IRS Auto Depreciation Limits Released for 2013

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The IRS recently released Rev. Proc. 2013-21 detailing the updated price inflation adjustment limitations on depreciation deductions and lease inclusion amounts for passenger automobiles first placed in service during calendar year 2013. These adjustments are required under Internal Revenue Code Section 280F. If you need advice relating to these matters, or any other tax or legal issues, please contact Sherayzen Law Office, PLLC.

Relevant Definitions

According to the IRS, “Passenger automobiles are defined in section 280F(d)(5)(A) as any 4-wheeled vehicle which is manufactured primarily for use on public streets, roads, and highways, and which is rated at 6,000 pounds unloaded gross vehicle weight (or, in the case of a truck or van, 6,000 pounds gross vehicle weight) or less. Section 280F(d)(5)(B) provides exceptions from this definition, and allows the Secretary to promulgate regulations to exclude trucks and vans from the definition of passenger automobiles” (Internal Revenue Bulletin: 2003-37).

Limits for Passenger Automobiles (Excluding Trucks and Vans)

The depreciation limitations for passenger automobiles (not including trucks or vans) first placed in service during calendar year 2013, and for which the additional bonus depreciation applies (allowing for 50% “expensing” of the cost of the automobile in the year of purchase), is $11,160 for the first tax year. The amounts for following years are: $5,100 the second tax year, $3,050 for the third year, and $1,875 for each succeeding year. Note that, for this category and for each category that follows below, any personal use of a passenger automobile, truck or van will reduce the maximum depreciation deduction that may be taken by a business.

As will be seen from the deduction amounts listed below, only the first year of depreciation is affected by the adjustments.

For passenger automobiles (excluding trucks and vans) placed in service during calendar year 2013 to which 50% bonus depreciation does not apply, the depreciation is $3,160 for the first tax year. For the following years, the amounts are: $5,100 the second tax year, $3,050 for the third year, and $1,875 for each succeeding year.

Limits for Trucks and Vans

The depreciation limitations for trucks and vans first placed in service during calendar year 2013, and to which the additional 50% bonus depreciation applies, is slightly higher than passenger automobiles, at $11,360 for the first tax year. For later years, the amounts are: $5,400 the second tax year, $3,250 for the third year, and $1,975 for each succeeding year.

The depreciation limitations for trucks and vans first placed in service during calendar year 2013, and to which the additional 50% bonus depreciation does not apply, is $3,360 for the first tax year. For later years, the amounts are: $5,400 the second tax year, $3,250 for the third year, and $1,975 for each succeeding year.

Bonus Depreciation

Rev. Proc. 2013-21 includes various factors as to why bonus depreciation may not apply, including the fact that a taxpayer, “(1) purchased the passenger automobile used; (2) did not use the passenger automobile during 2013 more than 50 percent for business purposes; (3) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(2)(D)(iii); or (4) elected to increase the § 53 AMT credit limitation in lieu of claiming § 168(k) additional first year depreciation.” If a passenger automobile, truck or van is not used at least 50% of the time for business purposes, the vehicle must be depreciated under standard straight-line ADS rules.
The Rev. Proc. also includes updated tables for the dollar amount of income inclusion for passenger automobiles (excluding trucks and vans), and separate tables for trucks and vans with a lease terms beginning calendar year 2013.

IRS Issue Statistics for CFC Holdings; Importance of Form 5471 Grows

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On March 6, 2013, the IRS issued statistics for the tax year 2008 with respect to foreign corporations controlled by U.S. corporations. These statistics emphasize the important growth in controlled foreign corporations (“CFCs”) and Form 5471.

IRS Statistics Published in Statics of Income Bulletin (Winter 2013)

In the tax year 2008, some 83,642 foreign corporations controlled by U.S. multinational corporations held $14.5 trillion in assets and reported receipts of $6.0 trillion. These controlled foreign corporations (CFCs) paid $125.2 billion in income taxes on $662.0 billion of earnings and profits (less deficit) before income taxes (“E&P”). Both CFC assets and receipts increased slightly more than 24 percent from tax year 2006, while “E&P” and foreign taxes income taxes paid increased by nearly 30 percent.

For the tax year 2008, these same CFCs were incorporated in 188 different countries (based on unpublished data). More than 42 percent, or 35,856, of these CFCs were incorporated in Europe. Nearly 91 percent of the European CFCs were located in European Union countries.

Almost 79 percent, or 65,740, of CFCs for Tax Year 2008 were concentrated in three major industrial sectors: (1) services; (2) goods production; and (3) distribution and transportation of goods. These three industrial sectors accounted for 81.2 percent of total receipts ($4.9 trillion), 74.9 percent of E&P (less deficit) before income taxes ($496.0 billion), and 57.5 percent of income taxes ($72.0 billion).

Furthermore, for the tax year 2008, controlled foreign corporations were tax owners of 17,548 foreign disregarded entities (FDEs). These foreign disregarded entities reported $4.9 trillion in assets and $230.1 billion in E&P (less deficit) after taxes.

Statistics Demonstrate the Continuous Growth of CFCs and Importance of Form 5471

The IRS statistics confirmed what is already well-known – with growing globalization, the importance of CFCs is increasing with each year. This further means that Form 5471 is also increasing in its importance for the IRS, which is already stepping up the enforcement of compliance with Form 5471 requirements.

Form 5471 is used by the IRS to satisfy the informational reporting requirements of 26 U.S.C. § 6038 (“Information reporting with respect to certain foreign corporations and partnerships”) and 26 U.S.C. § 6046 (“Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock”). It must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in specified foreign corporations, if various requirements are met. The penalties can be steep, so compliance with the reporting rules is crucial.

Contact Sherayzen Law Office for Help With Form 5471

If you own foreign corporations, you may need to comply with Form 5471 requirements. This is why you need to contact Sherayzen Law Office to schedule a consultation. Our international tax firm is highly experienced in dealing with Forms 5471 and we can help you comply with its requirements. If you are delinquent in your 5471 compliance, we can also advise you with respect to your voluntary disclosure options.

Accountants Beware: Offshore Disclosure with Form 8938 is a Legal Issue

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In an earlier article, I already explained why the FBAR disclosure is a legal issue. In terms of their lineage, Forms 8938 are very similar to the FBARs. While the FBARs are the creation of Bank Secrecy Act, Form 8938 is a creation of a legislation of a similar nature – FATCA (Foreign Account Tax Compliance Act).

The intent of both laws is similar – to produce legal disclosure of foreign assets by U.S. taxpayers. Notice that I am talking about legal disclosure, not an accounting calculation.

While the penalties associated with failure to file Form 8938 are not as severe as those of the FBAR, they are still substantial and have legal and tax repercussions. Where non-compliance is such that it requires voluntary disclosure, the issues associated with Form 8938 take on a new importance that requires the full protection of the attorney-client privilege and complex legal advocacy.

This is why it is so important for the accountants to avoid committing malpractice and recognize that an offshore disclosure that involves filing delinquent Forms 8938 is a legal issue that should be left to international tax attorneys who are trained and experienced in this area of law.

Contact Sherayzen Law Office for Legal Help with Your Voluntary Disclosure of Offshore Assets

If you have undisclosed offshore assets, contact Sherayzen Law Office . Our experienced international tax law firm will thoroughly analyze your case, estimate your potential FBAR penalties, identify all non-compliance issues, and develop a comprehensive approach to your offshore voluntary disclosure.

Can I Deduct My Rental Real Estate Losses?

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With the uncertain economic environment in the past few years, many individuals who own rental estate property have faced substantial losses. A question that often arises is whether such losses can be deducted, and if so, by how much? This article strives to answer these questions in general and provide a basic understanding of the deductibility of rental real estate losses. It is not intended to provide tax or legal advice. Renting real estate can be a complex area, full of many legal and tax obstacles, so you may wish to seek the advice of a competent, experienced attorney. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.

The General Rule of Passive Activity Losses

In general, passive activity losses and deductions are likely to be limited to offsetting income from only passive activities (similarly, credits from passive activities may only be used to offset taxes on passive activity income). Passive activity losses that are greater than passive activity income will be disallowed in a tax year. However, passive activity losses and credits may be carried forward to the next taxable year.

Passive activities are defined to mean trade or business activities in which an individual does not “materially participate”. According to the IRS, material participation means that a taxpayer is involved with the business operations on a “[r]egular, continuous, and substantial basis.” Certain real estate professionals may meet the material participation requirements.

Exceptions

Generally speaking, rental real estate activities will be treated as passive activities, subject to the limitations stated above, unless certain requirements are met. As noted above, one such exception is for material participation in rental real estate activities.

Another limited exception exists for “active participation” in such activities. In general, active participation means that an individual (or married couple) owned at least 10% of the fair market value of the rental property interests, and made management decisions or arranged for others to provide services in a significant and bona fide manner. According to the IRS, “management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.” Thus, generally, limited partners will not meet the active participation test.

For those who qualify for the “active participation” exception, individuals may offset a maximum of $25,000 per year of passive losses from rental real estate against active and portfolio income. More specifically, $25,000 for single individuals and married couples filing jointly for a tax year, $12,500 for married individuals who lived apart from their spouses for a year filing separately, and $25,000 for a qualifying estate reduced by the special allowance for which a surviving spouse qualified.

Provided the requirements are met, losses may be deducted in full by individuals with a modified adjusted gross income (MAGI) of $100,000 or less ($50,000 or less for married couples filing separately). For incomes greater than MAGI of $100,000, the deduction will be limited to half of the amount greater than $100,000 up to $150,000 of MAGI ($75,000 for married filing separately). For individuals with income greater than MAGI of $150,000, the deduction may not be taken.

Contact Sherayzen Law Office For Advice With Respect to Rental Income and Losses

If you have any questions with respect to rental income or losses, contact the experienced tax law firm of Sherayzen Law Office.

Pursuant to IRS Circular 230, any advice rendered in this communication on U.S. tax issues (i) is not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties imposed by the U.S. Internal Revenue Service, and (ii) may not be used or referred to in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement.