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March 27, 2015
Haven't filed state income taxes for your corporation or LLC? Haven't filed that annual report? Your privileges in the state could be suspended or voided. That's what happened in Medical Weight Control Specialist (T.C. Memo. 2015-52). The Court held that the corporation's privileges in California were suspended when it petitioned the Tax Court. As a result, the Court did not have jurisdiction to hear the case.
The reason for setting up a corporation (or an LLC or limited partnership) is to protect the owner's personal assets from the creditors of the corporation. But that protection isn't impenetrable. In William J. Kardish, Sr. Transferee; Charles K. Robb Transferee (T.C. Memo. 2015-51) a corporation, Florida Engineered Construction Products Corp. (FECP) did well during the early 2000s but reported no income to the IRS. By the time the IRS caught up with the corporation it owed over $120 million and its fortunes had reversed. Because the corporation was strapped, the IRS sought to collect from other parties. Certain principles in the corporation transferred large sums into their own pockets. The petitioners were minority shareholders and not a party to the fraud, but the Court found that certain amounts they received as compensation or loans that would not be repaid were fraudulent transfers under Florida law and held them liable for a portion of the unpaid taxes as transferees for some of the years at issue.
Tip of the Day
Investment expenses . . . You may be able to deduct investment expenses such as investment advisory fees, fiduciary fees, publications, etc., but only if they relate to producing taxable income (and exceed the 2% threshold). If the expenses are incurred in producing tax exempt income, they are not deductible. If you can't associate the expenses with the income, you must apportion the expenses based on the income produced. The same rules apply for investment interest on funds borrowed to generate the income.
March 26, 2015
The IRS has released the 2014 IRS Data Book, a snapshot of agency activities for the fiscal year. The report describes activities conducted by the IRS from Oct. 1, 2013, to Sept. 30, 2014, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance, and the IRS budget and workforce among others. The 2014 Data Book contains charts that show trends, such as the decline in the number of audits and the decline in telephone and in-person tax assistance and increases in the use of online resources and volunteer tax assistance. (The IRS Data Book contains a wealth of data such as the number of returns filed, the income (by group) on the returns, deductions taken, audit percentages, etc.)
The House is marking up a bill that would repeal the estate tax. Other bills in markup in the House include the Taxpayer Bill of Rights Bill of 2015, and several others that would modify the way the IRS conducts its activities.
Under the tax benefit rule amounts you receive as an overpayment, refund, etc. of a previously deducted item must be included in income. For example, you must report as income a state income tax refund in the year received, but only if you itemized in the prior year. If you didn't itemize, you didn't get a benefit for the taxes and your refund isn't includible in income. (There can be other reasons for not receiving a benefit.) In Jigal Elbaz et ux. (T.C. Memo. 2015-49) the taxpayers were shareholders in an S corporation that deducted real estate taxes. The benefit of the tax deduction was passed through to the shareholders by way of the reduced net income of the S corporation. The taxpayers received a QEZE (Qualified Empire Zone Enterprise) credit from the state on their personal return based on the real estate taxes paid. The Tax Court found that although the entities deducted the real property taxes, the shareholders/taxpayers led to a lower amount of income on their K-1 and that resulted in a reduced income tax liability which was a benefit to the taxpayers. Thus, the credit they received because of the real estate taxes was taxable income.
Tip of the Day
Medical expenses paid for others . . . You can deduct medical expenses you paid for yourself, your spouse or a dependent. To deduct these expenses the person must have been your dependent either at the time the medical services were provided or when you paid them. A person generally qualifies as your dependent if he or she was a qualifying child or a qualifying relative and a U.S. citizen or national or a resident of the U.S., Canada, or Mexico. You can include medical expenses paid for an individual that would have been your dependent but for the fact the he or she received gross income of $3,950 or more (2014) and filed a joint return for 2014.
March 25, 2015
Revenue Procedure 2015-25 (IRB 2015-14) provides the list of countries for tax year 2014 for which the minimum time requirements of the foreign earned income exclusion are waived.
You can only challenge your tax liability at a collection due process (CDP) hearing if you did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the liability. At the CDP hearing you can make an offer-in-compromise, ask for an installment agreement, etc., but generally not challenge your tax liability. In Walter Thorwald Skallerup, 3rd (T.C. Memo. 2015-48) the taxpayer petitioned the Court for review of the IRS Appeal's determination to proceed by lien to collect unpaid income tax liabilities. The Court held that the taxpayer's previous opportunities to challenge underlying tax liabilities for all but two of the years in issue precluded the Court's considering underlying liabilities for those years.
Tip of the Day
Child and dependent care credit . . . There's a chance you might miss this credit if you don't take it regularly. And, unless your preparer knows you well, he may not ask if you incurred the expenses. Basically, if you paid a day care provider, employed a nanny or babysitter, etc. to care for a qualifying individual to enable you (and your spouse if married) to work, you could qualify for the credit. The credit can be as much as 35% of the expenses incurred, but decreases as your adjusted gross income increases to 20% for AGI above $43,000. A qualifying individual is a dependent child under age 13, a disabled spouse physically or mentally unable to care for himself, or an physically or mentally disabled person whom you could claim as a dependent (such as a parent). Determining if you qualify for the credit is generally straightforward. Only the first $3,000 per child (maximum two children) of qualifying expenses can be used in calculating the credit--but child care expenses add up quickly. And even if your income is far in excess of $43,000, you'll get $600 of credit if you incur $3,000 in qualifying expenses. Any extra work is worth it since you're likely to be able to qualify for the credit for more than one year.
March 24, 2015
Most Tax Court cases where deductions are disallowed turn on the lack of documentation to support the expenses. But you may have to show that the expense was "ordinary and necessary". Often that's obvious--business insurance, chain saw for a landscaper, etc.--but not always. That's when you've got to show the relationship. In Urve V. Moyer (T.C. Memo. 2015-45) the taxpayer's business had declined substantially from that of only a few years earlier. In fact, for the year at issue, the taxpayer's gross income from the business was only $1,289. Many of the claimed deductions were disallowed for inadequate substantiation. After reviewing the expenses the Court found that a number of them were not shown to be "ordinary and necessary" for the business but were personal items such as music CDs, luggage, museum membership fees, camcorder, etc. The taxpayer claimed an auto was used full-time for business. The Court found that given the limited scope of the business, the auto was clearly used for business purposes infrequently and the taxpayer failed to establish the extent of the use. The Court allow only a small amount of expenses over what the IRS allowed.
Many tax benefits are associated with the purchase of personal (e.g., equipment, furniture) or real property. In some cases hard title in the property is not essential. For you sign an agreement to purchase a tractor from a neighbor, but because there's a lien on the equipment you can't get good title for some time. In the mean time you use the tractor, have maintenance done on it, etc. Because you've assumed the benefits and burdens of ownership, you could be viewed as having ownership. Whether a court will see it the same way will depend on all the facts and circumstances. In Ada Mae Pittman (T.C. Memo. 2015-44) the taxpayer claimed he purchased a residence and claimed the first-time homebuyer credit. The Court found the taxpayer had a lease with an unexercised option to purchase the property. The Court noted that an option to purchase in Florida does not give the optionee an equitable interest in realty until the option is exercised. The Court went on to say that Sec. 36 was clear in that a taxpayer must actually acquire a property to claim the credit. The Court held the taxpayer was not entitled to the credit.
Tip of the Day
Child's income . . . If your dependent child has investment income is $2,000 or less they can file their own return. If their total investment income is more than $2,000 the parent's tax rate may apply to part of the income instead of the child's rate. See the Instructions and Form 8615 to compute the tax. If the child's investment income is less than $10,000 you may be able to include the income on your return and the child will not have to file. See Form 8814.
March 23, 2015
The IRS has made changes to Publication 225, Farmer's Tax Guide, as a result of the Tax Increase Prevention Act of 2014 and a correction to Publication 523, Selling Your Home.
In John C. Bedrosian et ux. (144 T.C. No. 10) the taxpayers invested in a Son-of-BOSS transaction through a partnership that was subject to the partnership provisions of TEFRA. The IRS issued a Final Partnership Administrative Adjustment (FPAA) with respect to the partnership in determining that the partnership was a sham. The taxpayers did not file a timely petition. The taxpayers claimed deductions for professional fees. The IRS issued a notice of deficiency duplicating the partnership adjustments and also disallowing the deduction for professional fees. The IRS filed a motion to dismiss asserting that the Tax Court lacked jurisdiction over the entire case. In Bedrosian (T.C. Memo. 2007-375) the Court granted the motion in part but held that it had jurisdiction over the deductibility of the professional fees. The taxpayers sought leave to file a motion for reconsideration out of time that would asd the Court to revisit whether it had jurisdiction over the deductibility of the professional fees. The taxpayers assert that intervening caselaw would have the Court reach a different result. The Court held that in determining whether to grant leave to file a motion out of time, it may consider the merits of the underlying motion. The Court further held that the deductibility of professional fees paid and claimed as a deduction at the partner level is a factual affected item that is subject to deficiency procedures.
Tip of the Day
April 1 deadline . . . The IRS is reminding taxpayers who turned 70½ during 2014 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts and workplace retirement plans by April 1. While your bank, financial institution, financial advisor or CPA should be able to calculate the RMD, doing so is usually pretty straightforward. Get IRS Publication 590-B, Distributions from Individual Retirement Arrangements for guidance.
March 20, 2015
If IRS Commissioner John Koskinen's grilling before the House Appropriations Subcommittee on Financial Services and General Government is any indication, the Service isn't likely to see an increase in its budget anytime soon. The Commissioner was told that the IRS should be able to do more with the funding they have.
The IRS has recently updated a number of the topics in the Retirement Plans Frequently Asked Questions section of irs.gov.
The IRS previously published Notice 2014-5, which provides temporary nondiscrimination relief for certain “closed” defined benefit pension plans (i.e., defined benefit plans that provide ongoing accruals but that have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date). The relief provided in Notice 2014-5 is applicable for a plan year that begins before January 1, 2016. Notice 2014-5 also included a request for comments with respect to these plans, to assist the Treasury Department and the IRS in developing proposed regulations. Notice 2015-28 (IRB 2015-14) extends for one year the temporary nondiscrimination relief for certain closed defined benefit pension plans provided in Notice 2014-5, so that a closed defined benefit pension plan to which the relief under Notice 2014-5 applies may continue to use the temporary relief for a plan year that begins before January 1, 2017.
In Charles W. King (T.C. Memo. 2015-36) the Court found the IRS handled the taxpayer's request for an installment agreement poorly and abused its discretion by failing to abate interest for a portion of the time the taxpayer's liabilities were outstanding.
Over-the-road truck drivers have to have a certain number of hours of rest in a 24-hour period. Some drivers take hotel rooms, but many sleep in their trucks. In Richard K. Howard (T.C. Memo. 2015-38) the IRS disallowed the cost of electricity purchased at truck stops (truck stop electrification expense) to power the taxpayer's vehicle (heating, cooling, etc.) while he was sleeping in the truck. The IRS found the cost analogous to the cost of a hotel room which was not deductible because the taxpayer had no permanent home and thus was not away from home while on the road. The Tax Court found the electricity was similar to the cost of diesel fuel which could have been used as an alternative, but was more expensive and created more wear and tear on the truck. The Court allowed the deduction.
Tip of the Day
Reservist in the military? . . . You may be entitled to some special benefits when it comes to IRAs. First, normally distributions from IRAs before age 59-1/2 are subject to a 10% additional tax. Qualified reservist distributions are one exception to the penalty. The basic requirement is that the distribution was related to a call to active duty for a period of more than 179 days or for an indefinite period. Second, contributions to an IRA are limited to $5,500 ($6,500 for taxpayers age 50 or older). Qualified reservists can contribute more to an IRA if the amount is a "repayment contribution" to replace funds taken out of the plan as a qualified reservist distribution. See IRS Publications 590-A and 590-B for the details.
March 19, 2015
In IR-2015-54 the IRS is reminding taxpayers who receive requests from the IRS to verify their identities that the Identity Verification Service website, idverify.irs.gov, offers the fastest, easiest way to complete the task.Taxpayers may receive a letter when the IRS stops suspicious tax returns that have indications of being identity theft but contains a real taxpayer’s name and/or Social Security number. Only those taxpayers receiving Letter 5071C should access idverify.irs.gov. The website will ask a series of questions that only the real taxpayer can answer. Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them. If they did file the return, it will take approximately six weeks to process it and issue a refund.
The IRS has released a new ATG (Audit Techniques Guide), Real Estate Property Foreclosure and Cancellation of Debt. The Guide also covers exceptions to the rules, Forms 1099-A and 1099-C and passive activity losses.
In Ralim S. El (144 T.C. No. 9) the taxpayer failed to file a return and had unreported income as well as an early distribution from a pension plan. The Tax Court, for the first time, decided whether under Sec. 7491(c) the IRS has the burden of proof regarding the additional tax for an early distribution. The Court held Sec. 7491(c) does not shift the burden of production to the IRS with respect to the additional tax under Sec. 72(t) because the additional tax is a tax and not a penalty, addition to tax, or additional amount.
Tip of the Day
Making an IRA contribution? . . . A married couple could make a contribution of as much as $13,000 ($5,500 each plus $1,000 each for taxpayer age 50 or older). But if you're putting a significant amount in stocks or a mutual fund, consider spreading the contribution over two or three payments, say one month apart. That way you'll average the amount you pay instead of risking buying at a peak. You'll have to put the entire contribution in the bank or financial institution before April 15 (if the contribution is for 2014), but talk to the broker. They'll have a place for you to "park" the funds in a money-market type account.
March 18, 2015
The IRS and Free File Inc., also known as the Free File Alliance, have announced (IR-2015-52) a new five-year agreement that guarantees free, federal tax preparation software products for 70 percent of all taxpayers. The new agreement opens the door for innovations such as importing prior year information and requests for additional options for free state tax returns so that taxpayers have a seamless experience. It also provides greater transparency regarding any charges associated with state tax return preparation. Free File, available only at IRS.gov/FreeFile, provides taxpayers with free brand-name tax software or fillable form options. For 2015, anyone whose income was $60,000 or less is eligible for the free tax software. For people who made more than $60,000, the Free File Alliance provides Free File Fillable Forms, the electronic version of IRS paper forms. Free File also provides free tax extensions, with no income limitations. The goal of negotiations between the IRS and the Alliance was to improve the taxpayer experience when using Free File. For example, companies will be encouraged to import prior year tax return information to make tax preparation easier and import available information returns, such as Forms 1099. As part of the agreement, the Alliance agreed that it would ensure free federal and free state returns from IRS.gov for the 21 states plus District of Columbia that currently have their own partnerships with Alliance members. Alliance members would not be required to provide free state returns for all 50 states; however, some do so now. There also will be more information on IRS.gov about the Free File states and which companies offer free state tax preparation. Companies that charge for state tax preparation must also clearly display their fees on their landing pages. Companies also can expand their Free File offers to active duty military personnel beyond the income cap set for other taxpayers. As part of the agreement, the IRS will not develop a direct file return program of its own. The IRS and the Alliance currently are operating under a one-year extension. The new agreement will be effective October 31, 2015, through October 31, 2020.
The IRS has released final regulations (T.D. 9714) that amend the regulations (Sec. 9831) regarding excepted benefits under the Employee Retirement Income Security Act of 1974 (ERISA), the Code and the Public Health Service Act to specify requirements for limited wraparound coverage to qualify as an excepted benefit. Excepted benefits are generally exempt from the requirements that were added to those laws by the Health Insurance Portability and Accountability Act and the Affordable Care Act.
Tip of the Day
Measuring amount of a casualty loss . . . The amount of a casualty loss is generally measured by the difference in fair market value of the property before and after the casualty, less any insurance recovery. Neither the cost of repairing damaged property nor the cost of cleaning up is part of a casualty loss. However, you can use the cost of cleaning up or making repairs as a measure of the decrease in the fair market value if you meet all of the following:
March 17, 2015
In David J. Maines et ux. (144 TC No. 8) the taxpayers received targeted economic development payments from New York state. New York calls these payments "credits" and treats them as refunds for "overpayments" of state tax. All the credits required the taxpayers to make some amount of business expenditure or investment in targeted areas within the state. One of the credits, the QEZE Real Property Tax Credit, is limited to the amount of past real-property tax actually paid. The other two credits, the EZ Investment Credit and the EZ Wage Credit, are not limited to past tax actually paid. All the credits first reduce a taxpayer's state income-tax liability; any excess credits may be carried forward to future years or partially refunded. The Court held that the state-law label of the credits as "overpayments" of past tax is not controlling for Federal tax purposes. Because the EZ Investment Credit and the EZ Wage Credit do not depend on past tax payments, they are not refunds of past "overpayments" but rather are like direct subsidies. Because it does depend on past property-tax payments, the QEZE Real Property Tax Credit is treated like a refund of past overpayments. In addition, the portion of the EZ Investment Credits and the EZ Wage Credits that only reduce the taxpayer's state-tax liabilities are not taxable accessions to wealth. However, any excess portions of the credits that are refundable are taxable accessions to wealth to the taxpayers. The Court also held the portions of the QEZE Real Property Tax Credit payments that only reduce the taxpayer's state tax liabilities are not taxable accessions to wealth. Refundable portions of the QEZE Real Property Tax Credit payments are includable in the taxpayer's gross income under the tax-benefit rule to the extent that the taxpayers actually benefited from the previous deductions for property-tax payments.
Tip of the Day
File now, make IRA contribution later . . . The rule is that you've got to make your IRA contribution by the due date of your return--April 15. You can claim an IRA contribution, file your return, get your refund and then make the IRA contribution. But time is running out if you're waiting for the refund to make the contribution. You can speed things up with a direct deposit. Even better, you can designate that part or all of your refund be deposited in your IRA account. Don't forget, you can split your refund and have it deposited in multiple accounts. Use Form 8888. Remember, April 15 is the absolute deadline, filing extensions don't apply to an IRA contribution.
March 16, 2015
The IRS has announced (Rev. Rul. 2015-5) that interest rates on under- and overpayments will remain the same for the calendar quarter beginning April 1, 2015. The rates will be:
The IRS has released final regulations (T.D. 9713) relating to information reporting by brokers for bond premiums and acquisition premium. The document also contains final and temporary regulations relating to information reporting by brokers for transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain holder elections for reporting a taxpayer's adjusted basis in a debt instrument, and transfer reporting for Sec. 1256 options and debt instruments.
In IRS Fact Sheet FS-2015-14 the Service is advising taxpayers that they may qualify for an exemption from the individual shared responsibility payment if you didn't have the required health care coverage. While you can claim most exemptions on your tax return, some exemptions require you to apply for the exemption through the Health Insurance Marketplace. See Form 8965, Health Coverage Exemptions and the Instructions.
Tip of the Day
Buy or sell a business in 2014? . . . If so you might have to include Form 8594 Asset Acquisition Statement (Sec. 1060) with your return. Both the buyer and the seller of a group of assets that make up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets. There are some exceptions. See the Instructions to the form.
March 13, 2015
The IRS has reported the filing statistics for this season through March 6, 2015. Compared to last year, returns received by the IRS are down 0.7%; returns processed are down by 1.2%. Professionally prepared e-filed returns are down by 4.0%; e-filed returns by individuals are up by 5.6%. The number of returns claiming a refund is down by 2.1% but the average refund is up slightly.
Many more cases are decided on a taxpayer's substantiation and recordkeeping than on whether an amount is deductible or not. In Richard Charles Lussy (T.C. Memo. 2015-35) the taxpayer provided no testimony or substantiation documentation with respect to many of the expenses he deducted and the Tax Court sided with the IRS in disallowing the expenses. The Tax Court disallowed a deduction for legal expenses where the taxpayer failed to show that the expenses were ordinary and necessary business expenses. Finally, the Court disallowed a deduction for a net operating loss (NOL). The Court noted that taxpayers bear the burden of establishing both the existence and amounts of NOL carrybacks and carryforwards. The Court noted the taxpayer provided no testimony pertaining to the claimed NOL, nor did he offer any testimony or substantiating documentation with respect to the proper amount of the purported NOL.
Tip of the Day
Preparing your own return? . . . It doesn't take much to get pretty challenging, but with the current field of tax software it's certainly doable for many taxpayers. Here are some tips:
March 12, 2015
The IRS has announced that Federal income tax refunds totaling $1 billion may be waiting for an estimated one million taxpayers who did not file a federal income tax return for 2011. To collect the money, these taxpayers must file a 2011 tax return with the IRS no later than Wednesday, April 15, 2015. The IRS estimates half of the potential refunds for 2011 are more than $698. In cases where a tax return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. For 2011 tax returns, the window closes on April 15, 2015. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury. The law requires the tax return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return that qualifies for a refund.
Notice 2015-18 (IRB 2015-12) provides advance notification of a provision anticipated to be included in the proposed regulations to be issued under Sec. 529A. Section 529A was created by the Achieving a Better Life Experience Act of 2014 (ABLE). The new law is modeled on qualified tuition programs (QTP) and permits a state to establish and maintain a new type of tax-advantaged savings program for the purpose of meeting the qualified disability expenses of a disabled person. The IRS does not want the lack of guidance to discourage states from enacting their enabling legislation and is assuring states that enact legislation creating an ABLE program that the persons setting up accounts will not fail to receive the benefits of Sec. 529A merely because the account documents do not fully comport with the guidance when it is issued.
Tip of the Day
Sale of several assets at one time . . . If you sell a block of stock or other property that you bought at different times, you can report any short-term gain or loss on one line of Part I of Form 8949, and any long-term gain or loss on one line of Part II. For the date acquired, just enter "various". Your software should accept Various or Var. You'll have to use a different line for any asset sold at a different time.
March 11, 2015
In Pilgrim's Pride Corporation (U.S. Court of Appeals, Fifth Circuit) the Appellate Court overturned the Tax Court (141 TC--, No. 17) and held that the corporation's abandonment of securities was an ordinary loss, not a capital one. (Thus, the taxpayer could deduct the loss in full.) A capital loss is a loss from the sale or exchange of a capital asset. The abandonment of a capital asset for no consideration is not a sale or exchange as that term is used in Sec. 165(f). The Tax Court found that the taxpayer's transaction came under Sec. 1234A, which requires capital loss treatment for any loss "attributable to the cancellation, lapse, expiration, or other termination of -- (1) a right or obligation . . . with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer. The Court of Appeals found that Sec. 1234A did not apply here. The Court also rejected the IRS's alternative argument that Sec. 165(g) required the abandonment loss to be treated as capital.
Revenue Procedure 2015-21 (IRB 2015-13) provides correction and disclosure procedures under which failures to meet the additional requirements for charitable hospital organizations added by the Patient Protection and Affordable Care Act of 2010 will be excused. This revenue procedure affects charitable hospital organizations.
Tip of the Day
Home destroyed? . . . If your home was destroyed or condemned, any gain (for example as a result of insurance proceeds received) can be postponed under the $250,000/$500,000 exclusion. Any gain that cannot be excluded under that rule can be postponed in the case of a home destroyed (see Publication 547) or condemned (IRS Publication 544).
March 10, 2015
The IRS has issued proposed amendments (REG-100400-14) to the consolidated return regulations. The proposed regulations would revise the rules for reporting certain items of income and deduction that are reportable on the day a corporation joins or leaves a consolidated group.
Tip of the Day
Sold your home? . . . If you qualify you can exclude $250,000 ($500,000 if married, filing joint) of gain on the sale. But your cost basis may not be what you paid for the home. The most common increases to your basis include capital improvements such as adding another bath. The most common reduction to basis is any gain postponed on the sale of your main home under the rules in effect before May 7, 1977. For example, in 1985 you bought a home for $75,000. You made no improvements, and sold the house for $175,000 in 1995. You bought a new home for $220,000, postponing recognition of the $100,000 in gain. In 2014 you sold that home for $700,000. You've got to reduce your basis in your new home by the amount of the gain postponed on the first sale. In this case the gain postponed was $100,000. The price of the new home was $220,000. So your cost basis is $220,000 - $100,000 or $120,000. That means your gain was $680,000 ($800,000 selling price less $120,000 basis), so, assuming you're filing married, joint, you have a taxable gain of $180,000 ($680,000 total gain less the $500,000 exclusion). If that's confusing, you can look at it from a cash standpoint. Your basis is equal to the cash you paid (and any mortgage you took on) to buy the house. In the example above, you paid $75,000 for the first house. You reinvested the $175,000 you sold it for and paid an additional $45,000 for the new home. The $75,000 plus the $45,000 is $120,000. Don't forget, if you bought and sold more than one principal residence, you'll have to consider the postponed gain on each one.
March 9, 2015
The IRS released guidance on the tangible property final regulations ("repair regulations") in question and answer format. While the Q&A guidance doesn't answer all the questions that can arise with respect to the new regulations they do provide answers for the majority of questions most small business owners might encounter. Go to Tangible Property Final Regulations.
Tip of the Day
Failure to claim reimbursement for casualty losses . . . If your property is covered by insurance, you must file a claim for reimbursement, otherwise, you cannot deduct the loss as a casualty or theft loss. This rule does not apply to the portion of the loss not covered by insurance, e.g., a deductible. For example, you incur $4,000 of wind damage to your home. Your policy has a 5% deductible for such damage so you would not be able to anything even if you filed a claim. If you won't be filing a claim with your insurance company, be sure to document the claim by taking photos and filing a police report, if appropriate.
March 6, 2015
When a taxpayer receives tips daily, he or she is required to keep an accurate and contemporaneous record of the income. When a taxpayer fails to keep records, or maintains only incomplete or inadequate records of income, or when the records are no longer available, the IRS may recompute tips in any manner that clearly reflects income. In Alan Sabolic (T.C. Memo. 2015-32) the taxpayer was a casino bartender who opted out of the Gaming Industry Tip Compliance Agreement Program (GITCA Program) during the years at issue and, therefore, was required to keep daily logs. The IRS argued his recordkeeping was inadequate and calculated his tips based on several criteria (a substantial number of drinks were "comps" to regular players) and found he underreported his tip income for all three years. The taxpayer did keep a contemporaneous log, but keep no record of what he paid the "barbacks" as a portion of his tips. The Court found the taxpayer did keep adequate records and believed the taxpayer's explanation with respect to discrepancies and a generally lower level of tip income than what was expected.
You may be doing your friends a favor if you provide services to them at a substantial discount, but the IRS could interpret that as not having a profit motive and having your deductions related to the activity disallowed. That's what happened in Paresh M. Shah et ux. (T.C. Memo. 2015-31). The taxpayer neither sought nor received compensation for computer consulting services provided to family members. The Court held the taxpayer's activities were not engaged in for profit.
Moving expenses may be deductible if the distance from your old home to your new workplace is at least 50 miles more than your old home to your old workplace. But that wasn't the case in Jeffrey B. Palmer (T.C. Memo. 2015-30). The expenses the taxpayer claimed were related to moving his new wife from her home in South Carolina to his home in Minnesota.
Tip of the Day
Real estate taxes on property purchase . . . If you pay real estate taxes the seller owed on real property you bought and the seller did not reimburse you, you can't deduct the taxes as an expense. Instead, you must treat them as part of your basis.
March 5, 2015
The IRS has issued proposed regulations (REG-132253-11) under Section 6041 regarding the filing of information returns to report winnings from bingo, keno, and slot machine play. The proposed regulations affect persons who pay winnings of $1,200 or more from bingo and slot machine play, $1,500 or more from keno, and recipients of such payments.
The IRS has added three revised publications to IRS.gov. These publications will help businesses and individuals understand how to figure depreciation as well as pension options.
(Note. If you click on the links for publications and forms at SMBIZ.com you're automatically taken to the latest form or publication.)
The IRS has reported some filing statistics for this season through February 27, 2015. Compared to last year, returns received by the IRS are down 0.6%; returns processed are down by 1.0%. Professionally prepared e-filed returns are down by 4.4%; e-filed returns by individuals are up by 6.0%. (More than likely the reason is that professionals deal with the more difficult returns, which tend to get filed later.)
A business entity can't automatically avoid a liability for a predecessor's actions. For example, Madison Inc. has unpaid employment taxes. It liquidates and the shareholders incorporate Chatham Inc. using the same assets, customers, suppliers, etc. In TFT Galveston Portfolio, Ltd. as Successor In Interest for TFT #2, Ltd., et al. (144 T.C. No. 7) the taxpayer received a Notice of Determination Concerning Worker Classification and corresponding employment tax liabilities on its own behalf and other such notices as successor in interest to various partnerships. The IRS and the taxpayer dispute whether the taxpayer was a successor in interest under Texas law, and the IRS asserted the Tax Court should establish a Federal standard of successor in interest as Federal common law. In addition, the status of the taxpayer's workers for the period involving the taxpayer was itself at issue. The Court held that the taxpayer was not a successor in interest under Texas law and the Court did not adopt a Federal common law standard of successor in interest. Finally, the Court held the taxpayer's workers were employees.
Tip of the Day
Provide services as a notary public? . . . Report the payments received on Schedule C or C-EZ. These payments are not subject to self-employment tax so check the instructions for Schedule SE for additional information.
March 4, 2015
The IRS has released audit statistics for fiscal year 2014. Overall, the percentage of business returns audited is equal to the lowest level (FY 2005) in ten years, 0.57%. Returns of small corporations (assets under $10 million) were at 0.95% in FY 2014; large corporations (assets $10 million or higher) were at 12.23% (down from 15.84% in FY 2013 and 20% in FY 2005); S corporation returns were at 0.36%; and partnership returns at 0.43%. That means your partnership or LLC had less than a 1 in 200 chance of getting audited in FY 2014. (Based upon the IRS's budget in the upcoming year, your chances are likely to go down further.)
If you think tax reform will happen quickly, you should listen to Senate Finance Committee Chairman Orrin G. Hatch, R-Utah. He noted that the last major reform (1986) took three years to complete. Hatch also noted that it'll be even more difficult this time because of partisanship. He believes that any tax reform now would take at least two years.
In an alert from the Office of Professional Responsibility (OPR) (2015-04) the OPR has created a standard section 6103 information-request letter for practitioners and their representatives to use to request tax information maintained in OPR case files and obtained as part of an inquiry into possible violations of the regulations governing practice before the IRS (Circular 230).
Congress has passed, and the President has signed, the Protecting Volunteer Firefighters and Emergency Responders Act which provides that emergency services volunteers are not taken into account under the shared responsibility requirements contained in the Patient Protection and Affordable Care Act.
Tip of the Day
State employees receiving unemployment compensation . . . Payments similar to an state's unemployment compensation may be made by the state to its employees who are not covered by the state's unemployment compensation law. The payments are fully taxable, but don't report them as unemployment compensation. Report them on Form 1040,line 21, Other income.
March 3, 2015
The IRS has issued proposed regulations (REG-136018-13) that provide the method to be used to adjust the applicable Federal rates (AFRs) under Sec. 1288 (adjusted AFRs) for tax-exempt obligations and the method to be used to determine the long-term tax-exempt rate and the adjusted Federal long-term rate under Sec. 382. For tax-exempt obligations, the proposed regulations affect the determination of original issue discount under Sec. 1273 and of total unstated interest under Sec. 483. In addition, the proposed regulations affect the determination of the limitations under Sec. 382 and 383 on the use of certain operating loss carryforwards, tax credits, and other attributes of corporations following ownership changes.
The IRS has announced two changes to Form 3115. First, the instructions have been updated to describe how to e-file two or more automatic accounting method changes on a single form. For details go to www.irs.gov/uac/Recent-Development-2015-02-25-2009-Form-3115. The second change involves the mailing address for paper copies. The address change applies to applicants (other than exempt organizations) and exempt organizations filing for advance consent. The Ogden, Utah copy of Form 3115 should be mailed to:
Internal Revenue ServiceIn Sari F. Deihl (U.S. Court of Appeals, Ninth Circuit) the Court agreed with the Tax Court in denying the taxpayer innocent spouse relief. Her claim that her husband had abused her was not supported by third party testimony and the Court of Appeals held that, "in light of the considerable discretion we afford to the Tax Court's findings of facts, Appellant's argument is unavailing". The Court also noted that the Appellant's contention she played no meaningful role in her husband's business decisions was inconsistent with evidence she drew a salary from the business, participated in the business, and presented herself to the public as a co-founder and CEO.
1973 Rulon White Blvd.
Mail Stop 4917
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Tip of the Day
Statutory employees . . . Some individuals are classified as statutory employees. While they receive a W-2, their income is reported on Schedule C of Form 1040. They include:
March 2, 2015
The IRS has issued final regulations (T.D. 9712) relating to the election of the alternative simplified credit (ASC) under Sec. 41(c)(5). The final regulations affect taxpayers claiming the research activities.
In Internal Revenue News Release IR-2015-36 the Service announced that farmers and fisherman who miss this year's March 2 tax deadline because they are receiving corrected premium tax credit forms (Form 1095-A) will have until April 15, 2015, to file their 2014 returns and pay any tax due. (Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1.)
Tip of the Day
Accelerated death benefits . . . You may receive accelerated death benefits under a life insurance contract or viatical settlement before the insured's death. These may be excludable from income if the insured is terminally or chronically ill. A person is considered terminally ill if a physician certifies that the individual has an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.
February 27, 2015
In Internal Revenue News Release IR-2015-34 the IRS announced that almost 40 million tax refunds worth nearly $125 billion have been issued as of Feb. 20. The average refund is $3,120. The IRS has processed nearly 50 million returns, about one-third of the total individual federal income tax returns the agency expects to receive this year, with almost 83 percent of those returns resulting in refunds. More than 92 percent of refunds have been directly deposited into taxpayer accounts. The IRS is again advising taxpayers that longer wait times on IRS phone lines and at IRS offices mean it’s more important than ever for taxpayers to use IRS online tools and resources on IRS.gov.
The House has approved, by a wide margin (401-20), legislation that would change 529 plans. Under the bill computers are a qualified expense, the distribution aggregation requirements are removed, and a student receiving a refund of qualified 529 expenses can redeposit the funds in their 529 account without penalty.
Revenue Procedure 2015-22 (IRB 2015-11) contains a modification to Revenue Procedure 2013-22, as modified by Revenue Procedure 2014-28, and modifications to Revenue Procedure 2015-8. In particular, this revenue procedure changes the addresses to which applications for opinion and advisory letters for Sec. 403(b) pre-approved plans should be submitted and inserts a user fee that was omitted from Rev. Proc. 2015-8.
Tip of the Day
Suffered losses related to a federally declared disaster? . . . If so, you'll qualify for postponement of certain actions such as filing personal and business tax returns, among other things. But who qualifies? Affected taxpayers include:
February 26, 2015
In Estate of Eileen S. Belmont, Deceased (144 T.C. No. 6) the decedent's will directed that the residue of her estate, which included income in respect of a decedent, be left to charity. The estate took a charitable contribution deduction pursuant to Sec. 642(c)(2) on its Federal income tax return, claiming that it had permanently set aside an amount of its gross income for charity. At the time of her death, the decedent owned a condominium in which her brother resided. During the protracted administration of the estate, the brother took a variety of legal actions and asserted a life tenancy interest in the condo and was subsequently awarded a life tenancy in the condo. Because of the cost of litigation over the unit, the estate no longer had sufficient funds to pay the amount previously deducted as a charitable contribution. The Tax Court held that Sec. 642(c)(2) provides that any part of the gross income of an estate, which pursuant to the terms of the will is permanently set aside during the taxable year for a purpose specified in Sec. 170(c) will be deductible by the estate. The regulations provides that no amount will be considered permanently set aside for charity under this section unless under the terms of the governing instrument and the circumstances of the particular case the possibility that the amount set aside . . . will not be devoted to such purpose is so remote as to be negligible. The possibility that costs involved in a dispute over the condo would cause the estate to invade the amount set aside for charity was not "so remote as to be negligible" as required under Reg. Sec. 1.642(c)-2(d). Therefore, the estate did not permanently set aside the charitable contribution amount as required.
In Tim Sheridan (T.C. Memo. 2015-25) the taxpayer claimed a theft-loss deduction for an alleged patent infringement. The taxpayer advanced a number of arguments to support a theft loss, but failed to prove that a theft actually occurred under State law or to show the amount of the loss. He alleged no facts to show that an infringement of his patent occurred, much less that a crime was committed. The Court sided with the IRS in denying the claim noting the taxpayer neither proved a theft loss nor the amount of any loss.
Tip of the Day
Taxability of federal and state interest income . . . Be particularly careful when entering interest income from federal and state obligations in your tax software. Interest on federal obligations is generally not taxable for state purposes and interest on state obligations are not taxable for federal purposes. (Most states exempt interest on their own obligations, but not on those of other states.) But while interest on an issuer's bonds may not be taxable, interest on tax refunds, property taken by eminent domain, etc. generally aren't. Check with your tax adviser to be sure. There are exceptions to many rules.
February 25, 2015
The Financial Crimes Enforcement Network (FinCEN) has lauched a new Web page at www.fincen.gov/forms/bsa_forms/fbar.html to help individuals and institutions that must file an FBAR (Report of Foreign Bank Account). The site has a number of sections and a guide to make the reporting process easier.
Tip of the Day
Does your state follow federal rules? . . . Many states automatically follow federal tax law, with exceptions. For example, in one state gross income is basically the same for state and federal purposes. There are however modifications. The state does not allow the federal 50% bonus depreciation, subtracts the federal taxable social security benefits, etc. This year things could be even trickier for some state filers. Because the "extenders package" was passed so late, some states that don't automatically adopt federal rules may not have accepted the changes made at the end of 2014. Check the rules for your state.
February 24, 2015
The Affordable Care Act imposes an excise tax on high-cost employer-sponsored health coverage under Section 4090I (sometimes referred to as "Cadillac Plans"). If the aggregate cost of such employer-sponsored coverage (applicable coverage) provided an employee exceeds the statutory dollar limit (revised annually), the excess is subject to a 40% excise tax. Notice 2015-16 provides potential approaches with respect to a number of issues, which could be incorporated in future proposed regulations, and invites comments on these potential approaches. The issues addressed in the notice include the definition of applicable coverage, the determination of the cost of applicable coverage, and the application of the annual statutory dollar limit to the cost of applicable coverage.
The Department of Health and Human Services has announced that it will provide a special enrollment period from March 15 through April 30, 2015 for individuals who were uninsured in 2014 and obligated to make the individual responsibility payment. The special enrollment period will be available to individuals in states with a federal marketplace.
Tip of the Day
Change in life? . . . Get married last year? Divorced? Addition to the family? Taking care of an elderly relative? Death in the household? Become unemployed? Retire? Start a business? Acquire a rental property? Send a child to college? Any of those changes (and others) require extra consideration on your tax return. If you're preparing your own return, check the Form 1040 instructions, IRS Publication 17, and any IRS publications specific to your situation. YOu can find a quick index at sbrl046.html. If you're using a paid preparer, make sure to mention the changes to him or her at the opening of your interview.
February 23, 2015
Corporations (both S and C), LLCs, and limited partnerships offer protection to owners for the debts of the corporation. But the corporate veil can be pierced if the creditor can show that the entity was the alter ego of the owners. In Robert A. Politte, et al. (U.S. Court of Appeals, Ninth Circuit) the Court upheld a D.C. Calif. decision where the Court found the Appellants were liable for the unpaid employment taxes of a corporation where they were the majority shareholders. Under California law to pierce the corporate veil a creditor must show (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result would follow. The Court noted the Appellants were majority shareholders, exercised substantial control over the corporation's operations, and regularly drew on corporate funds to finance personal expenses, and borrowed money without maintaining corporate formalities. The Court also noted the transfer of funds between the corporation and another corporation where there was a unity of interest and ownership. The Court found the lower court did not clearly err in finding the Appellants were the corporation's alter egos.
Tip of the Day
Charitable contributions $250 or more . . . A canceled check alone won't do, nor will a credit card statement. You must have a written acknowledgment for each such contribution or one acknowledgment that lists the amount and date of each contribution. For example, you made two contributions to the Madison Relief Fund--one for $275 on January 23 and another for $255 on June 30. The charity can give you two separate letters or one letter where the two contributions are listed with the dollar amount and date. You must have the acknowledgment on or before the earlier of the date you file your return for the year of the contribution or the due date, including extensions for filing the return. Generally, that means you must have the acknowledgment before you file. Most charities are diligent and you probably got the acknowledgment shortly after making the contribution, or no later than January 31 of the following year. But if you don't have it, you've still got a chance to get the documentation before filing. You don't want to lose a deduction for lack of an acknowledgment.
February 20, 2015
Notice 2015-13 (IRB 2015-10) provides guidance on section 119 of the Tax Increase Prevention Act of 2014, American Taxpayer Relief Act of 2012, Pub. L. No. 113-295, enacted December 19, 2014. The Act amends Sec. 51 of the Internal Revenue Code to extend the Work Opportunity Tax Credit through Dec. 31, 2014. The notice also provides employers additional time beyond the 28-day deadline in Sec. 51(d)(13) for submitting Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to Designated Local Agencies.
In Dana Karl Bateman et ux. (T.C. Memo. 2015-22) the IRS determined a deficiency in the taxpayers' returns for two years and sent them a notice of deficiency on February 23, 2009. (The taxpayers filed a petition with the Tax Court which was dismissed because the petition was filed late.) On February 5, 2013 the IRS sent the taxpayers a Letter 3172, Notice of Tax Lien Filing (NTFL) relating to the years at issue. The taxpayers requested a collection due process (CDP) hearing. On July 18, 2013 the taxpayers faxed the IRS a Form 433-A (Collection Information Statement). At a CDP hearing the taxpayers informed the Appeals officer they disagreed with the determination of the underlying tax liabilities and that the NFTL was premature and threatened his employment. The Appeals officer discussed with the taxpayer the terms of a possible installment agreement, pursuant to which the NFTL eventually could be withdrawn (after the taxpayers paid a sufficient amount of their tax liabilities). The taxpayers said they could not afford the proposed monthly payments and rejected the agreement. The Court noted that to establish that the IRS abused its discretion, the taxpayers must establish that the IRS's actions were arbitrary, capricious, or without sound basis in law or fact. The Court looked at the facts and procedures followed by the Appeals officer and found that the IRS's determination not to withdraw the NFTL was not arbitrary or capricious.
Tip of the Day
Receive disaster relief payments? . . . They're generally nontaxable. The amount received must be to reimburse or pay reasonable and necessary personal, family, living or funeral expenses resulting from the disaster, to reimburse or pay for the reasonable and necessary expenses incurred for the repair or rehabilitation of your home or contents, or paid by a federal, state, or local government agency in connection with a qualified disaster. You can only exclude amounts for expenses not covered by insurance. There are some other points, but those are the most important.
February 19, 2015
Notice 2015-17 (IRB 2015-10) provides transition relief from the assessment of excise tax under Section 4980D for small employers (in particular, employers who are not applicable large employers) who reimburse or pay a premium for an individual health insurance policy for an employee. Notice 2015-17 also addresses the treatment for federal tax and for market reform purposes of arrangements reimbursing premiums of 2%-shareholder employees of S corporations. Finally, Notice 2015-17 addresses application of the market reforms to certain employer arrangements to fund Medicare premium payments or to provide a TRICARE-related health reimbursement arrangement (HRA).
The IRS announced (IR-2015-30) a limited test in 10 of its larger Tax Assistance Centers around the country to determine if an appointment-based service approach can help reduce taxpayer wait times during a time of severe budget cuts. While the IRS believes this approach will benefit taxpayers by helping them avoid long waits in line that they otherwise might have experienced, the IRS is testing this process during the tax filing season to ensure this is a more efficient approach for taxpayers. The initial test locations available by appointment are: Atlanta, Ga. (Atlanta-Woodcock), Austin, Texas, Birmingham, Ala., Chicago, Ill. (Dearborn), Denver, Colo., Fresno, Calif., Hartford, Conn., Plantation, Fla., San Antonio, Texas, and Seattle, Wash. The appointment-based test begins Feb. 23. For more information click on the link to the new release, above.
The IRS is warning return preparers and other tax professionals to be on guard against bogus emails making the rounds seeking updated personal or professional information that in reality are phishing schemes. Specifically, the bogus email asks tax professionals to update their IRS e-services portal information and Electronic Filing Identification Numbers (EFINs). The links that are provided in the bogus email to access IRS e-services appear to be a phishing scheme designed to capture your username and password. This email was not generated by the IRS e-services program. Disregard this email and do not click on the links provided. For more information go to IRS News Release IR-2015-31.
Tip of the Day
State tax refunds and income . . . Don't automatically include your state income tax refund you received last year on Line 10 of Form 1040. The amount you actually have to report could be less. There can be a number of reasons for the difference. First, if you didn't itemize in 2013, none of the refund is taxable. But there can be other reasons for less or none of the refund generating taxable income. If your itemized deductions were limited because your income was above the beginning of the phaseout amount, some of the refund may be nontaxable because you may not have received a deduction for part of the taxes. Second, if you owned the alternative minimum tax you may not have received a full benefit for your state income taxes. You should also make an adjustment for the amount you could have deducted as state and local general sales taxes on your return. There are some other reasons for a difference, but those are the more common ones. Your tax program should handle many of the differences, but most likely not without some input from you. See IRS Publications 17 and 525 for more information.
February 18, 2015
Deposits into your bank accounts can be considered as income by the IRS unless you can prove otherwise. In Susan Na a.k.a. Sung Hwa Na (T.C. Memo. 2015-21) the taxpayer made large deposits (more than a $1 million during the year at issue). The IRS claimed she had unreported income. The taxpayer testified that her employer instructed her to make certain deposits, from his sources including his business, into her accounts and to write certain checks from the accounts. She testified she did so to keep her job. She deposited funds from her employer's business into her account and traveled with him on gambling trips where she would withdraw funds from her accounts to use on her employer's gambling outings. The IRS found the taxpayer's explanation of the source of the deposits not credible. The Tax Court, on the other hand, believed the taxpayer's testimony. The Court noted that the evanescence showed she received little or no benefit from the funds, her accountant's testimony collaborated her claims, and the bank records revealed a striking pattern of matching deposits and withdrawals consistent with her story. The Court still found she had some unreported income, but left the calculation of the underpayment to the taxpayer and the IRS. Whether or not a substantial understatement penalty would be appropriate will depend on the taxpayer's liability. However, the Court found the taxpayer liable for the negligence penalty. She failed to maintain adequate books and records and did not maintain contemporaneous records of the funds received and paid out on behalf of her employer. She did not establish a formal trust relationship with the bank (informing them that all the funds were her's) or advise them she was using the accounts as trust accounts. Finally, she commingled her own funds with her employer's in the accounts, compounding the uncertainty by inadequate recordkeeping.
Tip of the Day
Net investment income tax . . . Many of the entries on Form 8960 are automatically completed by your software. Many, but not all. For example, your state and local income taxes deducted on Schedule A should automatically appear on line 9b of Form 8960. But most software will not automatically deduct any of those expenses. You'll have to enter the deductible amount. For example, your state income taxes total $30,000. You only have two sources of income--salary of $300,000 and rental income of $100,000. One-quarter ($100,000/$400,000) of the $30,000 of in income taxes should be allocable to your net investment income. Depending on your situation, the computations could be much more complex. And you may be able to deduct a portion of your miscellaneous itemized deductions. Another point, make sure your software correctly handles income from pass-through entities where you are nonpassive and rental income where you rent the property to your business or materially participate.
February 17, 2015
The House has passed America's Small Business Tax Relief Bill (H.R. 636). The bill would make permanent the higher expensing option of $500,000 in tangible personal property and software with a phaseout beginning at $2 million. The amounts would be adjusted for inflation.
Notice 2015-15 contains a proposed revenue procedure providing guidance to employers on employee consents used to support a claim for refund under Sec. 6402 and Reg. Sec. 31.6402(a)-2 for overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). The proposed revenue procedure clarifies that, in addition to providing the relevant name, address, and taxpayer identification number, a valid employee consent must identify the basis of the claim for refund and be signed by the employee under penalties of perjury. The proposed revenue procedure provides guidance as to what constitutes reasonable efforts to secure employee consent when a consent is not obtained.
Tip of the Day
NOL can't offset self-employment income . . . If you have an NOL carryforward from a prior tax year that NOL can't be used to directly offset self-employment income, even if the source of the NOL is the same. For example, in 2013 your sole proprietorship generated a net operating loss of $75,000. You elect to carry the loss forward to 2014. In 2014 you have a profit of $75,000 from the business. The $75,000 carryforward can offset your overall income (Line 21 of Form 1040), but you can't use it to offset the $75,000 of profit from the business that is subject to the self-employment tax. It seems inequitable, but that's the law. That's another reason why trying to level your income from year-to-year can save tax dollars.
February 13, 2015
As a result of a severe winter storm from December 9 to 12 certain areas of Vermont are eligible for disaster relief (FEMA-4207-DR). Taxpayers in the counties of Addison, Chittenden, Essex, Franklin, Lamoille, Orange, Orleans, Rutland, Washington, and Windsor who sustained losses may deduct them on their 2013 return.
A number of tax bills are in the works in Congress. One would strengthen 529 plans, another would make the deduction for state and local sales tax permanent, and another would make changes to the research and development credit.
Tip of the Day
Theft losses . . . You may be able to take a casualty loss (if it exceeds the $100 and 10% of AGILE threshold) for the theft of one or more items, but no deduction is allowed if the item is simply lost. Theft includes blackmail, burglary, embezzlement, extortion, larceny, and robbery. Theft also includes the taking of money or property through fraud or misrepresentation if it is illegal under state or local law. For example, Fred Flood uses the name of another licensed contracted and installs plumbing fixtures that are not to code. It costs you $12,000 to fix the problem. More than likely you have a theft loss.
February 12, 2015
The IRS is reminding taxpayers the Presidents Day holiday period typically marks one of the busiest weeks of the tax filing season for its phone lines. There are other alternatives to help taxpayers find answers to commonly asked tax questions. The IRS has several easy-to-use, online tools on IRS.gov. Taxpayers can check the status of their refund, request a copy of their tax transcript or get an answer to their tax questions around the clock.
In February 2011, the IRS began implementing the first of several initiatives to assist economically distressed taxpayers by offering viable collection alternatives to help resolve their delinquent balance due accounts. These initiatives are known as the Fresh Start Initiatives. Although the Fresh Start Initiatives helped many struggling taxpayers resolve their outstanding tax liabilities, if the potential risks are not fully mitigated, revenue collection could be jeopardized. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine the impact of the Fresh Start Initiatives in promoting tax compliance. TIGTA found the IRS’s implementation of the Fresh Start Initiatives provided several benefits to thousands of struggling taxpayers. For example, the number of Notices of Federal Tax Lien (NFTL) filed on taxpayers with assessed liabilities less than $10,000 decreased 60 percent, from 488,378 in Fiscal Year 2010 to 195,009 in Fiscal Year 2013. Many other taxpayers benefited from streamlined procedures for processing installment agreements and offers in compromise. In addition, penalties were not assessed on certain taxpayers who requested a filing extension. Although the Fresh Start Initiatives were generally implemented effectively, additional attention should be given in a few areas. For example, 524 taxpayers, who owed approximately $10.5 million, defaulted on their Direct Debit Installment Agreements after the IRS had withdrawn the NFTLs, yet the IRS did not file new NFTLs. In addition, the IRS has not fully assessed the revenue impact of filing fewer NFTLs. Performance measures may have helped identify potential problems and areas for improvement, but they were not established for all of the initiatives. To view the report, including the scope, methodology, and full IRS response, go to: www.treas.gov/tigta/auditreports/2015reports/201530005fr.html.
Tip of the Day
Nondeductible IRA contributions . . . If you're covered by a pension plan and your income exceeds the threshold, your ability to make deductible contributions is phased out. There is no income limit on nondeductible contributions (but the $5,500 limit and $1,000 catchup as well as the earned income requirements apply). There are pros and cons to making nondeductible contributions. But if you do, you must file Form 8606 to report them. If you fail to do so the full amount of the distribution will be taxable, rather than just the income portion. There's also a penalty for failure to file Form 8606.
February 11, 2015
Announcement 2015-8 (IRB 2015-09) addresses the application of the Court’s holding to claims for refund of employment taxes. In Quality Stores, Inc. 134 S.Ct. 1395 (2014), the Supreme Court held that the severance payments at issue in the case were wages subject to tax under the Federal Insurance Contributions Act (FICA). Under Rev. Rul. 90-72, supplemental unemployment compensation benefits that are linked to the receipt of state unemployment compensation and satisfy certain other requirements are excludable from wages for FICA, FUTA, and income tax withholding purposes, and are excludable from compensation for RRTA tax purposes.In Quality Stores, the parties agreed that the payments at issue did not satisfy the requirements for the narrow exclusion from FICA tax contained in Revenue Ruling 90-72. Accordingly, the Supreme Court did not address whether the exclusion from FICA taxes set forth in Rev. Rul. 90-72 for certain payments linked to state unemployment benefits is “consistent with the broad definition of wages under FICA.”
The IRS has published (IR-2015-26) it's list of the "Dirty Dozen" tax scams for 2015 and warning taxpayers about aggressive telephone scams continuing coast-to-coast during the early weeks of this year's filing season. The list includes repeaters from prior years but also includes offshore tax avoidance, fake charities, abusive tax shelters, falsifying income to claim credits, and excessive claims for fuel tax credits. Many of these scams are perpetrated in conjunction with a tax preparer. Chose a preparer carefully.
Tip of the Day
Capital loss in the year of death . . . A capital loss sustained by a decedent during his or her last tax year (or a carryover to that year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits still apply. The decedent's estate cannot deduct any of the loss or carry it over to following years.
Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536