Form 8938, Statement of Specified Foreign Financial Assets, (“Form 8938”) is a new reporting requirement that will be effective for 2011 and future tax years. These provisions are part of a broad initiative by the federal government to increase tax compliance, particularly by those with foreign accounts or foreign assets.
It is possible that the provisions will affect you, even though you many not believe you own "anything foreign”. Some of the financial assets that must be reported on the Form 8938 include:
Financial accounts maintained at foreign financial institutions;
- Foreign retirement accounts;
- Direct ownership of stock in a foreign corporation (outside of a financial institution);
- Foreign life insurance products;
- Foreign partnership interests, such as foreign hedge funds and foreign private equity funds;
- Foreign deferred compensation arrangements; and,
- Beneficial interest in foreign trusts or estates.
There are various thresholds above which the Form 8938 reporting requirements apply. Some taxpayers will be required to report if they have foreign assets and foreign accounts with an aggregate value of $50,000. Filing thresholds for business entities, trusts and estates have not been announced by the IRS.
At this time, we do not have a full guidance from the IRS detailing the rules associated with this required Form 8938 filing. However, Form 8938 will typically be attached to your annual federal income tax return, if you have a filing requirement.
There are significant civil and criminal penalties for failure to file the Form 8938 or to complete the form as required.
Form 8938 reporting is in addition to other filing requirements with respect to foreign assets and accounts you may have an interest in or authority over such as foreign bank and financial accounts on Form TD F 90-22.1 (commonly referred to as FBAR reporting).
Accordingly, if you are subject to Form 8938 reporting, we will likely need to perform additional work in order to prepare your 2011 tax federal income tax filings.
Charitable contributions of any amount are not deductible unless you have a ”proper receipt”. There have been recent court cases where the courts have disallowed significant deductions for charitable contributions where the taxpayers did not have a “proper receipt”. Please use the attached to help assist in determining if you have a “proper receipt”.
1. Contributions Made in Cash. The law requires that you have a receipt, letter, or other written communication from the charity (showing the
name of the charity, the
date and the amount of the contribution) documenting
ALL charitable contributions made in cash, regardless of size.
Please see additional requirements below if the contribution is $250 or more.
Do you have the above required documentation for charitable contributions made in cash? Yes No
2. Contributions Made by Check, Debit Card, or Charge Card. For charitable contributions made by check, the law requires that you either have a receipt as outlined above for Contributions Made in Cash, a copy of the cancelled check, or some other bank record (e.g., a bank statement). For charitable contributions made by a debit card or by charge card, you are required to either have a receipt as outlined above for Contributions Made in Cash, or a bank record (e.g., a bank statement, credit card statement, etc.). Please see additional requirements below if the contribution is $250 or more.
Do you have the above required documentation for charitable contributions made by check, debit card, or charge card? Yes No
3. Contributions of $250 or More. For all charitable contributions of $250 or more (contributions of cash, by check, by debit or credit card, or of property), the law requires a receipt (written acknowledgment) from the charity to which you made the donation stating the date and amount of the contribution as well as a statement as to whether you received anything in return for your contribution. If you received goods or services in return for the contribution, the receipt must include a description and an estimate of the value of the goods or services received in return for the contribution. If the goods or services received consist solely of intangible religious benefits, the receipt must include a statement to that effect.
For all charitable contributions of $250 or more, do you have the above required documentation? Yes No
4. Contributions of Vehicles, Boats, or Airplanes of More than $500. If you are claiming a deduction of more than $500 for a vehicle, a boat, or an airplane you contributed to charity, the law requires that you obtain a Form1098-C (or other written acknowledgment containing the same information shown on Form 1098-C) from the charity in order to deduct your contribution.
Do you have a Form 1098-C documenting your charitable contribution of a vehicle, boat or airplane? Yes No
5. Contributions of Clothing or Household Items. Generally, a deduction is not allowed for a charitable contribution of clothing or household items unless the items are in good used condition or better. Household items generally include: furniture; furnishings; electronics; appliances; linens; and other similar items.
Were your charitable contributions of clothing or household items in good used condition or better? Yes No
ALL OTHER NONCASH DONATIONS
Please remember there are numerous other substation requirements for: Publicly Traded Stock; Non Publicly Traded Stock; Artwork; Payroll Deductions; Volunteer Out-of-Pocket Expenses and for amounts over $5,000.
Copyright 2013 Sladek & Witek, CPA’s LLP
The IRS has released long-awaited guidance on new Code Sec. 199A, commonly known as the "pass-through deduction" or the "qualified business income deduction." Taxpayers can rely on the proposed regulations and a proposed revenue procedure until they are issued as final.
The IRS has released long-awaited guidance on new Code Sec. 199A, commonly known as the "pass-through deduction" or the "qualified business income deduction." Taxpayers can rely on the proposed regulations and a proposed revenue procedure until they are issued as final.
Code Sec. 199A allows business owners to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships, partnerships, trusts, and S corporations. The deduction is one of the most high-profile pieces of the Tax Cuts and Jobs Act ( P.L. 115-97).
In addition to providing general definitions and computational rules, the new guidance helps clarify several concepts that were of special interest to many taxpayers.
Trade or Business
The proposed regulations incorporate the Code Sec. 162 rules for determining what constitutes a trade or business. A taxpayer may have more than one trade or business, but a single trade or business generally cannot be conducted through more than one entity.
Taxpayers cannot use the grouping rules of the passive activity provisions of Code Sec. 469 to group multiple activities into a single business. However, a taxpayer may aggregate trades or businesses if:
- each trade or business is itself a trade or business;
- the same person or group owns a majority interest in each business to be aggregated;
- none of the aggregated trades or businesses can be a specified service trade or business; and
- the trades or businesses meet at least two of three factors which demonstrate that they are in fact part of a larger, integrated trade or business.
Specified Service Business
Income from a specified service business generally cannot be qualified business income, although this exclusion is phased in for lower-income taxpayers.
A new de minimis exception allows some business to escape being designated as a specified service trade or business (SSTB). A business qualifies for this de minimis exception if:
- gross receipts do not exceed $25 million, and less than 10 percent is attributable to services; or
- gross receipts exceed $25 million, and less than five percent is attributable to services.
The regulations largely adopt existing rules for what activities constitute a service. However, a business receives income because of an employee/owner’s reputation or skill only when the business is engaged in:
- endorsing products or services;
- licensing the use of an individual’s image, name, trademark, etc.; or
- receiving appearance fees.
In addition, the regulations try to limit attempts to spin-off parts of a service business into independent qualified businesses. Thus, a business that provides 80 percent or more of its property or services to a related service business is part of that service business. Similarly, the portion of property or services that a business provides to a related service business is treated as a service business. Businesses are related if they have at least 50-percent common ownership.
Wages/Capital Limit
A higher-income taxpayer’s qualified business income may be reduced by the wages/capital limit. This limit is based on the taxpayer’s share of the business’s:
- W-2 wages that are allocable to QBI; and
- unadjusted basis in qualified property immediately after acquisition.
The proposed regulations and Notice 2018-64, I.R.B. 2018-34, provide detailed rules for determining the business’s W-2 wages. These rules generally follow the rules that applied to the Code Sec. 199 domestic production activities deduction.
The proposed regulations also address unadjusted basis immediately after acquisition (UBIA). The regulations largely adopt the existing capitalization rules for determining unadjusted basis. However, "immediately after acquisition" is the date the business places the property in service. Thus, UBIA is generally the cost of the property as of the date the business places it in service.
Other Rules
The proposed regulations also address several other issues, including:
- definitions;
- basic computations;
- loss carryovers;
- Puerto Rico businesses;
- coordination with other Code Sections;
- penalties;
- special basis rules;
- previously suspended losses and net operating losses;
- other exclusions from qualified business income;
- allocations of items that are not attributable to a single trade or business;
- anti-abuse rules;
- application to trusts and estates; and
- special rules for the related deduction for agricultural cooperatives.
Effective Dates
Taxpayers may generally rely on the proposed regulations and Notice 2018-64 until they are issued as final. The regulations and proposed revenue procedure will be effective for tax years ending after they are published as final. However:
- several proposed anti-abuse rules are proposed to apply to tax years ending after December 22, 2017;
- anti-abuse rules that apply specifically to the use of trusts are proposed to apply to tax years ending after August 9, 2018; and
- if a qualified business’s tax year begins before January 1, 2018, and ends after December 31, 2017, the taxpayer’s items are treated as having been incurred in the taxpayer’s tax year during which business’s tax year ends.
Comments Requested
The IRS requests comments on all aspects of the proposed regulations. Comments may be mailed or hand-delivered to the IRS, or submitted electronically at www.regulations.gov (indicate IRS and REG-107892-18). Comments and requests for a public hearing must be received by September 24, 2018.
The IRS also requests comments on the proposed revenue procedure for calculating W-2 wages, especially with respect to amounts paid for services in Puerto Rico. Comments may be mailed or hand-delivered to the IRS, or submitted electronically to Notice.comments@irscounsel.treas.gov, with “ Notice 2018-64” in the subject line. These comments must also be received by September 24, 2018.
The IRS’s proposed pass-through deduction regulations are generating mixed reactions on Capitol Hill. The 184-page proposed regulations, REG-107892-18, aim to clarify certain complexities of the new, yet temporary, Code Sec. 199A deduction of up to 20 percent of income for pass-through entities. The new deduction was enacted through 2025 under the Tax Cuts and Jobs Act (TCJA), ( P.L. 115-97). The pass-through deduction has remained one of the most controversial provisions of last year’s tax reform.
The IRS’s proposed pass-through deduction regulations are generating mixed reactions on Capitol Hill. The 184-page proposed regulations, REG-107892-18, aim to clarify certain complexities of the new, yet temporary, Code Sec. 199A deduction of up to 20 percent of income for pass-through entities. The new deduction was enacted through 2025 under the Tax Cuts and Jobs Act (TCJA), ( P.L. 115-97). The pass-through deduction has remained one of the most controversial provisions of last year’s tax reform.
A legislative package that would make permanent the pass-through deduction, as well as other individual tax cuts, is expected to move though the House this fall. However, the House’s legislative efforts are not expected, at this time, to pass muster in the more narrowly GOP-controlled Senate.
Criticism
Several Democratic lawmakers and tax policy experts have already started to weigh in on the proposed regulations, which were released on August 8 while Congress remained in its annual August recess. Democrats have criticized the new deduction for primarily benefiting the wealthy. Meanwhile, several tax policy experts have taken to Twitter to note that the deduction is overly complex and administratively burdensome.
Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has reportedly said that the proposed regulations "confirm that the fortunate few win," under the new tax law. "Tax planners are already scouring through the nearly 200 pages of regulations in search of new ways to keep wealthy clients from paying their fair share."
Compliance Burdens
The pass-through deduction could add 25 million hours to taxpayers’ annual reporting burden, according to the proposed regulations. Additionally, the IRS has estimated that gross reporting annualized costs to taxpayers will total approximately $1.3 billion over 10 years.
Furthermore, the IRS has estimated that the compliance burden will vary between taxpayers, averaging between 30 minutes and 20 hours. The administrative burden on smaller pass-through entities is anticipated to be on the lower end of the estimate, according to the IRS.
Comment. Ryan Kelly, partner at Alston & Bird LLP, told Wolters Kluwer on August 13 that the IRS’s 25 million-hour estimate, whether accurate or not, suggests that there will be a significant increase in administrative compliance costs. "There is a real cost to tax compliance in lost time and productivity for taxpayers," Kelly said. However, Kelly predicted that taxpayers’ Code Sec. 199A compliance burden will eventually decrease. "Time will reveal the extent of taxpayers’ administrative burden to comply; however, it is likely that as time goes on the taxpayers’ compliance burden will fall as taxpayers, tax practitioners, and the Service all become more familiar with section 199A and how it is intended to operate."
Meanwhile, the chairs of the House and Senate tax writing committees have both praised Treasury and the IRS for quickly releasing the much anticipated regulations. Additionally, several tax policy experts have also praised the proposed regulations for alleviating confusion, as well as taxpayer anxiety, about ambiguous provisions of the law.
"This first-ever 20 percent deduction for small businesses allows our local job creators to keep more of their money so they can hire, invest, and grow in their communities," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in a statement. "These proposed regulations are intended to provide certainty and flexibility for Main Street businesses in this historic new small business deduction."
Improvements to the proposed regulations are expected in the coming months as stakeholders submit comments. A public hearing at IRS headquarters in Washington, D.C., has been scheduled for October 16. "Evolution of tax regulations is generally never a pretty process, but it is a necessary process that in this case will hopefully happen sooner rather than later," Kelly told Wolters Kluwer.
The House’s top tax writer has unveiled Republicans’ "Tax Reform 2.0" framework. The framework outlines three key focus areas:.
The House’s top tax writer has unveiled Republicans’ "Tax Reform 2.0" framework. The framework outlines three key focus areas:
- making permanent the individual and small business tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97);
- promoting family savings by streamlining retirement savings accounts and creating a new Universal Savings Account; and
- spurring business innovation by allowing new businesses to write off more initial start-up costs.
Tax Reform 2.0
The GOP’s tax reform "phase two" framework—otherwise known as "Tax Cuts 2.0"—was released by House Ways and Means Committee Chairman Kevin Brady, R-Tex. on July 24. The outline is expected to be used for GOP "listening sessions" to be held among lawmakers.
Brady has said that making permanent the TCJA’s individual and small business tax cuts, enacted last December temporarily through 2025, will be the "centerpiece" of the next tax reform package. Further, Brady told reporters on July 24 that he anticipates Tax Reform 2.0 to move forward as three separate tax bills. A House vote on the package is expected sometime in September.
Preliminary Analysis
Republicans’ Tax Reform 2.0 framework is a "good start," according to a July 24 report released by the independent, yet widely-considered conservative-leaning, think tank Tax Foundation. The report praised the framework’s proposal to streamline retirement savings accounts and make permanent the TCJA’s individual tax cuts. Additionally, the Tax Foundation estimates that making permanent the individual tax cuts set to expire in 2026 would grow the U.S. economy by 2.2 percent while reducing federal revenue by $165 billion annually on a static basis.
Democrats Disagree
However, several Democratic lawmakers began issuing statements criticizing the Tax Reform 2.0 framework shortly after its release. Democrats have remained united in their disapproval of the TCJA, criticizing last year’s tax code overhaul for primarily benefiting the wealthy and corporations.
"Republicans’ first tax bill exposed the party’s real priorities: big corporations and people at the top," House Ways and Means Committee ranking member Richard Neal, D-Mass., said in a July 24 statement. "This new framework is more of the same – it rewards the well-off and well-connected, fails to reinstate the state and local tax deduction, and leaves the middle class behind."
Corporate Tax Cuts
The Tax Reform 2.0 framework did not include a proposal to further reduce the corporate tax rate. President Trump has called for lowering the corporate tax rate to 20 percent. The corporate tax rate was lowered from 35 to 21 percent last December under the TCJA. Brady previously told reporters that House Republicans and the White House are continuing discussions on the idea.
Tax Reform 3.0, 4.0
"Tax Reform 2.0 is a new commitment to improve the tax code each and every year for American families and local businesses," the framework says. Congress will examine the tax code each year to identify areas of needed improvement, according to the outline. Additionally, Brady has said he hopes to see a Tax Reform 3.0, 4.0, and so on.
Senate
At this time, the Tax Reform 2.0 package is not expected to clear the Senate in its entirety. It is thought on Capitol Hill that Democrats may support measures that focus on retirement and education savings and business innovation. However, several lawmakers view it as unlikely that Democrats would support a bill that makes permanent the individual tax cuts under the TCJA.
Brady has reportedly said that extending TCJA’s individual provisions would increase the deficit by $600 billion over 10 years but would be offset, at least in part, by beneficial economic factors. Several Senate Democrats and Republicans have said they would not vote for extending or creating tax cuts that increase the federal deficit.
The IRS faces numerous challenges, most of which are attributable to funding cuts, the National Taxpayer Advocate Nina Olson told a Senate panel on July 26. "The IRS needs adequate funding to do its job effectively," Olson told lawmakers.
The IRS faces numerous challenges, most of which are attributable to funding cuts, the National Taxpayer Advocate Nina Olson told a Senate panel on July 26. "The IRS needs adequate funding to do its job effectively," Olson told lawmakers.
IRS Funding
Olson, while testifying at a Senate Finance Committee (SFC) Taxation and IRS Oversight Subcommittee hearing, placed blame on both congressional appropriations and IRS management for the Service’s challenges. "While some of the IRS’s struggles can be addressed by better management, much of the IRS’s challenges are attributable to funding cuts," Olson said.
The IRS has simultaneously seen an increased workload and budget reduction of 20 percent when accounting for inflation between fiscal years 2010 and 2018, according to Olson. "Because of these reductions, the IRS does not have enough employees to answer the phones, to conduct outreach and education, or to provide basic taxpayer service," she added.
Further, Olson noted that the IRS answered only 29 percent of telephone calls received on the Accounts Management lines during this year’s filing season. Additionally, IRS compliance and enforcement efforts have also struggled, Olson said, adding that the audit rate is at its lowest level in "memory."
Likewise, Phyllis Jo Kubey, testifying on behalf of the National Association of Enrolled Agents, IRS Advisory Council, remarked on decreased IRS funding. "The agency is handicapped by budgeting that is not only insufficient to meet its large and growing portfolio, but also inefficiently structured," Kubey told lawmakers.
IRS Reform
The SFC subcommittee hearing came just days after the 20-year anniversary of the IRS Restructuring and Reform Act of 1998. The House and Senate are currently working toward approving bipartisan legislation that would significantly reform the IRS for the first time in 20 years.
SFC Taxation and IRS Oversight Subcommittee Chairman Rob Portman, R-Ohio, and Sen. Ben Cardin, D-Md., unveiled on July 26 the bipartisan Protecting Taxpayers Bill. The measure aims to reform a number of IRS functions and administrative practices, according to a joint press release issued the same day.
"It has been 20 years since the last significant IRS reform, and it is time to update the agency once again," Portman said in the press release. Similarly, Cardin praised the bill for including needed updates to modernize the IRS. "Americans of all income levels deserve a responsive, effective IRS, and the updates contained in this bipartisan bill will help keep the IRS on that path," Cardin said.
Additionally, SFC Chairman Orrin G. Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., recently introduced the bipartisan Taxpayer First Bill ( Sen. 3246). The measure would also reform certain administrative practices at the IRS.
To that end, the House approved its bipartisan IRS reform package, the Taxpayer First Bill ( HR 5444) last April. The House package contains several proposals, which would, among other things:
- establish a single point of contact for tax-related identity theft victims;
- expand the use of Low-Income Taxpayer Clinics (LITCs); and
- require electronic filing for certain tax-exempt organizations
Path Forward
Hatch previously told Wolters Kluwer that the House’s IRS reform proposals are a "welcomed step forward." Additionally, Hatch told Wolters Kluwer that he will work with his "colleagues in Congress to find a path forward that reflects both the House and Senate views."
Senate Finance Committee (SFC) Republicans are clarifying congressional intent of certain tax reform provisions. In an August 16 letter, GOP Senate tax writers called on Treasury and the IRS to issue tax reform guidance consistent with the clarifications.
Senate Finance Committee (SFC) Republicans are clarifying congressional intent of certain tax reform provisions. In an August 16 letter, GOP Senate tax writers called on Treasury and the IRS to issue tax reform guidance consistent with the clarifications.
The letter, addressed to Treasury Secretary Steven Mnuchin and Acting IRS Commissioner David Kautter, identifies three sections of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) needing clarification:
- Section 13204 – qualified improvement property expensing;
- Section 13302 – net operating losses (NOLs) deduction; and
- Section 13307 – sexual misconduct settlement deduction.
Real Property Depreciation
Congressional intent for Section 13204 under the TCJA was to provide a 15-year modified accelerated cost recovery system (MACRS) recovery period for qualified improvement property, the lawmakers wrote. Additionally, the letter states that the new law should also provide a 20-year alternative deprecation system (ADS) recovery period for qualified improvement property.
NOLs
The TCJA contains a typographical error in Section 13302. The law should state that the NOL carryforward and carryback modifications are effective for NOLs arising in tax years beginning after December 31, 2017, the lawmakers noted. Currently, the legislative text states the effective date is for tax years ending after December 31, 2017.
Attorney’s Fees
Generally, section 13307 of the TCJA denies a deduction for attorney’s fees related to a settlement or payment stemming from a sexual harassment/abuse nondisclosure agreement (NDA). Congressional intent was that attorney’s fees would not be subject to the rule prohibiting the deduction, the letter states.
Technical Corrections
SFC Republicans intend to introduce a technical corrections bill addressing other needed clarifications of the TCJA, the letter notes. The intended technical corrections bill is not expected to be a part of Republican "Tax Reform 2.0" efforts.
"While this letter focuses on these three important provisions, we are continuing a thorough review…to identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress. After this review, we intend to introduce technical corrections legislation to address any items identified in the on-going review."
Taxpayers and practitioners need clarity on certain S corporation issues by next tax filing season, the American Institute of CPAs (AICPA) has said. In an August 13 letter sent to Treasury and the IRS, the AICPA requested immediate guidance on certain S corporation provisions under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).
Taxpayers and practitioners need clarity on certain S corporation issues by next tax filing season, the American Institute of CPAs (AICPA) has said. In an August 13 letter sent to Treasury and the IRS, the AICPA requested immediate guidance on certain S corporation provisions under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).
S Corporations
S corporations elect to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. Thus, S corporations are considered a pass-through entity. This election allows S corporations to avoid double taxation on the corporate income, according to the IRS.
"Taxpayers and practitioners need clarity on S corporation issues in order to comply with their 2018 tax obligations and to make informed decisions regarding cash-flow, entity structure, and tax planning issues," Annette Nellen wrote in the letter on behalf of the AICPA. Generally, the letter noted the following three areas for which guidance is needed:
- application of the new laws on loss carryforwards;
- clarification of certain provisions relating to the post-termination transition period (PTTP) and the eligible terminated S corporation period (ETSC Period); and
- treatment of deferred foreign income upon transition to participation exemption system of taxation for S corporation trust shareholders.
Earlier this year, the AICPA also called for guidance on the Code Sec. 199A new pass-through deduction.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
Additional tax on higher-income earners
There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.
The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).
Passthrough treatment
For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.
Withholding rules
Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.
Planning techniques
One planning device to minimize the tax would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.
Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.
If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.
As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.
As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.
Individuals
In less than three months, the individual income tax rates are scheduled without further action to automatically increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. Additionally, the current tax-favorable capital gains and dividends tax rates are scheduled to expire. Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the tax code, will be cut in half. Millions of taxpayers are predicted to be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals will either disappear or be substantially reduced after 2012.
In July, the House and Senate passed competing bills to extend many of these expiring incentives one more year (through 2013). No further action is expected on these bills until after the November elections. However, they do signal a highly probable temporary solution to the fate of the Bush-era tax cuts. Regardless of which party wins the White House and Congress, the probability of a one-year extension of the Bush-era tax cuts appears high.
Along with expiration of the Bush-era tax cuts, the two percent payroll tax holiday for 2012 is scheduled to expire. For individuals with income at or above the Social Security wage base for 2012 ($110,100), the payroll tax holiday represented a $2,202 savings. Unlike the Bush-era tax cuts, an extension of the payroll tax holiday is unlikely.
Putting aside the Bush-era tax cuts and the payroll tax holiday for a moment, two new taxes are scheduled to take effect after 2012: an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income. Both new taxes are targeted to individuals with incomes over $200,000 (families with incomes over $250,000). One important misconception about the 3.8 percent Medicare tax is that it is a direct real estate tax. Taxpayers that dispose of real estate may be exempt from the tax either because of income limitations or because of an exclusion provided for primary residence home sales. However, certain high-end homes may feel the sting of the 3.8 percent tax on some or all of the gain realized. Despite some rumblings in the GOP-controlled House, it is unlikely the new Medicare taxes will be repealed before 2013.
All these provisions can be seen as the perfect storm. Year-end tax planning takes on new urgency because of the uncertainty. Some variations on traditional year-end planning techniques may be valuable. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. The same strategy may apply to recognizing income from capital gains and dividends. Another valuable year-end strategy is to “run the numbers” for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes. Additionally, keep in mind the new Medicare taxes and how they will impact investments and possibly home sales.
Estate tax planning is also in flux. Under current law, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million (indexed for inflation) for decedents dying before January 1, 2013. Unless Congress acts, the estate tax will revert to its less generous pre-2001 rates. Gift and generation-skipping transfer (GST) taxes also will revert to their pre-2001 rates.
Businesses
Businesses are also confronted with uncertainty in tax planning as 2012 ends. Special incentives, such as bonus depreciation, enhanced Code Sec. 179 expensing and a host of business tax extenders, may be unavailable after 2012.
Under current law, 50-percent bonus depreciation applies to qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 (January 1, 2014 for certain property). For tax years beginning in 2012, the Code Sec, 179 expensing dollar limitation is $139,000 and the investment ceiling is $560,000 for tax years beginning in 2012. After 2012, 50-percent bonus depreciation is scheduled to expire (except for certain property) and the Code Sec. 179 expensing dollar limitation will drop to $25,000 with a $200,000 investment ceiling.
Enhanced Code Sec. 179 expensing is a good candidate for extension after 2012, but at less generous amounts. In July, the Senate approved a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after December 31, 2012. The House approved a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.
The list of expired business tax extenders is long. The expired incentives include the research tax credit, special expensing for film and television productions, the employer wage credit for military reservists, and many more. A host of related energy incentives have also expired and are awaiting renewal. Unlike past years, Congress is not expected to routinely extend all of the expired provisions. The more widely utilized incentives are likely to be extended; some lesser used incentives may not.
Businesses do have some good news in year-end planning. Temporary “repair” regulations issued in late 2011 include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer’s expensing policy is subject to a ceiling equal to the greater of 0.1 percent of gross receipts or two percent of total depreciation and amortization reported on the financial statement.
Businesses should also explore the Code Sec. 199 domestic production activities deduction. This deduction, unlike many other incentives, is permanent and will not expire after 2012. The deduction allows qualified taxpayers to deduct an amount equal to the lesser of a phased-in percentage of taxable income (adjusted gross income for individuals) or qualified production activities income. A taxpayer’s Code Sec. 199 deduction cannot exceed one-half (50 percent) of the W-2 wages paid by the taxpayer during the year.
Sequestration
The fate of the Bush-era tax cuts and the other incentives is linked to sequestration. The Budget Control Act of 2011 imposes across-the-board spending cuts starting in 2013. Many lawmakers want to postpone or repeal the spending cuts but savings must be recouped somehow. Several energy tax incentives, especially for oil and gas producers, have been viewed as likely candidates for elimination to offset repeal of the Budget Control Act.
Please contact our office if you have any questions about the incentives we discussed and how you can develop a year-end tax plan that responds to the current climate of uncertainty.
When Congress passed the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act (collectively known as the Affordable Care Act) in 2010, lawmakers staggered the effective dates of various provisions. The most well-known provision, the so-called individual mandate, is scheduled to take effect in 2014. A number of other provisions are scheduled to take effect in 2013. All of these require careful planning before their effective dates.
When Congress passed the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act (collectively known as the Affordable Care Act) in 2010, lawmakers staggered the effective dates of various provisions. The most well-known provision, the so-called individual mandate, is scheduled to take effect in 2014. A number of other provisions are scheduled to take effect in 2013. All of these require careful planning before their effective dates.
2013
Two important changes to the Medicare tax are scheduled for 2013. For tax years beginning after December 31, 2012, an additional 0.9 percent Medicare tax is imposed on individuals with wages/self-employment income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately). Moreover, and also effective for tax years beginning after December 31, 2012, a 3.8 percent Medicare tax is imposed on the lesser of an individual's net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately).
The Affordable Care Act sets out the basic parameters of the new Medicare taxes but the details will be supplied by the IRS in regulations. To date, the IRS has not issued regulations or other official guidance about the new Medicare taxes (although the IRS did post some general frequently asked questions about the Affordable Care Act's changes to Medicare on its web site). As soon as the IRS issues regulations or other official guidance, our office will advise you. In the meantime, please contact our office if you have any questions about the new Medicare taxes.
Also in 2013, the Affordable Care Act limits annual salary reduction contributions to a health flexible spending arrangement (health FSA) under a cafeteria plan to $2,500. If the plan would allow salary reductions in excess of $2,500, the employee will be subject to tax on distributions from the health FSA. The $2,500 amount will be adjusted for inflation after 2013.
Additionally, the Affordable Care Act also increases the medical expense deduction threshold in 2013. Under current law, the threshold to claim an itemized deduction for unreimbursed medical expenses is 7.5 percent of adjusted gross income. Effective for tax years beginning after December 31, 2012, the threshold will be 10 percent. However, the Affordable Care Act temporarily exempts individuals age 65 and older from the increase.
2014
The Affordable Care Act's individual mandate generally requires individuals to make a shared responsibility payment if they do not carry minimum essential health insurance for themselves and their dependents. The requirement begins in 2014.
To understand who is covered by the individual mandate, it is easier to describe who is excluded. Generally, individuals who have employer-provided health insurance coverage are excluded, so long as that coverage is deemed minimum essential coverage and is affordable. If the coverage is treated as not affordable, the employee could qualify for a tax credit to help offset the cost of coverage. Individuals covered by Medicare and Medicaid also are excluded from the individual mandate. Additionally, undocumented aliens, incarcerated persons, individuals with a religious conscience exemption, and people who have short lapses of minimum essential coverage are excluded from the individual mandate.
The individual mandate was at the heart of the legal challenges to the Affordable Care Act after its passage. These legal challenges reached the U.S. Supreme Court, which in June 2012, held that the individual mandate is a valid exercise of Congress' taxing power.
Like the new Medicare taxes, the Affordable Care Act sets out the parameters of the individual mandate. The IRS is expected to issue regulations and other official guidance before 2014. Our office will keep you posted of developments.
2014 will also bring a new shared responsibility payment for employers. Large employers (generally employers with 50 or more full-time employees but subject to certain limitations) will be liable for a penalty if they fail to offer employees the opportunity to enroll in minimum essential coverage. Large employers may also be subject to a penalty if they offer coverage but one or more employees receive a premium assistance tax credit.
The employer shared responsibility payment provisions are among the most complex in the Affordable Care Act. The IRS has requested comments from employers on how to implement the provisions. In good news for employers, the IRS has indicated may develop a safe harbor to help clarify who is a full-time employee for purposes of the employer shared responsibility payment.
If you have any questions about the provisions in the Affordable Care Act we have discussed, please contact our office.
Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.
Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.
Business travel
You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
- Travel by airplane, train, bus, or car to/from the business destination.
- Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
- Meals and lodging.
- Tips for services related to any of these expenses.
- Dry cleaning and laundry.
- Business calls while on the business trip.
- Other similar ordinary and necessary expenses related to business travel.
Business mixed with personal travel
Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.
The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.
Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.
Weekend stayovers
Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.
Foreign travel
The rules for foreign travel are particularly complex. The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related. Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.
In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.
Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.
Tax home
To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives. The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.
The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.
Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year. Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants. San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.
Accountable and nonaccountable plans
Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.
An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:
- There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.
- There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.
- Excess reimbursements or advances must be returned within a reasonable period of time.
Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding. A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.
As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.
Americans donate hundreds of millions of dollars every year to charity. It is important that every donation be used as the donors intended and that the charity is legitimate. The IRS oversees the activities of charitable organizations. This is a huge job because of the number and diversity of tax-exempt organizations and one that the IRS takes very seriously.
Americans donate hundreds of millions of dollars every year to charity. It is important that every donation be used as the donors intended and that the charity is legitimate. The IRS oversees the activities of charitable organizations. This is a huge job because of the number and diversity of tax-exempt organizations and one that the IRS takes very seriously.
Exempt organizations
Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.
Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status. The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.
Contributions
Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.
The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986. Similar information is available on an IRS Business Master File (BMF) extract.
In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract. Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.
Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.
Churches
As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.
Foreign charities
Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada. Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.
The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.
As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.
As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.
Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.
Business Expense Deductions
A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.
The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.
However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.
Individuals
Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.
Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:
Proof of medical and dental expenses;
Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
Pay statements that show the amount of union dues paid.
Electronic Records/Electronic Storage Systems
Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.
The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.
A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).
LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.
Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.
Although the IRS may compromise any tax liability, taxpayers may often find it difficult to obtain an offer-in-compromise (OIC). However, for taxpayers experiencing especially difficult financial hardship, the IRS may be more willing to negotiate, especially if the taxpayer has been compliant in the past.
Although the IRS may compromise any tax liability, taxpayers may often find it difficult to obtain an offer-in-compromise (OIC). However, for taxpayers experiencing especially difficult financial hardship, the IRS may be more willing to negotiate, especially if the taxpayer has been compliant in the past.
The OIC program was designed to allow the IRS to negotiate with taxpayers for a reduced settlement when the taxpayers are unable to pay their full tax bill. In the past, taxpayers seeking relief by way of OIC had to meet one of two tough conditions in order to be eligible:
- Doubt as to collectability of tax debt
- Doubt as to whether the debt is actually owed
The regulations create a third possible condition. If taxpayers don't meet one of the above mentioned conditions, they may now be eligible to enter into a compromise agreement if:
- Collection of the entire liability would create economic hardship
- Exceptional circumstances exist where collection of the entire tax liability would be detrimental to voluntary compliance.
The IRS stresses that these provisions are designed for taxpayers in extreme hardship situations and should not be viewed as an "out" for most taxpayers looking to get out of paying their taxes. Examples of such circumstances were given in the regulations and include the following:
- Where taxpayers (and/or their dependents) that are facing long-term illnesses or disability who have the funds to pay the tax debt but whose assets are needed to cover expenses related to the illness/disability
- Where the sale or liquidation of the taxpayers' assets would result in the taxpayers being unable to meet basic living expenses, including voluntary tax compliance
- Where taxpayers sustained a tax debt due to circumstances beyond their control, such as an extended hospital stay that left them unable to file tax returns.
If you believe that you may be eligible for relief under these regulations, please contact the office for assistance. You also should be aware that the IRS offers installment payment agreements, often given automatically upon application, for taxpayer who may not qualify for an offer in compromise but who nevertheless cannot pay what they owe. Our office can also assist you in qualifying for that payment alternative if appropriate.
