New IRS Regulations Regarding Fiduciary Expenses

If you are involved in any way with a trust or estate which is required to file Form 1041, U.S. Income Tax Return for Estates and Trusts, you may be interested in a change in the way these entities compute their tax.

The Internal Revenue Service, in final regulations issued in 2014, clarifies issues such as: fees paid to an investment advisor by a nongrantor trust or estate are generally miscellaneous itemized deductions subject to a floor of 2% of adjusted gross income, as is the case for individuals filing Form 1040. Other types of costs which would be subject to the 2% limitation if paid by an individual taxpayer will be required to be so treated by a trust or estate.

Fiduciaries (for the most part trustees or administrators and executors of estates) will be required to separate the amount of their “bundled” fees—in other words, “unbundle” them into the portion which is attributable to investment advice, and the portion which is not. The investment advice portion will be included with any other costs subject to the 2% limitation, and the rest will be fully deductible, except for:

  • Payments made to a third party out of the bundled fee that would have been subject to the 2% floor if paid directly by the trust or estate, and
  • Separately assessed expenses in addition to usual or basic fees or commissions, that are commonly or customarily incurred by an individual

The regulations also allow the use of any reasonable method to make the allocation to investment advice, and include a listing of the facts that may be considered in determining whether an allocation is reasonable.

While the final regulations initially called for the “unbundling” rule to be effective for tax years beginning on or after May 9, 2014, they have delayed its effective date to cover tax years beginning on or after December 31, 2014. This was in response to comment which indicated that insufficient time was given to allow fiduciaries to implement changes.

While this rule will largely affect corporate or professional fiduciaries, it is required by any individual trustee of a non-grantor trust, and any other fiduciary, such as the executor of an estate.

In addition to the “fee unbundling” rules, the regulations clarify several other matter of interest to fiduciaries of trusts and estates, specifically costs are subject to the 2% floor to the extent the cost is (1) included in the definition of miscellaneous itemized deductions; (2) incurred by an estate or nongrantor trust; and (3) commonly incurred by a hypothetical individual holding the same property. Some examples are:

  • Appraisal fees other than for determining the value of assets (1) as of a decedent’s date of death, or the alternate valuation date. (2) for making distributions, (3) as required to prepare tax returns or a generation-skipping transfer tax return.
  • Costs incurred to defend a claim against the estate, decedent, or nongrantor trust that are unrelated to the estate’s or trust’s existence, validity, or administration.

If these new regulations may impact you, be sure to contact Potts & Company for more information and details specific to your situation.

Joe

Personal Use of a Company Owned Vehicle Can Cost You

The Internal Revenue Code taxes individuals and businesses on “all income from whatever source derived.” This includes fringe benefits provided by an employer. Certain benefits provided by an employer are excluded from income by law. The personal use of an employer-provided vehicle is not a fringe benefit that is excluded.

When an employee has the benefit of using an employer-provided vehicle for their personal use, the IRS requires that the value of that benefit be included in the employee’s compensation even though the benefit is a non-cash benefit.

Why Is This Important?

The law requires that each employer provides its employee’s with a W-2 Wage and Tax Statement by February 2, 2015. Required to be reported in each employee’s W-2 taxable wages is the value of any non-cash fringe benefits. This includes the value of each employee’s personal use of a company owned vehicle.

What is Taxable and What Isn’t?

Not every “vehicle” used by an employee will result in a taxable fringe benefit. If a farmer wants to jump on a combine and drive it to the grocery store, the IRS would allow him to do so without taxing him on his personal use. That is because the IRS has defined certain vehicles as “qualified nonpersonal use vehicles. These are vehicles that wouldn’t be used for personal purposes except minimally. Qualified nonpersonal use vehicles listed in IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits include:

  • Clearly marked, through painted insignia or words, police, fire, and public safety vehicles
  • Unmarked vehicles used by law enforcement officers if the use is officially authorized.
  • An ambulance or hearse used for its specific purpose.
  • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
  • Delivery trucks and seating for the driver only, or the driver plus a folding jumpseat.
  • A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
  • School buses.
  • Tractors and other special-purpose farm vehicles.
  • Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks.

A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal vehicle if is clearly marked with permanently affixed decals or painted and identifies the truck as a company vehicle and has been specially modified so it is not likely to be used more than minimally for personal purposes. These modifications would include heavy equipment such as a hydraulic lift gate, permanent tanks or drums, an electric generator, a welder, etc.

A pickup truck will also be considered as a qualified nonpersonal vehicle if is used to transport a particular load in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified.

Demonstrator cars used by salespeople employed by a car dealership can qualify as a nontaxable working condition benefit if the use is primarily to facilitate the sale or lease of cars, but there are substantial restrictions on personal use.

When an employer provided vehicle does not meet the definition of a qualified nonpersonal use vehicle, the personal use of the vehicle is a taxable benefit to the employee. The general rule for valuing a fringe benefit is what the employee would have to pay a third-party in an arms-length transaction to buy or lease the benefit, in this case the use of the vehicle. Since calculating the fair market value of the vehicle used personally by an employee isn’t as simple as it sounds, the IRS has provided four other ways to determine the value of the benefit. These four methods are known as:

  • Lease Value Rule
  • Cents-Per-Mile Rule
  • Commuting Rule
  • Unsafe Conditions Commuting Rule

Almost all of Potts & Company’s clients use the Lease Value Rule. I expect that is the valuation rule you will use too. Therefore, I am not going to elaborate on the other valuation methods listed. If you have any questions about the other methods, call Joe, Rob, or me or consult the IRS’s Publication 15-B Employer’s Tax Guide to Fringe Benefits.

Lease Value Rule 

The lease value rule is basically the default rule. If you do not qualify for the Cents-Per-Mile Rule or the Commuting Rule you’re left with the Lease Value Rule.

To determine the taxable benefit amount of the personal usage of a company vehicle using the lease value rule, you first determine the fair market value of the vehicle on the first date it was made available to the employee. The IRS publishes its annual lease value table each year in Publication 15 B Employer’s Tax Guide to Fringe Benefits. Using the fair market value of the vehicle provided to the employee, you locate the annual lease value calculated by the IRS. This annual lease value multiplied by the percentage of personal miles to the total miles driven by the employee is the amount that is added to the employee’s W2.

As an employer, you will find that many of your employees do a poor job at tracking their mileage. If you’re like the average business owner, you have difficulty tracking your mileage accurately. (Interestingly enough, I have yet to meet an IRS agent that had difficulty in disallowing a mileage deduction for lack of adequate documentation.) Unfortunately if a company owns vehicles which an owner or an employee drive for their personal benefit, keeping up with the mileage is a requirement.

The IRS says that it is the employee’s duty to account for business mileage by substantiating the usage, the time and place of travel, and the business purpose of travel. Any mileage that is not substantiated as business mileage is therefore included in their income. So if you’re having trouble having an employee substantiate your mileage, reminding that the personal portion is included in the W-2 wages might incentivize them to keep adequate records. Of course what is good for the goose is good for the gander, if you catch my drift.

Bottom Line: 

If you are going to comply with the rules and report an employee’s personal usage of a company vehicle on their W-2, you need to be aware of the rules and the methods the IRS allows to value this benefit. Potts & Company recommends that the business owner or responsible person provide a form to each employee to report their personal and business use of company vehicle(s) they drove in 2014. This information can then be used to calculate the taxable value of their personal vehicle business use and added to their 2014 W-2.

If you need a form or an example of a form to accumulate this information from your employees, please contact Leacretia, Terra, or Debbie by calling 479-648-2846 or by emailing them using their name with @potts-cpa.com (e.g. Leacretia@potts-cpa.com).

 

David

Qualified Tax Deductions for Today’s Unemployed Job Seeker

Qualified tax deductions for the expense of job searching

Certain deductions can help you offset the expense of job searching while unemployed.

According to the United States Department of Labor, the unemployment rate has reached a record low of 5.9% as of September 2014 compared to each consecutive year since the beginning of the recession in 2008. The decrease sounds great as far as percentages, but that still leaves 9.3 million jobless individuals, of which 7.1 million are actively seeking full-time employment. This number includes part-time workers who were unable to find a full-time position and college graduates who have not been able to begin their careers.

Searching for employment can be a tedious process that has the potential to become financially costly, and adding such expenses to an already strained budget is not something anyone would want to do. The good thing is you may be able to deduct some of the expenses you accrue while on your journey. In Publication 529 for Miscellaneous Itemized Deductions, the IRS provides the job seeker with a list of qualified and nonqualified items, such as:

  • Same Occupation: Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Resume Costs: You can deduct the cost of preparing and mailing your resume.
  • Travel Expenses: If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency: You can deduct some job placement agency fees you pay to look for a job.
  • First Job: You can’t deduct job search expenses if you’re looking for a job for the first time.

We would all much more prefer to have a Congress that actually does some work and makes decisions that would help stimulate the economy instead of vacationing, but in the meantime the job seeker can take advantage of these qualified deductions.

For more information, contact Potts & Company. We can help you with the details of your situation!

 

Antonio