TEMPORARY TAX BENEFIT PROVISIONS THAT HAVE NOW EXPIRED

A number of provisions of the Code that favor taxpayers expired at the end of 2013. Historically, Congress usually gets around to reinstating such expired provisions, but in today’s partisan environment, nothing should be assumed. Indeed, in December Sen. Harry Reid introduced a bill to provide a one-year extension of nearly all of the provisions that were set to expire at year-end. The bill failed to advance.

Here is a list of most of the key provisions that are now expired, and that may (or may not) be extended retroactively.

INDIVIDUAL PROVISIONS:

-the deduction for state and local sales taxes;
- the above-the-line deduction for certain expenses of teachers;
-the above-the-line deduction for qualified tuition and related expenses;
-the deduction for mortgage insurance premiums deductible as qualified interest; 
-the exclusion of discharge of principal residence indebtedness from gross income;
-the credit for health insurance costs.

BUSINESS PROVISIONS:

  -the research and experimentation credit; 
  -the work opportunity tax credit; 
  -the increase in expensing to $500,000 / $2,000,000 and expanded definition of Section 179 property; 
  -the bonus depreciation; 
-the exceptions under Subpart F for active financing income; 
-the look-through treatment of payments between controlled foreign corporations;
  -the special rules for qualified small business stock;
-the reduction in S corporation recognition period for built-in gains tax; 
-the election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation;

OTHER PROVISIONS:

-the tax-free distributions from Individual Retirement Accounts (IRAs) for charitable purposes;
-the basis adjustment to stock of S corporations making charitable contributions of property;
-the special rules for contributions of capital gain real property for conservation purposes.

UPDATED PFIC AND CFC DEFINITIONS AND REPORTING RULES

The IRS has issued updated reporting regulations under Code Sections 1291, 1298, 6038 and 6046. A lot of the changes are technical definitions, and relate to updates from proposed regulations going back to 1992. A few highlights to alert readers to look further if these rules affect them, include:

a. Definitions of “pedigreed QEF,” “1291 fund,” and “shareholder” and “indirect shareholder” for Code Section 1291 purposes;

b. Rules relating to the application of the PFIC rules when estates and trusts are involved, including taking into account excess distributions under Code §1291;

c. Details regarding annual PFIC Form 8621 filing requirements, including how they relate to trusts and estates. Interestingly, an exception from reporting for PFIC stock that is worth under $25,000 ($50,000 for joint returns) has been provided; and

d. Updates to Form 5471 filing requirements.

TD 9650. Definitions and Reporting Requirements for Shareholders of Passive Foreign Investment Companies; Insurance Income of a Controlled Foreign Corporation for Taxable Years Beginning After December 31, 1986

CONTINUOUS EMPLOYMENT NEEDED TO DEDUCT MBA EXPENSES

Subject to certain exceptions, a taxpayer can deduct education expenses if (a) made to maintain or improve skills required in his business or employment, or (b) to meet the express requirements of his employer, or the requirements of law or regulations, imposed as a condition to retaining his salary, status or employment.

A taxpayer enrolled in an MBA program in 2009, and deducted his expenses. He claimed that that he was in the business of selling pharmaceuticals and that the MBA classes enabled him to obtain employment. His work history in 2009 was:

(a) January 1  to April 30 – oncology account specialist;

(b) May 1 to August 10 – unemployed;

(c) August 11 to October 1 – oncology account manager;

(d) October 2 to October 11 – unemployed;

(e) October 12 and after – professional for Walgreens (unrelated to drug sales).

Under the above rule, the taxpayer must be in business or be employed. This is why most students who go on to law school or business school after college cannot deduct their professional school costs.

Here, the Tax Court found that the taxpayer was not established in a trade or business before beginning the MBA program.  The Tax Court noted that carrying on a trade or business requires considerable continuous and regular activity – the sporadic employment of the taxpayer was not continuous enough for this purpose. While the taxpayer was “qualified” to engage in the business of selling pharmaceuticals, that is not the same thing as actually carrying on the business, either during the classes or before enrolling.

Hart, TC Memo 2013-289