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
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.
The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11 was issued concurrently to provide further guidance on the definition of wages. Also, a proposed revenue procedure, Notice 2019-7, was issued concurrently to provide a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.
Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.
Wolters Kluwer: What is your general overview of the revised, final regulations for the Section 199A Qualified Business Income (QBI) or "pass-through" deduction?
Tom West: I think it is admirable that Treasury and IRS were able to publish these final regulations so quickly and address so many of the comments and questions that the proposed regulations generated. I think they realized how important this particular package was to so many taxpayers for the 2018 filing season and, while questions obviously remain, having these rules out in time to inform decisions for this year’s tax returns is helpful. In particular, the liberalized aggregation rules and the additional examples regarding certain specified service trades or businesses (SSTBs) are the most consequential in my mind.
Wolters Kluwer: What should taxpayers and practitioners keep in mind in consideration of relying on either the proposed or final regulations for the 2018 tax year?
Tom West: I have to imagine that when choosing between the two, for most taxpayers the final regulations will ultimately provide the better result. The ability to aggregate at the entity level, which was only provided in the final regulations, may be a key consideration for those taxpayers with more complicated or tiered structures. That said, I do think taxpayers need to be careful in their aggregation modeling because you are going to be stuck with your aggregation once you’ve filed. It may be that some taxpayers wait on getting locked into a particular aggregation and continue to study the new rules—and even wait on additional guidance that may be coming. However, it may be important to note that the final regulations provide that if an individual fails to aggregate, the individual may not aggregate trades or businesses on an amended return—other than for the 2018 tax year.
Wolters Kluwer: How is the removal of the proposed 80 percent rule regarding specified service trades or businesses (SSTBs) from the final regulations likely to impact certain taxpayers?
Tom West: First of all, I think the removal of this rule is a demonstration of two important dynamics. One, the critical importance of the engagement of taxpayers in the comment process, and, two, the government’s willingness to listen and adapt in their rule-making. I don’t know if there are particular industries or taxpayers who will be impacted, but I do know that the change is a very logical and appropriate one, and logic doesn’t always prevail in these processes, so I’m happy to give the regulators credit when it does.
Wolters Kluwer: Which industries may have been helped or hindered by the final regulations with respect to SSTB rules?
Tom West: I’m not sure specific industries were helped, but the biggest positive in terms of the SSTB final rules is the carryover from the proposed regulations of the treatment of the skill or reputation provision. Had Treasury and the IRS gone in a different direction, there was a risk of that provision swallowing the rest of the 199A regime—not to mention how much more subjective the already sometimes difficult SSTB determinations would have become.
Wolters Kluwer: Are there any lingering, unanswered questions among taxpayers or practitioners that particularly stand out when determining what constitutes SSTB income?
Tom West: I think many taxpayers who have both SSTB and non-SSTB activities were hoping for more clarity, either in rules or examples, on how to acceptably segregate business lines or on when (or if) certain activities are inextricably tied together. There are also still lingering questions regarding when a trade or business is an SSTB—particularly in the field of health.
Wolters Kluwer: Were there any surprises in the final regulations?
Tom West: I don’t know if I’m surprised, knowing the concerns that led them to the decisions they made, but the fact that Treasury and IRS held the line on some of the SSTB-related rules is notable. I’m thinking specifically of the so-called "cliff" effect of the de minimis rule and the fact that owners of certain kinds of SSTB businesses, e.g., sports teams, are not allowed to benefit from the Section 199A deduction.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.
The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11, I.R.B. 2019-9, 742, was issued concurrently to provide further guidance on the definition of wages. Also, a proposed Revenue Procedure, Notice 2019-7, I.R.B. 2019-9, 740, was issued, concurrently providing a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.
Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.
Wolters Kluwer: Neither the proposed nor final regulations for Section 199A give guidance as to when rental real estate activity constitutes a Section 162 trade or business. How might the application of the safe harbor provided for in IRS Notice 2019-7 offer taxpayers clarity? And how might failure to qualify for the safe harbor impact the determination of whether the rental activity is a trade or business under Section 199A?
Tom West: The safe harbor is helpful but it appears to be intended for relatively smaller taxpayers who may have had questions about their activities rising to the level of a trade or business. I don’t think falling outside of the safe harbor is dispositive—especially in light of the recent policy statement from Treasury regarding sub-regulatory guidance.
Wolters Kluwer: Can you speak to the some of the complexity that may be involved in tax planning with respect to achieving the right balance between adequate W-2 wages and QBI?
Tom West: Other than for small taxpayers, there is only a benefit under Section 199A if the limitations are met. It does not do any good to have QBI but then have insufficient W-2 wages and qualified property to meet the limitations. So when taxpayers are evaluating what constitutes a qualified trade or business (or whether to aggregate qualified trades or businesses) they will need to determine the amount of W-2 wages with respect to each QTB. Aligning the W-2 wages with the QTB will be important—but the salary expense will also result in a reduction in the amount of QBI and therefore the amount of any Section 199A benefit—so modeling becomes critical. Consideration should also be given to any collateral consequences—for instance the impact of the alignment on allocation and apportionment for state taxes.
Wolters Kluwer: According to a March 18, 2019, Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2019-44-022, IRS management indicated that the timeline related to the issuance of Section 199A guidance did not provide enough time for the IRS to develop a QBI deduction tax form. Although the IRS did create a worksheet, do you have a prediction on what key elements may be included on the new form once released?
Tom West: I do think that worksheets could be developed that would facilitate the reporting of Section 199A information—particularly through tiered structures—so as to ease the reporting burden and enhance compliance.
Wolters Kluwer: The IRS has estimated that nearly 23.7 million taxpayers may be eligible to claim the Section 199A deduction and that more than 22.2 million (94 percent) of those eligible taxpayers will not require a complex calculation for the deduction. What notable differences do you expect there are between "complex" and the majority of calculations?
Tom West: For taxpayers under the Section 199A income thresholds ($157.5K single, $315K joint), the deduction is very easy to calculate and claim. Those taxpayers don’t need to worry about being in an SSTB, how much wages they paid, or the basis of their property. Once those taxpayers hit those income thresholds though, even in the phase-out range, things very quickly get complex—and that’s as a consequence of the statute; it is not something that the regulators can change.
Wolters Kluwer: Do you anticipate the IRS will issue further guidance on the Section 199A deduction?
Tom West: I do. As I said at the top, I think part of the government’s motivation in finalizing these regulations so quickly was providing guidance to taxpayers ahead of the tax-filing season. And while for the majority of taxpayers who are below the 199A cap there is probably now sufficient guidance, I think there are still a lot of questions for those with more complex situations. Given the number of taxpayers who are eligible for this deduction, and the importance of Section 199A as the big benefit to non-corporate businesses in what the Administration views as a signature legislative achievement, I have to believe that the government will be responsive to taxpayers’ requests for additional help on this provision. However, given that the provision is due to sunset, it will be important that any guidance is forthcoming in fairly short order to be of any usefulness to taxpayers.
Wolters Kluwer: At this time, do you have any recommendations for taxpayers and practitioners moving forward?
Tom West: As people are going through their tax filings this year, I’d keep a list of issues, questions, and areas where additional guidance would be helpful. It often happens that problems with new legislation or regulations don’t reveal themselves until taxpayers have to put pencil to paper and track their real-world numbers through returns. We’ll all have that experience this year and, with those lists of issues and questions in hand, there may be an opportunity to approach the IRS and Treasury in the hopes of getting resolution going forward. Keeping that list could also help identify areas for tax planning and perhaps ease the complexity of filing for 2019.
A bipartisan House bill has been introduced that would fix a GOP tax law drafting error known as the "retail glitch." The House bill, having over a dozen co-sponsors, is a companion measure to a bipartisan Senate bill introduced in March.
A bipartisan House bill has been introduced that would fix a GOP tax law drafting error known as the "retail glitch." The House bill, having over a dozen co-sponsors, is a companion measure to a bipartisan Senate bill introduced in March.
Immediate Expensing
The Restoring Investment in Improvements Act (HR 1869), sponsored by House tax writers Reps. Jimmy Panetta, D-Calif., and Jackie Walorski, R-Ind., would allow restaurants, retailers, and other leaseholders to immediately write off the cost of certain improvements. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, inadvertently excludes qualified improvement property (QIP) from the new 100 percent bonus depreciation provision.
The measure is a "small but critical fix for our job creators, and technical corrections like this are a normal part of the process when Congress enacts major reforms," Walorski said in a recent press release. "This bipartisan, commonsense bill will allow restaurants, retailers, and other small businesses to unlock the full benefits of tax reform and continue driving our nation’s economic growth."
Similarly, Panetta highlighted the negative impact that the loss of immediate expensing has caused many small businesses. "Our bill will allow restaurants, retailers, and other businesses to make the improvements they need to keep their stores competitive and safe and plan for the future," he said.
Although the "retail glitch" measure has solid bipartisan support, Democrats in general have seemed hesitant to fix any errors in the GOP tax law. To that end, House Ways and Means Committee Chairman Richard Neal, D-Mass., has said he would like to hold a hearing on technical corrections for the TCJA. The committee’s March 27 hearing on the TCJA did not specifically address technical corrections.
The House on April 9 approved by voice vote a bipartisan, bicameral IRS reform bill. The IRS bill, which now heads to the Senate, would redesign the IRS for the first time in over 20 years.
The House on April 9 approved by voice vote a bipartisan, bicameral IRS reform bill. The IRS bill, which now heads to the Senate, would redesign the IRS for the first time in over 20 years.
IRS Reform
The Taxpayer First Act of 2019 (HR 1957), as amended, cleared the House Ways and Means Committee by voice on April 2. The House and Senate both introduced the bicameral, bipartisan measure on March 28. If enacted, the bill would make numerous reforms to the IRS, some of which include modernizing antiquated information technology systems and enhancing taxpayer services and identity protections.
"With a new tax code, it is time for a new tax administrator," House Ways and Means Committee ranking member Kevin Brady, R-Tex., said in an April 9 statement. "I applaud the House for passing the Taxpayer First Act—a bold step to redesign the IRS to be an agency with one singular mission: putting taxpayers first."
The IRS Reform bill has been "years in the making," Brady said on April 9, echoing a joint statement that he and Ways and Means Chairman Richard Neal, D-Mass., along with other bipartisan tax writers recently issued. "The House Ways and Means Committee and the Senate Finance Committee have carefully and thoughtfully developed this legislation over several years, after numerous hearings and roundtables, in a bipartisan, bicameral manner," the lawmakers said.
AICPA Applauds Taxpayer First Act
The American Institute of CPAs (AICPA) issued an April 9 statement commending the House for passing HR 1957. "The AICPA appreciates the bipartisan recognition by members of the U.S. House of Representatives for bringing the Internal Revenue Service into the 21st Century," Edward S. Karl, vice president of taxation, said in a statement on behalf of the AICPA. "The AICPA has long been interested in and active in working to find ways to modernize the IRS so that it can better serve the needs of taxpayers and tax practitioners."
Free File Alliance
However, the bipartisan, bicameral bill has not advanced without its share of criticism. Several Democratic lawmakers have criticized a provision within the bill that would codify the Free File Alliance, which is an agreement between the IRS and certain tax preparation companies that includes the IRS being unable to directly assist in tax return preparation.
"Again and again in my service in the Senate I have battled the tax-preparation software industry to simplify filing taxes for the typical American," Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., said in an April 9 statement. "During the debate on the tax administration bill, my staff pushed back on a prohibition on the agency competing with private tax preparation services, and I will continue to push for my proposal for the pre-filed ‘simple’ return and the principle that a taxpayer should not have to use a private company to pay their taxes online," he added.
Looking Ahead
It remains unclear when the Senate will take up the Taxpayer First Act bill. However, the bill is presently expected on Capitol Hill to easily be approved in the Senate.
Proposed regulations address gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF). Taxpayers may generally rely on these new proposed regulations. The IRS has also requested comments.
Proposed regulations address gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF). Taxpayers may generally rely on these new proposed regulations. The IRS has also requested comments.
The proposed regulations also withdraw and replace placeholder provisions in an earlier set of proposed regulations ( REG-115420-18). These concern:
- the definition of "substantially all"regulations
- transactions that can trigger includible gain;
- the timing and amount of deferred gain that is included;
- treatment of leased property used in the qualified opportunity zone (QOZ) business;
- use of QOZ business property in the QOZ;
- sourcing of income to the QOZ business; and
- the reasonable period for a QOF to reinvest proceeds from the sale of qualifying assets.
In addition, within a few months the IRS expects to address administrative rules for a QOF that fails to maintain the required 90-percent investment standard, as well as information reporting requirements.
Finally, the IRS expects to revise Form 8996, Qualified Opportunity Fund, for 2019 and subsequent tax years. These revisions may require additional information, including the employer identification number (EIN) for the QOF business, and the amounts invested by QOFs and QOZ businesses located in particular QOZs.
"Substantially All" for QOZ Business
The 2018 regulations provided that a trade or business satisfies the "substantially all" test for a QOZ business if at least 70 percent of its tangible property is qualified opportunity zone business property. The new proposed regulations generally extend this 70-percent threshold to the "substantially all" tests for use. However, in the holding period context, the "substantially all" threshold is 90 percent.
Original Use of Purchased Tangible Property
The proposed regulations generally provide that the "original use" of tangible property acquired by purchase by any person starts on the date when that person or a prior person:
- first places the property in service in the qualified opportunity zone for purposes of depreciation or amortization; or
- first uses the property in the qualified opportunity zone in a manner that would allow depreciation or amortization if that person were the property’s owner.
Used tangible property will satisfy the original use requirement with respect to a QOZ so long as the property has not been previously used (that is, has not previously been used within that QOZ in a manner that would have allowed it to depreciated or amortized) by any taxpayer
In addition, a building or other structure that has been vacant for at least five years before being purchased by a QOF or QOZ business satisfies the original use requirement. Improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property for the amount of the unadjusted cost basis of the improvements.
Land can be treated as QOZ business property only if it is used in a trade or business of a QOF or QOZ business. The holding of land for investment does not give rise to a trade or business, and the land cannot be QOZ business property. Anti-abuse rules determine whether unimproved land can be qualifying property. However, other purchased real property generally must be substantially improved, determined on an asset-by-asset basis.
Leased Tangible Property in QOZ
Leased tangible property may be QOZ property if:
- the lease is entered into after 2017; and
- substantially all of the property’s use is in a QOZ during substantially all of the lease period.
However, the first-use requirement does not apply to leased tangible property. The leased property can generally also be acquired from a related person, though several conditions apply. The proposed regulations also provide methods for valuing the leased property.
QOZ Businesses
The proposed regulations:
- provide that in determining whether a substantial portion of intangible property of a QOZ is used in the active conduct of a trade or business, a substantial portion is at least 40 percent;
- address real property that straddles a QOZ;
- provide three safe harbors and a facts-and-circumstances test for determining whether a corporation or partnership derives at least 50 percent of its gross income from the active conduct of a qualified business;
- define "trade or business" by reference to Code Sec. 162, except that the ownership and operation (including leasing) of real property used in a trade or business can also be the active conduct of a trade or business; and
- provide a safe harbor for working capital.
Other Business Rules
The proposed regulations also address:
- Section 1231 gains;
- relief regarding the 90 percent asset test, including relief for newly contributed assets and QOF reinvestments;
- the amount of an investment for purposes of the deferral election;
- inclusion events, the timing on basis adjustments, includible amounts, and special rules for partnerships and S corporations;
- gifts and bequests;
- exceptions for disregarded transfers and some nonrecognition transactions;
- distributions and contributions;
- consolidated return provisions;
- holding periods and tacking rules;
- anti-abuse rules;
- special rules for Indian tribes and tribally leased property.
Comments Requested; Public Hearing Scheduled
A public hearing on the proposed regulations is scheduled for 10 am on July 9, 2019, at the New Carrollton Federal Building in Latnham, MD. Public comments may be mailed or hand-delivered to the IRS, or submitted via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-120186-18).
The IRS has provided a safe harbor for professional sports teams to avoid the recognition of gain or loss when trading players and/or draft picks. Under the safe harbor provision, the traded player’s contract or the traded draft pick would have a zero basis.
The IRS has provided a safe harbor for professional sports teams to avoid the recognition of gain or loss when trading players and/or draft picks. Under the safe harbor provision, the traded player’s contract or the traded draft pick would have a zero basis.
Value of Professional Sports Contracts
Professional sports teams enter into contracts with their personnel (e.g., managers, coaches, players, etc.). Typical personnel contracts provide an agreed-upon amount of compensation for a certain duration of service. The value of such a contract may fluctuate based on a variety of factors, including:
- player performance;
- the changing needs of the team and of other teams;
- a player’s effect on fan attendance; and
- the number of years until a player becomes a free agent and is able to sign a contract to play for any team in a league.
Other considerations affecting the value of a player contract include:
- the size of the team’s market (i.e., whether a smaller city or a major urban population);
- the cost of player development; and
- the impact of injuries and slumps on player performance.
In most cases, teams do not trade personnel contracts or draft picks unless the team thinks that it is receiving contracts of an equal or greater value. Because each party believes that they are receiving personnel contracts or draft picks of an equal or greater value, it is difficult to assign a monetary value to them. Accordingly, the IRS developed a safe harbor whereby each team is able to treat the traded contracts or draft picks as having a basis of zero, thus avoiding the recognition of gain or loss on the trade.
Safe Harbor Requirements
In order to use the safe harbor, professional sports teams must meet the following requirements:
- all teams involved in the trade must use the safe harbor;
- teams may only trade personnel contracts, draft picks, and/or cash;
- personnel contracts and/or draft picks cannot be Code Sec. 197 intangibles; and
- the financial statements of all teams involved in the trade must not reflect assets or liabilities resulting from the trade other than cash.
Application
Sports teams using the safe harbor will not recognize any gain or loss if they only trade personnel contracts or draft picks. However, teams that receive cash in a trade will recognize the amount of cash received as gain. In addition, the team providing cash to another team in the trade will receive basis in the personnel contract or draft pick equal to the amount of cash that it provided. A team providing cash to another team in a trade for two or more draft picks or personnel contracts must allocate its basis to each personnel contract or draft pick received from the other team by dividing the basis by the number of personnel contracts or draft picks received.
In certain cases, a team may have unrecovered basis in a draft pick or personnel contract under Code Sec. 167(c). In those instances, the team may recognize gain or loss based on the difference between the unrecovered basis and any cash received.
Effective Date
Teams may use the safe harbor for any trades involving personnel contracts or draft picks entered into after April 10, 2019. However, teams may choose to apply these rules in any open tax year.
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.
