News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2019, A/N Group, Inc.

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January 22, 2020

News

The IRS has issued final regulations (T.D. 9891) that provide guidance applicable to transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, when a U.S. person transfers appreciated property to a partnership with a foreign partner related to the transferor, the regulations override the general nonrecognition rule unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

You can secure a charitable contribution deduction for a gift of property, but once the value of the gift exceeds $5,000 you'll need, among other things, a qualified appraisal and provide certain information with the return. In Chad Loube and Dana M. Loube (T.C. Memo. 2020-3) the Court found that the taxpayers failed to strictly comply with DEFRA (Deficit Reduction Act of 1984) and the regulations thereunder because they failed to provide, among other information, the basis and the acquisition date of the contributed property on the appraisal summary. The taxpayers also failed to attach to the appraisal summary an explanation of reasonable cause for their inability to provide the basis, acquisition date, or other information related to the contributed property. The Court also found the taxpayers failed to substantially comply with Sec. 1.170A-13 of the regulations because DEFRA specifically requires the donors provide sufficient information to evaluate their reported contributions and basis was an important factor.

Tip of the Day

New item J on S corporation K-1 . . . The K-1 contains new checkboxes if activities were aggregated for at-risk purposes or grouped for passive activity purposes. Checkboxes on lines 18 and 19 are used to alert shareholders to statements attached to provide information on more than one activity for at-risk or passive activity purposes.

 

January 21, 2020

News

The Joint Committee on Taxation has published a list of tax provisions expiring between 2020 and 2029 (JCX-1-20). Go to www.jct.gov/publications.html?func=startdown&id=5240 to download the complete list.

The IRS has updated the disaster notice for victims of the severe storms, tornadoes and flooding that began on September 9, 2019 in South Dakota to include Aurora County. As a result individuals and households who reside or have a business in Aurora, Brookings, Charles Mix, Davison, Hanson, Hutchinson, Lake, Lincoln, McCook, Minnehaha, Moody, and Yankton Counties and the Flandreau Santee Indian Reservation and the Yankton Indian Reservation may qualify for tax relief.

he IRS has made an important change to the Certifying Acceptance Agent (CAA) program. CAAs may no longer authenticate the foreign military identification card for an Individual Tax Identification Number (ITIN) application. See the ITIN Acceptance Agent Program Change page at IRS.gov for more details.

The IRS has announced that the agency has become aware of limited circumstances in which it may be appropriate to provide relief from double taxation resulting from application of the repatriation tax under Section 965, as amended by the Tax Cuts and Jobs Act (TCJA). The IRS has determined that in unique circumstances, such as where a corporation paid an unusual dividend for business reasons, not because of the enactment of TCJA, it may be appropriate to provide relief from double taxation. When the same earnings and profits of foreign corporations are taxed both as dividends and under section 965, double taxation could result. Taxpayers who have fact patterns that may fit these limited circumstances may raise them with the IRS by contacting the Office of Associate Chief Counsel (International) at 202-317-3800.

Tip of the Day

Less schedules for Form 1040 . . . You'll find less schedules in this years' return. Schedules 1 through 6 for Form 1040 have been combined into just three--Schedules 1, 2, and 3. They each have two parts and the entries are similar, but the reduced number of schedules should make it easier to review and work with the return.

 

January 17, 2020

News

The IRS has announced it has updated the Modernized eFile (MeF) system to allow for certain recent extender legislation. The tax forms listed below for Tax Years 2018 and 2019 with extender-related credits are now available to file through MeF:

Form 6478 - Biofuel Producer Credit
Form 6627 - Environmental Taxes
Form 8844 - Empowerment Zone Employment Credit
Form 8864 - Biodiesel and Renewable Diesel Fuels Credit
Form 8900 - Qualified Railroad Track Maintenance Credit
Form 8910 - Alternative Motor Vehicle Credit

If you incur a net operating loss for a tax year, you can carry that loss forward to a subsequent year to offset income in that year. The loss can be carried forward until fully utilized. In Clark J. Gebman and Rebeca Gebman (T.C. Memo. 2020-1) the taxpayer claimed a substantial net operating loss (NOL). The Tax Court noted that a taxpayer claiming an NOL deduction must file with his return a concise statement setting forth the amount of the . . . (NOL) deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the . . . (NOL) deduction. The taxpayers bears the burden of proof of establishing both the existence of the NOLs for prior years and the NOL amounts that may properly be carried forward to the years at issue. The Court went on to say the taxpayers satisfied none of these requirements. They did not attach to any of their returns a concise statement including material and relevant facts or a detailed schedule showing computation of the NOL amount. The NOL deduction petitioners claimed for 2007 allegedly represented the carryforward of losses petitioners had incurred in 2003. They offered no evidence that they had sustained bona fide losses during 2003, apart from submitting copies of the tax returns on which they reported those losses. Merely reporting a loss on a tax return does not substantiate it. The Court sided with the IRS in disallowing the loss.

Tip of the Day

Tell your accountant about all asset dispositions . . . When doing your business return your accountant may uncover sales of business assets if you've shown the revenue separately in your records. But he probably won't find them if you disposed of them in other ways such as scrapping them. Assets that have been sold may produce a gain or a loss, but if an asset is scrapped there's a good chance you'll have a deductible loss. If the assets are located in a state with a personal property tax, they might be included on the rolls and continue to be taxed if they're not taken off the books.

 

January 16, 2020

News

The IRS has released Revenue Procedure 2020-11 that establishes a safe harbor extending relief to additional taxpayers who took out federal or private student loans to finance attendance at a nonprofit or for-profit school. Relief is also extended to any creditor that would otherwise be required to file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure. The Treasury Department and the IRS have determined that it is appropriate to extend the relief provided in Rev. Proc. 2015-57, Rev. Proc. 2017-24 and Rev. Proc. 2018-39 to taxpayers who took out federal and private student loans to finance attendance at nonprofit or other for-profit schools not owned by Corinthian College, Inc. or American Career Institutes, Inc. The Revenue Procedure provides relief when the federal loans are discharged by the Department of Education under the Closed School or Defense to Repayment discharge process, or where the private loans are discharged based on settlements of certain types of legal causes of action against nonprofit or other for-profit schools and certain private lenders. Taxpayers within the scope of this revenue procedure will not recognize gross income as a result of the discharge, and the taxpayer should not report the amount of the discharged loan in gross income on his or her federal income tax return. Additionally, the IRS will not assert that a creditor must file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure. To avoid confusion, the IRS strongly recommends that these creditors not furnish students nor the IRS with a Form 1099-C.

Notice 2020-08 (IRB 2020-7) provides the rules that claimants must follow to make a one-time claim for the credits and payments for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar years 2018 and 2019. The notice also provides instructions for how a claimant may offset its taxable fuel liability with the alternative fuel mixture credit for 2018 and 2019, and provides instructions for how a claimant may make certain income tax claims for biodiesel, second generation biofuel, and alternative fuel. The credits had expired on December 31, 2017, but were retroactively reinstated as part of the Further Consolidated Appropriations Act of 2020.

Tip of the Day

Forms 1099 arriving now . . . Banks, brokers, mutual funds, etc. have begun to send out 1099s. You may have even received some at the end of last year with a dividend check. You don't want to misplace them. No formal filing system? If so, just put them in a box as they come in and either sort through them when you do your return or get ready for the appointment with your tax preparer. Another point. Open the envelopes. Tax preparers have found checks, mortgage coupons, and other important documents along with the 1099s.

 

January 15, 2020

News

Documentation is key. In Charles L. Frost (154 T.C. No. 2) the Court sustained the IRS's disallowance of all of his schedule expenses as a result of an absence of evidence to support the deductions. The taxpayer was an insurance salesman and had clients in Oregon and Texas as well as a smaller number of clients in several other states. The largest expenses were for travel and auto expenses, both of which are subject to strict substantiation. At the time of examination the taxpayer created a list of expenses from memory. The IRS had allowed some of the expenses for travel and auto and the Court did not increase that amount. The Court also sustained the IRS's denial of a deduction for losses incurred by a partnership in which the taxpayer was an 80 percent owner. The taxpayer was unable to show that he had sufficient basis in the partnership to deduct the losses. The taxpayer was unable to substantiate a claim that he borrowed $50,000 as part of an investment in the company. Tip of the Day

In the military? . . . There are a number of tax breaks available to active duty military personnel. They include the ability to deduct moving expenses, the exclusion of combat pay, housing assistance payments, basic allowance for housing, family allowances, in-kind military benefits, etc. Unless you're using a preparer experienced in working with service personnel, you should read IRS Publication 3, Armed Forces' Tax Guide.

 

January 14, 2020

News

IRS penalties have to be approved by the agent's supervisor in order to be valid. In 154 T.C. No. 1Belair Woods, LLC, Effingham Managers, LLC, Tax Matters Partner (154 T.C. No. 1) was the tax matters partner of LLC which claimed on its 2009 return a charitable contribution deduction for a consercation easement. The IRS examined the return and concluded that LLC had substantially overvalued the easement. The IRS's agent sent the petitioner a Letter 1807 inviting the petitioner to a closing conference to discuss the IRS's tentative proposed adjustments. The proposed adjustments included disallowing the charitable contribution deduction and alternative penalties under Sec. 6662(c), (d), and (h). The Letter 1807 explained that all of these adjustments would be discussed at the conference. The IRS's Examination Division held two conferences with LLC's representatives, but no agreement was reached. The IRS's agent finalized a Civil Penalty Approval Form memorializing the IRS's intention to assert alternative penalties under Sec. 6662(c), (d), and (h). The agent's immediate supervisor signed that form, approving assertion of those three penalties. The IRS subsequently issued the petitioner a 60-day letter disallowing the charitable contribution deduction and asserting the three penalties. The 60-day letter offered the petitioner the opportunity to appeal these determinations to the IRS's Appeals Office, which the petitioner did unsuccessfully. The IRS then issued the petitioner an FPAA asserting alternative penalties under Sec. 6662(c), (d), and (h), as set forth in the 60-day letter, and a fourth penalty under Sec. 6662(e). The IRS's agent did not secure supervisory approval of the fourth penalty before issuing the FPAA. Sec. 6751(b)(1) provides that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination." The Tax Court held that the IRS's issuance of a Letter 1807 and summary report, setting forth the Examination Division's tentative proposed adjustments and inviting the petitioner to a conference to discuss them, did not constitute "the initial determination of. . . [a penalty] assessment" necessitating prior supervisory approval under Sec. 6751(b)(1). The Court also held that the IRS satisfied the requirements of Sec. 6751(b)(1) for the first three penalties because the IRS's agent secured written supervisory approval before the 60-day letter was issued to the petitioner, formally communicating to him the Examination Division's definite determination to assert those penalties. Finally, the Court held that the IRS did not satisfy the requirements of Sec. 6751(b)(1) with respect to the fourth penalty because it did not show timely supervisory approval of that penalty.

Tip of the Day

IRS Free File program . . . Don't want to spend money on tax software? Since 2003 a number of software providers have joined with the IRS in allowing taxpayers to use their software free of charge. In IR-2020-6 the IRS announced that the program is now open and accepting returns, but they can't be submitted until January 27. What's the catch? First, there's an income limitation. A taxpayer can have income no more than $69,0; it's less for some providers. Second, it's not like going to your accountant, handing him a stack of W-2s, 1099s, etc. While the software is generally easy to use, it's probably not for everyone. Most business owners should either get professional help or but the software. You should consider recommending it to your children or employees.

 

January 13, 2020

News

You may be able to get your tax liability reduced with an offer-in-compromise, but you'll have to meet certain requirements. In T.C. Memo. 2019-166Michael Gordon Banks (T.C. Memo. 2019-166) the IRS rejected the taxpayer's offer-in-compromise to settle his tax debts of $23,431 for $12,000 because he had sufficient assets to fully pay his tax liability. The Court noted the settlement officer gave the taxpayer an opportunity to produce additional information to show that rejection of the offer was inappropriate, but provided no new information. The Tax Court held that rejection of the offer was not an abuse of discretion by the IRS. In addition, the IRS filed a notice of federal tax lien (NFTL). The taxpayer argued that the NFTL should have been withdrawn because he made an offer-in-compromise. The Court noted that while a lien may be withdrawn if a taxpayer has entered into an agreement to satisfy the tax liability, it does not have to and there was no agreement here.

Tip of the Day

Forecasting project cash flow . . . Smart business owners generally do a cash flow budget for the business. But sometimes it makes sense to budget cash flow for a project. For example, you win a job that's much bigger than usual to do all the sheet rock for an office building. It's a big job to you, but a small one for the developer who has multiple properties. You may have to pay your suppliers upfront, but you anticipate your payments will be delayed by the customer. He knows he can stretch out payments so that you'll be partly financing his project. A cash flow budget is critical here. And, if you've got to borrow money for the job, you should factor the interest and other fees into the total cost to determine the profitability of the job.

 

January 10, 2020

News

The IRS has launched a new Gig Economy Tax Center on IRS.gov to help people in this growing area meet their tax obligations through more streamlined information. The Gig Economy Tax Center streamlines various resources, making it easier for taxpayers to find information about the tax implications for the companies that provide the services and the individuals who perform them. It offers tips and resources on a variety of topics including:

Tip of the Day

Nonbank lenders . . . There are more than a few out there that will lend a business funds with few questions asked. But the money generally comes with high fees and/or interest. Get good advice from an independent source before signing. This source should be generally limited to short-term needs such as financing a expected payment from a customer and even then consider what you'll have to pay back versus how much you're borrowing.

 

January 9, 2020

News

Acting National Taxpayer Advocate Bridget Roberts today released her 2019 Annual Report to Congress. Key challenges highlighted in the report include implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Roberts also released the third edition of the National Taxpayer Advocate’s “Purple Book,” which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration. Topics in the report include:

The IRS Is Struggling to Accomplish Its Mission
The IRS Does Not Receive Enough Funding to Meet Taxpayer Needs
The IRS Should Use the Taxpayer First Act as an Opportunity to Identify Taxpayer Needs and Preferences and Develop Initiatives to Meet Them

The report is split into several parts. You can download them individually. Links to the parts can be found at Taxpayer Advocate Service - Annual Report to Congress.

Tip of the Day

Sales tax changes . . . In a recent Tip of the Day we mentioned many states have law changes taking effect on January 1. We didn't focus on the changes in sales taxes. Many states are adopting new rules in the wake of the Wayfair decision. You no longer need to have property (e.g. equipment, inventory) or employees in a state to have to collect sales tax. No physical presence is required. That means internet sales are subject to tax. There is a low-end safe harbor for small businesses. Some states have set the safe harbor at $100,000 in transactions each year; others have set it higher. Some states have a 100-transaction and $100,000 threshold; others have the same combination but a higher dollar threshold. Check the rules for the states you do business in. And keep in mind, most states consider the sales tax a trust fund tax. That is, you can be personally responsible. In addition, if you don't file, there's no statute of limitation.

 

January 8, 2020

News

The IRS has announced it will begin accepting all individual tax returns at 9:00 a.m. Eastern time on January 27, 2020.

The IRS has also announced that it is in the process of updating the Modernized e-file (MeF) system to allow for the recent extender legislation. The tax forms listed below for Tax Year 2019 will continue to reject if an extender-related credit is claimed. It is asking users to refrain from sending these forms with extender-related credits until further notice. The forms are:

Form 3468 - Investment Credit
Form 6478 Biofuel Producer Credit
Form 6627 Environmental Taxes
Form 8835 Renewable Electricity, Refined Coal, and Indian Coal Production Credit
Form 8844 Empowerment Zone Employment Credit
Form 8864 Biodiesel and Renewable Diesel Fuels Credit
Form 8900 Qualified Railroad Track Maintenance Credit
Form 8910 Alternative Motor Vehicle Credit

Tip of the Day

Audit rates decrease . . . The IRS has reported that in 2019 audit rates again declined from the previous year. One of the sharpest percentage drops has been in audits of taxpayers earning over $1 million. That rate has dropped to just 3 percent. But, like all data, interpretations can be misleading. And, it's just a statistic, until it's your return that's being audited. There are some things to note. First, while the rate may be going down, the IRS is getting smarter. Computers are analyzing data to better focus on suspicious returns. Second, the returns audited in 2019 are generally ones filed in prior years. At lot few returns filed in 2019 (2018 returns) will have itemized deductions. That will free up revenue agents to look at other issues. Third, simple notices from the IRS reporting failure to include interest, dividend, etc. income aren't audits. And the IRS is doing more 1099 matching.

 

January 7, 2020

News

In Randy McRae and Shelby McRae (T.C. Memo. 2019-163) the Tax Court denied the taxpayers deductions for a number of Schedule C expenses for lack of substantiation. The Court denied the taxpayers deductions for utility expenses related to the use of their home because they did not claim a deduction for any home office expenses. The Court sustained the IRS's reconstruction of the taxpayers' income using the bank deposits method because the taxpayers did not maintain distinct records of their Schedule C business. Their only records consisted of a few receipts and the same bank statements the revenue agent used to reconstruct their income.

Tip of the Day

Limit customer choices . . . The more choices you give your customers, the more items you have to stock. If your business involves food, that means more things that can go bad. It also means having more shelf space. Most supermarkets stock at least five different brands of potato chips and there are multiple varieties in each brand. One German supermarket that's made inroads in the U.S. stocks one brand, its own, and only a few varieties. With next day delivery, other retailers may be able to reduce stock and either promise a customer next day pickup or ship to home. Manufacturers can use the same approach. Car companies offer far more limited color choices than 30 years ago; and choices other than some basic colors cost extra. Using common parts among different products can also reduce inventory. A side benefit is that with less items, you can stock just a limited number more yet substantially reduce out-of-stock chances. Not every solution applies to every business, but reducing complexity can boost profits in many situations.

 

January 6, 2020

News

The IRS has announced it will begin accepting all business tax returns at 9 a.m. Eastern on January 7, 2020.

You could relinquish your chance of challenging an IRS decision in Tax Court if you either fail to do so first at the IRS Appeals level or enter into a closing agreement. In Julie A. Rockafellor (T.C. Memo. 2019-160) the taxpayer attempted to challenge her return preparer penalties. The Court noted a taxpayer may dispute his underlying tax liability in a collection due process (CDP) case only if he properly raised that issue at the CDP hearing. An issue is not properly raised if the taxpayer does not request consideration of the issue by the Office of Appeals, or if consideration is requested but the taxpayer did not present to the Office of Appeals any evidence regarding the issue after being given a reasonable opportunity to do so. The taxpayer did not challenge her 2012 and 2013 tax return preparer penalties before the Office of Appeals, and thus the Court could not consider challenges to those underlying liabilities. In addition, although the taxpayer claimed in her petition that the settlement officer abused his discretion in rejecting her proposed installment agreement, she did not pursue the issue in her brief. As a result the Court held she abandoned that claim.

Tip of the Day

Form 1099-MISC . . . If your business pays an independent contractor more than $600 during the year, you've got to send him or her a Form 1099-MISC by January 31. There's an exception for independent contractors that do business as a corporation (either S or C). That exception doesn't apply to health care providers or attorneys. If you file 250 or more of a particular form type (e.g., 1099-MISC or 1099-INT) you must file electronically. Even if you don't approach that number, everyone should consider filing electronically. For one thing it's simpler. You won't have to worry about some of the minutia and the requirement to file state 1099s. There is a cost, but it's worth it. Keep in mind that failure to file a Form 1099 is subject to a $280 penalty.

 

January 3, 2020

News

Individual and business taxpayers can generally sell assets on the installment method, picking up income as payments are received. But that doesn't apply to inventory-type property. For example, a furniture store can sell one of its delivery trucks on the installment method, but not the furniture. In Joyner Family Limited Partnership, Gary Joyner Revocable Trust, A Partner other than the Tax Matters Partner, Janel Joyner Revocable Trust, A Partner other than the Tax Matters Partner, and Joyner Investment Company, Inc., Tax Matters Partner (T.C. Memo. 2019-159) the taxpayer that sold land and mobile homes. Dealers of real property (other than unimproved residential lots) or inventories of personal property do not qualify for Section 453 (installment sale) reporting. A seller of unimproved residential property is excepted from the definition of a dealer and is permitted to report its sales under the installment method. The IRS argued the taxpayer improved the land by adding driveways, septic tanks, water wells, and electrical hookups to the benefit of the individual lots. The taxpayer credibly claimed it only added roads. The electric company installed the poles without charge and the property buyers installed the driveways, etc. The Tax Court held the taxpayer did not make improvements to the lots in the land-only sales and was not a dealer with respect to the land-only sales. Thus, the taxpayer could use the installment method.

Tip of the Day

Grab market share with a big bang? . . . One way to succeed in a business where entry is easy is to price your product or service low and advertise like crazy to get a big share of the market. Once your competitors are out of the way you can raise prices and keep most of your market share. That's the theory. But before you achieve your goal you'll be losing a lot of money and will need steady infusions to keep going. It's a plan that's worked for some companies, but it is risky and could backfire. This is an approach that shouldn't be taken without considerable planning.

 

January 2, 2020

News

The IRS has announced (Notice 2020-05) the standard mileage rates for computing deductible costs of operating an auto for business, charitable, medical or moving expense purposes. (The standard mileage rate is an alternative to using the actual cost of operating a vehicle.) The standard mileage rate for 2020 for business use will be 57.5 cents per mile (down from 58 cents); the rate for medical and deductible moving expenses is 17 cents per mile (down from 20 cents); the rate for charitable use of an auto is 14 cents per mile (fixed by statute). The basis reduction amount for deemed depreciation is 27 cents per mile, up from 26 cents. The maximum fair market value for autos, trucks and vans for use of the cents-per-mile valuation rule is $50,400.

The IRS has announced (IR-2019-214) an agreement with Free File, Inc. (FFI) designed to bring more clarity for taxpayers choosing to use free online software during the 2020 filing season. The agreement reached will help make the Free File program more taxpayer-friendly while strengthening consumer protections in several key areas. Any taxpayer earning $69,000 or less can find one or more free commercial software products available by visiting IRS.gov/freefile. Some providers offer both free federal and free state tax preparation. Active duty military personnel with incomes of $69,000 or less may use a Free File software product of their choice without regard to other criteria. For more information, go to IR-2019-214).

Tip of the Day

New Year, new laws . . . Many law changes take effect on January 1st--both federal and state. The state minimum wage, which is higher than the federal rate, is increasing in a number of states. In addition, other rules are taking effect. Check the rules for your state. Many states send emails announcing these changes. If you're not on their list, sign up.

 

December 31, 2019

News

The IRS has issued final regulations (T.D. 9890) that provide guidance on certain due diligence and reporting rules applicable to persons making certain U.S. source payments to foreign persons, and guidance on certain aspects of reporting by foreign financial institutions on U.S. accounts. The final regulations affect persons making certain U.S.-related payments to certain foreign persons and foreign financial institutions reporting certain U.S. accounts.

Tip of the Day

Real estate tax liens . . . Each taxing jurisdiction has a day that real estate taxes become a lien on the property. If you fail to pay your taxes there's a grace period. But that grace period can vary widely among jurisdictions. The minimum grace period is never less than a year and it's usually longer, but don't count on it. Sometimes the grace period is shorter if the property appears to have been abandoned. Sometimes it's longer if the home is occupied and there are special circumstances. And there may be different rules for residential and commercial property. But once the grace period is over, the town or county can seize the property and recovering it can be both difficult and costly.

 

December 30, 2019

News

Claiming a loss for worthlessness of a stock, partnership interest, or other asset can be difficult. You've not only got to show worthlessness, you've got to claim the loss in the proper year. In MCM Investment Management, LLC, Mark and C’Ann McMillin Family Trust Dated 04/09/1990, Tax Matters Partner (T.C. Memo. 2019-158) the taxpayer claimed a partnership interest became worthless. The taxpayer advanced considerable amounts to a related partnership engaged in real estate development. The partnership's problems began during the financial crisis that began in 2007. The independent auditors noted the partnership was not in compliance with certain financial covenants related to its debt and expressed substantial doubt about the partnership entities' ability to continue as a going concern. The entities began having trouble with lenders and projections showed it would not be able to make certain principal payments on its debt. The Court noted that to be allowable as a deduction Section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the year. To prove entitlement to a Section 165(a) loss deduction for worthless property, a taxpayer must demonstrate its "subjective determination of worthlessness in a given year, coupled with a showing that in such year the asset in question is in fact essentially valueless." The requirement that an asset be "essentially" valueless demonstrates "the de minimis rule that the taxpayer does not have to prove that a given asset is absolutely, positively without any value whatsoever." The Court looked at a number of factors including whether the taxpayer considered the asset worthless by claiming worthless on the tax return and testifying credibly noting the losses, debt burden, and deteriorating cash flow projections. Other factors included lack of liquidating value, lack of potential future value, hopeless insolvency, foreclosure, bona fide loss, and expert valuation. In this case there was no valuation by an expert, but that did not sway the Court. The Court sided with the taxpayer, holding that the partnership interests were worthless for the year of the claim.

Tip of the Day

Repair or replace? . . . For many household appliances, the answer is replace. The charge to replace a circuit board on an inexpensive washing machine could be $300; a comparable new machine not much more than $400. Repair might make sense on a machine just out of warranty, but not on one five years old. The same may be true for some low-end office electronics such as deskside printers. But the eonomics changes when you look at factory equipment, larger electronics, vehicles, etc. For vehicles some companies compare the estimated cost to repair to the fair market value of the vehicle. If the repair cost is the same or greater than the book value, time to replace. Factory equipment is trickier. Many machines become functionally obsolescent before they're no longer repairable. Here the best advice may be to forecast future repair costs. In the case of shop machinery, you should also be factoring in the cost of removing the old and installing the new machine.

 

December 27, 2019

News

The IRS has issued proposed regulations (REG-100956-19) modifying the rules for determining the source of income from sales of inventory produced within the U.S. and sold without the U.S. or vice versa. These proposed regulations also contain new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the U.S. Finally, these proposed regulations modify certain rules for determining whether foreign source income is effectively connected with the conduct of a trade or business within the U.S.

The IRS has issued proposed regulations (REG-116163-19) that provide guidance on Section 6402(n), concerning the procedures for identification and recovery of a misdirected direct deposit refund. The regulations reflect changes to the law made by the Taxpayer First Act. The proposed regulations affect taxpayers who have made a claim for refund, requested the refund be issued as a direct deposit, but did not receive a refund in the account designated on the claim for refund.

The law states the government has a right to protect its interest when a taxpayer owes money. It can do so by filing a notice of federal tax lien (NFTL) if the balance is large enough. That can disadvantage a taxpayer who will then have a bad mark on the their credit, with all the associated implications. In Martin Washington Brown (T.C. Memo. 2019-157) in an attempt to avoid a NFTL the taxpayer paid off about a third of his outstanding liablity. The settlement officer advised the taxpayer that the lien would be withdrawn if he agreed to a Direct Debit Installment Agreement and an increase in his monthly payments from $300 to $508. The taxpayer declined to modify his monthly payments. The Tax Court found no abuse by the IRS in sustaining the NFTL. The Court noted the taxpayer did not qualify for withdrawal of the NFTL.

Tip of the Day

Specific bequests in a will . . . Estates have a nasty way of creating rifts among the closest relatives. And often it's not the size of the bequest, but one or more items. Fred may not care that he got the larger share of the inheritance, he's upset he didn't get the lake property where he spent summers and proposed to his wife. Because of the way the will was written the property had to be sold and the proceeds divided. Often the best approach is to talk to the heirs and find out what they want and either put that as a specific bequest in the will or gift the property before you pass.

 

December 26, 2019

News

The IRS has released a number of updated forms and publications. Some of the forms are still in draft form. Here's a list of the most common ones:

Final form:

Form 1040 (Schedule H), Household Employment Taxes
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
Form 8994, Employer Credit for Paid Family and Medical Leave
Form 8889, Health Savings Accounts (HSAs)
Form W-4, Employee's Withholding Certificate

Draft forms:

Form 940 (Schedule A), Multi-State Employer and Credit Reduction Information
Form 1094-B, Transmittal of Health Coverage Information Returns
Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns
Form 1095-B, Health Coverage
Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

Draft publications:

Pub 15, Circular E, Employer's Tax Guide
Pub 15-A, Employer's Supplemental Tax Guide (Supplement to Circular E, Employer's Tax Guide, Publication 15)
Pub 15-B, Employer's Tax Guide to Fringe Benefits
Pub 15-T, Federal Income Tax Withholding Methods
Pub 974, Premium Tax Credit (PTC)

Tip of the Day

Warranty or no warranty? . . . Are they worth it? The general answer is no. That's especially true on small appliances. Most of the extended warranties expire at the end of three years and that's when you're most likely to have problems. New cars are covered by their own warranty. But there are exceptions to the rule, and it depends on the item and the cost of the warranty. Laptop computers have a better chance of failure and can be expensive to fix. And, while you might toss a malfunctioning tablet, you'll probably fix a computer. Larger appliances such as washers can be more expensive. Ones with many features and/or electronics can be expensive to fix. When it comes to cars, some have a very low failure rate; others, particularly European imports, have a higher repair rate and those repairs can be much more expensive. Consider how long you're going to keep the vehicle, how you're driving it (e.g., highway driving is easiest on a vehicle), how sophisticated the vehicle is, and the coverage under the warranty. One German manufacturer is known for the reliability of its engines and the poor record of its electronics. With the large amount and high cost of electronics, any exclusions for those items could significantly reduce the value of an extended warranty. Read any warranty carefully for coverage and exclusions before buying.

 

December 24, 2019

News

President Trump has signed into law the Further Consolidated Appropriations Act, 2020. The Act contains a number of both tax and nontax provisions. The Act renews a number of "tax extenders", provisions in the law, many of which expired at the end of 2017 and were not renewed as they had been in the past. Most of the renewed provisions have been extended through 2020. The new law incorporates the SECURE Act, which makes a number of changes to the tax rules surrounding IRAs and qualified plans.

The IRS is urging taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area. In late 2016, the IRS designated certain syndicated conservation easement arrangements as "listed transactions" in Notice 2017-10. On Dec. 13, 2019, the U.S. Tax Court entered its first decision on a syndicated conservation easement transaction. In TOT Property Holdings, LLC the Tax Court sustained in its entirety the IRS's determination that all tax benefits from a syndicated conservation easement transaction should be denied and that the 40 percent gross valuation misstatement and negligence penalties applied. The Tax Court found that the transaction failed the legal requirements applicable to donations of land easements and, in imposing the gross valuation misstatement penalty, found that the actual value of the easement donation was less than 10 percent of what was originally reported on the tax return. Tax Court trials in four other syndicated easement cases were conducted earlier this year and more than 50 cases are pending. In other recent cases, the Tax Court has rejected arguments that various regulations taxpayers failed to comply with are invalid, essentially negating one of these taxpayers' main defenses.

Tip of the Day

Check out your partners' finances . . . If you're going into a partnership (or taking in stockholders in a corporation) you want to make sure your partners are financially able to handle the load. You may each start out putting in $20,000, but if things don't go as planned can they come up with any additional cash needed? And if you have to go for a loan, will their credit rating help or hurt your chances of approval? You don't want to share disproportionately in the risk.

 

 

December 23, 2019

News

When the 2020 tax filing season, taxpayers in more locations will be eligible to opt into the online Identity Protection (IP) PIN program. The IP PIN is a 6-digit number that adds another layer of protection for taxpayers' Social Security numbers and helps protect against tax-related identity theft. Taxpayers will be eligible for this voluntary program if they filed a federal tax return last year from Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas and Washington. The IRS has created Publication 5367, Identity Protection PIN Opt-In Program for Taxpayers to help taxpayers understand the required steps.

Employers who provide paid family and medical leave to their employees may claim a credit for tax years 2018 and 2019. To claim the Employer Credit for Paid Family and Medical Leave, eligible employers must have a written policy in place that satisfies certain requirements, including:

The IRS created the Family and Medical Leave Fact Sheet to help employers learn more about how to claim this credit.

Tip of the Day

Life insurance and annuities . . . If you have either a whole life policy or an annuity the security of your investment may depend on the state in which the company is licensed or your state of residence and the financial stability of the company. For life insurance, many states provide $300,000 of protection should the insurance company go under; New York has a $500,000 limit. The laws vary on annuities. The problem is that some insurance companies are selling portions of their business. Your policy may have started with a reliable, old line company, but the policy may be sold to a company with a shorter track record. You can exchange your policy for one in another company tax free (a Sec. 1035 exchange), but you could be hit with a nasty tax bill if you simply cash out a life insurance policy or annuity. Talk to your financial advisor to see if there's any need for concern.

 

December 20, 2019

News

The IRS has issued final regulations providing details about investment in qualified opportunity zones (QOZ). The final regulations (T.D. 9889) modified and finalized the proposed regulations (REG-120186-18) that were issued on October 28, 2018 and May 1, 2019. The final regulations provide additional guidance for taxpayers eligible to make an election to temporarily defer the inclusion in gross income of certain eligible gain. The final regulations also address, the ability of such taxpayers' eligibility to increase the basis in their qualifying investment equal to the fair market value of the investment on the date that it is sold, after holding the equity interest for at least 10 years. The statute permits the deferral of all or part of a gain that would otherwise be included in income, if corresponding amounts are invested into a qualified opportunity fund (QOF). The gain is deferred until an inclusion event or Dec. 31, 2026, whichever is earlier. The final regulations provide a list of inclusion events. Further, the final regulations provide guidance to determine the amount of income that must be included at the time of the inclusion event or December 31, 2026. The final regulations also address the various requirements that must be met to qualify as a QOF, as well as the requirements an entity must meet to qualify as a QOZ business. In order to provide clarity, the final regulations have modified the proposed regulations for QOFs and QOZ businesses. Specifically, the final regulations provide additional guidance on how an entity becomes a QOF or QOZ business, and the requirement that a QOF or QOZ business engage in a trade or business. The final regulations retain the general approach of the proposed regulations but provide additional guidance and clarity to the rules regarding QOZ business property. Related forms, instructions and other information taxpayers need to take advantage of this update will be made available in January 2020.

The IRS has updated areas deemed eligible for FEMA assistance by the president where taxpayers can claim losses on their 2019 or 2018 returns. Additional areas are in Mississippi (October 26 severe storm, straight-line winds and flooding) and Tennessee (October 26 severe storm and straight-line winds).

You may be able to recover your litigation costs in a battle with the IRS, but you must be the prevailing party and meet certain other requirements. In Mark C. Klopfenstein (T.C. Memo. 2019-156) the dispute over the taxpayer's return did not go to court, but the taxpayer incurred costs during the administrative proceeding. The Tax Court held that since the IRS and the taxpayer reached a settlement wherein the taxpayer owed a penalty for one year, but not the others, there was no deficiency notice, and the penalty under Section 6707 was an assessable penalty not subject to deficiency procedures, the IRS did not take a position contrary to the taxpayer's, he could not be treated as the prevailing party.

Tip of the Day

Invoice can be critical for sales tax purposes . . . You ship a equipment to Madison Inc. in Nebraska, but the billing address is Madison's corporate office in New York. You're registered to do business in New York. You want to make sure the destination is on the invoice. If it's not New York may claim you should have collected New York sales tax on the sale. It might also try to source the sale to New York for the allocation of sales on your income tax return. Rules vary among the states so talk to your tax advisor. If you're the buyer make sure the item is shipped directly to its ultimate destination.

 

December 19, 2019

News

Notice 2020-03 (IRB 2020-03) provides guidance for the 2020 calendar year regarding withholding from periodic payments for pensions, annuities, and certain other deferred income under Section 3405(a), including the rules for withholding from periodic payments under Section 3405(a) when no withholding certificate has been furnished.

The IRS announced (IR-2019-209) a new online assistant designed to help employers, especially small businesses, easily determine the right amount of federal income tax to withhold from their workers' pay. Known as the Income Tax Withholding Assistant for Employers, this new spreadsheet-based tool is designed to help employers easily transition to the redesigned withholding system (no longer based on withholding allowances), which goes into effect on Jan. 1. It does this by helping them easily implement new income-tax withholding requests from employees who fill out the completely redesigned 2020 Form W-4, Employee's Withholding Certificate. At the same time, the tool can also help employers continue to properly withhold from employees who still have a withholding request on file using a past version of the W-4, which was based on withholding allowances. For more information go to Downloadable Assistant.

Tip of the Day

Caution on concentration . . . You obviously don't want your business to be dependent on just a couple of customers. But what about products or services? Suppliers? Employees? Locations? Distributors? There are others. Few businesses will be subject to risk from more than a few sources, and you can't avoid all risk. The trick is to identify the ones that can bring your business to its knees. For example, your only source of income from your product sales is a single internet store. Can that store kick you off their service? If they did how much warning would you have? A local restaurant chain has a specialty menu that uses lettuce in over 80 percent of its dishes. That's dangerous not only because of the concentration, but also because lettuce is susceptible to several germs.

 

December 18, 2019

News

The IRS has issued final regulations (T.D. 9888) that provide guidance regarding the distribution by a distributing corporation of stock or securities of a controlled corporation without the recognition of income, gain, or loss. In particular, the final regulations provide guidance in determining whether a corporation is a predecessor or successor of a distributing or controlled corporation for purposes of the exception under Section 355(e) to the nonrecognition treatment afforded qualifying distributions. In addition, the final regulations provide certain limitations on the recognition of gain in certain cases involving a predecessor of a distributing corporation. The final regulations also provide rules regarding the extent to which Section 355(f) causes a distributing corporation (and in certain cases its shareholders) to recognize income or gain on the distribution of stock or securities of a controlled corporation. These regulations affect corporations that distribute the stock or securities of a controlled corporation and the shareholders or security holders of those distributing corporations.

The IRS has issued proposed regulations (REG-122180-18) under Section 162(m), which limits the deduction for certain employee remuneration in excess of $1,000,000 for federal income tax purposes. These proposed regulations implement the amendments made to Section 162(m) by the Tax Cuts and Jobs Act. These proposed regulations would affect publicly held corporations.

Tip of the Day

Keep good records . . . That's always good advice. But it can be critical in the case of sales tax. Some states are famous for using the one-day observation test of restaurants and many other establishments if the business doesn't keep good records for sales tax purposes. The issue can be a real problem if the day the auditor picks is one of your best days of the week. It can get worse if sales have been growing over the last few years. The auditor could simply take the sales for the day and multiply by 313 (365 days less 52, assuming the business is closed one day a week) then multiply by 3 for a 3-year period. That's a real problem if sales two years ago were significantly less than today. Contesting the assessment could be difficult. You may have to have an expert witness show the test was not statistically correct. In some cases, even that won't get you off the hook. You're fighting from a poor position because you didn't maintain the required records.

 

December 17, 2019

News

The IRS has issued proposed amendments (REG-107431-19) to the regulations under Sections 162, 164, and 170 with respect to the limit on the deduction state and local taxes. First, the proposed amendments update the regulations under Section 162 to reflect current law regarding the application of Section 162 to a taxpayer that makes a payment or transfer to an entity described in Section 170(c) for a business purpose. Second, the proposed amendments provide safe harbors under Section 162 to provide certainty with respect to the treatment of payments made by business entities to an entity described in Section 170(c). Third, the proposed amendments provide a safe harbor under Section 164 for payments made to an entity described in Section 170(c) by individuals who itemize deductions and receive or expect to receive a state or local tax credit in return. Fourth, the proposed amendments update the regulations under Section 170 to reflect past guidance and case law regarding the application of the quid pro quo principle under Section 170 to benefits received or expected to be received by a donor from a third party.

In preparation for the upcoming tax season, the IRS is advising tax preparers they should know where to file paper Form 941, Employer's Quarterly Federal Tax Returns, for business clients and where to file paper tax returns for individual taxpayers. If using pre-printed envelopes to mail your client’s tax forms, payments and correspondence, ensure the correct address is used. This will help eliminate delays. (The IRS is continuing to consolidate offices.)

Tip of the Day

Lump-sum Social Security payment . . . It's not unusual for a taxpayer to receive a lump-sum Social Security benefit attributable to one or more prior years in addition to a current-year benefit. That can result in an inequity since Social Security benefits may be nontaxable, 50% taxable, or 85% taxable depending on your adjusted gross income. Thus, receiving a lump-sum benefit in one year can result in higher taxation of the benefits. Taxpayers can make a special election under Section 86(e) to recalculate the taxability of the lump-sum as if it were paid in the years to which it is attributable. That doesn't require amended returns, just a special calculation for the year of receipt.

 

December 16, 2019

News

The IRS announced tax preparers who have submitted returns with questionable claims for the Earned Income Tax Credit, the Child Tax Credit Tax Credit/Additional Child Tax Credit, American Opportunity Tax Credit and Head of Household will soon receive Letter 5025. The intent of the letter is to raise awareness around questionable tax returns and assist preparers in meeting their due diligence requirements. The IRS has provided more information in the Tax Preparer Toolkit.

If your business has losses you may have to show that you're engaged in the business with a profit motive. In Lowell G. Den Besten (T.C. Memo. 2019-154) the taxpayer sold his seed business to his son only to reacquire it several years later to salvage the business. After an initial loss after repurchase, the business was profitable. The taxpayer also was involved in the business of breeding, raising, boarding, training and selling registered cutting horses. That operation resulted in losses. The taxpayer originally filed separate returns (a Schedule C and a Schedule F) for the two businesses, but at trial he claimed they were one activity. Because the IRS challenged the profit motive of the cutting horse business, the taxpayer argued the two businesses were a single activity. The Court held the two businesses were separate activities, noting the taxpayer had taken the position that they were separate and now had a high hurdle to show otherwise. However, the Court also ruled the taxpayer had a profit motive in pursuing the cutting horse activity. The Court disallowed net operating loss (NOL) carryforwards because the taxpayer failed to meet his burden of proof of the existence and amounts of the NOL carryforwards for two years.

Tip of the Day

States looking at worker classification . . . The IRS has always fought a battle with businesses who benefit from classifying a worker as an independent contractor instead of an employee. Congress has avoided the question and the IRS rulings rarely draw a bright line. But part-timers, independent contractors, and "gig" workers have grown in numbers, particularly since the last recession. And now states are also examining the issue. Once state has ruled that a worker is an employee if he or she is an important part of the business even if they work for you only infrequently and work for other businesses. Check the rules in the states in which you do business.
Copyright 2019 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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