Tax Lawyers Minneapolis

2013 4th Quarter Underpayment and Overpayment Interest Rates

The underpayment and overpayment interest rates will remain the same for the calendar quarter beginning October 1, 2013. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

IRS Recognized All Legal Same-Sex Marriages For Federal Tax Purposes

On August 29, 2013, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement. For information on filing an amended return, see Tax Topic 308, Amended Returns, available on IRS.gov, or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

Other agencies may provide guidance on other federal programs that they administer that are affected by the Code.

Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov. See also Publication 555, Community Property.

Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on Sept. 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired.

Home Office Expense and Unrecaptured Section 1250 gain

Do you take the home office expense on Schedule C for your small business? While taking the home office expense can help reduce your tax liability, you should be aware of a potential significant downside: unrecaptured Section 1250 gain on depreciation.

This article will explain the basics of unrecaptured Section 1250 gain; it is not intended to convey tax or legal advice. Running a small business can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Section 1250 Property Defined

The IRS defines Section 1250 property to include, “[A]ll real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation.” (Section 1245 property includes a variety of specified types of property, including tangible and intangible personal property).

Treatment of Unrecaptured Section 1250 Gain

Most taxpayers are aware that when single individuals or married couples sell their primary residence, some or all of the gain may be excluded from taxation (the exclusion is $250,000 for single taxpayers and $500,000 for married couples). Gain that exceeds the exclusion amount is then taxed at the favorable capital gains rates.

However, when taxpayers take the home office expense and depreciate their homes, the typical tax rules no longer apply. This is partly because by taking a depreciation expense on a home, a benefit is received in the form of a lower tax liability; thus it only makes sense that the IRS would want a portion of that amount back when a taxpayer finally sells a home (this is referred to as “recapturing” depreciation).

Unlike the general rule for sales or exchanges of property, if depreciable or amortizable property is disposed of at a gain, taxpayers may have to treat all, or part of, the gain (even if otherwise nontaxable) as ordinary income. Whereas the sale or exchange will allow taxpayers to pay at capital gains rates, dispositions involving unrecaptured Section 1250 gain will be taxed at a maximum of 25%, regardless of a taxpayer’s ordinary income bracket. Note that like typical capital gains transactions, dispositions involving unrecaptured Section 1250 gain will still be reported on Schedule D of Form 1040.

Does it Matter if Depreciation Expense Was Not Taken?

A frequent question arises when taxpayers take the home office expense on their Form 1040 Schedule C. Because of the disadvantage of paying tax on unrecaptured Section 1250 gain, taxpayers wonder whether they can simply take the home office expense but not take depreciation expense on their home, thereby avoiding this tax.

Unfortunately, this is not allowed under the Internal Revenue Code. As with rental real estate, taxpayers are imputed to have depreciated their business assets, regardless of whether depreciation was actually taken. As the IRS notes in Publication 946, “You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct. If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable.”

Interest Rates for the Third Quarter of 2013

On May 23, 2013, the Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning July 1, 2013, as in the prior quarter. The rates will be:

• three (3) percent for overpayments [two (2) percent in the case of a corporation];
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal short-term rate determined during April 2013 to take effect May 1, 2013, based on daily compounding.

IRS Will Be Closed Five Extra Days in 2013; Filing and Payment Deadlines

On May 15, 2013, the Internal Revenue Service announced additional details about the closures planned for May 24, June 14, July 5, July 22 and August 30, 2013.

Due to the current budget situation, including the sequester, all IRS operations will be closed on those days. This means that all IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed on those days. IRS employees will be furloughed without pay. No tax returns will be processed and no compliance-related activities will take place.

Taxpayers needing to contact the IRS about their returns or payments should be sure to take these furlough dates into account. In some instances, this may include taxpayers with returns or payments due soon after a furlough day, such as the June 17 deadline for taxpayers abroad and those making a second-quarter estimated tax payment as well as the September 3 deadline for truckers filing a highway use tax return.

No Impact on Tax-Filing and Tax-Payment Deadlines, but No Confirmation of Receipt

Because none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing deadlines. The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down.

Similarly, tax-payment deadlines are also unaffected. The only tax payment deadlines coinciding with any of the furlough days relate to employment and excise tax deposits made by business taxpayers. These deposits must be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), which will operate as usual.

Impact on Providing Documents to the IRS

IRS states that it will give taxpayers extra time to comply with a request to provide documents to the IRS. This includes administrative summonses, requests for records in connection with a return examination, review or compliance check, or document requests related to a collection matter. No additional time is given to respond to other agencies or the courts.

Where the last day for responding to an IRS request falls on a furlough day, the taxpayer will have until the next business day. If the last day to respond is Friday, May 24, for example, the taxpayer will have until Tuesday, May 28 to comply (Monday, May 27 is Memorial Day).

Some Services Will Continue to Function

Some web-based online tools and phone-based automated services will continue to function on furlough days, while others will be shut down. Available services include Withholding Calculator, Order A Transcript, EITC Assistant, Interactive Tax Assistant, the PTIN system for tax professionals, Tele-Tax and the Online Look-up Tool for those needing to repay the first-time homebuyer credit. Services not available on those days include Where’s My Refund? and the Online Payment Agreement.

Additional Furlough Days Possible

At a later date, the IRS may possibly announce one or two additional furlough days if necessary.