Arizona Department of Revenue is Struggling this Year
As many of you know I sit on both the Tax Steering and Tax Legislative committees at the Arizona Society of Certified Public Accountants. My role on these committees is to assist the Society in establishing continuing education curriculum for our members and to provide assistance to the Legislature in drafting Arizona tax law. Although our role is primarily supportive, through our lobbyist, we also advocate for tax simplification and economic stimulus provisions for individuals and businesses. This work, in addition to the representation services I provide to my clients, helps me keep my finger on the pulse of the legislative and regulatory activity occurring at the state level. With that in mind there are a few key issues I would like you to keep in mind as we plunge further into what is becoming an incredibly disheveled tax season.
AZDOR E-file is not processing returns with a negative adjusted gross income
Several CPAs have complained that they have been unable to get the Arizona Department of Revenue to accept individual income tax returns with a negative adjusted gross income. For the time being, we are being advised to paper file these returns. Keep in mind that failing to make an election to carry forward a net operating loss on a timely filed return will result in you forfeiting your ability to do so. There is no provision in the Internal Revenue Code or in the Arizona Revised Statutes that permits this election to be made when the return is filed late (or on an amended return). I know for some of you this could result in the loss of tens of thousands of dollars in future tax benefits. If we have to paper file your return, make sure you do it certified mail.
Erroneous collection actions related to 4th quarter payroll tax returns
A number of CPAs, including myself, have reported that the Arizona Department of Revenue has erroneously issued hundreds, if not thousands, of notices to businesses indicating that their 2014 4th quarter A1-QRTs have not been received. I received one of these letters for my own firm last week and I admit that I was quite frustrated by the situation. We experienced a similar issue near the end of the 2012 tax filing season in which the IRS and AZDOR’s systems failed to communicate and dozens of my clients, and thousands of individuals around the state, were erroneously assessed late filing penalties and received weeks of harassing collection calls until we were able to demonstrate that their extensions had been properly filed with the IRS.
Although this appears to be a computer glitch, never ignore correspondence from the Arizona Department of Revenue. The letter is an indicator that you are in the automated collection system. Failing to address the issue may keep the collections system running which can result in additional enforcement action, but it is probably not necessary to seek representation services from me on this issue. I recommend that you write a (short and concise) letter explaining that the return has already been submitted, provide proof of delivery (assuming you have followed my advice to always use certified mail when communicating with the government), resubmit your A1-QRT and the front and back side of the cleared check proving payment.
If you follow this procedure you should be able to avoid further enforcement action, but if this initial effort proves unsuccessful, feel free to contact me to discuss establishing an engagement to resolve this matter.
Uncertainty about Section 179 and 168(k) Bonus Depreciation
The federal government raised the Section 179 limit from $25,000 to $500,000 and reinstituted Section 168(k) bonus depreciation for the 2014 tax year on December 19, 2014. The extension also expired on December 31, 2014. It is tough to predict what will happen at the federal level in this political environment, but the House has passed bills to “permanently” (whatever that means in today’s world) increase the Section 179 limit and reinstitute Section 168(k). We will see how far those bills go. I personally do not expect to see an issue with the bills getting through the Senate, but they may run into some resistance when they hit Obama’s desk.
At the State level, there is even more uncertainty. I am actively working with the Society and the State Legislature to push through HB 2083, which would bring Arizona into conformity with federal tax law for 2014. We are currently getting resistance from Democratic legislators because of the bills $30.8 million price tag (hence making it an anti-education bill). I have made the argument, however, that the fully engrossed version of the bill requires businesses to recapture these tax benefits over the next 5 years, so in essence the bill is revenue neutral. I also pointed out that my clients need cash in their hands today to create new jobs. The bottom line is that spending more money on education will not help the state if there are no good paying jobs for the students when they graduate.
So, at this point, Arizona has not conformed to federal tax law in this area. We are limited to $25,000 in Section 179 expensing and no bonus depreciation at the state level. With the corporate filing deadline only two weeks away this puts us in a situation where we will probably have to file returns and amend if the Legislature passes the conformity bill. Hopefully we will have some certainty before April 15, so we can avoid amendments for my partnership and individual taxpayers that take advantage of these statutes.
Benjamin Podraza, CPA/PFS, MTAX, CGMA
March 2, 2015