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Tax Developments: Business Impacts (First Quarter of 2014)

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Minnesota

The Legislature passed two omnibus tax bills during the 2014 Session.  The second, H.F. 3167, was adopted at the end of the Session, on May 19.  The second omnibus bill included many technical changes to the property tax and sales/use tax structures, impacting primarily property tax administration, and compliance for local government and businesses.  The business tax provisions were very targeted, with some tightening of the exemption for expansion of Greater Minnesota businesses, clarification of the sales and use tax exemption for digital audio and audiovisual works, and charges for a live or prerecorded presentation accessed by participants as a digital audio or audiovisual work*, and modification of the process for revoking licenses related to nonpayment of state taxes.  It also reduces the June (starting 2014) accelerated sales and use tax, liquor tax, and tobacco and cigarette tax payments from 90% to 81.4% of estimated June liabilities, and increases the threshold from 120,000 to 250,000.

            *Clarification of the digital downloads tax. The Minnesota Department of Revenue has been applying the tax to online continuing professional education classes. The legislation states that digital seminars or courses are exempt from sales and use tax if the in-person presentation is not taxable.

The Angel Investment Credit was expanded in the first bill (see below), and the latest bill makes further changes by adding another category of qualifying business activity, and requiring the commissioner of DEED (Department of Employment and Economic Development) to promote usage of half the credits for Greater Minnesota and by women- and minority-owned businesses.

For youth and senior citizen nonprofits, annual sales tax exemption for fund raising sales is increased to $20,000, with the tax only assessed on the excess over $20,000.

On March 21 the Minnesota Legislature passed a federal conformity bill and Governor Mark Dayton signed it (HF 1777, Session Laws Chapter 150). Some of the changes in the bill affected tax year 2013. The legislation conforms Minnesota’s individual income tax and corporate franchise tax on an ongoing basis retroactively to tax year 2013 to most federal changes enacted since April 14, 2011.

Minnesota will not conform to increased section 179 expensing and increased bonus depreciation, which federal law extended to tax year 2013 only. Repeals the imposition of sales tax on the following business purchases as of April 1, 2014 (not retroactive):

  • repair labor for electronic and precision equipment
  • repair labor for commercial and industrial equipment (including farm equipment)
  • storage and warehousing services (currently not taxable until April 1, 2014).

The legislation reinstates and expands the exemption for capital equipment used in providing telecommunication and pay television services beginning May 1, 2014. The exemption will now cover poles, wire, cable, fiber, and conduit. The legislation delays the date on which the sales tax exemption on purchases of capital equipment would convert from a refund-based exemption to an upfront

Extended the Angel Investment Credit program by two years and increases the annual credit allocation from $12 million to $15 million.

Federal

Expired Tax Breaks.  Some key business breaks might be brought back, including the research credit, higher expensing, bonus depreciation, employer wage credit for activated military reservists, work opportunity tax credit, and 15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements, among other items.  Work has begun in Congress to revive these provisions and extend them through 2015.

Severance payments are subject to social security taxes.  In a unanimous decision (with one justice not participating), the Supreme Court, reversing the Sixth Circuit Court of Appeals, has held that severance payments that were made to involuntarily terminated employees, and that weren't tied to the receipt of State unemployment insurance, are subject to tax under the Federal Insurance Contributions Act (social security taxes). The Court concluded that the severance payments at issue fell within the law's broad definition of "wages" for social security tax purposes.

Luxury auto depreciation limits for 2014.  Under special "luxury automobile" rules, a taxpayer's otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2014. The depreciation deduction limits for 2014 are the same as in 2013 for a passenger auto, while the limits are $100 higher for a light truck or van for the first three years and the same for years after the third year. The first-year depreciation limit is $3,160 for autos and $3,460 for light trucks or vans first placed in service in 2014. The bonus depreciation rules for additional first-year depreciation for autos, light trucks and vans, under which the regular first-year dollar limit for eligible vehicles was increased by $8,000, only applied to vehicles placed in service before Jan. 1, 2014. But there is a chance that Congress may retroactively revive bonus depreciation to the beginning of 2014 and extend it through 2015.

Maximum auto/truck values for cents-per-mile valuation.  The IRS has released the 2014 maximum fair market values for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate. An employer must treat an employee's personal use of an employer-provided auto as fringe benefit income and value it using one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56¢ per mile for 2014). However, this method may be used only if the auto's fair market value does not exceed $12,800, as adjusted for inflation. The inflation-adjusted figures for vehicles first made available to employees for personal use in 2014 are $16,000 for autos (same as for 2013) and $17,300 for trucks and vans (up from $17,000 for 2013).

Guidance on the employer mandate to provide health insurance.  The IRS has issued final regulations and guidance in the form of frequently asked questions (FAQs) on the health care law's so-called employer mandate imposed on a large employer (one that employed on average at least 50 full-time employees on business days during the preceding calendar year). The mandate or employer shared responsibility provisions, as they are called, essentially impose a penalty on such employers if one or more of their full-time employees obtains a premium tax credit through the insurance exchange. The mandate was supposed to begin in 2014 but it has been delayed until 2015. The final regulations further delay the applicability of the employer mandate to mid-sized employers (i.e., those with between 50 and 99 full-time employees) until 2016, provided that the employer meets certain requirements. In addition, they provide a phased-in coverage requirement for large employers. The FAQs cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment.

New IRS guidance on virtual currency.  The IRS has provided guidance in the form of frequently asked questions (FAQs) on the tax treatment of virtual currency, such as Bitcoin. This guidance treats virtual currency as property for U.S. federal tax purposes. Thus, the general tax principles that apply to property transactions apply to transactions using virtual currency.

myRA.  By executive order, President Obama has directed Treasury to adopt a “starter” savings account program for employees of small businesses.  The program will be implemented later in 2014 and will look similar to the Roth IRA accounts.  Treasury has posted preliminary information about these accounts at its treasurydirect.gov website.  Some of the features will include (1) as little as $25 to open an account, (2) add to savings through regular payroll direct deposit, (3) no fees, (4) earn interest at the same variable rate as government securities used by the federal employees Thrift Savings Plan, (5) not be limited to one employer (the account will be portable), (6) contributions can be withdrawn tax-free, (7) earnings can be withdrawn tax-free after five years if the saver is 59 ½, and (8) account holders can build savings for thirty years or until the myRA reaches $15,000.