Depreciation of Assets Acquired as a Gift

Special rules apply to property acquired as a gift. The determination of the basis for depreciation purposes and the amount of deductible loss on the eventual sale of the asset are treated differently for property received as a gift.

The first step in determining the depreciation deduction allowable for property received as a gift is to determine the donor’s adjusted basis, the FMV of the property at the time of the gift, and any gift tax paid by the donor on the gift.

The donor’s adjusted basis plus a portion of the gift tax paid by the donor is used by the taxpayer to establish their depreciable basis in the gift. However, unlike a related party transaction, the taxpayer does not “step into the shoes” of the donor. Instead, the taxpayer starts the depreciation recovery period as of the date of the gift, using the applicable convention and method.

Example: Grandpa decided it was time to abandon his summer home and move permanently to Florida. On April 30, 2015, he gave his house to his niece, Peggy. The FMV of the property at that time was $250,000. Grandpa’s basis in the home was $200,000. He filed Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, but did not owe any gift tax.

Peggy decides to use the house as rental property. On her 2015 return, she reports the acquisition date as April 30, 2015, and a beginning basis of $200,000. Residential real estate is depreciated over 27.5 years using the mid-month convention and the straight-line method.

For gifts received after 1976, a portion of the gift tax that was paid on the gift is added to the basis. This is calculated by multiplying the gift tax by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift. The net increase in value of the gift is the FMV of the gift less the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies.

For an update on depreciation and other tax law changes affecting tax year 2015, get your tax updates today!

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Tax Issues of High-Income Clients

High-income clients face a number of complex tax-planning issues. Recent changes in tax law implemented by the Affordable Care Act (ACA) and ATRA have greatly increased the potential tax liability of this group of taxpayers.

Provisions important to high-income taxpayers include the following.

INCOME TAX MARGINAL RATE – ATRA permanently lowered the marginal tax rates for many middle-income taxpayers. However, it permanently increased the highest marginal tax rate for high-income earners from 35% to 39.6%. This increase affects single taxpayers with 2015 taxable incomes greater than $413,200 and married filing jointly (MFJ) taxpayers with taxable incomes greater than $464,850.

ADDITIONAL MEDICARE TAX – Beginning January 1, 2013, the ACA implemented an additional Medicare tax of 0.9% for taxpayers whose wages, compensation, and self-employment (SE) income exceeds threshold amounts. Thresholds for 2015 are $200,000 for single taxpayers and $250,000 for married filing jointly (MFJ) taxpayers. The additional Medicare tax applies to the following income categories.

  • Wages and other compensation subject to Medicare
  • Compensation subject to the Railroad Retirement Tax Act (RRTA)
  • SE net income (an SE net loss is not considered for purposes of this tax)
  • Taxable wages not paid in cash, such as noncash fringe benefits
  • Tips

CAPITAL GAINS TAX – ATRA permanently set the tax rate for long-term capital gains (assets held for more than one year) at 15% for many middle-income taxpayers. In addition, it eliminated a long-term capital gains tax for taxpayers in the two lowest income brackets. However, ATRA raised the long-term capital gains rate from 15% to 20% for taxpayers with ordinary income taxed at the highest marginal rate. 2015 rate is $413,200 for Single taxpayers and $464,850 for MFJ taxpayers.

PERSONAL EXEMPTION PHASEOUT – In 2015, taxpayers are granted a personal exemption of $4,000 for themselves and for each of their dependents. However, this exemption is reduced by 2% for each $2,500 (or part of $2,500) that AGI exceeds a certain threshold and is eliminated entirely at higher income levels. The phaseout begins at $258,250 for single filers and at $309,900 for MFJ filers.

ITEMIZED DEDUCTION LIMITATION – As with the personal exemption, certain itemized deductions are limited once a taxpayer reaches a certain income threshold. This limitation, sometimes called the Pease limitation, was permanently reinstated for tax years after 2012. The Pease limitation is triggered when AGI exceeds the threshold amounts for 2015 of $258,250 for single filers and $309,900 for MFJ filers.

These provisions that affect high-income taxpayers present numerous planning opportunities for tax practitioners. Don’t miss out.  Get your 2015-2016 Tax Updates today!

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Tracking CPE Made Easier for Firm Administrators

If you are a firm administrator responsible for tracking CPE for your staff, you’ll be happy to hear that CPE Link has released a couple of new features on its Compliance Manager dashboard that will make your job easier!

Here is a quick summary of what’s new:

  • Posting Credit for Multiple Staff – Firm administrators can now post CPE credit for multiple staff who attended a course from another CPE provider in one simple entry.
  • Multiple Firm Admins – Firms now have the ability to assign as many administrators to their Firm CPE account as desired. All administrators have full rights to manage staff CPE information.

Not using Compliance Manager yet?  Have questions? Interested in scheduling a demo? Please contact Janaye Fletcher at or (800) 616-3822 ext 220.




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Tax Avoidance vs. Tax Evasion

In addition to preparing tax returns, practitioners may provide additional related services, such as tax planning. Practitioners who engage in tax planning and provide tax advice must keep these rules in mind.

Tax Planning - Tax planning to reduce tax liability is a legitimate goal. However, if the planning includes an element of fraud, deceit, or concealment, it becomes tax evasion. Practitioners who engage in tax planning should keep the following references in mind.

• IRC §7201 relating to tax evasion
• IRC §7206 relating to false returns, concealment, and other prohibited conduct
• Requirements for written advice under Circular 230, §10.37

Tax Evasion - IRC §7201 states that any person who willfully attempts to evade any tax imposed by the Code (including evasion of tax payments assessed under the Code) is subject to felony conviction. Upon conviction, IRC §7201 provides a fine of up to $100,000 ($500,000 for a corporation), or five years’ imprisonment, or both (along with the costs of prosecution). Moreover, under the same Code section, a fine of up to $250,000 may be imposed for tax evasion.

Read more (including some specific examples of tax avoidance vs tax evasion).

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Recent Tax Bills Passed in the House

Since January 2015, several bills have been passed by the House, including ones to make permanent a few of the 50-plus provisions that expired at the end of 2014. Described below is a sampling.

Permanent, higher Sec. 179 expensing: America’s Small Business Tax Relief Act of 2015, H.R. 636, passed on Feb. 13. This bill makes permanent the $500,000 expensing and $2 million threshold amounts for expensing business property, also indexing them for inflation. Software and qualified real property, as well as air conditioners and heaters, would now be Sec. 179 property, and taxpayers can revoke a Sec. 179 election without IRS consent.

Permanent sales tax deduction: State and Local Sales Tax Deduction Fairness Act of 2015, H.R. 622, passed on April 16 (272–152). This bill makes permanent the option to claim an itemized deduction for sales tax rather than state income tax, which has existed in temporary form since 2004.

Permanent research tax credit: American Research and Competitiveness Act of 2015, H.R. 880, passed on May 20 (274–145). H.R. 880 makes the credit permanent and increases the rate for the simplified credit from 14% to 20%. The traditional credit with the 1984–1988 base years would be terminated. This bill also allows small businesses (gross receipts of $50 million or less on average over a three-year period) to use the credit against either regular tax or alternative minimum tax.

Read the full article

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Social Security Maximization versus Optimization

It is important for CPAs and advisors to recognize the difference between Social Security maximization and optimization. The Social Security maximization decision is based on math to target the highest lifetime dollar amount of Social Security income that the government will pay you. This is essentially a calculation that is done in a vacuum. This maximization calculation does not consider other aspects of the client’s bigger picture financial situation, such as income taxes and how other assets or income streams impact the taxation of the Social Security income stream. On the other hand, Social Security income optimization considers the Social Security income election technique and timing and includes other aspects of retirement financial and tax planning to work with the client towards harvesting the client’s maximum net after tax (i.e. post Uncle Sam!) lifetime income.

Some Social Security claimants think their Social Security income is, or will be, tax-free. For many, this may not be the case. Up to 85% of Social Security income may be taxable due to what is called provisional income. Provisional income, according to Kevin McCormally of Kiplinger, is “… basically your adjusted gross income plus any tax-exempt interest, plus 50% of your Social Security benefits.” In the media and amongst professionals this is often referred to as the stealth tax, because the taxation of the Social Security income benefit tends to “sneak up” on both consumers and tax professionals.

Several sources of income can contribute toward triggering the provisional income taxation thresholds for a client. These income sources may impact the taxation of their Social Security income benefit. These income sources include, but are not limited to, distributions from your 401k or IRA account(s), wages, pension income, CD and bond interest, and stock/mutual fund dividends.

Of course, clients ought to be mindful and attempt to minimize taxation of the Social Security income benefit if possible, and this often requires advanced planning. Therefore, it is important to investigate and determine in which sequence clients might draw upon their retirement income stream and/or retirement asset account buckets. When and how clients take their Social Security income can significantly enhance or reduce the longevity of their retirement assets and income stream.

Questions clients ought to be asking their advisor(s) might include:

• Should I take Social Security early or later?

• Which Social Security income election strategy will give me the most lifetime net after tax income?

• Does it make sense for me to first draw upon my 401K and/or IRA account(s) and then claim Social Security later?

• Does it make sense to re-distribute some of my assets into other investment vehicles that minimize, or altogether possibly eliminate, the taxation of my Social Security benefit?

The timing and election of the Social Security benefit in conjunction with investment and taxation management can lead to potentially higher standards of living in retirement for our clients.

Read more on considerations for adding Social  Security planning to your practice.

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Estate and Succession Planning: More Important Than Ever

After enactment of the American Taxpayer Relief Act of 2012, many clients and their advisors quickly concluded that “estate planning” was no longer important. This was primarily due to the effectively permanent large Federal estate and gift tax exemption level of $5 million-plus per person. This exemption, which is adjusted for inflation annually, this year is at $5.43 million – effectively eliminating Federal estate tax concern for over 99% of U.S. families! Yet estate and succession planning is more important than ever – for both tax and non-tax reasons.

First of all, 19 States still have an estate or inheritance tax of some type, and some of these jurisdictions have much lower exemption levels than does the Federal estate tax. So tax practitioners must know their State law for clients before eliminating estate tax from the planning agenda. In addition, many Wills and trusts are quite out-of-date, especially if not updated the past few years, and the changes in family situations, increase or decrease in net worth and other factors call for updating of the estate and succession plan.

Read the full article at

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Top Three Accounting & Auditing Issues: Peeling the Onion

Recent surveys have shown that the top three issues for professional CPAs are:

1. Keeping Up with the Effects of new Federal and State Regulations

  • Keeping up with new accounting and auditing pronouncements
  • Information technologies
  • Health Care and Related Issues
  • Consumer Issues

2. Keeping Up with the Complexities of Tax Laws

3. Finding Qualified Staff/Employees

These issues all have sub issues that are important. When we drill down into the issues we come across the top three accounting and auditing issues just below the surface. This is similar to “peeling an onion” to get to the heart of the issues. Other issues also arise such as:

  • Succession Planning
  • Seasonal workload compression

Nevertheless, the top three A & A issues always come back to changes in generally accepted accounting standards (GAAP), changes to generally accepted auditing standards (GAAS), and changes to compilation and review standards (SSARS). Some have said the overarching theme to all this is “standards overload.” Whether one is employed in public practice, industry, government, or education, the same “standards overload” concerns always seem to surface. “Standards overload” is said to be one of the primary reasons for the rise of the concept of “other comprehensive basis of accounting” (OCBOA).

There is growing appeal in the accounting profession to find an alternative for small businesses to some of the measurement and disclosure requirements of GAAP. We see this in the Private Company Council (PCC) with the FASB. Mr. Russell G. Golden’s, Chairman of the FASB, goals include simplicity and clarification of GAAP.

One solution often mentioned is the use of OCBOA financial statements. In 1981, the AICPA’s Special Committee on Accounting Standards Overload was formed to consider alternative means of providing relief from accounting standards that are not cost-effective, particularly for small, closely held businesses.

So the nature of the problem in finding the top three issues seems to be in finding which of the exact standards of GAAP, GAAS, or SSARS are the top three issues.

Read the full article at

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Fundamentals of Construction Accounting

While most believe the construction process begins on the left at the Estimating stage, the process truly begins at the Accounting stage. Accountants must provide estimators with the right internal information before the estimator can begin. The estimator is then able to draft blueprints and enter information for job costs. Once construction begins, information is delivered to Accounting and completes the circle as the job finishes.

Since the construction process begins with the Accounting stage, common issues will naturally occur. One main issue is the accumulation of contract costs. This error is a result of the cash method used to accumulate costs resulting in unrecorded liabilities that affect cost records for contracts in progress. The correct accounting fix to this issue is to use accrual accounting as costs should be allocated to the appropriate individual contract records.

Why is being aware of your costs the most important aspect of construction accounting? It helps you:

  • In the bidding process
  • To determine problem jobs and people
  • In the claims process
  • To make better business decisions
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Lost Revenue from Corporate Fraud

ACFE 2014 Report to the Nations states that organizations typically lose 5% of their revenue to fraud each year.

Most of the time, fraud takes place below the radar, and upon discovering it, companies tend to want to move forward as quickly as possible without notifying the public of the fraudulent activity.

The smallest organizations tend to suffer the largest median loss as these organizations typically employ fewer anti-fraud controls than their larger counterparts. It is not unusual for small business to lose a significant amount to fraud and end up closing their doors for good.

Read more

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