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ACA Due Dates, Information Returns, Bad Debt Deduction

Berdon Tax Team 01.11.2016 | eVisor

Due Dates Extended for 2015 ACA Information Returns

On December 28, 2015, the IRS extended the due dates for 2015 information returns (to be filed in 2016) under the Affordable Care Act (ACA).1  The due date for furnishing Forms 1095-B and 1095-C to employees and other service providers is extended from February 1 to March 31, 2016. The due date for filing Forms 1094-B and 1094-C with the IRS is extended from February 29 to May 31, 2016. And for those who are electronically filing, the due date jumps from March 31 to June 30, 2016.

For employers and other coverage providers who have already filed extension requests, the IRS has announced that the requests will not be formally granted. Instead, the extended due dates will apply.

For persons who furnish statements and file information returns after the extended due dates, late filing penalties could apply.  However, the IRS has announced that it will abate the penalties if the filer has made reasonable efforts to prepare for the new filing requirements.  Notwithstanding the extensions, the IRS requests that employers and other coverage providers furnish statements and file information returns as soon as they are ready.

1 IRS Notice 2016-4

New Information Reporting Requirements Effective January 1st

Issuers of securities are generally required to file Form 8937 to report actions that affect the basis of issued securities.  Rules effective on January 1, 2014, required issuers to report modifications to their debt.  The rules had ten categories of exemptions which no longer apply to debt modifications that occur on or after January 1, 2016.

Here are two examples of the impact of the new requirements:

  • The original rules contained an exemption if debt was evidenced by a physical certificate. For example, if a company issued a note or mortgage, any debt modification was exempt. This exemption resulted in very few issuers having to file Form 8937 to report debt modifications. Since the exemption for physical certificates has expired, many issuers will need to report their debt modifications.
  • The original rules also contained an exemption for foreign issuers which also expired.  Currently, there does not appear to be an exemption for foreign issuers that have no US activity. There is an exemption if 100% of the holders of a security are exempt recipients. Most foreign holders are considered exempt recipients.  As a result, a foreign issuer of debt will generally be required to file a Form 8937 to report a debt modification if there is a single US holder.

Forms 8937 are generally required to be filed within 45 days of a debt modification.

The Wrong Way to Take a Partial Bad Debt Deduction

An IRS ruling1 highlights that there is a right way and a wrong way to charge a bad debt off the books.  The ruling is unusual in that after finding that the taxpayer did not charge off the debt correctly, it explained how the taxpayer could have done so correctly.

Business taxpayers are generally permitted partial bad debt deductions. However, the amount of the deduction is limited to the amount "charged off" for accounting purposes during the taxable year.  The taxpayer in the ruling set up a general allowance account on its balance sheet as evidence that a mortgage loan was impaired. The offsetting entry was to reduce net income. The IRS took the position that a mere allowance or reserve for anticipated future losses does not meet the statutory requirement of a charge-off.

The authors of the ruling noted that the conclusion might have been different if the taxpayer used a reserve with the word "loss" in the title and had expensed the amount as a bad debt.  Such an entry would have indicated a sustained loss as opposed to an anticipated future loss.

In many cases, taxpayers set up reserves and allowances for debt impairments without seeking the help of tax professionals, an unfortunate decision. The entry for impairment of a loan or debt is one of the few times in which the actual book entry has tax consequences. The fact that small differences in words in a ledger can result in the allowance or disallowance of a deduction brings home the importance of getting tax professionals involved when setting up the book entry.

1 Field Attorney Advice 20153501F

Questions? Contact your Berdon advisor