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January 18, 2019
NewsThe sale of an assets by an individual usually produces capital losses. (In the case of a business, the abandonment or sale of equipment and certain other assets can produce ordinary loss treatment. That's limits your deduction to offsetting capital gains or a maximum of $3,000 per year. An ordinary loss can be used to offset income without limitation. Abandonment losses are usually considered ordinary. In Thomas E. Watts, Mary E. Watts, et al. (U.S. Court of Appeals, Eleventh Circuit) the Tax Court held the partners of a limited partnership were not entitled to ordinary loss treatment on the abandonment of their partnership interests. The Tax Court assumed the partners had preferential interests in the partnership, but that was not the case. The Appeals Court vacated and remanded the decision and sent it back to Tax Court for that and other reasons.
Tip of the DayChanges to Form 1040 . . . If you're looking for Form 1040A or 1040EZ, you can stop. They no longer exist. Now, everyone uses a 1040. But the redesign of the 1040 makes it easier to use for lower-income taxpayers and some higher-income individuals with simple tax situations. Those with income from items such as capital gains, unemployment compensation, business income, etc. you'll need Schedule 1. If you owe other taxes such as the self-employment tax, you'll need Schedule 4.
January 17, 2019
NewsThe IRS is providing some relief to taxpayers who may have underpaid their estimated taxes for 2018. The general rule is that you must have paid in withholding and estimated payments the lesser of (1) 90 percent of the current year's taxes or (2) 100 percent of the tax shown on your prior year return (110 percent if your AGI for the previous year was $150,000 or more) to avoid a penalty. Notice 2019-11 provides a waiver of the penalty for tax payments required to be made on or before January 15, 2019. The waiver is limited to individuals whose total withholding and estimated tax payments equal or exceed 85 percent of the tax shown on the return for the 2018 taxable year.
Tip of the DayIRS Publication update . . . The bad news is that many haven't been. They have always provided a wealth of information when preparing your own return. They're even useful for tax professionals. Some, like the one on moving expenses, now has limited value. Others, such as IRS Publication 17 cover a broad range of important topics and provide answers on a host of questions when preparing your return. It's important to note that the out-of-date publications are still included in the current list. Many of the publications are still largely applicable, but use extreme caution. If a publication is for use with 2018 returns, it will say on the cover "For use in preparing 2018 returns".
January 16, 2019
NewsThe IRS has announced that it will recall some 57 percent of its staff to accommodate tax season responsibilities. That will allow the Service paper as well as electronic returns as well as issue refunds. The IRS will also open its call sites and answer taxpayer questions. That may, however, be small comfort considering the additional challenge this year of dealing with the new tax law.
The IRS has restarted the Income Verification Express Service (IVES) program. This is service that provides verification of a taxpayer's income for use in obtaining a mortage, but also for other financial market purposes. The IRS advised it could take longer than the usual 72 hours to retart the service. The extra delay is related to the backlog of requests. The IRS also reported that approximately 87 percent of IRS employees are on furlough, or about 70,000 employees. The IRS will also start other fee-based sevices.
Tip of the DayDeath and taxes go on . . . Taxpayers should keep in mind that just because the IRS is "shut down" doesn't mean there are will be any changes in the due dates of returns or payments. Payment, as well as return schedules remain unchanged. It's unlikely that in the abscence of a major distruption to a involved system, the Service well waive any penalties.
Tip of the DayJanuary 15, 2019
NewsThe IRS has announced (IR-2019-02) that an improved version of IRS Free File begins has begun as a dozen private-sector partners offer their brand-name products to help eligible taxpayers navigate the new tax reform law and electronically prepare their tax returns. The free online software program, accessible only through IRS.gov, is available for taxpayers to use in advance of the start of the filing season on Jan. 28. A number of changes have been made to Free File this year, strengthening the program to make it even more taxpayer friendly. More than 53 million taxpayers have used Free File since the program's inception 16 years ago. The public-private partnership between the IRS and the Free File Alliance provides free, brand-name tax software and free electronic filing to taxpayers who earned $66,000 or less last year. Some providers offer both free federal and free state tax preparation. Active duty military personnel with incomes of $66,000 or less may use any Free File software product offering a military option without regard to other criteria.
Tip of the Day
Resident alien . . . If you are a resident alien for the entire year, you must file a tax return following the same rules that apply to U.S. citizens. If you are a nonresident alien, the rules and tax forms that apply to you are different from those that apply to U.S. citizens.
January 14, 2019
January 11, 2019
NewsThe IRS has announced the Forms 706 (U.S. Estate Tax Return) filed after January 1, 2019 should be sent to Department of the Treasury, IRS Center, Cincinnati, OH 45999. Forms filed after June 30, 2019 should be mailed to Department of the Treasury, IRS Center, Kansas City, MO 6499. Gift tax returns (Form 709) filed in 2019 should be sent to Department of the Treasury, IRS Center, Kansas City, MO 64999. Keep in mind that if using a private delivery service, different addresses apply.
Tip of the DayExtending credit to customers? . . . For many small business owners it's a necessary evil. You've got to do it to make the sale, but you run the risk you won't get paid. If your business is local, listen to others in the industry. You may hear that the customer has issues with other suppliers. Another tip off is a customer who puts in a order much larger than his usual amount. He may be stockpiling supplies.
January 10, 2019
NewsBefore you go to Tax Court you've got to determine if the Court has jurisdiction. In a collection due process (CDP) case, the Court's jurisdiction depends on the issuance of a notice of determination following a timely request for a CDP hearing and the filing of a timely petition for review. In this case, the Court found it did have jurisdiction for his underlying tax liabilities for 2009 and 2010, but the taxpayer failed to submit any evidencce on the subject, despite several requests that he do so. Nor did he submit, during or after the CDP hearing, amended returns showing what he believed his correct tax liabilities for 2009 and 2010 to be. A settlement officer advised him on February 22, 2016, of the need to submit amended returns, but he submitted no returns during the ensuing four months. The Court held the taxpayer did not raise a proper challenge to his 2009 and 2010 tax liabilitiesat the CDP hearing. The taxpayer asserted he filed his delinquent 2014 return, but never offered a specific collection alternative. The Court held that it is not an abuse of discretion by the IRS to reject collection alternatives where the taxpayer has failed to file the requested information. James Edward Terrell (T.C. Memo. 2018-216)
Tip of the DaySales tax exemptions for fuel and power . . . If you're engaged in manufacturing, there's a good chance you're entitled to a sales tax exemption for electric, fuel, etc. used in the manufacturing process. Most states provide such an exemption. The rules vary, as does the definition of manufacturing. At least one state provides a limited exemption on sales tax on fuel used by any small business. Check the rules in your state.
January 9, 2019
NewsYou may be able to settle your debt with the IRS for less than the full amount under the offer-in-compromise provisions. But before the IRS accepts such an offer it will calculate your reasonable collection potential (RCP). In William E. Gustashaw and Nancy D. Gustashaw (T.C. Memo. 2018-215) the settlement officer found that the taxpayers' reasonable collection potential substantially exceeded their offer. The Court did find that the settlement officer made an error by including the cash value of life insurance policy, but that would have no effect on the outcome.
Tip of the DayLiquidating stocks for a purchase? . . . If you've got to liquidate some of your portfolio to make the downpayment on a property, don't wait till the last minute. The lender will check on where the downpayment is coming from. Cash in the bank carries more weight than stocks in a portfolio. The lender is likely to see the value of the portfolio as a percentage (e.g., 70%) of cash--and they won't put a higher value on it simply because you've got a bunch of blue chips. You want to have your finances in order to avoid any questions. Another point, liquidating at the last minute could mean holding up the closing. And don't forget to factor in the tax you'll have to pay on the gain. You may want to sell additional stock to have the funds to pay the tax.
January 8, 2019
NewsValuing residential property, particularly in the suburbs, is usually based on comparable sales, adjusted up or down for differences in the property. For example, an appraiser has recent sales for three nearby properties, but the property in question has an extra bathroom, but an outdated kitchen compared to tbe other properties. The appraiser takes that into account. Valuing easements where there are no there are often no comparable sales, is often based on the "before and after" method. That is, the value of the easement is considered to be equal to the pre-easement value of the land minus the post-easement value of the land. That is the approach the taxpayer used in Pine Mountain Preserve, LLLP f.k.a. Chelsea Preserve, LLLP, Eddleman Properties, LLC, Tax Matters Partner (T.C. Memo. 2018-214). On the other hand, the IRS's appraiser used an approach which rleid on the sale prices of rural undevelopable property. But the IRS approach didn't take into account the fact that there was a probability the land could be developed. The Court found offsetting errors in both approaches (the taxpayer overestimating the value; the IRS underestimating it) and held that the value of the easement would be 50% of the $9,110,000 claimed by the taxpayer and 50% of the $449,000 asserted by the IRS.
Tip of the DayStore closings an opportunity? . . . Small retailers have been under pressure from both big box stores and online sellers for some time. With several big box stores going under or closing locations, there could be some room for local retailers to increase sales. In addition, some online retailers are changing tactics because of rising shipping costs. While certainly there's no reason for local stores to pop the cork on champagne, it does bode well for some improvement in sales and/or margins. Look for places where you can fill a niche left by closing stores.
January 7, 2019
NewsThe IRS has announced that it will begin accepting eletronic filing of business tax returns on January 8, 2019. The acceptance of electronic filed individual tax returns has not been announced. The IRS will determine when individual returns will be accepted in January. Keep in mind that even when individual returns are accepted, refunds will not be issued until the shutdown is over.
Tip of the DayStart of a New Year . . . And it brings increases in the minimum wage in close to half the states. The Federal minimum wage is $7.25, many states are higher. California is $12 per hour for businesses with 26 or more employees; $11 for the remainder. Florida is $8.46; New Jersey is $8.85. New York is the most complex one. New York City employers with 11 or more employees must pay $15 per hour; $13.50 if they have 10 or fewer; in Nassau, Suffolk, and Westchester counties, it's $12 and $11.10 per hour for the remainder of the state. There are other minimums for fast food workers in New York City and those working at LaGuardia, JFK and Liberty Internation airports. The new minimum in Ohio is generally $8.55, but there's a lower rate for small businesses (less than $314,000 in gross receipts). Check the rules in your state.
January 4, 2019
NewsIf a debt, personal or business, is canceled, the amount forgiven is income. There are exceptions such as if you're insolvent. In Robert A. Connell and Ann P. Connell; Robert A. Connell (T.C. Memo. 2018-213) the taxpayer was a financial advisor and had a considerable client base with a substantial amount under management. The taxpayer jointed a new brokerage firm which lent him some $3.6 million as a signing bonus. The loan was evidenced by a promissory note. Some $40,000 was due and payable each month by the taxpayer, but the amount was to be deducted from the taxpayer's compensation. This arrangement was common in the industry and allowed the taxpayer to receive the full amount of the transitiion compensation upfront, while recognizing income only as each monthly payment came due. There was an issue and the taxpayer resigned rather than be asked to leave. According to the terms of the employment agreement, the loan became due and payable. The taxpayer disputed the forced resignation and brought an action against the brokerage firm. FINRA (Financial Industry Regulatory Authority) was asked to resolve the dispute through arbitration. It did so and found that the loan should be forgiven. The Court noted that amounts received for injury or damage to capital assets in excess of the basis of the property would be taxable as capital gain; amounts received for lost profits are taxable as ordinary income. The FINRA panel did not explain the basis of their award. The taxpayer argued that the unpaid portion of the loan proceeds was to compensate the taxpayer for his book of business and the settlement should be taxed as a capital gain. The Court noted the taxpayer presented other arguments to the FINRA panel. The Court found the taxpayers did not meet their burden to establish the book of business was the reason for the settlement. The Court held that the extinguishment of the taxpayer's debt constituted cancellation of debt income and the full amouant was taxable as ordinary income.
Tip of the DayTaking care of your parents? . . . It's not that unusual that one sibling, often because he or she lives nearby, ends up performing the bulk of the work in taking care of elderly parents. Whether or not that individual wants to be compensated is a separate issue. But if the caregiver is seeking to be compensated or is promised compensation on the death of the parent (or other relative) provision should be made in the will. You shouldn't expect the siblings to gratuitously relinquish a portion of their inheritance. In fact, the contrary can happen. Fred helps his mother for five years and gets 60% of the estate while sisters Sue and Carol get 20% each. It's not unusual for the parties receiving the smaller share to complain. The will should specifically state that Fred is getting the larger share because of his efforts. While the courts can sometimes correct an inequity, don't count on it. There can be a number of ways to handle the issue but the solution may require taking a number of financial and personal factors into account. There can also be tax consequences. Talk to your attorney.
January 3, 2019
NewsThe Tax Court has announced it shut down starting Friday, December 31, 2018 and will remain closed until further notice. The trial sessions schedule for the weeks of January 7 and 14, 2019 will proceed as scheduled. eFiling and eAccess will be available. Taxpayers may comply with statutory deadlines for filing petitions or notices of appeal by timely mailing a petition or notice of appeal to the Court. Timeliness of mailing of the petition or notice of appeal is determined by the United States Postal Service’s postmark or the delivery certificate of a designated private delivery service.
A taxpayer can face both criminal and civil fraud penalties. Conviction on criminal fraud can result in jail time; the penalty for civil fraud is 75 percent of the underreported liability. In Richard C. Mathews (T.C. Memo. 2018-212) the taxpayer lied to the IRS revenue agent and special agent (for the Criminal Investigation Division) during the initial interview and during the criminal investigation. In the criminal case the taxpayer was charged with subscribing to false income tax returns for 2004 through 2008 and with impeding administration of the internal revenue laws under Section 7212. The civil action in Tax Court went differently. The taxpayer did not dispute he underreported his income for 2007 and 2008, he argued that the periods of limitation had expired and also disputed the applicability of the fraud penalties. Assessment was barred by the statute of limitations unless an exception applied and the IRS relied on the fraud exception, noting if a taxpayer files “a false or fraudulent return with the intent to evade tax, the tax may be assessed . . . at any time.” The IRS has the burden of proving, by clear and convincing evidence that and underpayment exists and that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. The Court did not believe that the taxpayer lied in his testimony in this case. The Court noted the taxpayer's lack of sophistication with financial matters and did not understand how to report the income from his business venture. The Court also noted that conviction for criminal fraud does not collaterally estop a taxpayer from denying that his returns were fraudulent. The Court held the IRS failed to establish by clear and convincing evidence that petitioner filed false and fraudulent returns with the intent to evade tax for 2007 and 2008, the IRS was barred by the Section 6501(a) limitations period from assessing deficiencies and alternative Section 6662(a) accuracy-related penalties against petitioner for those years.
Tip of the DayRetirement planning for singles . . . One of the comedy teams of the 1940's said "two can live as cheaply as one, but for only half as long". When it comes to retirement planning, a single individual may be at a disadvantage. Some big expenses such as housing will be the same, or almost as much, as a couple. Even car expenses may be proportionately more. A couple may need only one car, the same as a single individual. But the income of a couple is often double that of the single individual. The social security your spouse receives expires on their death. Taxes are likely to be more too. As with many issues in personal financial planning, much depends on your particular situation. Consider looking for a new financial advisor if he or she tries to apply a standard formula to you.
January 2, 2019
NewsNotice 2019-09 provides interim guidance on the provisions of the new Sec. 4960 added by the Tax Cuts and Jobs Act, and announces the intent of Treasury and the IRS to issue proposed regulations. Section 4960 provides that excess remuneration and excess parachute payments paid by an applicable tax-exempt organization to a covered employee are subject to an excise tax (currently 21 percent). This notice provides interim guidance defining (1) “applicable tax-exempt organization,” (2) “excess remuneration,” (3) “covered employee,” and (4) “excess parachute payment.” In addition, the notice instructs taxpayers on how to report and pay the excise tax.
If you owe unpaid taxes, you may be eligible for a collection alternative such as an installment agreement, offer-in-compromise, but you have to meet certain requirements. One is that you must be current in your estimated tax obligations. In James Anthony Ransom (T.C. Memo. 2018-211) the Tax Court agreed with the IRS settlement officer who rejected a collection alternative because the taxpayer was self-employed and not current on his estimated tax obligations. The taxpayer had made a payment toward his obligation but had not paid in full. The taxpayer argued that he could not do so because of the loss of a client, but that argument was rejected because the client loss postdated the hearing.
You may be able to secure a tax deduction for a qualified conservation contribution of real property, but one of the requirements is that the easement is that it must continue in perpetuity. In Pine Mountain Preserve, LLLP f.k.a. Chelsea Preserve, LLLP, Eddleman Properties, LLC, Tax Matters Partner (151 T.C. No. 14) a partnership acquired a tract of land near Birmingham, Alabama, and conveyed to a qualified land trust, in 2005, 2006, and 2007, easements covering relatively small portions of that property. Each easement defined a conservation area that was to be restricted in perpetuity from commercial and residential development, with a carve-out in the 2005 and 2006 easements for 16 reserved “building areas,” within each of which the partnership could construct a single-family residence. The 2006 easement did not specify the location of the building areas, and the 2005 easement permitted the partnership (with the trust's consent) to move the building areas from their initially designated locations to any other location within the conservation area. The 2005 easement also reserved to the partnership the rights to construct, within the conservation area, other facilities appurtenant to residential development, such as barns, riding stables, scenic overlooks, and boat storage buildings, some of which could include additional living quarters. The partnership claimed charitable contribution deductions for the easements on its 2005, 2006, and 2007 tax returns. The IRS contended that the easements were not “qualified real property interest[s]” under Sec. 170(h)(1)(A); that the easements were not made “exclusively for conservation purposes” under Sec. 170(h)(1)(C) and that the partnership overstated the fair market values of the easements. The Tax Court held that the 2005 and 2006 easements did not restrict a specific, identifiable piece of real property because they allowed supposedly conserved land to be taken back and used for residential development. Because neither easement constituted “a restriction (granted in perpetuity) on the use which may be made of the real property,” Sec. 170(h)(2)(C), neither easement constituted a “qualified real property interest” that could give rise to a charitable contribution deduction under Sec. 170(h)(1)(A). The Court also held that the 2007 easement covered a specific, identifiable piece of real property and was “granted in perpetuity” under Sec. 170(h)(2)(C) and the 2007 easement was made “exclusively for conservation purposes” under Sec. 170(h)(1)(C). Finally, the Court held the inclusion in the 2007 easement of a provision allowing amendments, provided that they were “not inconsistent with the conservation purposes of the donation,” did not prevent that easement from satisfying the granted-in-perpetuity requirement of Sec. 170(h)(2)(C).
Tip of the DaySinking fund . . . The concept isn't used much these days but it was important in debt financing years ago. The idea was that a debtor with a balloon payment due on a bond or note had to put away enough every year to retire the debt at the end of the term. The concept was also used to require a business to put away a certain amount each year for replacement of equipment (or a major portion thereof) or a part of a building that would wear out such as a roof. The economic environment has changed and instead of a sinking fund it's assumed that any outstanding debt will be refinanced or the replacement financed with new debt. But putting money into a sinking fund each year still makes sense. The problem is that putting the money into a bank or treasury securities won't produce much income. If the idea is to make a balloon payment, consider paying down the associated debt (if possible), renewing or replacing equipment piecemeal, etc.
December 31, 2018
NewsSeveral states have been working on or considering a work around for their residents on the restriction on the deduction for state and local taxes. In Rev. Proc. 2019-12 provides safe harbors under Section 162 for certain payments made by a C corporation or a specified pass-through entity to or for the use of an organization described in Section 170(c) (e.g., a state or local government) if the C corporation or specified pass-through entity receives or expected to receive a state or local tax credit in return for such payment. Generally, C corporations will be allowed a deduction for payments to such organizations, but pass-through entities (S corporations, partnerships, etc.) will be allowed a deduction onliy if the entity is subject to a state or local tax incurred in carrying on a trade or business that is imposed directly on the entity.
Tip of the DayCheck state tax laws . . . If you threw out those receipts for those unreimbursed employee businesses expenses, it's time to go dumpster diving. Not all states are following federal law. New York in particular is allowing individual taxpayers to deduct unreimbursed business expenses, real estate taxes in excess of the $10,000 federal limit, casualty and theft losses, moving expenses, and certain miscellaneous deductions such as tax preparation fees that are no longer deductible on your federal return. The downside, of course, is that those deductions are not worth nearly as much on your state return. Nonetheless, check the rules for your state. The same applies to your business returns. There can be other differences too. For example, businesses may not be able to use the 100-percent bonus depreciation allowed for federal purposes.
December 28, 2018
NewsThe IRS has issued proposed regulations (REG-113604-18; NPRM REG-113604-18) implementing Section 864(c)(8) of the Code. The proposed regulations affect certain foreign persons that recognize gain or loss from the sale or exchange of an interest in a partnership that is engaged in a trade or business within the United States. The proposed regulations also affect partnerships that, directly or indirectly, have foreign persons as partners.
In order to save money and speed resolution, the IRS often uses a telephone hearing in place of a face-to-face hearing in a collection due process (CDP) conference. A taxpayer may request a face-to-face CDP hearing at the Appeals Office closest to the taxpayer's residence. However, “a face-to-face CDP conference concerning a collection alternative, such as an installment agreement or an offer to compromise liability, will not be granted unless . . . [another] taxpayer would be eligible for the alternative in similar circumstances.” For example, if a taxpayer is not in compliance with his filing obligations or has not made certain required deposits of tax as set forth in Form 656, no face-to-face conference will be granted to the taxpayer if he wishes to make an offer-in-compromise but has not fulfilled these obligations. In Leon Steinhardt (T.C. Memo. 2018-206) the settlement officer determined that the taxpayer had Federal tax filing obligations for 2010 through 2016. As a result the Court found there was no abuse of discretion in the IRS's determination to deny a face-to-face hearing.
Petitioners in many Tax Court cases are not represented by an attorney and the Court is often less formal than in other courts when it comes to evidence. In Mary Louise Sholes (T.C. Memo. 2018-203) the taxpayer deducted a substantial amount of legal and professional fees originally claimed as rental expenses on Schedule E. The Court denied the deductions, saying "Petitioner's evidence is simply too unreliable and her arguments are too unpersuasive for any disputed deductions to be allowed. Petitioner has presented no reason why the notice of determination upholding the lien filing while petitioner's liabilities remain in currently-not-collectible status should not be sustained."
Tip of the DayPromote from within . . . It often makes sense for companies of many sizes and for many positions. Current employees are familiar with the processes, company climate, etc. In addition, you won't have to go through the expense of a search (which can be considerable) and you may be able to offer a bump in salary to an amount that's less than you'd have to pay to bring in an outsider. While there are a number of advantages, there are two big potential drawbacks. First, and obvious, the employee may not have the skills needed to do the job and, second, bringing in outside blood can bring new ideas to the firm.
December 27, 2018
NewsThe credit for increasing research activities, was enacted in 1981 to stimulate research and development in the United States by helping businesses offset some of the costs associated with increasing their qualified research activities and now allows qualified small businesses to apply a portion of the Research Credit against their employer portion of the Social Security tax. Qualified small businesses could begin claiming this credit after December 31, 2015. In Tax Year 2017, over 2,200 Research Credit claims totaling over $53.2 million were made. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit because qualified small businesses could begin claiming the Research Credit to offset their payroll tax liability beginning in Tax Year 2016. The objective of this review was to determine whether the IRS can ensure that taxpayers who claim the Research Credit against their payroll taxes are eligible to claim the credit and claim the correct amount. TIGTA found the IRS does not have processes to identify small businesses that do not meet the eligibility requirements and dollar limitations for claiming the Research Credit. TIGTA’s review of 1,467 businesses claiming over $53.2 million in Research Credits on Tax Year 2017 employment tax returns identified 143 businesses that claimed or received about $11.8 million in potentially erroneous Research Credits. For example, TIGTA identified 81 businesses with potentially erroneous Research Credit claims totaling almost $2.8 million because they did not meet one or more of the eligibility requirements to claim the Research Credit. TIGTA also identified 55 businesses with potentially erroneous Research Credit claims totaling $586,190 on a return prior to when the credit became available. In response to our findings, IRS management stated that they are developing post-processing compliance initiatives to ensure that eligibility for the Research Credit has been met as well as to ensure the accuracy of the credit amounts claimed. To see the complete report, go to www.treasury.gov/tigta/auditreports/2019reports/201940014fr.pdf
The Code disallows a deduction for expenses related to trafficking in illegal drugs. But this case involved a more complex set of facts that in recent ones. First, medical marijuana is legal in California. Second, the corporation had some legitimate business activities. In an attempt to preserve a deduction, the taxpayers allocated the expenses between the trafficking and non-trafficking activities. In Alternative Health Care Advocates, et al. (151 T.C. No. 13) C, a corporation, operated a medical marijuana dispensary in California. Other taxpayers were individual shareholders of S, an S corporation that was organized to handle daily operations for C including paying employee wages and salaries. C deducted Sec. 162 business expenses and later adjusted COGS (cost of goods sold) to include indirect expenses per Sec. 263A. The IRS determined that both C's and S's sole trade or business was trafficking in a controlled substance and that Sec. 280E precluded C's and S's deducting business expenses. In light of that determination, the IRS further determined that the taxpayers had underreported their flowthrough income from S. The IRS also determined that C is not entitled to COGS in an amount greater than what the IRS already allowed and that C is liable for Sec. 6662(a) accuracy-related penalties. The Tax Court held that Sec. 280E precluded C from deducting Sec. 162 business expenses, that Sec. 280E precluded S from deducting Sec. 162 business expenses. that the taxpayers underreported their flowthrough income from S and that C is not entitled to a COGS greater than what respondent allowed. Finally, the Court held C was liable for Sec. 6662 accuracy-related penalties.
Tip of the DayLast estimate tax payment for 2018 . . . For most taxpayers it's due January 15 (special rules apply to farmers and fisherman). Because of all the changes in the tax law for 2018, there's a good chance your taxes could be materially different than in the past. Now's a good time to review your estimate. You know most of your numbers, or should be able to estimate them pretty close, and the early version of some tax preparation software is available. Many IRS forms and instructions are also available. After reviewing your situation you may find you're overpaid already and can skip the last estimate. Conversely, you may find yourself underpaid and either make or up your last estimate for 2018.
December 26, 2018
NewsRev. Proc. 2019-8 (IRB 2018-3) provides guidance under the Tax Cuts and Jobs Act, (the “TCJA”). The TCJA amended Sec. 179 of the Code by modifying the definition of qualified real property that may be eligible as Sec. 179 property under Sec. 179(d)(1). The TCJA amended Sec. 168 by (i) requiring certain property held by an electing real property trade or business, as defined in Sec. 163(j)(7)(B), to be depreciated under the alternative depreciation system in Sec. 168(g), and (ii) changing the recovery period under the alternative depreciation system from 40 to 30 years for residential rental property. The TCJA amended Sec. 168 by requiring certain property held by an electing farming business, as defined in Sec. 163(j)(7)(C), to be depreciated under the alternative depreciation system. This revenue procedure also modifies Rev. Proc. 87-57 to provide an optional depreciation table for residential rental property depreciated under the alternative depreciation system with a 30-year recovery period, and Rev. Proc. 2018-31 to provide guidance for calculating a Sec. 481(a) adjustment for a change in method of accounting due to a change in the use of depreciable tangible property.
Notice 2019-8 (IRB 2019-3) provides the 2018 maximum values for use with the vehicle cents-per-mile valuation rule under Reg. Sec. 1.61-21(e) and the fleet-average valuation rule, which is an optional component of the automobile lease valuation rule under Reg. Sec. 1.61-21(d). These values are adjusted annually for inflation. This notice also provides interim guidance on new procedures for calculating the inflation adjustments to the maximum values for use with the special valuation rules under Reg. Sec. 1.61-21(d) and (e) using Section 280F(d)(7). The Internal Revenue Service (IRS) and the Department of the Treasury anticipate that further guidance on these issues will be issued in the form of proposed regulations and expect that the regulations will be consistent with the rules set forth in this notice.
Notice 2019-5 (IRB 2019-2) supplements Notice 2014-76, 2014-50, as supplemented by Notice 2017-14, by identifying additional hardship exemptions from the individual shared responsibility payment under Sec. 5000A of the Code that a taxpayer may claim on a Federal income tax return for the 2018 tax year without obtaining a hardship exemption certification from the Health Insurance Marketplace.
Tip of the DayBuy or lease? . . . There's no rule of thumb for all situations. And nonfinancial factors may be far more important than financial ones. Which is cheaper from a financial standpoint will depend on the interest rate (lease vs. buy) and the residual value. Some leases can be expensive. Ones where the manufacturer is holding the lease may be attractive. But other factors may loom larger. Technology driven equipment is becoming obsolete much faster than in the past. Do you want to be trying to sell a 3-year old computer you bought? Leasing often means you can walk away at the end of term. The same can be true for vehicles, shop equipment, etc. On the other hand, an 8-year old forklift that you haven't abused may still be more than serviceable. On vehicles the deciding factor may be the excess mileage charge. There's one time when tax considerations may be important. Leasing autos and trucks may be more attractive than buying because of depreciation restrictions. But even there you should work through the numbers.
December 21, 2018
NewsUnless an exception applies, early distributions (before age 59-1/2) from an IRA are generally subject to a 10-percent penalty. In Marlon G. Dasent and Kendra Walcott-Dasent (T.C. Memo. 2018-202) the taxpayers claimed the distributions from the IRA were for their children's qualified higher education expenses. The Court requested documentation to that effect from the taxpayers. The Court agreed with the IRS in questioning the authenticity of the documents and held that the additional evidence did not show that the taxpayers used the funds for higher education expenses.
If a customer or other party owes you money for goods or services and becomes delinquent, make sure you understand state law. In Payne Family Homes, LLC, Plaintiff v. Survant Air Systems, Inc., et al. (U.S. District Court, E.D. Missouri) the Court found that as a result of federal employment tax assessments the IRS had a priority lien over a contractor that installed air conditioning systems in homes built by Payne. The Court noted the contractor, and the equipment supplier, did not file a financing statement regarding the money owed. Under Missouri law, perfection of a security interest occurs when a financing statement identifying the debtor, the creditor, and giving a general indication of the collateral, is filed with the Secretary of State. The Court also noted Federal tax liens attach to “all property and rights to property” “belonging to” the taxpayer as of the assessment date and continues until the liability is satisfied or becomes unenforceable by lapse of time. As a result, the tax lien attaches not only to property belonging to the taxpayer on the assessment date, but also to “after-acquired property” (property acquired after the date the lien attaches) until the tax is paid or collection becomes barred by the statute of limitations. The Court held the tax liens had priority over the supplier's claim.
Tip of the DayYear-end payments to related parties . . . Even if you're on the accrual method of accounting you can't take a deduction for amounts owed to related party for items such as interest, rent, salaries, etc. If your business owes you personally for interest on a loan or rent for a property lease, keep that in mind.
December 20, 2018
NewsThe IRS has announced (IR-2018-256) it would stop its tax transcript faxing service as of Feb. 4, 2019, and offer a more secure alternative to taxpayers and tax professionals. The IRS worked with the tax preparation community to reach agreement on an alternative that will meet tax practitioners’ needs in e-filing individual tax returns while also enhancing safeguards for taxpayer data. The Feb. 4, 2019, discontinuation of the faxing service also applies to business tax transcripts as well as individual tax transcripts. However, business tax transcripts are not masked. At the request of business taxpayers, the transcript will be mailed to the address of record. Tax professionals may obtain a business tax transcript through the e-Service Transcript Delivery System. Note. This news release contains much more information of particular interest to tax professionals.
The IRS is generally precluded from issuing more than one notice of deficiency for a taxable year. An exception exists for affected items that require partner-level determinations. In Raghunathan Sarma and Gaile Sarma (T.C. Memo. 2018-201) the petitioners argued that a loss was not an affected item and not a computational adjustment. They argued that the IRS was precluded from issuing the 2016 notice because it is an invalid further notice of deficiency for 2001 through 2004. The Court held that the loss deduction was an affected item that required a partner-level determination and the exception applied.
Tip of the DayS corporation salary . . . If you're doing business as an S corporation and you haven't paid yourself--or other shareholder/officers--a salary so far this year you should do so before yearend. Under the new law S corporations that don't pay a salary, or an inadequate salary, are likely to be scrutinized more closely than in the past. How much to pay can depend on a number of factors. If you haven't discussed this with your tax adviser, you should do so.
December 19, 2018
NewsThe IRS and its Security Summit partners are warning tax professionals of an uptick in phishing emails targeting them that involve payroll direct deposit and wire transfer scams. These business email compromise/business email spoofing (BEC/BES) tactics generally target all types of industry and employers. Recently the IRS received a number of reports from tax preparers that they, too, are being targeted. The IRS and the Summit partners, consisting of state revenue departments and tax community partners, are concerned these scams--as well as the Form W-2 scam--could increase as the 2019 tax season approaches. These emails generally impersonate a company employee, often an executive, and are sent to payroll or human resources personnel. The email from the "employee" asks the payroll or human resource staff to change his or her direct deposit for payroll purposes. The "employee" provides a new bank account and routing number, but it is actually controlled by the thief. This scam is usually discovered pretty quickly, but not before the victim has lost one or two payroll deposits. In another version of the BEC/BES scam, the emails impersonate a company executive and are sent to the company employee responsible for wire transfers. The email requests that a wire transfer be made to a specific account that is controlled by the thief. Companies that fall victim to this scam can lose tens of thousands of dollars. A common theme in these and many other email scams is that they include grammatical and spelling mistakes. All businesses should be alert to these BEC/BES scams that take many forms such as fake invoice payments, title escrow payments, wire transfers or other schemes that result in a quick payoff for the thief. Businesses should consider policy changes to guard against such losses. For more information see Internal Revenue News Release IR-2018-253.
In 2012 the petitioner (Jason Bontrager; 151 T.C. No. 12) pleaded guilty to violation of Sec. 7201 of the Code. The basis for his conviction was that he had aided and abetted his father in evading payment of his father's Federal income tax liability for 1994. In 2013 the petitioner filed a petition under chapter 7 of the Bankruptcy Code. At sentencing in 2014 the District Court ordered the petitioner to pay restitution of $72,710, representing 10% of the Government's total tax loss attributable to his father's unpaid tax liability for 1994. Relying on Sec. 6201(a)(4), the IRS assessed the $72,710 of restitution that the petitioner had been ordered to pay and recorded this assessment as a liability for his 1994 tax year. When he did not pay the balance of the liability, the IRS began collection action by filing a notice of Federal tax lien (NFTL). After a CDP hearing the settlement officer upheld the filing of the NFTL, and the petitioner timely petitioned the Tax Court. The Tax Court held that Sec. 6201(a)(4) authorizes the IRS to assess restitution that a person has been ordered to pay upon conviction of violating Sec. 7201, when his wrongdoing consisted of aiding and abetting the evasion of payment of a third party's tax liability. The Court also held that the petitioner's restitution liability was not discharged in the bankruptcy proceeding and that the IRS collection action was sustained.
Tip of the DayMore reasons to be careful . . . The Federal Trade Commission has won a default judgment and order requiring nine related Canadian and U.S. defendants to pay more than $4.6 million for tricking small businesses into paying for Internet directory listings, search engine optimization services, or website design and hosting services they never ordered. The defendants were charged with making unsolicited calls to small businesses to induce them to pay for unordered Internet directory listings, search engine optimization services, or website design and hosting services. The defendants allegedly targeted businesses using several names, including Premium Business Pages, Ameteck Group, The Local Business Pages, and Data Net Technologies. When first contacting businesses, the defendants claimed to be calling to collect on a past-due invoice for one of their services. In reality, the small businesses contacted never ordered or agreed to buy anything from the defendants and were never sent a bill. In many cases, the defendants’ telemarketers threatened that the business’s accounts would be turned over to “collections” or would be “red flagged.” In some cases, even after a business paid money it did not owe, the defendants called back weeks later, sometimes claiming to be a different company demanding payment for other “outstanding invoices,” or claiming that the first payment was only the first installment.
December 18, 2018
NewsNotice 2018-96 announces the credit phase-out schedule for new qualified plug-in electric drive motor vehicles sold by Tesla, Inc.
The IRS has issued proposed regulations (REG-132881-17) eliminating withholding on payments of gross proceeds, deferring withholding on foreign passthru payments, eliminating withholding on certain insurance premiums, and clarifying the definition of investment entity. This notice of proposed rulemaking also includes guidance concerning certain due diligence requirements of withholding agents and guidance on refunds and credits of amounts withheld.
Tip of the DayStock market action . . . If you've been watching the market you're probably dismayed to see it go down even further. If you watch the market hour-by-hour, you're probably particularly stressed to see the wild price swings. We've had big inter-day swings before, but the current ones are much larger and more frequent. If you're playing with Susie's college fund and she just entered high school, that's probably not a good move. On the other hand, if you're in your 30's and you're working with your retirement fund, you might want to take a look at your portfolio to see what you might sell--and what you might buy. But there's no reason to panic; things should work out in the long term. Few people can time the market on any consistent basis. The best approach is probably one advocated years ago--dollar averaging. Buy a little at a time; sell a little at a time. You won't make that big killing--but you won't get killed in a big way either.
December 17, 2018
NewsThe IRS has released Notice 2019-02, updating the standard mileage rates for autos, pickup trucks, and vans. For 2019 the rate for business use is 58 cents per mile, for medical and moving it's 24 cents per mile and for charitable use it's 14 cents per mile. Keep in mind that the Tax Cuts and Jobs Act suspended until 2026 all itemized deductions subject to the 2-percent threshold. Members of a reserve component of the Armed Forces, state or local government officials paid on a fee basis, and certain performing artists can deduct unreimbursed employee travel as an adjustment to total income on line 24 of Schedule 1 of Form 1040. In addition, moving expenses are generally no longer deductible. There's an exception for active duty Armed Forces personnel who move pursuant to a military order and incident to a permanent change of station. The Notice also provides that the basis reduction for depreciation in 2019 is 26 cents per mile and the maximum auto cost for computing an allowance under a FAVR plan may not exceed $50,400 for 2019.
Tip of the DayFact sheets on new law . . . The IRS has issued a number of Fact Sheets on the new law. They do a good job of explaining the new law in plain English and are definitely helpful. Here are some useful links:
--A link to all the Fact Sheets released in 2018
--What's new for farmers in 2018?
--Highlights of Tax Reform for businesses
--Depreciation under the new law.
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