Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
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December 13, 2017
NewsThe tax bill continues to be tweaked. It appears that the corporate tax rate could increase to 21% and the top rate for individual taxpayers fall to 37%. There are likely to be more changes and there is growing concern that the final bill is likely to be received poorly by many taxpayers.
In Donald J. Planty and Miriam Alvarez (T.C. Memo. 2017-240) the taxpayers' return was audited and the IRS determined additional tax, penalties and interest were owed. A few days later the IRS sent the taxpayers a notice that they were, instead, due a small refund. The IRS sent a second revised report some five months later showing an amount due of almost exactly the same as the prior refund. In a further notice some four months later the IRS notified the taxpayers of an additional amount due. Within a month the taxpayers submitted a Form 1040X, Amended U.S. Individual Tax Return reporting an increase in tax of $4,091, but because of an increase in withholdings and credits, a refund of $1,560 was requested. Both the original and amended returns claimed a deduction for real estate losses of $147, 135. The IRS informed petitioners by letter that it had accepted the examination report that, previously, he had given to them (it is unclear to which report the IRS was referring) and that he did not plan to make any additional changes to their 2010 return. The IRS did, however, treate the Form 1040X as the taxpayers' request for audit reconsideration, and reconsidered the result of the prior examinations, determining not only that petitioners were not entitled to any refund but that they owed additional tax. In part, the IRS's determination that the taxpayers owed additional tax was due to the disallowance of their $147,135 deduction for real estate losses under the passive activity loss rules. The taxpayers claimed that they were subjected to an impermissible second examination of their 2010 return. The Court noted that the IRS treated the Form 1040X as a request for audit reconsideration and that was not a new audit. In addition, the prohibition against a second audit is to prevent the IRS from inspecting the taxpayer's books and records a second time. But no examination of records was involved here. The Tax Court held there was no impermissible audit. The taxpayers argued that there was substantial authority for the position they took with respect to the real estate losses. The Court noted that “There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.” The substantial authority claimed by the taxpayers was as a result with respect to the Form 1040X, in part, because the IRS did not raise the loss as an issue on the original return. The other reason for claiming the real estate loss was advice from a tax attorney, but the taxpayers did not call her as a witness. The Court found the taxpayers did not have reasonable cause for the underpayment and the accuracy-related penalty was allowed.
Tip of the DayFranchise vs. franchise . . . While a good franchise can be a path to a good living, not all franchises are worth it. Be particularly careful if the entry fee is low. We know of one franchise where the purchase price is only $5,000. But you're not guaranteed a territory. And the franchisor is entitled to far more of your gross receipts than other, similar franchises. While you're saving up front your earnings will be less and, with little or no guaranteed territory, your risk is high. The terms could also make it difficult to sell even if you've built up a substantial following. You're often making a big commitment. On the other hand, some franchises are overpriced. Remember, if you've decided to go the franchise route, you've probably done so because you want support from the franchisor in startng and operating the business. There's a good chance you're investing more than what you paid for your house, and the downside in that purchase is generally small. Get good advice before signing. December 12, 2017
NewsThe House is going to try and pass the Tax Cuts and Jobs Bill the week of December 18. There are still significant differences between the House bill and the Senate amendment to be ironed out and there appears to be increasing backlash over a number of provisions as well as the substantial increase in the deficit the bill is projected to create.
In Lasrry D. Jarnagin et ux. (U.S. Court of Federal Claims) the taxpayers sought to get a refund of some $80,000 in penalties they paid for failure to file FBARs (Reports of Foreign Banm and Financial Accounts) for four years on an account in Canada. While both taxpayers were U.S. citizens, the husband had acquired dual U.S.-Canadian citizenship and the wife had Canadian residency status. They had substantial properties in Canada and the bank account in question had no less than $1,870,000 during the years at issue. The petitioners did not contest the fact that they maintained the bank account but argued that had reasonable cause for failure to file, citing reliance on professionals in the preparation of the tax returns. The Court noted that the mere fact the returns were prepared by professionals does not excuse their failure to file FBARs. While reliance on a prefessional may establish reasonable cause, the taxpayers neither requested nor received any advice regarding the filing of the FBARs. The Court held the taxpayers did not exercise ordinary business care and prudence and that their failure to file FBARs was not due to reasonable cause and they were not entitled to a refund of the penalties.
Tip of the DayTransfer to partnership was gift to children . . . Gifting stock or an interest in an S corporation, partnership or LLC to children or other relatives often makes sense. But don't try to use the entity as a tax avoidance device. It may not work. In a Technical Advice Memorandum the taxpayer established a limited partnership with her children. She then transferred municipal bonds to the partnership with the entire amount of the contribution allocated to the capital accounts of the children. Sometime later the bonds were distributed to the children. The IRS held that the contribution of the bonds to the partnership were part of an integrated transaction to simply transfer title by way of a gift to the children. The IRS also held that no discount on the valuation was appropriate since the bonds were publicly traded. The IRS also noted that indirect gifts to the individual shareholders can occur when someone transfers property to a corporation (or other entity).
December 11, 2017
NewsStarting Dec. 10, 2017, all e-Services users must register through a new, more rigorous identity proofing process called Secure Access. Any e-Services user who has not previously created a Secure Access account through Get Transcript Online, IP PIN tool, View Balance or by exception processing in recent days must validate their identity through this more rigorous process. This also includes all TIN Matching users and users who received Letter 5903 last December and authenticated by telephone. This new process is not optional on the part of the IRS or its online users. We apologize for the short notice, but as you know we’ve been planning this move for more than a year. The IRS must make this change to meet federal information system standards. Additionally, cybercriminals increasingly are targeting tax professionals to steal e-Services usernames and passwords, putting taxpayer data at risk. In recent years, we authenticated each e-Services user individually. When you registered for e-Services, you were asked for your name, address, social security number, your date of birth, adjusted gross income and filing status. That limited amount of information no longer is enough to meet federal information system standards. Users will continue to be authenticated as individuals. Here’s how Secure Access helps:
--First, it strengthens the initial identity proofing process to make sure the person registering is who they say they are.
--Second, it strengthens security through a two-factor authentication process for returning users that helps prevent account takeover by cybercriminals. Two-factor authentication means you must have your credentials (username and password) plus a security code sent to your mobile phone or generated by your IRS2Go app each time you log in.
Once you have authenticated your identity and established a Secure Access account for e-Services, there is no further action required. Under Secure Access, you can no longer script the login process. Learn more about the steps you must take to successfully complete the Secure Access process, alternatives to online processing and how to use the IRS2Go app. See “Important Update about Your e-Services Account” at www.irs.gov/eservices.
Notice 2017-75 (IRB 2017-52) provides guidance on the application of Secs. 409A and 457A. Specifically, this guidance addresses the transition provisions enacted as part of Sec. 457A that generally provide that amounts deferred and attributable to services before January 1, 2009, that would otherwise have been subject to inclusion in income under Sec. 457A, are includible in gross income in the later of the last taxable year beginning before 2018 or the date of vesting. This notice provides that service recipients may accelerate distributions to pay federal and state taxes on amounts includible in 2017 and after without violating Sec. 409A.
Tip of the DayLife insurance and annuities . . . If you have either a whole life policy or an annuity the security of your investment may depend on the state in which the company is licensed and the financial stability of the company. For life insurance, most states provide $300,000 of protection should the insurance company go under; New York has a $500,000 limit. The laws vary on annuities. The problem is that some insurance companies are selling portions of their business. Your policy may have started with a reliable, old line company, but the policy may be sold to a company with a shorter track record. You can exchange your policy for one in another company tax free (a Sec. 1035 exchange), but you could be hit with a nasty tax bill if you simply cash out a life insurance policy or annuity. Talk to your financial advisor to see if there's any need for concern.
December 8, 2017
NewsThe Senate has voted to go to a conference committee with the House on the Tax Cuts and Jobs Bill. There are a number of differences to be reconciled including whether or not to keep the Alternative Minimum Tax (AMT), the fate of the estate tax, the differences in individual tax rates, the Senate's repeal of the Patient Protection and Affordable Care Act's individual mandate penalty.
Meals, entertainment and lodging expenses require strict substantiation. In Constantine Gus Cristo (T.C. Memo. 2017-239) the taxpayer had substantial lodging and meal expenses, but failed to substantiate any of the lodging. The IRS allowed the taxpayer to deduct 50 percent of the claimed amount for lodging and meal expenses based on a Federal per diem rate for meals and incidental expenses (M&IE). The taxpayer stayed weith his ex-wife for 167 nights and his aunt for 21 nights. During these stays petitioner often purchased groceries and housekeeping supplies for his host, claiming that he spent $4,454.85 and that he should be allowed to deduct this amount in lieu of lodging. The Court noted he could not substantiate the amount claimed. The IRS allowed 50 percent of the amount and the Tax Court refused to allow more.
Sec. 280E denies a deduction for expenditures in connection with carrying on a trade or business of dealing in illegal drugs. That includes medical marijuana which is not legal under Federal law. In Edward Arash Jabari et ux. (T.C. Memo. 2017-238) the taxpayers were partners in a partnership that was licensed by the State of Colorado to grow and sell medical marijuana. The IRS allowed only a portion of expenses of the partnership, denying the other portion because the taxpayers failed to document the partnership's gross sales or to substantiate any expenses or costs relating to any gross sales. The Court noted since there existed no reasonable basis for applying the Cohan rule, it was inappropriate to approximate the amounts of business expenses or costs of goods sold. The Court denied deductions beyond that allowed by the IRS. The Court did not rule on the applicability of Sec. 280E.
Tip of the DayNo change audit . . . Just because the IRS audits your return and doesn't challenge an item doesn't mean you're off the hook for the same position in the future. While there are exceptions to the rule, each tax year stands alone, so that acceptance of a position by the IRS one year is not controlling in a later year. And keep in mind that IRS agents are human. The examiner may have the dollar amount of the questionable item wasn't worth pursuing, or may just have overlooked the item. Sometimes a particular expense is being questioned and other items ignored on purpose. Check with your tax advisor.
December 7, 2017
NewsNotice 2017-74 (IRB 2017-51) provides that individuals who are not eligible for coverage under an eligible employer-sponsored plan and who lack access to affordable coverage should not be denied the use of the affordability exemption under Sec. 5000A(e)(1) of the Code and Reg. Sec. 1.5000A-3(e) merely because they reside in an area served by a Marketplace that does not offer a bronze-level plan. Consequently, for purposes of the affordability exemption under Sec. 5000A(e)(1) and Reg. Sec. 1.5000A-3(e), if an individual resides in a rating area served by a Marketplace that does not offer a bronze plan, the individual generally should use as his or her applicable plan the lowest cost metal-level plan available in the Marketplace serving the rating area in which the individual resides.
The origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether a legal expense was ‘business’ or ‘personal’ and hence whether it is deductible or not. In William M. Barry and Trudi G. Swain (T.C. Memo 2017-237) the taxpayer sued his ex-wife to recover alimony he claims should not have been paid. The Court could not find precedent that allowed the deduction for the taxpayer's legal fees. It noted generally, attorney's fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife. The Court held the legal fees were non-deductible personal expenses.
You may be able to negotiate an installment agreement with the IRS to pay off a liability over time. But the IRS will review your living expenses and income to determine how much you can pay. In Patrick S. Bero et ux. (T.C. Memo. 2017-235) the IRS settlement officer (SO) determined the taxpayers' ability to pay, exceeded the amount they offered, even by their own calculations and denied the installment agreement. The SO offered two alternatives (1) higher monthly installments or (2) an initial payment of $1,000 to bring their outstanding liabilities below $50,000, rendering them eligible for a “streamlined installment agreement” requiring payments of only $700 per month. The taxpayers rejected both approaches. The Tax Court held their was no abuse of discretion. The Court also dismissed the taxpayers' argument that there was a change in the taxpayers' circumstances that would justify a remand to IRS Appeals.
Tip of the DayRequired minimum distributions . . . You can delay your first one to April 1 of the year following the year you turn 70-1/2. For example, your 70th birthday was June 29, 2017. You'll reach age 70-1/2 on December 29, 2017. You'll have to take your first RMD by April 1, 2018. After your first, you must take subsequent distributions on a calendar-year basis. That means your second RMD must be taken by December 31, 2018.
December 6, 2017
NewsIn Rev. Rul. 2017-25 (IRB 2017-52) the IRS announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2018. The rates will be:
Notice 2017-72 (IRB 2017-52) contains the 2017 Required Amendments List for individually designed qualified retirement plans. The list identifies certain changes in qualification requirements that became effective in 2017 that may require a retirement plan to be amended in order to remain qualified, and establishes the date by which any necessary amendment must be made.
Payments to an ex-spouse are only classified as alimony if they meet certain requirements under the tax law. One of the requirements is that the payments terminate on the death of the recipient. To determine whether a payor has liability to continue payments after the payee's death, the Court applies the following sequential approach: (1) the Court first looks for an unambiguous termination provision in the applicable divorce instrument; (2) if there is no unambiguous termination provision, then the Court looks to whether payments would terminate at the payee's death by operation of State law; and (3) if State law is ambiguous as to the termination of payments upon the death of the payee, the Court will look solely to the divorce instrument to determine whether the payments would terminate at the payee's death. In Courtland L. Logue, Jr. (T.C. Memo. 2017-234) the Court found the language in the divorce agreement did not contain an unambiguous provision. The Court then looked to state (Texas) law and found that support payments do not terminate on death of the payee spouse unless there is an provision in the agreement to do so. The Court then looked to the divorce instrument and held that the payments would not terminate on death and thus were not alimony.
Tip of the DayAlternate source . . . There appears to be consolidation in many industries with more components and products having only a few sources, some only one. What happens if that source has a fire, flood, goes bankrupt, stops making the item, or the source's product proves to be defective? You should be prepared with a backup plan. That could be buying a certain amount of your supply from another source, or at the very least, investigating a second source. There may be other options such as redesigning the product to use several different source. You may not have many options, but researching the possibilities could save time and money should you be faced with a crisis.
December 5, 2017
NewsNotice 2017-73 (IRB 2017-51) describes approaches that the Department of the Treasury and the Internal Revenue Service are considering to address certain issues regarding donor advised funds of sponsoring organizations and requests comments on those approaches.
According to IRS estimates, taxpayers collectively pay a bit more than 80% of the taxes they owe. This difference between the taxes people and businesses owe and what they pay on time is known as the tax gap, which IRS estimated to be $458 billion, on average, for 2008-2010. IRS used to set specific, numeric goals for improving taxpayer compliance, but has moved away from that approach. Officials told us that there are too many factors outside of IRS's control for such goals to be useful. The Government Accountability Office did a study and issued a report that provides information on (1) the main drivers of the tax gap; (2) IRS's confidence in the tax gap estimates; (3) IRS's goals, if any, for reducing the tax gap; and (4) the extent to which IRS uses tax gap estimates and underlying data to develop strategies to reduce the tax gap. GAO reviewed IRS tax gap data and reports and interviewed IRS officials. For the complete report, go to www.gao.gov/products/GAO-18-39.
Your tax debt may be discharged in a bankruptcy proceeding. In Benjamin Jeffery Ashmore (T.C. Memo. 2017-233) the taxpayer asserted his 2009 liability was discharged in bankruptcy. Such an assertion amounts to a challenge to the appropriateness of the IRS collection action. The Court noted The taxes that are not dischargeable under that provision include (1) income tax which became due within three years before the date that the bankruptcy was filed, (2) income tax assessed within 240 days of the date the bankruptcy was filed, and (3) income tax not assessed before the bankruptcy was filed but still assessable thereafter. The taxpayer's 2009 form 1040 was due April 15, 2010, which is less than three years before April 8, 2013, the date of filing of his bankruptcy petition. The Court held the taxpayer's 2009 liability was not dischargeable and could be collected and that the the IRS settlement officer's decision to sustain the levy was not an abuse of discretion. The Court also held the IRS did not violate the automatic stay provision which operates as a stay of any actions by a creditor to collect a debt that arose before commencement of the bankruptcy case.
Tip of the DaySexual harassment . . . Or any type of on-the-job harassment or bullying. How you handle it depends on a number of factors. One thing is sure. Ignoring the accuser is the worst thing you can do. First, the accused may continue the action (or may have done similar things in the past) causing more problems. Second, sweeping it under the rug will make things look worse if and when the allegations do surface. Third, ignoring the accuser can escalate the situation from she or he being satisfied with an simple apology to a lawsuit (or a number of actions in between). Finally, if it becomes public there will surely be negative publicity. Right or wrong, everyone has a different view of what constitutes a real issue. This could be one of the most difficult areas in management. Here are some steps you should take:
The top advice is don't ignore or belittle the feelings of the victim. Being aware that management is also upset and will take action can go a long way in stopping the victim from instituting a lawsuit. And if there is one, you'll be on much better ground if the jury feels you don't tolerate such behavior and tried to take action.
December 4, 2017
NewsThe Senate has passed its version of the tax reform legislation by a one-vote margin. There are many differences between the two bills, some of them significant. The Senate bill would:
--The corporate rate would drop to 20%, but not until 2019.The corporate tax rate reduction would be permanent, but many of the individual provisions would sunset in 2025.
--As with the House bill, the standard deduction would double, the personal exemption would be eliminated.
--Caps the state and local tax deduction at $10,000.
--Allows for hardship distributions from certain pension plans in disasters.
--Increases the Sec. 179 expense limit and expands it to include other assets.
--Sets bonus depreciation at 100%.
--Sets a higher limit on auto depreciation.
--Puts a 25-year depreciable life on commercial and residental rental property.
--Like the House bill, makes the holding requirement for an exclusion of gain on principal residence at 5 out of 8.
--Increases the alternative minimum tax exemption for individuals by about 40 percent.
--Repeals deduction for home equity interest.
--Makes a number of changes to liberalize accounting rules for small businesses.
--Provides a 23% deduction of qualified business income from gross income.
--Puts limits on net operating losses.
--Increases the deduction for teacher's expenses to $500.
--Retains the estate tax but increases the exemption to $10 million per individual.
Your tax return, or, in this case your Tax Court petition, is considered timely filed if it's postmarked, by the U.S. Post Office on the last day to file. But things get more complicated if you don't have an official postmark. You may have to show that the delivery date was within the normal processing time for mail from that zip code. In Lincoln C. Pearson et ux. (149 T.C. No. 20) the last day for the taxpayers to petition the Court was Apr. 22, 2015. The Court received their petition via certified mail on Apr. 29, 2015. The envelope containing the petition was properly addressed and had been deposited at a U.S. post office with sufficient postage prepaid through Stamps.com, a USPS-approved commercial vendor. Affixed to the envelope containing the petition was a Stamps.com postage label bearing the date Apr. 21, 2015, the date on which the postage was paid and the label printed. The envelope did not bear a USPS postmark. The USPS entered the envelope into its tracking system for certified mail on Apr. 23, 2015. An employee of the law firm mailing the petition testified as to placing the item in the mail on time. The Tax Court held that the date shown on the Stamps.com postage label was a “postmark not made by the United States Postal Service” within the meaning of Sec. 7502(b) and data retrieved from the USPS tracking system for certified mail is not “a postmark made by the U.S. Postal Service” within the meaning of Reg. Sec. 301.7502-1(c)(1)(iii)(B)(3). The Court held the taxpayer's petition was timely mailed.
Tip of the DayCollectibles as investments? . . . Sounds like an easy way to amass a fortune. Buy artwork, autographs, rare books, a 1969 Camaro, or any number of other collectibles. But the approach isn't as foolproof as you might think. First, not every collectible goes up consistently; they often move in cycles. Some common collectibles that were worth big money in the early 90's won't command half that amount today. And vice versa. Second, old doesn't mean it's valuable. Often it's a combination of old, rare, in excellent condition, and in favor. Third, you've got to buy from the right source. A rare find at a flea market could be a great investment. Buying from a dealer often means waiting a long time to recover your investment. Fourth, the market can be very illiquid. That means you may not be able to get the best price when you want to sell. And you may have to use an auction house which can take a 10%. Fifth, buy low and sell high doesn't always work. You don't have to overpay for more than one or two items to offset the gain on a number of others. Sixth, if you do have a gain, it could be taxed at 28% rather than the lower capital gain rates applied to most investments. Having said all that, investing in collectibles can be rewarding from a personal as well as a monetary standpoint. Do your homework, learn the market, and start slow. Until you become an expert, keep the investment to a very small portion of your portfolio. But if you think it's the road to retirement, you're on the wrong street.
December 1, 2017
NewsRepublicans are engaged in making some serious changes to the tax bill in order to get enough Senators on board to achieve the needed votes on the floor. There is an attempt to recover a substantial amount of lost revenue to satisfy deficit hawks. It now looks like the earliest the full Senate will vote is Friday, December 1.
Notice 2017-71 (IRB 2017-51) provides that any act performed for the 2016 taxable year of a partnership, REMIC, or certain other entities will be treated as timely for all purposes under the Code, except with respect to interest, if the act would have been timely if the Surface Transportation Act had not changed the due date for partnership returns.
The IRS has issued proposed regulations (REG-119667-17) implementing section 1101 of the Bipartisan Budget Act of 2015 (BBA), which was enacted into law on November 2, 2015. Section 1101 of the BBA repeals the current rules governing partnership audits and replaces them with a new centralized partnership audit regime that, in general, assesses and collects tax at the partnership level. These proposed regulations provide rules addressing how certain international rules operate in the context of the centralized partnership audit regime, including rules relating to the withholding of tax on foreign persons, withholding of tax to enforce reporting on certain foreign accounts, and the treatment of creditable foreign tax expenditures of a partnership.
Tip of the DayZero-based budgeting . . . Most companies prepare next year's budget by taking the current income, expenses, etc. numbers and adjusting for changes. The theory behind zero-based budgeting is that you start from zero and flesh out the numbers from scratch. That forces the budget preparers to look at all the income and expenses much more carefully, hopefully undercovering padding, outmoded projects, unnecessary expenses, etc. The approach makes sense and it's almost a certainty you'll be able to trim at least some, and maybe a considerable amount of costs. The problem is it can be an undertaking that's too big for a small company on limited resources. One option is to use the zero-based approach for a limited number of departments in each annual budget cycle. By rotating the areas you save manpower, yet still reap most of the benefits.
November 30, 2017
NewsThe Senate is continuing to make progress on its version of the Tax Cuts and Jobs Act. It's expected the full Senate will vote on a revised bill on Thursday, Noveber 30. While it appears Republicans are getting close to the total number they need, passage is not a sure thing.
The IRS has a good track record at winning hobby loss cases in court, but in Finis R. Welch and Linda J. Waite (T.C. Memo. 2017-229) they picked the wrong taxpayers The taxpayer husband was an economist who had an undergraduate degree in agricultural economics (1961) and a Ph.D. in econmics (1966). The husband started and operated a number of successful businesses and, from a young age had an interest in agriculture. The taxpayers acquired some 8,688 acres of land over a number of years. The purchase price of the various parcels totaled some $11 million; the appraised value was some $30 million. The ranch had cattle, horse, and hay operations. In addition, there was timber cutting, leased land for hunting, and a vet clinic. The ranch had 25 full-time employees with annual salaries between $25,000 and $115,000. The operation was a multimillion-dollar activity. First, the Court held that the ranch's cattle, hay, and horse operations were one activity. The Court then examined the various factors to determine if a profit motive existed. The Court found the taxpayer carried on the activity in a businesslike manner. The Court dismissed the IRS's argument that there was no written business plan--the busness plan was evidenced by the taxpayer's actions. The Court noted the ranch generated substantial income, which was increasing each year. The Court also noted that the start-up phase for a horse operation is 5 to 10 years. The taxpayer hired competent professionals to handle the manual labor. The Court found there was a profit motive for the ranch operation, but cautioned if the losses were not reined in, the taxpayer could again find his profit motives questioned.
Tip of the DayTake a break . . . Do you know the rules on breaks for employees? For federal purposes, short breaks, such as a 15 minute coffee break in the morning and after noon are compensable (you can't deduct the time). On the other hand, a lunch break can reduce the employee's total time for the day. That's important for overtime purposes. But state rules are also important. You may or may not have to provide a lunch break (it could depend on the number of hours worked), and you may or may not have to provide morning and afternoon breaks. Check the rules in your state. This is often a touchy area for employees and getting it wrong could prove costly.
November 29, 2017
NewsThe Senate budget committee has voted to advance the tax bill. The next step is a vote by the full Senate on its version of the Tax Cuts and Jobs Act bill. There is some momentum at this point, but passage by the full Senate is not guaranteed.
Be careful what you sign. In Craig K. Potts et ux. (T.C. Memo. 2017-228) the taxpayers' authorized representative signed a 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment. By executing the Form 870-AD the taxpayers agreed to “waive the restrictions provided in section 6213(a) and to consent to the assessment and collection of the deficiency and additions to tax”. The agreement provided that, upon acceptance of the taxpayers' offer, the IRS would not reopen the case absent fraud, malfeasance, misrepresentation of a material fact, or an important mistake in mathematical calculation. The Tax Court held the taxpayers could not contest their liability in a Collection Due Process (CDP) hearing. Because the taxpayers failed to submit the requested financial information and an actual offer, the Court found the IRS settlement officer did not abuse her discretion in refusing to accept an offer-in-compromise.
Tip of the DayBanking fees . . . One major bank is going to switch many checking accounts from free or lower cost to $12. You can avoid the fee if you maintain a balance of at least $1,500, or meet one of two other requirements (which may not be viable options for you). If you don't normally carry that large a balance, what should you do? The first question is, do you need the account? Some individuals and business owners have accounts that really aren't active. They may have been an account that was switched but never closed out, or one opened for a specific purpose that never materialized. You should have a separate account for every business, and a separate payroll account, but additional accounts may not be necessary. Evaluate the account in question; the easiest move may be to just close it. The second question is what's the fee and how much do you normally keep in the account? Lets' assume you normally keep a very low balance in the account (less than $100).At $12 per month the annual total is $144. The required balance is $1,500. That's equivalent to an annual interest rate of 9.6%. You probably don't make that on your investments. Keeping a $1,500 balance makes sense economically. And there's a good chance the return is even higher. Assume you normally keep $500 in the account for emergencies. In this case you only have to put $1,000 in the account to make the required balance. Here the saving is 14.4% ($144 on $1,000).
November 28, 2017
NewsThere appears to be support among Republicans for repeal of the individual mandate of the ACA (Affordable Care Act) as a part of the tax bill now under consideration. The White House's position is that they don't won't to sacrifice a timely tax bill should inclusion of the repeal cause problems.
The IRS has launched a new web page, Small Business and Self-Employed Tax Center with resources for taxpayers who file Form 1040, Schedules C, E, F or Form 2106, as well as small businesses with assets under $10 million. While it won't answer every question, it's a great starting point for small business owners. A little time spent there could save a call to your accountant, or, at least, better prepare you for a discussion.
Tip of the DaySharing economy . . . If you use one of the many online platforms available to rent a spare bedroom, provide car rides, or to connect and provide a number of other goods or services, you’re involved in what is sometimes called the sharing economy. The IRS is becoming increasing concerned about this area as a material portion of the income is probably going unreported. Moreover, since many of the transactions are in cash where there are no third party records, the IRS doesn't have automatic notification as in the case of many other transactions that generate a 1099 information return. Keep in mind that there are no lower limits on reporting income. Technically, even $1 of income would require you to file a Schedule C, E, etc., although we think the IRS might not care about $1 of income. The fact that the business had a substantial net loss after expenses or that you didn't receive a 1099 is immaterial, if you had gross income, it's got to be reported.
November 27, 2017
NewsThe Department of Labor and the IRS have announced the extension of certain time frames under the Employee Retirement Income Security Act and the Code for group health plans, disability and other welfare plans, pension plans, participants and beneficiaries of these plans, and group health insurance issuers directly affected by Hurricane Maria.
Tip of the DayHealth Flexible Spending Arrangements . . . If your employer offers one, it makes considerable sense. You'll be putting saving income and FICA taxes on the amounts put in the account. It's a use it or lose it arrangement, so don't overdo it. But you can use the arrangement to pay for medical expenses not covered by health insurance, including co-pays, eyeglasses, dental, etc. Get an idea of your out-of-pocket expenses each year, then defer a lower amount to be on the safe side. If your employer doesn't offer one, suggest it. Self-employed individuals are not eligible to participate. You must decide on the amount to contribute each year--before the beginning of the plan year. You can contribute up to $2,650 each year (adjusted for inflation).
November 24, 2017
NewsRevenue Procedure 2017-60 (IRB 2017-50) provides a safe harbor that allows an individual to deduct the amounts paid to repair damage to his or her personal residence caused by deteriorating concrete foundations containing the mineral pyrrhotite.
There are a number of possible ways to show material participation in a partnership, S corporation or similar activity. In Asif Syed et ux. (T.C. Memo. 2017-226) the Court found a doctor, a limited partner in a medical center, was not able to show he participated in the activity for more than 500 hours during the year. The doctor presented no evidence to support his claim of hours worked. The Court also held the taxpayers were not able to satisfy the material participation test in a ranch because capital was an income-producing factor and the personal services tests did not apply.
Tip of the DayCheck out your partners' finances . . . If you're going into a partnership (or taking in stockholders in a corporation) you want to make sure your partners are financially able to handle the load. You may each start out putting in $20,000, but if things don't go as planned can they come up with any additional cash needed? And if you have to go for a loan, will their credit rating help or hurt your chances of approval? You don't want to share disproportionately in the risk.
November 22, 2017
NewsThe provision in the Senate version of the Tax Cuts and Jobs Act bill repealing the Affordable Care Act's (ACA) mandate requiring health insurance may not make to the version to be voted on by the full Senate. The provision could derail the tax bill and President Trump is currently more interested in a tax bill on his desk than repealing the individual mandate.
The IRS’s electronic filing (e-file) Provider Program offers taxpayers an alternative to filing a traditional paper tax return. It enables tax returns to be sent to the IRS in an electronic format via an authorized IRS e-file Provider. A Provider is generally the first point of contact for most taxpayers filing a tax return through the e-file Provider Program. In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found the IRS is still not verifying citizenship status for all individuals on e-file applications. TIGTA’s review identified 45 approved applications that listed a Principal or Responsible Official who was not a U.S. citizen or resident alien according to Social Security Administration records at the time of application. The review also identified 1,494 individuals associated with approved applications despite the fact that Social Security Administration records do not show a citizenship status for them. TIGTA’s review of a statistical sample of 34 approved e-file Program partnership applications identified nine (26 percent) that omitted at least one partner with a five percent or greater ownership interest in the partnership. TIGTA estimates that 256 of the 969 partnership applications omitted one or more partners. In addition, EFINs are not timely deactivated for deceased Principals and Responsible Officials of firms. Of 965 EFINs with deceased Principals and Responsible Officials, 349 were still active, and for 399, the IRS took an average of 1,080 days to deactivate the EFIN. Lastly, referrals of 328 EFINs used to file potentially fraudulent tax returns were not consistently evaluated or forwarded to the Electronic Products and Services Support organization. The Return Integrity and Compliance Services organization did not evaluate the 328 EFINs for potential fraud, and only 104 were evaluated for identity theft. For the complete report go to www.treasury.gov/tigta/auditreports/2018reports/201840003fr.pdf.
If the IRS sends a notice of deficiency assessing additional tax, you're entitled to a hearing before levy also called a collection due process hearing. The Appeals officer (AO) can deny a face-to-face hearing under certain circumstances. In Paul B. Muir (T.C. Memo. 2017-224) the taxpayer appealed his denial of a face-to-face hearing. The Tax Court found the AO did not abuse his discretion in doing so because the taxpayer did not provide financial information. The failure by the IRS to note an address change was not a factor because the taxpayer was advised of the requirement to provide the information.
Tip of the DayIRA transfer to charity . . . If you're taking distribution from an IRA because you have to take required minimum distributions, making them directly to a charity can provide more tax benefits than simply making a charitable contribution. Using this approach the charitable contribution portion of the IRA distribution never shows up in your adjusted gross income. The lower AGI can be beneficial because it's used to determine a number of phaseouts. IRA owners age 70½ or older can transfer up to $100,000 per year to an eligible charity tax-free. The transfer can count toward your required minimum distribution for the year. Funds must be transferred directly by the IRA trustee to the eligible charity. Talk to your tax advisor.
November 21, 2017
NewsFor the second year, the IRS, state tax agencies and the tax industry, partners in the Security Summit, will host National Tax Security Awareness Week to encourage both individual and business taxpayers to take additional steps to protect their tax data and identities in advance of the 2018 filing season (IR-2017-190). There are three key steps the Summit partners urge people to take to protect tax and financial information:
--Learn to recognize and avoid phishing emails, threatening phone calls and texts from thieves posing as legitimate organizations such as banks, credit card companies and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails.
--Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and will automatically update. Encrypt sensitive files such as tax records stored on computers. Use strong passwords.
--Protect personal data. Use strong, unique passwords for each online account. Don't routinely carry Social Security cards, and make sure tax records are secure. Treat personal information like cash; don't leave it lying around.
As we reported last week, the Senate's version of the Tax Cuts and Jobs Act is out of committee. The big differences in the two bills are:
--the Senate bill repeals the Obamacare mandate;
--the Senate bill has seven brackets to the House's 4;
--the mortgage interest deduction is retained by both, but the House version provides a lower cap on the related debt;
--the House version repeals the deduction for medical expenses, the Senate version does not;
--the House version retains up to $10,000 deduction for state and local taxes, the Senate version repeals it completely;
--the Senate version sunsets the tax rate reductions for individuals in 2025; and
--the Senate version delays for one year the drop in the corporate tax rate.
While it would appear that the differences are such that they could be ironed out in a Conference Committee, there are few sure things in politics.
If you're a partner in a partnership or shareholder in an S corporation, the entity's income is passed through and reported on your individual tax return. You've got to report what's on the K-1. If there is an error there are procedures to handle it. It makes no difference how much of the profits are distributed to the partners or shareholders. In Jay Enis et ux. (T.C. Memo. 2017-222) were shareholders in an S corporation where there was a falling out of the shareholders. The taxpayers filed a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request with their tax return, claiming the S corporation initiated litigation contesting the taxpayer's ownership interest and that the entity and certain shareholders had prevented them from exercising some of their ownership rights. For those reasons, the taxpayers did not include their share of the S corporation's income on their return. The Tax Court found the taxpayers were not deprived of their beneficial ownership and had to include the their pro rata share of the S corporations's income.
Tip of the DayEmployee discounts . . . They're generally a good idea. They improve morale and often can be less expensive than provide a like amount of additional salary. And who doesn't like to get something at a discount? The IRS has their eye on discounts. Done the wrong way, at least part of the discount could be additional income to the employee. In the case of property, the discount can't exceed the gross profit percentage of the price at which the property is offered to customers. In the case of services, the discount can't exceed 20% of the price at which the services are offered to customers. Discounts in excess of this amount taxable income to the employee. For example, Andersen Marine will haul a boat out of the water, wash the bottom, put it on a cradle and shrinkwrap it for the winter for $40 a foot. Fred, an employee, has Andersen perform the services on his 35 foot boat. The charge would normally be $1,400, but Andersen charges Fred only $1,000. With a 20% discount his cost would be $1,120. The extra $120 of discount is taxable income to Fred and has to be included on his W-2. The rules can quickly become involved because of the different situations that can be encountered. However, a short talk with your tax adviser and you should be able to devise some simple guidelines that keep it simple.
November 20, 2017
NewsThe IRS is reminding (IR-2017-189) employers and other businesses of the Jan. 31 filing deadline that now applies to filing wage statements and independent contractor forms with the government. The Protecting Americans from Tax Hikes (PATH) Act includes a requirement for employers to file their copies of Form W-2 and Form W-3 with the Social Security Administration by Jan. 31. The Jan. 31 deadline also applies to certain Forms 1099-MISC filed with IRS to report non-employee compensation to independent contractors. Such payments are reported in box 7 of this form. Employers should verify employees' information now. This includes names, addresses, Social Security or individual taxpayer identification numbers. They should also ensure their company's account information is current and active with the Social Security Administration before January. If paper Forms W-2 are needed, they should be ordered early. An extension of time to file Forms W-2 is no longer automatic. The IRS will only grant extensions for very specific reasons. Details can be found on the instructions for Form 8809 .
You may be able to deduct attorney's fees in defending yourself in an IRS action, but you've got to meet certain requirements. In Claudia Appelbaum(U.S. Court of Appeals, Fourth Circuit) the Court found no reversible error of a District Court that the IRS's position that it was substantially justified in claiming the petitioner was a responsible person liable for the truat fund recovery penalty. While the petitioner was found not responsible, the IRS had a number of pieces of circumstantial evidence that a reasonable person would have found convincing.
Tip of the DayRead the fine print . . . Many bills (e.g., your monthly cell phone bill) specify that if you want to contest the bill, you might have only 30, 60, 90, etc. days to do so. Miss the deadline and you could be out of luck. Best advice? Review your bills as soon as possible after receiving them; certainly before paying them. That's also true for bank and other financial statements.
November 17, 2017
NewsThe House has passed its version of the Tax Cuts and Jobs Act 227 to 205 with no Democrats voting for it and 13 Republican defectors. The Senate Finance Committee has voted (12 to 10, along party lines) the bill out of committee and to be voted on by the full Senate. Passage in its present form there is less certain. And, even if passed, the differences between the House and Senate must be ironed out--another job that is unlikely to be easy.
If you work in a foreign country, you may be able to exclude all or a portion of your income from Federal income tax. But you've got to strong proof that you're a resident of the foreign country. That can include the amount of time spent in the country, the establishment of a home (as opposed to using hotel rooms), the nature of temporary absences from the foreign country, etc. In Robert Hudson et ux. (T.C. Memo. 2017-221) the taxpayer was a pilot for Korean Airlines, but never established a presence enough to meet the residence test in that country. As a result, the Court denied the exclusion.
Small businesses often operate through several entities and, even if there is only one operating entity, funds often go back and forth between the owners and the business. When there are multiple entities funds often flow between entities. In many cases the flow of funds is allowed, but only if the rules are met. Related party transactions often come under enhanced scrutiny. In VHC, Inc. and Subsidiaries (T.C. Memo. 2017-220) there was a holding company and five subsidiaries controlled by one family. During the years at issued the taxpayer advanced some $111,000,000 to the principal stockholder or hsi related companies. The amount included guaranties of the principal shareholder and his related companies' debts, lines of credit, nonguaranteed advance, and payments to his and his related companies' creditors. For the years 2004 through 2013 the company claimed partially worthless bad debt deductions for some $92,000,000. The IRS challenged the taxpayer's contention that the advances were really debt. The Court looked at the ten factors usually examined to determine if the advances were bona fide debt. The Court noted the risky nature of the advances, the fact that the debt would be hard to enforce and the debt brought increased management participation. While many of the advances were supported by promissory notes, they carry little weight when related parties are involved. The notes had a fixed maturity date, but that was meaningless since many of the notes were routinely renewed withhout any payments of principal or interest. In addition, the company's records contained errors with respect to the notes. The Court found they were not bona fide debt.
Tip of the DayReusable coupons . . . Instead of putting a one-shot coupon in a flyer, newspaper, etc. consider a reusable one with an expiration date. The concept can be useful to get customers to frequent the restaurant, store, etc. and convert them to regular customers. The idea is best suited to a business where customers return regularly--grocery store, deli, restaurant, hardware store, etc. It's probably not for a retailer where purchases are relatively infrequent.
November 16, 2017
NewsCancellation or forgiveness of debt by a creditor generally results in income to the debtor. The logic is he or she has become richer by the amount forgiven because money they received in the past won't have to be repaid. In FloEtta Bullock (T.C. Memo.2017-219) the taxpayer was not the primary obligor on the loan. While she simply intended to cosign for her son and daughter-in-law in the purchase of a truck she unwittingly signed paperwork indicating that he was the primary obligor on the loan. However, after the paperwork was signed, the lender dealt only with the taxpayer's son and daughter-in-law and testified that they never intended the taxpayer to be the primary obligor. She made no payments on the loan, never used the truck didn't know she was the primary obligor until trial.The Court noted a guaranty creates a contingent liability where a party's obligation to make a payment under the guaranty is contingent upon the primary obligor's failure to pay the debt. The guarantor of a contingent liability generally does not recognize income upon discharge of a debt. Such a discharge creates no previously untaxed accretion in assets that would result in an increase in net worth that constitutes income. The Court held the taxpayer had no cancellation of debt income.
In In re: Brothers Materials Ltd., A Texas Limited Partnership, Debtor (U.S. District Court, S.D. Texas) the IRS sought to collaterally attack the Bankruptcy Court's order confirming the Debtor's Chapter 11 Bankruptcy Plan. The District Court held that the incontrovertible truth was that the IRS did not object to the Plan or directly appeal the confirmation order. Yet when the Debtor filed a motion to enforce an unambiguous Plan provision in the Bankruptcy Court, the IRS changed course, asserting for the first time the Court's alleged lack of jurisdiction to confirm the Plan. The Court agrees with the Bankruptcy Court's holding that the time to make such a challenge has long since passed and that its confirmation order was res judicata. The District Court affirmed the judgment of the Bankruptcy Court.
Tip of the DayGet creative with rental property . . . If you're renting out one or more houses, there's not much you can do if the demographics, etc. change. Chances are the property is zoned residential and there's not much you can do about it. But if you own a strip center, small shopping center, etc. you may have options. Instead of the traditional retail stores you might be able to rent to an urgent care center, service business, even offices and churches. Before courting different tenants, make sure you're zoned for the change and that there are no clauses in other tenants' leases preventing such action. You should even consider consulting existing tenants. You don't want existing tenants not renewing because of the new tenants.
November 15, 2017
NewsWork continues on the Tax Cuts and Jobs Act proposal. The Senate version eliminates all deductions for state and local taxes; the House bill would retain a deduction for the first $10,000 of real estate taxes. This could be a sticking point from several angles. President Trump has said the bill can't eliminate all state and local tax deductions. And if things weren't challenging enough, there is talk of adding repeal of the Obamacare individual mandate to the legislation.
In Robert E. Smith, III et ux. (T.C. Memo. 2017-218) the IRS issued a notice of deficiency determining a $623,795 income tax deficiency and a $124,759 accuracy-related penalty for the taxpayers' 2009 tax year. During 2009 the taxpayers transferred their personal assets of cash and marketable securities to a wholly owned S corporation, which in turn transferred the assets to a family limited partnership. The taxpayers dissolved the S corporation and received the partnership interest in the dissolution of the S corporation. Through this structure and the transfer of their personal assets, the taxpayers claimed an ordinary loss deduction on the liquidating distribution by using a substantially discounted value for the assets held by the partnership. They conceded that to the extent they are entitled to a loss deduction for 2009, it should be characterized as a short-term capital loss. After concessions the issues for consideration are whether the taxpayers: (1) are entitled to deduct a short-term capital loss for 2009 relating to the dissolution of the S corporation and (2) are liable for a Section 6662(a) accuracy-related penalty for 2009. The IRS contended the taxpayers were not entitled to deduct the 2009 loss upon the dissolution of the S corporation because the partnership structure lacked economic substance, or in the alternative, the loss deduction did not meet the Section 165 requirements for a bona fide loss incurred in a trade or business or a transaction entered into for profit. The taxpayers argued that there were legitimate business purposes for starting the entities (to manufacture a product in which the taxpayer had an interest) but their plans changed. The Court did not find the taxpayers claims credible. It found the transaction lacked economic substance and the taxpayers were not entitled to any loss for the year at issue. In addition, despite the plan was conceived by an attorney who was also a CPA and tax professional, the Court found the taxpayers liable for the accuracy-related penalty.
Tip of the DayDon't apologize for crossed invoices . . . If you're sending out the second or third invoice, don't apologize for the possibility the customer may have already mailed his payment. If you're sending the second invoice, he's already late, so no apology is necessary. Moreover, the apology may indicate weakness.
November 14, 2017
NewsRev. Proc. 2017-59 modifies Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev. Proc. 2016-1. Rev. Proc. 2015-13 provides procedures for obtaining the consent of the IRS to change a method of accounting for federal income tax purposes. With respect to elections under Sec. 404A of the Internal Revenue Code, which are treated as changes in method of accounting for purposes of Sec. 481, this revenue procedure specifies the Sec. 481 adjustment period.
Revenue Ruling 2017-22 provides the covered compensation tables effective Jan. 1, 2018.
The IRS is serious about businesses that fail to remit employment taxes. Not only is the business liable for the taxes, any responsible individual can be held personally responsible. That was the situation in S. P. Davis, Sr., Willie J. Singleton, Andrew Davis, Jr., Defendants-Appellants (U.S. Court of Appeals, Fifth Circuit). The Government attached a lien to commercial property owned by all three appellants and a fourth party to force the sale of the property. Only two of the property owners were liable for the employment taxes, but the Government decided to foreclose on the property and sell it rather than sell the partial interests. The Court noted that Sec. 7403 allows the Government to enforce a lien against property that a tax debtor owns by forcing a sale of such property. The Court also noted that in Rodgers the Supreme Court enumerated several factors for courts to consider in deciding whether or not to allow foreclosure. The district court considered the facts of the case in light of those factors and correctly found that they weigh in favor of the forced sale. The Court held the District Court did not err in ordering the forced sale of the property. (The Court determined that this opinion should not be published and is not precedent.)
Tip of the DayNoncompete agreement . . . If you're selling your business, more than likely you'll be asked to sign a noncompete agreement. Generally, there's nothing wrong with that. However, you should make it conditional on the buyer fulfilling his side of the deal. For example, if he defaults on the payments on a note, the noncompete becomes voidable. It gives you some leverage and allows you to get back in the business, if you want. Talk to your attorney. You'll probably want other guarantees.
November 13, 2017
NewsThe U.S. has tax treaties with many foreign countries. The treaties govern the taxation of many intercountry transactions. In Zhongxia Ye (T.C. Memo. 2017-216) the petitioner was a citizen of China with an accounting degree. She worked as an accountant in China but wanted to get a Ph. D. and entered the U.S. on an F-1 visa to get such a degree n business administration. She entered the U.S. in 2001 and left only twice. In 2006 she accepted a full-time, permanent, tenure track positiion as an assistant professor of accounting at Kennesaw State University. Her employment was extended for the academic year starting in August, 2007. In 2008 petitioner earned wages of $94,747 from working as an assistant professor at KSU. She hired a CPA to prepare her 2008 Form 1040NR, U.S. Nonresident Alien Income Tax Return (return). In that return, she claimed her wages of $94,747 were “income exempt by a treaty”. A Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), attached to petitioner's 2008 return states in pertinent part: Taxpayer is hired as an assistant professor by the Kennesaw State University (a public state university of Georgia) primarily to teach, lecture and conduct research on August 14, 2006 on a H1B1 visa status. An alien individual is treated as a resident of the United States with respect to any calendar year if the individual: (1) is a lawful permanent resident of the United States at any time during the calendar year; (2) meets a substantial presence test; or (3) makes a first-year election to be treated as a resident of the United States. The IRS argued the petitioner was a resident alien under the substantial presence test for tax years 2008 and 2009. The Court sided with the IRS and found the petitioner met the substantial presence test for those years and was a resident of the U.S. The treaty provides an exception for individuals who are a resident of the other contracting state (China) and temporarily present in the first-mentioned contracting state (U.S.) for the primary purpose of teaching, giving lectures, or conducting research . . . The Court noted that the petitioner didn not have any plans to move out of the U.S., citing the application for permanent residency and the limited trips outside the U.S. The Court found the contingencies as to continued work in the U.S. to be remote. The Court found the petitioner was not "temporarily present" in the U.S. for 2008 and 2009 and her earnings were not exempt under the treaty.
Tip of the DayPlanning a year-end charitable contribution of stock? . . . Don't delay too long. The gift to a charity of a prperly endorsed stock certificate is completed on the date of mailing or other delivery to the charity or to the charity's agent. However, if you give a stock certificate to your agent or to the issuing corporation for transfer to the name of the charity, your gift is not completed until the date the stock is transferred on the books of the corporation.
November 10, 2017
NewsThe Tax Cuts and Jobs Act has been reported out of the House Ways and Means Committee with a 24 to 16 vote. The bill now moves on to the House floor. There are a number of substantive differences between the House and Senate versions, several of which may be hard to reconcile for political reasons. The Senate version is more generous in a number of ways, but would delay the effective date of the 20% corporate rate for a year. The Senate version includes more individual brackets along with a lower starting rate and lower top rate. Whether or not these differences can be ironed out and a compromise bill approved by the full House and Senate is still open.
In response to the extreme need for charitable relief for victims of the 2017 California Wildfires, employers may have adopted or may be considering adopting leave-based donation programs. Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Sec. 170(c) of the Code (Sec. 170(c) organizations). Notice 2017-70 provides guidance for income and employment tax purposes on the treatment of cash payments made by employers under leave-based donation programs for the relief of victims of the 2017 California Wildfires.
Tip of the DayBonuses--year deductible . . . If you're on the accrual method of accounting, you can deduct amounts in one year that are paid in the following year, but only if (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. That means that in order to deduct bonuses in 2013, the amount is determined with certainty and you have a legal obligation to pay the amount at the end of the year. If there is doubt as to the amount or there's no legal obligation, you can't deduct the amount until actually paid. Check with your tax advisor to be sure. Make sure you provide him or her with all the facts. If the deduction in 2013 would be valuable, you may want to cut the checks this year and deal with the cash flow consequences.
November 9, 2017
NewsThere have been several changes to the House bill on tax reform and there is talk of more to come, even before any word from the Senate. There may be some fear that the bill as first introduced needs to be sweetened to survive.
In Dana D. Messina and Nancy G. Messina; Kyle R. Kirkland and Stephanie Layne (T.C. Memo. 2017-213) during 2012 M and K together owned 80% of S1, an S corporation, which owned Q, a qualified subchapter S subsidiary. Q was the borrower under a loan from an unrelated entity. M and K formed S2, a wholly owned S corporation, to acquire the loan. M and K contended that S2 should be disregarded for Section 1366(d)(1)(B) purposes and the loan deemed indebtedness of S1 to them, allowing them to increase their bases in S1's indebtedness and take into account its pass-through losses. The IRS maintained that S2's separate corporate existence should be respected and the loan not be treated as indebtedness of S1 to M and K. The Tax Court held that S2 was not the incorporated pocketbook of M and K, that S2 was neither an agent of M and K nor a conduit, that M and K had made an actual economic outlay to S2, which in turn made an actual economic outlay to S1 and Q. The Court also hald the step transaction doctrine did not apply and M and K were bound by the form of their transaction.
You may be able to discharge your tax liabilities in bankruptcy, assuming you filed a timely return. But like other debts, discharge is not automatic. In In re: Matthew L. Feshbach and Kathleen M. Feshbach, Debtors. Matthew L. Feshbach and Kathleen M. Feshbach, Plaintiffs (U.S. Bankruptcy Court, M.D. Flordia) the taxpayers had not filed returns for some 10 years and owed a substantial amount in taxes. The Court noted that the Plaintiffs alleged inability to pay this debt resulted from a conscious decision to spend their considerable income to support an excessive lifestyle based on a conviction that it takes money to make money. While such a conviction may in some instances prove true, it cannot excuse the Plaintiffs' intentional failure over the course of more than a decade to pay their tax debt while at the same time realizing in excess of $21 million in income ($13 million of that from tax years 2002-2010) and living what most would consider a luxurious life. Consequently, they are not entitled to a discharge of any of their tax debt.
Tip of the DayBackup executor . . . Serious consideration should be given to naming one in your will. Even if you've discussed it with your first choice he or she may end up declining or not up to the task when the time comes. There could be any number of reasons. Don't forget that person may not be called on for many years.
Copyright 2017 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. 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