We can all always use more time. This year-end article is designed to help by offering a list of tasks to consider to get ready for the upcoming filing season. Spoiler alert: It’s a long list, and you’ll likely think of a few more items to add as you read it.
1. Review federal and state laws enacted in 2015 to determine which clients are affected and how they might affect your office procedures.
Here is a list of federal laws enacted in 2015 (through Dec. 4, 2015), with their key tax provisions.
- Medicare Access and CHIP Reauthorization Act of 2015, P.L. 114-10 (4/16/15): Medicare changes and a process to remove Social Security numbers from Medicare cards.
- Don’t Tax Our Fallen Public Safety Heroes Act, P.L. 114-14 (5/22/15): Modifies the Sec. 104 exclusion for injuries.
- Defending Public Safety Employees’ Retirement Act, P.L. 114-26 (6/29/15): Adds a new exemption to the 10% early-distribution penalty.
- Trade Preferences Extension Act of 2015, P.L. 114-27 (6/29/15): Tax changes include requiring a Form 1098-T, Tuition Statement, to claim certain education credits and deductions, denial of the refundable child tax credit when the Sec. 911 foreign earned income exclusion is used, and increased penalties for failure to file correct information returns (Sec. 6721) and payee statements (Sec. 6722).
- Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41 (7/31/15): Changes include new due dates starting with 2016 tax returns filed in 2017 (see AICPA chart), a new basis consistency requirement and reporting obligation for certain estates, and additional information required for Form 1098, Mortgage Interest Statement.
- Continuing Appropriations Act, 2016, P.L. 114-53 (9/30/15): Extends the Internet Tax Freedom Act to Dec. 11, 2015.
- Protecting Affordable Coverage for Employees Act, P.L. 114-60 (10/7/15): Includes a definitional change to the Patient Protection and Affordable Care Act.
- Bipartisan Budget Act of 2015, P.L. 114-74 (11/2/15): Makes significant changes to examination of certain partnerships.
- Fixing America’s Surface Transportation Act, P.L. 114-94 (12/4/15): Denies a passport to individuals with seriously delinquent tax liabilities, requires the IRS to use third-party debt collectors, and removes the changed extended due date for Forms 5500 added by P.L. 114-41.
2. Extenders: Over 50 provisions expired at the end of 2014, and renewal was not yet determined at this writing. By the time this article is published, there might yet be one more public law to add to the above list for 2015. Review any law that passes as soon as possible after enactment as there may be limited time to take advantage of renewed provisions.
3. Review new regulations: A list of federal regulations issued in 2015 can be reviewed at this website maintained by the author.
Review tax forms and compliance tools
4. IRS form instructions typically include a “What’s New” section. State tax forms might have similar information.
5. Find out what changes are being made to your tax preparation software.
6. Be sure clients know what documentation is required, as well as special documentation required for any donation of $250 or more (Sec. 170(f)(8)), noncash donations valued at over $500 (Form 8283, Noncash Charitable Contributions), and donations valued at over $5,000 (usually a qualified appraisal). Review the rules of Sec. 170 and the regulations, Form 8283, and IRS Publication 526, Charitable Contributions. Practitioners may want to share with clients a summary of recent cases where individuals lost their charitable contribution deduction for lack of proper documentation (see, e.g., Beaubrun, T.C. Memo. 2015-217, and Isaacs, T.C. Memo. 2015-121). Sometimes, the contemporaneous written acknowledgment (CWA) received from a donee for donations of $250 or more is insufficient. Tell clients what a proper CWA looks like and be sure they have the requisite CWAs before reporting any donation to you for inclusion on their return.
Determine what Patient Protection and Affordable Care Act (PPACA) information clients need
7. New Forms: Let clients know about the two new PPACA forms for 2015 they may receive in January. Form 1095-B, Health Coverage, will be issued by providers of health coverage as well as any employer with a self-insured group health plan. Form 1095-C, Employer-Provided Health Insurance Offer and Coverage Insurance, is issued by “applicable large employers” (Sec. 4980H(c)(2)) to their full-time employees or, if self-insured, to all insured employees. Individuals who receive coverage through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement (same as for 2014). These forms might look more like health insurance forms than tax forms, so a reminder to include them with other tax records they provide to you should be helpful.
8. No coverage penalty: Notify any client who paid the individual shared-responsibility penalty in 2014, or who you know likely owes it for 2015 (because they don’t have health coverage and do not qualify for an exemption), that the penalty is higher for 2015 than for 2014 and will be even higher in 2016 when it is fully phased in.
The penalty applies to individuals without health coverage for any month of the year and who do not qualify for an exemption. The penalty is equal to the greater of either the flat dollar amount or a percentage of household income (less the filing threshold amount). The penalty cannot exceed the national average cost of bronze level coverage. This figure, provided by the IRS, is $207 per month per individual for 2015 ($2,484 for the year) (see Rev. Proc. 2015-15, Sec. 5000A(c), and Regs. Sec. 1.5000A-4). Possible exemptions (Sec. 5000A(d) and (e)) are summarized in the instructions to Form 8965, Health Coverage Exemptions, and on an IRS webpage.
For clients who tell you they had no coverage for 2015, consider sharing information about the Sec. 36B premium tax credit with them if they appear to be eligible for this credit for 2016 (consider their household income in relation to 400% of the federal poverty line (FPL), along with the other criteria). (Note: It is too late to get the premium tax credit for 2015 for taxpayers who did not purchase coverage through the Marketplace.) The IRS website has a good deal of helpful information, including a flowchart on eligibility for the premium tax credit to share with clients. To determine whether someone qualifies for the premium tax credit, FPL is based on the prior-year figures (i.e., 2014 data for 2015). The figures for 2015 (to be used for calculating the 2016 premium tax credit), are available at the Department of Health & Human Services (HHS) website.
Household income for premium tax credit purposes is defined at Sec. 36B(d)(2) as adjusted gross income increased by any Sec. 911 exclusion, tax-exempt interest, untaxed Social Security benefits, as well as income of any dependent who is required to file a return.
9. Can advance premium tax credit repayment problems be addressed? For clients claiming the premium tax credit (Sec. 36B), remind them of the “cliff” that occurs when their household income exceeds 400% of the FPL, thus ending their eligibility for the premium tax credit. These individuals are required to repay any credit received in advance during the year (in the form of reduced monthly premiums). Consider ways to reduce income to be below the 400% cutoff, including IRA contributions, if eligible (IRA contributions must be made by April 15, 2016). The figures for 2015 for all states other than Alaska and Hawaii (see the instructions to Form 8962, Premium Tax Credit (PTC), for additional figures):
For 2014, the IRS granted limited relief to taxpayers with estimated tax penalties from receiving too much premium tax credit in advance (Notice 2015-9). It is unknown whether similar relief will be provided for the 2015 tax year. Thus, try to determine if any client is in a situation where he or she will have to repay all or part of the advance, and, if so, see if the fourth quarter 2015 estimated tax payment can be adjusted.
10. Employers: Employers continue to have a variety of responsibilities under PPACA. Forms 1095-B and 1095-C noted earlier are new for 2015. Applicable large employers should have had systems in place in January 2015 for dealing with the reporting as well as how to avoid the employer shared-responsibility payment of Sec. 4980H. Applicable large employers with 50 or more, but less than 100, full-time and full-time equivalent employees were exempted from the Sec. 4980H penalty for 2015, but they will need systems in place by January 2016 to avoid the penalty for 2016.
The numerous details of employer PPACA obligations are beyond the scope of this article. The IRS website for employers is helpful in addition to information for employers offering certain health care reimbursement arrangements (potentially at risk for the excise tax under Sec. 4980D).
Helping same-sex couples
11. The U.S. Supreme Court’s decision in Obergefell, 135 S. Ct. 2584 (2015), results in same-sex married couples’ filing as married in all states. Amended returns might be in order for prior years. Review information from state tax agencies for guidance. In addition, refunds or adjustments might be in order for sales or other taxes paid for past property transfers.
12. Be sure same-sex couples you have as clients are aware of the federal and state tax rules for same-sex couples who are married versus those in a civil union or similar arrangement. Prior tax planning approaches might need updating.
Prepare for tasks related to the tangible property regulations
13. If your client filed a Form 3115, Application for Change in Accounting Method, to adopt the tangible property regulations in 2014, be sure the depreciation records are updated for the change.
14. Review the elections available in the tangible property regulations to determine when clients should use them and how your tax prep software handles them. The six elections:
- Capitalize and depreciate certain materials and supplies (Regs. Sec. 1.162-3(d)).
- De minimis safe-harbor election (Regs. Sec. 1.263(a)-1(f)).
- Capitalize amounts paid for employee compensation or overhead as amounts that facilitate acquisition of property (Regs. Sec. 1.263(a)-2(f)(2)(iv)(B)).
- Safe harbor for small taxpayers for buildings (Regs. Sec. 1.263(a)-3(h)).
- Capitalize repair and maintenance costs (Regs. Sec. 1.263(a)-3(n)).
- Partial asset disposition (Regs. Sec. 1.168(i)-8(d)(2)).
15. If clients plan to make the de minimis safe-harbor election (Regs. Sec. 1.623(a)-1(f)), be sure they have the appropriate accounting policy in place at the start of the tax year. Starting in 2016, the IRS increased the $500 threshold for taxpayers without an “applicable financial statement” to $2,500 (see Notice 2015-82 and IR-2015-133).
Review tax rules gaining wider application
16. Residential short-term rentals: With more individuals renting their property via Airbnb and similar sites, brushing up on the rules at Secs. 162, 183, 280A, 469, and 1402 should be helpful.
17. Self-employment: If your client base includes freelancers, such as Uber drivers and Amazon Mechanical Turks, a review of rules on travel, home office, equipment, startup, and hobby vs. business, should be timely.
18. Individuals generating revenues in the sharing economy should be receiving Forms 1099-K, Payment Card and Third Party Network Transactions, and/or 1099-MISC, Miscellaneous Income. A review of the rules on Form 1099-K (Sec. 6050W) will help you reconcile a client’s form to its actual receipts. Also consider how to help clients with recordkeeping. Consider what questions to ask clients to find out if they are involved in the sharing economy, because they might not generate revenues sufficient to receive a Form 1099-K (generally over 200 transactions and over $20,000 of revenues).
19. Local taxes and fees likely also apply. Determine if you will handle these for your client or not (see engagement letter item below).
Review engagement letters and checklists
20. Determine what might need to be clarified from last year’s engagement letter. Ask your malpractice carrier if it has any suggestions or new letters.
21. Consider new or expanded items for the engagement letter, such as clarification as to responsibility for non-income tax items, including whether an applicable large employer has systems in place to avoid the Sec. 4980H penalty and handle required issuance of Form 1095-C (Sec. 6056); sales and use tax obligations; and obligations for local taxes including business license taxes and transiency occupancy taxes (such as for rentals through Airbnb).
22. Review AICPA compliance tools (organizers, engagement letters, checklists, practice guides, and more) (available to AICPA Tax Section members).
With 2016 being an election year, we will hear more about reforming the tax system. One more “to do” to consider is how you might help your clients understand these proposals by better understanding their own tax situation (such as marginal and average tax rates), as well as the tax system in general.
Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and maintains the 21st Century Taxation blog .