This Page Contains Various Tax Tips and Notes – Scroll Down for Articles
Tax Cuts & Jobs Act – Qualified Business Income Deduction – Update January 30, 2018
The Tax Cuts and Jobs Act includes a significant new tax deduction taking effect in 2018. It should provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income.
The deduction is generally equal to 20% of your “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U. S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.
The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.
Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
These rules involve “thresholds,” i.e. taxable income of over $157,500 ($315,000 for joint filers). If your taxable income is at least $50,000 above the threshold, i.e., it is at least $207,500 ($157,500 + $50,000), all of the net income from a specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, the exclusion from QBI of income from specified service trades or businesses is phased in. Specified service trades or businesses are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Additionally, for taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element. Here’s how it works: If your taxable income is at least $207,500 ($415,000 for joint filers), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. If you wish to work through the mechanics of the deduction with me, with particular attention to the impact it can have on your specific situation, please give me a call.
Tax Cuts & Jobs Act – Update January 4, 2018
On December 22, 2017, President Trump signed the Tax Cut and Jobs Act (the Act). It is the most comprehensive tax “reform” since the 1986 Tax Act.
The Act makes significant changes to both individual and business taxation and the provisions are complex, confusing, and inter-connected. At this early date (January 4, 2018), the accounting profession is just starting to come to grips with the ramifications of the law and how it will affect clients in 2017, 2018, and later years.
During my professional career, I remember the 1976, 1981, and 1986 tax acts in addition to this one. None of the previous acts had as much wide-spread media mis-information as this one. Virtually every one of the scare tactic predictions are NOT included in the actual act. One colleague (a nationally known tax educator and speaker) sampled 20 of his clients and found that, in all cases, the taxpayers paid less tax under the new act than the existing 2017 tax laws.
That being said, one of the certainties of the Act is that it is complex. That complexity makes generalizations impossible. Each individual must apply the new law to their unique circumstances to determine how it will affect them. The good news is that it is early in 2018 and we all have time to understand the changes to the laws and how to legally apply those changes to benefit our clients.
Unless you have simplest return, seeking the advice of a tax professional is needed. The Act is so complex that the simple “online interview” and “check the box” preparation method used by various off-the-shelf tax preparation softwares is likely to lead to an unexpected result. In one interesting 2017 tax court case (Bulakites TC Memo 2017-79), the taxpayer argued that he followed the Turbo Tax instructions to prepare his return and, therefore, he used due diligence and should have the penalties caused by his errors abated. The judge had no patience for this argument and the taxpayer ended up paying both the penalties and court costs.
This is the first of several updates that will explain the various provisions of the Act. It gives an overview of the Act as it applies to individuals. Each of these topics will be expanded as time goes on.
Tax Rates & Brackets
The tax rates are effective starting in 2018 (tax returns filed by April 15, 2019 have been lowered and the brackets expanded. The net effect is that a larger proportion of taxable income will be taxed at lower rates.
The standard deductions for 2018 have been almost doubled over the amount in 2017 ($12K for single and $24K for married couples filing joint returns). Based on this a larger proportion of taxpayers will be able to use the standard deduction. Except for those taxpayers with significant itemized deductions, this change will lower taxable income.
Itemized Deductions & Charitable Contributions
Many itemized deductions have been repealed and others changed. Since charitable contributions have been subject to so much media mis-information, I will talk about them first. Under current law (2017), taxpayers cannot (generally) deduct charitable contributions in excess of 50% of their adjusted gross income. Starting in 2018, that limit is increased to 60%. That is an increase of the allowed deduction.
The confusion is caused by the increased standard deduction. Taxpayers who make moderate charitable contributions AND who used itemized deductions in 2017 may find that the increased standard deduction in 2018 is more advantageous. They will not deduct their contributions as part of their itemized deductions because using the standard deduction will reduce their taxes overall. Taxpayers that continue to itemize will still be able to deduct charitable contributions.
The floor (that amount that medical deductions needs to exceed to lower taxable income) has been reduced back to 7.5%. This will increase the medical deduction for all taxpayers who itemize.
Mortgage interest is still deductible for first mortgages of $750,000 or less but the $100,000 home equity loan deduction has been repealed. This is a planning opportunity for 2018.
State and Local Income and Property Taxes
The income and property tax deduction is limited to $10,000. The effects of this provision on taxable income, too, must be considered in light of the increased standard deduction. Each individual needs to see how this change will affect their tax return.
Miscellaneous Itemized Deductions
This deduction, which very few of our clients could use anyway, has been repealed for 2018 and later years.
The personal exemption has been repealed. It would appear that this repeal hurts young families with many children. As with all of this Act, that is too simple an answer. Both the increased standard deduction (above) and the increased Child Credit (below) will offset the loss of personal exemptions.
For 2017, the child credit (not a deduction but a reduction in the amount of tax) was $1,000. For 2018, that amount is doubled to $2,000. To see how this will work (using estimated amounts and round numbers), presume we have a married couple with 2 children for both 2017 & 2018. For both years, they use the standard deduction.
For 2018, they will lose their personal exemptions (4K x 4) for a $16K increase in taxable income. However, at the same time, their standard deduction increased by $12K. At this point, their taxable income has increased $4K.
If they were in the 25% tax bracket in 2017, that increased taxable income would result in an increase in tax of $1,000 (25% of $4K). However, for 2018, they would have an increased child credit of $2,000 ($1,000 for each child). When all the dust settles, their tax is reduced in 2018 by $1,000.
Contrary to many media reports the HOPE and Lifetime learning Credits were not repealed.
Starting in 2018 alimony paid is no longer deductible and, at the same time, alimony received is no longer taxable. Since both the payer and recipient are treated equally, this provision seems fair to us.
New Qualified Business Income Deduction (QBID)
Starting in 2018, individual taxpayers who receive “pass-through income” will be able to take a 20% of pass-through income deduction.
This deduction will be the subject of a future update. It is complicated and limited by the amount of income, wages paid, and equipment used. In spite of the complication, it will benefit many small business owners particularly those who operate family businesses.
This short update covers many of the provisions of the Act that have received the most attention. As weeks go by, we will focus more deeply on these and other provisions.
Tax Reform – President’s Tax Plan – Update – 5-25-17
We are beginning to get some information about President Trump’s proposed tax changes. These changes have a long way to go before they become law and no one, at this point, knows what the new law will look like.
However, these few notes will give you an idea of the direction the President is taking.
Tax rates for regular C corporations will be reduced from 35% to 15% and a new 15% tax will be added for certain S Corporation and Limited Liability Company income. The idea here is to make American business more competitive. Although many pundits don’t report this, remember that you really cannot tax a business. The funds businesses use to pay taxes come from increased prices to us – the consumer. In the end, we end up paying the business’ taxes and our personal taxes too. So, in this accountant’s opinion, reducing corporate taxation is likely to make our American corporations more competitive and increase employment in the US – both desirable results.
For individuals, the standard deduction will be increased to $24,000 for married individuals filing joint returns, the alternative minimum tax will be repealed (more below), the credit for child care expenses will be increased (about time), and the 3.8% investment income tax will (finally) be eliminated.
The Alternative minimum Tax (AMT) has been one of the most unfair taxes I have encountered in my entire career. It was originally enacted to assure that everyone paid ‘some’ tax and to keep certain targeted taxpayers from taking advantage of items called “tax preferences”. Over the years, the AMT has ended up targeting middle income taxpayers (typically two earner married couples). To compute the AMT, you compute your regular taxable income and then your alternative minimum taxable income (the regular income with many deductions added back in) and pay tax on the HIGHER of regular or alternative minimum taxable income. The AMT has turned out to be a penalty tax for those skilled workers who are the backbone of the American economy and should be repealed once and for all.
We’ll continue posting updates as more information become available.
Tax Reform – “A Better Way” – Update – 5-23-17
Tax reform is on the horizon and it will affect all taxpayers from those who file simple short-form returns to those who operate large multi-location businesses. We have been experiencing the effects of the budget cuts on the Internal Revenue Service’s ability to provide services in a timely manner. The National Taxpayer Advocate is your voice to the IRS. Here is a statement from Nina Olson, National Taxpayer Advocate.
Statement of Nina E. Olson, National Taxpayer Advocate, before the Subcommittee on Oversight (May 19, 2017)
On May 19, National Taxpayer Advocate Nina Olson testified before the Ways and Means Oversight Subcommittee on proposals to reform IRS operations in “A Better Way”, the House Republican tax reform blueprint (the Blueprint).
Ms. Olson began her testimony by commending the subcommittee for its plans to “take a hard look at IRS priorities and operations”, noting that it has been almost 20 years since the enactment of significant legislation to improve tax administration and strengthen taxpayer rights—and that a lot has changed in that time.
She noted that the Blueprint is a “general document” that doesn’t clearly state what changes are contemplated or their reach. She further cautioned that, given the size and complexity of IRS, “well-intentioned proposals can often have unintended consequences” and stressed the importance of thoroughly vetting potential changes prior to implementation.
The Blueprint identified problems at IRS, which Ms. Olson addressed as follows:
• Poor customer service levels. Ms. Olson encouraged the subcommittee to focus not just on the percentage of calls that IRS answers but also “the range of services we want the tax administrator to provide”. She noted that IRS “today answers only “basic” tax-law questions during the filing season, and it does not answer any tax-law questions at all during the other 8 1/2 months of the year”. She opined that answering most tax-law questions would reduce taxpayer burden and improve compliance, stating that it “is a central function of a tax administration agency to help taxpayers understand what the law requires of them”. She also said that, instead of centralizing its operations and closing taxpayer assistance centers, IRS should “maintain a more robust presence in local communities”.
• Civil asset forfeiture policies. Ms. Olson agreed that IRS’s Criminal Investigation function (CI) should generally pursue only illegal-source structuring violations and applauded IRS for deciding generally to no longer pursue legal-source structuring cases. Structuring involves manipulating cash transactions in order to avoid certain reporting requirements; and legal-source structuring means that the funds themselves come from a legal activity. She also shared the concern of subcommittee members that CI shouldn’t threaten taxpayers with the possibility of criminal prosecution as a way to get them to agree to excessive civil penalties, noting that such practice goes beyond structuring cases (e.g., in the offshore voluntary disclosure program, where certain taxpayers felt the penalties were excessive and wanted to opt out of the program but feared criminal charges). Finally, she noted that CI has taken the position that it is subject to the Taxpayer Bill of Rights only when it investigates cases under the Code, explained why she considers that position problematic, and encouraged Congress to clarify that, except in “explicitly-stated extraordinary circumstances”, all IRS employees must act in accord with taxpayer rights.
• Excessive improper EITC payments. Ms. Olson acknowledged the “relatively high improper payments rate” for Earned Income Tax Credits (EITCs), but observed that, taking into account the administrative costs of the program—notably, the lack of pre-payment eligibility verification costs—the “overall costs” of the program fall “in the middle of the pack of social benefits programs”. She also advocated bifurcating the existing credit into a Worker Credit and a Family Credit, stating that such would simplify compliance burdens and substantially reduce the improper payment rate.
• Outdated IT systems. Ms. Olson agreed that IRS’s outdated information technology (IT) systems “substantially limit” IRS’s efficiency and its ability to meet taxpayers’ needs. She said that IRS’s IT systems are “a top priority and will continue to be so for the foreseeable future”.
The Blueprint, after identifying these problems, proposes to restructure IRS by creating three major units:
1. Families and individuals;
2. Businesses; and
3. Dispute resolution through an independent “small claims court” that “will allow routine disputes to be resolved more quickly, so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake”.
Ms. Olson noted that an independent dispute resolution mechanism is central to effective tax administration. She opined that IRS’s Office of Appeals was intended to provide that function but has unfortunately fallen short, in that it is viewed as not truly independent and not user-friendly. She noted that, while it’s important for small businesses to be able to access independent dispute resolution, it’s important for individual taxpayers to have similar access—something that the Blueprint doesn’t clearly provide. She advised Congress to instead “assess the strengths and weakness” of Appeals and make changes to improve it.
New Overtime Rules – Breaking News – 11-30-16
The new overtime rules that affect millions of workers and that were scheduled to take affect tomorrow, December 1, 2016, have been blocked by a preliminary injunction issued by U.S District Court Judge Amos Mazzant in Texas. That means that employers are NOT required to make any changes in their payroll at this time. This rule applies to all states. We can expect the injunction to be lifted when the existing litigation brought by 21 states and the US Chamber of Commerce is resolved.
IRA Rollover – 60 Day Rule – No Exception – 6-29-16
You can take funds from IRA and use them for whatever you want BUT to avoid tax and penalties on those funds, they must be rolled over into another IRA or Qualified Plan within 60 days. From IRS Private Letter Ruling 201625022:
Background. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity and Code Sec. 403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period. (Code Sec. 408(d)(3)(B))
IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). (Code Sec. 408(d)(3)(I))
IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution and inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institution, etc. (Rev Proc 2003-16, 2003-1 CB 359)
Facts. Early in 2015, Taxpayer’s daughter’s home was in foreclosure. On Apr. 8, 2015, Taxpayer and her spouse put their vacation home up for sale in order to raise funds to purchase their daughter’s home. Prior to the sale of their vacation home, in order to avert foreclosure, Taxpayer took a distribution from her IRA on Apr. 24, 2015. The distribution was used to purchase her daughter’s home on Apr. 27, 2015.
Taxpayer intended to redeposit the distributed amount into her IRA within the 60-day rollover period which ended on June 23, 2015. However, the sale of the vacation home was not completed until July 1, 2015, and Taxpayer didn’t have sufficient funds available during the 60-day period to complete the rollover. Taxpayer indicated that her spouse was willing to take a distribution from his IRA within the 60-day period to complete the rollover but that her medical condition prevented this from occurring. She attempted to complete the rollover once she received the funds from selling the vacation home, but the 60-day period had expired.
Taxpayer requested that IRS waive the 60-day requirement in Code Sec. 408(d)(3) with respect to the distribution.
Relief denied. IRS found that the documentation and materials submitted by Taxpayer did not demonstrate that her failure to complete a timely rollover was due to any of the factors enumerated in Rev Proc 2003-16. Although Taxpayer represented that her inability to complete a timely rollover was caused by her medical condition during the 60-day period, IRS was “not convinced” given her “continued work and travels”. IRS found that her failure to complete a timely rollover was instead due to her use of the funds as a short-term loan to purchase her daughter’s home, which left her unable to recontribute the amount to her IRA until after the sale of her vacation home was completed.
Foreign Bank Account Reporting Reminder – 6-24-16
IR-2016-90, June 17, 2016
WASHINGTON — The Internal Revenue Service today reminded taxpayers who have one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by Thursday, June 30.
By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCen).
“Robust growth in FBAR filings in recent years shows we are getting the word out regarding the importance of offshore tax compliance,” said IRS Commissioner John Koskinen. “Taxpayers here and abroad should take their foreign account reporting obligations very seriously.”
In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.
In 2015, FinCen received a record high 1,163,229 FBARs, up more than 8 percent from the prior year. FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCen data.
The IRS is implementing the Foreign Account Tax Compliance Act (FATCA), which mandates third-party reporting of foreign accounts to foster offshore tax compliance. FATCA created a new filing requirement: IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with individual tax returns. The filing thresholds are much higher for this form than for the FBAR.
The International Taxpayers page on IRS.gov provides the best starting place to get answers to important questions. The website has a directory that includes overseas tax preparers. International taxpayers will find the online IRS Tax Map and the International Tax Topic Index to be valuable resources.
Another Tax Scam – The Student Tax – 6-1-16
The scammers are continuing to call taxpayers with threats so that they can get immediate payment of made up tax bills. Do NOT fall for these scams. IRS will NOT call you with demands for immediate credit card information over the phone. This is from IRS notice 2016-81. Please read this one carefully and don’t get scammed! At the bottom of this notice is information on how to report suspected scammers. If you are contacted by IRS, call us – we can help.
IRS Warns of Latest Scam Variation Involving Bogus “Federal Student Tax”
IR-2016-81, May 27, 2016
WASHINGTON — The Internal Revenue Service today issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”
Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.
“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”
Scam artists frequently masquerade as being from the IRS, a tax company and sometimes even a state revenue department. Many scammers use threats to intimidate and bully people into paying a tax bill. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.
Some examples of the varied tactics seen this year are:
•Demanding immediate tax payment for taxes owed on an iTunes gift card.
•Soliciting W-2 information from payroll and human resources professionals (IR-2016-34)
•“Verifying” tax return information over the phone (IR-2016-40)
•Pretending to be from the tax preparation industry (IR-2016-28)
The IRS urges taxpayers to stay vigilant against these calls and to know the telltale signs of a scam demanding payment.
The IRS Will Never:
•Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
•Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
•Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
•Require you to use a specific payment method for your taxes, such as a prepaid debit card.
•Ask for credit or debit card numbers over the phone.
If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:
•Do not give out any information. Hang up immediately.
•Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
•Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.
•If you think you might owe taxes, call the IRS directly at 1-800-829-1040.
More information on how to report phishing or phone scams is available on IRS.gov.
Good News for Small Charities – 5/31/16
For a small charity to become tax exempt under Internal Revenue Code Section 501(c)(3) and, thereby, be able to accept tax deductible donations, they need to file a form 1023 and include a user fee of $400. Effective July 1, 2016, that fee has been reduced to $275.
To learn more see Revenue Procedure 2016-32 in Internal Revenue Bulletin 2016-22 IRB 1019.
Trust Fund Recovery Penalty – Update – 5/20/16
Companies that withhold payroll taxes from employees and then do not pay those taxes to the government, are subject to the Trust Fund Recovery Penalty (called the “100% Penalty”). IRS just released more guidance on that penalty. This information is based on IRS Notice 784(https://www.irs.gov/pub/irs-pdf/n784.pdf), Could You be Personally Liable for Certain Unpaid Federal Taxes?
If you are in a situation where payroll taxes are not paid, call us. We can help.
Notice 784, Could You be Personally Liable for Certain Unpaid Federal Taxes?
IRS has updated its webpage guidance on the trust fund recovery penalty and who IRS can reach to pay it. The guidance is a reminder for all potential “responsible persons” to make sure that timely payment of employment taxes is given the highest priority at any profit or nonprofit enterprise.
Background on trust fund recovery penalty. Code Sec. 6672 imposes the trust fund recovery penalty (also known as the 100% penalty) on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. It’s called the trust fund recovery penalty because responsible persons are treated as holding the withheld tax in trust until there’s a federal tax deposit of the amount. The amount of the penalty is equal to the amount of the tax that was not collected and paid.
What does “willfully” mean? According to IRS (as well as the courts), “willfully” means voluntarily, consciously, and intentionally. A responsible person acts willfully if he knows that the required actions are not taking place. Paying other business expenses, including paying net payroll, instead of paying trust fund taxes, is considered willful behavior.
IRS also says that for willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes; and
- Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Who is a responsible person? A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.
According to IRS, this person may be:
- An officer or an employee of a corporation.
- A member or employee of a partnership.
- RIA observation: In Rev Rul 2004-41, 2004-18 IRB, IRS concluded that LLC members may be liable for the unpaid employment taxes under the Code Sec. 6672 trust fund recovery penalty rules.
- A corporate director or shareholder.
- A member of a board of trustees of a nonprofit organization.
- RIA observation: Code Sec. 6672(e) may provide taxpayers relief in certain cases. It provides that unpaid volunteer board members of tax-exempt organizations who are solely serving in an honorary capacity, aren’t involved in day-to-day financial activities, and don’t know about the penalized failure are exempt from the penalty, unless that results in no one being liable for it.
- Another person with authority and control over funds to direct their disbursement. This may include accountants, trustees in bankruptcy, banks, insurance companies, or sureties. It even may include another corporation.
- RIA observation: For example, in Erwin v. U.S., (DC NC 02/05/2013) 111 AFTR 2d 2013-748111 AFTR 2d 2013-748, a district court held that two outside accountants were each liable for over $325,000 in trust fund recovery penalties due to their failure to remit a financially troubled client’s unpaid withholding taxes to IRS. Even though the accountants were not officers or directors of the client, it was clear that they had substantial control over the client’s payroll operations.
- Another corporation or third party payer.
- Payroll Service Providers (PSPs) or responsible parties within a PSP.
- Professional Employer Organizations (PEOs) or responsible parties within a PEO.
- Responsible parties within the common law employer (client of PSP/PEO).
New rules in place for PEOs. Small businesses often contract with PEOs, also known as employee leasing companies, to ensure compliance with workplace laws and regs. In the typical contract, the PEO computes the FICA, withholding tax, worker’s compensation, and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the clients’ tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees. Under the law that existed before the Tax Increase Prevention Act of 2014 (TIPA), when a business contracted with a PEO to administer its payroll functions, the business customer remained responsible for all withholding taxes with respect to its employees. Thus, even though the PEO paid the employees, the customer remained liable if the PEO failed to withhold or remit the taxes or otherwise comply with related reporting requirements.
However, effective for wages for services performed on or after Jan. 1, 2016, Code Sec. 3511, as added by TIPA, allows a “certified PEO” (CPEO) to, in certain circumstances, be treated as the sole employer of the employees. Earlier this month, IRS issued proposed reliance regs that define terms and provide details as to the operations and responsibilities of CPEOs. (T.D. 9768, Weekly Alert ¶ 28 05/12/2016) IRS also issued proposed reliance regs that set out the Federal employment tax liabilities and other obligations of persons certified by the IRS as CPEOs. (Preamble to Prop Reg05/04/2016, Weekly Alert ¶ 31 05/12/2016)
Assessing the trust fund recovery penalty. If IRS determines that a person is a responsible person, it will inform him of its plan to assess the trust fund recovery penalty. The person then has 60 days (75 days if this letter is addressed to a person outside the U. S.) from the date of this letter to appeal. A nonresponse will result in the assessment of the penalty and trigger an IRS Notice and Demand for Payment. Once IRS asserts the penalty, it can take collection action against the taxpayer’s personal assets. For instance, it can file a federal tax lien or take levy or seizure action.
References: For trust fund recovery (100%) penalty for responsible person’s failure to collect, account for, and pay over tax, see FTC 2d/FIN ¶ V-1700 ; United States Tax Reporter ¶ 66,724 ; TaxDesk ¶ 864,001 ; TG ¶ 71655 .
2015 Returns Due April 18, 2016 – 4/10/16
If you have not yet filed your 2015 income tax returns, the returns are due on Monday, April 18, 2015. You can get an extension to file the returns but the extension is an extension for filing the return not for paying any tax that may be due.
Should you file the extension, end up with a tax due when the return is filed, and make no payment with extension, IRS may disallow the extension and charge late filing interest and penalties. In order to be sure the extension is valid, you need to make a good faith payment with the extension.
Since the final return is not completed, the exact amount of the tax is not yet known. We can help you determine a reasonable amount to pay with the extension and file it electronically for you. If you have questions, give us a call.
IRS Hacking Update – 2/25/16
From the Internal Revenue Service:
IRS has announced that the “Get Transcript” hacking incident discovered last May was more widespread than initially thought and that approximately 390,000 additional taxpayer accounts were potentially accessed during the period from January 2014 through May 2015. The Treasury Inspector General for Tax Administration (TIGTA) conducted a 9-month long investigation looking back to the launch of the application in January of 2014 and discovered additional suspicious attempts to access taxpayer accounts using sensitive information already in the hands of criminals.
Background. In January of 2014, IRS launched the “Get Transcript” program on its website. This application allowed taxpayers to have the option of immediately viewing and downloading their tax transcript or having it mailed to their address. Taxpayers could view or order multiple years of transcript information. For the 2015 filing season, approximately 23 million transcripts were ordered. Since its launch in 2014, around 47 million transcripts have been ordered through the “Get Transcript” tool.
In May of 2015, IRS announced it had discovered that criminals, using taxpayer information stolen elsewhere, had been able to pass procedures to access the “Get Transcript” application. At that time, IRS identified approximately 114,000 taxpayers whose transcripts had been accessed and about another 111,000 taxpayers whose transcripts were targeted but not accessed.
In August of 2015, IRS announced it had identified another 220,000 taxpayers whose transcripts may have been accessed and an approximately 170,000 taxpayers whose transcripts were targeted but not accessed.
After IRS made its announcement, TIGTA investigators began their own review, covering from 2014 through May 2015. TIGTA investigators identified suspicious email addresses that made multiple attempts to access accounts. IRS noted that it was possible that some of those identified may be family members, tax return preparers or financial institutions using a single email address to attempt to access more than one account. However, in an abundance of caution, IRS will notify all taxpayers impacted.
The online viewing and download feature of “Get Transcript” has been unavailable since May 2015, and IRS is working to restore that part of the service in the near future with enhanced taxpayer-identity authentication protocols. Other transcript options remain available via IRS’ website, with online requests being taken for mailed copies of transcripts. IRS reminds taxpayers to plan ahead if they need transcripts — it can typically take five to 10 days before the transcripts arrive in the mail.
IRS response. IRS is moving immediately to notify and help protect these additional taxpayers from tax-related identity theft, including through free identity theft protection services as well as Identity Protection PINs. Steps include:
- Notifying by mail those taxpayers whose transcripts were accessed and those taxpayers whose transcripts were targeted but not accessed;
- Informing taxpayers whose transcripts were accessed that they can request an Identity Protect PIN, which provides an additional layer of protection for the taxpayer’s Social Security Number (SSN) on federal tax returns, by completing a Form 14039, Identity Theft Affidavit;
- Offering taxpayers whose returns were accessed a free Equifax identity theft protection product for one year, and encouraging taxpayers to place a “fraud alert” on their credit accounts;
- Placing extra scrutiny on tax returns that contain taxpayer SSNs; and
- Placing special markers on these taxpayer accounts to advise IRS assistors that the caller is part of this event.
Other attacks on taxpayer information. In addition, only a week before this latest hacking announcement, IRS warned in IR 2016-28, of a new surge in IRS email schemes during the 2016 tax season. Taxpayers are receiving fraudulent emails designed to look like official communications from IRS or others in the tax industry, including tax software companies. The phishing schemes asked taxpayers about a wide range of topics, including information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information. This personal tax information could be used to help file false tax returns.
When people clicked on these email links, they were taken to sites designed to imitate an official-looking website, such as IRS’s website. The sites asked for SSNs and other personal information. In addition, the sites might carry malware, which could infect people’s computers and allow criminals to access taxpayers’ files or track their keystrokes to gain information.
In IR 2016-28, IRS noted an increase in such phishing and malware schemes, including:
- There were 1,026 incidents reported in January, up from 254 from a year earlier.
- The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
- This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.
The 100% Penalty – 2/25/16
All companies that have payroll are required to withhold federal income and social security taxes from employee paychecks and to pay these withheld taxes to IRS. These taxes are called “Trust Fund Taxes” because the withheld taxes are the employee’s money held in trust by the employer.
Under IRC Section 6672, the IRS can impose a penalty of 100% of the amount of Trust Fund Taxes withheld if the employer fails to pay these taxes to IRS. This penalty is commonly called the 100% penalty.
The penalty is imposed on individuals and operating as a corporation does not protect owners from the penalty. It can be imposed on anyone who is a “responsible party”.
Code Section 6672 reads (in part): Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid. Responsible parties is interpreted broadly and can include stockholders, bookkeepers, CPAs, and anyone who has the power in the organization to determine which bills are paid.
In a recent court case (Schiffmann v. U.S. (CA 1 1/26/16 117 AFTR 2d 2016-386), the court listed several factors to be considered when determining who is a responsible party. From the case:
In determining whether an individual is a responsible person, courts consider factors including whether the individual: (1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority. (Vinick v. Comm., (CA 1 1997) 79 AFTR 2d 97-190579 AFTR 2d 97-1905) Responsibility is generally a matter of status and authority, and it is determined on a quarter-to-quarter basis. In determining whether there is willfulness, the courts have focused on whether a taxpayer had knowledge about the nonpayment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.
IRS is aggressive in assessing this penalty. If your company has delinquent payroll taxes, contact our office. We can help you work out an agreement with IRS before this penalty is imposed.
Ordinary & Necessary – 2/18/16
Business owners can deduct all “ordinary and necessary” expenses of carrying on a trade or business under Section 162 of the Internal Revenue Code. While most expenses easily pass these tests, it is important to remember that both tests apply. A common example applies to MLMs (for example Amway). Operators of the MLM often spend an excessive amount of training seminars and materials provided my the MLM. They deduct these costs as business expenses and then get a surprise when audited by IRS. The Service will assert that, although these expenses may by ordinary for the business, they are not necessary in the amount incurred for the expenses (i.e. not reasonable in an amount that would be spent by a prudent business owner.)
In a court case decided on 1/6/16 (Elick v. Comm. (CA 9 1/6/16) 116 AFTR 2d 2016-345), a dentist was denied a deduction for management fees paid to a related entity. The court held that these fees were not ordinary and necessary within the meaning of IRC Code Section 162.
Although there are many other issues in this case, it reminds that we need to keep the “ordinary and necessary” rule in mind when deducting business expenses.
Solar Energy Credits – 2/15/16
Both IRS and New Mexico offer tax credits for the installation of qualified solar energy producing equipment. The federal credit is 30% of the cost of qualified property and it is “non-refundable” which means it is limited to a taxpayers income tax less other credits. It can be carried over to future years.
New Mexico offers the Solar market Development Tax Credit which is a credit offered to purchasers of solar equipment. The credit is 10% of the cost up to $9,000 and each taxpayer must be qualified. The amount to total credits issued for the entire state is limited, so those making application early in the year are more likely to be able to claim the credit. For more information go here.
IRS Reducing Taxpayer Services – 2/1/16
In her 2015 annual report to Congress, National Taxpayer Advocate (NTA) Nina Olson expresses concern that IRS may be on the verge of dramatically scaling back telephone and face-to-face service that it has historically provided to assist the nation’s 150 million individual taxpayers and 11 million business entities comply with their tax obligations. In particular, she calls for IRS to release its “Future State” plan documents, provide additional detail about its anticipated impact on taxpayer service operations, and solicit public comments, and recommends that Congress conduct oversight hearings on IRS’s plan.
Background. The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The TAS is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.
The second of these reports is submitted at the end of the year and is required to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.
The NTA’s annual report to Congress creates a dialogue within IRS and the highest levels of government to address taxpayers’ problems, protect taxpayers’ rights, and ease taxpayers’ burden. The NTA delivers its report directly to the tax-writing committees in Congress (the House Committee on Ways and Means and the Senate Committee on Finance), with no prior review by the IRS Commissioner, the Secretary of the Treasury, or the Office of Management and Budget.
NTA’s concerns. Since 2014, IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants. The NTA reports says that implicit in the plan—and explicit in internal discussion—is IRS’s intention to substantially reduce telephone and face-to-face interaction with taxpayers. Ms. Olson notes that while these reductions are a central assumption in the Future State planning process, it is impossible to describe the scope of the contemplated reductions with specificity because little about service reductions has been committed to writing. The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance, which would likely increase compliance costs for millions of taxpayers who now obtain free IRS assistance.
IRS has historically maintained a robust customer service telephone operation that, in every year since Fiscal Year 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than five million taxpayers.
IRS now appears to presume taxpayer interactions with IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers. The NTA stated that technology improvements often do not reduce demand for personal service to the extent expected.
In recent years, IRS has already begun to reduce taxpayer services by declaring that all but simple tax-law questions “out of scope” for IRS to answer during the filing season; by declaring that it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); by eliminating an online program that allowed taxpayers to submit questions electronically; and by eliminating the preparation of tax returns in its walk-in sites.
Ms. Olson characterized the combination of reductions in personal service and IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of IRS user fees) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves. Further, expressing concerns about data security, she warned about the consequences of giving unregulated tax return preparers more access to taxpayer accounts.
The NTA report says that it’s critical that IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, and how it will provide sufficient support for taxpayers. The NTA report recommends that IRS immediately publish its plan and seek public comments.
Other issues. In addition to IRS’s Future State planning, the NTA report says that the “most serious problems” include problems that undermine taxpayer rights and impose taxpayer burden; problems that waste IRS’s resources and impose taxpayer burden; and problems that contribute to earned income tax credit noncompliance. Other issues addressed in the NTA report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.
The report says that, as IRS has struggled with reduced funding, it has sometimes made short-sighted decisions that have had the effect of creating rework for itself as well as increasing taxpayer burden. In particular:
Between FY 2010 and FY 2015, when IRS’s appropriation was reduced by about 10%, its user fee revenue rose by 34%. The NTA report suggests that cuts to IRS’s budget have prompted it to consider fees that will impede its mission to help taxpayers voluntarily comply and pay their taxes. The NTA report recommends that IRS estimate the effect of proposed fee increases on demand for services, make its analysis public before adopting the increases, and refrain from charging fees that will have a significant negative impact on its service-oriented mission, voluntary compliance, or taxpayer rights.
Since July 2014, IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3)), which adopts a “checkbox approach” that requires applicants to merely attest to, rather than demonstrate, qualification for exempt status. IRS approves about 95% of applications submitted on Form 1023-EZ, while it approves only about 77% of applications when it requests documentation. The NTA report recommends that IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that IRS review this information before deciding whether to approve exemption applications.
IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft. These filters have high “false positive” rates (in some cases 36%), causing substantial refund delays for hundreds of thousands of legitimate taxpayers. The NTA report recommends that IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.
Small Businesses Expensing (Section 179) Made Permanent – 12/15/15
One of the most significant tax saving benefits for small business has been (finally) made permanent by the 2015 Protecting Americans from Tax Hikes (PATH) Bill – commonly call the ‘tax extender bill’ because it either extends or makes permanent tax code provisions that have expired. Two of the provisions that benefit small businesses the most are the Section 179 Election and Bonus Depreciation.
The Section 179 Election permits a taxpayer to expense (rather than depreciate) personal property in the year that it is placed in service. The cap for purchases is $500,000 and there is a deduction phase out for purchases over $2 million. Special rules apply for qualified real property.
Bonus Depreciation permits a taxpayer to take first year bonus depreciation of 50% of the cost of asset in the year placed in service. For bonus depreciation, they taxpayer must be the “original user” of the property (i.e. it must be new property.)
Small Businesses Can Now Deduct $2,500 in Repairs – 12/15/15
Under the ‘New’ Repair Regulations (effective for 2014 and later years), the rules used to determine whether an payment qualifies as a repair (which can be deducted currently) or a capital expense (which has to be depreciated) were significantly tightened and the necessary record keeping increased. In its IRS Newsroom for Small Businesses, IR-2015-133, IRS raised the safe harbor for expenditures form $500 to $2,500 for items substantiated by an invoice. This is a significant benefit for small businesses.
Call us for more information and to see how this change will help your business.
More 2015 Last Minute Tax Planning Ideas – 12/15/15
As the end of 2015 approaches, here are some more strategies to minimize your 2015 tax bite:
- Make contributions to your HSA account. The maximum deduction is $3,300 for an individual and $6,550 for a family (persons 55 and older can contribute a $1,000 catch-up amount.) If you employer made some contributions, you can increase the total contributed up to these limits.
- Sell stocks – see General Tax Planning Notes below for more details
- Accelerate tax deductible charitable contributions
- If you itemize deductions, pay your state income taxes that may be owed in April 2016 before the end of 2015 to get a deduction on Schedule A.
- If you are required to take minimum required distributions from an IRA or 401(k) plan, take the distribution before the end of the year. If you are 70 1/2 in 2015, you can delay the distribution to 2016. Failure to take the distribution can result in a penalty of 50% of the required distribution.
- Make year end gifts up to $14,000 per recipient. A donor can gift-spilt with their spouse which increases the annual exclusion to $28,000 for each recipient of the gift.
Call us if you have questions or need additional information
General Tax Planning Notes – 12/10/15
There is no longer any “magic bullet” to save taxes. The ‘glory days’ of the 1980s when tax shelters offered write-offs that were many times the amount spent or invested are gone forever. Tax planning today requires a comprehensive approach to review each taxpayer’s entire return to save taxes. There are many interrelated items that, when taken together, can save taxes while offering good cash management at the same time. This article reviews many of those strategies.
While every effort has been made to be sure that this information is correct, it is based on income tax laws and regulations in effect at the time it was written (December 2015) and each person’s tax situation is different. These notes are intended to be an overview of tax planning ideas and are only to be used as a starting point for discussions with us (or other tax professionals).
Flexible Spending Accounts
o Take Advantage of Flexible Spending Accounts (FSA)
Your employer may have a FSA – typically a §125 Plan – under this plan certain services can be paid with pre-tax rather than after tax dollars. Expenses include medical and dependent care.
Most plans are ‘use it or lose it”. Some plans (at option of employer) permit 2 ½ month grace period.
Investment Decisions – “Harvesting Capital Gains/Losses”
o Low Capital Gain Rates
Long Term Capital Gain rates are the lowest in 70 years and these rates are good through 12/31/15. One thing is certain: capital gains rates will not be lower in the future!
Special Long Term Capital Gain Rates:
• Collectibles = 28%
• Gain on Small Business Stock (§1202) = 28%
• Un-recaptured §1250 Gain = 25%
For 2015, the Long Term Capital Gains tax rate is 0% for married taxpayers filing joint returns with taxable income of $74,900 or less. That works out to gross income of $95,500 using a standard deduction and two personal exemptions – see following notes.
Long Term Capital Gain are taxed at 20% for taxpayers in the 39.6% bracket (married taxpayers filing joint returns with over $464,851 taxable income) and 15% for taxpayers in the 25% to 35% brackets (married taxpayers filing joint returns with taxable income between $74,900 and $464,850). See IRS Publication 17 for complete list of tax brackets.
If a taxpayer has a low income year and has a stock with a large unrecognized gain –and – they want to keep the stock. They can sell the stock, recognize the gain, and pay little or no tax. They can then buy the stock back at current market value which increases their basis in the stock. Many taxpayers think that this transaction is prohibited by the wash sale rules. However, the wash sale rules only apply to stocks sold at a loss not stocks sold at a gain. This strategy can significantly save future taxes with little or no current cash cost to the taxpayer.
Also, for tax year 2015, a married couple with gross income of $95,500 will pay no tax on capital gains. So, they should consider stock sales before the end of 2015 – See preceding note.
Make Itemized Deductions Count
o Maximizing the Value – if possible, bunch deductions to avoid phase outs. In some (rare) cases, taxpayers may claim standard deduction one year and itemize the next. Note: deductible items paid with credit cards (VISA. MC, etc.) are claimed in the year charged even though the card is paid in the following year.
o Certain High Income taxpayers have their ability to claim itemized deductions phased out. The phase outs as of 2015 are:
o Itemized Deduction Phase Out:
Phase outs of 3% reduction in itemized deductions (reduction limited to 80% of deductions):
Single = $258,250
Married – Joint = $309,900
Head of Household = $285,350
Married – Separate = $154,950
o Personal Exemptions also phase out:
Single = $258,250
Married – Joint = $309,900
Head of Household = $284,050
Married – Separate = $154,950
o Avoiding the 2% Miscellaneous Itemized Deductions Trap
Many employers offer an “Accountable Plan” for expense reimbursement. Under this plan, business expenses are reimbursed by the employer directly with no tax effects to employee.
If you qualify, become Statutory Employee and deduct business expenses on Schedule C. Statutory employees include full time traveling salesmen, full time life insurance salesmen, agent or commission drivers, and certain home workers using employer furnished materials. Box 13 of your W-2 will be checked. See IRS instructions for form Sch C, page 5, “Statutory Employees”
Minimizing the effect of the 10% Medical floor
Bunch deductions for medical items such as child delivery or braces (or other expensive medical procedures) by pre-paying in one tax year.
Use §125 Plan (also called Flexible Spending Arrangement)
Set up Health Savings Arrangement (HSA) if you qualify.
Multi-Year Planning for AMT (Alternative Minimum Tax)
What is The Alternative Minimum Tax: When this tax was first enacted, it was intended to be a tax on the wealthy “to ensure that no taxpayer with substantial income can avoid significant tax liability by using exclusions, deductions, and credits” (Tax reform Act of 1986). According to the Tax Policy Center (http://www.taxpolicycenter.org/ taxtopics/quick_amt.cfm), from 2013 to 2023 (projected) the number of Americans paying the AMT will rise from 3.9 million to 6 million. Clearly, the AMT is not a tax on the “rich”. It has become a tax on the working middle class – particularly two earner families – and is burdensome to say the least.
There is no easy way to avoid this tax but many strategies can minimize it
The idea is to look at the components of the tax and then to plan the timing of income and deductions to avoid being trapped by the tax.
Alternative Minimum Taxable Income (AMTI) does NOT allow Schedule A deductions for State & Local Income Taxes, Real Property Taxes, Miscellaneous Itemized Deductions. Bunching of deductions, although a good strategy for regular income tax, may end up trading regular tax for AMT.
Comprehensive multi-year tax plan is necessary to plan for AMT.
AMTI (Alternative Minimum Taxable Income) for 2015 is computed by:
• Starting Regular Taxable Income
• Adding back personal exemptions
• Adding back state and local taxes, home equity interest (non-qualified), and miscellaneous itemized deductions
• Subtracting state refunds
• Subtracting the AMT Exemption of
o Married filing joint return = $83,400
o Unmarried Individuals = $53,600
• Computing the AMTI and applying the tax rate
o 26% for first $184,500 of AMTI ($183,600 for 2016)
o 28% for AMTI over the amount above.
• Taxpayer pays the LARGER of the regular or AMT tax
Make Gifts Within the Annual Exclusion
The tax code imposes a tax on donor when gifts are made.
However, a taxpayer can give $14,000 per taxpayer, per donee, per year with no gift tax liability and can elect to ‘gift split’. Gifts below this amount are not reported and do not reduce the unified lifetime exclusion.
So a married couple with two children could give their children $56,000 with no gift tax liability:
• Mom could give $14,000 to each child ($28,000 total), and
• Dad could five $14,000 to each child *$28,000 total).
Pay State Taxes before End of year:
Income taxes paid to state and local governments are deductible on your federal return (if you itemize deductions.) If you pay the state tax before the end of the year by making an estimated state tax payment, the deduction can be claimed on this year’s federal return rather than next year’s return. If you are in the 28% federal tax bracket, you will reduce your current year’s federal tax by 28% of the state tax paid and receive the benefit this April – one year sooner – a significant return on investment.
Protect Business Deductions
Avoid the §183 Hobby Loss trap – run your business as a business and keep records.
All “Ordinary & Necessary” expenses can be deducted under §162 but the expenses must meet BOTH tests – ordinary AND necessary. If either test is failed, no deduction.
The Ordinary & Necessary test is often used by IRS to disallow deductions for various Multi Level Marketing businesses. Call us for more information on how to protect these deductions.
Maximize IRA contributions
For 2015 limit is $5,500 per person (up to earned income)
The $5,500 includes contributions to a Roth IRA account
If taxpayer is member of qualified plan, the deduction phases out when for Adjusted Gross Income (AGI) exceeds certain levels. For married taxpayers filing joint returns, the deduction phases our starting at $96,000 ($60,000 for single taxpayers and $10,000 for married taxpayers filing separate returns).
IRA can be set up until April 15th. Contribution must be made by the due date of the return without extensions (April 15th).
See IRS Publication 590-A for more information.
Set Up SEP IRA
Funded entirely by employee – 100% vested at time of contribution
Must cover all employees that at (1) 21 or over, (2) worked for the taxpayer in 3 of the last 5 years, and (3) received in compensation in 2015.
Annual 5500s not required
Can be setup by the due date of the return including extensions (this can be up to October 15th)
Limited (for 2015) to 25% of compensation or $53,000 whichever is less.
Catch up contributions may be available if you are 50 or over – the catch up contribution is $1,000 (both traditional and Roth)
Certain taxpayers with lower income may ay receive a tax credit for contributions to an IRA account or employer sponsored retirement plan. See Retirement Saver’s Credit under separate heading.
o SIMPLE (Savings Incentive Match Plan for Employees)
Funded by tax-deferred employee contributions and employer matches
Plan must be written but 5500s not needed
Maximum deferral of lesser of compensation or $11,500 (plus “catch up” deferral). For 2016, the amount is $12,500.
Form 5304 or 5305 SIMPLE is used to set up – must be set up by October 1st of current year (too late for 2015)
Employer must match 2% or 3%
See https://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Establishing-a-SIMPLE-IRA-Plan for more information.
Protect Dependency Deductions
$4,000 per person claimed on return for 2015. The taxpayer and spouse each get a deduction and dependency deductions are also available for children or other relative for which the taxpayer provided more than 50% of their support in the tax year.
For a Child or Grandchild:
• Must be under age 19 or under age 24 and full time student
• Must live with taxpayer for more than half the year
• Must not provide more than half their support
For a relative that is not a child (aka dependent parent)
• Must receive more than half of support from taxpayer
• Must have gross income of less than $4,000 which generally does not include social security benefits.
• Must be related to taxpayer or share taxpayer’s home.Child Tax Credit
$1,000 per qualifying child
Child must be under 17 at end of year
Child must be US Citizen or Resident
Credit phases out when AGI exceeds $110,000 Married Filing Jointly (MFJ)
Child and Dependent Care Credit
Credit available to permit taxpayer or spouse to work,
Qualifying child must be under age 13 or a disabled person not able to care for himself or herself,
Maximum expenses are $3,000 for one child and $6,000 for two or more,
Credit ranges from 35% to 20% based on AGI – see form 2441
Student Loan Deduction
Up to $2,500 may be deducted “above the line” to compute Adjusted Gross Income,
The deduction is lost when your modified adjusted gross income reaches $160,000 for married persons filing joint returns and $80,000 for other filers.
The interest can be deducted over the remaining life of the student loan.
The Internal Revenue Code provides income tax credits to provide an incentive for taxpayers, spouses and their children to pursue higher education.
The American Opportunity and Lifetime Learning Credits are available.
|Comparison of the Credits:|
|American Opportunity Credit||Lifetime Learning Credit|
|Up to $2,500 credit per student||Up to $2,000 per tax return|
|Available only for the first 4 years of post-secondary education||Available for any post-secondary education and courses to acquire or improve job skills|
|Available for only 4 years per student||Available for an unlimited number of years|
|Student must be enrolled in degree or credential program||Degree or credential program not required|
|Student must be enrolled at least half-time for at least one semester beginning during the year||Available for one or more courses|
|NO felony drug conviction on student’s record||Drug conviction rule does not apply|
Who Pays Estimated Tax?
If you have income that is not subject to withholding and your tax liability is expected to be $1,000 or more, you are required to make estimated tax payments.
It is usually easier on your cash flow to “pay as you go” rather than to go hit with a large tax bill in April.
For households where one spouse works for wages and the other is self-employed, a good strategy is to have the spouse who works for wages adjust their withholding to cover the estimated tax requirements. This smooths cash flow and avoids tax penalties.
Safe Harbors for 2016
Pay 90% of current year’s (2016) tax or
100% of prior year’s (2015) tax
High Income Taxpayers
If you are a high income taxpayer (AGI over $150,000 MFJ or $75,000 single), you must pay 110% of prior year’s tax to avoid the penalty.
Avoiding the Penalties
If your income was uneven during the year, annualizing income may avoid the penalty.
Shifting Income – Defer Income – Accelerate Expenses
Typically applies to cash basis taxpayer – Taxpayers need to examine financials for hidden deductions (AR write offs – obsolete inventory – §179 Deduction – Expense repair items, etc.
Can give only one year benefit – but if lower tax bracket is expected in future, the benefit may be significant. Be careful to not hurt next year’s cash flow by using cash at the end of this year.
Ways to Postpone Income
Be careful of Constructive Receipt Rules – call us for more information
Delay collections (if that does not jeopardize collectability)
If you work for accrual basis corporation, have bonus accrued at year end and paid next year – within 2 ½ month of the end of the year.
Interest Income on T-Bills is not taxable until received at maturity
Installment Sales – Gross Profit from sale of non-inventory property by non-dealers is taxed when received. Installment sale rules are mandatory unless elected out. Note: ALL depreciation recapture is reported in the year of sale – even if no cash received.
Like Kind Exchange – Gain is recognized only to the extent of “boot” received but remember debt relief is boot.
Start Up Costs
Rather than amortizing start up costs over 180 months, expenses incurred after October 22, 2004 may be deducted in the year incurred.
Deduction is limited to $5,000
Section 179 Election
For 2015, taxpayers may expense $25,000 of tangible personal property placed in service on or before 12/31/15
Limits apply to passenger automobiles and other listed assets.
The Section 179 election is limited to net income from business.
Capitalization v. Expense
There are always questions about what costs can be expensed in the current year and what costs need to be capitalized and depreciated. For those costs that can be expensed currently, the tax payer gets a benefit in the current year while those that are capitalized benefit future years and following the depreciation rules.
For years beginning January 1, 2014, new rules apply to the decision of whether to expense or to capitalize cost to repair or improve equipment.
These regulations largely replace the tests used to expense repairs for years before 2014.
These new rules are complex and depend on whether the expenditure was a “betterment”, “restoration”, or “adaptation”.
Several de minimis and safe harbor rules exist
For more information call us or go to https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations
Retirement Planning as Business Owner
See SEPs and SIMPLEs under Retirement Planning
Employing Family Members
Family members must be paid fair market wages for their services.
Employment taxes must be paid
• Payments paid by parents to children under 18 are not subject to FICA or Medicate taxes (does not apply to children employed by corporations owned by parents)
• Workers Compensation Insurance may also apply
Cost Segregation System – Depreciation Recovery
For buildings with significant improvements, cost segregation may result in significant tax savings
Cost Segregation Studies help to mitigate the effects of the new Repair Regulations – see Capitalization v. Expense section earlier.
Clients have successfully used Cost Segregation Services Inc. (www.costsegserve.com) and Bedford Cost Segregations (www.bedfordcap.com). You can contact these companies for more information.
For buildings not placed in service in current year, the cost segregation method can be used and the catch up depreciation is a deduction in the current year. See Rev Proc 2002-09, 2002-19, and Hospital Corporation of America v. Commissioner (109 TC 21 – CCH Dec. 52,163)
Strategies for the Self-Employed
100% of a self-employed person’s medical insurance is “above the line” deduction. That is that this deduction reduced Adjusted Gross Income (AGI)which increases the availability of other medic al deductions and Miscellaneous Schedule A Deductions subject to the 2% AGI limitation.
Medical Insurance can cover the taxpayer, spouse, dependents, and any child under 27 years old.
Deduction is limited to net income from self-employment
Business Use of Listed Property & Automobiles
Deductions (including Section 179 discussed above) are limited for automobiles and other “listed property”. Listed property includes property that is normally used for both business and personal purposes.
Listed property includes passenger automobiles with Gross Vehicle Weight (GVW) of 6,000 pounds or more and that cost $15,800 or more, computers and related peripherals, and cell phones.
Deductions for these items are limited to documented business use and logs are needed to support that use.
Depreciation and Section 179 deductions for Luxury Passenger Automobiles is limited to $3,160 for first year, $5,100 for second year, $3,050 for third year, and $1,875 for each succeeding year. (See IRS Rev. Proc 2015-19 for more information).
Standard Mileage v. Actual Costs
Standard mileage rate for 2015 = 57.5 cents per mile (business)
Charitable Use = 14 cents per mile
Medical and Moving – 23 cents per mile (IR-2014-114, Dec. 10, 2014)
Tax payer can use greater of standard or actual but records need to be kept for both methods.
Deductions for automobiles and listed property are required to be supported by adequate substantiation – keep receipts and a log.
We can help you set up a record keeping system that meets IRS requirements.
Travel & Entertainment
Meals and Incidental Expenses are limited to 50% of actual expenditures.
Exceptions are provided for meals provided by the employer on company premises for employer convenience.
Meals while traveling are also subject to the 50% limit.
Deduction for Office in the Home
Self-employed individuals that work from their homes can save taxes by deducting the part of their home that is used for business. To claim the deduction, the taxpayer must meet two tests: First, the part of the home to be deducted must be used exclusively and regularly for the conduct of a trade or business, and, second, that part of the home must be the principal place of business, a place used to meet patients, customers, or clients, or a separate structure not attached to the home. When both of these tests are met, the taxpayer may deduct the business percentage of mortgage interest, taxes, insurance, utilities, and other operating expenses.
In addition to these deductions, the taxpayer receives two other benefits: First, your home becomes your “tax home” for purposes of claiming business use of automobile deductions. Normally, the distance from a person’s home to their tax home (principal place of business or employment) is non-deductible commuting mileage. In addition, the business use percentage of mortgage interest and other home expenses reduces the net income from business and both the regular tax and the self-employment (social security) tax paid on business income. The value of these deductions can approach 50% (federal tax 28%, self-employment tax rate 15.3%, and state income tax approximately 5%-9%).
Starting in 2013, instead of reporting the detailed costs (as described above), the taxpayer can elect to deduct $5 per square foot of their home used for business up to 300 square feet. The maximum deduction is $1,500 if 300 square feet are used solely and exclusively for business.
Retirement Saver’s Credit – 12/5/15
Many taxpayers feel that they cannot afford to make a contribution to an IRA or employer sponsored retirement plan. IRS offers an incentive to these taxpayers to save for retirement in the form of a Savers’ Credit (the Retirement Savings Contribution Credit). This article gives a brief description of the credit.
Certain taxpayers within income limits may receive a tax credit for contributions to an IRA account or employer sponsored retirement plan.
- To qualify for the credit you must be:
- Age 18 or older
- Not a full time student
- Not claimed as a dependent on another person’s return.
- The amount of the credit varies from 50% to 10% of the amount contributed to the retirement plan based on your adjusted gross income per the following tables.
- Go to https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit or call us for additional information.
- To qualify for the credit you must be:
|2015 Saver’s Credit|
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $36,500||AGI not more than $27,375||AGI not more than $18,250|
|20% of your contribution||$36,501 – $39,500||$27,376 – $29,625||$18,251 – $19,750|
|10% of your contribution||$39,501 – $61,000||$29,626 – $45,750||$19,751 – $30,500|
|0% of your contribution||more than $61,000||more than $45,750||more than $30,500|
|2016 Saver’s Credit|
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $37,000||AGI not more than $27,750||AGI not more than $18,500|
|20% of your contribution||$37,001 – $40,000||$27,751 – $30,000||$18,501 – $20,000|
|10% of your contribution||$40,001 – $61,500||$30,001 – $46,125||$20,001 – $30,750|
|0% of your contribution||more than $61,500||more than $46,125||more than $30,750|
Seven Ways to Save Business Taxes – 12/1/15
These guidelines are a list of some common strategies for minimizing the income taxes for small businesses. The list is not exhaustive and does not constitute income tax advice for any specific client or situation.
1 – Defer Income & Accelerate Expenses
This ‘tried and true’ planning method is alive and well. Most effective tax planning is accomplished through a many well planned small steps rather than a few magic large ones. Defer Income. Taxpayers can save taxes in one year by deferring income to a future year. This can be done through various contractual arrangements and controlling the completion dates and/or ship dates of contracts (“defer shipments”).
Accelerate Expenses: To the extent that operating expenses can be accelerated, that can lower taxable income in the current year. Be careful with this technique because it will reverse in the following year.
2 – Purchase Equipment
Section 179 Election. This election permits a taxpayer to deduct in the year placed in service up to $25,000 of property (equipment) that would normally be depreciated.
Bonus Depreciation – Bonus Depreciation is available for property not elected under section 179 or for the remaining basis in that property after the 179 Election. The deduction is generally 50% of allowable basis.
Accelerated Depreciation – Depreciation using the Modified Accelerated Cost Recovery System is available for the basis of assets placed in service not claimed in a or b above.
3 – Domestic Production Activities Deduction. A Corporate taxpayer is eligible for a credit of up to 9% of qualified production activities income.
Domestic Production Gross Receipts Include
The lease, rental, license, sale, exchange, or other disposition of
1 -Tangible personal property, computer software, and sound recordings manufactured, produced, grown, or extracted in whole or in significant part within the United States
2 -Any qualified film produced in the United States, and
3 – Engineering or architectural services performed in the United States for construction located in the United States
The Credit is claimed on form 8903 and is subject to complex rules. Go to https://www.irs.gov/pub/irs-pdf/i8903.pdf for more information.
4 – New Repair Regulations
- New repair regulations include safe harbors that may permit taxpayers to deduct certain repairs that may have been capitalized. Detailed review is required.
5 – Expense Start Up Costs
- A C Corporation may deduct up to $5,000 in qualified startup expenses with the remainder to be amortized over 180 months
- The deduction is phased- out when the startup expenses exceed $60,000.
6 – Set Up Retirement Plans
- Retirement plans can generate deductions for a corporation even though they may not be funded until after year end.
- They include profit sharing, money purchase pension, various defined benefit plans.
- Rules are complex and the plan must be in place before the end of the tax year.
- See the Tax Planning Section on this page for discussion of retirement plans.
7 – Review of Assets and Liabilities
- This often overlooked step can result in significant tax savings. These procedures consist of detailed review of all assets and liabilities to assure that any assets that have lost value (e.g. uncollectible ARs, overvalued inventory, expired prepaid expenses, abandoned equipment) are written off for tax purposes
- Similarly, careful review should be made of all liabilities to assure that no accrued expenses are missed. (This step interfaces with , above.)
Contributions to Charity – 11/25/15
This 2015 Year End Tax Tip is taken from the IRS Website and presented here for the convenience of our clients and visitors to this website.
IRS OFFERS TIPS FOR 2015 YEAR-END CHARITABLE CONTRIBUTIONS
In a news release, IRS has reminded individuals and businesses making year-end charitable contributions, of several important tax law provisions and general substantiation requirements that they should keep in mind.
Rules for clothing and household items. To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item (e.g., furniture, furnishings, electronics, appliances, and linens) for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Donors must get a written acknowledgment from the charity for all gifts worth $250 or more, that includes, among other things, a description of the items contributed.
Guidelines for monetary donations. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
Other IRS charitable giving reminders. To help taxpayers plan their holiday season and year-end giving, IRS offered these additional reminders:
• Only donations to qualified organizations are tax-deductible. IRS maintains a searchable online database (Exempt Organization Select Check, available at irs.gov by clicking “Tools”) listing most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in the database.
• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2015 even if the credit card bill isn’t paid until next year, and checks count for 2015 as long as they are mailed before the end of the year.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. Thus, individuals who choose the standard deduction, including anyone who files a short form (i.e., Form 1040A or 1040EZ), are ineligible to claim the deduction. A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. The 2015 Form 1040 Schedule A can be used to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, the taxpayer should get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, the taxpayer should keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly completed Form 8283 must be submitted with the tax return.
Back to School – 8/1/15
As we all prepare for the start of another school year, there are opportunities for tax savings. If you, your spouse, or your dependents are heading back to school, you will want to check to see if you qualify for these tax credits.
American Opportunity Tax Credit (AOTC)
The AOTC is a tax credit of up to $2,500 per eligible student. You can claim this credit for the first four years of higher education. The AOTC is a ‘40% partially refundable credit’. That means that you can get $1,000 refund even if you do not owe any taxes.
Lifetime Learning Credit (LLC)
This credit is worth up to $2,000 and there is no limit on the number of years you can claim it for an eligible student.
These credits are available for ‘qualified expenses’ which include tuition, fees, and other expenses directly related to the education. You must attend an eligible school which includes most colleges and universities and many vocational schools. Most schools will give a form 1098-T that contains most of the information you will need to claim the credits.
You can only claim one of the credits per student and income limits apply.
You can get more information by calling our office, visiting the IRS website (www.IRS.gov search for Education Credits) or from IRS Publication 970.
Selling Your Home – 7/15/15
There are many tax advantages that may help you reduce or eliminate taxes that you could owe upon the sale of your home. This short paper lists some of them that are available in 2015.
Exclusion of Gain:
If you have owned your home and lived in it as your principal residence for two of the last five years, you may be able to exclude $250,000 ($500,000 for joint filers) of gain on the sale of your home.
To qualify, there are two tests: the ownership test and the residency test. You must pass both tests to exclude the gain from income. There are exceptions to those tests. Some of them are:
- If you are in the military, work for certain government agencies, you can suspend the 5 year test for that period of time that you did not live in the home because of military of government service.
- If you are disabled, you only need to have lived in the home for 1 year.
- If you are married and only one spouse meets the ownership requirements, both spouses are deemed to qualify and the $500,000 exclusion is available.
- If your home was destroyed or condemned, you may be able to count that time towards the ownership and residency test. There are other complex rules. You can get more information by calling our office, visiting the IRS website (www.IRS.gov), or from IRS Publication 523.
Moving Expenses – 7/10/15
If you moved to start a new job in a new location, you may be able to deduct your moving expenses.
Your move must be related to starting a new job. Generally you can consider the deduction of moving expenses within one year of the date you started your new job at the new location.
Your new job must be more than 50 miles farther away from your old home than your old job was. :
- For example, if your old job was 25 miles from your old home, your new job must be 75 or more miles from your old home.
- If you are disabled, you only need to have lived in the home for 1 year.The Time Test:To qualify for the deduction, you must work full time at your new job for at least 39 weeks in the first year after the move. (The same requirement applies to self-employed persons.) In addition, you must work full time for 78 weeks in the first two years.There are other complex rules. You can get more information by calling our office, visiting the IRS website (www.IRS.gov), or from IRS Publication 521.