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5 New Tax Developments To Consider

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5 Tax Developments For 2013

1. Cell phones. The Small Business Jobs Act of 2010 (Pub. L. No. 111-240) made it easier for employers to claim income tax deductions for the cost of providing cell phones to employees. Starting with 2010, deductions have been allowed without detailed recordkeeping regarding personal and business use of the cell phones. However, in the wake of the tax law change, a big question remained: How are employer-provided cell phones treated on the employee end?

The IRS recently provided an answer to this question. The IRS says the value of an employer-provided cell phone is excludable from an employee’s income as long as the phone is provided primarily for noncompensatory business purposes. And, as long as the noncompensatory business purpose test is met, recordkeeping requirements are deemed satisfied and any personal use of the phone is disregarded. A reimbursement to an employee to cover the business use of the employee’s personal cell phone will also be tax free under similar conditions [Notice 2011-72, 2011-38 I.R.B. 407; Field Examination Operations Memorandum, Sept. 14, 2011].

Examples of noncompensatory business purposes include the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day. According to the IRS, a cell phone provided to promote the morale or goodwill of an employee, to attract a prospective employee, or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.

2. Home mortgage interest. In new decision, the Tax Court imposed a strict limit on how much interest can be deducted when unmarried individuals buy a home together. According to the court, an unmarried couple is subject to the same interest deduction limit as a married couple [Sophy, 138 TC No. 8.].

Under the tax code, a taxpayer can claim an itemized deduction for interest paid on the first $1 million of debt incurred to acquire a home. In addition, a taxpayer can claim a deduction for interest paid on the first $100,000 of home equity loans. The same limits apply to both single taxpayers and couples filing a joint return (the limits are cut in half for married couples filing separately). But what limits apply to an unmarried couple filing as singles? Is each individual allowed a deduction for interest up to the $1 million/$100,000 limit or is the couple subject to an overall $1 million/$100,000 limit?

The Tax Court says it’s the latter. The $1 million and $100,000 debt limits apply on a per-residence, not a per-individual, basis. The court pointed out that the tax code refers to “any indebtedness” on the residence when imposing the limits so the focus is on the amount of debt carried by the residence and not on the debt carried by individuals.

3. Unemployment insurance. The IRS recently ruled that an employee can claim a deduction for the cost of purchasing a private unemployment insurance policy. The policy purchased by the employee supplements benefits received under a state unemployment insurance program if the employee is involuntarily terminated.

The IRS said that the premiums paid on a private unemployment insurance policy are analogous to the premiums paid by businesses to insure against lost profits during a shutdown. The unemployment insurance policy provides indemnity coverage for lost wages due to unemployment. Since an employee is in the “business” of being an employee, the premiums are a business expense that can be claim as a miscellaneous itemized deduction [Priv. Ltr. Rul. 201152005].

4. IRA loans. The tax law allows taxpayers to use IRAs as a short-term source of cash. As long as an IRA distribution is redeposited in the IRA within 60 days, there are no tax consequences. And the tax law permits the IRS to waive the 60-day limit when delaying events are beyond a taxpayer’s control and a waiver would be equitable.

In a new ruling, the IRS said that the waiver will generally not be available when a taxpayer loans an IRA distribution to someone else. The ruling involved a taxpayer who loaned a distribution to his mother to buy a house until she could get permanent financing. Because of bank delays, the taxpayer’s mother could not repay the loan and the taxpayer could not redeposit the funds within the 60-day limit. The IRS ruled that, whether or not the taxpayer intended to redeposit the funds within 60 days, he assumed the risk that the loan might not be repaid on time. Thus, the taxpayer was ineligible for the waiver and the IRA distribution was taxable [Priv. Ltr. Rul. 201118025].

5. Charitable donations. According to a recent Tax Court decision, at least some of the expenses a taxpayer incurs for pets under a foster care program may be deductible as a charitable donation [Van Dusen, 136 T.C. No. 25].

The tax code allows taxpayer to deduct out-of-pocket expenses paid in connection with providing volunteer services to a charitable organization. The taxpayer in the Tax Court case used her residence to provide a foster home for about 80 cats under the direction of a charitable organization. The Tax Court ruled that by providing the foster home, the taxpayer was performing volunteer services to the organization.

Since the taxpayer had seven pet cats of her own, the Tax Court said that the taxpayer could claim a charitable deduction for 90 percent of her veterinary and pet supply expenses. In addition, the Tax Court allowed a deduction for a portion of her cleaning and utility expenses.

Source: Intuit Accountants