Vernoia, Enterline + Brewer, CPA LLC

Archive for August, 2013

How do I? Compute the shared responsibility payment for individuals

Beginning January 1, 2014, the Patient Protection and Affordable Care Act (PPACA) requires individuals to carry comprehensive health insurance (referred to as minimum essential coverage or MEC). Individuals without coverage must make a shared responsibility payment to the IRS, unless they qualify for an exemption. This requirement is known as the individual mandate. The individual mandate also applies to children and other dependents.

Minimum essential coverage

The individual mandate applies on a monthly basis. The payment amount is based on the number of months in the calendar year that the individual lacks MEC and does not have an exemption. An individual who is covered by health insurance that provides MEC will not owe the payment. MEC includes certain government-sponsored coverage, such as Medicare, most employer group health plans, and coverage offered in the individual market.

Affordability and other exemptions

The payment does not apply if the coverage available to the employee is not “affordable.” MEC is not affordable if it costs more than eight percent of the taxpayer’s household income for the year. If an individual is not eligible for employer coverage, the individual’s minimum required contribution is the premium for the lowest cost bronze-level plan offered by an affordable insurance exchange.

There are nine categories of exemptions from the individual mandate. These include religious, Indians, individuals who do not have to file a return, hardship, and unaffordable coverage.

Payment

The payment owed by an individual without coverage or an exemption is the lesser of: the monthly payment amount for each individual (maximum three family members), or the monthly national average bronze plan premiums for the family. The monthly payment amount is the greater of: a flat dollar amount, or the excess income amount. The flat dollar amounts are $95 in 2014, $325 in 2015, $695 in 2016, and an indexed amount amount after 2016. The amount is cut in half for an individual under 18.

The excess income amount is the excess of the taxpayer’s household income over the taxpayer’s filing threshold, multiplied by a percentage. The percentage is 1.0 percent for 2014; 2.0 percent for 2015, and 2.5 percent after 2015.

Collection

A taxpayer must report liability for the payment on the taxpayer’s income tax return.  The penalty is payable upon notice and demand by the IRS. Because the IRS cannot use liens or levies to collect the payment, it expects to collect the payment primarily through refund offsets.

FAQ: To what extent are business meals deductible?

A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)

Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. The 50-percent reduction is made only after determining the amount of the otherwise allowable deductions. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer’s employees. In that case, it doesn’t matter if the taxpayer reimburses the employees for 100 percent of the expenses.

Employee-only meals.  If the value of any property or service provided to an employee is so minimal that accounting for the property or service would be unreasonable or administratively impracticable, it is a de minimis fringe benefit that is excluded for income and employment tax purposes.  Such benefits that are food-related may include occasional parties or picnics, occasional supper money due to overtime work, and employer-furnished coffee and doughnuts.

A subsidized eating facility can be a de minimis fringe if it is located on or near the business premises and the revenue derived from it normally equals or exceeds direct operating costs. Further, if more than one-half of the employees are furnished meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Therefore, the meals are fully deductible by the employer, instead of possibly being subject to the 50-percent limit on business meal deductions, and excludable by the employees.

Taxpayers and practitioners wait for post-DOMA guidance from IRS

More than one month after the U.S. Supreme Court found Section 3 of the Defense of Marriage Act (DOMA) unconstitutional, the IRS has yet to issue guidance in critical areas of tax filing, employee benefits, and more. Many taxpayers and tax professionals are questioning what revisions the IRS will make to its rules and regulations. At the same time, other federal agencies have announced changes in their policies to reflect the demise of Section 3 of DOMA.

DOMA

On June 26, 2013, the Supreme Court struck down Section 3 of DOMA, which provided that the word “marriage” meant only a legal union between one man and one woman as husband and wife, and the word “spouse” referred to only a person of the opposite sex who is a husband or a wife. Because of Section 3 of DOMA, the IRS did not recognize same-sex married couples as married for federal tax purposes.

Now, same-sex married couples who reside in states that recognize same-sex marriage should be entitled to the same tax benefits and responsibilities of opposite-sex married couples. These include the ability to file a joint federal income tax return as a married couple, possible refunds for open tax years, and to take advantage of many benefits in the Tax Code available to married couples. However, it is unclear if this is true for same-sex married couples who reside in states that do not recognize same-sex marriage. As of August 1, 2013, same-sex marriage is recognized in California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Maryland, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and the District of Columbia.

The IRS posted an announcement on its website shortly after the Supreme Court’s decision.  The agency promised it would “move swiftly to provide revised guidance in the near future.”  To date, that is the only official announcement from the IRS. As a result, there has been much speculation on how the IRS will treat same-sex married couples post-DOMA.

Common-law marriages

The IRS may take the same approach to same-sex marriage as it did more than 50 years ago with common-law marriage. Some states recognize common-law marriage; others do not. Common-law marriage is a term used to describe a marriage that has not complied with the statutory requirements most states have enacted for a ceremonial marriage.

In Rev. Rul. 58-66, the IRS announced that if a state recognizes common-law marriages, the status of individuals living in this relationship is, for federal income tax purposes, that of husband and wife. This rule also applies in the case of taxpayers who enter into a common-law marriage in a state that recognizes their relationship and who move to a state that does not recognize common-law marriage.  The IRS still treats the common-law couple as married even if they no longer live in a state that recognizes their marriage. The IRS could treat same-sex married couples, who marry in a state that recognizes same-sex marriage and who move to a state that does not recognize their marriage, in the same way.

Other federal agencies

Within days of the Supreme Court’s decision, the U.S. Department of Homeland Security (DHS) announced that it would use the location of legal marriage for a same-sex couple for immigration purposes. On July 17, DHS’ Bureau of Immigration Appeals (BIA) made its first official decision post-DOMA. The BIA held that DOMA would no longer be an impediment to the recognition of lawful same-sex marriages and will recognize same-sex spouses under the Immigration and Nationality Act if the marriage is valid under the laws of the state where it was celebrated.

The U.S. government’s Office of Personnel Management (OPM) also announced some changes in its benefits post-DOMA. OPM told federal employees that all legally married same-sex spouses and children of legal same-sex marriages will be eligible family members under the federal employees’ group life insurance program. Additionally, all legally married same-sex spouses will be able to apply for long-term care insurance under the federal long-term care insurance program.

The U.S. Department of Labor is expected to issue guidance on the status of same-sex spouses under the Family and Medical Leave Act (FMLA).  FMLA entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.  Because of DOMA, spouse was defined only as a person of the opposite sex who is a husband or wife.

Employers

Many employers are revisiting their employee benefits post-DOMA. Employers may need to review their health and retirement plans, as well as their FMLA and other leave policies. A same-sex married couple presumably would have the same rights to tax-exempt spousal coverage under a health plan and the right to a joint and survivor annuity under a retirement plan as an opposite sex-married couple. The IRS and DOL are expected to issue guidance on how quickly employers must act to make changes to health and retirement plans to reflect the Supreme Court’s decision.

If you have any questions about the IRS’s expected guidance regarding any of the post-DOMA issues, please contact our office at (908) 725-4414.

U.S. delays FATCA’s withholding, reporting and other rules for six months

The scheduled January 1, 2014 rollout of withholding, reporting and other rules in the Foreign Account Tax Compliance Act (FATCA) has been delayed six months, the Treasury Department and the IRS have announced. The six-month delay is expected to give the U.S. more time to conclude negotiations and sign agreements to implement FATCA with foreign governments. The Treasury Department and the IRS have not, however, delayed the rules for reporting by individuals.

Far-reaching scope

FATCA ‘s scope is very far reaching. FATCA requires certain foreign financial institutions (FFIs) to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.

FATCA also requires that some individuals holding financial assets outside the U.S. must report those assets to the IRS. The IRS has developed Form 8938, Statement of Specified Foreign Financial Assets. This reporting requirement is separate from the long-time reporting requirement under the Bank Secrecy Act to file an “FBAR” (Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts).

Final rules

In early 2013, the Treasury Department and the IRS issued final FATCA regulations. The final rules require withholding agents to withhold 30 percent of certain payments (called “withholdable payments”) to FFIs unless the FFI has entered into a reporting agreement with the IRS. To avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to:

  • Identify U.S. accounts,
  • Report certain information to the IRS regarding U.S. accounts, and
  • Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.

Delay

The final regulations called for the gradual phasing-in of the FATCA rules beginning in 2014 and continuing through 2017. Now, the Treasury Department and the IRS have further delayed the start of some of the FATCA rules, including rules on withholding, reporting and due diligence by FFIs.  Withholding agents generally will be required to begin withholding on withholdable payments made after June 30, 2014 instead of December 31, 2013.

Withholding agents also generally will be required to implement new account opening procedures by July 1, 2014. In addition, Treasury and the IRS intend to modify the final regulations so that the information reports previously required from certain FFIs on U.S. accounts for the 2013 and 2014 calendar years will be required only for 2014 (with respect to   U.S. accounts identified by December 31, 2014).  Reporting by these FFIs would be required by March 31, 2015. Additionally, all qualified intermediary agreements that would otherwise expire on December 31, 2013 will be extended to June 30, 2014. The launch date of the IRS’s online FATCA registration site has also been delayed to August 19, 2013.

Agreements

Since FATCA became law, the U.S. has been negotiating with foreign jurisdictions to implement its reporting requirements. The U.S. has developed two model intergovernmental agreements (IGAs). The first model agreement (Model I) generally requires an FFI to report account information to its government, which, in turn, will exchange the information with the IRS.  Under the second model agreement (Model II), an FFI registers with the IRS and reports account information directly to the IRS. As of August 1, 2013, the U.S. has entered into IGAs with nine countries (Denmark, Germany, Ireland, Japan, Norway, Mexico, Spain, Switzerland, and the U.K.). The Treasury Department has reported that it hopes to conclude negotiations before 2014 with Argentina, Belgium, Korea, Malaysia, New Zealand, South Africa, and many other countries.

Individuals

FATCA’s rules for reporting by individuals are not delayed. Generally, FATCA requires taxpayers to file Form 8938 if he or she is a U.S. citizen, a resident alien, and in some cases, a nonresident alien. The taxpayer also must own a “specified foreign financial asset,” which includes any financial account maintained by an FFI unless specifically excluded. Additionally, the aggregate value of the specified foreign financial asset must exceed certain reporting thresholds.

For single individuals living in the U.S., the total value of the specified foreign financial assets must be more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married couples filing a joint return and living in the U.S these amounts are $100,000 and $150,000. The threshold amounts are higher for taxpayers living outside the U.S.

Form 8938 is not a substitute for the FBAR. The forms have different filing requirements. Please contact our office for more details about the two forms and their filing requirements.  The IRS is also expected to issue rules on FATCA reporting by domestic entities if the entity is formed or used to hold specified foreign financial assets and the assets exceeds the appropriate reporting threshold. Until the IRS issues regulations, only individuals must file Form 8938.

FATCA is a very complex law, which impacts many taxpayers here and abroad. Please contact our office at (908) 725-4414 if you have any questions about FATCA.

Affordable Care Act’s schedule for 2014 & 2015

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the “employer mandate”) and the individual shared responsibility provisions (known as the “individual mandate”). One – the employer mandate – has been delayed to 2015; the other – the individual mandate – has not been delayed. Employer shared responsibility payments Very broadly, the Affordable Care Act imposes a shared responsibility payment (also known as a penalty) on an applicable large employer that either: Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in MEC (Minimum Essential Coverage) under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(a) liability), or Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(b) liability). The amount of the employer shared responsibility penalty varies depending on whether the employer is liable under Code Sec. 4980H(a) or Code Sec. 4980H(b). The calculations of the payment are very complex but two examples help to shed some light on how they are intended to work. Example 1 is based on Code Sec. 4980H(a) liability and Example 2 is based on Code Sec. 4980H(b) liability. Example 1. Employer A fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee over a 30-employee threshold, the employer would owe $2,000, for a total penalty of $140,000. The Code Sec. 4980H(a) penalty is assessed on a monthly basis. Example 2. Employer B offers minimum essential coverage and has 100 full-time employees, 20 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee receiving a tax credit, the employer would owe $3,000 for a total penalty of $60,000. The maximum penalty for Employer B would be capped at the amount of the penalty that would have been assessed for a failure to provide coverage ($140,000 above in Example 1). Since the calculated penalty of $60,000 is less than the maximum amount, Employer B would pay the calculated penalty of $60,000. The Code Sec. 4980H(b) penalty is assessed on a monthly basis. These examples are merely provided to illustrate how the employer shared responsibility payment is intended to work. Every employer’s situation will be different depending on the number of employees, the type of insurance offered and many other factors. Please contact our office for more details. IRS guidance Since enactment of the Affordable Care Act, the IRS and other federal agencies have issued guidance on the employer shared responsibility provision. The IRS has defined what is an applicable large employer (generally defined as businesses with 50 or more employees), who is a full-time employee with certain exceptions for seasonal workers, and much more. The IRS has not, however, issued guidance on reporting requirements by employers and insurers. The Affordable Care Act generally requires employers, insurers and other entities that offer minimum essential coverage to file annual information returns reporting information about the coverage. As originally enacted, this information reporting was scheduled to take effect in 2014, the same year that the employer shared responsibility provisions were scheduled to take effect. Delay In early July, the Treasury Department announced that information reporting by employers, insurers and other entities offering minimum essential coverage will not start in 2014 but will be delayed until 2015. The IRS followed-up with transitional guidance. Information reporting by employers, insurers and other entities offering minimum essential coverage is waived for 2014. However, the IRS encouraged employers, insurers and others to voluntarily report this information. The IRS reported it is working on guidance and expects to issue regulations before year-end. Because information reporting has been delayed, the Affordable Care Act’s employer shared responsibility provisions are waived for 2014. The IRS explained that the transitional relief is expected to make it impractical to determine which employers would owe shared responsibility payments for 2014. As a result, no employer shared responsibility payments will be assessed for 2014. Individual mandate The January 1, 2014 scheduled start date of the Affordable Care Act’s individual shared responsibility provisions is not delayed. Unless exempt, individuals must carry minimum essential health coverage after 2013 or pay a shared responsibility payment (also called a penalty). The Affordable Care Act exempts many individuals, such as most individuals covered by employer-provided health insurance, individuals enrolled in Medicare and Medicaid, and many others. After 2013, individuals may be eligible for a new tax credit (the Code Sec. 36B credit) to help offset the cost of obtaining health insurance. The credit is payable in advance to the insurer. The January 1, 2014 scheduled start date of the Code Sec. 36B is also not delayed. Small employers Qualified small employers will be able to offer health insurance to their employees through the Small Business Health Options Program (SHOP). Enrollment for coverage through SHOP is scheduled to begin October 1, 2013 for coverage starting January 1, 2014. For 2014, SHOP is open to employers with 50 or fewer employees. Beginning in 2016, SHOP will be open to employers with up to 100 employees. After 2013, the small employer health insurance tax credit is scheduled to increase from 35 percent to 50 percent for small business employers (and from 25 percent to 35 percent for tax-exempt employers). However, the credit is only available after 2013 to employers that obtain coverage through SHOP. This credit is targeted to very small employers with the credit gradually phasing out as the number of employees reaches 50. If you have any questions about employer reporting or the employer shared responsibility payment-or any questions about the Affordable Care Act-please contact our office at (908) 725-4414.