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Health Care Tax Tips
July 25, 2014
Revenue Procedure 2014-46 (IRB 2014-33) provides the 2014 monthly national average premium for qualified health plans that have a bronze level of coverage for taxpayers to use in determining their maximum individual shared responsibility payment under Sec. 5000A(c)(1)(B) and Reg. Sec. 1.5000A-4. This revenue procedure also provides an explanation of the methodology used to determine the monthly national average premium amount.
Revenue Procedure 2014-37 (IRB 2014-33) provides the methodology to determine the applicable percentage table in Sec. 36B(b)(3)(A) used to calculate an individual’s premium assistance credit amount for taxable years beginning after calendar year 2014. It also provides the methodology to determine the required contribution percentage in Sec. 36B(c)(2)(C)(i)(II) used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage for purposes of Sec. 36B for plan years beginning after calendar year 2014. Additionally, Revenue Procedure 2014-37 reproduces the required contribution percentage, as determined under guidance issued by the Department of Health and Human Services, used to determine whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage under Sec. 5000A(e)(1)(A) for plan years beginning after calendar year 2014.
Revenue Procedure 2014-41 (IRB 2014-33) provides calculation methods a taxpayer may use to resolve the interrelationship between the Section 162(l) deduction and the premium tax credit under Section 36B. It provides an iterative calculation and alternative calculation taxpayers may use, as well as examples demonstrating the calculations.
Notice 2014-42 (IRB 2014-33) provides procedural guidance relating to the annual fee imposed on branded prescription drug manufacturers and importers under Sec. 9008 of the ACA.
The IRS has announced that it has no plans to delay premium subsidies under PPACA (Patient Protection and Affordable Care Act) as a result of the opposing decisions in the D.C. and Fourth Circuit courts.
Tip of the Day
Moving expenses . . . If you move to be closer to a new job you may be able to deduct the expenses of moving household goods and personal effects and traveling to your new home. The cost of traveling includes lodging (but not meals) and air or train fare or driving your own car. You have to meet certain tests including a distance test (the new job must be at least 50 miles more from your old home than your former job was) and a time test. The time test is satisfied if the move is closely related to the start of work (in most cases the moving expenses must be incurred within 1 year from the date you first reported to work at the new location) and you must work at the new location for 39 weeks or 78 weeks if you're self-employed. There are exceptions to the rules and there are a number of circumstances where things can get more complicated. There's more data in IRS Publication 521.
July 24, 2014
The IRS has issued final regulations (T.D. 9682) relating to basis of indebtedness of S corporations and their shareholders. These final regulations provide that S corporation shareholders increase their basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide, which is determined under general Federal tax principles and depends upon all the facts and circumstances.
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit designed to encourage employers to hire individuals from certain targeted groups who have consistently faced significant barriers to employment. For Tax Year 2013, the maximum credit per individual that could be claimed was $9,600. The credit has been in existence since 1978 but expired on December 31, 2013. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether controls were adequate to identify questionable employer claims for the WOTC. Between January 1 and December 30, 2012, more than $721 million in the WOTC was claimed on 21,278 electronically filed tax returns. The number and amount claimed on paper returns is not available. TIGTA found the IRS did not establish processes to verify the eligibility for the WOTC. TIGTA identified 759 WOTC claims totaling approximately $13 million on 687 tax returns processed in Processing Year 2012 for which the IRS had information at the time the tax returns were processed that could have been used to identify these claims as questionable. The IRS reviewed 77 of the 759 WOTC claims to determine whether the WOTC was in fact potentially erroneous. The IRS confirmed that 24 of the 77 were erroneous WOTC claims. The remaining 53 WOTC claims involved mistakes on the part of the filer or the pass-through entity. For the complete report go to www.treasury.gov/tigta/auditreports/2014reports/201440041fr.html.
The law provides a premium credit to individuals who purchase health insurance through one of the exchanges if their household income is between 100 and 400 percent of the federal poverty line. The wording in the law seems to indicate that only insurance purchases made on state exchanges, not the federal exchange, qualify for the credit. Thus, individuals in states without an exchange (most of the states) would not be entitled to the credit. In recent cases, Halbig v Burwell, D.C. Circuit and King v Burwell, Fourth Circuit two U.S. Court of Appeals for different circuits have reached different conclusions. In one case individuals who signed with the federal exchange would get the credits; in the other they wouldn't.
Tip of the Day
Don't oversell . . . Recognize that some prospects are just not going to buy. There can be any number of reasons--from no money to their brother-in-law is in the business. The latter is virtually impossible to overcome. Even if Fred doesn't like his brother-in-law, he doesn't want to get his wife mad at him. There's a fine line between wearing down a good prospect to get him to commit and wasting your time and irritating the prospect.
July 23, 2014
There seems to be an impetus in Congress for dealing with the corporate inversions (where corporations move overseas) by plugging the loophole and reducing the corporate tax rate.
The only deductions you can take for your personal residence are mortgage interest and real estate taxes. You can deduct relevant expenses for a property that's rented during the year and not used for personal purposes. There's a third variation--where you use the property for personal purposes for 14 days or more or 10% or more of the time the property is rented at a fair rental value. In Douglas D. Schumann (T.C. Memo. 2014-138) the taxpayer had two apartments aboard a cruise ship. The IRS disallowed the deductions for one because the taxpayer used it at least 162 days during the year at issue and was not rented. The second apartment was donated as a live auction item for charity. The IRS disallowed deductions for the second apartment because it too was never rented at a fair rental value during the year and thus used for personal purposes. The Tax Court sided with the IRS on both issued and disallowed the deductions. The Tax Court also found the taxpayer was not a real estate professional with respect to other properties that he did rent because he did not show he materially participated.
Tip of the Day
Make your offer upfront . . . If you're making an offer--20% off, free shipping, buy one-get one free--put the offer as early in your ad as you possible. Many prospects are no longer taking the time to read through a long ad, multi-page direct mail piece, etc. If the offer is a good one, it should grab their attention.
July 22, 2014
The IRS has postponed the effective date of the final regulations (T.D. 9664) issued in May, 2014 involving costs incurred by estates and trusts (other than grantor trusts) that are subject to the 2% of adjusted gross income floor under Sec. 67 for miscellaneous itemized deductions. The regulations as originally published would have applied beginning January 1, 2015. That would mean the new rules would apply immediately to a trust created or the estate of a decedent who died after May 8, 2014. Under the amended regulations the rules apply to taxpayers whose tax years begin on or after January 1, 2015.
The IRS has issued amendments to correct the final regulations (T.D. 9636) that provide guidance on the application of Secs. 162(a) and 263(a) regarding the deduction and capitalization of expenditures related to tangible property. The original regulations were published September 19, 2013. There are a number of corrections. The final regulations contain errors that may prove to be misleading and are in need of clarification.
The IRS has issued final regulations (T.D., 9680) to amend the definition of research and experimental expenditures under Sec. 174. In particular these final regulations provide guidance on the treatment of amounts paid or incurred in connection with the development of tangible property, including pilot models.
Notice 2014-44 (IRB 2014-32) provides guidance relating to certain dispositions of assets following a Section 901(m) covered asset acquisition.
The IRS has issued income statistics from tax return data for 2012 of selected income and tax return items by State, ZIP code, county and size of adjusted gross income.
In Gerald Lee Ridgely, Jr. (U.S. District Court, D. District of Columbia) the permanently enjoined the IRS from enforcing the restrictions on contingent fee arrangements with respect to the preparation and filing of ordinary refund claims where "preparation and filing" precedes the inception of any examination or adjudication of the refund claim by the IRS and any formal legal representation on the part of the practitioner.
Tip of the Day
Location isn't everything . . . Some stores have to be on the right road. A fast food restaurant that's three blocks off the main road is almost sure to fail. But that's not true for every business. A business that doesn't deal with the public doesn't have to be on a main road. It can pick a place where the rent is cheaper. The same may apply to almost any business that relies on repeat business rather than generating new customers. One company we know did some cheap rehabbing of space in abandoned factory mills. Their occupancy cost was 20% of some other companies in the same business. Being in the warehouse district may not be detrimental even for some retailers. A woman won't go that far out of the way to buy a spool of thread, but will make the trip for floor tile, appliances, furniture, etc. that's significantly cheaper. And keep in mind that location was (and still is for impulse purchases) more important when customers decided on where to shop by stores they've seen. Now, many customers start their search on the internet. A fancy office isn't necessary for all businesses. We know of one small business that insisted on high-priced location to impress customers. Trouble was, almost all the selling took place at the customer's office. After three years with only one visitor to the office, the company rented some class B space along with a virtual office where it could use a conference room. But think it through. A plumbing supply company didn't need the visibility, but lost customers when contractors couldn't get in and out quickly and parking was difficult for trucks.
July 21, 2014
The IRS has issued final regulations (T.D. 9678) relating to Sec. 1092 identified mixed straddles after the date of publication in the Federal Register. The final regulations explain how to account for unrealized gain or loss on a position held by a taxpayer prior to the time the taxpayer establishes a mixed straddle using straddle-by-straddle identification.
If you're required to deposit your employment taxes electronically, failure to do so will result in a late penalty, even if you paid the amount on time. That's what happened to the taxpayer in Commonwealth Bank and Trust Company (U.S. District Court, W.D. Kentucky. The Court found the taxpayer liable for the penalty.
Tip of the Day
Hack attack . . . If you're computer or network is connected to the internet your chances of getting hacked or receiving a virus are very high. In one study, some 30% of the attacks were the result of operating-system vulnerability. The second most likely entry (about 20%) was the result of guessed passwords. There are simple measures you can take to protect yourself. Here are some tips:
July 18, 2014
Rev. Proc. 2014-43 provides revised procedures for individual payees who are required under Reg. Sec. 31.3406(d)-(g)(5) to obtain validation of social security numbers (SSNs) from the Social Security Administration (SSA) to prevent or stop backup withholding under Section 3406 of the Internal Revenue Code following receipt of a second backup withholding notice from a payor within a three-year period. This revenue procedure sets forth revised procedures for an individual payee to obtain validation of the payee’s name and SSN from SSA on or after August 1, 2014. Under these revised procedures, following receipt of a second B notice, a copy of a social security card, as described in section 4, is validation from the SSA of a name and SSN combination. This revenue procedure instructs payors and individual payees regarding these revised procedures.
The National Taxpayer Advocate, Nina E. Olson, has issued her mid-year report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will address in the upcoming year. The report emphasizes the importance of taking concrete steps to give meaning to the recently adopted Taxpayer Bill of Rights, issuing refunds to victims of return preparer fraud, continuing to make improvements in the Exempt Organizations area, and expanding the recently announced voluntary return preparer certification program to include competency testing. The report states that no refunds have been issued to victims of return preparer fraud (where the preparer inflates the refund and changes the bank account number so the refund is transmitted to the preparer's own account). The report also recommends Congress to pass legislation authorizing the IRS to reinstitute the program it had implemented prior to the U.S. Court of Appeals decision (S. Loving)
In Michael Hume et ux. (T.C. Memo. 2014-135) the Tax Court sided with the IRS in disallowing a business interest deduction on a home the taxpayer intended to third parties. The home needed extensive repairs and was never rented. The taxpayers could only deduct the interest as home mortgage interest subject to those limitations.
Tip of the Day
Buying a business? . . . Be careful you don't become liable for the debts. In a recent Indiana case, a limited liability company changed hands after the audit years. The LLC's owner argued it was the former owner who was responsible. The Indiana Department of Revenue held the LLC, not the owner, was responsible. That meant it essentially came out of the pocket of the new owner.
July 17, 2014
The IRS has issued final regulations (T.D. 9676) that provide guidance concerning the allocation and apportionment of interest expense by corporations owning a 10% or greater interest in a partnership, as well as the allocation and apportionment of interest expense using the fair market value method. These regulations also update the interest allocation regulations to conform to the statutory changes made by Sec. 216 of the Education Jobs and Medicaid Assistance Act of 2010 affecting the affiliation of certain foreign corporations for purposes of Sec. 864.
Thinking of filing a "zero" return? Think again. In John Lewis Hill (T.C. Memo. 2014-134) that's what the taxpayer did. The Court allowed the Sec. 6702 frivolous return penalty and held the penalty was not barred by the statute of limitations because the return was not a valid return.
Tip of the Day
Nothing's forever . . . Office products would seem to be an easy business to be in, yet the major stores are struggling. Why? Could be a number of reasons--less paper and toner being used, slower business growth, competition from warehouse clubs for bread and butter items, etc. There has always been changes in products, services, etc., but the pace has accelerated. Thirty years ago only professionals (and not all of them) had nail guns, now it's a common tool for many do-it-yourselfers. Some of it has to do with falling costs, some with technology changes. But both are moving faster. There are other reasons such as changes in tastes, but those have always been around and are rarely as significant. Businesses that survive are those that recognize early that changes are in the wind and react quickly. There are few businesses that are immune.
July 16, 2014
The President has threatened to veto IRS budget cuts in the IRS budget that would place funding at the level it was at several years ago.
T.D. 9675 amends the Income Tax Regulations to authorize filers of information returns to truncate a payee's or other person's nine-digit identifying number on payee statements and certain other documents.
Tip of the Day
Manage what you can manage, hedge what you can't . . . In business risks come in many forms. There's a chance fire will burn down your plant. There's a risk your key engineer will die in a car crash. There's a possibility your primary supplier for a critical part won't be able to ship. Some of these can be managed. For example, make sure you have a backup supplier for all critical parts. Some can't be managed. You can't afford to hire a second engineer, at least not like the one who accounted for so much of the company's success. Your only option may be to carry insurance on his life and make sure you keep track on similar engineers in the industry. The fire risk is one you can partially manage--install sprinklers, maintain good housekeeping, store flammables in a separate building, etc. and partially hedge--carry enough fire insurance. Look at the risks from the top down. What's the most critical? If your production process isn't complicated or unique, you might be able to get back up and running quickly even after your plant is destroyed. On the other hand, your engineer is 60% of the way through a redesign of a product that provides 55% of your revenue and you're already losing ground to the competition. The engineer could be your most important risk.
July 15, 2014
The full House has passed the bonus depreciation bill by a vote of 258 to 160. The bill would make permanent the 50% bonus depreciation that expired at the end of 2013. However, even if passed by the Senate, President Obama has indicated that he would veto the measure, largely because there are no offsetting revenue raisers.
In Kenneth L. Holmes (U.S. District court, W.D. New York) the Plaintiff brought suit against the payroll manager for a company for which he was a contract employee as a result of the company's garnishment of his pay. The Defendant sought dismissal arguing (1) that the Court does not have subject matter jurisdiction over the Plaintiff's claim for injunctive relief; and (2) that the Plaintiff failed to state a claim upon with relief could be granted. The Court granted the Defendant's motion and dismissed the complaint. The Court noted that Sec. 6332(d) provides that any person who fails or refuses to surrender any property or rights to property, subject to a levy, upon demand by the IRS shall be liable in his own person for both the amount of the levy as well as a penalty of 50% of the amount recoverable.
Tip of the Day
Employment agreements in business buyouts . . . Amounts you pay for equipment in an asset purchase are depreciable using the regular depreciation rules; goodwill and other intangibles purchased must be amortized using the straightline method over 15 years. Payments to the seller under an employment contract are currently deductible as salary. But you've got to be careful on the wording of the contract. The seller may want a certain amount guaranteed should be die or become disabled before the end of the employment term. That makes the employment contract look more like additional payments for the asset or stock purchase and could result in the IRS recharacterizing the amounts and make them subject to the 15-year amortization. There may be ways around the problem. Discuss this with your attorney and tax advisor.
July 14, 2014
The IRS has withdrawn part of a notice of proposed rulemaking (REG-209459-78) that specifically relates to rollovers from individual retirement arrangements (IRAs) (Reg. Sec. 1.408-4(b)(4)(ii). The partial withdrawal of the proposed regulation will affect individuals who maintain IRAs and financial institutions that are trustees custodians or issuers of IRAs. This is the one per year rollover rule that now applies to a taxpayer's IRAs in the aggregate as opposed to individually under prior law. The change is a result of the Bobrow decision.
Tip of the Day
Investing in a rental for tax losses? . . . If you're thinking of investing in a rental property for the tax losses, you should check your math carefully. First, not all of your investment will be depreciable. Some of it will have to be allocated to the land, for which there is no depreciation deduction. And, depending on the location, the land could be a significant portion of the total investment. That's true in many areas in California, Florida, New York, etc. Second, those losses may not be currently deductible. You can only deduct the first $25,000 of rental losses against ordinary income, and then only if your adjusted gross income (AGI) is no more than $100,000. Between $100,000 and $150,000 those losses are phased out. Once your AGI exceeds $150,000, none of the losses are deductible. (The losses can be carried forward and taken when you sell, when your AGI falls below the thresholds, or used to offset passive income.) In addition, if the rental property is used for personal purposes for more than 14 days or 10% of the days during which the home is rented at a fair rent, your deduction is limited to gross income. Finally, the hobby loss rules can apply. Rental properties can be a smart investment, particularly if you pick them up at a good price, just don't depend on the tax benefits for your return.
July 11, 2014
The IRS has updated its FACTA page at www.irs.gov. New and updated FAQs have been posted with regards to NFFEs, FFI and EAG Changes, and Registration Updates. All of the new and updated FAQs are dated 7/10/2014.
The Center on Budget and Policy Priorities (CBPP) has come out against making the 50%-bonus depreciation permanent, arguing that doing so would essentially negate its use as a device to invigorate a poor economy. In addition, the provision would cost some $276 billion over 10 years.
The statute of limitations for the IRS is normally three years. Past that, you can breath a sigh of relief--but not if you underreport your income by more than 25% the statute is extended to six years. In Thomas J. Heckman (T.C. Memo. 2014-131) the taxpayer failed to report distributions from an ESOP (Employee Stock Ownership Plan) in which he had an interest. It was clear the taxpayer underreported by more than 25% (closer to 49%), but the taxpayer argued he disclosed enough information to the IRS that it should have been aware of the omitted income, which would have left the statute of limitations at three years. The Court did not agree, finding there was no necessary clue. Information contained on a related partnership return was not sufficient.
Tip of the Day
Service contracts vs. billing for work . . . Selling a service or similar contract can make a lot of sense. You get monthly income--rain or shine. That can make cash flow planning easier. The flip side is that when you spend 10 hours rebuilding the customer's unit, you can't bill for any of it. Correct pricing can usually solve the problem. You'll still probably lose on certain jobs, but you hope to make up for it with the customer who goes a year without a service call. The key here is to do your homework. Sometimes you just bill about what the competition does. But your business may not be identical. For example, your customers' units are, on average, about 5 years old that your competitors. You'll have to price higher. If you have no competition to use as a starting point, things are tougher. You've got to know your costs and have a good idea on the probability the customers will call for service. You should also consider some sort of stop-loss protection. For example if the unit is beyond a certain age, your liability should be limited. You might want to start small, testing contracts on a limited number of customers. While there is some risk, if you get it right contracts can improve your profitability and provide a steady cash flow stream you can forecast. That can provide stability to the business and improve it's value.
July 10, 2014
FEMA has updated the designation of parts of Indiana as disaster areas during the severe winter storm from January 5, 2014 to January 9, 2014 (DR-4173) to include Lake County. Taxpayers in Lake County who sustained losses may deduct them on their 2013 return.
Taxpayers can file Form 1040X, Amended U.S. Individual Income Tax Return, to correct previously filed income tax returns. The IRS only allows amended tax returns to be filed on paper. As a result, there is additional taxpayer burden and increased potential for erroneous tax refund payments. The IRS received more than 4 million amended tax returns in Fiscal Year 2012. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit because previous TIGTA audits have identified problems with IRS processes for verifying claims on amended tax returns. The objective of this review was to determine whether the IRS has controls in place to ensure that claims for refunds on amended tax returns are appropriate. Based on the sample results, TIGTA estimates the IRS may have issued more than $439 million in potentially erroneous tax refunds claimed on 187,421 amended tax returns during Fiscal Year 2012. As such, the IRS could issue more than $2.1 billion in potentially erroneous tax refunds claimed on amended tax returns over the next five years. TIGTA recommended that the IRS revise Form 1040 to enable taxpayers to amend their original tax return using this form, expand e-filing to include amended tax returns, and conduct a review of the 44 amended tax returns TIGTA identified for which potentially erroneous refunds were issued to determine the proper tax liability. The IRS agreed with two of TIGTA’s recommendations and disagreed with one recommendation. Although the IRS disagreed with revising Form 1040, the IRS plans to consider changing the format and appearance of Form 1040X. The IRS also plans to consider e-filing of amended tax returns based on available funding and resources.
Tip of the Day
Sell sheet up to par? . . . Many salesmen and businesses use "sell sheets", one page sheets describing their product. The sheet should contain the most important information about the product and, if appropriate, should include a picture, diagram, etc. The sheet is worthless if the potential customer doesn't read it. So the first thing is to grab his/her attention. You want to make it readable, so too much copy could be a negative. Appearance is not just important, it's critical. This isn't the time to go cheap on a printer. High school English wasn't your best subject? Get professional help with spelling and grammar. Producing a great job isn't that much more costly than a mediocre one, but the results markedly different. Consider the cost/benefit ratio. If you're pitching your product to distributors, one deal could pay for the sheet multiple times over. And get some independent opinions. They don't have to be in the same field. You want an impression of how the sheet looks.
July 9, 2014
The House is expected to vote this week on a bill that would make the 50-percent bonus depreciation permanent. Democrats are objecting on both the cost and the permanent extension of the provision, making its trip through the Senate unlikely. While this bill may not pass, the provision could pass in another form.
A recent study by the GAO (Government Accountability Office) found that notices the IRS sends during correspondence audits have misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence. For example, notices stated that IRS would respond within 30 to 45 days when it has consistently taken several months to do so. Further, as of early 2014, IRS data show that it had not responded timely to more than 50 percent of the correspondence taxpayers sent. In many cases, refunds are held up until the audit is finished. According to IRS tax examiners, notices caused taxpayer frustration and generated unnecessary taxpayer calls to IRS. Furthermore, examiners who answer such calls said they do not know when IRS will respond. IRS recently revised the notices, but the revisions were not based on analysis of historical data nor did IRS have a plan to analyze data to ensure it is responding timely per revised notices.
Tip of the Day
Commercial rents headed higher? . . . In a number of areas of the country it looks that way. The market should still be relatively weak based on demand. But it's more complicated. Construction of new space has been hampered by the market and difficulty in obtaining loans. That means there isn't a big surplus of space available. At some point building is likely to pick up, but that could take time. If you can forecast your requirements, you might want to consider locking in a new lease earlier.
July 8, 2014
The president has determined that certain areas of Nebraska are eligible for assistance as a result of sever storms, tornadoes, straight-line winds and flooding from May 11 to 12, 2014. Taxpayers in the counties of Clay, Fillmore, Saline, Saunders, Seward and York may claim any losses on their 2013 returns. In addition, notices in several states have been updated. In Florida (FEMA 4177-DR) the counties now include Bay, Calhoun, Holmes, Jackson and Washington. In Indiana (FEMA-4173-DR) the counties now include Allen, Blackford, Clinton, Fulton, Hamilton, Johnson, LaGrange, Mario, Montgomery and Vanderburgh. In Mississippi (FEMA 4175-DR) the counties now include Jones, Leake, Montgomery, Simpson and Warren.
The government continues to add countries to it's list of those that have signed on to FACTA (Foreign Account Tax Compliance Act). The latest to be added are the British Virgin Islands and Israel.
Tip of the Day
It's the investment not the vehicle . . . IRA (traditional), 401(k), traditional profit sharing, 403(b), etc. have one thing in common--any income or capital gains generated are tax deferred until you start taking distributions. Even annuities and life insurance produce tax deferred income. Clearly, there are differences. Contributions to a 401(k) are pre-tax, contributions to an IRA are after tax and may or may not be tax deductible. And no one would suggest life insurance as a good retirement planning tool. But while the vehicle (e.g., IRA) has to be considered, the investment in that vehicle is far more important. You'd be better off earning 10% annually in your own name than 3% in your IRA. Switching your money from your employer's 401(k) or other plan to an IRA when leaving the company may make sense if your return in the 401(k) has been below average. The money coming from your employer's plan is likely to be substantial. You want to make the right choices. Research your choice of advisors carefully. Because IRAs shelter investment returns from current taxes, investments such as variable annuities, partnerships, etc. may not be appropriate within the IRA. And, since distributions from most plans are taxed at ordinary income rates, long-term capital gains are worth no more than interest, short-term gains, etc.
July 7, 2014
The IRS has announced that in an effort to combat fraud and identity theft, new procedures effective January 2015 will limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three. The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer. Taxpayers also will receive a notice informing them that the account has exceeded the direct deposit limits and that they will receive a paper refund check in approximately four weeks if there are no other issues with the return. For the complete details go to www.irs.gov.
Tip of the Day
Exiting a contract . . . Unless you've been through it before, chances are you won't think about how to terminate a joint venture or contract. For example, Fred owns 30 acres on which he grows vegetables. Most are sold to wholesalers, but his son wants to set up a stand for local sales. Fred has frontage only on a side road. His good friend Mike has frontage on a route with high traffic. For a not much more than a nominal amount Mike rents space to Fred who puts up a stand. Fred's son runs the stand for several years, but then decides to move away. Can a neighbor run the stand under the same deal? If no one runs the stand does the building revert to Mike? What if Mike wants it off his property? Does Fred have to tear it down? What if Mike sells the property? Does Fred have any rights? Unless there's a formal lease dealing with these issues, it could get complicated. To Fred it may be a cheap rental. To Mike it's getting $700 a year for a plot that wouldn't have brought $100 in hay. But unraveling the deal could be a headache.
July 3, 2014
The IRS has issued final regulations (T.D. 9673) relating to the use of longevity annuity contracts in tax-qualified defined contribution plans under Sec. 401(a), Sec. 403(b) plans, individual retirement annuities and accounts (IRAs) under Sec. 408 and eligible governmental plans under Sec. 457(b). These regulations provide guidance necessary to comply with the required minimum distribution rules under Sec. 401(a)(9) applicable to an IRA or a plan that holds a longevity annuity contract. The regulations will affect individuals for whom a longevity contract is purchased under these plans and IRAs, sponsors and administrators of these plans and trustees and custodians of these plans and IRAs.
T.D. 9674 contains final and temporary regulations providing guidance to eligible organizations seeking recognition of tax-exempt status under Sec. 501(c)(3). The final and temporary regulations adopt a streamlined applications process that eligible organization may use to apply for recognition of tax-exempt status.
The IRS has released Fact Sheet (FS-2014-8) describing, in question and answer format, the Filing Season Program for Tax Return Preparers. The voluntary program is designed to encourage tax return preparers to participate in continuing education courses.
Bipartisan legislation has been introduced in both the House and Senate that would provide a tax credit for "Angel" investments in high-tech startups. The credit would equal 25% of the investment with the credit not to exceed $250,000. In addition, in order to qualify the amount of the investment must exceed $25,000. There are a number of other requirements.
Tip of the Day
Electronic funds transfers . . . If you use a general office computer or any computer that's exposed to internet usage (e-mail, web surfing, etc.) you run the risk of malware, intercepted passwords, etc. A simple approach is to purchase an inexpensive laptop and use it only for checking bank accounts, making EFTs, etc. Since you're not running software that would tax the system, you don't need a machine that's particularly fast and memory requirements are minimal. You'll still need virus protection and a firewall. Restrict access to the machine and password protect it. Finally, reconcile your electronic funds transfers daily. While you may have recourse to the bank, they'll be looking for ways to avoid responsibility. There may be other safeguards you can take. Talk to your accountant.
July 2, 2014
Revenue Procedure 2014-42 (IRB 2014-29) provides guidance regarding a new, voluntary Annual Filing Season Program designed to encourage tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns. In addition, this revenue procedure modifies and supersedes Revenue Procedure 81-38, regarding limited practice before the IRS by individuals who are not attorneys, CPAs, or EAs.
The IRS has released a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily. The new Form 1023-EZ, now available on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible. The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. Form 1023-EZ must be filed online. The instructions include an eligibility checklist that organizations must complete before filing the form. The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40.
The IRS has announced (IR-2014-76) that Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for five consecutive years. To give all interested parties time to adjust and allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016. The new, more uniform policy applies to any ITIN, regardless of when it was issued. Only about a quarter of the 21 million ITINs issued since the program began in 1996 are being used on tax returns. The new policy will ensure that anyone who legitimately uses an ITIN for tax purposes can continue to do so, while at the same time resulting in the likely eventual expiration of millions of unused ITINs.
If your business has a net loss you could have a net operating loss that you can forward or back. You can have a net operating loss on your personal return. That was the situation in Darryl L. Jones (T.C. Memo. 2014-125). The IRS disallowed the carryforward losses because the taxpayer could not detail the activity generating the losses and presented little evidence of his income in the years to which the losses could be carried. The Court disallowed the losses. The Court found that the taxpayer's wife, who worked for his law office, was an independent contractor, not an employee. She worked from home and accomplished the tasks in her own time and in her own way.
Tip of the Day
Mistakes can be costly . . . Having a good idea, service, product, timing etc. isn't the only thing you need to succeed in business. Avoiding mistakes can be as, if not more, important. One clothing manufacturer seemed to have a lock on athletic clothing. The line had high margins and consistently sold out. A mistake in manufacturing by a new supplier wasn't caught until consumers discovered the colors faded and the fabric wore out quickly. The bad press severely hurt sales. Avoiding all mistakes may be too costly. Concentrate on errors that will have the most effect on the business. Home builder? Some ill fitting molding can be repaired. In many cases the customer may not notice. Water in the basement is another issue. You can be sure they'll complain and it's much tougher to fix later.
July 1, 2014
It may be the electronic age, but you've still got to check mail delivered the old fashioned way. In Eric Onyango (142 T.C. No. 24) the U.S. Postal Service attempted on several occasions to deliver a notice of deficiency to the taxpayer. The IRS sent the notice certified mail, return receipt requested. On at least two occasions the Postal Service left notice of attempted delivery of the certified mail at the address of the taxpayer's legal residence, notifying him it had certified mail that he had to sign for. The taxpayer declined to check on a regular basis his mailbox at his legal residence and to retrieve on a regular basis mail items delivered there. (After several unsuccessful attempts to deliver the certified mail in question, the Postal Service returned it to the IRS. The Tax Court held that the taxpayer could not decline to retrieve his mail, when he was reasonably able and had multiple opportunities to do so, and thereafter successfully contend that he did not receive the notice of deficiency. The Court also rejected the taxpayer's contention that he was entitled under Sec. 6330(c)(2)(B) to dispute the underlying tax liability to which that notice pertained.
Tip of the Day
Business car bought and sold in same year? . . . If yo place a car in service and dispose of it in the same tax year, you can't claim any depreciation deduction for that car.
June 30, 2014
The IRS has released final regulations (T.D. 9670) on the tax credit available to certain small employers that offer health insurance coverage to their employees. The credit is provided under Sec. 45R, enacted by the Patient Protection and Affordable Care Act.
At an IRS Practice and Procedure Conference an IRS territory manager reported that beginning in November 2013 IRS representatives made educational visits to some 3,000 return preparers.
In 1993 the IRS mailed notices of deficiency to the taxpayers, Douglas P. Snow et ux. (142 T.C. No. 23), regarding their 1987 and 1990 tax years. In 1995 the taxpayers filed petitions with the Tax Court. The taxpayers moved to dismiss for lack of jurisdiction alleging that the notices had not been mailed to the taxpayers' last known address and were therefore invalid. The IRS also moved to dismiss for lack of jurisdiction because the petitions were untimely. These cases were assigned to a Special Trial Judge who wrote an initial report granting the taxpayers' motions to dismiss. Because of the amounts in issue, the decisions in these cases were required by statute to be made by a regular judge. After the Special Trial Judge submitted his initial report for review, it was rewritten to grant the IRS's motions to dismiss rather than the taxpayers' motions. A regular judge adopted the rewritten report and then entered orders dismissing for lack of jurisdiction on October 15, 1996. The orders, which are treated as decisions, became final on January 13, 1997. In August 2005 the Court informed the taxpayers that the initial report had proposed to grant the taxpayers' motions. The taxpayers filed motions for leave to file motions to vacate the orders of dismissal that had become final in January, 1997. The Tax Court denied the taxpayers' motions finding that, as a general rule, the finality of a Tax Court decision is absolute; the recognized exceptions are when there has been a fraud on the Court or when the decision was void because the Court did not have jurisdiction to enter the decision. Here there was no fraud on the Court and the Court clearly had jurisdiction to decide whether we had jurisdiction to redetermine the deficiencies involved.
Tip of the Day
Can't agree with your spouse? . . . Marital disputes often take a nasty turn when it comes to finances. Sometimes the disputes result in both spouses losing. That can occur when it comes to filing a return. Not talking? You should still consider getting together to file a joint return. If you don't file a return, the IRS will file one for you--and, since filing joint is an election you have to make together, it won't be a joint return. That could substantially increase your tax bill. In more than a few divorces the IRS is the party that comes out ahead. Get good financial advice.
June 26, 2014
The House Appropriations Committee has approved a bill that would provide $10.95 billion of funding for the IRS in fiscal year 2015, down some $341 million from fiscal year 2014. The Center on Budget and Policy Priorities (CBPP) has issued a statement that the cuts will impact the IRS's workforce and delay technology upgrades.
In Blessing U. Anyanwu (T.C. Memo. 2014-123) the IRS used the bank deposits method to reconstruct the taxpayer's income. The taxpayer was able to show that some of the deposits to her bank account were nontaxable transfers between her business and herself. However other amounts she claimed as repayments of loans that she made to relatives and members of her church. The taxpayer provided no evidence that such loans existed and the deposits were held to be income. Amounts the taxpayer testified were security deposits related to leases that were not sufficiently explained were considered income.
In Lee Anthony Baker (T.C. Memo. 2014-122) the taxpayer was an independent truck driver who used his own tractor to haul tank trailers. The IRS disallowed all of the taxpayer's truck expenses because of a lack of documentation. The Tax Court held that the vehicle was not listed property because substantially all of the use was in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire. That allowed the Court to apply the Cohan rule and estimate his expenses. The taxpayer claimed expenses of $38,516 for fuel (he drove 65,000 miles for the year and the truck got approximately 6.75 miles to the gallon). The Tax Court allowed $18,000. Of the other expenses claimed for maintenance, insurance, and license plates the Court allowed one-third of the claimed amount.
Tip of the Day
Commercial loans easier to get? . . . That may be the case. If you shopped for a loan a year or more ago, you may have better luck now. And if you could have gotten a loan then but were turned off by the covenants, you may find the deal more palatable now. Not ever lender has softened, so you might have to do some looking. Don't wait too long. No one knows for sure when interest rates will head higher, but they will.
June 26, 2014
An amendment to H.R. 3393, Student and Family Tax Simplification Act, would make it clear that the American Opportunity tax credit is allowed on a per-student rather than a per-taxpayer basis and would increase the phaseout thresholds for the American Opportunity tax credit to begin at $160,000 for married taxpayers filing joint ($80,000 for all other taxpayers).
A new FAQ has been posted regarding Withholding Foreign Partnership (WP) and Withholding Foreign Trust (WT) Agreements. For more information, go to FACTA-FAQs General.
In David H. Garza (T.C. Memo. 2013-121) the taxpayer used his personal pickup truck for traveling to customers as an employee. He kept records in a calendar planner book. Through the year, he usually recorded his truck's odometer readings at the start and end of each month, with intermediate readings for some months. Besides the odometer readings the calendar planner had some personal notes but provided no other information related to vehicle expenses. The planner did not record any personal travel made while using the truck. On his 2010 return he claimed 40,171 in business miles and $20,085.50 in vehicle expense (a portion of which was conceded before trial) based on the standard mileage rate. The Court disallowed the deduction because the taxpayer did not record the amount, the time, or the business purpose of each business use of his truck.
Tip of the Day
Online statements aren't free forever . . . There's a good chance you no longer get a paper bank statement, telephone bill, etc. Regular vendors may not provide paper (or you may have opted out to save money). You may be able to download your statement for only a limited period of time, say two years. After that, it'll cost. Don't take a chance on having to pay if you're audited by the IRS or need them for other purposes. Download them each month. A year's worth of statements takes very little space and today disk space is cheap.
June 25, 2014
An updated FFI Agreement has been released and posted to the FATCA Website. Revenue Procedure 2014-38 updates and supersedes the FFI Agreement originally released as Revenue Procedure 2014-13.
The IRS has issued final regulations (T.D. 9671) clarifying the maximum allowed length of any reasonable and bona fide employment-based orientation period, consistent with the 90-day waiting period limitation in section 2708 of the Public Health Service Act, as added by the Patient Protection and Affordable Care Act.
Tip of the Day
Capital gain or ordinary income? . . . What type of income the sale produces will have a big effect on your tax bill. The answer is usually clear, but there are exceptions. One is when a real estate developer holds a property for long-term investment rather than developing it. There are five factors the IRS and the courts look at to determine whether the property was held for sale in the ordinary course of business or as an investment. Showing the property was purchased for investment is difficult enough, but how do you show your intentions changed. That is, you started to develop the property but then changed your intentions. Letting the property go farrow and make no attempt to sell it for a number of years or constructing and living in a residence on the property may help. Another option may be to improve and rent the property. The outcome here will depend on the facts. Talk to your tax advisor for help in your particular situation.
June 24, 2014
You generally can't take losses on property that's not held out for rental or sale. In Jackie H. Robinson et ux. (T.C. Memo. 2014-120) the taxpayers had rented the property before and after the years at issue, but during 2007 and 2008 the they received no rent from the property and their efforts to sell the property were minor. The Court held the taxpayers did not hold the house for the production of income and did not engage in any for-profit activity to which the house was connected.
In Herman Cherizol (T.C. Memo. 2014-119) the taxpayer engaged in an unincorporated venture that he claimed included (1) planning, and accompanying models on overnight trips to a clothing optional beach for suntanning; (2) selling comic books, baseball cards, and other paraphernalia, (3) creating and publishing a book of restaurant reviews; (4) trading stocks on the Internet, and (5) consulting. The taxpayer argued he never received a notice of deficiency. The IRS claimed, and was able to show, that one was mailed to his last known address. The Court noted that was the address on his most recent three years of returns and his Tax Court petition. The Court held it had jurisdiction. The Court reviewed the taxpayer's claimed deductions for wages, meals, travel, repairs and maintenance, office expense, legal and professional, advertising, and cost of goods sold. The Court noted that meals and travel expenses did not meet the strict substantiation requirements for those expenditures. Other expenses had no documentation, invoices that appear to have been created by the taxpayer, expenses listed on self-created spreadsheets, some documents were missing critical information such as dates, or what was purchased. The Court sustained the IRS's determinations.
Tip of the Day
Document nontaxable deposits to business accounts . . . If you're audited the IRS will almost surely ask to see the business bank statements. In most cases they'll assume that amounts deposited in your bank accounts are income. While they may not be true, you'll have to show why the deposits aren't. If you (or a relative, friend, etc.) loaned business money, make sure you have a promissory note (talk to your accountant or attorney about the requirements). If you intend a capital contribution, issue stock or otherwise document the details. Just a transfer between accounts? You should be able to trace it through your bank statements. accounts? You should be able to trace it through your bank statements. Much the same is true for your personal accounts. An unexplained $5,500 deposit to your personal account could be interpreted but the IRS as an business receipts deposited in your personal account. Really a gift from your uncle? Make a copy of the check before depositing or any other documentation that can show it's nontaxable.
June 23, 2014
The statute of limitations for filing tax refund claims may be extended if you can prove "financial disability", that is, a physical or mental disability so severe that you can't manage your own financial affairs. The law states that an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual is not considered as financially disabled ruing any period that such individual's spouse or any other person is authorized to act on behalf of such individual in financial matters. The IRS has specific requirements as to what must be provided by a physician to support a claim of financial disability. In Patrick Meconi (U.S. District Court, D. Delaware) the Court found the taxpayer's refund claim was beyond the statute of limitations. While the taxpayer was his wife's sole caregiver (she suffered from Alzheimer's) and he had his own health problems (undergoing a number of operations), the taxpayer did not provide the required physician's statement.
Tip of the Day
New, used, or refurbished? . . . Since the price difference can be substantial, if you've got a choice you should not reject any of the options out of hand. Sometimes the decision between new and used comes down to price. For example, if you're buying an airplane both new and used will be equally serviceable. You'll probably save a bundle on the price, more than making up for having to overhaul a part a little earlier. In some cases, used may as good, if not better than new. Some old tools, office furniture, etc. were actually made of heavier metal and may be more serviceable than new while saving money. When it comes to powered equipment--electric, gas or diesel--the decision may be tougher. It may hinge on the price and your requirements. Weigh the savings against the potential repair bills. Opting for used makes more sense if you can fix the equipment in house and/or your usage won't tax the unit. For example, an old backhoe may do just fine for a landscaper who needs it only occasionally, but a poor choice for a contractor who'll be depending on it 8 hours a day, 5 days a week. Used makes more sense if the unit can be thoroughly checked, and parts are available and not overpriced. (Stay away from low volume units.) What about refurbished? The choice here can be tricky. Airplanes have to conform to certain FAA specifications or they're not airworthy. It's a go-no go situation. But a car or truck with many problems can be put on the market. Refurbished means different things to different sellers. Sometimes a unit is overhauled to near new specifications and you get a 1-year warranty. Sometimes the seller fixes obvious faults, sprays on a coat of paint, gives you a 6-month warranty and hopes for the best. Even for "certified" used cars there's no standard. Do your homework and get good advice. You might want to forgo used or refurbished equipment that's critical to your business that can't be easily repaired or replaced if there's a failure.
June 20, 2014
The House Appropriations Committee on Financial Services and General Government has approved the cuts to the IRS budget discussed in our June 19 news report.
Make an error on your return that the IRS misinterprets and gives you a bigger refund? In D. Lloyd Thomas et ux. (T.C. Memo. 2014-118) the taxpayers reported their Social Security benefits on their return, leaving the gross Social Security line blank, but entering the correct amount on the taxable line. The IRS treated the entry as the gross amount and recomputed the taxpayer portion. The IRS's error served to increase the taxpayer's refund by $548. The Tax Court held that the $548 received was a rebate refund because it was based on the IRS's recalculation of the taxpayer's tax liability. The Court also held that the rebate refund constituted a deficiency recoverable by the IRS through the deficiency procedures.
In Jose L. Uribe et ux. (T.C. Memo. 2014-116) the Tax Court remanded the case to the Office of Appeals for consideration of collection alternatives. The record showed the taxpayers' attorney said they were interested in a collection alternative, but neither the settlement officer nor any IRS employee asked the taxpayers for financial information making it impossible for the IRS to evaluate the their ability to pay without knowing financial information.
Tip of the Day
Bad debt percentage . . . How much can you write off in bad debts before it starts to hurt? It depends on your profit margins. For example, Madison Inc. is a reseller of special industrial goods. The gross margin on the items is only 10%. After selling and overhead is added, Madison brings about 5% to the bottom line (before taxes). Clearly, if bad debts are more than 5% of sales, Madison will be turning a loss. On the other hand, Dover Inc. sells a different line and has a pretax profit equal to 20% of sales. Dover can have much higher losses before bad debts start to hurt. That means Dover can be a little more lax with its credit requirements in an effort to generate higher sales.
June 19, 2014
The House Appropriations Committee has released the fiscal 2015 Financial Services and General Government Appropriations bill. The bill would provide $10.95 billion for the IRS, a cut of $341 million from the 2014 fiscal year and $1.5 billion below the President's budget request. That would put the agency's budget below the sequester level and below that amount that was in place in fiscal year 2008. The bill provides $862 million for the SBA. The bill fully funds business loans aty $195 million; $68 million below the fiscal year 2014 enacted level due to a reduction in loan subsidy rates, but is sufficient to support all expected loan demand.
If a debt is forgiven, you generally have cancellation of indebtedness income equal to the amount forgiven. That was the case in Robert Sievers (T.C. Memo. 2014-115). The taxpayer purchased a truck and made only a few payments before the vehicle was repossessed. The vehicle was sold at auction, but there remained an outstanding balance of approximately $12,000. Ford Motor Credit Co. issued a Form 1099-C, reporting cancellation of indebtedness income of $9,186. The IRS summoned documents from Ford relating to the loan and the vehicle identification number. The taxpayer's version of the events was not supported by the record. The Court noted that Ford had received no payments in 36 months and that was the general testing period for an identifiable event. The Court found the taxpayer had cancellation of debt income equal to the amount shown on the 1099-C.
Tip of the Day
Best employees leaving? . . . Your best employees are the ones most likely to be poached so depending on the size of your company you've got to expect some turnover. But you should conduct an exit interview. Thank them for their service (you want to remain on good terms), but ask why they're leaving. You can't survive long if your best people won't stay. Even if it seems to be something you can't do anything about (e.g., the work is in an isolated location) there has to be something you can do to make the job, work environment, etc. more attractive. If not addressed the problem can feed on itself. Few businesses do well if the turnover is high.
June 18, 2014
The GAO (General Accountability Office) has recently done a study of unreported income of S corporations and partnerships. The GAO found that the full extent of partnership and S corporation income misreporting is unknown. The IRS's last study of S corporations, using 2003-2004 data, estimated that these entities annually misreported about 15 percent (an average of $55 billion for 2003 and 2004) of their income. IRS does not have a similar study for partnerships. Using IRS data and the study results, GAO derived a rough-order-of-magnitude estimate of $91 billion per year of partnership and S corporation income being misreported by individuals for 2006 through 2009. IRS examinations and automated document matching have not been effective at finding most of the estimated misreported income. IRS's processes for selecting returns to examine could be improved. Not all partnership and S corporation line items from paper returns are digitized, and IRS officials said that having more return information available electronically might improve examination selection. In 2011, about 65 percent of partnerships and S corporations electronically filed (e-filed). Certain large partnerships and S corporations are required by statute to e-file. Expanding the mandate would increase digitized data available for examination selection. Further, in 1995 GAO found that IRS's computer scoring system for selecting partnership returns to examine used outdated information. IRS does not have a strategy to update and use this information to select partnerships for examination. Relatively few partnerships are examined compared to other business entities, and many examinations result in no change in taxes owed. The GAO suggested that Congress consider requiring more partnerships and corporations to e-file their tax returns. GAO recommended, among other things, that IRS (1) develop a strategy to improve its information on the extent and nature of partnership misreporting, and (2) use the information to potentially improve how it selects partnership returns to examine. IRS stated it would consider all the recommendations and identify appropriate actions. For more information on this report go to gao.gov/products/gao-14-453
You may be able to defer gain on the sale of property either by a like-kind exchange or because of an involuntary conversion. An involuntary conversion can include a casualty loss or the taking of the property by eminent domain. But in Gerald Peters, et al. (U.S. District Court, East. Dist. Missouri, East. Div.) the Court found that gain from the sale of a property did not qualify for deferral under Sec. 1033. The Court noted that the taxpayers listed the property for sale voluntarily and there was no evidence they were forced to sell.
Tip of the Day
Employee theft . . . Small business owners are often particularly susceptible. If you use a computer program for your accounting you have a tool that, with minimal effort, can help you spot problems. For example, you should be able to see a vendor list with dollar amounts for, say the past six months. Sort it by dollar amount. Look down the list of the for any vendors you don't recognize. You might ignore the small dollar amounts (say $100 or less, unless they show up very frequently), but take a good look at more significant ones. Another approach is to just scan down the check register, looking at vendor names. Many should be on a regular schedule--e.g., rent is monthly, so is telephone and electric, cleaning services may be weekly, etc. Ones that pop up frequently that shouldn't, or ones that occur at irregular intervals should be scrutinized. There are other tricks. Talk to your accountant.
June 17, 2014
In Michael A. Coburn (T.C. Memo. 2014-113) the taxpayer, a physician, claimed a net operating loss (NOL) carryforward to the tax year at issue. The IRS disallowed the loss. The taxpayer argued that because the IRS did not audit his returns for the years during which the net operating losses purported arose, the IRS's determination to disallow the NOL carryforward was arbitrary. But other than his own testimony and his tax preparer's (an enrolled agent) vague testimony, the taxpayer provided no evidence to substantiate the loss. The Court sided with the IRS in disallowing the loss.
In Frank J. Blangiardo (T.C. Memo. 2014-110) the taxpayer purchased real property for $488,000 when married to his first wife. On their divorce to his first wife. On their divorce he entered into a stipulation of settlement to distribute the marital property. The taxpayer paid the first wife $500,000 to waive any interests she had in the property. He remarried. He and his second wife divorced and he paid her $80,000 for any claim to the property. He sold the property two years later for $2.250 million and purchased another property for $1,430,000, claiming a like-kind exchange using an intermediary. The taxpayer claimed that his basis in the property was increased by the $500,000 and the $80,000 paid incident to the divorces. The IRS did not agree. The Court noted that Section 1041 provides that no gain or loss is recognized on the transfer of property from one spouse to another or to a former spouse if incident to a divorce. The Court disallowed the increase in basis. The Court found the intermediary used was an attorney, but he was also the taxpayer's son. A transaction can still qualify for like-kind exchange treatment if the proceeds from the sale of property are held by a qualified intermediary. A disqualified person includes an agent of the taxpayer, such as an attorney, accountant, or banker, who was an agent of the taxpayer within two years of the transaction or a family member. The Court found the intermediary was a disqualified person.
Tip of the Day
Avoid mid-project failures . . . It may not have happened to you, but you almost surely know someone who has fallen into the trap. It could be rehabbing a house to flip, building a new facility, bringing a new product to market, starting a new company, or any number of other projects. Somewhere in the project's life you run out of money (or have to abandon it for another reason, perhaps technical problems). You're now in one of the most costly positions you can be in. Take rehabbing a house or small office building. The money runs out when you're only 75% done. If you've got a loan, there's a good chance the lender will not advance additional funds. He'll foreclose, take his losses and sell the property. You might try to get additional financing, but it will have to be subordinate to the first loan. That will mean a higher interest rate and probably more covenants, if you can get the loan at all. Getting additional funds is likely to be difficult since the project is already tainted. If you can't get additional funding or technical support, selling the project is almost sure to be difficult. A buyer can smell the blood in the water. You're desperate and he knows it. Plan to have a cash cushion or exit strategy before starting a project. And sometimes partnering with a better financed or technically superior company makes sense even if you'll have to give up some control and/or profits.
June 16, 2014
The House has passed two bills of relevance to small businesses. The first would increase the Section 179 expense option from the current $25,000 to $500,000, effectively making the 2013 level benefits permanent. Another bill would make permanent the 5-year period for recognition of built-in gains on conversion of a C to an S corporation. At this time it's unlikely the bills will advance in the Senate.
A bill has been introduced in the House that would reinstate the 100% bonus depreciation to purchases of equipment used in a manufacturing process.
FEMA has reported that as a result of a severe winter storm and snowstorm on January 5-9, 2014 in Indiana, taxpayers in the counties of Boone, Clay, Hendricks, Huntington, Jasper, Kosciusko, Madison, Morgan, Newton, Noble, Owen, Parke, Putnam, Sullivan, Tipton, Vigo, Wabash, White and Whitley, can take casualty losses resulting from the storm on their 2013 returns. An earlier notice (April 11, 2014) from FEMA involving a severe winter storm during the period March 2-4, 2014 in certain areas of Tennessee has been amended. The counties of Fayette and Hickman are now included in the disaster area.
Sec. 893 excludes from gross income and exempts from taxation income received by an employee of a foreign government or international organization if certain conditions are met. The exemption can be waived, and it must be waived by a person who wishes to become a permanent resident of the U.S. The exemption does not apply to income received by a permanent resident after filing the waiver. In Clifford A. Abrahamsen et ux. (142 T.C. No. 22) the taxpayer and his wife entered the U.S. in 1983 to work for Finland's Permanent Mission to the United Nations (Mission) in New York. She left the Mission to work for a bank and, while employed there, obtained U.S. permanent resident status. As a condition of obtaining that status she executed, in 1992, a waiver of rights, privileges, exemptions, and immunities otherwise available to her by virtue of her occupation. In 1996 she recommenced employment with the Mission and remained employed by the Mission throughout the years at issue. The taxpayers did not report as income the wages the Mission paid to them during 2004-2009. They claimed that her wages were exempt from taxation pursuant to Sec. 893, the U.S.-Finland tax treaty, the Vienna Convention on Diplomatic Relations, the Vienna Convention on Consular Relations, and the International Organizations Immunities Act. The Court held that Sec. 893 did not apply to wages she received from the Mission during 2004-09 because she had previously executed a valid waiver of rights, privileges, exemptions, and immunities. The Court further held that neither the U.S.-Finland tax treaty, the Vienna Convention on Diplomatic Relations, the Vienna Convention on Consular Relations, and the International Organizations Immunities Act provides an income tax exemption to permanent U.S. residents working in nondiplomatic positions for international organizations.
Tip of the Day
Supreme Court rules on inherited IRA . . . If you file for personal bankruptcy some assets are exempt from a debtor's bankruptcy estate. But in a recent U.S. Supreme Court decision (Clark v. Rameker) the Court held that only funds held in an account that is tax exempt under Sec. 401, 403, 408, 408A, 414, 457, or 501(a) and an inherited IRA does not fall into the same category. The Court noted several distinctions between a regular IRA or retirement account and an inherited IRA. The Court held the amounts were not excluded from the bankruptcy estate.
Copyright 2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536