2012

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Tax:

First Round of Fees Under 2010 Affordable Health Care Act Due July 31, 2013
The 2010 Affordable Care Act (the “Act”) established the Patient-Centered Outcomes Research Trust Institute to carry out the provisions in the Act relating to comparative clinical effectiveness research…Click here to read complete article

Review of IRS’s Treatment of Conservative Groups Intensifies; Agency Under 30-Day Top-Down Review
The IRS’s improper handling of applications for tax-exempt status from conservative groups has led to the removal of top officials, the appointment of a new Acting Commissioner…Click here to read complete article

IRS Steps Up Guidance Under Health Care Law as 2014 Mandates Loom
The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014…Click here to read complete article

Senate Passes Internet Sales Tax Bill That Will Require State Sales Tax on All Online Purchases
On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (a.k.a, the “Internet Sales Tax Bill”) by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales…Click here to read complete article

FAQ: How Are Vacation Homes Taxed?
Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income…Click here to read complete article

How Do I Calculate Imputed Interest on Bargain Rate Loans?
Loans without interest or at below-market interest rates are recharacterized so that the lender must recognize market-rate interest income. Put another way, below-market loans are loans for which a rate of interest that is lower…Click here to read complete article

Construction:

Appeals Court Affirms Denial of Travel Expenses to Contractor
The Court of Appeals for the Third Circuit, affirming the Tax Court, has held an independent building contractor/property renovator could not claim deductions for transportation and other auto-related expenses…Click here to read complete article

Not-for-Profit:

Ohio Filing Requirement Changes for Booster Groups and Parent-Teacher Organizations
The Ohio Administrative Code that provided for booster groups and parent-teacher organizations to be exempt from filing with the Ohio Attorney General changed in August 2012…Click here to read complete article

Firm News:

Congratulations to Our Newest CPA, Kyle Bowers

Bruner-Cox LLP Welcomes Zachary M. Soehnlen

Categories of bargain-rate loans

The below market loan rules apply to a loan within one of six categories:

• gift loans;
• compensation-related loans;
• corporation-shareholder loans;
• tax avoidance loans;
• loans to qualified continuing care facilities; or
• other below-market loans.

A below-market loan is further characterized as either a demand loan or a term loan:

Below-market demand loans

Below-market demand loans are restructured for tax purposes so that the foregone interest is treated as transferred from the lender to the borrower, either as a gift, charitable contribution, dividend, compensation, or other payment, and retransferred by the borrower to the lender as interest. The foregone interest attributable to each calendar year is treated as transferred and retransferred on the last day of that year.

Below-market term loans

Below-market loans other than gift or demand loans are term loans, which are restructured for tax purposes so that the excess of the loan amount over the present value of all required loan payments, that is, the loan’s original issue discount (OID), is treated as transferred from the lender to the borrower on the date of the loan. The lender and borrower recognize the interest under the OID rules over the life of the loan.

The principal distinction between the treatment of a gift or demand below-market loan and a term below-market loan, therefore, is in the timing of the consideration deemed transferred by the lender to the borrower. In both instances, the borrower is treated as paying interest and the lender as receiving interest income.

Exceptions/exemptions

The below-market loan rules include several exceptions and exemptions. There is a $10,000 de minimis exception for gift loans, compensation-related loans, and corporation-shareholder loans. Israeli bonds, loans between an employer and an employee stock ownership plan (ESOP), and loans to qualified continuing care facilities are also exceptions to the rules. For gift loans directly between individuals, the imputed interest payment cannot exceed the borrower’s net investment income for the borrower’s tax year. Special rules apply to below-market employee relocation loans, loans from foreign persons, loans between spouses, and interest obligations that are cancelled, waived or forgiven. A lender must attach a statement to an income return that reports income or deductions arising from below-market loans.

If you have any questions on how to calculate imputed interest on bargain rate loans, please contact Bruner-Cox LLP or David L. Groves, CPA, Tax Partner at 330.497.2000.

Homeowners can deduct mortgage interest they pay on up to $1 million of “acquisition indebtedness” incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don’t need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.

Capital gain on vacation properties

Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property’s contract price (including any mortgage assumed or taken “subject to”), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. “Adjusted proceeds” include the property’s sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There’s no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.

Vacation home rentals

Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

1. Income from rentals totaling not more than 14 days per year is nontaxable.
2. Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
3. Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true “rental” property, which entitled them to a greater number of deductions.

If you have any questions regarding how vacation homes are taxed, please contact Bruner-Cox LLP or David L. Groves. CPA, Tax Partner at 330.497.2000.

Small seller exemption

The Marketplace Fairness Act includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act.

Proponents of the bill say that the main issue is fairness. Brick-and-mortar retailers have long argued that the physical presence restriction provides Internet sellers with an unfair advantage. By not collecting sales tax, an online retailer seller can, in effect, sell an item at a lower price than a store. Retailers who operate stores have increasingly complained of “showrooming” by customers who come to a store to browse and then order the same merchandise online where they will not be charged for sales tax.

On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 jurisdictions. Conservative groups also contend that the Marketplace Fairness Act allows overreaching by state governments.

Authority to require tax collection

The Marketplace Fairness Act would allow a state to require all online sellers that do not qualify for the small seller exemption to collect tax on all taxable sales sources to that state. Streamlined sales tax member states would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.

Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to exercise the authority and implements the Marketplace Fairness Act’s mandatory simplification requirements.

The Marketplace Fairness Act is currently sitting in the House of Representatives. For information on any recent developments, please contact Bruner-Cox LLP or David L. Groves, CPA, Tax Partner at 330.497.2000. 

The health law provisions interact. Individuals are supposed to carry health insurance or pay a tax. Employers are supposed to offer coverage or pay a tax. The exchanges will provide information about the availability of different health care plans and will certify individuals eligible for the premium assistance tax credit. Individuals who cannot obtain affordable coverage may purchase insurance through an exchange and may be entitled to a premium assistance tax credit.

Exchanges

The DOL, in a technical release, provided temporary guidance to employers about their obligation to notify their employees of the availability of health insurance through an exchange and of the potential to qualify for the premium assistance tax credit if they purchase insurance through an exchange. Exchanges will begin operating January 1, 2014 and will provide open enrollment for their coverage beginning October 1, 2013. DOL provided model notices for employers to send out beginning October 1, 2013. Notices must be issued to all employees, whether or not the employer offers insurance and whether or not the employee enrolls in the employer’s insurance.

Employer mandate

As part of the regulatory process, the IRS recently held a hearing on proposed regulations regarding the employer mandate, which imposes a penalty on employers who fail to provide adequate health insurance coverage in certain circumstances. The employer mandate takes effect January 1, 2014. Twenty different groups testified on relevant issues, including: the definition of a large employer subject to the penalty, the definition of a full-time employee who must be offered coverage, and the determination whether the coverage is affordable.

Minimum value

The IRS issued proposed regulations to clarify the minimum value requirement for employer-provided health insurance. The regulations provide additional guidance on how to determine whether an individual is eligible for the premium assistance tax credit. Taxpayers will not be eligible for the credit if they are eligible for other “minimum essential (health insurance) coverage” (MEC). MEC includes employer-sponsored coverage that is affordable and that provides minimum value. Employer coverage fails to provide minimum value if the employer pays less than 60 percent of the cost of plan benefits. Taxpayers may rely on the proposed regulations for years ending before January 1, 2015.

Medical loss ratio (MLR)

The IRS issued proposed regulations on MLRs. Insurance companies must provide premium rebates to their customers if they fail to spend at least 80 percent (85 percent for large companies) of their premiums directly on health care, as opposed to executive salaries and other expenses. The provision took effect in 2012; and the first round of MLR rebates was distributed in 2012. The IRS issued several notices to implement the program; the proposed regulation would apply to tax years beginning after December 31, 2013.

Annual limits on benefits

PPACA generally prohibits group health plans and health insurance issuers that offer group or individual health insurance from imposing annual or lifetime limits on the value of essential health benefits. Although some limits are allowed for plan years beginning before January 1, 2014, HHS regulations provide that HHS may waive the limits if they would cause a significant decrease in benefits or significant increase in premiums. IRS, DOL, and HHS issued frequently asked questions (FAQs) to clarify that plan or issuer receiving a waiver may not extend the waiver to a different plan or policy year.

Summary of benefits and coverage

PPACA generally requires insurers, employers and other health care plan providers to give a Summary of Benefits and Coverage (SBC) to participants and other affected individuals. In recent FAQs, the three government agencies advised that an updated SBC template and a sample SBC are available on the DOL’s website. These documents can be used for coverage beginning in 2014. The agencies also extended certain enforcement relief. The agencies issued final regulations in 2012, and indicated that providers can continue to use coverage examples in current guidance, without adding new examples to their SBC.

Employer reporting

The Treasury Inspector General for Tax Administration (TIGTA) issued a recent report on some of the new information reporting requirements that PPACA has imposed on employers. For example, health insurance providers must report information for each individual who receives coverage. Large employers must report details about the coverage offered to employees and their dependents, including the premiums and the employer’s share of costs. Employers must also report the cost of coverage to employees on their Forms W-2. The IRS will use these reports to administer PPACA’s requirements.

PPACA is a complicated law. Many of its most important provisions take effect in 2014. The IRS and other responsible federal agencies continue to issue guidance and to take comments on the administration of the law.

If you have any questions about PPACA and what strategies you or your business might adopt, please contact Bruner-Cox LLP or David L. Groves, CPA, Tax Partner at 330.497.2000.

In 2012, a House Committee asked the Treasury Inspector General for Tax Administration (TIGTA) to investigate reports of the IRS improperly handling applications for tax-exempt status from conservative groups. TIGTA launched a lengthy investigation that included interviewing IRS employees in Cincinnati, who process applications for tax-exempt status. On May 10, a few days before TIGTA was scheduled to release its findings, an IRS official apologized for the agency’s inappropriate treatment of applications for tax-exemption from conservative groups.

TIGTA confirmed what the IRS official had said. TIGTA found that the IRS personnel in Cincinnati had used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions. These included names such as Tea Party, Patriots and 9/12.

TIGTA further discovered that the IRS had sent requests for unnecessary information to these organizations. According to TIGTA, examples of this unnecessary information included the names of past and future donors, listings of all issues important to the organization and what the organization’s positions were regarding the issues, and whether officers or directors have run for public office or would be running for public office in the future. TIGTA told Congress that all of the IRS’s actions were inappropriate because they went beyond what was authorized by federal law and regulations. The IRS’s inappropriate criteria may have led to inconsistent treatment of organizations applying for tax-exempt status, TIGTA concluded.

New leader, 30-day review

On May 15, President Obama announced that the Acting Commissioner of the IRS had resigned at his request. President Obama appointed Daniel Werfel, a career government employee, as the new Acting Commissioner.  “The American people deserve to have the utmost confidence and trust in their government as we work to get to the bottom of what happened in the IRS,” the President said.

Werfel has been ordered by the White House to undertake a 30-day review of the agency’s operations, processes and practices. Werfel is to report his findings and recommendations for improvements to President Obama before the end of June. Since Werfel’s appointment, the head of the IRS Tax-Exempt Division has retired and the official who oversaw the Cincinnati office was placed on administrative leave, after reportedly being asked to resign by Werfel. White House officials have indicated that more personnel changes may take place after the results of the 30-day review are announced.

Congressional investigations

Three Congressional Committees – the Senate Finance Committee, the House Oversight and Government Reform Committee and the House Ways and Means Committee – held hearings in May. The former Commissioner of the IRS, Douglas Shulman, and the ex-Acting Commissioner, Steven Miller, both told lawmakers that they were dismayed at TIGTA’s report. “As a general principle, as the IRS commissioner, I didn’t touch individual cases and I certainly didn’t touch cases that involved political activity.” Shulman said. Shulman added that he was “saddened” that these activities occurred on his watch.  Miller acknowledged that the IRS had acted improperly but denied any partisan motivation for the conduct of employees.

For many lawmakers, the key question is whether IRS officials mislead them in previous hearings. “We are concerned about the extent to which senior officials became aware of these practices, when they found out, and what they did or did not do to put a stop to them. And, perhaps most important, we want to know why the IRS purposefully misled Congress when they led us to believe that no groups were being targeted,” Sen. Orrin Hatch, R-Utah, said.

More Congressional hearings are scheduled. “We need to understand how and why this targeting occurred,” Senate Finance Committee Chair Max Baucus, D-Montana, said. “We need to know who was involved and who was responsible, and we need to install new safeguards to ensure this targeting never happens again.”

Criminal investigation

The U.S. Department of Justice has opened a criminal investigation into the IRS’s scrutiny of applications from conservative groups.  “The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters related to the IRS,” Attorney General Eric Holder said on May 14. Holder has not said when the results of the investigation will be released.

We will continue to bring you current updates as the investigation progresses. If you have any questions about the ongoing investigation or the IRS’s 30-day top-down review, please contact Bruner-Cox LLP or David L. Groves, CPA, Tax Partner at 330.497.2000.

Kyle joined Bruner-Cox LLP in 2011. He provides many services including audits, reviews, and compilations of financial statements. He also provides services involving agreed-upon procedures and employee benefit plans. Kyle provides these accounting and auditing services for a variety of industries including manufacturing, construction, healthcare and not-for-profit.

Kyle earned his bachelor’s degree in both accounting and business administration from Malone University.

He is a member of The Ohio Society of Certified Public Accountants. Kyle is a volunteer with Lifeline Christian Ministries and is actively involved in his church.

Congratulations Kyle!

Zach is pursuing a Bachelor of Science degree in accounting at The University of Akron with an anticipated graduation date of May 2014.

He enjoys sports and is an avid Cleveland Indians, Ohio State, and Browns fan. He also enjoys reading and working out. Welcome to the team, Zach!

The Court of Appeals for the Third Circuit, affirming the Tax Court, has held an independent building contractor/property renovator could not claim deductions for transportation and other auto-related expenses involving travel between his residence and various worksites because the expenses were nondeductible commuting costs.

Costs of commuting between a taxpayer’s residence and place of business are generally nondeductible personal expenses. There are three exceptions to this general rule:

• Transportation between the taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works is deductible (temporary distant workplace exception);
• If the taxpayer has one or more “regular work locations away from the taxpayer’s residence,” transportation between the taxpayer’s residence and a temporary work location is deductible (regular work location exception); and
• Transportation between the taxpayer’s residence (if the residence serves as the taxpayer’s principal place of business) and a regular or temporary work location is deductible (home office exception).

The IRS determined tax deficiencies for the 2005 and 2006 tax years of Glenn Patrick Bogue, who was an independent contractor based in Cherry Hill, New Jersey. During those years, he lived in a house owned by his fiancé (Bogue’s residence) and was building an addition to it in his spare time.

During 2005 and 2006, Bogue worked with Raymond J. Mancino to renovate residential properties. During 2005, he worked on three properties. During 2006, he worked on properties on two different properties. Those five work locations (worksites) were 20.1, 15.7, 15.0, 14.7, and 4.0 miles, respectively, from his residence. He worked at each of the worksites for a number of months and then, when the project at that worksite was finished, he moved to another worksite.

On his returns for the years in issue, Bogue claimed deductions for a variety of expenses related to his transportation between his residence and the worksites. He claimed deductions for car and truck expenses of $9,232 and $9,657.50 on Schedules C, Profit or Loss from Business, attached to his tax returns for 2005 and 2006, respectively. In addition to car and truck expenses, he deducted as part of his “Other Expenses” on his Schedules C amounts, for tolls that he paid on the way to worksites. He claimed deductions of $660 and $400 for those tolls during 2005 and 2006, respectively. As part of the insurance expenses he reported on his Schedules C, he deducted auto insurance expenses of $2,028 and $1,866 for 2005 and 2006, respectively. He also deducted $650 in car rental expenses for the period during 2005 when he was renting a car after his ’91 Ford Explorer became inoperable.

The Tax Court denied his deductions for transportation and other auto-related expenses involving travel between his residence and various worksites. It found that the expenses all came under the general nondeductible personal expense rule for commuting costs. The Tax Court rejected his arguments that the expenses were deductible under all three of the exceptions under Rev Rule 99-7:

• The Court denied the expenses under the home office exception for lack of proof that he actually used an office in his residence exclusively for business.
• The temporary distant worksite exception was unavailable because the worksites at issue, although away from Bogue’s home, were within the normal distance/areas where he normally worked.
• The regular work location exception was also unavailable since the only locations at which he worked during the years at issue were temporary worksites and he showed no other, regular work locations. The Tax Court rejected his contention that his storage shed, his car, the bank, and various building supply stores should be considered regular work locations.

Further, while costs of transporting tools to and from worksites, travel to supply stores, or travel between worksites themselves might qualify as deductible transportation or travel, they were denied because Bogue failed to substantiate them.

Before the Third Circuit, Bogue only argued that the travel expenses should be allowed under the regular work location exception. He claimed that he met this exception because the bank and various building supply stores were regular work locations for him. The Third Circuit observed that the Tax Court rejected that argument, and noted that Bogue did not establish that he worked or performed services at any of those locations. The Third Circuit said that construing a building supply store or bank as a “regular work location” strains the meaning of “work location,” as Bogue was at those locations as a customer, rather than a worker. Thus, it affirmed the Tax Court’s ruling that Bogue’s mileage deductions were not allowable business expenses.

For more information regarding the decisions made by the Tax Court, please contact Bruner-Cox LLP or Daniel R. Riemenschneider, CPA, CMA, Tax Partner at 330.376.0100.