|
|||||
© 2010 CPAmerica International
Didn’t File for 2006? Time is Running Out
Do you have a friend or relative who has failed to file an income tax return in a prior year?
It seems that, as more people realize their withholding exceeds their tax liability, they decide not to bother filing a tax return.
The IRS is holding approximately $1.3 billion in unclaimed refunds just for calendar year 2006. They are waiting for almost 1.5 million people to file their 2006 federal income tax return to claim their refunds.
Here’s the rub. If someone is owed a refund for 2006 and has yet to file a tax return, the refund is gone after April 15, 2010. If a return is filed after that date, the IRS is not allowed to process the refund claim. That’s because refunds must be claimed no later than three years after the original due date of the tax return.
Returns seeking a refund must be properly addressed, postmarked and mailed by April 15. No penalties are assessed for filing late returns that qualify for refunds.
If you have yet to file a return for 2006, there may be even more money at stake than overpaid withholding taxes. That was also the year when you could claim a one-time telephone excise tax refund. That refund is a standard $30, or $60 on a joint return, unless you can prove a higher amount. Lower-income taxpayers may qualify for a refundable earned income tax credit, in addition to their over-withheld taxes.
Unfortunately, traffic flows only one way on this street.
Although a refund for 2006 cannot be claimed after April 15, 2010, the IRS can still assess additional taxes owed. The three-year period that the IRS has to assess additional taxes doesn’t begin until a return is filed.
New Rules on Section 1031 Exchanges
The IRS has issued a revenue procedure that provides a safe harbor method of reporting gain or loss for a taxpayer who initiates a deferred like-kind exchange – sometimes called a "deferred Section 1031 exchange" or a "Starker exchange" – but who fails to complete the exchange because a qualified intermediary defaults on its obligation to acquire and transfer replacement property to the taxpayer.
The revenue procedure is available to a taxpayer who meets all of the following criteria:
If these requirements are satisfied, the taxpayer will not be required to recognize gain from the failed exchange until the taxable year in which the taxpayer receives a payment attributable to the relinquished property.
Tax Court Rules on Life Insurance Policy Value
The Tax Court has ruled that a married couple who purchased a life insurance policy from their employer’s profit-sharing plan could not reduce the value of the policy by the amount of the policy’s surrender charge.
Karl and Deborah Matthies owned an S corporation. The S corporation’s profit-sharing plan bought a life insurance policy on their lives using money rolled over from Karl’s IRA. The profit-sharing plan later sold the life insurance policy to Karl for $315,023.
At the time of the sale, the policy was worth $1,368,327 but was subject to a surrender charge of $1,062,461. Because the value after the surrender charge was less than the purchase price, Karl reported no taxable gain on the transaction.
The IRS determined that Karl should have reported a gain of $1,053,304 on the purchase of the policy and that Karl and Deborah were liable for a $58,985 accuracy-related penalty.
The court agreed with the IRS that Karl should have recognized $1,053,304 in gross income from the bargain sale of the insurance policy but concluded that no penalty should apply because:
The Tax Court has never before addressed the tax treatment of a bargain sale of a life insurance policy.
The IRS modified its arguments during the case and subsequently amended its regulations.
Therefore, the court held that Karl and Deborah had a reasonable basis for the position they took on their return.
Read more in Matthies v. Commissioner, 134 TC ___, No. 6, Feb. 22, 2010.
Rules for Donating to Chile Disaster
Once again a major disaster has struck. On Feb. 27, 2010, a devastating earthquake and resulting tsunami ravaged Chile.
With earthquake relief efforts in Haiti barely under way, you are once again being called upon to provide financial assistance to aid the victims. If you decide to provide financial help, you may be able to obtain a tax deduction on your 2010 return.
Contributions to domestic tax-exempt charitable organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has control and discretion over the use of funds.
You can ensure that you are contributing to a qualified charity by using the "Search for Charities" function on the IRS Web site at www.IRS.gov to see if the charity you intend to support is a qualified charity listed in IRS Publication 78. Certain organizations, such as churches or governmental organizations, may be qualified to accept charitable contributions, even though they are not listed in Publication 78.
Contributions directly to victims are not deductible. Also, the time period for contributing to Haitian earthquake relief and claiming a deduction on last year’s tax return has expired.
Read more in IRS Publication 526, Charitable Contributions.
No one likes to contemplate the prospect of an IRS audit, much less undergo the experience personally.
CNNMoney.com recently offered five tips for avoiding a tax audit.
If you are self-employed, be ready to prove you really have a business venture and not a hobby in disguise. Keep good records.
Don’t try to hide money in foreign bank accounts. There is nothing wrong with investing overseas, but be sure to report all of your income.
When you sell stocks or other investments, make sure you have a record of your basis for determining gain or loss on the sale. Special basis rules apply to assets received as gifts or inheritances.
Read more here.
Court Rules on Deductibility of Legal Fees
T
he Tax Court has allowed a financial adviser to deduct legal fees paid to successfully sue his former employer.The legal fees were deductible as employee business expenses. As such, they were deductible as miscellaneous itemized deduction, subject to the 2-percent-of-adjusted-gross-income floor.
James Purdy left his employment with a regional brokerage firm to go to work for a national firm. After three years, Purdy became disenchanted with his new employer and filed a claim alleging he had been underpaid. After the firm terminated his employment, he filed an additional claim alleging wrongful termination.
The first claim was settled for approximately $400,000, and the second claim was dismissed. Purdy paid $120,000 of legal fees in connection with these claims. Purdy argued that the legal fees were fully deductible as ordinary and necessary expenses incurred in the course of carrying on a trade or business.
The court concluded that the legal fees were related to Purdy’s role as an employee of the national brokerage firm and did not relate to the business partnership he established later.
Read more in James L. Purdy v. Commissioner, TC Memo 2010-27, Feb. 17, 2010.
Automobile Depreciation Deductions Released for 2010
The IRS has released its annual tables showing the depreciation deductions for owners of passenger automobiles, trucks and vans first placed in service during calendar year 2010.
For passenger automobiles, the deduction limits are $3,060, $4,900 and $2,950 for 2010, 2011 and 2012, respectively, and $1,775 for each succeeding year. For trucks and vans, the depreciation limits for the first three years are $3,160, $5,100 and $3,050, and the limit for each succeeding year is $1,875.
For leased passenger automobiles and trucks and vans, there is also a reduction in the deduction allowed. This reduction is expressed as an income inclusion amount according to a formula provided by the IRS. The inclusion amounts for leased vehicles vary with the fair market value.
Read more here.
New Service Centers for Some States
Residents of nine states and the District of Columbia will file their 2009 tax returns with a different IRS service center than the one they sent their returns to last year. If you file your return electronically, you do not have to worry about this change.
But if you live in Alabama, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, Vermont, Virginia or the District of Columbia and file a paper return, you will be sending your return to a different service center.
If you received an instruction booklet from the IRS in the mail and use the labels included with the booklet, your return will go to the correct address. If you do not receive a package, you should refer to the back cover of the instructions for Form 1040, 1040A or 1040EZ.
If you live in Maine, Massachusetts, New Hampshire, Vermont, Virginia or the District of Columbia, you should mail your return to the IRS center in Kansas City, Mo. Residents of Indiana and Michigan should mail their returns to the IRS center in Fresno, Calif. And Alabama residents should mail their returns to the IRS center in Austin, Texas.
Read more here.
Haiti Relief Deduction For 2009 Ends Soon
Time is running out on your opportunity to contribute to the Haitian earthquake relief efforts and claim a tax deduction on your 2009 return.
Earlier this year, Congress passed a law allowing you to treat cash contributions made for the relief of victims in areas affected by the earthquake in Haiti on Jan. 12, 2010, as if the contributions were made on Dec. 31, 2009. To qualify, a contribution must be made no later than Feb. 28, 2010.
Contributions made after Feb. 28 will be deductible on your 2010 return. The new law also allows your telephone bill to serve as documentation for phone-in contributions.
To qualify for a charitable deduction, contributions must be made to a qualified tax-exempt U.S. charitable organization. Contributions to foreign charities and amounts given as direct aid to affected persons generally do not qualify for the deduction. Also, you will receive a tax benefit only if you itemize your deductions.
Disability Tax Benefits Defined
I
f you or your spouse is disabled, or if you are a parent of a child with a disability, you may qualify for a number of tax benefits.Read more in Publication 3966, Living and Working with Disabilities or Publication 907, Tax Highlights for Persons With Disabilities
Proposed Tax Changes Announced
On Feb. 1, 2010, President Obama announced the federal government’s fiscal year 2011 budget. At the same time, the Treasury Department issued its General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals, commonly referred to as the "Green Book."
The following are among the proposed tax changes highlighted in the Green Book, most of which will require congressional action before becoming law:
Read more in the General Explanations of the Administration’s Fiscal Year 2011Revenue Proposals (2011 Green Book).
New Rules for Assets Transferred to a Trust
The IRS has issued a notice that raises a caution about transferring assets to a trust during 2010. The IRS is concerned that taxpayers and their advisers may incorrectly conclude that such a transfer is not a gift for gift tax purposes.
The IRS issued the notice as a result of some complex changes to the gift tax law that took effect Jan 1, 2010. The change in the law created little fanfare because the enactment took place in 2001 but is only now taking effect.
Here is the situation: In general, the gift tax applies to transfers of assets, whether outright or in trust, and whether the transfer is direct or indirect. A gift is considered complete only when the donor parts with sufficient dominion and control as to leave the donor with no power to change the disposition.
The IRS says that tax law changes applicable to transfers made in 2010 broaden the types of transfers subject to gift tax. Some of those transfers would have been considered incomplete and, thus, not subject to the gift tax under pre-2010 law. A transfer in trust is treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor’s spouse under the tax law’s grantor trust provisions.
Court Rules on Deductibility of Sex Change Surgery
The Tax Court has allowed a medical expense deduction for the costs of a sex change operation – but not the expenses for breast augmentation surgery. The taxpayer in the case was born male but was diagnosed with gender identity disorder. To treat this condition, the taxpayer underwent a treatment regimen that led to the surgeries.
The tax law allows an itemized deduction for medical care, which includes:
Cosmetic surgery is specifically excluded from the definition of medical care.
The IRS disallowed the deduction, arguing that all of the treatment qualified as cosmetic surgery. According to the IRS, the procedures were directed at improving the taxpayer’s appearance and not toward treating an illness or disease. The IRS argued that gender identity disorder is not a disease because it does not "arise from an organic pathology within the human body."
The court concluded that gender identity disorder is a disease for purposes of the medical deduction and that the tax law does not require a demonstrated organic origin. The court ruled that hormone therapy and sex reassignment surgery were not cosmetic surgery and allowed the deductions for those costs as treatment for a disease. However, the court disallowed the deduction for the breast augmentation surgery because it was a cosmetic surgery directed at improving appearance and neither promoted proper function of the body nor treated a disease.
Read more in O’Donnabhain v.Commissioner, 134 TC No. 4, Feb. 2, 2010.
Eight Tips for Taking Making Work Pay Tax Credit
Although you may have already received your Making Work Pay Tax Credit through a reduction in your withholding taxes, you will still have to claim the credit on your 2009 return. Here are eight things the IRS wants you to know about this tax credit to ensure you receive the entire amount for which you are eligible.
Haitian Earthquake Relief Contribution Deductible for 2009 Taxes
Just when you thought you had closed the door on 2009, at least from a tax-planning perspective, Congress has cracked open a window – however briefly.
Last week, President Obama signed legislation that allows a deduction on your 2009 federal income tax return for certain contributions to the Haitian earthquake relief effort.
The new law allows you to treat cash contributions made for the relief of victims in areas affected by the earthquake in Haiti on Jan. 12, 2010, as if the contribution was made on Dec. 31, 2009.
To qualify, the contribution must be made between Jan. 12 and Feb. 28, 2010. The new law also allows your telephone bill to serve as documentation for phone-in contributions.
To qualify for a charitable deduction, contributions must be made to a qualified tax-exempt U.S. charitable organization. Contributions to foreign charities and amounts given as direct aid to affected persons generally do not qualify for the deduction. You will receive a tax benefit only if you itemize your deductions.
Domestic organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has
control and discretion over the use of funds. You can check Publication 78, available on the IRS Web site (www.irs.gov), to see if the charity you intend to support has received IRS qualification. Churches or governmental organizations may be qualified to accept charitable contributions even though they are not listed in Publication 78.
The IRS has also designated the earthquake in Haiti as a qualified disaster for federal tax purposes. That means recipients of qualified disaster relief payments, who may be U.S. taxpayers, can exclude those payments from income on their tax returns. Also, employer-sponsored private foundations can assist victims in areas affected by the earthquake without adversely affecting their tax-exempt status.
A private foundation that is employer-sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. These payments would not be included in the individual recipient’s gross income.
Home Buyer Credit Requires Additional Paper Work, No E-Filing
If you qualify for a home buyer credit for 2009, be sure to gather the documents you will need to submit with your tax return.
Because of the additional documents that must be attached, you will not be able to e-file your return. That also means it may take the IRS a bit longer to process your refund.
To claim the first-time home buyer credit, your return must include one of the following documents:
If you purchased a new residence and qualify for the home buyer credit available to longtime residents of the same principal residence, the IRS encourages you to include with your return documentation to show that you lived in your old home for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. Such documents may include one of the following:
COBRA Premium Subsidy Extended
Workers who lose their jobs during January and February of 2010 may qualify for a 65 percent subsidy on their COBRA health insurance premiums. These newly eligible individuals, along with those already receiving the subsidy, can now receive it for up to 15 months.
The COBRA subsidy eligibility period, created by the American Recovery and Reinvestment Act of 2009, was originally scheduled to expire at the end of 2009, and eligible individuals qualified for the subsidy for only nine months. But the Department of Defense Appropriations Act, 2010, enacted on Dec. 19, 2009, extended the eligibility period and the maximum duration of COBRA premium assistance.
As a result, workers who were involuntarily terminated from employment between Sept. 1, 2008, and Feb. 28, 2010, may be eligible for a 65 percent subsidy of their COBRA premiums for a period of up to 15 months. Involuntarily terminated employees who meet certain other requirements, and certain family members of those individuals, are referred to as "assistance-eligible individuals."
Employers must provide COBRA coverage to assistance-eligible individuals who pay 35 percent of the COBRA premium. Employers are reimbursed for the other 65 percent by claiming a credit for the subsidy on their payroll tax returns. Employers must maintain supporting documentation for the claimed credit.
The administrator of a group health plan or other entity must notify certain assistance-eligible individuals of the extension by Feb. 17, 2010. For assistance-eligible individuals whose nine months of subsidy had already ended, the new law also provides an extended period for the retroactive payment of their 35 percent share during a transition period.
Read more on the COBRA pages of the IRS Web site,
www.irs.gov.
U.S. Supreme Court rules on Campaign Finance Laws
Last week, the U.S. Supreme Court issued a landmark decision interpreting campaign finance laws. As a result, the popular press is filled with stories about the future of corporate financial involvement in the election process.
Businesses and individuals who participate in the political process by contributing money to candidates, political parties, political action committees, etc., or who get involved in lobbying or grass roots political activities, should keep in mind that nothing in the Supreme Court’s ruling changes the tax law concerning political contributions or political activities.
Contributions to a political candidate or party are not deductible. They are not considered a business expense or a charitable contribution. Similarly, lobbying expenses directed toward influencing federal or state legislation are generally not deductible.
However, the prohibition does not generally apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation may be deductible.
Read more in Citizens United v. Federal Election Commission, U.S. Supreme Court, Jan. 21, 2010.
IRS To Begin Regulating Tax Preparers,
But Until Then.....
T
he popular press is providing a great deal of coverage to a recent announcement by the IRS that it plans to initiate testing, registration and regulation of tax return preparers.CPAs, attorneys and enrolled agents (EAs) will be exempt from many of the new rules because they are already subject to testing and regulation by others, such as professional associations.
Often overlooked in the press coverage is the fact that it will take the IRS some time to implement the new rules, and they certainly will not be in place for the current tax filing season. In the meantime, the IRS has issued guidance to help taxpayers choose a tax return preparer. Some of the observations by the IRS include:
Read more in IRS Fact Sheet 2010-3.
New Guidelines Implemented for Nonqualified Deferred Compensation
The IRS has provided methods under which taxpayers can voluntarily correct certain failures by a nonqualified deferred compensation plan to comply with tax laws and, in certain cases, reduce taxes.
Nonqualified deferred compensation plans must comply with Internal Revenue Code §409A in both form and operation. The newly issued guidance primarily addresses the failure to comply in form, i.e., document failures. Previously issued guidance (Notice 2008-113) primarily addressed operational failures.
Failure to comply with the requirements of §409A can result in both the loss of deferral and additional taxes to the plan beneficiary.
Read more here.
Tax Laws Regarding Gambling Wins & Losses
The Tax Court has decided that recreational gamblers should determine their winnings or losses each time they redeem their tokens (e.g., cash in their chips).
George and Lillian Shollenberger were recreational gamblers. On March 29, 2005, they took $500 to a casino in Charles Town, W.V. That day, George hit a $2,000 jackpot on a $1 slot machine. George and Lillian each took $200 of the slot winnings for additional gambling and pocketed the other $1,600. By the time they left the casino, only the $1,600 they had put aside remained.
The Shollenbergers reported no gambling winnings on their 2005 federal income tax return and claimed the standard deduction. The Shollenbergers argued that gambling losses on other days more than offset their winnings on March 29. The IRS argued that they should have reported the $2,000 winnings from the slot machine jackpot.
The Tax Court concluded that a casual gambler recognizes a gain or loss at the time she redeems her tokens. Fluctuating wins and losses left in play are not accessions to wealth until the gambler can definitively calculate the amount of gain or loss by redeeming the tokens. As a result, the court ruled that the Shollenbergers had $1,100 of gambling winnings on March 25, 2005. They entered the casino with $500 and left with $1,600, resulting in a $1,100 profit.
To the extent the Shollenbergers experienced gambling losses on other occasions during 2005, those losses could be deducted as itemized deductions up to the amount of their gambling winnings. Since the Shollenbergers did not itemize their deductions, no gambling losses were allowed.
Read more in Shollenberger v. Commissioner, TC Memo 2009-306, Dec. 28, 2009.
2010 Signals End of Popular Tax Provisions
The advent of the new year 2010 also signaled the expiration of a number of popular tax provisions. Most significant was the estate and generation-skipping tax regime, which is repealed for 2010. Although several bills have been introduced in Congress that would revive the estate tax, as of today no extension has been enacted. As a result, the estate and generation-skipping taxes no longer exist, at least temporarily.
In addition, a number of temporary tax provisions, often referred to as "extenders," expired as of Jan. 1, 2010. They include tax credits, deductions and various tax incentives. Many of the provisions have been extended several times in the past, and a bill to extend them again is pending in Congress (HR 4213). It passed the House on Dec. 9, 2009, and has been referred to the Senate Finance Committee.
Some of the expired temporary tax credits include:
Some of the expired temporary deductions include:
Some of the other expired provisions include:
© 2009 CPAmerica International
M
any people like to file their tax returns early, particularly if they are expecting a refund. But nothing is more frustrating than filing your tax return, only to have any additional piece of important tax information arrive in the mail a few days later.Most tax information that you receive from third parties, such as wage and tax statements (Form W-2), dividend and interest statements (Forms 1099-DIV and 1099-INT) and retirement distribution statements (Form 1099-R), normally should be in your hands by Feb. 1, 2010. However, if you sold real estate last year, engaged in bartering transactions or received certain payments from your broker or attorney, you may not receive the related tax forms until Feb. 16, 2010.
If you do not receive a tax statement by its due date, or if the statement you receive is incorrect, you should contact the payer and request the statement or a corrected statement.
If you do not include all of your tax information with your original return and you must file a corrected or amended return, it is likely that your refund will be delayed. So it usually pays to file a complete return on the first attempt.
IRS Rules on QTIP Trust Gross-Ups
T
he Tax Court has determined that the gift tax gross-up rule applies to gift taxes paid as the result of a deemed transfer of an interest in a QTIP trust.Under the estate tax rules, gifts made within three years of death are included in the decedent’s estate. In addition, any gift taxes paid in connection with those gifts are also included in the estate.
Howard Morgens died in January 2000, leaving assets in trust for the benefit of his wife. Morgens’ estate divided the assets into two trusts, a qualified terminal interest property trust and a residual trust. As a result of the QTIP election, the assets of the QTIP trust qualified for the marital deduction in Mr. Morgens’ estate, and the trust assets would be included in Mrs. Morgens’ estate when she died.
Anne Morgens died in August 2002, having made a number of gifts from the QTIP trust. All of those gifts were made within the three-year period preceding her death. All of the resulting gift taxes were paid by the trustee of the residual trust.
The Tax Court ruled that the gift taxes paid from the residual trust represented taxes imposed on Mrs. Morgens as the donor of the gifts. Since the gifts were made within three years of her death, Mrs. Morgens’ estate was required to include both the value of the gifts and the related gift taxes in the calculation of the estate tax.
Read more in Estate of Anne W. Morgens v. Commissioner 133 TC No. 17, Dec. 21, 2009.
Brokers Will Have to Show Gross Proceeds Starting in 2011
Brokers will soon be required to show the gross proceeds from the sale of a covered security, along with information about the customer’s adjusted basis in the security and whether any gain or loss is long-term or short-term. The Treasury Department and the IRS have issued proposed regulations that are expected to be finalized for the 2011 tax year.
Covered securities are stocks, notes, bonds debentures, other debt instruments and certain commodities and other financial instruments acquired on or after an applicable date. The applicable date of the reporting depends on the type of security that is sold.
Brokers will be required to calculate basis reflecting the total amount paid by a customer, adjusted for commissions and the effects of other transactions occurring within the account. The proposed regulations also require brokers to take into account information received from another broker when the customer transfers securities into the account. However, the broker would not be required to adjust the reported basis for transactions, elections or events occurring outside the account.
When a security is sold, the customer will be able to instruct the broker identifying the security sold or requesting that average basis be used. If no instruction is provided by the customer, the proposed regulations generally require the broker to report basis using a first-in, first-out (FIFO) method.
The proposed regulations also provide guidance on reporting obligations for wash sales, short sales and transfers of gifted, inherited and borrowed securities.
IRS Rules on Involuntary Conversion Rules
In a private letter ruling, the IRS Chief Counsel concluded that involuntary conversion rules applied to a situation in which corporate stock was taken in connection with a state’s unclaimed property laws.
In the facts described in the ruling, the successor trustee of a trust was unaware of an escrow account holding shares on behalf of the trust. The original trustee had died, and the escrow agent was unable to contact the successor trustee to release the shares. As a result, the shares were eventually turned over to the state and sold.
When the successor trustee became aware of the published list of unclaimed property, the trustee filed a claim and obtained the proceeds of the sale from the state. The ruling concludes that the transfer of the shares to the state was an involuntary conversion. As such, the trustee can avoid recognition of gain by purchasing replacement securities within two years from the close of the tax year in which the shares were transferred to the state.
IRS Will Not Penalize for Under Witholding Caused by New Tax Tables
As reported in prior issues of Washington Tax Update, tax withholding tables used by employers since early 2009 may cause certain employees to be under-withheld.
Now, in the instructions for the 2009 version of form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, the IRS has announced that it will not impose a penalty for an underpayment of tax caused by the new withholding tables.
This relief should assist higher income taxpayers and two-earner families, who are most likely to owe additional taxes as a result of being under-withheld.
I
f you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.You can generally figure the amount of your deductible car expense using one of two methods:
The standard mileage rate method
The actual expense method
If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which gives you a larger deduction.
For 2009, the standard mileage rate for business use of a car is 55 cents per mile. Effective Jan. 1, 2010, the amount is 50 cents per mile. You can add to your deduction any parking fees and tolls incurred for business purposes.
To use the actual expense method, you must determine what it actually costs to operate the car for business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) attributable to the portion of the total business miles driven.
Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement.
If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, the reimbursements should not be included in your wages on your Form W-2, and you should not deduct the expenses.
If your employer uses a nonaccountable plan to reimburse you for the expenses, the reimbursements are included in your wages. Your employee business expenses may be deductible as an itemized deduction.
Read more in Revenue Procedure 2009-54.
Take Care When Claiming Expenses for Business Start-Up
T
he Tax Court has refused to allow a deduction for expenses incurred when trying to establish a new business.During 2003 and 2004, John Ding reported almost $50,000 in losses in connection with his attempt to start a consulting business. He deducted these losses as business losses from a sole proprietorship.
Ding’s business plan was to match American businesses interested in exporting to Asia with Asian businesses interested in investing in American businesses. He hoped to earn income through commissions and finder’s fees.
Ding thought he could develop business leads and contacts through various business associations to which he already belonged. He attended meetings of several organizations, which offered both social and networking opportunities. At the end of 2004, Ding abandoned his efforts to establish a consulting business without having generated any income.
The court ruled that Ding’s expenditures were "startup" or "pre-opening" expenditures since they were incurred before his business actually began operations to generate income. As startup expenditures, they could not be deducted when incurred. Rather, they would have to be amortized after the business commenced operations. The court also ruled that since Ding’s business never commenced operations, no amortization deduction was permitted.
Note that, under current law, a limited amount of startup expenditures can be deducted when incurred and the balance must be amortized over 180 months, beginning with the month in which business commences.
Read more in John Y. Ding, et. ux.v. Commissioner, TC Summary Opinion 2009-186, Dec. 7, 2009.
IRS to Start Three-Year Study of Employment Tax Compliance in 2010
T
he IRS announced plans to conduct a three-year study of employment tax compliance starting in February 2010. The IRS plans to randomly select 2,000 taxpayers in each of the next three years for comprehensive examinations to collect data on employment tax filers.This study will be the IRS’ first Employment Tax National Research Project in a quarter century. The last employment tax study was conducted in the 1980s. The IRS will use data collected from the examinations to better understand the compliance characteristics of employment tax filers.
There are two main goals for the research project: to secure statistically valid information for computing the employment tax gap and to determine compliance characteristics so the IRS can focus its efforts on the most noncompliant employment tax areas.
The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk.
If your business receives a notice describing the process for the research project, you should expect to be required to produce all of your records relating to filing employment tax returns and deposits of employment taxes.
Attributed Tip Income Program Extended to Dec. 31, 2011
T
he IRS has announced a two-year extension of its program that simplifies the record-keeping burden for reporting tip income in the food and beverage industry.The Attributed Tip Income Program (ATIP) was first announced in 2006 and was set to expire Dec. 31, 2009. It has now been extended to Dec. 31, 2011.
Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts, which are generally allocated among employees based on the practices of the restaurant.
Both employees and employers benefit from participation in the ATIP program. The IRS will not initiate a tip examination during the period the employer and employee participate in ATIP. Participating employees do not have to keep a daily tip log or other tip records.
Enrollment is simple. Employers elect participation in ATIP by checking the designated box on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Employees who work for a participating employer can easily elect to participate in ATIP by signing an agreement with their employer to have their tip income computed under the program and reported as wages.
Read more in Revenue Procedure 2009-53.
Record Keeping for Barter Transactions
I
n today’s economy, small-business owners sometimes look to the oldest form of commerce – the exchange of goods and services, or bartering. The IRS reminds small-business owners that bartering transactions generally have associated tax reporting, accounting and record-keeping responsibilities.Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal direct one-on-one basis between businesses and individuals, suppliers, customers, distributors, partners, contract labor and employees, or it can take place on a third-party basis through a modern Internet barter exchange.
Bartering is an exchange of one taxpayer’s property or services for another taxpayer’s property or services. The fair market value of property or services received through barter is taxable income.
Go to
www.irs.gov/businesses/small/article/0,,id=215975,00.html to read more about record-keeping requirements for barter transactions.
If you are planning a charitable contribution and would like to secure an itemized deduction in 2009, you must make the contribution before Dec. 31.
Contributions can be made in cash, by check or by credit card. Even though you don’t receive your credit card statement until next year, the contribution is considered made on the date you provide the charity with your credit card information.
For contributions of cash, checks or other monetary gifts, regardless of amount, you must maintain either a bank record, a receipt or other communication from the charity indicating the name of the charity and the amount and date of the contribution. For contributions of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity. Additional record-keeping rules apply to noncash contributions.
.
For the second year in a row, Congress has allowed businesses that experienced a net operating loss (NOL) an expanded carryback period to recover taxes paid in prior years.
Normally, an NOL can be used only to refund taxes paid in the prior two years. But last year, Congress allowed qualifying smaller businesses to elect a three- to five-year carryback period. Even owners, such as partners in partnerships and shareholders in S corporations, who had personally paid the taxes on the business profits were allowed to elect the extended carryback.
Now Congress has made the election available for another year, applying it to NOLs for calendar years 2008 and 2009 and fiscal years ending in 2008 and beginning in 2009. If you have an NOL in more than one qualifying year, you can generally elect the extended carryback period only one time. However, if you qualified for the extended carryback under last year’s law, you can also qualify under the new law for a different year.
Importantly, the new law removes the restriction limiting the election to smaller businesses. Businesses of all sizes can now qualify. So if you were prevented from electing the extended carryback period last year because your business was too large, the new law may qualify last year’s NOL for the extended carryback election.
Be Careful What You Use Early IRA Withdrawls For
The Tax Court has decided that parents who withdrew more than $100,000 from their IRA were not subject to the 10 percent early distribution penalty on the portion used to pay part of their daughter’s living expenses while she was away at college. However, the 10 percent penalty applied to the remaining portion that was used to pay down their $80,000 credit card debt to avoid bankruptcy.
Richard and Robert Venet were both under age 59½ at the time they took the distribution from their IRA. They paid tax on the distribution, but not the 10 percent early distribution penalty. The Venets argued that the penalty should not apply because they took the distribution while in a state of financial hardship. The court ruled that no financial hardship exception exists under the tax law.
However, the court was persuaded by the Venet’s alternative argument that no penalty should apply to the extent funds were used to pay qualified higher education expenses for their daughter. The daughter’s tuition was paid by a state education trust fund set up by the Venets in an earlier year. But the Venets also gave their daughter money to pay for food and rent and utilities on her off-campus apartment.
The court noted that an exception to the early distribution penalty is available for amounts used to pay for tuition, fees, books, supplies and equipment and, in limited circumstances, room and board. The amount for room and board is limited to the student’s allowance for room and board included in the cost of attendance as determined by the educational institution.
Read more in Venet v. Commissioner, T.C. Memo 2009-268, Nov. 24, 2009.
Making Work Pay Tax Credit May Actually Cost You
When it comes to taxes, the IRS giveth and the IRS taketh away.
The federal government is now reporting that an estimated 15.4 million tax filers may be getting paid more of the Making Work Pay credit than they should, at least according to a report from the Treasury Inspector General for Tax Administration.
If you are one of the affected taxpayers, that means either you will get a lesser refund or will actually owe money when you file your 2009 return.
The issue stems from the Making Work Pay credit, created as part of the stimulus legislation enacted last February. The credit is 6.2 percent of earnings up to $400 per person ($800 per couple for joint filers). The full credit is paid to people making $75,000 or less ($150,000 per couple). A partial credit applies to those making above those amounts but no more than $95,000 ($190,000 for couples).
For most people, the 2009 credit is being paid incrementally through their paychecks. It is built into income tax withholding tables the IRS issued last spring. But that can result in too high a credit in some circumstances.
For example, two spouses might be receiving the full credit at their jobs when their joint income only qualifies them for a partial credit or none at all. Or a single person with more than one job might be receiving the full credit at each job, when in fact there is only one $400 credit available.
The following taxpayers are most vulnerable:
N
ow is the time to check your withholding and/or estimated tax payments to see if you will have enough taxes paid to avoid the underpayment penalty.The underpayment penalty may apply if your 2009 tax return shows a balance due of at least $1,000 and you have not paid at least 90 percent of your 2009 tax through a combination of withholdings and quarterly estimated tax payments.
You can avoid the penalty if your payments during 2009 are at least 100 percent of your 2008 income tax. If your adjusted gross income for 2008 was more than $150,000, your 2009 payments must be at least 110 percent of your 2008 income tax to avoid the underpayment penalty for 2009.
Your 2009 withholding may be less than you anticipated when you filed your 2008 return because of new withholding tables issued during 2009 under the Making Work Pay tax credit that was part of the stimulus law.
If your estimated tax payments and withholding are not going to be high enough to avoid penalties, you can increase your last quarterly estimated tax payment, which is due Jan. 15, 2010. Even better, if you receive wages, IRA distributions, annuity payments or other payments from which you can ask for withholding, have the additional taxes withheld. You are more likely to avoid penalties by increasing withholding than by increasing your last estimated tax payment.
The IRS is looking for more than 100,000 people – 107,831 to be exact. And they are trying to return over $123 million in tax refunds.
Each year, the U.S. Postal Service returns to the IRS refund checks addressed to taxpayers who move between the time they file their tax returns and the time the refund check arrives. If the post office has no forwarding address, the checks are returned to the IRS.
If you think you may be missing a refund check, use the "Where’s My Refund?" tool at www.irs.gov. This tool enables you to check the status of your refund. You will be asked to enter your Social Security number, filing status and the amount of the refund shown on your 2008 return. The tool will show the status of your refund and, in some cases, provide instructions on how to resolve delivery problems. You can also use the tool to update your mailing address.
You can access a telephone version of "Where’s My Refund?" by calling (800) 829-1954.
Check With Your Tax Advisor Before Cashing In Life Insurance Policies
A recent Tax Court case underscores the importance of consulting with your tax adviser before cashing in a life insurance policy.
In 1980, Harvey Barr purchased a life insurance policy on his wife in the face amount of $200,000. After paying the premiums for eight or nine years, the policy had built up sufficient cash value that Barr stopped writing checks to pay the premiums. Instead, the premiums were automatically paid with dividend accumulations and loans against the cash value of the policy.
In 2005, Barr decided to surrender the policy. He received checks from the insurance company totaling about $12,000. The $12,000 represented the difference between the policy’s cash value of just over $361,000 and policy loans that had been used to pay the premiums since 1988 or 1989.
The difference between the cash value and Barr’s total investment in the contract amounted to almost $136,000, which Barr was required to include as taxable income in 2005. Moreover, the income was taxed as ordinary income, not as long-term capital gain, since a surrender of a life insurance policy is not a "sale or exchange," a requisite for capital gain treatment.
Read more in Barr v. Commissioner, TC Memo 2009/250, Nov. 3, 2009.
First Time Homebuyer Credit Extended, New Provisions Added
As predicted in the last issue of Washington Tax Update, on Nov. 6, 2009, President Obama signed the Worker, Home Ownership, and Business Assistance Act of 2009, which extends the scheduled expiration date of the popular first-time home buyer credit.
The first-time home buyer credit now includes homes under a purchase contract by April 30, 2010, and closed by June 30, 2010. The credit was originally slated to expire on Nov. 30, 2009. The maximum credit for first-time home buyers is $8,000. The credit does not have to be repaid if the buyer keeps the home for at least three years. A first-time home buyer is someone who has not owned a home during the prior three years.
The new law also creates a new credit for existing homeowners. This new $6,500 credit is available for those who have owned their existing home for at least five years. This credit is available for home purchases after Nov. 6, 2009, and before May 1, 2010, as long as closing takes place by June 30, 2010.
The income limits to qualify for both the credits have also been increased to $125,000 for individuals and $225,000 for married couples. After Nov. 6, 2009, the credits are not available for homes priced above $800,000. Both credits are also limited to 10 percent of the cost of the new home.
D
o you barter?Barter is trading one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses or through third parties using a barter exchange company.
Bartering is the most ancient form of commerce. While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair. The tax law requires that the fair market value of the goods and services exchanged be reported as income by both parties.
Here are a few things you should know about bartering:
Barter Exchange
– A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is Internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.Barter Income
– Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter, you should report the fair market value of the products or services you receive on your tax return.Taxes
– Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.
On Oct. 29, 2009, senators announced that they had reached a compromise agreement on how to extend the $8,000 home buyer tax credit that is set to expire at the end of November. A vote in the Senate is expected soon and approval by the House is considered likely.
The proposal would extend the tax credit for first-time home buyers through June 2010 and allow a reduced credit of $6,500 for homeowners who have lived in their current residence for five years or more. The compromise would also increase the income limits, allowing potential joint filers earning less than $225,000 and single filers earning less than $125,000, to claim the credit. Homes that are worth more than $800,000 would not be eligible for the credit.
The revised credit includes a binding contract provision that would allow anyone who has entered into a binding contract to be eligible for the credit, as long as they close on the home within 60 days. The extended tax credit would also continue to allow military personnel to claim the credit for an additional year.
W
hen you receive property, including employer stock, as compensation, you generally must pay tax on the value of the property on the day you receive it. If the property is subject to what the tax law calls a substantial risk of forfeiture, taxation is usually delayed until the risk of forfeiture lapses.On July 1, 1999, Olafur Gudmundsson received over 73,000 shares of stock under his employer’s incentive compensation plan. On that day, the stock was trading above $17 per share, and Gudmundsson included nearly $1.3 million in his 1999 income. After the shares were issued, the following events occurred:
Gudmundsson amended his 1999 return, claiming a revised value of the shares he received of about $7.50 per share and requesting a refund of approximately $300,000 plus interest. The IRS denied the refund claim, and now a federal district court has agreed with the IRS.
Despite exploring the numerous arguments raised by Gudmundsson that the value of the stock was overstated on July 1, 1999, the court was persuaded that if Gudmundsson had sold the stock on that date, he would have received $1.3 million. And that was the amount he was required to include in income.
Read more in Gudmundsson v. U.S., DC-NY, Oct. 26, 2009.
Don't Forget Energy-Saving Tax Credits
W
ith winter approaching, keep in mind that the tax law rewards you for winterizing your home. Making energy-saving improvements this fall can cut your winter heating bills and lower your 2009 tax bill as well.The American Recovery and Reinvestment Act of 2009 expanded two home energy tax credits: the nonbusiness energy property credit and the residential energy efficient property credit.
The nonbusiness energy property credit equals 30 percent of the cost of eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.
If you are going green, you should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of the cost of qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines and fuel cell property. Generally, labor costs are included when calculating this credit. No cap exists on the amount of credit available except in the case of fuel cell property.
Not all energy-efficient improvements qualify for these tax credits. Be sure to check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements.
E
ven though Cash for Clunkers is over, there are still tax incentives for vehicle purchases.With 2010 model vehicles arriving in dealer showrooms, the IRS has issued a reminder that purchasing a new car, light truck, motor home or motorcycle could qualify you for a special deduction on your 2009 tax return for the state and local sales and excise taxes. Purchases made before Jan. 1, 2010, will qualify for this special deduction under the American Recovery and Reinvestment Act of 2009.
The deduction is limited to the sales and excise taxes and similar
fees paid on up to $49,500 of the purchase price of a new vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and others with MAGI between $125,000 and $135,000. If your income exceeds these amounts, you do not qualify.This special deduction is available regardless of whether you itemize your deductions. If you claim the standard deduction, that amount is increased by the special sales tax deduction.
Like so many incentives added to the tax code in recent months, this one has a limited life. To qualify, you must purchase a new vehicle before the end of this year.
Retirement Plan Navigator Now Available
The IRS has created a new Web-based tool to
help small business owners determine which tax-favored pension plan best suits their needs and how to keep their plans in compliance.The IRS Retirement Plan Navigator is intended to provide employers with an easy-to-use guide that focuses on three areas: choosing a plan, maintaining a plan and correcting a plan.
By using the navigator, you may find that choosing and maintaining a pension plan is not as daunting as you may have thought. Some plan types are less costly and easier to establish than others. The navigator does not suggest which plan may be best, but it does lay out the options to help you choose one that best fits your situation.
The navigator includes a side-by-side comparison of pension plans and their requirements. It also provides a checklist and suggested resources for maintaining compliance. Pension laws change frequently. You can minimize problems by doing a once-a-year review to ensure continued compliance.
Important Employers Tax Guide Information
If you run your own business, it is hard to grow
your sales and profits single-handedly. After all, there are only so many hours in the work day. Having just one employee – which may be you if your business operates as a corporation – significantly increases your responsibilities to the taxing authorities. It is your obligation to withhold federal, state and sometimes local income taxes, withhold Social Security taxes and timely deposit those withheld taxes, along with federal and state unemployment taxes.Compliance with all of the employment tax laws may be difficult and time-consuming. But failure to fulfill your responsibilities can cost interest, penalties and even more time. Here is a summary of the basic requirements:
Even if you use an outside payroll service to handle the deposits and paperwork, you remain responsible for your employment tax obligations.
Read more in Publication 15, Employer's Tax Guide.
Laid Off? Be Careful when Claiming Contract Work Activities
Those who have been laid off during the economic downturn may look for
opportunities to generate income from contract work activities. As demonstrated in a recent case, if your expenses exceed your income, your expenses are deductible only if you are engaged in a trade or business activity.Ernestine Forrest is a lawyer who had worked for three years as a securities regulator for the California Department of Corporations. After
her employment terminated, she worked as a contract attorney during 2000 but not at all during 2001 and 2002.In 2003, Forrest decided to again try to work as a contract attorney. She attended the ABA 2003 Midyear Meeting where she networked with colleagues and informed them she was available as a contract attorney. Before she secured any clients or earned any income as a contract attorney in 2003, she was reinstated by the California Department of Corporations and returned to work.
Forrest argued that during 2003 she carried on a business of working as a contract attorney and that she paid certain expenses in connection with this business. The IRS argued that Forrest was not engaged in a business because she admittedly had no clients and reported no income related to the activity during 2003. Forrest argued that her activity in 2003 was a continuation of a business carried on previously.
The Tax Court concluded that, under the facts presented, Forrest’s activity in 2003 was not a continuation of a business carried on earlier. The court concluded that Forrest’s activity as a contract attorney in 2003 was not regular and continuous. Therefore, she was not entitled to a business expense deduction.
Read more in Forrest vs. Commissioner, T.C. Memo 2009-228, Oct. 5, 2009.
F
or those who reached age 70½ by Dec. 31, 2008, the required minimum distribution (RMD) rules were waived for 2009. If you have already received a distribution during 2009, you still have an opportunity to undo it.The IRS has provided guidance for retirement plan administrators, plan participants and retirees regarding the waiver of the RMD requirement for 2009, as provided in the Worker, Retiree, and Employer Recovery Act of 2008.
Generally, a required minimum distribution is the smallest annual amount you must withdraw from an IRA or an employer’s plan beginning with the year you reach age 70½. The 2008 law waives RMDs for 2009 for IRAs and defined contribution plans (such as 401(k) plans) and allows certain amounts that were distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.
The IRS has issued a notice that provides relief for anyone who has already received a 2009 RMD this year. You generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.
The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 RMDs. Both sample amendments provide that participants and beneficiaries can choose to receive – or not to receive – 2009 required minimum distributions. Both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.
Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012, for governmental plans).
Proper Method of Accounting for Inventory Addressed
The IRS addressed the proper method of accounting for inventory by a franchised automobile dealership that sold new and used vehicles, sold vehicle parts and accessories and repaired vehicles in a 2007 technical advice memorandum (TAM 200736026).
The IRS concluded the dealer was engaged in production activities because it was installing parts on its own vehicles. The IRS also addressed how production costs would be handled by the taxpayer in the Simplified Resale Method absorption ratio, assuming the taxpayer was permitted to use the ratio. And the IRS addressed whether purchasing, storage and handling costs could be treated as mixed service costs or whether such costs should be treated as resale or production activities.
To give auto dealerships an opportunity to comply with the technical advice memorandum, the IRS has suspended examinations of this issue begun after Sept. 15, 2009. The suspension will last through Dec. 31, 2010, to give dealerships an opportunity to voluntarily comply with the procedures described in the memorandum.
The IRS addressed the proper method of accounting for inventory by a franchised automobile dealership that sold new and used vehicles, sold vehicle parts and accessories and repaired vehicles in a 2007 technical advice memorandum (TAM 200736026).
The IRS concluded the dealer was engaged in production activities because it was installing parts on its own vehicles. The IRS also addressed how production costs would be handled by the taxpayer in the Simplified Resale Method absorption ratio, assuming the taxpayer was permitted to use the ratio. And the IRS addressed whether purchasing, storage and handling costs could be treated as mixed service costs or whether such costs should be treated as resale or production activities.
To give auto dealerships an opportunity to comply with the technical advice memorandum, the IRS has suspended examinations of this issue begun after Sept. 15, 2009. The suspension will last through Dec. 31, 2010, to give dealerships an opportunity to voluntarily comply with the procedures described in the memorandum.
Sole Shareholder Corporation not Eligible for S Corporation Status
T
he Tax Court has ruled that a corporation was not eligible for S corporation status because its sole shareholder was a Roth IRA. A Roth IRA is not an eligible S corporation shareholder. Consequently, the corporation was taxable as a C corporation.The taxpayer argued that the Roth IRA is a custodial account and therefore its beneficiary who, as an individual, should be considered the shareholder of the S corporation. The Tax Court found this argument unpersuasive.
N
ormally the IRS has three years to challenge your tax return. However, the time period is extended to six 6 years, if you fail to report 25 percent of your income.In the past, the IRS has argued unsuccessfully in court that overstating your tax (cost) basis in an asset you sell is the same as omitting income. An overstatement of basis reduces the gain or increases the loss you report on the sale.
Now the IRS has issued temporary and proposed regulations supporting their contention than a basis overstatement can invoke the six-year limitation period. The IRS acknowledges that the position it is taking in the regulations is contrary to the results obtained in , CA-FC, July 30, 2009, and other cases. However, the IRS believes the regulations provide a reasonable interpretation of the Internal Revenue Code.
Read more in T.D. 9466 and REG-108045-08.
The IRS has reminded potential home buyers they must complete their first-time home purchases before Dec 1, 2009, to qualify for the first-time home buyer credit.
In other words, the last day to close on a home is Nov 30, 2009. The credit cannot be claimed until after the purchase is completed but, once completed, you may claim the credit on either your 2008 or 2009 return.
The credit is 10 percent of the purchase price of the home, up to a maximum credit amount of $8,000 ($4,000 for a married person filing a separate return). Home buyers who have never owned a home or have not owned one in the past three years may claim the credit.
The credit reduces your tax bill or increases your refund, dollar for dollar. Unlike most tax credits, the first-time home buyer credit is fully refundable. So the credit will be paid even if you owe no tax or the credit is more than the tax owed.
Only the purchase of a main home located in the United States qualifies. Vacation homes and rental properties are not eligible. If you are constructing the home, you qualify for the credit if you occupy the home before Dec. 1, 2009.
The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on modified adjusted gross income (MAGI). For a married couple filing a joint return, the phaseout range is $150,000 to $170,000. For other taxpayers, the range is $75,000 to $95,000. Therefore, the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.
The credit must be repaid if, within three years of purchase, the home ceases to be your main home.
Read more in
Information Release 2009-83.
IRS issues guidance on rollovers to Roth IRAs
The IRS has issued guidance describing the federal income tax consequences of rolling over an eligible rollover distribution from a qualified employer plan to a Roth IRA. The guidance reflects the creation of Roth accounts in qualified employer plans and the elimination of the income limitation on rollovers from traditional IRAs to Roth IRAs that takes effect Jan. 1, 2010.
Under the new guidance, a rollover from a Roth account in a qualified employer plan to a Roth IRA generally has no income tax consequences. A rollover from a non-Roth account in a qualified employer plan to a Roth IRA will have the same income tax consequences as a rollover from a traditional IRA to a Roth IRA. In general, you will be taxed on the amount transferred from the non-Roth account to the Roth IRA.
For rollovers prior to Jan. 1, 2010, the income limitations that apply to rollovers from traditional IRAs to Roth IRAs remain in effect. In other words, you cannot make a transfer from a non-Roth account to a Roth IRA prior to Jan. 1, 2010, unless your adjusted gross income for 2009 does not exceed $100,000.
Beginning Jan. 1, 2010, such rollovers will be permitted without regard to your adjusted gross income.
Read more in Notice 2009-75.Court makes surprising ruling on local business travel
Persons whose business takes them to several different business locations during the course of a day can generally deduct as a business expense the cost of traveling between one business location and another. But when is traveling considered simply commuting?
Since commuting is a nondeductible personal expense, the courts have generally held that the cost of traveling from home to the first business location of the day and the cost of traveling home from the last business location of the day are nondeductible personal commuting expenses.
In an unusual set of facts, the Tax Court recently decided the case involving Leslie Freeman. Freeman worked for an auto parts distributor. He traveled each morning from his home to the company's warehouse. From the warehouse, his route took him though several stops.
Freeman's last business stop was at a point much closer to his home than to the warehouse. Rather than return to the warehouse, Freeman drove home, where he completed his reports for delivery to the warehouse the following morning, where his daily cycle began anew.
The IRS agreed that the cost of traveling between the warehouse -- the first business location of the day -- and the last business location of the day constituted business travel. Freeman argued, and the Tax Court agreed, that his morning commute was not the entire trip from home to the warehouse. Rather, the morning commute was limited to the trip from home to the last business location from the previous day.
In other words, the Tax Court allowed Freeman to treat the entire circuit of his route as a business expense. His nondeductible commute was limited to the distance from his home to the nearest point on his business route.
Read more in Freeman v. Commissioner, T.C. Memo 3009-213, Sept. 16, 2009.IRS Web site details available education deductions
The IRS has launched a new Web section highlighting various tax breaks and Section 529 plan changes designed to help parents and students pay for college.
The new Tax Benefits for Education section on www.IRS.gov includes tips for taking advantage of education deductions and credits. It includes a special section highlighting 529 plans and frequently asked questions. It also features two key changes enacted earlier this year that will be in effect during 2009 and 2010.
One change allows families saving for college to use 529 plans to pay for a student's computer-related technology needs. Under the other change, more parents and students will be able to use the new American opportunity credit to pay part of the cost of college.
Tax-free college savings plans and prepaid tuition programs can be used to buy computer equipment and services for an eligible student during 2009 and 2010. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.
Distributions from 529 plans are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment and special needs services. For someone who is enrolled at least half time, room and board also qualify.
For 2009 and 2010, expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution are added to the list of qualified expenses. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit, or tuition and fees deduction.
The American opportunity credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to more people. Income guidelines are expanded, and required course materials are added to the list of qualified expenses. The maximum annual credit is $2,500 per student. Some key features of the credit include:
Those who do not qualify for the American opportunity credit include a married person filing a separate return, regardless of income; joint filers whose MAGI is $180,000 or more; and single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.
The American opportunity credit applies only during the first four years of college. However, graduate students still qualify for the lifetime learning credit and the tuition and fees deduction.
Read more here.
There may be some surprises when the IRS announces the 2010 inflation
adjustments later this fall.
Many tax provisions, such as dependency exemptions, tax brackets, etc., are
adjusted annually for inflation. These adjustments generally reduce the
amount of taxes you pay in the subsequent year. But, current indications are
that inflation has been so low or nonexistent that new adjustments may be
forthcoming.
Most of these adjustments can increase, but not decrease, from one year to
the next. However, Mercer, the human resources consulting firm, is reporting
that the maximum amount most workers can contribute to their 401(k) plans
could be reduced from $16,500 in 2009 to $16,000 in 2010.
A flat or negative inflation rate also means that Social Security recipients
may not receive a cost-of-living adjustment. Seniors have received a COLA
every year since the adjustments were adopted in 1975. By law, Social
Security benefits cannot decline. But because premiums for the Medicare drug
program are expected to increase next year, seniors who have the premiums
deducted from their benefits will see a drop in payments.
IRS issues new rules about taxation of tips
If
you operate a business in which customers deposit employee tips in a jar or
other receptacle, a new memorandum issued by the IRS Chief Counsel applies
to you.
The memo addresses the employer's tax filing responsibilities for tips. It
sets out rules for determining when an employer must include the tips in the
income of the employees and how to deal with related issues of withholding
taxes.
It all comes down to a matter of control. If the employer collects the tip
jar, counts the money and distributes it to the employees, the tips are
considered wages, and the employer is subject to the normal rules for wages
paid. However, if the employees themselves are responsible for dealing with
the tips, and a non-management employee is responsible for counting the
tips, keeping the tips in a secure place and distributing the tips to
eligible employees, the funds are not wages subject to withholding by the
employer.
In any event, the employees should report the tips received as taxable
income.
Read more here.
Court rules on timely payment of business taxes
A federal district court in Arkansas has determined that a corporation was liable for penalties assessed against it for failure to timely file employer's tax returns, timely pay employer's quarterly taxes and timely make employer's federal tax deposits.
Benton Workshop, Inc., operates a commercial printing business. Janis Graves is the president of the corporation. Her husband, Thomas Graves, is the vice president.
In the spring of 2003, Mrs. Graves fell and hit her head, which caused neck and back injuries. Because of her ongoing pain and the effects of pain medication, Mr. and Mrs. Graves together decided that Mrs. Graves should generally give up her duties at the corporation, although Mrs. Graves continued to work for a few hours at a time when she was able to do so.
Mrs. Graves was responsible for preparing and filing the company's employment tax returns. Mr. Graves was aware of this fact and recognized that it was an important legal obligation of the company.
After Mrs. Graves stopped performing her duties, the company failed to timely file its payroll tax returns and timely deposit its payroll taxes for four consecutive quarters. The IRS imposed more than $25,000 in penalties.
The court upheld the penalties, ruling that even though there was no willful neglect, the president's illness was not reasonable cause for failure to file the returns and deposit the taxes.
Read more in Benton Workshop, Inc., DC Ark, Aug. 21, 2009IRS issues 'Top 10 List' for charitable contributions
Taking a page from David Letterman's Late Show
script, the IRS has issued its own "Top 10 List" for those who plan to claim
an itemized deduction for contributions to charity.
The points the IRS wants everyone to remember are:
During difficult economic times, you may be
tempted to tap into your retirement savings. Before withdrawing money from
your tax-qualified retirement accounts, it pays to know the rules governing
early withdrawals.
If you are under age 59½ and withdraw money from your retirement account,
you will likely pay both income tax and a 10 percent early distribution tax
on any previously untaxed money that you take out.
Withdrawals from a SIMPLE IRA before you are age 59½, as well as during the
first twoyears from the first day that contributions are deposited, may be
subject to a 25 percent additional early distribution tax instead of 10
percent.
You should consider the decrease in your retirement savings and the increase
in tax before you withdraw money from any tax-qualified account, including
an IRA, 401(k) or 403(b) account.
There are some exceptions to the early distribution tax. Early withdrawals
from an IRA are not subject to the additional 10 percent tax if you use the
amount withdrawn to pay for medical insurance premiums while unemployed, to
cover qualified higher education expenses, or to buy, build or rebuild a
first home. An exception also applies if you receive distributions in the
form of an annuity.
For other types of retirement plans, the additional 10 percent tax does not
apply if you separate from service and are age 55 or older in that year or
you elect to receive the money in substantially equal periodic payments
after separation from service.
Read more in
Publication 590, Individual Retirement Arrangements (IRAs)
and
Publication 575, Pension and Annuity Income.
IRS now using social media to communicate news
The tax man has entered the 21st century. The IRS has launched a YouTube video site and an iTunes podcast site.
You can visit the video site to view information about the 2009 tax provisions in the American Recovery and Reinvestment Act, including tax tips and how-to videos. The videos are in English, Spanish, American Sign Language and other languages.
The YouTube videos highlight the $8,000 first-time home buyer's credit for those who purchase a house this year, the sales or excise tax deduction on new car purchases, and the expanded credits for education and energy conservation. Also included is a video on using the IRS withholding calculator.
Many workers received the Making Work Pay tax credit in April through their tax withholding at work. However, people who have more than one job or working spouses should especially check their withholding to ensure neither too much nor too little is being withheld. People can use the calculator to help determine if they should make adjustments.
Visit the video site at www.youtube.com/irsvideos, or listen to the audio at iTunes or at:
www.irs.gov/newsroom/article/0,,id=167993,00.html.
How to substantiate valid business expenses
If you deduct travel, entertainment, gift or transportation expenses, you must be able to substantiate certain elements of expense.
If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. You will also have proof of expenses that your employer may require if you are reimbursed for your expenses.
You should keep the proof you need in an account book, diary, statement of expense or similar record. You should also keep documentary evidence such as receipts, canceled checks or bills to support your expenses. Documentary evidence is not needed if your employer reimburses you under a per diem method for meals and/or lodging, if you have expenses other than lodging of less than $75, or if you have a transportation expense for which a receipt is not readily available.
Documentary evidence ordinarily will be
considered adequate if it shows the amount, date, location and essential
character of the expense. A canceled check, together with a bill from the
payee, ordinarily establishes the cost. However, a canceled check by itself
does not prove a business expense without other evidence to show that it was
for a business purpose.
You must generally provide a written statement of the business purpose of an
expense. However, the degree of proof varies according to the circumstances
in each case. If the business purpose of an expense is clear from the
surrounding circumstances, then you do not need to provide a written
explanation.
You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support your deduction (or an item of income) for three years from the date you file the income tax return on which the deduction is claimed.
The IRS has created a chart summarizing the record-keeping rules. View the IRS chart here.
If you are a business owner, you may want to
act soon if you are planning to acquire new business assets. At the end of
2009, some important tax breaks are scheduled to expire
For tax years beginning in 2009, you can generally deduct up to $250,000 of
equipment and software placed in service this year. Both new and used assets
are eligible. Known as the Section 179 deduction, this provision is an
exception to the general rule that you must depreciate equipment and
software costs over several years.
The Section 179 deduction is scheduled to be reduced to about $135,000 for
tax years beginning next year. One limitation is that this deduction cannot
create or increase an overall business loss. So if your business is having a
marginal year, you may not be able to take full advantage of this deduction.
Another big tax break is available for most new, but not used, business equipment and software and some leasehold improvements that are purchased and placed in service by Dec. 31, 2009. For these assets, your business can generally claim first-year bonus depreciation deductions equal to 50 percent of the cost that is left over after subtracting any allowable Section 179 deduction.
Unlike Section 179 deductions, bonus depreciation is available even if your business experiences a tax loss for the year.
To take advantage of these tax breaks, you will have to order the assets in time to put them into use before the end of the year. It is possible that Congress could act to extend the higher Section 179 limit and bonus depreciation for another year, but you cannot count on it.
IRS addresses reimbursement for tool costs
The IRS has issued a private ruling detailing a plan under which a business can reimburse the cost of tools purchased by employees so that the reimbursements are not taxable to the employees.
This ruling should be useful to employers and employees in construction and other industries that require the use of specialized tools or testing equipment. If a tool reimbursement plan qualifies as an "accountable plan arrangement," reimbursements are not subject to income and Social Security taxes.
For the plan to qualify, there must be a business connection between the amount reimbursed and the performance of services as an employee. Also, the employee must substantiate the expenses to the employer within a reasonable period. Finally, the employee must return reimbursements that exceed the substantiated expenses.
Read more in the IRS ruling.
Court addresses rules for overstatement of basis
Normally, the IRS has
three years within which to examine your tax return and assess any
additional tax. A special provision of the tax code extends that period to
six years if you omit more than 25 percent of the income that should have
been reported on the return.
In 2007, the Court of Federal Claims ruled that the six-year rule applied in
a situation where a partnership overstated the basis of an asset it sold.
The case involved a complex transaction involving short-sale and
partnership-termination rules.
By overstating the basis, the partnership reported a lower gain on the sale.
The amount of the missing gain was more than 25 percent of the partnership's
gross income for the year.
Now the Court of Appeals for the Federal Circuit has ruled that
overstatement of basis is not an omission of income for purposes of the
six-year rule.
More commonly, taxpayers sometimes sell assets that were acquired many years
in the past, and basis information may be sketchy at best. This case should
put the IRS under a three-year limit to challenge the basis calculation.
Read more in
Salman Ranch Ltd. v. United States,
CA-FC, July 30, 2009.
'Cash for Clunkers' rules fuzzy on state taxes
The Consumer Assistance to Recycle and Save
Act of 2009 (CARS), more commonly known as, "Cash for Clunkers," became
effective on July 23 and ran through its $1 billion budget in just a few
days. Congress scrambled to triple the budget in the hope of extending the
program at least to Labor Day.
For those who purchase new cars under the program, the rebate is tax exempt.
But there is no exemption for auto dealers. They must include the rebate as
part of the purchase price and therefore as part of gross income. However,
the dealer can deduct the costs of implementing and maintaining the rebate
program.
States are divided on whether the consumer has to pay and the dealer has to
collect sales tax on the rebate amount. Some states levy sales tax on the
gross vehicle price. Other states tax the sales price net of the rebate
amount. Check the rules in your state before purchasing a new car.
For 2009, you can claim an income tax deduction for the sales tax charged on
the first $49,500 of the cost of a vehicle. This deduction is available
whether or not you itemize your deductions. If you live in one of the states
without a sales tax, you may be able to deduct other fees imposed on the
transaction.
The IRS has issued a reminder about several tax breaks made available by the American Recovery and Reinvestment Tax Act of 2009.
To take advantage of these tax benefits, in many cases, you must take action within the 2009 or 2010 calendar years.
Ruling addresses joint tax return for same-sex couple
The Tax Court recently ruled that a same-sex couple was not entitled to file a joint federal income tax return.
Charles Merrill and Kevin Boyle have been together for more than 18 years. During 2004 and 2005, they lived in North Carolina, where they participated in a commitment ceremony in 2004. North Carolina did not recognize same-sex marriages. They were legally married in 2008 after moving to California.
The IRS contacted Merrill after he failed to file a tax return for 2004 or 2005. Merrill responded with a letter stating that he was not evading taxes. Rather, he refused to pay taxes as an act of civil disobedience advocating same-sex marriage equality. In response, the IRS prepared substitute returns, using the single filing status, and issued deficiency notices to Merrill.
The Tax Court noted that Merrill was not married during the years at issue. It also noted that he did not file a return for the years at issue and, therefore, is not entitled to married filing jointly status. The court observed that whether a person is married is determined by reference to the laws of the state of his marital domicile for federal income tax purposes. The court ruled against Merrill on the narrow issue that he did not file a joint return.
Missing from the court's opinion was any discussion of whether Merrill would have been eligible to file a joint return if North Carolina had recognized same-sex marriages, as several states now do. That discussion would require the court to review the Defense of Marriage Act (P.L. 104-199, Sec. 3), which defines marriage for purposes of administering federal law as the "legal union between one man and one woman as husband and wife." It further defines "spouse" as "a person of the opposite sex who is a husband or wife."Rule issued for Chinese drywall replacement
Federal court issues opinion on limited partners
Here's a tax break for the busy summer.
Many working parents must arrange for care of their children under 13 years of age during the school vacation period. A popular solution -- with a tax benefit -- is a day camp program.
The cost of day camp can count as an expense toward the child and dependent care credit. Expenses for overnight camps do not qualify.
You figure the credit on up to $3,000 of expenses for one child or $6,000 for two or more children. The credit rate ranges from 20 to 35 percent of expenses, depending on your income. The 35 percent rate applies if your income is under $15,000; the 20 percent rate, if your income is over $43,000.
Read IRS Publication 503, Child and Dependent Care Expenses, here.
Questions unresolved on active losses for LLPs, LLCs
If you own an interest in a business that
operates as a limited liability partnership (LLP) or a limited liability
company (LLC), you may wish to follow future developments in a recently
decided Tax Court case, particularly if your business interest produces
losses that have been treated as passive losses for tax-reporting purposes.
In the new case, Paul and Alicia Garnett owned interests in seven LLPs and
two LLCs that were engaged in agribusiness operations, primarily the
production of poultry, eggs and hogs. Following its standard procedure, the
IRS treated all of the Garnetts' losses from these businesses as passive
activity losses, meaning that those losses could be used only to offset
passive activity income. The Garnetts argued that they were actively
involved in these businesses, which should make the losses active rather
than passive, thereby allowing them to fully deduct the losses.
While the Tax Court ruled in favor of the Garnetts, the ruling is quite
technical, and the implications tend to be misreported in the popular press.
In effect, the Tax Court ruled that the IRS could not treat the losses as
passive simply because they were generated from LLPs and LLCs. Rather, the
case will have to go to trial to determine whether, in fact, the Garnetts
actively participated in the business activities.
The confusion stems from the fact that Congress wrote the applicable tax law
at a time when LLPs and LLCs did not exist. So the court will ultimately
have to determine how Congress intended the law to apply to these types of
entities.
The ultimate resolution of this case may resolve not only whether LLP and
LLC losses are passive but also whether profits from those entities are
subject to self-employment tax.
Read more in
Garnett v. Commissioner,
132 T.C. No. 19, June 30, 2009.
Deals available for trading clunkers for new cars
Congress has passed the cash-for-clunkers bill, more formally known as the Car Allowance Rebate System (CARS).
Under this bill, car buyers will be eligible for a tax-free voucher of either $3,500 or $4,500 toward the purchase or lease of a new, more fuel-efficient vehicle between July 1 and Nov. 1, 2009.
The amount of the credit generally depends on the type of vehicle you purchase and the difference in fuel economy between your new vehicle and the vehicle you trade-in. You must purchase a new vehicle to be entitled to the credit. The new vehicle may be U.S.- or foreign-made, and the price cannot exceed $45,000.
Car dealers are referring to the voucher as a credit, but it is not a credit to be claimed on your tax return nor will you receive a voucher. Instead, the dealer will reduce the purchase price of the vehicle and be reimbursed by the federal government.
To qualify as a "clunker," your trade-in vehicle must have a combined city/highway fuel economy of 18 miles per gallon or less, be drivable, have been continuously registered and insured by you for one year before trade-in, and be no more than 25 years old.
Since the program requires the dealer to "junk your clunker," don't expect to get a significant trade-in allowance in addition to the credit.
Read more at the National Highway Traffic Safety Administration Web site www.cars.gov.IRS takes hiatus on tax shelter penalty actions
The IRS has responded to a recent letter it received from members of the Senate Finance Committee and the House Ways and Means Committee. The letter had asked the IRS to suspend certain "tax shelter" penalties assessed on small businesses and individuals while Congress works on corrective legislation.
IRS Commissioner Douglas H. Shulman has responded by announcing that the IRS will hold off until at least Sept. 30, 2009, before taking any collection enforcement action on cases in which the annual tax benefit from the transaction is less than $100,000 for individuals or $200,000 for businesses per year.
Because the penalty determination is related to the underlying transaction, and the IRS can determine the amount of tax benefit only through examination, it will not suspend its examination of such cases.
Read more in the IRS Letter.
The summer months can be a stormy time of the year. Hurricane season is now under way, and high winds and tornadoes can accompany thunderstorms. Add flooding and the occasional earthquake and no area of the country is entirely safe from natural disasters.
From a tax standpoint, you should develop a disaster recovery plan for your business and personal affairs by taking a few simple steps:
1. Create a backup set of electronic
records
Keep your backup records in a safe
place, stored at a different location from the original records. Keeping a
backup set of records is easier now that many financial institutions provide
statements and documents electronically, and much financial information is
available on the Internet. Even if the original records are provided only on
paper, they can be scanned into an electronic format. With documents in
electronic form, you can download them to a backup storage device, like an
external hard drive, or burn them to a CD or DVD.
2. Document your valuables
Photograph or videotape the contents of your home and business, especially
items of higher value. The IRS has a disaster loss workbook, Publication
584, which can help you compile a room-by-room list of belongings. A
photographic record can help prove the market value of items for insurance
and casualty loss claims. Photos can be stored electronically or given to a
friend or family member who lives outside your area.
3. Update emergency plans
Emergency plans should be reviewed annually. Personal and business
situations change over time, as do preparedness needs. When employers hire
new employees or when a company or organization changes functions, plans
should be updated accordingly and employees should be informed of the
changes.
4. Check your insurance coverage
Make sure property insurance covers the full replacement cost of the asset
insured. Meet with your insurance agent to review deductibles and determine
whether additional riders are necessary. Be sure you understand what risks
are covered and which are excluded. If you have a business, consider
business interruption coverage.
A few simple steps now can prevent unpleasant surprises later
IRS ruling to help distressed homeowners
The federal Making Home Affordable modification program helps homeowners who have defaulted, or are at risk of default, on their mortgages.
A homeowner who makes timely payments on a modified loan is eligible to have incentive payments made to lenders/investors that reduce the principal balance on the loan. The IRS has determined that these Pay-for-Performance Success Payments are excludable from the homeowner's income under the general welfare exclusion of the income tax law.
Read IRS Revenue Ruling 2009-19 here.Are seasonal workers employees or independent contractors?
For many businesses, summer traditionally brings an influx of part-time or seasonal workers into the work force. Employers are responsible for treating these workers properly for employment tax purposes.
Generally, workers are either employees or independent contractors, based upon the facts and circumstances of the relationship between the business and the worker. For federal income tax withholding, Social Security, Medicare, and federal unemployment tax purposes, neither the number of hours worked nor the amount earned determines the status of an individual as independent contractor or employee.
For example, an individual can be an employee even though the individual works one hour a week or one day a year. Part-time or seasonal workers who are employees are subject to the same tax withholding rules that apply to other employees.
More information about treating these workers properly is on the "Part Time or Seasonal Help" Web page on www.irs.gov. The page contains helpful tips for filing Form 941, Employer's Quarterly Federal Tax Return, other information about seasonal/part-time workers and links to other resources to help businesses with employees.
Congress asks IRS for tax help for small businesses
Members of the Senate Finance Committee and House Ways and Means Committee have asked IRS Commissioner Douglas H. Shulman to suspend certain penalties assessed on small businesses while Congress works on legislation to address what they term an inequitable and unintended consequence in the tax code.
The members of Congress are concerned that small businesses with investments in listed tax shelter transactions have been assessed tax penalties significantly larger than the tax benefits received.
In a letter dated June 12, 2009, the
lawmakers requested that Shulman "use the discretion provided to the IRS
with its effective tax administration authority to suspend efforts to
collect IRC (Internal Revenue Code) Section 6707A liabilities ... while
Congress acts to remedy this situation." Code Sec. 6707A was enacted in 2004
as part of a package of provisions intended to help the IRS detect, deter
and shut down tax shelters.
Treasury regulations require taxpayers to tell the IRS if they invest in
"listed" tax shelter transactions, and Code Section6707A imposes penalties
on taxpayers who fail to disclose this information. For listed transactions,
the penalties are $100,000 for natural persons and $200,000 for others.
The lawmakers pointed out that the inequitable consequences were unexpected
at the time the penalty was enacted, and they plan to introduce legislation
that would result in penalty amounts that are more reasonable in proportion
to the tax benefits. No timetable was offered as to when new legislation
might be introduced.
Read more in the Letter to the IRS
The IRS has clarified the income tax deduction authorized by Congress to stimulate new car sales.
The deduction for state and local sales or excise taxes on the purchase of new vehicles is available to purchasers in states without a sales tax. If you purchase a new motor vehicle in a state that does not have state sales taxes, you are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per-unit fee.
To qualify for the deduction, you must purchase a new vehicle between Feb.
17 and Dec. 31, 2009. Importantly, the deduction is available even if you
don't itemize. That means the deduction also reduces your adjusted gross
income (AGI) for purposes of determining whether you qualify for other tax
breaks.
If your new vehicle is very expensive, the deduction is limited to the
portion of the tax attributable to the first $49,500 of the purchase price.
To qualify for the full deduction, your modified AGI cannot exceed $125,000
for individuals or $250,000 for married couples. No deduction is available
if your modified AGI is greater than $135,000 for individuals or $260,000 on
a joint return.
The deduction is available for any qualified purchase of a new car, light
truck, motor home or motorcycle.
Read Information Release 2009-60
here.
IRS clarifies rules for unemployed, formerly self-employed, workers
If you receive unemployment compensation for 12 consecutive weeks under any federal or state program, you generally qualify to make penalty-free withdrawals from your IRA to pay for your health insurance.
Tax Court rules on foreign earned income exclusion
If you are living and working abroad, you may be entitled to the foreign earned income exclusion. But qualifying for the exclusion may be more complicated than it sounds.
The Tax Court ruled recently that a flight
attendant could not treat income earned in international airspace as income
earned in a foreign country because such airspace is not under the
sovereignty of a foreign government. The court had previously denied the
exclusion to a worker in Antarctica for the same reason.
Yen-Ling Rogers was a flight attendant for United Airlines based in Hong
Kong. She regularly flew round-trip flights from Hong Kong to San Francisco
or Chicago. Rogers contended that all of her income was earned for services
performed outside the United States. However, the IRS contended, and the Tax
Court agreed, that only services she provided in a foreign country or while
flying over a foreign country qualified for the exclusion.
Generally, the earned income exclusion is available to United States
citizens and resident aliens who live and work abroad. These individuals may
be able to exclude all or part of their foreign salary or wages from their
income when filing their U.S. federal tax return. They may also qualify to
exclude compensation for their personal services or certain foreign housing
costs.
To qualify for the foreign earned income exclusion, a U.S. citizen or
resident alien must have a tax home in a foreign country and income received
for working in a foreign country, otherwise known as foreign earned income.
The taxpayer must also meet one of two tests: the bona fide residence test
or the physical presence test.
The foreign earned income exclusion is adjusted annually for inflation. For
2009, the maximum exclusion is $91,400 per qualifying person.
Read more in
W.D. Rogers v. Commissioner,
TC Memo. 2009-111, May 20, 2009.
IRS defines 'United States Person' for foreign bank and financial accounts forms
June 30 is the deadline for filing the current year Report of Foreign Bank and Financial Accounts, Treasury Form TD F 90-22.1 (FBAR).
FBAR forms are deemed filed when received by
the IRS, not when postmarked, so use certified mail with return receipt when
filing these forms. There is no extension of time to file available.
The IRS has announced that you can rely on the definition of a United States
person as set forth in the prior instructions to the FBAR form when
determining your filing requirement. The IRS took this action to reduce the
burden after concerns and questions were raised regarding the new
instructions issued last year on who must file the revised Form TD F
90-22.1.
For this year, you can rely on the definition of a United States person
included in the prior instruction: "United States Person - The term "United
States person" means (1) a citizen or resident of the United States, (2) a
domestic partnership, (3) a domestic corporation, or (4) a domestic estate
or trust."
All other requirements of the current version of the FBAR form and
instructions (revised in October 2008) are still in effect. The current
version of the form must be used when filing an FBAR.
This substitution affecting who must file the FBAR applies only to FBARs due
on June 30, 2009. The IRS will follow up with additional guidance on the
requirement to file for future years.
Read more in
Announcement 2009-51.
Businesses planning to claim the newly expanded work opportunity tax credit (WOTC) for eligible unemployed veterans and unskilled younger workers hired during the first part of 2009 have until Aug. 17 to request the certification required for these workers, according to the IRS.
The American Recovery and Reinvestment Act, enacted in February, added unemployed veterans returning to civilian life and "disconnected youth" to the list of groups covered by the credit. Though eligible unemployed veterans and disconnected youth who begin work anytime during 2009 or 2010 may qualify a business for the credit, certification by the state work force agency is required.
In general, an unemployed veteran is a person discharged or released from the military during the five years preceding the hiring date, who received unemployment benefits for at least four weeks during the one-year period ending on the hiring date. A "disconnected youth" is a person age 16 to 24 on the hiring date who has not been regularly employed or attending school and who meets other requirements.
The WOTC offers tax savings to businesses that
hire workers belonging to any of 12 targeted groups. The other 10 groups
include people ages 18 to 39 living in designated communities in 43 states
and the District of Columbia, Hurricane Katrina victims, recipients of
various types of public assistance, and certain veterans, summer youth
workers and ex-felons.
The certification requirement applies to all groups of workers except
employees who were Hurricane Katrina victims.
Normally, a business must file Form 8850 with the state work force agency within 28 days after the eligible worker begins work. But under a special rule, businesses have until Aug. 17, 2009, to file this form for unemployed veterans and disconnected youth who begin work on or after Jan. 1, 2009, and before July 17, 2009.
Read more in Notice 2009-28
IRS proposes alternatives to termination of safe harbor plans
The IRS has published proposed regulations allowing employers that incur a substantial business hardship an alternative to terminating their §401(k) safe harbor plans. Qualifying employers can reduce or suspend required safe harbor nonelective contributions without losing their plan's qualified status.
Prior to issuance of the proposed regulations, employers were required to maintain the safe harbor plan throughout the entire plan year, with two exceptions:
The proposed regulations allow an employer that suffers a substantial business hardship to amend its plan to reduce or suspend the plan's safe harbor nonelective contributions if procedural requirements specified in the proposed regulations are followed.
In determining whether the employer is suffering a substantial business hardship, the IRS will consider whether:
Small Business Administration offers new loan program
The Small Business Administration has announced a new loan program for debt-burdened small businesses. The program is called the American Recovery Capital (ARC) Loan Program.
Guaranteed by the SBA, the ARC Loan Program provides interest free loans to small businesses "for the purpose of making principal and interest payments on existing, qualifying small business loans for up to six months." These loans can include credit card loans, capital leases, Certified Development Company (504) loans, other loans made without an SBA guaranty, and loans made with or without an SBA guaranty since Feb. 17, 2009.
The ARC Loan provides up to $35,000 to qualified small businesses to make payments of principal and interest, on one or more existing qualifying small business loans for up to six months. The loan is interest free and 100 percent guaranteed by the SBA. No collateral is needed, and there are no fees associated with the loan.
Repayment of the ARC Loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years.
The loan is available to viable, for-profit small businesses in the United States that are experiencing immediate financial hardship. To qualify, you must be able to prove the viability of your business by providing evidence that you can project sufficient cash flow to be able to meet the loan payments over a two-year period from the loan approval date.
ARC Loans are provided by commercial lenders. Your lender or bank can help determine your eligibility.
Read more at the SBA's dedicated ARC Loan Web page at www.sba.gov/recovery/arcloanprogram/index.html.Court rules on deductibility of leasehold improvements
The Tax Court has agreed that the leasehold improvements made by a partnership to a hotel property owned by a city were substitutes for rent, and the cost of the leasehold improvements was allowed as a tax deduction. The partnership operated a Sheraton Hotel at the Cleveland Hopkins International Airport.
The property was owned by the city of Cleveland. The partnership was losing money, and the property was in need of repair. Through a series of negotiations, the partnership and the city reached an agreement whereby the cost of certain improvements approved by the city would be credited against rent otherwise payable by the partnership.
In allowing the deduction for the cost of the improvements, the Tax Court ruled that:
HUD to allow FHA borrowers to use new credit toward cost of home purchase
The first-time home buyer tax credit is set to expire at the end of November. Now the Department of Housing and Urban Development (HUD) has announced a plan to allow borrowers who use Federal Housing Administration (FHA) financing to apply the first-time home buyer credit toward the purchase of a home. The new policy is the latest move by the Obama administration to spur demand in the housing market.
Through Nov. 30, 2009, qualified first-time home buyers are entitled to a tax credit equal to 10 percent of the purchase price of the dwelling, or $8,000, whichever is smaller. Normally, the tax credit can be claimed only by filing your federal income tax return once the home has been purchased. Several states -- including Colorado, Idaho, Missouri, New Jersey and Ohio -- allow people to "monetize" the tax credit by advancing money to qualified borrowers so that they can apply the funds from the tax credit toward the down payment on a home purchase.
HUD has announced that it will allow FHA borrowers to do something similar. However, amounts advanced by FHA lenders cannot be used to meet FHA's minimum 3.5 percent down payment. The law bars such lenders from assisting borrowers with their down payments. FHA borrowers may use the money to increase the size of their down payment above the 3.5 percent minimum or to pay closing costs, any upfront interest charges or FHA's upfront premium.
State and local housing finance agencies as well as certain nonprofits aren't barred from assisting FHA borrowers with their down payment. They will be allowed to provide short-term loans to borrowers for that purpose under FHA's new policy. To assure that lenders and borrowers don't abuse the program, HUD requires that any fees and costs charged by the lender to advance funds from the tax credit must be reasonable.
Read more at www.hud.gov/.
If you are thinking about buying one of those new electric vehicles designed to get you to the grocery store and run other neighborhood errands, both the Emergency Economic Act of 2008 and the American Recovery and Reinvestment Act of 2009 created tax credits that can help lower your out-of-pocket cost.
The credit for qualified plug-in electric drive motor vehicles placed in service between Jan. 1, 2009, and Dec. 31, 2014, is $2,500 plus an additional $417 for each kilowatt hour of traction battery capacity in excess of four kilowatt hours.
For purchases after Feb. 17, 2009, a separate credit is available for 10 percent of the cost of acquiring certain electrically powered two-wheeled vehicles, three-wheeled vehicles and low-speed vehicles. The credit is available in the tax year the vehicle is placed in service.
Qualifying vehicles, often called "neighborhood electric vehicles," must be manufactured primarily for use on public roadways. Some vehicles may qualify for either or both credits, but you can claim only one credit per vehicle.
Read IRS Information Release 2009-45 here.IRS issues guidance on taxation on sale of life insurance policy
The IRS has issued a new ruling clarifying the tax treatment when you sell or surrender a life insurance policy. The ruling describes three situations: a surrender of a cash-buildup policy to the insurance company, a sale of a cash-buildup policy to a third party, and a sale of a term policy to a third party.
The ruling describes how to calculate the tax basis in the insurance policy to determine the amount of gain on the sale. For a policy you own personally, as opposed to one owned by a business, gains are taxable but losses are nondeductible personal losses.
The ruling also concluded that any gain attributable to the cash buildup in the policy is taxed as ordinary income. Only gain attributable to a payment from a third party in excess of the policy's cash buildup would qualify for capital gain treatment.
Read Revenue Ruling 2009-13 here.
Minimum wage to rise again in July
The federal minimum wage rate will be increased to $7.25 per hour, effective July 24, 2009. The rate has been set at $6.55 per hour since July 24, 2008.
The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA).
Many states also have minimum wage laws. Some state laws provide greater employee protections, and employers must comply with both. If the state minimum wage is higher than the federal amount, employees are entitled to the greater amount.
Read more in FSLA Fact Sheet #14 here.
Court case decision hinges on grammar
Do the abbreviations "i.e." and "e.g." confuse you? Are you unsure which one to use? A recent tax case required the court to deliver a grammar lesson.
First a little background on the tax issue involved in the case. Compensation received for physical injury is generally excluded from income. However, emotional trauma is not considered physical injury. So payments received for emotional distress are fully taxable.
In a settlement with her former employer, Laura Seidel received $157,000. The settlement agreement described the payment as being for "personal injury (i.e., emotional distress) damages only."
The case originally went before the Tax Court in 2007. All of the parties - the court, Seidel and the IRS - focused their attention on the "i.e." Seidel argued that emotional distress was an example of the types of injuries she received. The IRS argued that "i.e." is a limiting phrase that should be read to mean that emotional distress was the only type of personal injury being compensated by the payment.
The Tax Court observed that "i.e." is an abbreviation for the Latin phrase id est, which roughly means "that is" or "that is to say." Accordingly, the court agreed with the IRS.
Now the Court of Appeals for the 9th Circuit has upheld the Tax Court. Interestingly, the higher court did not comment on the Tax Court's grammar skills. The appellate court simply upheld the Tax Court's decision in an unpublished opinion.
Note that Seidel might have fared better if the settlement agreement had used "e.g." instead of "i.e." Both are abbreviations for Latin terms. However, "e.g." stands for exempli gratia, which means "for example."
Read more in Laura Seidel v. Commissioner, CA-9, 2009-1 USTC ¶50,370, April 28, 2009, here.IRS provides additional information on withholding from pension payments
In the last issue of Washington Tax Update, we advised pensioners that new IRS withholding tables may, in some cases, cause too little to be withheld from pension payments, resulting in additional taxes owed when 2009 income tax returns are filed.
Now the IRS has advised payors of pension benefits, that they are not required to use new withholding tables that reflect lower withholding due to the Making Work Pay tax credit in effect for 2009. However, payors are given the choice of using the new withholding tables or the withholding tables that were issued before the new tax credit was enacted.
Pension recipients are now faced with an additional challenge. If you qualify for the Making Work Pay tax credit, and taxes are being withheld using the old withholding tables, you may be overwithheld. If you don't qualify for the credit and your payor uses the new withholding tables, your taxes may be underwithheld. You are going to have to check carefully to avoid a surprise next April 15.
Read Information Release 2009-50 here.
You may have noticed a modest increase in your take-home pay recently.
To encourage you to spend more to stimulate economic activity, the government adjusted the income tax withholding tables so the tax savings from the new Making Work Pay Credit is immediately available. This credit is equal to 6.2 percent of earned income – from a job or from self-employment – up to a maximum of $400. A married couple can get up to $800, even if only one works.
Everyone is not eligible for the credit, however, including high income households, dependents and nonresident aliens. Because withholding tables cannot always distinguish those eligible for the credit, it is possible that you could have your withholding reduced inappropriately.
You are most likely to have this problem if you and your spouse are both working, you hold more than one job at the same time or you are someone else’s dependent. If you are self-employed, you will not benefit from the credit until you file your 2009 return unless you reduce your quarterly estimated tax payments to account for the credit.
If you want to check to see if the credit has been reflected in your take-home pay, compare a recent pay stub to one issued in February to see if your withholding has gone down. For most people, the amount will drop by $10 to $15 per week. If you don’t think you will qualify for the credit, consider filing a new Form W-4 with your employer to increase your withholding and avoid a tax surprise next April 15.
Here are some reasons you may not qualify for the Making Work Pay Credit:
Here are some reasons you may qualify for the Making Work Pay Credit, but your employer may reduce your withholding too much.
IRS issues guidance on energy credits for individuals and businesses
The IRS has released three pieces of guidance regarding new energy credits available to both individuals and businesses.
In Information Release 2009-44, the IRS reminds taxpayers that new tax benefits were enacted as part of the American Recovery and Reinvestment Tax Act of 2009. These benefits are available to individuals and businesses that reduce energy use and to producers that create new energy sources.
For homeowners, tax credits have been increased for energy-efficient improvements or installation of alternative energy equipment. Homeowners seeking to claim these credits may rely temporarily on existing manufacturer certifications or Energy Star labels in determining which products are qualified until the IRS announces updated certification guidelines.
Under provisions relevant to energy producers, taxpayers who place in service facilities that produce electricity from wind or other renewable resources can choose among the following:
The IRS has also issued Fact Sheet 2009-10, which summarizes the provisions of the new law that provide new, extended or increased incentives for taxpayers' efforts to increase energy efficiency. The most in-depth discussion focuses on the residential energy property credit. This credit is available for improvements including the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
Other credits discussed in the fact sheet include:
The fact sheet also discusses the opportunity for businesses to obtain renewable energy grants in place of the energy investment credit or the renewable energy production credit.
Finally, in Notice 2009-41, the IRS has provided interim guidance on the credit provided for residential energy-efficient property. This credit applies to expenditures on qualified solar electric property, qualified solar water-heating property; qualified fuel cell property; qualified small wind energy property and qualified geothermal heat pump property. The credit extends to labor costs for site preparation, assembly, original installation and piping or wiring to connect the property to the dwelling.
Read more in Information Release 2009-44, Fact Sheet 2009-10 and Notice 2009-41.
IRS issues rules for paid employees on active duty
The IRS has issued a ruling describing the payroll tax consequences for employers who continue to pay employees who leave their job to go on active duty with the military.
According to the ruling, this differential pay is subject to income tax withholding but is not subject to either Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) taxes. The payments must be reported to employees annually on Form W-2.
Read more in Revenue Ruling 2009-11.
Court rules on ownership of documents in McVeigh trial
The Court of Appeals for the 10th Circuit has upheld a decision of the Tax Court that the lead defense attorney for Timothy McVeigh in the Oklahoma City bombing trial could not claim a charitable contribution deduction for the donation of discovery material he had accumulated during the trial.
The attorney's tax basis in the material was zero. Therefore, unless the property was a long-term capital asset, the amount of the deduction would also be zero because the charitable contribution deduction would be reduced by the amount that would be ordinary income in a hypothetical sale.
The Tax Court had previously held that the attorney did not own the property because, under Oklahoma law, discovery materials belong to the client. Alternatively, the material was not a capital asset because capital assets do not include "a letter or memorandum, or similar property, held by a taxpayer whose personal efforts created such property ... (or by) a taxpayer for whom such property was prepared or produced."
The appellate court ruled that copies of FBI memoranda, lab reports, computer discs and photographs containing information regarding McVeigh, as well as letters to McVeigh from the FBI and Department of Justice, were clearly letters, memoranda or similar property within the plain language of the statute.
Although the material was not originally created for the attorney's benefit, it was produced or prepared for the attorney. The material was copied, organized and categorized by the government for the benefit of the attorney and his client and then placed in boxes with a letter listing the contents. The material, which was of the type typically produced for use in a criminal trial, was then provided to the defense attorney. The appeals court never ruled on ownership.
Read more in Sherrel and Leslie Steven Jones v. Commissioner, CA-10, 2009-1 USTC ¶50,316, March 27, 2009.
IRS provides grace period for disclosure of offshore interests
The IRS recently provided a six-month grace period during which taxpayers with offshore financial interests can voluntarily reveal previously undisclosed foreign financial accounts and pay a reduced penalty.
U.S. citizens and residents are required to pay tax on worldwide income. They are also required to disclose to the IRS ownership interests in foreign accounts, often by filing form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as FBAR.
The IRS has indicated it will not pursue criminal penalties against those who voluntarily disclose during the grace period.
This opportunity
to become compliant is available until Sept. 23, 2009.
Read more in the IRS's
FBAR Voluntary
Disclosure Memo.
If you paid your taxes with a credit or debit card this year, keep track of any convenience fees charged by your card company. Convenience fees can be charged to offset the costs associated with the processing of credit card charges The IRS had previously declined to allow a deduction for these fees but has reconsidered.
If you itemize your deductions in 2009, you will be able to deduct the
convenience fees as a miscellaneous itemized deduction. Miscellaneous
itemized deductions are deductible only to the extent the total exceeds 2
percent of your adjusted gross income (AGI).
Read IRS Information Release 2009-37 here.
Will the tax
code change in 2011?
President Obama has formed a task force, chaired by former Federal Reserve chairman Paul Volcker, to study ways to revise the federal tax laws. The task force is charged with closing loopholes, streamlining the law and generating revenue to pay for the stimulus/recovery program.
Consistent with promises made during the campaign, the president has
directed the panel not to increase taxes on families earning less than
$250,000 a year and not to increase taxes in 2009 or 2010. The timetable is
to have recommendations ready for the 2011 budget.
Past attempts to simplify the tax code have met with mixed results. President Reagan managed to remove a plethora of loopholes and tax breaks to construct a two-tiered system of 28 percent and 15 percent tax rate, with a "bubble rate" of 33 percent, on all personal income. The system did not last long.
Both Presidents George H. W. Bush and Bill Clinton raised income taxes, expanding the number of tax brackets from two to eventually five. Currently, there are six tax brackets.
Congress regularly inserts tax breaks and loopholes to satisfy political objectives and lobbyists. The first President Bush appointed the most recent bipartisan commission to study tax revisions. The recommendations of the commission were largely ignored.
Various proposals for a "flat tax" or "fair tax" have been floated for the past 10 or so years, ranging from one offered by former presidential candidate Steve Forbes to one proposed by former Arkansas governor and presidential candidate Mike Huckabee. The goal of a flat tax is a single rate on all income with few or no deductions. The fair tax scraps the income tax altogether and replaces it with a tax on goods and services at the point of purchase, like a national sales tax or value-added tax.
Tax law offers incentives for purchasing hybrid cars ... but be aware of phaseouts
The tax law provides a couple of incentives to assist you in purchasing a new hybrid vehicle.
Depending on the type of vehicle you purchase and the date of purchase, you may be entitled to a tax credit. In addition, if you purchase the vehicle after Feb. 16, 2009, and before Jan. 1, 2010, you will be able to deduct some or all of any sales or use tax you pay on the purchase.
If you are planning to support the American auto industry by purchasing a new Ford hybrid, however, your tax benefits may be limited. For purchases made after March 31, 2009, the tax credit for hybrid passenger automobiles and light trucks manufactured by the Ford Motor Company has begun to phase out. The full credit ranges from $1,950 on some Ford Escapes and Mercury Mariners to $3,400 on the 2010 Ford Fusion and Mercury Milan.
The phaseout has already begun because, during the last quarter of 2008, Ford's total sales of credit-qualified vehicles reached 60,000 units. Those who purchased or leased Ford hybrids prior to April 1, 2009, will receive the full credit. From April 1 through Sept. 30, 2009, the credit level will be 50 percent of the full amount. The credit drops to 25 percent on Oct. 1, 2009, and is eliminated after March 31, 2010.
Read IRS Notice 2009-37 here.
Courts tackle executive bonus compensation
Compensation issues are an ongoing point of dispute between taxpayers and the IRS when a corporation pays compensation to a controlling shareholder who is also an employee of the corporation.
The portion of the compensation that reasonably rewards the services as an employee is fully deductible. However, any excess amount is considered a disguised dividend, paid to a shareholder. The corporation may not deduct dividend payments.
In a recent case, the Court of Appeals for the 7th Circuit reversed a decision of the Tax Court, which had disallowed a deduction for almost $10 million paid as a bonus to the CEO and controlling shareholder of a home improvement retailer. The appeals court chastised the Tax Court for gauging the reasonableness of the compensation by comparing the CEO's compensation to the cash salaries and stock options received by CEOs of two publicly traded competitors, while ignoring the value of severance packages, retirement plans and other perquisites available to the other executives.
The appellate court also questioned whether the Tax Court adequately compared the duties of this CEO, who took only seven days of vacation per year and micromanaged the business, with the duties of the CEOs of the public companies, who employed large staffs to whom they might delegate responsibilities.
The appeals court also was unimpressed by several arguments normally put forth by the IRS in reasonable compensation cases. First, the court disagreed that the payment of a year-end bonus is indicative of a disguised dividend.
The court observed that bonuses are normally paid at the end of the year and are based on profits. Dividends are seldom calculated based on the corporation's profits.
The court also rejected the Tax Court's view that a controlling shareholder would be willing to work without compensation because the shareholder would benefit from the retained profits of the business.
Read more in Menard v. Commissioner, CA-7, 2009-1 USTC ¶ 50,270, March 10, 2009.
In a recent article, TIME magazine quoted an auto dealer as saying that the average car in America is more than nine years old.
In the same article, TIME quotes an industry economist as predicting that 35 million cars now on the road will be at least 10 years old in two years. TIME's conclusion: "There's not enough duct tape in America to hold that much junk together."
If you are driving one of these limping lizzies and you're thinking it may be time for a replacement, consider the recently enacted tax deduction available for new passenger vehicles purchased this year. The vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the deduction.
The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The amount of the deduction is phased out for those with modified adjusted gross income between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. The special deduction is available regardless of whether you itemize deductions.
Read more in Information Release 2009-030.
IRS offers guidance on mortgage interest deduction
You can deduct as an itemized deduction the interest you pay on a mortgage used to acquire a home. However, the deduction is limited to the interest paid on the first $1 million of mortgage debt. A $100,000 limit applies for home-equity debt.
The IRS Office of the Chief Counsel was recently asked to address the question of how the $1 million limitation applies to a home with multiple owners. Does each owner receive a $1 million limit, or is the $1 million limit shared among the owners? If each owner has a $1 million limit, then a married couple could deduct the interest paid on a $2 million mortgage.
The chief counsel concluded that the $1 million limit is applied "per home," rather than "per taxpayer." For example, if three people pool their funds to purchase a home in which they all live, the $1 million limit is distributed proportionately to the share of the total interest payments each owner makes during the year.
Read more in CCA 200911007.
New programs offer assistance to small businesses
In addition to tax relief, the American Recovery and Reinvestment Act includes a number of additional provisions aimed at stimulating small businesses.
Last month, the White House, the United States Department of the Treasury and the Small Business Administration (SBA) all announced measures aimed at addressing the economic challenges faced by small businesses and entrepreneurs.
The SBA recently announced changes to its lending and investment programs that will make it easier and less expensive for more small businesses to get financing. These changes include:
Read more here.
Tax Court addresses Madoff-type losses
The IRS ruled that investors in the Ponzi scheme perpetrated by Bernard Madoff are entitled to a theft loss deduction. However, a recent Tax Court case highlights some of the challenges a taxpayer faces when trying to claim that deduction.
To support a deduction for a theft loss, you must be prepared to prove three claims: (1) the fact that a theft occurred; (2) the amount of the loss; and (3) the year of discovery of the loss.
For Madoff investors, the fact that a theft occurred and the year of discovery of the loss seem to be satisfied by Madoff's guilty plea and the IRS's own pronouncements.
Under the income tax regulations, however, if you have a reasonable prospect of recovery on a claim for reimbursement by insurance or otherwise, the loss deduction is postponed until it can be ascertained with reasonable certainty whether the recovery will be received. Many of Madoff's victims invested through other advisers and may have claims against those intermediaries.
In the Tax Court case, Dominick Vincentini had invested in a phony investment scheme. The operators of the scheme were convicted of numerous federal criminal charges including money laundering, tax fraud, mail fraud and wire fraud. Vincentini claimed a theft loss deduction, either in the year the operators were charged with fraud or in the year they were convicted.
The IRS objected and the Tax Court sided with the IRS, ruling that Vincentini was unable to prove that he had no reasonable possibility of recovering some or all of his investments because he had yet to fully pursue his recovery plans. Therefore the amount of the theft loss could not yet be determined.
Read more in Dominick J. Vincentini v. Commissioner, T.C. Memo 2008-271.
As economic conditions continue to tighten, more people are operating businesses out of their homes. If you use part of your home exclusively for business, you may be able to deduct expenses for the business use of your home.
The home office deduction is available for homeowners and renters and applies to all types of homes, from apartments to mobile homes. Deductible expenses may include mortgage interest, insurance, utilities, repairs and depreciation.
But be careful. The IRS is concerned that the Internet may provide a new medium for promoters to sponsor illegal tax avoidance schemes. Some of these schemes suggest the conversion of a hobby or recreational activity into a "business" to claim personal expenses improperly as business expenses.
Many schemes involve the use of fictitious online businesses including online retail and services, online auction sales and bartering.
You must carry on a bona fide business, as well as meet other specific requirements, to deduct expenses related to the business use of your home. Even then, your deduction may be limited.
To qualify to claim a home office deduction for business expenses, your business use of that part of your home must be both exclusive and regular. In addition, the business part of your home must be one of the following:
Read more in IRS Headline Volume 263.
IRS issues guidance for net operating loss carrybacks
Eligible small businesses may carry back a 2008 net operating loss up to five years instead of the normal two-year limit, according to guidance recently issued by the IRS.
The guidance applies to the enhanced net operating loss (NOL) carryback provisions of the American Recovery and Reinvestment Act. Eligible small businesses are those with average gross receipts of $15 million or less for the three-year period ending in 2008.
These provisions do not apply just to corporations. Individuals who experience an NOL as a result of losses from one or more eligible small businesses that operate as sole proprietorships, partnerships, LLCs or S corporations also qualify for the extended carryback period.
Fiscal year businesses may make the election for an NOL occurring in a tax year either beginning or ending in calendar 2008, but not both.
Depending upon whether you have already filed a return for the NOL year, you may be required to take action as early as April 17, 2009, to perfect your right to a five-year carryback. In an accompanying news release, the IRS said it will work to issue NOL-related refunds within 45 days or sooner.
Read more in Revenue Procedure 2009-19.
IRS offers guidance to investors who are fraud victims
The IRS has decided that an investor's loss resulting from a Ponzi-type scheme is a theft loss rather than a capital loss.
This guidance is for investors who lost money in the Ponzi scheme operated by Bernard Madoff. It also applies to losses in any similar frauds.
The loss is deductible as an ordinary loss from a transaction entered into for profit. As such, the loss is fully deductible and not subject to the limitations that apply to personal theft losses.
Also, to the extent the loss creates a net operating loss, the investor is eligible to carry the loss back to receive a refund of taxes paid in prior years.
As a theft loss, the loss is deductible in the year discovered rather than in the year it occurred. The amount deductible is the amount of the loss not covered by a claim for reimbursement. In some cases, the IRS will allow investors to claim the deduction before the person charged with the crime is actually convicted.
Read more in
Revenue Ruling 2009-9
and
Revenue Procedure 2009-20.
New stimulus grant scam, same old crooked game
The federal government has reported a new scam involving fake economic stimulus grants for small businesses.
Undoubtedly, you have read a number of reports about scammers impersonating the IRS in an attempt to gain access to your personal information and steal your identity. Because of these reports, crooks know you are suspicious, so they set up Web sites that discuss government grants. The information sites then direct you to the scammers' other sites.
Here's how a typical scam works. For a fee of $30 to $50 you get a subscription to a grants database or a grant package with information on how to write a grant proposal, along with a list of government agencies that provide grants to businesses.
After you pay the fee, you may or may not receive the information promised. And if you pay by credit or debit card, you may receive continuing charges for your subscription.
Federal and state agencies do not provide small business grants to start a business, pay off debt or cover operating expenses. However, they do provide guarantees on low-interest loans that can be used for these purposes.
Government agencies publish free grant information on the Web. You do not need to pay anyone to gain access to this information.
Visit agency Web sites and use your favorite search engine to access a wealth of free information from the government.
©Copyright 2010 Barnard, Vogler & Co. If you have any questions concerning the site design please contact our webmaster.