Small Business Taxes & ManagementTM--Copyright 2018, A/N Group, Inc.
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December 14, 2018
NewsYou may be able to avoid penalties for failure to file, pay estimated tax, etc. if you can show reasonable cause. There aren't many, but medical reasons can be a valid one. In Mehdy Namakian (T.C. Memo. 2018-200) the taxpayer failed to timely file his Federal income tax returns and to make estimated tax payments for tax years 2005 through 2013 and had outstanding liabilities for five of those years. The taxpayer argued that he had reasonable cause for failing to timely file his returns for the years at issue because of stress he faced from his financial setbacks and the deaths of his mother-in-law and father-in-law. He also asserted that the uncertainty about the outcome of his Tax Court cases relating to his 2007 and 2008 tax years contributed to his failure to timely file his tax returns for 2011, 2012, and 2013. The Court noted that reasonable cause may exist if the taxpayer's or a family member's illness or incapacity prevents the taxpayer from filing his or her tax return, but not if the taxpayer is able to continue his or her business affairs despite the illness or incapacity. In addition, financial difficulties generally do not constitute reasonable cause for failure to file a return. The Court also noted that the taxpayer's pattern of chronic noncompliance—going back to at least 2005—in failing to file his returns on time weighs against a finding of reasonable cause.
You generally can't change accounting methods without IRS consent. And a change in accounting methods can be more subtle than going from the cash to accrual method or vice versa. In Thrasys, Inc. et al. (T.C. Memo. 2018-199) the company was in the business of developing software. During 2008 the company received, but did not report, a $15 million payment from a customer. It contended the payment was an advance payment, the taxation of which was properly deferred to 2009 under the deferral method of accounting permitted by Rev. Proc. 2004-34. The IRS argued that the taxpayer could not avail itself of the deferral method because adoption of that method would constitute an impermissible change in its method of accounting. The taxpayer argued that, because it did not deliver the first version of the program on time, it was in technical breach of the agreement at the end of 2008. Instead of treating the amount as deferred revenue, as it had done in earlier years, it put the amount on the balance sheet as a deposit with a corresponding other liability. The Court listed two reasons that there existed genuine disputes of material fact. First, as far as the record revealed, the company treated only one customer payment—the $15 million payment it received in 2008—as a “deposit” for book or Federal income tax purposes. That treatment appeared on only one tax return, namely, the taxpayer's Form 1120 for 2008. (On its Form 1120S for 2009 the company shifted the $15 million from the “deposit” category into the “deferred revenue” category.) A question of material fact existed as to whether the taxpayer's “deposit” treatment displayed the consistency required to constitute a method of accounting on the basis of which the company “regularly computed” its income. Second, a change in method of accounting does not include “a change in treatment resulting from a change in underlying facts.” The company treated the $15 million payment differently from the customer payments it had received during 2005-2007, and it did so in accordance with adjustments that an independent auditor had made to its 2008 financial statement. Because the company at yearend 2008 was in technical breach of its software development contract(s) with the customer, the auditor believed that the $15 million payment might have to be refunded and thus should be reflected on the company's financial statement as a customer “deposit” offset with a “deposit obligation.” The Court denied the IRS's motion for summary judgment.
Tip of the DayMissed issues . . . Seems that everything in life is more complicated these days and everyone is a specialist. It may be up to you to make sure that a professional doesn't miss something. You go to a lawyer to draft a purchase agreement for some property. He also helps with the loan agreement. He knows you use a CPA for your business accounting and tax work so he assumes you'll get the CPA's opinion on some of the terms in the loan agreement. But you assume the attorney is in charge and you don't have to consult another professional. That can be a mistake. You can't blame the attorney here. The reverse can also be true. The smart move would be to ask the attorney if you should be discussing any portion of the agreement with your CPA.
December 13, 2018
NewsIf you want to enter into an installment agreement with the IRS, you have to take positive action and be current on your tax filings. In The Community Law Firm, Inc. (T.C. Memo. 2018-198) the Court found the taxpayer did not provide financial or other information that would justify granting its request. Petitioner failed to participate in the CDP hearing and failed to participate meaningfully in the overall administrative process. In addition, the taxpayer was not current in its tax filing obligations for at least five calendar quartersd subsequent to the quarters at issue when the settlement officer made her determination.
The IRS will send notices to your last known address. They may pick up a change of address from a new address on a filed tax return, but that's not foolproof. The best approach is to file Form 8822, Change of Address (use Form 8822-B for business returns). In Ronald E. Davis (T.C. Memo. 2018-197) the taxpayer argued that the notice was not mailed to his last known address. The Tax Court noted that change of address information provided by the taxpayer to a third party (e.g., the post office) does not constitute clear and concise notification of a different address (even if the third party files information returns with the IRS that reflect that change). The only exception to this rule, inapplicable here, is where a taxpayer files a change of address with the USPS, and the USPS reports it to the IRS through the National Change of Address database. The Court held the notice was valid.
Tip of the DayHoliday gifts . . . If you want a deduction, they're limited to $25. Thus, if you give a customer a $40 bottle of wine, you can deduct only $25. That's not much in current times. But for customers, suppliers, etc. you may have other options. Dinner or a show around the holiday season for you and a customer isn't subject to the $25 rule. But only 50% is deductible. A holiday party for your employees and customers may be fully deductible, and help cement relationships.
December 12, 2018
NewsThe IRS, state tax agencies and the nation’s tax industry have joined together to warn small businesses to be on-guard against a growing wave of identity theft and W-2 scams. Small business identity theft is big business for identity thieves. Just like individuals, businesses may have their identities stolen and their sensitive information used to open credit card accounts or used to file fraudulent tax returns for bogus refunds. Employers also hold sensitive tax data on employees, such as Form W-2 data, which also is highly valued by identity thieves. Identity thieves have long made use of stolen Employer Identification Numbers (EINs) to create fake Forms W-2 that they would file with fraudulent individual tax returns. Fraudsters also used EINs to open new lines of credit or obtain credit cards. Now, they are using company names and EINs to file fraudulent returns. The IRS has identified an increase in the number of fraudulent Forms 1120, 1120S and 1041 as well as Schedules K-1. The fraudulent filings apply to partnerships as well as estate and trust forms. Businesses, partnerships and estate and trust filers should be alert to potential identity theft and contact the IRS if they experience any of these issues:
Employers are urged to put steps and protocols in place for the sharing of sensitive employee information such as Forms W-2. One example would be to have two people review any distribution of sensitive W-2 data or wire transfers. Another example would be to require a verbal confirmation before emailing W-2 data. Employers also are urged to educate their payroll or human resources departments about these scams. For more information go to IR-2018-243.
The IRS is reminding taxpayers who were age 70-1/2 or older in 2018 they must take a required minimum distribution from their IRAs and pension plans. An exception applies to retirees who reached age 70-1/2 in 2018. They can defer the distribution to April 1, 2019. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs. Roth IRAs don’t require distributions while the original owner is alive. RMDs also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans. But generally, employees still working don't have to take distributions from workplace retirement plans. Check IR-2018-248 for more information and links to additional resources.Tip of the Day Contract for professional, not just for company . . . If you're hiring a consulting firm, you generally do just that. If a professional working on your project leaves the company, you may be stuck with someone you don't have confidence in or, worse, can't work with. If you believe a certain individual is critical to the success of the job, consider a clause that allows you to back out of or otherwise modify the contract if he quits.
December 11, 2018
NewsNotice 2018-99, provides interim guidance for taxpayers to determine the amount of parking expenses for qualified transportation fringes (QTFs) that is nondeductible under Sec. 274(a)(4) and for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (UBTI) under Sec. 512(a)(7) attributable to the nondeductible parking expenses. Sections 274 and 512 were amended by the Tax Cuts and Jobs Act (2017) (the Act), effective for amounts paid or incurred after December 31, 2017. As amended by the Act, Sec. 274(a)(4) generally disallows a deduction for expenses with respect to QTFs provided by taxpayers to their employees, and Sec. 512(a)(7) generally provides that a tax-exempt organization’s UBTI is increased by the amount of the QTF expense that is nondeductible under Sec. 274. However, the Act does not address how to determine the amount of the QTF expense that is nondeductible or treated as an increase in UBTI.
Notice 2018-100 provides certain tax-exempt organizations a waiver of the addition to tax under Sec. 6655 for underpayment of estimated income tax payments required to be made on or before December 17, 2018 to the extent the underpayment of estimated tax results from the changes to the tax treatment of qualified transportation fringes. The IRS has posted Tax Reform Tax Tip 2018-190 to irs.gov. The tip provides a brief highlight of the changes made by the Tax Cuts and Jobs Act of 2017 to employee achievement awards.
Tip of the DayDon't put off billing . . . You may think that you're doing customers a favor by delaying billing, particularly for those customers you know are having financial difficulty. That may be poor reasoning. Most customers want to get the bill so they know the amount and can budget, even if they won't be able to pay immediately. It's also important to you should the customer declare bankruptcy.
December 10, 2018
NewsThe IRS has issued final regulations (T.D. 9843) on allocating costs to certain property produced or acquired for resale by a taxpayer. These final regulations: provide rules for the treatment of negative adjustments related to certain costs required to be capitalized to property produced or acquired for resale; provide a new simplified method of accounting for determining the additional costs allocable to property produced or acquired for resale; and redefine how certain types of costs are categorized for purposes of the simplified methods. These final regulations affect taxpayers that are producers or resellers of property that are required to capitalize costs to the property and that elect to allocate costs using a simplified method.
The IRS has issued Notice 2018-97 offering guidance on a recent tax law change that allows qualified employees of privately-held corporations to defer paying income tax, for up to five years, on the value of qualified stock options and restricted stock units (RSUs) granted to them by their employers. The tax law change was included in the 2017 Tax Cuts and Jobs Act (TCJA). In general, executives, highly-compensated officers and those owning one percent or more of the corporation’s stock cannot make the deferral election. Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax payable on the value of qualified stock may not be deferred. Notice 2018-97 offers initial guidance taxpayers can rely on until proposed regulations are issued and requests public comment on additional issues that should be addressed in those regulations.
Tip of the DayProperties in more than one state? . . . If you own properties in more than one state you should be able to prove your domicile. Otherwise you risk another state claiming you're a resident. For example, you have a home in Massachusetts, which you claim as your domicile, that's near one of your offices, but you have another home in Los Angeles where you have another office. Unless you keep a diary both states may claim you as a resident. You may be able to show otherwise without a diary by indirect means, but it could take more effort. The closer you are to being in a state 183 days (the threshold), the more important the diary can be. Talk to your tax advisor to see if this applies to you. And some cities, notably New York, have their own income tax. The same rule applies.
December 7, 2018
NewsRevenue Ruling 2018-32 (IRB 2018-51) provides the interest rates for underpayments and overpayments. The rates for interest determined under Section 6621 of the code for the calendar quarter beginning January 1, 2019, will be 6 percent for overpayments (5 percent in the case of a corporation), 6 percent for underpayments, and 8 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 3.5 percent. These rates are 1 percent higher than those for the fourth quarter of 2018.
Net real estate losses that are passive claimed by individuals are generally limited to $25,000--less if your modified adjusted gross income exceeds $100,000. But that limitation doesn't apply if you can show you're a real estate professional. Basically that means you have to spend more time in half your working time and more than 750 hours for the year in real estate trades or businesses. In Estate of Lydia Ramirez, Deceased, Rowena L. Ramirez, Special Administrator (T.C. Memo. 2018-196) the estate tried to reclassify the decedent's real estate activities as active. The Court found that the estate could not show that the decedent had spent the requisite hours working as a real estate professional. She was involved in other businesses and there was no contemporaneous diary of time spent on real estate. The only indication was the testimony of her daughter who did not live with her full time and who the Tax Court found not credible. Moreover, because the decendent had not elected to treat the rental properties as a single activity, she would have had to meet the test for each of them. The Court did find the estate not liable for the accuracy-related penalty because the IRS failed to prove they were approved by an IRS supervisor.
Tip of the DayPromotional items subject to sales tax? . . . It depends. The rules vary from state to state but often a company buys items to give to customers. For example, you buy t-shirts with the company name imprinted on them and give them to regular customers who come to your store. They get a t-shirt whether they purchase an item or not. In most cases you should be paying sales (or use) tax on the t-shirts. You also own a small theater in town that books rock bands. A special t-shirt is designed for each band and given free to all customers who buy a ticket to the concert. In this case the t-shirt is for resale and the selling price is included in the cost of the ticket. Check the rules in your state. The dollars can often by substantial. If there's no clear-cut guidance, write the state for a ruling.
December 6, 2018
NewsThe holiday season brings out not only shoppers but more email phishing scams. The IRS, state tax agencies, and the tax industry are warning of a surge of new sophisticated phishing scams. There were more phishing scams in 2018 as the IRS noted a 60 percent increase in bogus email schemes that seek to steal money or tax data. These schemes can endanger a taxpayer’s financial and tax data, allowing identity thieves a chance to try stealing a tax refund. In IR-2018-240 the IRS discussed the issue and provided tips that can help prevent getting stung. (Phishing emails and associated websites are getting much more sophisticated, making it harder to recognize a bogus email or site.)
While the IRS will show some sympathy to taxpayers who lose their records in a disaster, you'll still have to document the items lost, original cost, and current fair market value if only by indirect means. IRS Fact Sheet FS-2018-18 provides a number of tips on ways to do that. It's a good reference for taxpayers both before and after the disaster. There are also links to related IRS publications and other government agencies that can help.
Tip of the DayScan it . . . You may still like to work with paper documents, at least for some purposes, but they're a nuisance to archive. Keeping them in your home or office can take up space and can be a disaster if you have a fire, flood, etc. Storing in a secure location can be expensive. Scanning them can save space and provide for secure storage in multiple locations. You can fit a lot on a 1 terabyte backup drive. Scanners have become much cheaper. For less than $200 you can get a scanner that will handle 25 pages at a time, You could easily do 750 pages in an hour.
December 5, 2018
NewsNotice 2018-95 (IRB 2018-52) provides transition relief from the “once-in-always-in” (OIAI) condition for excluding part-time employees under Reg. Sec. 1.403(b) 5(b)(4)(iii)(B). Under the OIAI exclusion condition, for a Sec. 403(b) plan that excludes part-time employees from making elective deferrals, once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis that the employee is a part-time employee. In addition, in applying the OIAI exclusion condition for exclusion years after the transition relief ends, this notice provides a fresh-start opportunity for plans.
Tip of the DayGoing to appeals court . . . Court rules vary from state to state. If you take your case to Tax Court and lose, you can get a second chance by appealing to the U.S. Court of Appeals (that's assuming you didn't use the small case option in Tax Court). But the rules in the Court of Appeals are different than in the Tax Court. The Tax Court's legal determinations are reviewed de novo; its factual findings and “disposition of mixed questions of law and fact” are reviewed for clear error. The latter means that there has to be a clear error on the part of the lower court. In other words, if you lost in Tax Court you'll probably lose in the Court of Appeals. Before going to Appeals you should get a second opinion on your case. But if you haven't gotten to the lower court, make sure you've prepared as well as possible. While you can get a second shot, it may be harder to score.
December 4, 2018
NewsThe IRS has again updated the notices on a number of recent natural disasters including Hurricane Michael, Hurricane Florence, and the California wildfires. Go to Tax Relief in Disaster Situations for additional information.
Generally, distributions from a IRA before reaching age 59-1/2 are subject to a 10-percent penalty. There are a number of exceptions, one is if the IRA owner becomes disabled. In Kathryn J. Gillette and Raif Szczepanski (T.C. Memo. 2018-195) the taxpayer took distributions from her IRA and claimed the distributions were subject to the disability exception. The Court noted that a taxpayer is disabled if he or she is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” An individual's substantial gainful activity “is the activity, or a comparable activity, in which the individual customarily engaged prior to the arising of the disability”. But an impairment that is remediable does not constitute a disability for this purpose. An impairment is remediable if the taxpayer can treat the impairment “with reasonable effort and safety to himself”, and where the taxpayer “will not be prevented by the impairment from engaging in his customary or any comparable substantial gainful activity.” The Court held that the taxpayer did not qualify for the exception.
Tip of the DayPlaying the market . . . Many individuals who invest in the market would like to boast about making a killing--buying Madison, Inc. at $5 and selling out 5 years later for $100 a share. Does it happen? Yes, but on a speculative investment you've got a good chance you'll turn that $5 into $1. Got a hot tip? You may not fare much better. There is an approach you can try. Keep the bulk of your money in mutual funds, ETFs, or a portfolio of more reserved stocks. Take 5 percent of your investment funds and use that to satisfy your urge to play the speculative investments.
December 3, 2018
NewsYou can't take a deduction for business expenses associated with the sale of illegal substances and marijuana is still illegal under federal law. That's true even if the sale is legal under state law or the business is a medical marijuana dispensaryh. In Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center (151 T.C. No. 11) a California medical-marijuana dispensary deducted Section 162 business expenses and adjusted for indirect COGS per the Section 263A UNICAP rules for producers. The IRS determined that the taxpayer's sole trade or business was trafficking in a controlled substance and that Section 280E prevented it from deducting business expenses. The IRS also determined that the taxpayer had to calculate COGS using the Section 471 regulations for resellers and was liable for accuracy-related penalties. The taxpayer argued that Section 280E didn't apply to it, that it was a producer, and that a dismissed civil-forfeiture action precluded a deficiency action. The Tax Court held that the Government's dismissal with prejudice of a civil-forfeiture action against the taxpayer does not bar deficiency determinations. It also held that Section 280E prevents the taxpayer from deducting ordinary and necessary business expenses and during the years at issue the taxpayer was engaged in only one trade or business, which was trafficking in a controlled substance. Finally, the Court held the taxpayer must adjust for COGS according to the Section 471 regulations for resellers.
Tip of the DayLong-term contracts risky . . . Years ago you could sign a long-term contract and still sleep at night if you did your due deligence. In most businesses that's no longer true. Largely as a result of technology things are changing much more quickly. And we're not talking about just cell phones and other electronic technology. Consider the electric utilities. Change used to come at a snail's pace. But not 10 years ago coal was an economic and viable fuel option. The economics of using coal have changed to the point where utilities are shutting or converting relatively young plants. Transportation costs have risen to the point were it makes more sense for some manufactures to have smaller plants near their markets to save shipping costs. Some garbage carters were making a worthwhile profit on selling our recyclables to China. In one stroke China has changed the economics such that the carters have to pay to dispose of the items. In some cases the carters signed 25-year contracts with municipalities. Consider carefully before signing a long-term contract. Can you get caught in a change in technology, political climate, demographics, etc.? Make sure you have an out in the contract.
November 30, 2018
NewsIR-2018-236 describes the proposed hardship withdrawal regulations to provide relief for disaster victims. The preamble to the proposed regulations will allow for plan loans and hardship distributions to victims of Hurricane Michael and Hurricane Florence and members of their families.
Notice 2018-94 (IRB 2018-51) extends the due dates for certain 2018 information reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Section 6055 and for applicable large employers under Section 6056. Specifically, this notice extends the due date for furnishing to individuals the 2018 Form 1095-B, Health Coverage, and the 2017 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2019, to March 4, 2019. This notice also extends transitional good-faith relief from Section 6721 and 6722 penalties to the 2018 information reporting requirements under Sections 6055 and 6056.
Revenue Procedure 2018-60 (IRB 2018-51) provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue under Sec. 446 and Sec. 1.446-1(e) of the Regulations to change a method of accounting to comply with Sec. 451(b), as amended by section 13221 of the Tax Cuts and Jobs Act, relating to the timing of the recognition of income for taxable years beginning after December 31, 2017. This revenue procedure also provides procedures for certain qualifying taxpayers to make a method change to comply with Sec. 451(b) without filing a Form 3115, Application for Change in Accounting Method. This revenue procedure modifies Rev. Proc. 2018-31.
Tip of the DayDebt load increasing . . . The economic resurgence following the Great Recession has improved the fate of many businesses, but it's also brought more debt. While the debt load isn't nearly as bad as that in the housing and real estate markets at the peak of those sectors, it has begun to be disturbing to more than a few economists. Handled properly debt can allow a business to grow faster and allow it flexibility it might not otherwise have. But there's no question that too much debt has dragged more than one business under. Before undertaking new debt make sure you have the cash flow available to make the monthly payments, with a generous cushion. Be aware that interest rates are rising and many loans (other than real estate or equipment financing) carry a variable interest rate. Talk to your accountant or financial advisor as to the proper amount of debt for your business.
November 29, 2018
NewsThere's a tax bill in the House containing a range of provisions including technical corrections to the TCJA passed last December, year-end extenders, relief for victims of several natural disasters, some provisions Republicans wanted in their "Tax Reform 2.0" package, and IRS reform. The bill is contains both Republican initiatives and bipartisan provisions. Extenders include a number of energy provisions including the credit for nonbusiness energy property, the income exclusion for qualified principal residence interest, and the deduction for qualified tuitiion and related expenses.
The IRS has issued proposed regulations (REG-105600-18) on foreign tax credits for businesses and individuals. The 2017 Tax Cuts and Jobs Act (TCJA) changed the way the U.S. taxes foreign activities. The TCJA also modified the foreign tax credit rules, which allow U.S. taxpayers to offset their taxes by the amount of foreign income taxes paid or accrued, in several important ways to reflect the new international tax rules. These changes include repeal of rules for computing deemed-paid foreign tax credits on dividends on the basis of foreign subsidiaries’ cumulative pools of earnings and foreign taxes, and the addition of two separate foreign tax credit limitation categories for foreign branch income and amounts includible under the new Global Intangible Low-Taxed Income provisions. The TCJA also modified how taxable income is calculated for the foreign tax credit limitation by disregarding certain expenses related to income eligible for the dividends-received deduction and repealing the use of the fair market value method for allocating interest expense. The new foreign tax credit rules apply to 2018 and future years.
The IRS and its Security Summit partners are warning (IRS warns of "Tax Transcript" email scam; dangers to business networks) of a surge in fraudulent emails using the lure of "tax transcripts" to trick unwary recipients into downloading malware. In a typical case, the scammer takes on the identity of a specific bank or financial institution to trick an email recipient into opening an infected document. In the past few weeks, scammers have sent email from what appears to be "IRS Online." The email includes an attachment labeled "Tax Account Transcript."
Tip of the DayLoss of miscellaneous itemized deductions . . . Because of the 2 percent floor, many taxpayers either couldn't benefit from being able to deduct miscellaneous itemized deductions. For example, if your income was $100,000, those expenses would have to break $2,000 before you'd get a benefit. Nonetheless, more than a few taxpayers will feel the impact of this loss from the new law. Losers include taxpayers who incur employee business expenses, employees who have to purchase their own uniforms and take continuing education courses, individuals with high investment expenses, etc. Taxpayers who's business is deemed a not-for-profit activity by the IRS will still have to report the income, but won't be able to deduct the associated expenses.
November 28, 2018
NewsIn Rev. Proc. 2018-59 (IRB 2018-50) the IRS is providing additional guidance on the limitation on the deduction for business interest and providing a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business under Section 163(j)(7)(B).
In Jeffrey D. Gregory (T.C. Memo. 2018-192) the IRS filed a notice of Federal tax lien to secure the collection of an unpaid liability shown on the taxpayer's Federal income tax return for 2005 and for 2009. The taxpayer challenged the validity of the IRS's assessment of a deficiency for 2009 because of an alleged failure to mail him a notice of deficiency. The Tax Court held that a “reprint” of a notice of deficiency for the taxpayer's 2009 taxable year evidences the creation of the notice before assessment, even though the reprint was prepared more than two years after the alleged mailing of the original notice and omitted or misstated information that would have appeared on any notice actually mailed. The Court also held a certified mail list was sufficient to evidence the mailing of a notice of deficiency and the IRS need not use an official U.S. Postal Service form and that a valid notice of deficiency need not comply with the definition of that term provided in the Internal Revenue Manual and thus need not include all of the information listed in that definition. The Court also held that omission from a notice of deficiency of the last day to file a timely petition for redetermination does not invalidate the notice. Finally, the Court held that a technical services territory manager has authority to sign and issue a notice .
Tip of the DayFinancing help from a local government? . . . You've seen the deals big companies can make in getting financing, tax breaks, breaks on electric service, help in staffing, etc. to locate their business in a community. Small businesses may be able to get help too. It depends on how much clout you have, and that depends on a number of factors. You'll stand a better chance if the community needs a business (e.g., an important employer just closed), your business is attractive (clean manufacturing, distribution, high-tech), you bring new jobs (particularly higher paying), you can use or rehab an existing structure, etc. The availability of assistance varies widely. Some communities have more money to spend than others, some won't help certain business categories. But it doesn't hurt to shop around. You could get a good deal.
November 27, 2018
NewsNotice 2018-92 relates to the Tax Cut and Jobs Act changes to Sections 3402 and 3405, and the IRS’ and Treasury Department’s decision to delay an overhaul of the Form W-4 from 2019 to 2020. This notice provides interim guidance for 2019 on income tax withholding, requests comments on certain withholding procedures, and indicates that regulations are planned to update the withholding regulations to reflect changes made by the TCJA. Specifically, the notice (1) announces that the 2019 Form W-4 will be similar to the 2018 Form W-4, (2) addresses new TCJA “withholding allowance” terminology, (3) continues until April 30, 2019 Notice 2018-14’s temporary suspension of the requirement to furnish new Forms W-4 within 10 days for changes resulting solely from the TCJA, (4) provides that, for 2019, the default rule when an employee fails to furnish a Form W-4 will continue to be single with zero withholding allowances, (5) allows taxpayers to take into account the qualified business income deduction under section 199A to reduce withholding under Section 3402(m), (6) announces that the IRS and Treasury intend to update the regulations under section 3402 to explicitly allow taxpayers to use the online withholding calculator or Publication 505, Tax Withholding and Estimated Tax, in lieu of the worksheets to Form W-4, (7) requests comments on alternative withholding methods under Section 3402(h) and announces that the IRS intends to eliminate the combined income tax withholding and employee FICA tax withholding tables under Treas. Reg. Sec. 31.3402(h)(4)-1(b), (8) modifies notification requirements for the withholding compliance program, and (9) provides that, for 2019, withholding on annuities or similar periodic payments where no withholding certificate is in effect is based on treating the payee as a married individual claiming 3 withholding allowances under Sec. 3405(a)(4).
The IRS has issued proposed regulations for a provision of the Tax Cuts and Jobs Act, which limits the business interest expense deduction for certain taxpayers. Certain small businesses whose gross receipts are $25 million or less and certain trades or businesses are not subject to the limits under this provision. For tax years beginning after Dec. 31, 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30 percent of adjusted taxable income and floor plan financing interest. Taxpayers will use new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report their deduction and the amount of disallowed business interest expense to carry forward to the next tax year. This limit does not apply to taxpayers whose average annual gross receipts are $25 million or less for the three prior tax years. This amount will be adjusted annually for inflation starting in 2019. Other exclusions from the limit are certain trades or businesses, including performing services as an employee, electing real property trades or businesses, electing farming businesses and certain regulated public utilities. Taxpayers must elect to exempt a real property trade or business or a farming business from this limit.
the IRS has announced (IR-2018-229) that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The IRS issued proposed regulations (REG-106706-18) which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA). As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025. To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.
Tip of the DayHome equity loans dead? . . . You can no longer deduct the interest on a home equity loan or the interest on principal that exceeds the original amount on a refinanced home mortgage. Interest on amounts borrowed for home improvements such as adding a garage still qualify, but not if the principal is used for other purposes such as purchasing a new car. But that doesn't necessarily mean you shouldn't tap your home for funds. Borrowing at, say 4-1/2 percent, on your home is a lot cheaper than a personal loan at 9 percent. It may even make sense to pay off credit card debt that could be at 15 to 29 percent. Borrowing for your business can make sense too, since interest on such a loan would be tax deductible if you structure it properly. Talk to your accountant or financial advisor.
November 26, 2018
NewsIn Estate of Clyde W. Turner, Sr., Deceased, W. Barclay Rushton, Executor (151 T.C. No. 10) the decedent (D) transferred property to a family limited partnership (FLP) in exchange for general and limited partnership interests and then transferred portions of his limited partnership interest as gifts during his lifetime. In Estate of Turner v. Commissioner, T.C. Memo. 2011-209, the Tax Court held that the inter vivos transfer of property to the FLP was subject to Sec. 2036. In Estate of Turner v. Commissioner, 138 T.C. 306 (2012), the Court held that D's estate was not entitled to a marital deduction with respect to the value of certain property included in D's gross estate under Sec. 2036 because the property was the subject of lifetime gifts and did not pass to D's surviving spouse. Under Sec. 2036 the value of the property transferred to the FLP was included in D's gross estate and resulted in Federal estate and State death tax liabilities. D's estate's liability for Federal estate and State death taxes arose solely because of the Sec. 2036 inclusion. The IRS filed computations and amended computations for entry of decision pursuant to Rule 155, Tax Court Rules of Practice and Procedure. D's estate objected. The parties disagreed as to (1) whether D's estate must reduce the Sec. 2056 marital deduction by the amounts of the Federal estate and State death taxes owed that the IRS claimed must be paid from estate assets passing to the surviving spouse (marital deduction property) and (2) whether D's estate may increase the marital deduction by postdeath income that was not included in the gross estate but was generated by marital deduction property. The Tax Court held that D's estate was not required to reduce the marital deduction by the amounts of the Federal estate and State death taxes it owed because (1) those taxes are attributable solely to the value of property included in the gross estate under Sec. 2036, (2) the executor has a right under Sec. 2207B to recover from the beneficiaries who received the property during D's lifetime an amount equal to the Federal estate and State death taxes plus interest attributable to those transfers, and (3) the executor must exercise the right of recovery under Sec. 2207B to prevent the marital deduction property from bearing D's estate's tax burden contrary to D's intent. The Court also held the estate may not increase the marital deduction by the amount of postdeath income generated by the marital deduction property.
Tip of the DayRequired distributions from pension plans . . . Most taxpayers know about the requirement to take a required minimum distribution from an IRA once they reach age 70-1/2. There's a similar requirement for regular pension plans sponsored by your employer. But there are some differences. First, you can delay taking a distribution if you're still working. You only have to start on retirement (afer reaching 70-1/2). There's an exception to the rule for employees who own more than 5 percent of the stock or more than 5 percent of the capital or profits interest in the business. They can't delay the start. Second, in the case of IRAs, if you have multiple accounts, you can generally aggregate the balance in the accounts and take the entire required distribution out of one account or spread the distribution in any way you choose. For pension plans, you would have to compute and take the required minimum distribution out of each account. Check with your bank or broker for help.
November 23, 2018
NewsNotice 2018-91 (IRB 2018-50) contains the Required Amendments List for 2018 (2018 RA List). Section 5 of Rev. Proc. 2016-37, provides that, in the case of an individually designed plan, the remedial amendment period for a disqualifying provision arising as a result of a change in qualification requirements generally is extended to the end of the second calendar year that begins after the issuance of the Required Amendments List (RA List) in which the change in qualification requirements appears. There are no entries listing changes in qualification requirements on the 2018 RA List.
The IRS has issued FAQs on qualified research expenses that supplement the information contained in the Large Business & International (LB&I) Directive “Guidance for Allowance of the Credit for Increasing Research Activities under IRC Section 41 for Taxpayers that Expense Research and Development Costs on their Financial Statements pursuant to ASC 730” (Directive), signed on September 11, 2017. The questions and answers contained in these FAQs apply solely to the use of the Directive. Further, the intent of this document is to clarify the methodology followed in the Directive and the costs allowed within.
November 21, 2018
NewsRevenue Procedure 2018-58 updates Revenue Procedure 2007-56, providing clear guidance with regard to time-sensitive acts that may be postponed for taxpayers affected by a federally-declared disaster, a terroristic or military action, or individuals serving in a combat zone. The list of acts in the revenue procedure supplements the list of postponed acts in Section 7508(a)(1) of the Code and Reg. Sec. 7508A-1(c)(1)(vii). This revenue procedure does not, by itself, provide any postponements under Section 7508A. In order for taxpayers to be entitled to a postponement of any act listed in this revenue procedure, the Internal Revenue Service (IRS) generally will publish a notice or issue other guidance (including an IRS News Release) providing relief with respect to a federally declared disaster, or a terroristic or military action.
Notice 2018-90 provides that transition relief in Rev. Rul. 2018-17 (Withholding and Reporting With Respect to Payments from IRAs to State Unclaimed Property Funds) is extended so that a person will not be treated as failing to comply with the withholding and reporting requirements described in Rev. Rul. 2018-17 with respect to payments made before the earlier of January 1, 2020, or the date it becomes reasonably practicable for the person to comply with those requirements. Under the facts presented in Rev. Rul. 2018-17, payments from an IRA to a State unclaimed property fund are subject to federal income tax withholding and reporting. However, Rev. Rul. 2018-17 included the following transition relief: “A person will not be treated as failing to comply with the withholding and reporting requirements described in this revenue ruling with respect to payments made before the earlier of January 1, 2019, or the date it becomes reasonably practicable for the person to comply with those requirements.”
A U.S. Residency Certificate is an important tool that resident individuals and corporations can use to alleviate their foreign withholding tax. The IRS has announced that eginning December 1, the user fee for non-individual taxpayers who file Form 8802, Application for United States Residency Certification, will increase from $85 to a flat fee of $185 per application. This increase will not affect individual taxpayer applications, which will remain $85 each.
Tip of the DayRead the contract . . . You may have a contract with a vendor, service provider, etc. It's not unusual for the vendor to be able to assign the contract, for the contract to have an automatic renewal clause, an onerous fee for late payment, etc. Many of the clauses are boilerplate and standard industry practice. There may be no reason to negotiate most of those points. But even a quick read could turn up an automatic renewal clause or a provision that allows the supplier to suspend delivery for any reason. Or you may not want him to substitute the source of an item (e.g., you need a certain percentage of your final product to be made in the U.S.). Or allow another contractor to fulfill the job. Make sure you're protected on any critical points. And don't assume the current contract you're signing is the same as the last one.
November 20, 2018
NewsNotice 2018-88, is intended to initiate and inform the process of developing guidance under Sections 4980H and 105(h) that would address these issues, and requests comments on potential approaches developed by the Treasury Department and the IRS, so employers understand how to structure integrated HRAs to avoid assessable payments (Section 4980H) and potential loss of the exclusion from income for employer-provided health benefits (Section 105(h)). Notice 2018-88 is related to a notice of proposed rulemaking (REG-135724-17) issued on October 23, 2018 that, in relevant part, would (a) remove the current prohibition on integrating HRAs with individual health insurance coverage (integrated HRAs) if certain conditions are met, allowing employers to offer employees integrated HRAs in lieu of providing more traditional group health plans (the proposed integration regulations being proposed by the Treasury Department, DOL and HHS); and (b) address when individuals offered coverage under an integrated HRA who are otherwise eligible for a premium tax credit (PTC) will remain eligible for the PTC (proposed PTC regulations being proposed by the Treasury Department and IRS). The proposed integration regulations and the proposed PTC regulations would raise issues concerning the application of Section 4980H (the employer shared responsibility provisions) and Section 105(h) (addressing discriminatory self-insured group health plans) to employers offering integrated HRAs and their employees.
Identity thieves continue to conduct more sophisticated fraud schemes using stolen tax information from employers and tax return preparers to file fraudulent returns that often mirror the actual taxpayer’s return. To assist taxpayers and help protect them from tax-related identity theft, the IRS must distinguish the identity thieves’ tax returns from returns filed by the taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to assess the effectiveness of IRS assistance to victims of external data breaches. TIGTA found that in response to the increasing number of data breaches, the IRS has taken many actions to inform external stakeholders on how to protect taxpayer information as well as actions to take if a data breach occurs. For example, the IRS developed and released tax tips, alerts, and news releases on its public website to educate stakeholders and the public on safeguarding taxpayer information and actions they should take if their systems have a data breach. For Calendar Year 2017, the IRS’s Return Integrity and Compliance Services (RICS) organization recorded 730 external data breaches on its Incident Management Tracker Matrix. However, our review identified that RICS analysts did not record and monitor 89 data breaches of external entities that were reported to the IRS. For 70 of these incidents, the RICS analysts did not request the external entity to provide the IRS with a list of stolen client Taxpayer Identification Numbers (TIN). The analysts should have also recorded these incidents on the tracker. In another four data breaches, the external entity declined to provide a TIN list. For these breaches, RICS analysts did not attempt to create a list of stolen TINs as required. In addition, the external entity provided a TIN list for 15 data breaches but the RICS analysts did not record the incidents on the Incident Management Tracker Matrix. As a result, 11,406 Social Security Numbers associated with these breaches were not added to the IRS’s Dynamic Selection List (DSL) to protect taxpayers from tax-related identity theft. For 79 of these Social Security Numbers, the taxpayers already experienced the burden of an identity thief using their Social Security Number to file a fraudulent Tax Year 2016 or 2017 return. For the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201940010fr.pdf.
Tip of the DayLike-kind exchanges . . . Beginning with exchanges after December 31, 2017 deferring recognition of gain using a like-kind exchange will only work for real estate. Trade in that flat bed truck for a new one and you'll have to recognize any gain. For example, you bought the truck for $50,000 five years ago and it's now fully depreciated. The dealer allows you $30,000 for the truck. The $30,000 is depreciation recapture income. You'll be buying another truck for the business costing $45,000. Under the new law you can expense the entire amount in the year of purchase. The $45,000 deduction offsets all the income and gives you another $15,000 of deduction. But that's only true if both transactions take place in the same year. And the full amount of income is only offset if you use Sec. 179 expensing or take the bonus depreciation. If you elect out of bonus depreciation or elect a slower depreciation method, you could be skewing your income. Talk to your tax advisor before making any signficant year-end asset transactions.
November 19, 2018
NewsHow long do you have to keep records? Most taxpayers will answer three years. Actually it's three years from the date of filing the tax return. But there are a number of exceptions to the rule. Records substantiating basis in property should be retained until at least three years from the filing date of the return showing the sale of the property. In Richard A. Forde (US. Court of Appeals, Fourth Circuit) the taxpayer bought for $835,000 an old house which he demolished, building a 16,000 square foot house one the property while living in the guesthouse. He then proceeded to renovate the guest house. As a result of financial difficulties, the taxpayer was forced to "sell" the property in a sham transaction for a stipulated price of some $3.9 million. The IRS used that amount as the selling price. The return was filed nine years late and the taxpayer could only substantiate the purchase price of the old house and a small amount (compared to the selling price) of the construction costs and other expenses as his basis in the property. The Court did not accept other evidence such as the payoff of mechanic's liens as evidence of payment.
Tip of the DayFlexible spending account deadlines . . . If your employer has a flexible spending account (FSA) plan, you need to decide on how much to contribute to the plan before the beginning of the plan year. In most cases plan years are on a calendar-year basis. That means you have to make your decision before the end of the year. There's no extension on the deadline. You usually have the option to change during the year if there's a change in your situation, such as a birth in the family. Flexible spending accounts let you pay for health care with pre-tax dollars, getting more bang for your buck.
November 16, 2018
NewsThe IRS has announced the tax year 2019 inflation adjustments for some 60 tax provisions. That includes the tax rate brackets, the standard deduction, the estate tax exclusion, tax penalties, the dollar amounts for the limitations on medicial savings accounts, the thresholds for maximum capital gains tax rates, and eligible long-term care premiums. For a copy of the revenue procedure, go to Revenue Procedure 2018-57.
The IRS has updated the notice related to the California wildfires that began on November 8, 2018. For additional information go to Tax relief for victims of November 8 wildfires in California. The IRS has also updated the notice for victims of Hurricane Florence. Go to Help for Victims of Hurricane Florence.
Tip of the DayRebates taxable? . . . It all depends. If you purchase a car solely for personal use and receive a rebate from the dealer or manufacturer, the amount isn't taxable. The same would be true for a rebate on your electric bill. On the other hand, if you got a tax benefit for the original payment, the rebate is probably taxable. For example, you deducted your real estate taxes on your 2018 individual tax return and got a full benefit for the deduction. In mid-2019 you received a rebate of $276. That amount is taxable income on your 2019 return. If you receive the rebate in the same year you pay the tax, the general rule is to simply offset the two amounts. If you took the standard deduction in 2018, the rebate would not be income in 2019 (you got no tax benefit). There are some situations that can be trickier. The same rules apply to medical expenses and similar items. IRS Publication 525 has more information.
November 15, 2018
NewsSubstantiation is often the deciding factor in whether a taxpayer is able to claim a deduction for an expense. In Max Sutherland and Eric P. Decker (T.C. Memo. 2018-186) the taxpayers failed that test with respect to unreimbursed employee business expenses, job search expenses, and medical expenses. The Court allowed a deduction with respect to some job search expenses were the Court found a relationship between the expenses and his job search. However, the Court found no such relationship with respect to other expenses including meals, travel, and entertainment. Rather, the Court found many of the expenses were personal in nature. The Court found that the taxpayer could have been reimbursed for his employee business expenses. Finally, the Court noted that the taxpayer kept no trvel log or diary of the trips to the doctor or pharmacy and disallowed those medical expenses.
In Craig Douglas Hoglund and Christine Joan Hoglund (T.C. Memo. 2018-185) the Tax Court held that the Appeals Officer did not abuse her discretion when she sustained the proposed levy. The taxpayers did not participate in the hearing and did not challenge their tax liability. In addition, the taxpayers provided no collection alternatives and failed to provide the requested financial information. At the Collection Due Process hearing they did raise their purported claim for damages under Section 7433 articulated in their administrative claim letter.
Tip of the DayNonresident partners or shareholders . . . Does your S corporation or partnership (or LLC) have nonresident partners? In the past, that shareholder or partner would have to file a nonresident income tax return in that state. Often, the individual failed to do so. Many states have changed their rules requiring the S corporation or partnership to file a composite return, essentially paying the tax for the owner, or the S corporation or partnership could be required to withhold and remit estimated taxes equal to the amount for which the individual would be liable. About half the states have such a requirement. Make sure you're compliant.
Copyright 2018 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