Small Business Taxes & Management

News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.

For the full text of a Revenue Ruling, Revenue Procedure, new Regulation, Notice, or Announcement go to:
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  IRS Written Determinations
For IRS Forms and Publications:
  Forms and Publications
For Health Care Tax Tips:
  Health Care Tax Tips

 

November 28, 2014

News

In William D. Evans et ux. (T.C. Memo. 2014-237) the Court found the taxpayers' sponsorship of their son's motocross motorcycle racing activities were ordinary and necessary business expenses. The motocross racing activity produced direct promotional benefits for the taxpayers' construction company.

If you rent your vacation home but use it for personal purposes more than 14 days or 10% of the number of days the dwelling is rented at a fair rental value your deductions are limited. In Mark A. Van Malssen et ux. (T.C. Memo. 2014-236) the taxpayers claimed the rental of a condominium for a week to the taxpayer's brother was at a fair rental value. However, the taxpayer provided no documentation that showed the amount paid. On a related issue the taxpayers were able to show the Court that they engaged in repair and maintenance work for a number of days and the Court found that these days were not considered personal. Some days were considered personal where the taxpayer was not primarily engaged in repair and maintenance.

Tip of the Day

What to reward customers? . . . Give a rebate or a gift card. Rebates are great if you make the customer do some work. For example, the item costs $75, but you give a $25 rebate, either in cash (or debit card) or as a gift card. The catch? The customer has to apply for it, either by mail or on line. There's a good chance (often more than 50% depending on the amount of the rebate) that the customer won't apply and you've sold the item for full price. If you provide a gift card, either with or without an application, the customer has to buy from you in the future. Chances are the customer will spend more than he would have, seeing the gift card as almost "free money". Or you might get the customer to spend it with you rather than your competitor. The best of all worlds? He doesn't use the gift card.

 

November 26, 2014

News

You can't deduct expenses associated with a business until you're actually in business. In James Clement Powell et ux. (T.C. Memo. 2014-235) the taxpayer could not deduct expenses associated with an activity of growing hops. The taxpayer testified he planted seeds, but whether conditions stalled their growth. The taxpayers provided no evidence they were successful in harvesting or selling any hops during the years at issue. The Court held the activity was not a functioning concern.

In Ronald L. Kirkpatrick, Sr. (T.C. Memo. 2014-234) the taxpayer was assessed a trust fund recovery penalty as the responsible person for employment taxes on a corporation he controlled. The taxpayer argued that the corporation had entered into an installment agreement to pay the taxes, and thus he should no longer be liable for the penalty. The Court noted that the Internal Revenue Manual (IRM) does not suggest that collection should be suspended on previously assessed trust fund recovery penalties of a responsible person. The Court found the settlement officer did not abuse her discretion in sustaining the proposed levy.

Tip of the Day

Try before you buy . . . Just what do you need? Many products are available in a dizzying array of options. While that's been true of vehicles for some time, it seems to now be true for many more products. For example, one chain saw manufacturer has over 10 different models with a similar size chain bar. Sometimes you can upgrade easily; sometimes adding an option after delivery can substantially increase the price of the option. In some cases it may be unavailable. Just forget the choices and go for the top-of-the line? If you're just buying one and the price difference isn't prohibitive, that approach may make sense. But if you're buying several units that can get expensive. Here are some thoughts:

 

November 25, 2014

News

Notice 2014-74 (IRB 2014-50) amends the two safe harbor explanations in Notice 2009-68, that can be used to satisfy the requirement under Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. Amendments to the safe harbor explanations reflected in this notice relate to the allocation of pre-tax and after-tax amounts, distributions in the form of in-plan Roth rollovers, and certain other clarifications to the two safe harbor explanations. The amendments to the safe harbor explanations (and attached model notices) may be used for plans that apply the guidance in section III of Notice 2014-54, with respect to the allocation of pretax and after-tax amounts.

The IRS has issued final regulations (T.D. 9705) relating to the requirement to maintain minimum essential coverage enacted by the Patient Protection and Affordable Care Act. The regulations provide individual taxpayers with guidance under Sec. 5000A. The regulations also provide guidance on the exemptions from that requirement.

The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to determine whether the IRS has controls in place to provide reasonable assurance that outside employment requests are documented and reviewed for conflicts with employees’ official duties. IRS records indicate that, in Calendar Year 2011, nearly 3,000 of the more than 6,000 active, full-time IRS employees who held jobs or participated in business activities outside the IRS did not obtain documented approval, as required by Department of the Treasury regulations and IRS policies. IRS Human Capital Office management was generally not aware of the number of employees with unapproved outside employment because responsibility has not been assigned for overseeing the overall outside employment process. It will be difficult for the IRS to monitor outside employment because 93 percent of the existing records in the database used to compile outside employment requests are out of date. Improving controls will be important because TIGTA identified current and former IRS employees with both actual and potential conflicts of interest. One employee pled guilty to engaging in a criminal conflict of interest for accessing taxpayer information for the purpose of conducting a private tax and accounting business, 44 IRS employees prepared tax returns for compensation (a prohibited practice), and TIGTA’s analysis identified 20 employees with a high risk of potential conflicts of interest who received outside income without documented approval. For example, four employees operated businesses with annual gross receipts ranging from more than $500,000 to more than $7 million, and six employees had wages of more than $50,000 from outside of the IRS. Significant outside income could impact the employee’s effectiveness on the job. For the complete report go to www.treasury.gov/tigta/auditreports/2014reports/201410073Ffr.html.

The Department of Justice has announced the sentencing of Credit Suisse for conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and other documents with the IRS. Credit Suisse pleaded guilty to conspiracy earlier this year. There have also been indictments of seven Credit Suisse employees. At sentencing the U.S. District Court judge entered judgment for $1.8 billion dollars. The company will pay the Justice Department's Crime Victims Fund a fine of approximately $1.136 billion and the IRS $666.5 million in restitution. The agreement provides that Credit Suisse cannot challenge the restitution amount, which can also provide the basis for an IRS civil tax assessment. In the plea agreement Credit Suisse stated it employed a variety of means to assist U.S. clients including destroying account records sent to the U.S. for client review, structuring transfers of funds to evade currency transaction reporting requirements, providing offshore credit and debit cards to repatriate funds in undeclared accounts, and assisting clients in using sham entities.

Tip of the Day

Home sale exclusion . . . If you used part of your home for business, or rented it out, you can't claim the $250,000/$500,000 exclusion on that portion. For example, you have a $200,000 gain on the sale of your home but used 20% of the home for business. You've got to pay tax on $40,000 of the gain. On the other hand, if you sell the home for a loss, you can claim a loss on the portion of home used for business.

 

November 24, 2014

News

Revenue Ruling 2014-32 (IRB 2014-50) updates previous guidance on the use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringe benefits to employees. This revenue ruling also provides guidance on the use by employees of debit cards for paying mandatory shipping fees on transit passes. Finally, the revenue ruling provides that after December 31, 2015, employers may no longer provide qualified transit fringe benefits under a bona fide cash reimbursement arrangement in cases in which a terminal-restricted debit card is the only readily available transit pass in the employer’s geographic area.

Notice 2014-76 (IRB 2014-50) provides a list of the Sec. 5000A hardship exemptions that taxpayers may claim on a Federal income tax return without obtaining a hardship exemption certification from the Marketplace.

Revenue Procedure 2014-62 (IRB 2014-60) announces the indexed applicable percentage table in Sec. 36B(b)(3)(A) of the Code, which is used to calculate an individual’s premium tax credit for taxable years beginning after calendar year 2015. It also announces the indexed 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 2015. Finally, the Rev. Proc. cross-references 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 2015.

Tip of the Day

Roth or traditional? . . . The earlier you put money in an IRA, the better. A one-time investment of $1,000 in a stock returning just 5% and you'll have $7,040 at the end of 40 years. Make the same investment 10 years later and you'll have only $4,322 at the end of 30 years. When you're in high school, college, or just starting to work you'll probably be in a low bracket, or may even be paying no taxes. The tax deduction of a traditional IRA won't give you any benefits. Go with a Roth. The same is true in a year you're in the 10% or even the 15% bracket, but are normally in a high bracket and expect the same when you retire.

 

November 21, 2014

News

Senate Finance Committee Chairman Ron Wyden, D-Ore. issued a statement after the GAO released a report on IRAs with large balances, also known as "mega IRAs". The GAO reported that for 2011 roughly 600,000 taxpayers had IRA accounts worth more than $1 million, and some 9,000 taxpayers had IRAs worth more than $5 million. That contrasts with the median IRA account balance of about $21,000.

The Department of Labor has announced the jurisdictions that will have a Federal Unemployment Tax Act credit reduction for 2014. Normally an employer can claim a credit of 5.4% on the first $7,000 of wages subject to FUTA for unemployment taxes paid to state or other jurisdiction, effectively reducing the 6% FUTA rate to 0.6%. However, if a state borrows from the Federal fund, an employer can't claim the full FUTA credit for that year. For 2014, California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio and the U.S. Virgin Islands are credit reduction jurisdictions. Thus, after reduction the FUTA tax rates are 2.3% for Connecticut, 2.1% for Indiana and 1.8% for the other jurisdictions cited. Follow the instructions on Form 940 when completing the form next January.

Tip of the Day

Fees matter . . . Fees to manage investment accounts and mutual fund fees can vary widely. And often there's little correlation between performance and the fee. In some cases there's actually a negative correlation. The difference can add up to a substantial amount. For example, assume you're investing $500 a month and getting a return of 7% in one fund or a return of 6% in alternate fund because of an extra 1% fee. Over 40 years the 6% fund will accumulate to $995,700; the 7% fund will accumulate to $1,312,400--an extra $316,700. That's a substantial amount.

 

November 20, 2014

News

The IRS has issued final and temporary regulations (T.D. 9704) relating to the consequences to U.S. and foreign persons for failing to file gain recognition agreements (GRAs) or related documents or to satisfy other reporting obligations, associated with certain transfers of property to foreign corporations in nonrecognition exchanges. These regulations affect U.S. and foreign persons that transfer property to foreign corporations in nonrecognition exchanges.

The IRS has recently issued a number of updates to forms. Of particular interest are:

4684 Casualties and Thefts
8801 Credit for Prior Year Minimum Tax-Individuals, Estates, and Trusts
8889 Health Savings Accounts (HSAs)
8962 Premium Tax Credit
8965 Health Coverage Exemptions
2106 Employee Business Expenses

For the latest forms go to IRS.gov.

Tip of the Day

Covering up is usually a bad idea . . . It didn't work well when you were a kid, it's even less acceptable in business. Unlike your mother or father, customers, the press, etc. are likely to keep digging and when they find the truth the consequences are usually a lot worse than admitting a mistake up front. There may be legal implications so make sure your attorney is involved from the start. Don't wait for the disaster to happen. Have a plan for the likely disasters and a team to handle it. Chances are you know where you're vulnerable--a chemical manufacturer is most likely to have a defective product, a spill, or a fire. Any company dealing with food products is vulnerable to health hazards. The planning process should also provide valuable information on what you can do to reduce the impact and maybe even avoid the disaster.

 

November 19, 2014

News

For the past several years, the IRS had included fuel tax credit scams on its list of the "Dirty Dozen". (Taxpayers who purchase fuel with a highway use tax included in the price but use it off-highway, such as in a bulldozer, farm equipment, etc., are entitled to a credit.) The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to evaluate whether opportunities exist to improve the return classification and examination process for individual income tax returns claiming a fuel tax credit. The audit discovered that some returns above the threshold for manual screening were not properly coded for review. In addition, some 198,000 returns with fuel tax credit claims below the manual screening threshold amount that were questionable because they did not report any business income to support the business use of the fuel. As a result of just these two errors the IRS may have released payments of some $167 million over a three-year period. For the complete report go to www.treasury.gov/tigta/auditreports/2014reports/201430067Ffr.html.

Tip of the Day

Material participation in rental real estate . . . We've discussed this issue before. You may be able to deduct losses from rental real estate without regard for the usual $25,000 allowance if you can show you're a real estate professional. One way is by showing you've spent a certain amount of time in the real estate trades. In one recent case the taxpayer had a business installing automobile and residential glass. The Tax Court noted that in order to be in the real property trade or business he must be involved in construction or reconstruction. The Court found that installing original or replacement windows in newly built or existing buildings constituted construction or reconstruction, but cutting and installing mirrors and table tops, cutting and installing shower and bath glass enclosures, and replacing window panes did not. Would that mean hanging drywall would be construction but painting it would not be? If you're planning on claiming to be a real estate professional, get good advice.

 

November 18, 2014

News

In Janetta Lee Perry (T.C. Memo. 2014-231) the taxpayer filed a petition for redetermination with the Tax Court on June 6, 2014. Some 3-1/2 hours later that same day she filed a petition for bankruptcy with the U.S. Bankruptcy Court in California. The IRS moved to dismiss the Tax Court case for lack of jurisdiction on the ground that the automatic stay imposed by the bankruptcy law (11 U.S.C. sec. 362(a)(8)) operated to bar the commencement of a case in the Tax Court. The Tax Court held that the taxpayer filed her petition with the Tax Court before she filed her bankruptcy petition and thus before the automatic stay took effect. Thus, the taxpayer properly invoked the Tax Court's jurisdiction. The Court dismissed the IRS's motion.

Tip of the Day

Payments for physical injury . . . Awards from a lawsuit, settlement, etc. for physical injury are not taxable. But it's difficult to stretch the concept of physical injury. In one case the taxpayer was taking a drug for a recognized disability that had a side effect. At first his employer accommodated the problem from the side effect and permitted an exception from company rules but then disciplined him for violating company policy, eventually terminating him. The taxpayer filed a suit claiming the company discriminated against him because of his disability and that he suffered emotional distress, anxiety, depression and other damages. The employer settled the claim and agreed to pay $35,000 for a release. In the settlement $5,000 was allocated to lost wages. The court noted the settlement agreement made no mention of physical injuries or sickness. The claim of emotional distress is not physical. The court found the proceeds fully taxable.

 

November 17, 2014

News

There is more talk about the extenders package going through the House and Senate before the end of the year. There is also some indication that some of the provisions could be made permanent rather than expire at the end of 2014. That could provide less incentive for Congress to pass meaningful tax reform.

Tip of the Day

Medical marijuana business attractive? . . . Maybe not as much as you think. Currently Section 280E prohibits a deduction or credit for amy amount paid or incurred in carrying on a trade or business if the business consists of trafficking in controlled substances which is prohibited by Federal law or the law of any state in which the business is conducted. And, while medical marijuana may be legal in several states, it's still not legal under Federal law. That means the IRS will deny a deduction for your "cost of goods sold". That will increase your tax bill.

 

November 14, 2014

News

The IRS has released frequently asked questions and answers on the Additional Medicare Tax.

Using a private foundation for charitable contributions can provide some tax advantages, but you must file a Form 990-PF each year. In Grace Foundation, et al. (T.C. Memo. 2014-229) the return was due on May 15, 2004, but was not filed until February 16, 2011. The IRS assessed a delinquency penalty of $10,000 ($20 per day up to a maximum of the lesser of $10,000 or 5% of the gross receipts of the organization for the year. The taxpayer argued the IRS did not follow proper procedure since the Section requires the approval of an immediate supervisor before asserting this penalty. The IRS argued approval was not required because it was a penalty calculated through electronic means and managerial approval is not required. The taxpayer also argued that the Attachment to Notice of Determination erroneously referred to Section 6552 rather than Section 6652. The Court saw this as a typographical error and noted the taxpayer was not misled by the error. The Court rejected the taxpayer's arguments and allowed the penalty.

Tip of the Day

Self-constructed property . . . It's not that unusual for a taxpayer to self-construct property. A farmer who builds a new barn, the service business that has its own welders and machinists construct some new equipment, etc. The expense of the in-house labor used to construct the property can't be deducted as a current expense. Instead it has to be capitalized and depreciated as part of the equipment cost. There may be other costs that have to be capitalized. Talk to your accountant before starting the project to make sure you're capturing all the costs correctly.

 

November 13, 2014

News

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found that while e-filing of business tax returns continues to increase, the e-filing rate still lags behind that of individual tax returns. While 81 percent of individual tax returns were e-filed in 2012, only 41 percent of business returns were electronically filed. Employment tax returns provide the most significant opportunity for growth in business e-filing. For Tax Year 2012, more than 21.1 million (71 percent) employment tax returns were paper-filed. Processes have not been established to consistently ensure compliance with e-filing requirements and assessment of penalties. In addition, establishing a requirement for paid preparers to e-file business returns corresponding to the individual return requirement of 11 or more returns filed would result in an increase of electronically filed business returns. The review of Tax Year 2012 business tax returns found that the IRS could increase its e-filing rate by 23.8 percent and reduce IRS paper return processing costs by more than $17 million. TIGTA recommended that the IRS develop a business tax return e-filing Service-wide strategy, continue to expand the types of business tax returns that can be e-filed, and evaluate providing business filers with the option of Free Fillable Forms. In addition, the IRS should develop a less burdensome electronic signature process for employment tax returns, evaluate the feasibility of using the Electronic Federal Tax Payment System to e-file employment tax returns, and develop processes and procedures to consistently identify business filers that are not compliant with the e-filing requirements and assess penalties. www.treasury.gov/tigta/auditreports/2014reports/201440084Ffr.html.

The IRS has issued updated forms 8822, Change of Address and 8822-B, Change of Address or Responsible Party-Business. The Service has also released an updated version of Publication 509, Tax Calendars. The November 7th update corrects an error in an earlier version in the table of deposit dates for withheld and Social Security taxes.

Tip of the Day

What's your's is your's, what's mine is mine . . . The line between business and personal assets and expenses is often crossed in a closely held business. But that's exactly what the IRS often looks for in an audit, and, while usually unintentional, it can prove costly. For example, you purchase a building in your own name and lease it to your S corporation. Your attorney helps you draft a lease where the corporation pays you $5,000 a month (a fair rental). You're responsible for taxes, utilities, etc. You're off to a good start, but some time later things start to go awry. Here are some actions taxpayers have taken that can cause both tax and legal problems:

Some mistakes can be more costly than others. Many can be corrected, sometimes by some simple accounting entries. Talk to your accountant. If legal assistance is needed, talk to your attorney.

 

November 12, 2014

News

The IRS has issued guidance (Announcement 2014-32) with respect to the new one-year rollover rule for IRAs (traditional and Roth). The announcement addresses certain concerns since the IRS released Announcement 2014-15. Under the new rule, an individual receiving an IRA distribution on or after January 1, 2015, cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from an IRA in the preceding 1-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over under Sec. 408(d)(3)(A)(i), provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution. In other words, the new aggregation rule, which takes into account all distributions and rollovers among an individual's IRAs, will apply to distributions from different IRAs only if each of the distributions occurs after 2014. The one-rollover-per-year limitation also does not apply to a rollover to or from a qualified plan (and such a rollover is disregarded in applying the one-rollover-per-year limitation to other rollovers, nor does it apply to trustee-to-trustee transfers. In addition, a rollover from a traditional IRA to a Roth IRA (a "conversion") is not subject to the one-rollover-per-year limitation.

The IRS has issued final regulations (T.D. 9702) regarding the determination of the basis of stock or securities in certain reorganizations where no stock or securities of the issuing corporation is issued and distributed in the transaction. The regulations clarify that only a shareholder that owns actual shares in the issuing corporation in such a reorganization can designate the actual share of stock of the issuing corporation to which basis, if any, of the stock or securities surrendered will attach.

The president has determined that as a result of severe storms and flooding from September 15-26 certain areas in New Mexico are eligible for assistance from the federal government. Affected taxpayers in the counties of Colfax, Eddy, Lea, Lincoln, Otero, San Miguel, Santa Fe and Sierra can deduct the losses on their 2013 return. In addition, the area affected by the severe storms and flooding that occurred in New Mexico from July 27 to August 5, 2014 has been amended to include the counties of Lincoln, Otero and Sandoval and the Santa Clara Pueblo.

Tip of the Day

Invoice can be critical for sales tax purposes . . . You ship a equipment to Madison Inc. in Nebraska, but the billing address is Madison's corporate office in New York. You're registered to do business in New York. You want to make sure the destination is on the invoice. If it's not New York may claim you should have collected New York sales tax on the sale. It might also try to source the sale to New York for the allocation of sales on your income tax return. Rules vary among the states so talk to your tax advisor. If you're the buyer make sure the item is shipped directly to its ultimate destination.

 

November 10, 2014

News

The IRS can issue third-party summonses to banks, brokers, vendors, etc. That's what happened in Xoriant Corporation, Petitioner; Idea Solutions, Inc., Petitioner (U.S. District Court, N.D. California, San Jose Div.) when it requested information from Xoriant and Idea Solutions in the course of an investigation of Versatech Consulting, Inc. The summonses required the petitioners to produce documents related to the companies' interactions with Versatech. Xoriant and Idea Solutions filed petitions to quash the summonses. The IRS filed Motions to Dismiss arguing that the Court lacked subject matter jurisdiction because neither Xoriant nor Idea Solutions may assert a pre-enforcement challenge to the IRS summonses. The Court granted the IRS's motion to dismiss because neither petitioner demonstrated a basis for subject matter jurisdiction. The Court noted that the IRS need not give any "notice" to the summoned party outside of the subpoena itself, effectively precluding a summoned party from filing a motion to quash.

Tip of the Day

Expanding/Contracting businesses and taxes . . . It sounds counterintuitive, but you could be facing a bigger tax bill if your business is contracting and a smaller one if expanding. Why? An expanding business is usually making expenditures for additional staff, marketing, etc. and, if buying equipment, getting the benefit of an immediate writeoff under Section 179 or big depreciation deductions in the early years. On the other hand, a company contracting may still be taking in substantial revenue but cutting back on expenses, selling fully depreciated assets, etc. While this isn't always the case, you should be aware of the potential consequences of shrinking the business and discuss it with your tax advisor to avoid a nasty surprise when filing your return.

 

November 7, 2014

News

In Charles Copeland et ux. (T.C. Memo. 2014-226) the taxpayers secured a modification of their home loan. The modification included an increase in the loan balance for past due interest of $30,273. On their return for the year at issue the taxpayers took a deduction for the interest they paid (equal to the amount shown on a Form 1098) plus the capitalized interest added to the loan balance. The IRS disallowed the deduction for capitalized interest. The Tax Court agreed, noting the taxpayers are cash basis taxpayers and as such "pay" interest only when paid in cash or its equivalent to the lender. A note given to the lender does not constitute payment of interest.

Tip of the Day

Buying growth . . . It's not unusual for a big company to buy another business. In some cases it appears the purchase price is out of line with the apparent value. But there's a factor that may not be obvious. Creating a new product, particularly in some industries, can be expensive--and risky. While buying a company already in the field with a product, or on the verge of completing development, may not be as expensive as it appears once risk is taken into account. The same may be true if you're buying a customer list, or buying a company for the list. It could take a considerable amount of money and several years to get to the same number of customers as you might reach in the few months it takes to close an acquisition. There's a cost and risk involved in working to get to the same customer base you could buy. Which approach is best--buy or build? It depends on what you're looking to acquire and your skills.

 

November 6, 2014

News

Republicans have captured control of the Senate and now control both houses of Congress. While this increases the chances for meaningful tax reform, it's far too early to even guess at the form. A reduction on the corporate rate along with a higher exemption or elimination of the estate tax seem more likely. At this time the most important task before Congress is passage of an extenders package to resolve the tax issues of 2014.

The IRS has released draft versions of Forms 8960, Net Investment Income Tax, draft Instructions for 1120-S, U.S. Income Tax Return for an S Corporation, and final instructions for Form 1099-MISC for the upcoming filing season.

In order to deduct mortgage interest you have to both pay the interest and be obligated to do so. In Lourdes Puentes (T.C. Memo. 2014-224) the taxpayer paid the mortgage interest on her brother's property while he was unable to do so. The brother had legal title and the taxpayer had no ownership agreement with her brother and did not assume the "benefits and burdens" of ownership. The Court held she could not deduct the interest.

Tip of the Day

Sell a high profile product . . . It's tough to compete with big box stores and internet sites, but you may have an option. More than a few local stores, service providers, etc. sell a high-profile product that's not available elsewhere. For example, Madison Powertools sells only through authorized dealers who also service their products. They're not available in big box stores. There are two advantages here. First, if the product has a recognizable name and they're known for quality you'll be able to draw in customers, even if they don't buy the product. It'll enhance the prestige of your business. Second, Madison will almost surely provide you with co-op advertising. That could be a big sign, magazine, tv, and other media ads listing you as a dealer, etc. Third, you may get repair business, be able to sell parts and accessories, etc. Since you don't have to compete with big box stores, your margins on these products should be higher. There may be some downsides, but it's definitely worth consideration.

 

November 5, 2014

News

It now appears that Congress may act on the "extender" legislation in November. In addition, legislators want to write a comprehensive tax reform law that would do away with "extenders".

Notice 2014-69 (IRB 2014-48) advises employers and other taxpayers that employer-sponsored health plans that fail to provide substantial coverage for in-patient hospitalization services or for physician services do not provide minimum value within the meaning of Sec. 36B and that the IRS, the Treasury Department, and the Department of Health and Human Services (HHS) expect shortly to propose regulations to this effect. The notice also advises that IRS, Treasury, and HHS are considering whether the continuance tables underlying the Minimum Value Calculator produce valid actuarial results for plans with these designs. Employers offering plans that fail to cover in-patient hospitalization or physician services should exercise caution in relying on the Minimum Value Calculator to demonstrate that these plans provide minimum value for any portion of a taxable year after publication of final regulations.

If you receive payments in your trade or business and the other party requests your I.D. number for a Form 1099, you have to supply the number. If you fail to do so the payor can withhold an amount. In Vivian L. Rader, et al. (143 T.C. No. 19) the taxpayer sold two parcels of real property that were subjected to 10% withholding by the escrow agent pursuant to Sec. 1445(a) which applies to the disposition of U.S. real property interests by foreign persons and gives rise to a tax credit. The taxpayers failed to furnish the payor with a TIN or a certification that they were not foreign persons which would have exempted them from withholding. The taxpayers failed to file returns for the years at issue and the IRS created substitutes for return. The Tax Court held the taxpayers were liable for the deficiencies as determined by the IRS on the substitute returns and that the taxpayers were not entitled to any portion of the tax withheld from the real property sales because the deemed filing date of the refund claim was more than two years after the overpayment (which was deemed to have occurred on the April 15th of the year the returns were due.

Tip of the Day

Appropriate advertising media . . . Producing an ad or getting public relations recognition that's cost effective isn't as easy as it may look. There's the theme, the production and finally placing the ad. There's no reason to put an ad in a national publication if your market is strictly local or regional. Putting an ad on the radio where you expect an immediate response doesn't make sense either, at least not during "drive time". While many drivers have cell phones, most may not want to call to order a product while driving; many won't even bother to copy down the phone number. Paying to have your name on a local park or stadium may or may not make sense. If your product or service is purchased by a general audience such as mid-priced autos, you've got to analyze the costs and benefits. If your potential customer base is limited, for example your sell to small business owners, you probably won't get your money's worth. The local high school yearbook or similar journal may be cost effective; some specialized journals are not. Picking the right media isn't as easy as it sounds and sometimes you have to go with a new approach.

 

November 4, 2014

News

The IRS has issued proposed regulations (REG-151416-06) that prescribe how a partner should measure its interest in a partnership's unrealized receivables and inventory items, and that provide guidance regarding the tax consequences of a distribution that causes a reduction in that interest. The proposed regulations take into account statutory changes that have occurred subsequent to the issuance of th existing regulations. The proposed regulations affect partners in partnerships that own unrealized receivables and inventory items and that make a distribution to one or more partners.

The Automated Collection System (ACS) is an integral part of the IRS’s efforts to collect unpaid taxes and secure unfiled tax returns. The ACS is responsible for answering incoming taxpayer calls and working the inventory of taxpayer delinquent accounts. Declining resources could affect ACS effectiveness and have a substantial impact on the amount of Federal taxes that remain uncollected. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the ACS inventory management process can be improved to balance the workload and maximize the assignment of productive cases. TIGTA found IRS management places a high priority on answering incoming telephone calls because they believe that communication with taxpayers helps resolve delinquencies and brings taxpayers into compliance with their tax obligations. Since Fiscal Year 2010, 39 percent of the ACS workforce has been lost due to attrition or reassignment. Because resources are needed to answer telephone calls, fewer resources are available to work inventory. However, the IRS’s overall Collection inventory practices were not changed and new inventory continued to be sent to the ACS without interruption, even though inventory was infrequently worked. The combination of fewer resources and the business need to continue answering telephone calls has contributed to unfavorable trends in several ACS business results over the past four years. For example, new inventory outpaced closures, inventory took longer to close, cases in inventory were older, more cases were closed as uncollectible, fewer enforcement actions were taken, and more aged cases were transferred to the Queue. IRS management should take steps to ensure that inventory routing and ACS resource capabilities are aligned with overall IRS tax administration priorities and their vision for the role of the ACS in the Collection enforcement strategy. In addition, the IRS has not established performance metrics to measure the effect answering incoming calls has had on compliance business results. Capturing this data would allow ACS management to assess the impact of prioritizing call handling. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201430080Ffr.html.

Tip of the Day

Retirement planning for singles . . . One of the comedy teams of the 1940's said "two can live as cheaply as one, but for only half as long". When it comes to retirement planning, a single individual may be at a disadvantage. Some big expenses such as housing will be the same, or almost as much, as a couple. Even car expenses may be proportionately more. A couple may need only one car, the same as a single individual. But the income of a couple is often double that of the single individual. Taxes are likely to be more too. As with many issues in personal financial planning, much depends on your particular situation. Consider looking for a new financial advisor if he or she tries to apply a standard formula to you.

 

November 3 2014

News

As a result of the earthquake on August 24, 2104 in certain parts of California the president has declared the counties of Napa and Solano a federal disaster area. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. Certain deadlines falling on or after August 24, 2014 and on or before January 15, 2014, have been postponed through January 15, 2015. The filing date for the third quarter estimated payment has been extended to January 15, 2015.

Tip of the Day

Read the contract . . . You may have a contract with a vendor, service provider, etc. It's not unusual for the vendor to be able to assign the contract, for the contract to have an automatic renewal clause, an onerous fee for late payment, etc. Many of the clauses are boilerplate and standard industry practice. There may be no reason to negotiate most of those points. But even a quick read could turn up an automatic renewal clause or a provision that allows the supplier to suspend delivery for any reason. Or you may not want him to substitute the source of an item (e.g., you need a certain percentage of your final product to be made in the U.S.). Or allow another contractor to fulfill the job. Make sure you're protected on any critical points. And don't assume the current contract you're signing is the same as the last one.

 

October 31, 2014

News

The IRS has announced (Rev. Proc. 2014-61; IRB 2014-47)) the annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. The changes of greatest interest include:

In Elizabeth Varela, Petitioner, and Jose M. Lozano, Intervenor (T.C. Memo. 2014-222) the ex-wife received innocent spouse relief where the Court found she did not receive benefits resulting from the husband's funds, she was not involved in the management of the corporation or rental properties that generated the husband's income, she did not have access to the bank accounts, and had no reason to know of the understatements.

Tip of the Day

Doing business through multiple entities . . . It's not unusual for business owners to use several entities--partnerships, LLCs, S corporations and even regular corporations. It's also not 's also not unusual for the entities to have intercompany transactions. Madison Inc. performs management functions for Chatham LLC which rents property to Waterford Inc. You should be careful that the transactions are handled on an arms' length basis. And, if some of the entities have losses while others have profits, you should watch your basis carefully. You generally don't want to be in the position where one or more entities generates a loss that can't be used because you have insufficient basis while a related entity generates profits that are taxed. Discuss the issues with your tax adviser.

 

October 30, 2014

News

The IRS has released final regulations (T.D. 9698) that provide guidance on the mandatory electronic filing of Form 2290, Heavy Highway Vehicle Use Tax Return, for 25 or more vehicles; credits or refunds for sold, destroyed, or stolen vehicles; and the tax liability and computation of tax on the use of certain second-hand vehicles. The regulations affect owners and operators of highway motor vehicles with a taxable gross weight of 55,000 pounds or more. The final regulations also remove the temporary regulations that provide guidance on the filing of Form 2290 and payment of the associated highway use tax for the taxable period beginning July 1, 2011.

In C. Lynn Moses (T.C. Memo. 2014-220) the taxpayer failed to file returns for the period 1999 to 2002. The IRS used third party summonses to obtain bank records and reconstructed the taxpayer's income from a real estate business using the bank deposits method. The Court found the taxpayer failed to rebut the presumption that the IRS's determinations were correct and sustained the IRS's determinations.

Tip of the Day

Get ready for mutual fund distributions . . . The market has done well in the last couple of years and many professionals expect mutual funds to pay significant dividends before the end of the year. It's not too early to start thinking about your plan to handle the distributions. There are a number of considerations here, but you if you have any unrealized losses you may want to take at least some to offset the income.

 

October 29, 2014

News

The Department of Justice has announced that the federal government will recognize same-sex marriages in six more states: Alaska, Arizona, Idaho, North Carolina, West Virginia and Wyoming. As a result of these additions, same-sex marriages are recognized as legal in 32 states and the District of Columbia. The IRS recognizes a marriage based upon place-of-celebration. That is, if the marriage was legal were it was performed, the individuals are considered married in their state of domicile, even if that state does not recognize a same-sex marriage.

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found that for Processing Year 2013, the IRS issued over 770,000 IP PIN (Protection Personal Identification Numbers) notices to taxpayers for use in filing their tax returns. This number increased to more than 1.2 million for Processing Year 2014. The IRS also started a limited pilot in January 2014 whereby taxpayers who obtained an electronic filing PIN through an IRS authentication website and live in the District of Columbia, Florida, or Georgia were provided with an opportunity to obtain an IP PIN. In addition, taxpayers who used their IP PIN to file their tax returns claiming a refund in Processing Year 2013 had their returns processed in a time frame similar to the general population of return filers claiming a refund. Although the program expanded, the IRS did not provide an IP PIN to 532,637 taxpayers who had an identity theft indicator on their tax account indicating that the IRS resolved their case. The IRS also did not provide an IP PIN to 24,628 taxpayers who were potential victims because their Personally Identifiable Information had been lost, breached, or stolen by/from the IRS. In addition, IRS programming errors resulted in 32,274 taxpayers not timely receiving an IP PIN and the issuance of 13,220 IP PIN notices to deceased taxpayers. TIGTA also found that the IP PIN notice issued to 759,446 taxpayers for Processing Year 2013 does not provide taxpayers adequate instructions on the use of the number and its importance on a tax return. You can find the full report at www.treasury.gov/tigta/auditreports/2014reports/201440086Ffr.html.

Tip of the Day

Hobby losses . . . You can't avoid the hobby loss rule by putting the activity in your S or C corporation, partnership, or other business entity. Even if the entity has a profitable business, the IRS can break out an activity and separately claim there was no intent to make a profit.

 

October 28, 2014

News

The IRS has issued final regulations (T.D. 9699) that will remove regulations relating to information reporting and backup withholding for the Qualified Payment Card Agent (QPCA) Program. T.D. 9699 also amends regulations to remove references to the QPCA Program Enactment of the payment card and third party network reporting requirements.

In most states, when property is held in joint tenancy with a right of survivorship, liens issued against a deceased joint tenant's interest in the property are extinguished when the deceased joint tenant dies and any other living joint tenants succeed to his share. In NPA Associates, LLC, Plaintiff v. Estate of Dennis A Cunning et al. (U.S. District Court, D. Virgin Islands) tax liens attached to Cunning's interest in the property. The Court noted that although no Virgin Islands' statute or case law addresses this issue, it concluded that the Supreme Court of the Virgin Islands would not depart from this general rule if the issue were before it. When Cunning died the joint tenant became the sole owner of the property through the Warranty Deed because she was a joint tenant with a right of survivorship. At that time any liens attached to Cunning's interest in the property were extinguished.

Tip of the Day

IRA not for everyone . . . Many advisors suggest putting money into an IRA as a no brainer--either a deductible IRA or a Roth. But that's not always true. You've got to consider your situation. A young couple just starting out may have little or no backup savings. They need something for an emergency in case the old car bites the dust, there's a medical bill that's not fully covered by insurance, etc. Or it could be they're saving for a house. Or have a house and need an emergency fund for home repairs. Tapping the IRA is likely to mean a 10% penalty as well as taxes on the distribution. In some cases that's inevitable; the funds needed exceed your rainy day reserve. But you should have a reserve to tap first.

 

October 27, 2014

News

IRS Commissioner Koskinen has advised Congress that if a delay in resolving the "extenders" provisions persists into December or later it could result in the postponement of the opening of the 2015 tax season. Any policy changes to the existing extenders or new provisions would result in the Service having to reprogram systems and make processing changes which could result in longer delays.

Notice 2014-66 (IRB 2014-46) provides a special rule that enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants. This special rule provides that, if certain conditions are satisfied, a series of TDFs in a defined contribution plan is treated as a single right or feature for purposes of the nondiscrimination requirements of § 401(a)(4) of the Internal Revenue Code. This permits the TDFs to satisfy those nondiscrimination requirements as they apply to rights or features even if one or more of the TDFs considered on its own would not satisfy those requirements.

Notice 2014-67 (IRB 2014-46) provides guidance for determining whether a State or local government entity or a 501(c)(3) organization will be considered to have private business use of its tax-exempt bond-financed facilities due to its participation in an "accountable care organization" and guidance regarding certain management contracts that do not result in private business use.

Tip of the Day

Right to audit . . . You hire an independent contractor for consulting work and agree to reimburse him for expenses including meals, lodging, equipment rentals, subcontractors, etc. If the contract is substantial, make sure you include a right to audit his expenses. Contractors have been known to pad charges that should be legitimately passed through without a markup. Similarly, if you're a tenant in a building you should also have the right to review building cost data if a share of the expenses are being passed through on your lease.

 

October 24, 2014

News

The Social Security Administration has released the cost-of-living adjustments (COLA) for a number of inflation indexed amounts. For 2015 the maximum taxable earnings for Social Security will be $118,500, up from $117,000 in 2014. (There is no limit for Medicare.) The COLA for 2015 is only 1.7%, so benefits will increase only slightly. The estimated average monthly benefit for all retired workers will increase from $1,306 to $1,328. For more information go to 2015 Social Security Changes.

The IRS has announced the cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change, but other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment. Of particular interest:

In R. Jean Fisher (T.C. Memo. 2014-219) the taxpayer worked for a medical services corporation and received payments as an independent contractor but received no Form 1099 from the firm. The taxpayer claimed the amounts she received weren't compensation for services but a loan from the corporation. The IRS and the Tax Court found otherwise. The Court looked at the factors the courts review to determine if a bona fide loan exists and found they did not support a loan. Moreover, the doctor who owned the practice testified the payments were for services.

Tip of the Day

Ongoing savings beat one-shot cuts . . . If you're doing a full-blow return-on-investment study you're sure to consider future benefits in your analysis. If you're just doing a quick-and-dirty calculation, you may not go that far. For example, by switching to a certain vendor you can save $50 per month; the competitor will cost you more per month but has a $300 upfront bonus for signing with them. If you anticipate an ongoing relationship, you're better off with the first choice. At the end of 6 months you'll have saved $300 on the monthly service--just equal to the signing bonus; at the end of a year you'll have saved another $300 on the monthly charge, putting you $300 ahead.

 

October 23, 2014

News

The president has determined that certain areas of Kentucky, New Mexico, and Montana are eligible for government assistance. In Kentucky the disaster was a result of severe storms, flooding, landslides, and mudslides from August 18 to 23, 2014 and affected taxpayers in the counties of Floyd, Johnson, Knott and Pike. For Montana the disaster resulted from severe storms, straight-line winds and flooding from August 21 to 25, 2014 and affected taxpayers in the counties of Blaine, Carter, Musselshell, Petroleum and Valley and Fort Belknap Reservation in Blaine County. For New Mexico the disaster resulted from severe storms and flooding from July 27 to August 5, 2014 and affected taxpayers in the counties of Guadalupe, Rio Arriba and San Miguel and the Pueblo of Acoma. Taxpayers in the affected areas can deduct losses on their 2013 returns.

You can deduct gambling losses up to the amount of your winnings, but you'll have to substantiate the amount of your losses. In Jacqueline D. Burrell (T.C. Memo. 2014-217) the taxpayer did not track her winnings and losses. On her Schedule A the taxpayer reported losses equal to the amount of her winnings for the three years at issue. Documents from the casinos in which she gambled reported losses equal to a fraction of her winnings. The IRS allowed a substantial portion of the claimed losses for two of the years and all of the claimed losses for the third. The Tax Court allowed the taxpayer no additional loss deductions. The Court also held the taxpayer could not avoid the accuracy-related penalty by claiming reliance on her preparer. The Court noted the taxpayer failed to show the advisor was a competent professional who had sufficient expertise to justify reliance; she provided necessary and accurate information to the advisor; and she actually relied in good faith on the advisor's judgment.

Tip of the Day

Track customers with declining orders . . . We often advise knowing your best customers, what they're buying, etc. That's very important. But you should also be keeping track of customers who are ordering less and/or less frequently. Identify them and then try to find out why they're buying less. Have they found a cheaper supplier? Better quality? Is demand for a product declining because of a market shift? You want to know the reason. If it's price, quality, or customer service, you can do something to regain the account. If it's because of a market shift, there may be other actions you can take.

 


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


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