For the full text of a Revenue Ruling, Revenue Procedure, new Regulation, Notice, or Announcement go to:
Internal Revenue Bulletins
For a Tax Court Case:
Tax Court Cases
For IRS News Releases:
News Releases and Fact Sheets
For Letter Rulings and Technical Advice Memoranda:
IRS Written Determinations
For IRS Forms and Publications:
Forms and Publications
For Health Care Tax Tips:
Health Care Tax Tips
July 31, 2014
Announcement 2014-28 (IRB 2014-34) provides guidance to U.S. citizens or resident aliens living and working abroad whose tax home is in a foreign country and meet either the bona fide residence test or the physical presence test, choosing to exclude from their income a limited amount of their foreign earned income ($99,200 for 2014). Both the bona fide residence test and the physical presence test contain minimum time requirements. The minimum time requirements can be waived, however, for those who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Rev. Proc. 2014-25 contains the list of countries for tax year 2013 for which the minimum time requirements are waived. However, that list is incomplete. South Sudan and its departure date have been added.
The Senate has passed the Highway and Transportation Funding Bill by a 79 to 18 vote, but House Speaker John Boehner has indicated the bill will not get through the House if it contains tax provisions.
Democrats have introduced a No Federal Contracts for Corporate Deserters Bill. The measure would not allow federal contracts to be let to businesses that incorporate outside the U.S. The bill seeks to put a stop to corporate inversions.
An audit by TIGTA (Treasury Inspector General for Tax Administration) found the IRS eliminated or reduced tax return preparation, tax law assistance, refund inquiries, and transcript request services. However, prior to developing this plan, the Service did not evaluate the burden each service change would have on taxpayers who visit Taxpayer Assistance Centers. In addition, the IRS has not established processes to identify optimal locations to provide face-to-face services or to identify underserved areas that would benefit from virtual service. The complete report is at www.treasury.gov/tigta/auditreports/2014reports/201440038fr.pdf.
Tip of the Day
Accounting methods and separate businesses . . . While your choice of accounting methods may be interesting only to a tax accountant, it can have implications on the complexity of your accounting, cash flow, etc. In recent Chief Counsel Advice (201430013) the Service held that a former subsidiary of a corporation that became an LLC with the corporation as its sole member was a separate and distinct trade or business from the corporation within the meaning of Sec. 446(d). The LLC did not elect to be taxed as a corporation and kept separate books and records, was in a different geographical location from the corporation, and the two did not share employees except for the highest level executives.
July 30, 2014
In a study the Office of the Director of National Intelligence found that about 83,000 DOD employees and contractors who held or were determined eligible for secret, top secret, or SCI clearances had unpaid federal tax debt totaling more than $730 million as of June 30, 2012. The median debt amount owed was $2,700, and tax debts ranged from a minimum of about $100 to millions of dollars. About 40 percent of the individuals were in a repayment plan with the IRS and about half of the individuals with tax debt were federal employees.
The tax law denies a deduction for any fine or similar penalty paid to a government for the violation of any law. Government includes a corporation or other entity serving as an agency or instrumentality of a domestic or foreign government. In 2008 Guardian Industries Corp. (143 T.C. No. 1) paid a fine to the Commission of the European Community (Commission) for participating in a price-fixing cartel that violated the competition provisions of EC law. The taxpayer claimed a deduction for the payment on its federal income tax return. The IRS claimed the Commission is an instrumentality of the government of a foreign country. The Tax Court held that "government of a foreign country" may refer both to the government of a single foreign country and to the governments of two or more foreign countries. The Court also held the Commission is an entity serving as an instrumentality of the EC member states. The Court disallowed a deduction for the fine.
Tip of the Day
Got references? . . . For some businesses references may be unimportant or even superfluous. But for most they're important and for some essential. A contractor can advertise, but a good reference can easily top many dollars spent on advertising. If references are important in your business be sure to cultivate them in your customers, clients, etc. And you should have a couple of names you can drop if asked for references (get their permission first). In some cases, such as selling in a small market, you might even incorporate them right in your advertising.
July 29, 2014
The House has passed, by a 237 to 173 vote, the Child Tax Credit Improvement Bill of 2014. The bill would increased the child tax credit phase-out threshold for married couples from $110,000 to $150,000 ($75,000 for those filing married, separate) and index the credit for inflation. The bill may not see law as President Obama has threatened to veto it.
The IRS has issued draft of a number of health care forms including:
You can download any of these forms by going to apps.irs.gov/app/picklist/list/draftTaxForms.html.
Tip of the Day
Buying a business? . . . Or buying into a business? Chances are you'll check out the fixed assets, inventory, receivables, etc. If there are contracts in process, you want to check them carefully. You may end up committing to a job that could generate losses, or worse, subject you to a liability for cleaning up a site, etc. The seller may be walking away with the profits and leave you the liabilities. It's not that unusual for a seller to get out of a really bad contract by selling a business. That not only affects the value of the business (i.e., you overpaid), but it could mean a significant cash outlay you're not prepared for. Check with an accountant who has industry experience.
July 28, 2014
The IRS has announced that during the week of July 28, the IRS Return Preparer Office will be mailing letters to approximately 5,000 return preparers who are preparing tax returns without valid preparer tax identification numbers (PTIN). Letters will be sent to preparers who are using legacy PTINs obtained prior to September 2010 and never renewed in the new online PTIN system, those who are using Social Security numbers instead of PTINs and those who are using expired PTINs.
The IRS has issued final (T.D. 9683) and temporary (REG-104579-13) regulations relating to the health insurance premium tax credit (Sec. 36B). These regulations affect individuals who enroll in qualified health plans through Affordable Insurance Exchanges and claim the premium tax credit, and Exchanges that make qualified health plans available to individuals. The regulations also provide guidance concerning circumstances in which a married taxpayer may claim a premium tax credit on a separate return.
Tip of the Day
Refinancing a rental property? . . . If you refinance for the same amount as the remaining balance on the old loan, all the interest on the new loan is fully deductible. Things get more complicated if the amount of the refinancing is more than the balance on the old loan. Interest on the additional amount borrowed is not deductible unless the additional amount taken down is used for finance expenditures on the property or the additional principal is used for other purposes where the interest would be deducible. For example, you have a rental property with a mortgage balance of $200,000. You refinance taking down a loan of $250,000. You use the $50,000 for a new car. Only 80% of the interest (200/250) is deductible. Assume the same facts but you use the $50,000 for capital improvements to the property. All the interest on the new loan would be deductible.
July 25, 2014
Revenue Procedure 2014-46 (IRB 2014-33) provides the 2014 monthly national average premium for qualified health plans that have a bronze level of coverage for taxpayers to use in determining their maximum individual shared responsibility payment under Sec. 5000A(c)(1)(B) and Reg. Sec. 1.5000A-4. This revenue procedure also provides an explanation of the methodology used to determine the monthly national average premium amount.
Revenue Procedure 2014-37 (IRB 2014-33) provides the methodology to determine the applicable percentage table in Sec. 36B(b)(3)(A) used to calculate an individual’s premium assistance credit amount for taxable years beginning after calendar year 2014. It also provides the methodology to determine the required contribution percentage in Sec. 36B(c)(2)(C)(i)(II) used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage for purposes of Sec. 36B for plan years beginning after calendar year 2014. Additionally, Revenue Procedure 2014-37 reproduces the required contribution percentage, as determined under guidance issued by the Department of Health and Human Services, used to determine whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage under Sec. 5000A(e)(1)(A) for plan years beginning after calendar year 2014.
Revenue Procedure 2014-41 (IRB 2014-33) provides calculation methods a taxpayer may use to resolve the interrelationship between the Section 162(l) deduction and the premium tax credit under Section 36B. It provides an iterative calculation and alternative calculation taxpayers may use, as well as examples demonstrating the calculations.
Notice 2014-42 (IRB 2014-33) provides procedural guidance relating to the annual fee imposed on branded prescription drug manufacturers and importers under Sec. 9008 of the ACA.
The IRS has announced that it has no plans to delay premium subsidies under PPACA (Patient Protection and Affordable Care Act) as a result of the opposing decisions in the D.C. and Fourth Circuit courts.
Tip of the Day
Moving expenses . . . If you move to be closer to a new job you may be able to deduct the expenses of moving household goods and personal effects and traveling to your new home. The cost of traveling includes lodging (but not meals) and air or train fare or driving your own car. You have to meet certain tests including a distance test (the new job must be at least 50 miles more from your old home than your former job was) and a time test. The time test is satisfied if the move is closely related to the start of work (in most cases the moving expenses must be incurred within 1 year from the date you first reported to work at the new location) and you must work at the new location for 39 weeks or 78 weeks if you're self-employed. There are exceptions to the rules and there are a number of circumstances where things can get more complicated. There's more data in IRS Publication 521.
July 24, 2014
The IRS has issued final regulations (T.D. 9682) relating to basis of indebtedness of S corporations and their shareholders. These final regulations provide that S corporation shareholders increase their basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide, which is determined under general Federal tax principles and depends upon all the facts and circumstances.
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit designed to encourage employers to hire individuals from certain targeted groups who have consistently faced significant barriers to employment. For Tax Year 2013, the maximum credit per individual that could be claimed was $9,600. The credit has been in existence since 1978 but expired on December 31, 2013. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether controls were adequate to identify questionable employer claims for the WOTC. Between January 1 and December 30, 2012, more than $721 million in the WOTC was claimed on 21,278 electronically filed tax returns. The number and amount claimed on paper returns is not available. TIGTA found the IRS did not establish processes to verify the eligibility for the WOTC. TIGTA identified 759 WOTC claims totaling approximately $13 million on 687 tax returns processed in Processing Year 2012 for which the IRS had information at the time the tax returns were processed that could have been used to identify these claims as questionable. The IRS reviewed 77 of the 759 WOTC claims to determine whether the WOTC was in fact potentially erroneous. The IRS confirmed that 24 of the 77 were erroneous WOTC claims. The remaining 53 WOTC claims involved mistakes on the part of the filer or the pass-through entity. For the complete report go to www.treasury.gov/tigta/auditreports/2014reports/201440041fr.html.
The law provides a premium credit to individuals who purchase health insurance through one of the exchanges if their household income is between 100 and 400 percent of the federal poverty line. The wording in the law seems to indicate that only insurance purchases made on state exchanges, not the federal exchange, qualify for the credit. Thus, individuals in states without an exchange (most of the states) would not be entitled to the credit. In recent cases, Halbig v Burwell, D.C. Circuit and King v Burwell, Fourth Circuit two U.S. Court of Appeals for different circuits have reached different conclusions. In one case individuals who signed with the federal exchange would get the credits; in the other they wouldn't.
Tip of the Day
Don't oversell . . . Recognize that some prospects are just not going to buy. There can be any number of reasons--from no money to their brother-in-law is in the business. The latter is virtually impossible to overcome. Even if Fred doesn't like his brother-in-law, he doesn't want to get his wife mad at him. There's a fine line between wearing down a good prospect to get him to commit and wasting your time and irritating the prospect.
July 23, 2014
There seems to be an impetus in Congress for dealing with the corporate inversions (where corporations move overseas) by plugging the loophole and reducing the corporate tax rate.
The only deductions you can take for your personal residence are mortgage interest and real estate taxes. You can deduct relevant expenses for a property that's rented during the year and not used for personal purposes. There's a third variation--where you use the property for personal purposes for 14 days or more or 10% or more of the time the property is rented at a fair rental value. In Douglas D. Schumann (T.C. Memo. 2014-138) the taxpayer had two apartments aboard a cruise ship. The IRS disallowed the deductions for one because the taxpayer used it at least 162 days during the year at issue and was not rented. The second apartment was donated as a live auction item for charity. The IRS disallowed deductions for the second apartment because it too was never rented at a fair rental value during the year and thus used for personal purposes. The Tax Court sided with the IRS on both issued and disallowed the deductions. The Tax Court also found the taxpayer was not a real estate professional with respect to other properties that he did rent because he did not show he materially participated.
Tip of the Day
Make your offer upfront . . . If you're making an offer--20% off, free shipping, buy one-get one free--put the offer as early in your ad as you possible. Many prospects are no longer taking the time to read through a long ad, multi-page direct mail piece, etc. If the offer is a good one, it should grab their attention.
July 22, 2014
The IRS has postponed the effective date of the final regulations (T.D. 9664) issued in May, 2014 involving costs incurred by estates and trusts (other than grantor trusts) that are subject to the 2% of adjusted gross income floor under Sec. 67 for miscellaneous itemized deductions. The regulations as originally published would have applied beginning January 1, 2015. That would mean the new rules would apply immediately to a trust created or the estate of a decedent who died after May 8, 2014. Under the amended regulations the rules apply to taxpayers whose tax years begin on or after January 1, 2015.
The IRS has issued amendments to correct the final regulations (T.D. 9636) that provide guidance on the application of Secs. 162(a) and 263(a) regarding the deduction and capitalization of expenditures related to tangible property. The original regulations were published September 19, 2013. There are a number of corrections. The final regulations contain errors that may prove to be misleading and are in need of clarification.
The IRS has issued final regulations (T.D., 9680) to amend the definition of research and experimental expenditures under Sec. 174. In particular these final regulations provide guidance on the treatment of amounts paid or incurred in connection with the development of tangible property, including pilot models.
Notice 2014-44 (IRB 2014-32) provides guidance relating to certain dispositions of assets following a Section 901(m) covered asset acquisition.
The IRS has issued income statistics from tax return data for 2012 of selected income and tax return items by State, ZIP code, county and size of adjusted gross income.
In Gerald Lee Ridgely, Jr. (U.S. District Court, D. District of Columbia) the permanently enjoined the IRS from enforcing the restrictions on contingent fee arrangements with respect to the preparation and filing of ordinary refund claims where "preparation and filing" precedes the inception of any examination or adjudication of the refund claim by the IRS and any formal legal representation on the part of the practitioner.
Tip of the Day
Location isn't everything . . . Some stores have to be on the right road. A fast food restaurant that's three blocks off the main road is almost sure to fail. But that's not true for every business. A business that doesn't deal with the public doesn't have to be on a main road. It can pick a place where the rent is cheaper. The same may apply to almost any business that relies on repeat business rather than generating new customers. One company we know did some cheap rehabbing of space in abandoned factory mills. Their occupancy cost was 20% of some other companies in the same business. Being in the warehouse district may not be detrimental even for some retailers. A woman won't go that far out of the way to buy a spool of thread, but will make the trip for floor tile, appliances, furniture, etc. that's significantly cheaper. And keep in mind that location was (and still is for impulse purchases) more important when customers decided on where to shop by stores they've seen. Now, many customers start their search on the internet. A fancy office isn't necessary for all businesses. We know of one small business that insisted on high-priced location to impress customers. Trouble was, almost all the selling took place at the customer's office. After three years with only one visitor to the office, the company rented some class B space along with a virtual office where it could use a conference room. But think it through. A plumbing supply company didn't need the visibility, but lost customers when contractors couldn't get in and out quickly and parking was difficult for trucks.
July 21, 2014
The IRS has issued final regulations (T.D. 9678) relating to Sec. 1092 identified mixed straddles after the date of publication in the Federal Register. The final regulations explain how to account for unrealized gain or loss on a position held by a taxpayer prior to the time the taxpayer establishes a mixed straddle using straddle-by-straddle identification.
If you're required to deposit your employment taxes electronically, failure to do so will result in a late penalty, even if you paid the amount on time. That's what happened to the taxpayer in Commonwealth Bank and Trust Company (U.S. District Court, W.D. Kentucky. The Court found the taxpayer liable for the penalty.
Tip of the Day
Hack attack . . . If you're computer or network is connected to the internet your chances of getting hacked or receiving a virus are very high. In one study, some 30% of the attacks were the result of operating-system vulnerability. The second most likely entry (about 20%) was the result of guessed passwords. There are simple measures you can take to protect yourself. Here are some tips:
July 18, 2014
Rev. Proc. 2014-43 provides revised procedures for individual payees who are required under Reg. Sec. 31.3406(d)-(g)(5) to obtain validation of social security numbers (SSNs) from the Social Security Administration (SSA) to prevent or stop backup withholding under Section 3406 of the Internal Revenue Code following receipt of a second backup withholding notice from a payor within a three-year period. This revenue procedure sets forth revised procedures for an individual payee to obtain validation of the payee’s name and SSN from SSA on or after August 1, 2014. Under these revised procedures, following receipt of a second B notice, a copy of a social security card, as described in section 4, is validation from the SSA of a name and SSN combination. This revenue procedure instructs payors and individual payees regarding these revised procedures.
The National Taxpayer Advocate, Nina E. Olson, has issued her mid-year report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will address in the upcoming year. The report emphasizes the importance of taking concrete steps to give meaning to the recently adopted Taxpayer Bill of Rights, issuing refunds to victims of return preparer fraud, continuing to make improvements in the Exempt Organizations area, and expanding the recently announced voluntary return preparer certification program to include competency testing. The report states that no refunds have been issued to victims of return preparer fraud (where the preparer inflates the refund and changes the bank account number so the refund is transmitted to the preparer's own account). The report also recommends Congress to pass legislation authorizing the IRS to reinstitute the program it had implemented prior to the U.S. Court of Appeals decision (S. Loving)
In Michael Hume et ux. (T.C. Memo. 2014-135) the Tax Court sided with the IRS in disallowing a business interest deduction on a home the taxpayer intended to third parties. The home needed extensive repairs and was never rented. The taxpayers could only deduct the interest as home mortgage interest subject to those limitations.
Tip of the Day
Buying a business? . . . Be careful you don't become liable for the debts. In a recent Indiana case, a limited liability company changed hands after the audit years. The LLC's owner argued it was the former owner who was responsible. The Indiana Department of Revenue held the LLC, not the owner, was responsible. That meant it essentially came out of the pocket of the new owner.
July 17, 2014
The IRS has issued final regulations (T.D. 9676) that provide guidance concerning the allocation and apportionment of interest expense by corporations owning a 10% or greater interest in a partnership, as well as the allocation and apportionment of interest expense using the fair market value method. These regulations also update the interest allocation regulations to conform to the statutory changes made by Sec. 216 of the Education Jobs and Medicaid Assistance Act of 2010 affecting the affiliation of certain foreign corporations for purposes of Sec. 864.
Thinking of filing a "zero" return? Think again. In John Lewis Hill (T.C. Memo. 2014-134) that's what the taxpayer did. The Court allowed the Sec. 6702 frivolous return penalty and held the penalty was not barred by the statute of limitations because the return was not a valid return.
Tip of the Day
Nothing's forever . . . Office products would seem to be an easy business to be in, yet the major stores are struggling. Why? Could be a number of reasons--less paper and toner being used, slower business growth, competition from warehouse clubs for bread and butter items, etc. There has always been changes in products, services, etc., but the pace has accelerated. Thirty years ago only professionals (and not all of them) had nail guns, now it's a common tool for many do-it-yourselfers. Some of it has to do with falling costs, some with technology changes. But both are moving faster. There are other reasons such as changes in tastes, but those have always been around and are rarely as significant. Businesses that survive are those that recognize early that changes are in the wind and react quickly. There are few businesses that are immune.
July 16, 2014
The President has threatened to veto IRS budget cuts in the IRS budget that would place funding at the level it was at several years ago.
T.D. 9675 amends the Income Tax Regulations to authorize filers of information returns to truncate a payee's or other person's nine-digit identifying number on payee statements and certain other documents.
Tip of the Day
Manage what you can manage, hedge what you can't . . . In business risks come in many forms. There's a chance fire will burn down your plant. There's a risk your key engineer will die in a car crash. There's a possibility your primary supplier for a critical part won't be able to ship. Some of these can be managed. For example, make sure you have a backup supplier for all critical parts. Some can't be managed. You can't afford to hire a second engineer, at least not like the one who accounted for so much of the company's success. Your only option may be to carry insurance on his life and make sure you keep track on similar engineers in the industry. The fire risk is one you can partially manage--install sprinklers, maintain good housekeeping, store flammables in a separate building, etc. and partially hedge--carry enough fire insurance. Look at the risks from the top down. What's the most critical? If your production process isn't complicated or unique, you might be able to get back up and running quickly even after your plant is destroyed. On the other hand, your engineer is 60% of the way through a redesign of a product that provides 55% of your revenue and you're already losing ground to the competition. The engineer could be your most important risk.
July 15, 2014
The full House has passed the bonus depreciation bill by a vote of 258 to 160. The bill would make permanent the 50% bonus depreciation that expired at the end of 2013. However, even if passed by the Senate, President Obama has indicated that he would veto the measure, largely because there are no offsetting revenue raisers.
In Kenneth L. Holmes (U.S. District court, W.D. New York) the Plaintiff brought suit against the payroll manager for a company for which he was a contract employee as a result of the company's garnishment of his pay. The Defendant sought dismissal arguing (1) that the Court does not have subject matter jurisdiction over the Plaintiff's claim for injunctive relief; and (2) that the Plaintiff failed to state a claim upon with relief could be granted. The Court granted the Defendant's motion and dismissed the complaint. The Court noted that Sec. 6332(d) provides that any person who fails or refuses to surrender any property or rights to property, subject to a levy, upon demand by the IRS shall be liable in his own person for both the amount of the levy as well as a penalty of 50% of the amount recoverable.
Tip of the Day
Employment agreements in business buyouts . . . Amounts you pay for equipment in an asset purchase are depreciable using the regular depreciation rules; goodwill and other intangibles purchased must be amortized using the straightline method over 15 years. Payments to the seller under an employment contract are currently deductible as salary. But you've got to be careful on the wording of the contract. The seller may want a certain amount guaranteed should be die or become disabled before the end of the employment term. That makes the employment contract look more like additional payments for the asset or stock purchase and could result in the IRS recharacterizing the amounts and make them subject to the 15-year amortization. There may be ways around the problem. Discuss this with your attorney and tax advisor.
July 14, 2014
The IRS has withdrawn part of a notice of proposed rulemaking (REG-209459-78) that specifically relates to rollovers from individual retirement arrangements (IRAs) (Reg. Sec. 1.408-4(b)(4)(ii). The partial withdrawal of the proposed regulation will affect individuals who maintain IRAs and financial institutions that are trustees custodians or issuers of IRAs. This is the one per year rollover rule that now applies to a taxpayer's IRAs in the aggregate as opposed to individually under prior law. The change is a result of the Bobrow decision.
Tip of the Day
Investing in a rental for tax losses? . . . If you're thinking of investing in a rental property for the tax losses, you should check your math carefully. First, not all of your investment will be depreciable. Some of it will have to be allocated to the land, for which there is no depreciation deduction. And, depending on the location, the land could be a significant portion of the total investment. That's true in many areas in California, Florida, New York, etc. Second, those losses may not be currently deductible. You can only deduct the first $25,000 of rental losses against ordinary income, and then only if your adjusted gross income (AGI) is no more than $100,000. Between $100,000 and $150,000 those losses are phased out. Once your AGI exceeds $150,000, none of the losses are deductible. (The losses can be carried forward and taken when you sell, when your AGI falls below the thresholds, or used to offset passive income.) In addition, if the rental property is used for personal purposes for more than 14 days or 10% of the days during which the home is rented at a fair rent, your deduction is limited to gross income. Finally, the hobby loss rules can apply. Rental properties can be a smart investment, particularly if you pick them up at a good price, just don't depend on the tax benefits for your return.
July 11, 2014
The IRS has updated its FACTA page at www.irs.gov. New and updated FAQs have been posted with regards to NFFEs, FFI and EAG Changes, and Registration Updates. All of the new and updated FAQs are dated 7/10/2014.
The Center on Budget and Policy Priorities (CBPP) has come out against making the 50%-bonus depreciation permanent, arguing that doing so would essentially negate its use as a device to invigorate a poor economy. In addition, the provision would cost some $276 billion over 10 years.
The statute of limitations for the IRS is normally three years. Past that, you can breath a sigh of relief--but not if you underreport your income by more than 25% the statute is extended to six years. In Thomas J. Heckman (T.C. Memo. 2014-131) the taxpayer failed to report distributions from an ESOP (Employee Stock Ownership Plan) in which he had an interest. It was clear the taxpayer underreported by more than 25% (closer to 49%), but the taxpayer argued he disclosed enough information to the IRS that it should have been aware of the omitted income, which would have left the statute of limitations at three years. The Court did not agree, finding there was no necessary clue. Information contained on a related partnership return was not sufficient.
Tip of the Day
Service contracts vs. billing for work . . . Selling a service or similar contract can make a lot of sense. You get monthly income--rain or shine. That can make cash flow planning easier. The flip side is that when you spend 10 hours rebuilding the customer's unit, you can't bill for any of it. Correct pricing can usually solve the problem. You'll still probably lose on certain jobs, but you hope to make up for it with the customer who goes a year without a service call. The key here is to do your homework. Sometimes you just bill about what the competition does. But your business may not be identical. For example, your customers' units are, on average, about 5 years old that your competitors. You'll have to price higher. If you have no competition to use as a starting point, things are tougher. You've got to know your costs and have a good idea on the probability the customers will call for service. You should also consider some sort of stop-loss protection. For example if the unit is beyond a certain age, your liability should be limited. You might want to start small, testing contracts on a limited number of customers. While there is some risk, if you get it right contracts can improve your profitability and provide a steady cash flow stream you can forecast. That can provide stability to the business and improve it's value.
July 10, 2014
FEMA has updated the designation of parts of Indiana as disaster areas during the severe winter storm from January 5, 2014 to January 9, 2014 (DR-4173) to include Lake County. Taxpayers in Lake County who sustained losses may deduct them on their 2013 return.
Taxpayers can file Form 1040X, Amended U.S. Individual Income Tax Return, to correct previously filed income tax returns. The IRS only allows amended tax returns to be filed on paper. As a result, there is additional taxpayer burden and increased potential for erroneous tax refund payments. The IRS received more than 4 million amended tax returns in Fiscal Year 2012. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit because previous TIGTA audits have identified problems with IRS processes for verifying claims on amended tax returns. The objective of this review was to determine whether the IRS has controls in place to ensure that claims for refunds on amended tax returns are appropriate. Based on the sample results, TIGTA estimates the IRS may have issued more than $439 million in potentially erroneous tax refunds claimed on 187,421 amended tax returns during Fiscal Year 2012. As such, the IRS could issue more than $2.1 billion in potentially erroneous tax refunds claimed on amended tax returns over the next five years. TIGTA recommended that the IRS revise Form 1040 to enable taxpayers to amend their original tax return using this form, expand e-filing to include amended tax returns, and conduct a review of the 44 amended tax returns TIGTA identified for which potentially erroneous refunds were issued to determine the proper tax liability. The IRS agreed with two of TIGTA’s recommendations and disagreed with one recommendation. Although the IRS disagreed with revising Form 1040, the IRS plans to consider changing the format and appearance of Form 1040X. The IRS also plans to consider e-filing of amended tax returns based on available funding and resources.
Tip of the Day
Sell sheet up to par? . . . Many salesmen and businesses use "sell sheets", one page sheets describing their product. The sheet should contain the most important information about the product and, if appropriate, should include a picture, diagram, etc. The sheet is worthless if the potential customer doesn't read it. So the first thing is to grab his/her attention. You want to make it readable, so too much copy could be a negative. Appearance is not just important, it's critical. This isn't the time to go cheap on a printer. High school English wasn't your best subject? Get professional help with spelling and grammar. Producing a great job isn't that much more costly than a mediocre one, but the results markedly different. Consider the cost/benefit ratio. If you're pitching your product to distributors, one deal could pay for the sheet multiple times over. And get some independent opinions. They don't have to be in the same field. You want an impression of how the sheet looks.
July 9, 2014
The House is expected to vote this week on a bill that would make the 50-percent bonus depreciation permanent. Democrats are objecting on both the cost and the permanent extension of the provision, making its trip through the Senate unlikely. While this bill may not pass, the provision could pass in another form.
A recent study by the GAO (Government Accountability Office) found that notices the IRS sends during correspondence audits have misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence. For example, notices stated that IRS would respond within 30 to 45 days when it has consistently taken several months to do so. Further, as of early 2014, IRS data show that it had not responded timely to more than 50 percent of the correspondence taxpayers sent. In many cases, refunds are held up until the audit is finished. According to IRS tax examiners, notices caused taxpayer frustration and generated unnecessary taxpayer calls to IRS. Furthermore, examiners who answer such calls said they do not know when IRS will respond. IRS recently revised the notices, but the revisions were not based on analysis of historical data nor did IRS have a plan to analyze data to ensure it is responding timely per revised notices.
Tip of the Day
Commercial rents headed higher? . . . In a number of areas of the country it looks that way. The market should still be relatively weak based on demand. But it's more complicated. Construction of new space has been hampered by the market and difficulty in obtaining loans. That means there isn't a big surplus of space available. At some point building is likely to pick up, but that could take time. If you can forecast your requirements, you might want to consider locking in a new lease earlier.
July 8, 2014
The president has determined that certain areas of Nebraska are eligible for assistance as a result of sever storms, tornadoes, straight-line winds and flooding from May 11 to 12, 2014. Taxpayers in the counties of Clay, Fillmore, Saline, Saunders, Seward and York may claim any losses on their 2013 returns. In addition, notices in several states have been updated. In Florida (FEMA 4177-DR) the counties now include Bay, Calhoun, Holmes, Jackson and Washington. In Indiana (FEMA-4173-DR) the counties now include Allen, Blackford, Clinton, Fulton, Hamilton, Johnson, LaGrange, Mario, Montgomery and Vanderburgh. In Mississippi (FEMA 4175-DR) the counties now include Jones, Leake, Montgomery, Simpson and Warren.
The government continues to add countries to it's list of those that have signed on to FACTA (Foreign Account Tax Compliance Act). The latest to be added are the British Virgin Islands and Israel.
Tip of the Day
It's the investment not the vehicle . . . IRA (traditional), 401(k), traditional profit sharing, 403(b), etc. have one thing in common--any income or capital gains generated are tax deferred until you start taking distributions. Even annuities and life insurance produce tax deferred income. Clearly, there are differences. Contributions to a 401(k) are pre-tax, contributions to an IRA are after tax and may or may not be tax deductible. And no one would suggest life insurance as a good retirement planning tool. But while the vehicle (e.g., IRA) has to be considered, the investment in that vehicle is far more important. You'd be better off earning 10% annually in your own name than 3% in your IRA. Switching your money from your employer's 401(k) or other plan to an IRA when leaving the company may make sense if your return in the 401(k) has been below average. The money coming from your employer's plan is likely to be substantial. You want to make the right choices. Research your choice of advisors carefully. Because IRAs shelter investment returns from current taxes, investments such as variable annuities, partnerships, etc. may not be appropriate within the IRA. And, since distributions from most plans are taxed at ordinary income rates, long-term capital gains are worth no more than interest, short-term gains, etc.
July 7, 2014
The IRS has announced that in an effort to combat fraud and identity theft, new procedures effective January 2015 will limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three. The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer. Taxpayers also will receive a notice informing them that the account has exceeded the direct deposit limits and that they will receive a paper refund check in approximately four weeks if there are no other issues with the return. For the complete details go to www.irs.gov.
Tip of the Day
Exiting a contract . . . Unless you've been through it before, chances are you won't think about how to terminate a joint venture or contract. For example, Fred owns 30 acres on which he grows vegetables. Most are sold to wholesalers, but his son wants to set up a stand for local sales. Fred has frontage only on a side road. His good friend Mike has frontage on a route with high traffic. For a not much more than a nominal amount Mike rents space to Fred who puts up a stand. Fred's son runs the stand for several years, but then decides to move away. Can a neighbor run the stand under the same deal? If no one runs the stand does the building revert to Mike? What if Mike wants it off his property? Does Fred have to tear it down? What if Mike sells the property? Does Fred have any rights? Unless there's a formal lease dealing with these issues, it could get complicated. To Fred it may be a cheap rental. To Mike it's getting $700 a year for a plot that wouldn't have brought $100 in hay. But unraveling the deal could be a headache.
July 3, 2014
The IRS has issued final regulations (T.D. 9673) relating to the use of longevity annuity contracts in tax-qualified defined contribution plans under Sec. 401(a), Sec. 403(b) plans, individual retirement annuities and accounts (IRAs) under Sec. 408 and eligible governmental plans under Sec. 457(b). These regulations provide guidance necessary to comply with the required minimum distribution rules under Sec. 401(a)(9) applicable to an IRA or a plan that holds a longevity annuity contract. The regulations will affect individuals for whom a longevity contract is purchased under these plans and IRAs, sponsors and administrators of these plans and trustees and custodians of these plans and IRAs.
T.D. 9674 contains final and temporary regulations providing guidance to eligible organizations seeking recognition of tax-exempt status under Sec. 501(c)(3). The final and temporary regulations adopt a streamlined applications process that eligible organization may use to apply for recognition of tax-exempt status.
The IRS has released Fact Sheet (FS-2014-8) describing, in question and answer format, the Filing Season Program for Tax Return Preparers. The voluntary program is designed to encourage tax return preparers to participate in continuing education courses.
Bipartisan legislation has been introduced in both the House and Senate that would provide a tax credit for "Angel" investments in high-tech startups. The credit would equal 25% of the investment with the credit not to exceed $250,000. In addition, in order to qualify the amount of the investment must exceed $25,000. There are a number of other requirements.
Tip of the Day
Electronic funds transfers . . . If you use a general office computer or any computer that's exposed to internet usage (e-mail, web surfing, etc.) you run the risk of malware, intercepted passwords, etc. A simple approach is to purchase an inexpensive laptop and use it only for checking bank accounts, making EFTs, etc. Since you're not running software that would tax the system, you don't need a machine that's particularly fast and memory requirements are minimal. You'll still need virus protection and a firewall. Restrict access to the machine and password protect it. Finally, reconcile your electronic funds transfers daily. While you may have recourse to the bank, they'll be looking for ways to avoid responsibility. There may be other safeguards you can take. Talk to your accountant.
July 2, 2014
Revenue Procedure 2014-42 (IRB 2014-29) provides guidance regarding a new, voluntary Annual Filing Season Program designed to encourage tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns. In addition, this revenue procedure modifies and supersedes Revenue Procedure 81-38, regarding limited practice before the IRS by individuals who are not attorneys, CPAs, or EAs.
The IRS has released a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily. The new Form 1023-EZ, now available on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible. The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. Form 1023-EZ must be filed online. The instructions include an eligibility checklist that organizations must complete before filing the form. The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40.
The IRS has announced (IR-2014-76) that Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for five consecutive years. To give all interested parties time to adjust and allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016. The new, more uniform policy applies to any ITIN, regardless of when it was issued. Only about a quarter of the 21 million ITINs issued since the program began in 1996 are being used on tax returns. The new policy will ensure that anyone who legitimately uses an ITIN for tax purposes can continue to do so, while at the same time resulting in the likely eventual expiration of millions of unused ITINs.
If your business has a net loss you could have a net operating loss that you can forward or back. You can have a net operating loss on your personal return. That was the situation in Darryl L. Jones (T.C. Memo. 2014-125). The IRS disallowed the carryforward losses because the taxpayer could not detail the activity generating the losses and presented little evidence of his income in the years to which the losses could be carried. The Court disallowed the losses. The Court found that the taxpayer's wife, who worked for his law office, was an independent contractor, not an employee. She worked from home and accomplished the tasks in her own time and in her own way.
Tip of the Day
Mistakes can be costly . . . Having a good idea, service, product, timing etc. isn't the only thing you need to succeed in business. Avoiding mistakes can be as, if not more, important. One clothing manufacturer seemed to have a lock on athletic clothing. The line had high margins and consistently sold out. A mistake in manufacturing by a new supplier wasn't caught until consumers discovered the colors faded and the fabric wore out quickly. The bad press severely hurt sales. Avoiding all mistakes may be too costly. Concentrate on errors that will have the most effect on the business. Home builder? Some ill fitting molding can be repaired. In many cases the customer may not notice. Water in the basement is another issue. You can be sure they'll complain and it's much tougher to fix later.
July 1, 2014
It may be the electronic age, but you've still got to check mail delivered the old fashioned way. In Eric Onyango (142 T.C. No. 24) the U.S. Postal Service attempted on several occasions to deliver a notice of deficiency to the taxpayer. The IRS sent the notice certified mail, return receipt requested. On at least two occasions the Postal Service left notice of attempted delivery of the certified mail at the address of the taxpayer's legal residence, notifying him it had certified mail that he had to sign for. The taxpayer declined to check on a regular basis his mailbox at his legal residence and to retrieve on a regular basis mail items delivered there. (After several unsuccessful attempts to deliver the certified mail in question, the Postal Service returned it to the IRS. The Tax Court held that the taxpayer could not decline to retrieve his mail, when he was reasonably able and had multiple opportunities to do so, and thereafter successfully contend that he did not receive the notice of deficiency. The Court also rejected the taxpayer's contention that he was entitled under Sec. 6330(c)(2)(B) to dispute the underlying tax liability to which that notice pertained.
Tip of the Day
Business car bought and sold in same year? . . . If yo place a car in service and dispose of it in the same tax year, you can't claim any depreciation deduction for that car.
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