Small Business Taxes & ManagementTM--Copyright 2018, A/N Group, Inc.
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September 18, 2018
NewsYou may be able to secure a tax deduction for a contribution of land or an easement as a qualified conservation contribution. In Champions Retreat Golf Founders, LLC., Riverwood Land, LLC., Tax Matters Partner (T.C. Memo. 2018-146) the LLC operated a golf club contributed a portion of its property. But the Court found that the easement did not met the conservation purpose requirement by providing a habitat for rare, endangered, or threatened species of animals, fish, or plants nor is a natural area that contributes to the ecological viability of Sumter National Forest, the Court found that the contribution was not made for the conservation purpose of protecting a relatively natural habitat. The Court also found the contribution was not made for the preservation of open space that would yield a significant benefit to the public. The Court found the taxpayer was not entitled to a deduction for a qualified conservation easement.
Long-term disability benefits can be fully taxable, fully exempt, or a combination. If you pay all the premiums, or your employer pays but the premiums are included in your income, the benefits are not taxable. In Catherine J. Clay (T.C. Memo. 2018-145) the taxpayer's employer paid the premiums and none were included in her income. In addition, the taxpayer had to take the benefits into income in the year received, even though she might have to repay a portion of them under certain circumstances. In addition, the Court held that all of her income including the long-term disability benefits and a state tax refund had to be included in the computation of the amount of social security benefits that were taxable.
Tip of the DayBuild or buy? . . . This question pops up in many business situations. Buy a business to get a new product line or start your own? Design a system from scratch or buy off-the-shelf? In this case we're talking about a building. More than a few entrepreneurs want to have their own building, with their own idea of what it should look like. But building from scratch involves risks of cost overruns, delays in construction, sometimes more difficulty in getting funding, and, if you're not going to occupy the entire structure, it also means securing outside tenants. Buying may look more expensive, but the time to find and close on a property is usually much less than in building your own. And that costs money. The calculus changes if you need a special purpose property and have to do extensive modifications on the building or you're looking at a spcific location.
September 17, 2018
NewsTaxpayers should keep in mind that today, September 17, is the deadline for filing Forms 1120S (S corporation returns) and 1065 (partnership returns). Today is also the deadline in many states for accompanying state returns.
Generally, you must receive a notice of deficiency and have an opportunity to challenge it. In Paul T. Venable II (T.C. Memo. 2018-144) the IRS sent notices of deficiency for 2008, 2009, and 2010 to the correct address, but not the 2011 notice. The taxpayer didn't argue he hadn't received notices for the first three years, only the last one. The taxpayer did have a collection due process hearing. The Court found that the taxpayer had multiple opportunities to challenge his underlying liability for 2011 during his appeals hearing but he offered only frivolous arguments about why he was not subject to tax. The Court rejected his abuse of discretion by the IRS claim.
Tip of the DayBuying a business? . . . It may look cheap based on the purchase price, but that may be only the tip of the iceberg. Take a good look. In order to make it viable do you have to increase inventory, beef up advertising, replace equipment, etc.? If you're not familiar with the business does it have a good reputation? It's not unusual in the sale of a small business for the seller to retain and collect the receivables. That means you'll have use capital to finance future sales. A seasonal business could require additional capital if it's purchased at the wrong time. Equipment may have to be upgraded, the office or retail space redone, etc. All that's assuming the business is profitable and will generate enough cash flow for you to live on. If not, your required capital will be even more. Don't fall in love with the business. Talk to your accountant, get an independent opinion, even if it's informal, and do your homework.
September 14, 2018
NewsThe IRS issued proposed regulations (REG-104390-18) concerning global intangible low-taxed income under Section 951A and related sections of the Code. The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made major changes to the tax law, including adding new rules requiring the inclusion of global intangible low-taxed income generated by controlled foreign corporations (CFCs). Under the TCJA, a U.S. person that owns at least 10 percent of the value or voting rights in one or more CFCs will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder. A U.S. person includes U.S. individuals, domestic corporations, partnerships, trusts and estates.
If you don't pay assessed taxes plus any interest and penalties, the IRS can put a lien on your property. That's what the IRS did in Ronald W. Armstrong, et al. (U.S. District Court, S.D. Texas) in order to establish priority over other third-party lienholders. The taxpayers filed their 2003 and 2004 returns in 2007, but did not pay the full amount due with the returns, nor any of the interest and penalties that would have been due by that tiem. The remaining liability was substantial and the IRS filed the lien. Over the course of time the tax liability was paid, but not the interest and penalties. Allegedly by mistake, the IRS filed a Form 668 Certificate of Release of Federal Tax Lien relating to the the taxpayers 2003 and 2004 tax liabilities on July 13, 2017. The Certificate of Release certifies that the taxpayer “has satisfied the taxes listed below and all statutory additions.” The taxpayers argued that the Certificates of Release had the effect of releasing and extinguishing the claims for penalties and interest. The Court did not agree. It found the taxpayer still liable for the unpaid interest and penalties.
Tip of the DayEstimated tax deadline approaching . . . The IRS is reminding taxpayers (IR-2018-184) that third quarter estimated tax payments for individuals are due September 17. While many taxpayers may see lower overall taxes this year, that's not universally true. Taxpayers with state and local taxes that exceed the maximum deduction ($10,000), those deducting home equity interest and those with significant miscellaneous itemized deductions could see their taxes increase. Keep in mind that for the same salary as last year your withholdings will be less as a result of the new withholding tables. Finally, those taxpayers with capital gains and other investment income as well as income from a business or pension should also review their withholdings and payments. The easiest way to pay is online at IRS Direct Pay.
September 13, 2018
NewsThe Collection Due Process (CDP) Program was designed to give taxpayers an opportunity for an independent review to ensure that a levy action that has been proposed or a lien that has been filed is warranted and appropriate. An effective process is necessary to ensure that statutory requirements are met and taxpayers’ rights are protected. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit because TIGTA is statutorily required to determine whether the IRS complied with the required procedures under Code Sections 6320 and 6330 when taxpayers exercised their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a Notice of Intent to Levy. During this year’s audit, TIGTA identified similar deficiencies in the IRS’s processing of CDP cases as previously reported. Specifically, the Office of Appeals did not always classify taxpayer requests properly and, as a result, some taxpayers received the wrong type of hearing. From two statistically valid samples, TIGTA identified eight taxpayer cases that were misclassified. This is a slight increase from the six misclassified taxpayer cases that were identified in the prior year’s review. TIGTA also identified an issue involving taxpayers that mail or fax their hearing request to the wrong IRS location. When taxpayers mail or fax their hearing request to other than the required IRS location, Compliance function guidance requires employees to fax the taxpayer’s request to the CDP Coordinator at the correct Compliance function site on the same day. TIGTA determined that the IRS Compliance function did not timely process the hearing requests for an additional eight taxpayers. These taxpayers were not granted a CDP hearing but properly requested an Equivalent Hearing, and Appeals appropriately provided the hearing per guidelines. However, the IRS Compliance function did not follow procedures and may not have adequately protected taxpayer rights by the untimely processing of the misdirected hearing requests. In addition, TIGTA continued to identify errors related to the determination of the Collection Statute Expiration Date (CSED) on taxpayer accounts. From two statistically valid samples, TIGTA identified nine taxpayer cases that had an incorrect CSED. For the nine taxpayer cases identified, the IRS incorrectly extended the time period in seven of the taxpayer cases, allowing the IRS additional time it should not have had to collect the delinquent taxes. To see the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201810054fr.pdf.
If the IRS uses the bank deposits method to reconstruct your business income, you may be able to refute some of the income if you can show the deposits are from nontaxable sources such as loans, loan repayments, gifts, etc. In Andrew Mitchell Berry and Sara Berry; Ronald Gene Berry and Linda Kathryn Berry (T.C. Memo. 2018-143) the taxpayers tried to show that some of the deposits were loans. A promissory note they presented was neither signed nor dated nor was there any evidence of repayment. The Court concluded no bona fide loan existed. The Court disallowed cost of goods sold for a construction business because of inadequate documentation. The Court also disallowed deductions for auto and truck expenses because the taxpayers presented no car log.
Tip of the DayStopping a business? . . . It's usually not as simple as turning off the lights and locking the door for the last time. There's a final tax return, possible sales tax returns due, etc. If you're doing business as a corporation, you have to legally dissolve. Often not a big deal, but an important one. And there could be expenses after you close. Talk to your accountant and/or attorney about closing bank accounts, notices to vendors, etc.
September 12, 2018
NewsThe second leg of tax reform, sometimes termed "Tax Reform 2.0" could come up for a House vote this month. A markup of the bill is expected this week. The cornerstone of the bill would make the individual tax cuts permanent.
The IRS web page detailing tax help for California wildfire victims has been updated again. If you're affected by these fires, check the page at irs.gov.
The 2015 Fixing America’s Surface Transportation (FAST) Act required the IRS to begin using private collection agencies (PCA) to collect inactive tax receivables. The PCAs may contact taxpayers to collect delinquent taxes. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to evaluate the IRS’s planning and implementation of the private debt collection (PDC) program as well as initial program results. As of May 31, 2018, total program revenue ($56.62 million) was approximately $1.3 million more than costs ($55.33 million). However, as of June 2018, the four PCAs collected just 1 percent of the $4.1 billion assigned. A study commissioned by the collection industry trade association showed the national collection average for Calendar Year 2016 was 9.9 percent. A possible cause of the low collection yield is the age of the cases being assigned. TIGTA also noted that some IRS policies may be harmful to taxpayers such as a complaint process that is dependent on private debt collectors reporting on themselves and authentication procedures that needlessly expose taxpayers to risk. To see the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201830052fr.pdf.
Tip of the DayToo many brands? . . . Often having a number of brands or varieties for your customer to select from increases your total sales. But you can get carried away. And each version requires some expense--package design, formulation, marketing, etc. In some cases you could be spending more to differentiate a product than you're making in gross profit. That's when deleting some of those choices can increase profits. The first step is a profit analysis. Are you making money on the option or is it just taking shelf space? The second is to do a test to see if customers will switch to one of your other options or go to a competitor. Sometimes marketing an offbrand can cannibalize sales from more profitable items.
September 11, 2018
NewsThe IRS collaborates with Federal, State, and local governmental agencies to increase tax compliance, enforcement, and services to taxpayers. One way that the IRS accomplishes this is through the Fed/State Program. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine the effectiveness of the IRS’s use of data and information received from State agencies to increase tax compliance by identifying nonfilers and underreporters. FIGTA found the IRS can more effectively address filing noncompliance and underreporting by better using the State Audit Report Program. TIGTA analyzed Fiscal Years 2013 through 2016 State Audit Report Program nonfiler inventories and found that the IRS had dropped 39,142 records for taxpayers who were either repeat nonfilers, high-income nonfilers, or both with estimated tax liabilities not collected totaling approximately $285 million. Additionally, only 12 States participate in the State Audit Report Program. TIGTA also found that there is a lack of coordination and knowledge regarding the agreements with State agencies. TIGTA recommended that the IRS expand the State Audit Report Program to other State agencies, evaluate high-income and repeat nonfilers prior to dropping them from the State Audit Report Program nonfiler inventory, and document the analysis. For the complete report, go to www.treasury.gov/tigta/auditreports/2018reports/201830060fr.pdf.
In Roberto Toso and Marcela Salman (151 T.C. No. 4) the taxpayers timely filed returns for their 2006, 2007, and 2008 income tax but failed to report gains from sales of stocks in passive foreign investment companies (PFICs). They asserted that assessment of any deficiency is time barred because for each year the notice of deficiency was issued outside the three-year limitations period under Sec. 6501(a). The IRS claimed that the limitations period was extended to six years under Sec. 6501(e)(1)(A)(i), which applies if the taxpayer omits an amount of gross income in excess of 25% of the gross income reported on the return. Resolution of this issue turned largely on whether gains from sales of PFIC stocks that are excluded pursuant to Sec. 1291 from gross income for the current year (non-current-year PFIC gains) are properly counted as gross income for purposes of Sec. 6501(e)(1)(A)(i). The taxpayers also asserted that, to the extent the assessments are not time barred, any deficiency should be reduced by offsetting their PFIC gains with PFIC losses in applying Sec. 1291. The Tax Court held that non-current-year PFIC gains are not counted as gross income for purposes of Sec. 6501(e)(1)(A)(i) and that assessment of the taxpayers' 2006 deficiency was not time barred under Sec. 6501(e)(1)(A)(i) because after excluding non-current-year PFIC gains, the taxpayers omitted an amount from their 2006 return greater than 25% of the gross income reported on that return. The Court also held that assessment of the taxpayers 2007 and 2008 deficiencies was time barred and that Sec. 1291 does not provide for offsetting PFIC gains with PFIC losses.
Tip of the DayWages on the rise? . . . With unemployment as low as it's been since 2000 economists have been wondering when wages will start to rise. There are some indications that may be about to happen. And there may be more incentive for employees to search for better positions. Entry level and minimum wage jobs are likely to be tougher to fill and workers in these positions may be among the group with the greatest incentive to move on. If raising wages for this group is difficult you should consider providing another sweetener.
September 10, 2018
NewsRevenue Ruling 2018-25 (IRB 2018-39) provides the rates for interest determined under Section 6621 of the code for the calendar quarter beginning October 1, 2018, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent. That's unchanged from the current quarter.
Beginning October 14, e-Services users, after entering their accounts, will see a pop-up asking that users accept the terms of the updated user agreement. The IRS is offering a preview of the agreement at Preview Updated e-Services User Agreement; Launch Set for October 14 at www.irs.gov/eservices. The IRS is strongly encouraging our e-Service users to read this content, because of the importance of these changes to improve security for our users and taxpayers. The user agreement is not long, and may require some tax practitioners to review how they conduct business.
Tip of the DayDoing some capital improvements on your home? . . . Don't forget to tell your insurance company when you're done. Many improvements are costly and add significantly to the value of your home. You don't want to be underinsured after going through that cost and work. You should also talk to your insurance company if you've added or changed items that could make your house safer such as filling in a pool. You may also have to inform the local tax assessor. (That's usually automatic if you need a building permit from the town for the improvements.) It'd be nice to get away without paying tax on the improvement, but some localities have penalties for failing to report additions.
September 7, 2018
NewsThe IRS has posted a new web page designed to assist organizations seeking tax-exempt status. The page contains basic information as well as a number of links to state government websites, and other IRS pages. See IRS Tax Tip 20018-138.
Using an offer in compromise you may be able to settle your tax liability for less than the full amount. But you've got to show that you have neither the income nor the saleable assets to pay the full amount. In Michael McAvey and Kathleen McAvey (T.C. Memo. 2018-142) the taxpayers made an offer in compromise that was rejected because it was less than their reasonable collection potential (RCP). The IRS advised the taxpayers that it would no accept an offer of less than $473,000 and they agreed to a collateral agreement waiving their unused NOLs and capital losses. If they were to agree to that they would be forfeiting significant tax benefits. After failing to hear from the taxpayers, the IRS sustained the notices of intent to levy. The taxpayers argued that the collateral agreement would result in them paying essentially the full amount of the tax due. The Court held the agrument was without merit, noting that in offers in compromise a collateral agreement enabling the government to collect funds in addition to the amount actually secured by the offer or to add additional terms not included in the standard agreement was not unusual. The Court found no abuse of discretion by the IRS.
You may be entitled to a theft loss (casualty losses are no longer permitted individual taxpayers beginning in 2018), but you have to prove a theft occurred, the value of the property before the theft, and that you owned the property. In Lyndha Elayne Evensen (T.C. Memo. 2018-141) the taxpayer claimed a loss on an investment that turned out to be a Ponzi scheme. But the taxpayer failed to prove that she had made an investment or had received the investment as compensation for services she performed. The Court held there was no theft loss.
Tip of the DayThat site must be safe . . . Don't bet on it. Apparently some scammers created websites to look like military recruitment pages to get potential names for secondary schools. Avoiding such scams requires some effort. Before accepting the site check the wording of the address to make sure it makes sense. A spelling difference such as madiison.com instead of madison.com is instantly suspect. Endings other than .com, .gov, .net or .org may be legitimate, but require additional research. Still not sure? Do a search for the organization, e.g. Madison, LLC, and see what turns up. If there's a telephone number you can enter it in a regular Google or Bing search and see what comes up. Often scams are reported. There's no one answer here. The FTC recently shut down a site called www.army.com. The tipoff here is the .com. Government sites are generally .gov. Asking for personal information is also a tipoff. And there are few legitimate sites that ask for info such as you social security number, mother's maiden name, first pet, etc.
September 6, 2018
NewsThe IRS is reminding taxpayers they have until Sept. 28 to apply for the Offshore Voluntary Disclosure Program (OVDP). Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used the various terms of the program to comply voluntarily with U.S. tax laws. These taxpayers with undisclosed offshore accounts have paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. The IRS will continue to hold taxpayers with undisclosed offshore accounts accountable after the program closes. Since the announcement, the IRS has not received any public comments addressing a continued need for the OVDP. The IRS will maintain a pathway for taxpayers who may have committed criminal acts to voluntarily disclose their past actions and come into compliance with the tax system. Updated procedures will be announced soon. For additional information, go to Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets.
The IRS announced (IR-2018-178) that business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses. Responding to taxpayer inquiries, the IRS clarified that this general deductibility rule is unaffected by the recent notice of proposed rulemaking concerning the availability of a charitable contribution deduction for contributions pursuant to such programs. The business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense. Therefore, businesses generally can still deduct business-related payments in full as a business expense on their federal income tax return. For more information, go to Clarification for business taxpayers: Payments under state or local tax credit programs may be deductible as business expenses.
Generally, if a debt, business or personal is forgiven, in whole or in part, you have cancellation of debt income (COD). The amount of income is equal to the amount forgiven. There are exceptions to the general rule. In Daniel Smethers (T.C. Memo. 2018-140) the taxpayer failed to report cancellation of debt income from mortgages included on a Form 1099-C. Two of the exceptions to COD provide an exclusion for taxpayers who are insolvent or debt related to a principal residence. The taxpayer failed to show that he was insolvent or that the home had been his principal residence. The Court held the taxpayer did not qualify for either of the two exceptions.
Tip of the DayVictim of a disaster? . . . The IRS has page with FAQs for Disaster Victimes with 15 links that will answer a number of questions for taxpayers affected by a natural disaster. In addition, now that the hurricane season is upon us, you should check Tax Relief in Disaster Situations containing information specific to each disaster.
September 5, 2018
NewsRev. Proc. 2018-36 (IRB 2018-38) updates and restates the lists of jurisdictions in Rev. Proc. 2014-64 as supplemented, adding Argentina and Moldova as jurisdictions with which the United States has in force a relevant information exchange agreement, and adding Greece as a jurisdiction with which the relevant automatic exchange of tax information has been determined appropriate. Effective for interest paid after January 1, 2018 there is a reporting requirement of certain deposit interest paid to nonresident alien individuals. The Rev. Proc. also provides a current list of the jurisdictions with which the Department of the Treasury and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under Secs. §1.6049-4(b)(5) and 1.6049-8(a).
Instead of going to Tax Court you can pay any assessment and sue for a refund in a U.S. District Court. But in order to do so, you must pay the entire amount of taxes and penalties. In Joseph A. White (U.S. District Court, D. Arizona) the taxpayer failed to do so and the District Court said it did not have jurisdiction over the tax refund claim.
Section 6651 provides a penalty for filing or paying late. There are few acceptable excuses for filing late. In Katherine Marte Kopstad (T.C. Memo. 2018-139) the taxpayer failed to file because she was not aware she received income from the family business and her accountant did not file for an extension. The IRS assessed a penalty. The taxpayer sought an abatement based on the IRS's first-time abatement of penalty program. That was denied because she received such an abatement within the prior three years, a disqualifying condition. She argued the earlier penalty should not have been assessed, but that year was not at issue. The Court sustained the IRS's penalty.
Tip of the DayRecord ownership . . . Selling your business? Liquidating? If you're audited down the road you may need access to those records. It's common to provide records to the new owner, but make sure you either keep a copy or include language in the contract allowing you access to them for the appropriate period of time. There's no reason you shouldn't be able to retain a copy of any electronic data, e.g., your accounting files. Chances are the info will fit on a couple of CD's. Talk to your accountant and attorney.
September 4, 2018
NewsPresident Trump has proposed changes to the minimum distibution requirements for IRAs and certain other plans and to ease the rules on multiemployer plans to broaden their availability and usage.
In Harbor Lofts Associates, Crowninshield Corporation, Tax Matters Partner (151 T.C. No. 3) a nonprofit development corporation, was the fee simple owner of two buildings listed on the National Register of Historic Places. The taxpayer, a partnership, was a long-term lessee of those buildings. In 2009, the taxpayer and the nonprofit joined together in transferring a facade easement to a qualified organization under Sec. 170(h)(3). H claimed a charitable contribution deduction of $4,457,515 for 2009. The IRS disallowed the partnership's claimed charitable contribution deduction for the donation of the facade easement. The IRS argued that the partnership, as the long-term lessee of the two buildings, is not entitled to a charitable contribution deduction under Sec. 170(f)(3)(B)(iii) and (h) because it did not hold a fee interest in the buildings and cannot meet the perpetuity requirements. The Tax Court held that the partnership, as a long-term lessee of the two buildings, does not hold a fee interest in the property subject to the facade easement and cannot contribute a conservation easement and that a lessee is not entitled to a charitable contribution deduction for joining the fee owner of real property in granting a conservation easement.
You may be able to secure a business bad debt deduction for partial worthless of a business debt such as an account receivable, but for individuals there must usually be a completed act or total worthlessness. In Robert Forlizzo and Judith Ingram (T.C. Memo. 2018-137) the taxpayers claimed a deduction for losses related to partnership interests they held. The taxpayer claimed a loss in the partnership interests on an 2008 amended return. While the partnerships (engaged in real estate development) did not fare well in the recession, they remained in business and the taxpayer did not sell or abandon his interests during 2008, 2009, 2010, or 2011. The Court noted a taxpayer may claim an ordinary loss deduction relating to his investment in a partnership if the investment becomes worthless and sale or exchange treatment does not apply, but a loss relating to a worthless interest must be evidenced by closed and completed transaction, fixed by identifiable events actually sustained during the taxable year. A decline in the assets' value or mere shrinkage is not sufficient to establish a closed or completed transaction necessary to justify a loss deduction. Formal bankruptcy, liquidation, insolvency, or market events and conditions can sufficiently establish a closed and completed transaction necessary to justify a loss deduction relating to a worthless interest in a partnership. The Court noted that there was still value in the partnerships at that time, based on the underlying properties. The Court sided with the IRS in denying the deductions for 2008.
Tip of the DayProperty given to employees . . . Companies often give used office furniture, computers, etc. to employees. You should be aware that such gifts are taxable as compensation to the employees. The amount to include on the employee's W-2 is the fair market value of the property. In the case of a bargain purchase (e.g., the employee pays $50 for a desk with a fair market value of $200), only the bargain element ($150 in the example) is additional compensation. As always, there are some exceptions. Property you give the employee so that he can do his work isn't taxable. For example, you expect the employee to work out of his house. A computer, desk, etc. that you provide him for use in the home office wouldn't be additional compensation. Special rules apply to products taken home for testing, merchandise sales at a discount, etc.
August 31, 2018
NewsFEMA has declared some 19 disasters so far during August. You may be entitled to assistance from FEMA and special benefits from the IRS. For a list of declared disasters, go to www.fema.gov/disasters.
It rarely has made sense to buy an asset, business, etc. for the tax losses. It makes even less sense under the new lower tax rates. Even if you're in the 40% bracket (federal and state) paying $1 for $1 deduction saves you only 40 cents in taxes. Debt can increase your leverage, but also your risk. In Scott A. Householder and Debra A. Householder (T.C. Memo. 2018-136) the taxpayers bought into a horse breeding venture and claimed to materially participate in the activity. The venture produced enough in losses in one year to more than offset $771,000 in wage, business, and Schedule E income. The Tax Court first dealt with the issue of material participation. The taxpayers claimed they satisfied the 500 hour test. The Tax Court found that their logs did not approach the requisite number of hours. Testimony of a third party was not convincing. The Court also found that the activity did not rise to the status of a trade or business. The Court examined the nine factors usually reviewed when determining whether an activity is entered into with a profit motive and found all nine factors weighed against them. The Court also noted that the literature they received from the promoters of the horse-breeding program showed the taxpayers how to offset the income they received from other sources with the breeding losses. The Court denied the losses.
Tip of the DayEquipment trade-ins . . . The only like-kind exchanges that now defer gain on a disposition of property are those involving real estate. Trade-in that truck for a new one? You'll have to recognize gain just as if you sold it. That means there's no longer any tax incentive to trade-in equipment. You may get a better deal from the dealer or another party or you may just want to avoid the problems associated with selling the equipment on your own. Those could still be valid reasons. And, in some states you may get a break on the sales tax.
August 30, 2018
NewsThe IRS is required by law to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. Taxpayers might be adversely affected if the IRS does not follow the requirements to notify both the taxpayers and their representatives of the taxpayers’ rights related to assessment statute extensions. The Treasury Inspector General for Tax Administration (TIGTA) did a review of a statistical sample of 60 closed taxpayer audit files with assessment statute extensions and found that the IRS was compliant with Code Section 6501(c)(4)(B). However, 10 of the taxpayer audit files lacked documentation to support that employees followed the IRS’s internal procedures for further explaining the taxpayers’ rights to the taxpayers. In addition, TIGTA’s review found instances in which the audit files lacked documentation to support that the IRS complied with procedures requiring the notification of a taxpayer’s representative when an authorization for third-party representation exists. TIGTA reviewed 43 taxpayer audit files that had authorizations for third-party representation and found that five of the taxpayer audit files did not contain documentation to support that the taxpayers’ representatives were provided with the required notifications. To read the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201830059fr.pdf.
The IRS is prohibited from labeling taxpayers as Illegal Tax Protesters or any similar designations. Using Illegal Tax Protester or other similar designations may stigmatize taxpayers and may cause employee bias in future contacts with these taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) is required to annually evaluate IRS compliance with the prohibition against using Illegal Tax Protester or similar designations. The purpose of this audit was to determine whether the IRS complied with RRA 98 Section 3707 and its own internal guidelines that prohibit IRS officers and employees from referring to taxpayers as Illegal Tax Protesters or any similar designations. TIGTA found the IRS has not reintroduced past Illegal Tax Protester codes or similar designations on taxpayer accounts. However, in reviewing the narrative data entered for approximately 65 million taxpayers in the Account Management Services system, TIGTA found that there were nine instances in which nine employees referred to taxpayers as “Tax Protester/Protestor.” TIGTA also found, in reviewing the Taxpayer Advocate’s Management Information System narrative data consisting of approximately 30,000 records, three instances of employees using Illegal Tax Protester or similar designations in referring to taxpayers. For the complete report, go to www.treasury.gov/tigta/auditreports/2018reports/201830056fr.pdf.
In Louis S. Schuman and Sandra Schuman (T.C. Memo. 2018-135) the taxpayers originally claimed a business casualty loss carryover on their 2011 Schedule C. The taxpayers subsequently submitted two amended returns. The second return claimed the loss was related to lost equity from the sale of a home and not deducting the cost basis of stock options from income from stock options. On brief the taxpayers conceded that the casualty loss was not related to the taxpayer's business but contend that it is nevertheless deductible on three different grounds, alternatively arguing that it represents: (1) the loss in equity from the sale of taxpayers' residence to pay taxes that were not legitimately owed; (2) the abandonment of a negligence claim against return preparers who inaccurately reported the value of stock options granted to the taxpayer, resulting in overpayments of taxes; or (3) a form of compensation for refund claims for those overpayments barred by the statute of limitations. The Court noted that if the claimed loss was personal, it must be related to a casualty. The Court rejected the arguments as unrelated to a loss of property. The Court also found it did not have jurisdiction on overpayment claims related to prior returns because they were not at issue.
Tip of the DayS corporation losses . . . Just because you have a shareholder in an S corporation doesn't mean you can automatically take any losses on your personal return. First, you have to have sufficient basis--either equity or debt--and you must be "at-risk" with respect to that amount. Then you must materially participate in the activity. You can meet the final requirement in several different ways, but generally you must participate in the day-to-day management of the business. If you don't meet all the tests those losses are suspended until you do or you dispose of all of your interest in the stock. If you switch from S to C corporation status, the losses are suspended until the entity is once again an S corporation. Check with your tax advisor before making any switch. You may have other options.
August 29, 2018
NewsNotice 2018-70 (IRB 2018-38) informs individual taxpayers that Treasury and the IRS intend to issue proposed regulations clarifying who is a qualifying relative for the new $500 credit for dependents and head of household filing status for years in which the exemption amount is zero--taxable years 2018-2025. The notice explains that proposed regulations will provide that the reduction of the personal exemption amount to zero will not be taken into account for purposes of the $500 credit and head of household filing status. Instead, the exemption amount for the application of these provisions will be treated as $4,150, as adjusted for inflation, for years in which the exemption amount is zero. The notice further provides that taxpayers may rely on the rules of this notice prior to the issuance of proposed regulations.
The IRS has released the eighth tip in a series called Protect Your Clients; Protect Yourself: Tax Security 101. The Security Summit awareness campaign is intended to provide tax professionals with the basic information they need to better protect taxpayer data and to help prevent the filing of fraudulent tax returns.
In two cases involving a single petitioner, William Mark Scott (T.C. Memo. 2018-133 and 2018-134) the Tax Court sustained the IRS denial of a whistleblower award because the IRS took no action based on the information provided by petitioner and, therefore, received no proceeds. Common reasons for declining to act on information include statute of limitations issues, limited resources, or a conclusion that there are no material issues.
Tip of the DayRead the fine print . . . While it might seem like a routine transaction, be sure to read the fine print. Or at least scan the bold headings. That's especially true if it looks like you're getting a special deal. One business owner signed up for a service that was cheaper than the competition, only to find it wasn't nearly as good as his previous service. When he went to cancel he discovered he signed up for a 3-year contract. The service was $2,500 a year and the penalty for early cancellation of the contract was $1,900. He paid the $1,900. As a business there's a good chance you won't have nearly the same protection as a consumer.
August 28, 2018
NewsThe IRS has announced (IR-2018-174) changes to the Compliance Assurance Process (CAP) program for 2019. CAP is a cooperative pre-filing program for some of the largest taxpayers. To give affected taxpayers more time to assess the proposed changes, the IRS will shift the start of the application period to Oct. 1, 2018 and it will close on November 30, 2018. The CAP program began in 2005 as a way for resolving tax issues through open, cooperative and transparent interactions between the IRS and taxpayers before the filing of a return. The program began with 17 taxpayers and currently has 169 taxpayer participants. The proposed changes are designed to improve operation of the program, make the best use of limited government resources and to ensure the sustainability of the program. Changes will be effective for the upcoming 2019 application period, with additional changes expected the following year and into the future. While interest in CAP has grown, since the inception of the program, the IRS workforce in the LB&I division has declined more than 25 percent.
Certain U.S. citizens or resident aliens, specifically contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, may now qualify for the foreign earned income exclusion. The Bipartisan Budget Act of 2018, enacted in February, changed the tax home requirement for eligible taxpayers, enabling them to claim the foreign earned income exclusion even if their “abode” is in the United States. The new law applies for tax year 2018 and subsequent years. This means that these taxpayers, if eligible, will be able to claim the foreign earned income exclusion on their income tax return for 2018 when they file. For more information, see IR-2018-173.
It's all about the records. No receipt, no deduction. In Raghvendra Singh and Kiran Rawat (T.C. Memo. 2018-132) the taxpayers had a sales and repair business. The IRS disallowed deductions for cost of goods sold and other business expenses for lack of documentation. The taxpayers offered no receipts or other evidence for the disallowed deductions. The IRS also disallowed auto and truck expenses for failing to meet the strict substantiation requirements of Sec. 274. The Tax Court sustained the IRS's disallowance. The Court also sided with the IRS in disallowing a mortgage interest deduction for lack of a For 1098. A claimed deduction for real estate taxes was disallowed by the Court because the taxpayers couldn't identify the properties on which the taxes were paid nor did they offer any documentation as to the amounts paid.
Tip of the DayProduct costing . . . Knowing the true cost of a product you manufacture or service you perform can be critical to improving your profitability. You don't want to continue manufacturing a product you're losing money on (although sometimes there are reasons for doing so); conversely, you want to expand sales of a profitable product or service. But accounting for the costs of items can be difficult. The final cost includes not only direct costs such as materials and labor, but also depreciation on machinery and tools, a charge for using a portion of the plant, and overhead such as marketing and administrative costs. Talk to your CPA or in-house accounting and finance staff.
August 27, 2018
NewsNotice 2018-69 (IRB 2018-37) extends the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5, by making that relief available for plan years beginning before 2020 if the conditions of Notice 2014-5 are satisfied.
The IRS has launched a new webpage to help taxpayers understand tax reform. For more information and links to the page, go to IRS launches new easy-to-use web pages to help all taxpayers understand tax reform.
One of the disadvantages of a C corporation is the possibility of the IRS recharacterizing a deduction as a personal expense and the amount paid becoming a disguised dividend. In Pacific Management Group, BSC Leasing, Inc., Tax Matters Partner et al. (T.C. Memo. 2018-131) the facts were more complicated. It involved a scheme to avoid taxes four C corporations, five ESOPS, five S corporations and a partnersbip. The partnership extracted cash from the C corporations in the form of alleged “factoring fees” and “management fees.” The C corporations claimed deductions for these payments, wiping out substantial portions of their taxable income. The partnership distributed much of this cash to its five partners, each of which was an S corporation formed by one of the five individuals. The distributions to each S corporation were made ratably on the basis of the corresponding individual's ownership interest in the C corporations. Each individual received from his S corporation a salary, in whatever amount he believed necessary to support his anticipated living expenses. The individuals reported those amounts as taxable income; the S corporations retained the rest of the cash and (after paying certain expenses) invested it for the individuals' benefit. All of the stock of each S corporation was owned by an ESOP. The sole participant in (and beneficiary of) each ESOP was the individual who had formed the S corporation. Because the ESOPs were tax exempt, the distributions the S corporations received from the partnership (net of the salaries and benefits paid to the individuals) were purportedly exempt from current Federal income taxation. The desired end result, therefore, was largely to eliminate taxation of the operating profits at the C corporation level and defer indefinitely any taxation of those profits at the individual shareholder level, even though the profits had been distributed ratably for each shareholder's benefit. The IRS attacked it on numerous grounds for tax years that (owing to calender and fiscal year differences) span 2002-2005. The Tax Court held that the “factoring fees” and most of the “management fees” were not deductible expenses of the C corporations but rather were disguised distributions of corporate profits. To the extent set forth below, we hold that these distributions were currently taxable to the individual shareholders of the C corporations as constructive dividends or as income improperly assigned to the S corporations.
Tip of the DayFees matter . . . Fees to manage investment accounts and mutual fund fees can vary widely. And often there's little correlation between performance and the fee. In some cases there's actually a negative correlation. The difference can add up to a substantial amount. For example, assume you're investing $500 a month and getting a return of 7% in one fund or a return of 6% in alternate fund because of an extra 1% fee. Over 40 years the 6% fund will accumulate to $995,700; the 7% fund will accumulate to $1,312,400--an extra $316,700. That's a substantial amount. The lower the investment return, the more the fee hurts.
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