The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules.
The Treasury and IRS have issued final regulations excepting certain partnership-related items from the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 (BBA), providing alternative examination rules for the excepted items, conforming the existing centralized audit regime regulations to Internal Revenue Code changes, and clarifying the existing audit regime rules. The regulations finalize with revisions 2020 proposed regulations ( REG-123652-18).
Centralized Partnership Audit Regime
The Bipartisan Budget Act of 2015 (BBA, P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA, P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments, and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113) and the Tax Technical Corrections Act of 2018 (TTCA, P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017. A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all the partners are eligible partners.
Under the post-2017 centralized partnership audit regime, the IRS examines “partnership-related items” of all domestic and foreign partnerships and their partners. A "partnership-related item" is any item relevant to the determination of the income tax liability of any person. However, Code Sec. 6241(11), added by the BBA, authorizes Treasury to except “special enforcement matters” from the centralized partnership audit regime and to issue regulations providing alternative assessment and collection rules for those matters. The 2020 proposed regulations and these final regulations implement Code Sec. 6241(11) and make changes to previously issued final regulations pertaining to the centralized partnership audit regime.
Special Enforcement Matters
Code Sec. 6241(11) sets forth six categories of "special enforcement matters":
- (1) failures to comply with the requirements for a partnership partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
- (2) assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
- (3) criminal investigations;
- (4) indirect methods of proof of income;
- (5) foreign partners or partnerships; and
- (6) other matters identified in IRS regulations.
The final regulations add three new types of special enforcement matters:
- partnership-related items underlying non-partnership-related items;
- relationship of a partner to the partnership under the Code Sec. 267(b) or Code Sec. 707(b) related-party rules and extensions of the partner’s period of limitations; and
- penalties and taxes imposed on the partnership under chapter 1.
The final regulations also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.
In addition, the final regulations clarify that the IRS may adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, the partner is under criminal investigation, or the adjustment is based on an indirect method of proof of income.
However, the final regulations provide that a determination about partnership-related items made outside of the centralized partnership regime is not binding on any person who is not a party to that proceeding. The final regulations clarify that neither the partnership nor the other partners are bound by a determination regarding a partnership-related item from a partner-level examination and that neither the partnership nor the other partners need to adjust their returns.
In addition, the special-enforcement-matter rules do not apply to the extent a partner can demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were (i) previously taken into account under the centralized audit regime by the person being examined or (ii) included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed-year partner (but only if the amount exceeds the amount reported by the partnership to the partner that was either reported by the partner or included in the deficiency or adjustment).
Imputed Underpayments
The IRS and Treasury believe that a mechanism must exist for including adjustments from a centralized-regime audit in the partnership’s imputed underpayment, even if the partnership elects to “push out” the adjustment to its partners.
Under existing regulations for calculating imputed underpayments, an adjustment to a non-income item (that is, an item that is not an item of income, gain, loss, deduction, or credit) that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero. The final regulations require a partnership to take into account an adjustment to a non-income item on its adjustment-year return by adjusting the item to be consistent with the adjustment, but only to the extent the item would appear on that return without regard to the adjustment. If the item already appeared on the partnership’s adjustment-year return as a non-income item or the item appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment-year return.
The final regulations provide that if the partnership is required to adjust its basis in an asset, the partnership does so in the adjustment year; however, the partnership only recognizes income and gain as a result of the basis adjustment in situations in which income or gain would be recognized. The final regulations also demonstrate how adjustments to liabilities are taken into account when they do not result in an imputed underpayment, and how an amended return should reflect adjustments to non-income items.
The final regulations follow the proposed regulations in allowing either the IRS or the partnership to treat an adjustment to a non-income item as zero. The final regulations also permit a partnership to treat such an adjustment as zero if the adjustment is related to, or results from, another adjustment to a non-income item. The partnership may not, however, treat such an adjustment as zero if one adjustment is positive and the other is negative.
Partnership Ceasing to Exist
Code Sec. 6241 states that if a partnership ceases to exist before any partnership adjustments take effect, the former partners of the partnership must take the adjustments into account in the manner prescribed in regulations. The final regulations clarify that even if a partnership has ceased to exist, it may make the election to push out the adjustments, request modification of the imputed underpayment, or pay the imputed underpayment within ten days of notice and demand for payment.
A section of the proposed regulations that would define "former partners" is not included in the final regulations and remains proposed.
Effective and Applicability Dates
The final regulations, which are effective December 8, 2022, apply to tax years ending on or after November 20, 2020 (except that final Reg. § 301.6241-7(b) applies to tax years beginning after December 20, 2018).
An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions.
An IRS Notice provides guidance on the prevailing wage and apprenticeship requirements that the Inflation Reduction Act of 2022 ( P.L. 117-169) added to several new and amended tax credits and deductions. The IRS also anticipates issuing proposed regulations and other guidance with respect to the prevailing wage and apprenticeship requirements.
These requirements generally apply if construction of a qualified facility, or installation of qualified property in an energy efficient commercial building, begins on or after the date that is 60 days after the IRS publishes guidance. This notice serves as the guidance that starts the 60-day clock. Thus, these rules apply when a qualified facility begins construction or the installation of qualified property begins on or after January 29, 2023.
The notice also provides guidance for determining the beginning of construction of a facility for certain credits, and the beginning of installation of certain property with respect to the energy efficient commercial buildings deduction.
The notice includes examples to illustrate these rules.
Prevailing Wage Requirements
For purposes of the credits, a taxpayer must satisfy the prevailing wage requirements with respect to any laborer or mechanic employed in the construction, alteration, or repair of a facility, property, project, or equipment by the taxpayer and the taxpayer’s contractors and subcontractors. The taxpayer must also maintain and preserve sufficient records to establish compliance, including books of account or records for work performed by contractors or subcontractors.
The prevailing wage rate is generally the one published by the Secretary of Labor on www.sam.gov for the geographic area and type of construction applicable to the facility, including all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics.
If the Secretary has not published a prevailing wage rate for the geographic area or the particular type of work, the taxpayer may request a wage determination or wage rate from the Wage and Hour Division. The taxpayer must follow prescribed procedures in order to rely on the provided wage or rate.
Similarly, for purposes of the deduction for energy efficient commercial buildings, the prevailing wage rate for installation of energy efficient commercial building property, energy efficient building retrofit property, or property installed pursuant to a qualified retrofit plan, is determined with respect to the prevailing wage rate for construction, alteration, or repair of a similar character in the locality in which the property is located, as most recently determined by the Secretary of Labor.
Apprenticeship Requirements
A taxpayer satisfies the apprenticeship requirements if:
- The taxpayer satisfies the Apprenticeship Labor Hour Requirements, subject to any applicable Apprenticeship Ratio Requirements;
- The taxpayer satisfies the Apprenticeship Participation Requirements; and
- The taxpayer maintains sufficient records.
Under the Good Faith Effort Exception, the taxpayer will be considered to have made a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.
Beginning of Construction or Installation
The beginning of construction is determined under the Physical Work Test and the Five-Percent Safe Harbor established in Notice 2013-29. The Continuity Safe Harbor established by Notice 2016-31 also applies.
The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires.
The IRS has notified taxpayers, above the age of 72 years, that they can delay the withdrawal of the required minimum distributions (RMD) from their retirement plans and Individual Retirement Accounts (IRA), until April 1, following the later of the calendar year that the taxpayer reaches age 72 or, in a workplace retirement plan, retires. The Service also reminded taxpayers that they must meet the deadlines to avoid penalties and that such RMDs may not be rolled over to another IRA or retirement plan. The Service also informed taxpayers that not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.
The deadlines for the different RMDs are as follows:
- Taxpayers holding traditional IRAs , and SEP, SARSEP, and SIMPLE IRA should take their first RMD, even if they’re still working, by April 1, 2023, and the second RMD by Dec. 31, 2023, and each year thereafter.
- For taxpayers with retirement plans, the first RMD is due by April 1 of the later of the year they reach age 72, or the participant is no longer employed. A 5% owner of the employer must begin taking RMDs at age 72.
- An IRA trustee, or plan administrator, must either report the amount of the RMD to the IRA owner or offer to calculate it. They may be able to withdraw the total amount from one or more of the IRAs. However, RMDs from workplace retirement plans must be taken separately from each plan.
An RMD may be required for an IRA, retirement plan account or Roth IRA inherited from the original owner. A 2020 RMD that qualified as a coronavirus-related distribution may be repaid over a 3-year period or the taxes due on the distribution may be spread over three years. A 2020 withdrawal from an inherited IRA could not be repaid to the inherited IRA but may be spread over three years for income inclusion.
The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information.
The Financial Crimes Enforcement Network (FinCEN) has issued a Notice of Proposed Rulemaking (NPRM) that would implement the beneficial ownership information provisions of the Corporate Transparency Act (CTA) that govern access to and protection of beneficial ownership information. The proposed regulations address the circumstances under which beneficial ownership information may be disclosed to certain governmental authorities and financial institutions, and how that information must be protected.
The proposed regulations would—
- specify how government officials would access beneficial ownership information in support of law enforcement, national security, and intelligence activities;
- describe how certain financial institutions and their regulators would access that information to fulfill customer due diligence requirements and conduct supervision; and
- set high standards for protecting this sensitive information, consistent with CTA goals and requirements.
The NPRM also proposes amendments to the final reporting rule issued on September 30, 2022, effective January 1, 2024, to specify when reporting companies may report FinCEN identifiers associated with entities.
Limiting Access to Beneficial Ownership Information
The NPRM follows the final reporting rule which requires most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States, to report information about their beneficial owners to FinCEN. Per CTA requirements, the proposed regulations limit access to beneficial ownership information to—
- federal agencies engaged in national security, intelligence, or law enforcement activities;
- state, local, and Tribal law enforcement agencies, if authorized by a court of competent jurisdiction;
- financial institutions with customer due diligence requirements, and federal regulators supervising them for compliance with those requirements;
- foreign law enforcement agencies, judges, prosecutors, central authorities, and other agencies that meet specific criteria, and whose requests are made under an international treaty, agreement, or convention, or via law enforcement, judicial, or prosecutorial authorities in a trusted foreign country; and
- U.S. Treasury officers and employees whose official duties require beneficial ownership information inspection or disclosure, or for tax administration.
The proposed regulation would subject each authorized recipient category to unique security and confidentiality protocols that align with the scope of the access and use provisions.
Proposed Effective Date
FinCEN is proposing an effective date of January 1, 2024, to align with the date when the final beneficial ownership information reporting rule becomes effective.
Request for Comments
Interested parties can submit written comments on the NPRM by or before February 14, 2023 (60 days following publication in the Federal Register). Comments may be submitted by the Federal E-rulemaking Portal ( regulations.gov), or by mail to Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-2021-0005 and RIN 1506-AB49/AB59.
The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).
The IRS and the Treasury Department have released final regulations that provide some clarity and relief with regards to certain provisions of the Affordable Care Act ( P.L. 111-148), including the definition of minimum essential coverage under Code Sec. 5000A and reporting requirements for health insurance issuers and employers under Code Secs. 6055 and 6056. The final regulations finalize 2021 proposed regulations with some clarifications ( REG-109128-21).
The final regulations provide that the term "minimum essential coverage" does not include Medicaid coverage limited to COVID-19 testing and diagnostic services provided under the Families First Coronavirus Response Act ( P.L. 116-127). If an individual qualifies solely for this coverage, then it does not prevent them from claiming the premium tax credit under Code Sec. 36B. This amendment to Reg.§ 1.5000A-2 applies for months beginning after September 28, 2020.
The final regulations also provide:
- An automatic 30-day extension of time under Code Sec. 6056 for "applicable large employers" (generally employers with 50 or more full-time employees, including full-time equivalent employees) to furnish statements relating to health insurance that the applicable large employers offer to their full-time employees; ·
- An automatic 30-day extension of time under Code Sec. 6055 for providers of minimum essential coverage (such as health insurance issuers) that would provide an automatic extension of time for furnishing statements to responsible individuals; and
- An alternative method for reporting entities to furnish statements to their insured members when their shared responsibility payment is zero. The regulations under Reg.§1.6055-1(g)(4)(ii)(B) provide sample language for furnishing these statements.
The regulations under Reg. §§1.6055-1 and 301.6056-1 apply for years beginning after December 31, 2021.
The final regulations affect some taxpayers who claim the premium tax credit; health insurance issuers, self-insured employers, government agencies, and other persons that provide minimum essential coverage to individuals; and applicable large employers.
A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.
A theme running through the recent Internal Revenue Service Independent Office of Appeals Focus Guide for fiscal year 2023 is moving on past the issues created by the COVID-19 pandemic and getting back to helping taxpayers through the appeals process.
"It's time, as we leave some of those pandemic issues behind us, to focus more on our core mission in appeals, which is the quality resolution of taxpayer cases," Independent Office of Appeals Chief Andy Keyso said in a recent interview with Federal Tax Daily. "I think that's the theme you see throughout the focus guide," which was issued November 4, 2022.
To that end, Keyso highlighted two key areas that will enable the office to meet that core mission – staffing and technology upgrades.
Rebuilding Staff
On the staffing side, Keyso noted that 10 years ago, the Appeals staff was at 2,100 employees, but in that window dropped to a low of about 1,100.
"We have made a big push to restack, using any kind of approval we could get here internally, and we currently are sitting at about 1,500 employees," he said, adding that the office currently has about 1,500 employees, with a goal in 2023 to get up to 1,725.
Keyso noted that the office is different from other parts of the IRS that have an exam or a collections function.
"If you don’t have the number of people you’d like to have, you just do fewer collection actions or you do fewer audits," Keyso said. "In Appeals, we have unique challenges. We’ve got to work every case that comes in the door. We can’t say, ‘We don’t have enough people, so we are not going to work your case.’ So for us, hiring is particularly an acute issue and recruiting and hiring will be one of our focus areas for this year."
He added that the staffing targets are based on the IRS’ set budget for 2023 and do not include potential increases that could come with the additional funding provided by the Inflation Reduction Act.
Improving Technology
Like the rest of the agency, the Office of Appeals is working through its own technology issues and is in need of upgrades.
In particular, Keyso highlighted the need to get away from paper.
"I think we learned during the pandemic a few things about technology and how paper can really be our Achilles heel when you have to move paper case files," he said. "That was a particular issue during the pandemic when you didn’t have all of your people in the office to ship case files around."
Moving to a more paperless environment is a "continuing challenge," Keyso said, not only for communicating between Appeals employees, but between staff and taxpayers. "Should we really be mailing things back and forth through the U.S. Postal Service? Or is there a better way to communicate with taxpayers that’s faster and maybe preferable to taxpayers?"
As part of the technology challenges, the Independent Office of Appeals also is looking to continue to use video conferencing, something that gained traction during the pandemic.
"With the service wide return to the office, we are again offering in person conferences, which is something Appeals is very excited about," Amy Giuliano, senior advisor to the Chief and Deputy Chief in the Office of Appeal, said. "But we want video conferences to remain a permanent option to alongside in person. We requested comments in August … for people to submit input on experiences they had with video conferences with appeals that should inform our longer term guidelines. And we've received a lot of positive feedback that video conferences, when they're managed effectively, are a great way for a taxpayer to present their case to appeals."
She applauded the fact that video conferences have the benefits of a face-to-face conference in that one can see the IRS agent they are dealing with, but they avoid the logistical issues with traveling to an IRS office to conduct the meeting. It makes things more accessible, especially if the taxpayer has medical or other mobility issues.
"That's why it's so important that it remain an option going forward alongside in person and alongside telephone," she said.
Improving Overall Access
Keyso also noted that a key area of focus going forward is improving the overall access to the Independent Office of Appeals now that access has been codified into law through the Taxpayer First Act of 2019. Treasury is currently working on regulations that will implement the law.
"Our position in the Appeals Office is, you know, we want the broadest access to appeals possible for us to hear controversies or disputes between IRS and taxpayer," Keyso said. "So we will continue to push for broad access to taxpayers to appeals."
Giuliano added that "enhancing the taxpayer experience is really what sort of animates and informs everything else that we're doing."
Keyso also mentioned that Appeals is planning on continuing convening practitioner panels, during which the office invites practitioners to talk about issues they are facing as they deal with the appeals process. He noted that it was through these panels that the office made changes to letters that went out to taxpayers and their representatives that included more contact information on managers so taxpayers and their representatives have it handy if they need to escalate a situation.
Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.
Audits by the Internal Revenue Service in 2017 and 2019 were not conducted to target specific individuals, according to a new report by the Treasury Inspector General for Tax Administration.
The report, dated November 29, 2022, but released December 1, found that "key decisions and information related to the tax return selection process for Tax Years 2017 and 2019 were determined prior to the start of each year’s respective filing season and prior to the selection of any returns," the Treasury watchdog said in a statement. "TIGTA also confirmed that the computer program used to select tax returns worked as designed and di not included any malicious code that would force the selection of specific taxpayers for an NRP [National Research Program] audit."
TIGTA conducted the analysis of the audit selection process following a July 2022 media report that suggested the selection for those tax years may not have been random. To answer the allegations, TIGTA hired a contractor that, according to the report, "replicated the process. Specifically, the contractor replicated each week’s original sample selection file through April 2018 and July 2020 for TYs 2017 and 2019, respectively."
Once replicated, a return-by-return comparison of the replicated files and the original sample selection was conducted to verify the files matched.
"They concluded that the tax returns in the original samples were the same tax returns selected when the process was replicated using the respective seed numbers," the report states. "TIGTA also compared the contractor’s replicated weekly output files to the original weekly output files, and same as the IRS, TIGTA determined they matched."
The report noted that a line-by-line review of the original source code was conducted "to determine whether information (i.e., TIN) was improperly coded in the program that would result in a specific taxpayer being selected for an NRP audit. The contractor concluded that no specific taxpayer information was included in the original source code."
If you're thinking about setting up employees as telecommuters, you're not alone. Businesses ranging from large multi-nationals to small shops know that telecommuting not only can improve worker morale and performance, it can also save you and your employees money. What's not to like about zero commuting costs and no office rent? You can also sell the benefits of telecommuting by alerting employees to some significant tax breaks.
If you're thinking about setting up employees as telecommuters, you're not alone. Businesses ranging from large multi-nationals to small shops know that telecommuting not only can improve worker morale and performance, it can also save you and your employees money. What's not to like about zero commuting costs and no office rent? You can also sell the benefits of telecommuting by alerting employees to some significant tax breaks.
Your federal tax responsibility
As the employer, your federal tax responsibilities will not change because one or all of your employees telecommute. They are still your employees even though they are not working in one central location, or multiple locations, owned and operated by you. You'll withhold federal payroll and income taxes from their paychecks just as before. Some states and local jurisdictions, however, are trying to capitalize on the telecommuting trend by demanding withholding taxes based on the location of the telecommuter rather than that of a business's regular office. Check with our office to see if this development applies to you.
Tax savings for employees
Telecommuting can open the door to some tax savings for your employees. However, and this is very important, the IRS looks very carefully for abuses, especially inflated home office deductions. You'll want to spell things out very clearly when you set up an employee in a home office.
The home office must meet some tough IRS tests to qualify for the deduction. It must be used for the convenience of the employer and used regularly -- and exclusively -- as a principal place of business or a place where the taxpayer meets or deals with patients, clients or customers. Additionally, the employee must not rent any part of his or her home to the employer.
If you decide that an employee, or all your employees, should telecommute, your decision satisfies the "at the convenience of the employer" test. However, if an employee asks you if he or she can work from home, that request likely would not satisfy the test. An employee's preference to work from home would not meet the IRS's criteria.
Telecommuters who work exclusively from home should not have difficulty satisfying the "principal place of business" test. Their home office is where they work for you 100 percent of the time. However, taking depreciation deductions on a home office may not provide a significant tax savings since those deductions reduce your tax basis in your home and therefore raise the amount of gain potentially taxable on its eventual sale. The $250,000 exclusion of taxable gain from the sale of a principal residence ($500,000 in the case of a joint return) may not be used to shelter any gain attributable to the business-use of your residence. That may point to foregoing the home office deduction even if the employee may be entitled to it.
Your employee may not work from home all the time. For example, he or she may work at home three out of five days. If you're thinking about this type of telecommuting arrangement, contact our office for more details. We'll help you and your employees avoid any potential mishaps with the IRS.
Home office supplies
A home office needs supplies just like in the employer's workplace. Items you supply, such as furniture, computers, scanners, fax machines, stationary, telephones, are deductible by you as the employer. They get the same tax treatment just as if you provided them in your workplace. This is regardless of whether a portion of the home itself qualifies for the home office deduction.
You may want to reimburse your telecommuters for utility charges, telephone calls and similar expenses. Generally, these amounts will not be considered income to the employee. They could also be treated as tax-free working condition fringe benefits.
Just like the rules for deducting a home office, deductions for supplies can get complicated. Again, let us help you put together a telecommuting plan that not only maximizes tax savings for you and your employees but, most importantly, does not raise any red flags for the IRS.
Transportation costs
Transportation costs from a home office to another place of business may be either a deductible transportation expense or a nondeductible commuting expense. It depends on which location is the individual's principal place of business. This area is fraught with potential traps. The IRS and the courts have made some very technical and fine distinctions. Our office can help you understand them and set up a transportation policy that meets your needs.
Information returns usually arrive in January or February and consist of either Form 1099 or Form 1098. For some, they seem as ubiquitous as their holiday mail in December. Form 1099s are especially likely to populate your mailbox, being used to report a whole array of income other than wages, salaries and tips. While a Form 1099 is not needed to record every taxable transaction, one Form 1099 can record multiple transactions; for example, from your broker for dividends and stock trades. The payer will send a Form 1099 to you by the end of January and will file the form with the IRS by the end of February. Typical forms are sent out for dividend and interest income, self-employment or independent contractor's income, student loan interest and mortgage interest statements.
Information returns usually arrive in January or February and consist of either Form 1099 or Form 1098. For some, they seem as ubiquitous as their holiday mail in December. Form 1099s are especially likely to populate your mailbox, being used to report a whole array of income other than wages, salaries and tips. While a Form 1099 is not needed to record every taxable transaction, one Form 1099 can record multiple transactions; for example, from your broker for dividends and stock trades. The payer will send a Form 1099 to you by the end of January and will file the form with the IRS by the end of February. Typical forms are sent out for dividend and interest income, self-employment or independent contractor's income, student loan interest and mortgage interest statements.
If you happen to receive an incorrect information return, there is no need to panic. However, you do need to act quickly to prevent a bigger problem; namely, having your tax return not match what your information returns say. Therefore, the first step to take when receiving any Form 1099 or 1098 is to open it immediately and take a look at whether it reflects the amount that you think should be reported. If the Forms just sit unopened in your shoe box until you bring it for return preparation, valuable time has been lost.
Should you determine that you have received an incorrect information return, first contact the entity providing the form and ask for a corrected form. Use the number the sender provides on the form. You should receive a revised form that has "corrected" marked on it. Sometimes the information provider itself catches a mistake and sends you a corrected form without your having to ask.
Sometimes, the discrepancy on an information return may be the result of a difference of opinion in interpreting the tax law. This can occur, for example, when determining in which tax year a transaction falls, or whether forgiveness of indebtedness income exists on a contested loan. In those cases, it is best to first try to persuade the information return provider to change its mind rather than just reporting the transaction on your return based on your interpretation. Once the IRS becomes aware of a difference of opinion, the issue usually will take a lot more effort to resolve.
If all else fails in your trying to correct an information return with the return provider, after February 15, 2013 you should contact the IRS at (800) 829-1040. An IRS agent will assist in filing a complaint by sending Form 4598 to the payer requesting that a corrected form be sent out. If no corrected Form is issued, you will have to file a Form 4852 which will allow for you to claim the true amount on your tax return. If you have already filed and have received a form not reported or forget to report income, you are obligated to file a Form 1040X to report income that was not previously reported.
Penalties do exist for payers who fail to provide you with the correct payee statements when they cannot show reasonable cause for the failure. However, if you operate a business and also wear the hat of an information provider, you'll be glad to know that inconsequential error or omission will not be considered a failure to include the correct information.
Nevertheless, both the party who provides and who receives an information return have obligations under the tax law that must be met in good faith and with reasonable efforts to comply. Otherwise, the IRS will not hesitate to use its penalty powers.
Please feel free to contact this office if you have any concerns over an incorrect information return over this coming tax season.
Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?
Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?
Exclusion Amount
The general rule is that there is a designated limit above which gifts become taxable to the giver. For the 2009 tax year, that limit is $13,000. The gift tax threshold is from each donor to each recipient per year. In other words, a donor may give multiple gifts to a single recipient in 2009 up to $13,000, and may repeat this with an unlimited number of recipients without incurring gift tax liability.
Furthermore, married couples may give up to $26,000 during 2009 to each recipient in a year without incurring tax, but to do this, they must indicate on a gift tax return that they are electing to split the gift.
Contributions to so-called 529 plans are subject to this limitation, except that a donor may "front-load" giving by contributing up to $60,000 to an individual's account in a single tax year and counting the gift against that year and the four succeeding years. This does make any gifts to that individual in the subsequent years taxable.
Exceptions to the Rule
Some gifts do not count against this threshold. There is no limitation on gifts to spouses or charitable organizations (although there are limits on the tax benefits of charitable contributions). Payments for medical or educational expenses also do not count against the threshold if the money is paid directly to the source of the expenses. A gift of $15,000 to a relative for college tuition is a taxable gift, but a $15,000 payment to the college is not.
Even when a gift exceeds the threshold, it is not necessary to pay tax on the gift. This is because in addition to the annual exclusion amount, there is a lifetime credit against the estate and gift tax. The credit effectively exempts the first $3.5 million of taxable gifts from gift tax in 2009, and must be claimed by filing a gift tax return, Form 709.
The gift tax applies not only to gifts of cash, but also to property. The value of property given as a gift counted against the exclusion amount is the fair market value of the property at the time of the gift, whether the gift is of stocks and other securities or more traditional holiday presents, including food and drink.
The Business Context
Sometimes, gift giving makes for good business. However, even if you give an employee or business contact a gift completely out of gratitude, with no expectation of profit in return, the IRS treats these gifts as business gifts. As such, certain tax rules apply. Gifts of cash within a business context are always taxed to the recipient, whether an employee, contractor or other business. Gifts of property are similarly taxed subject, however, to a de minimis exception for small gifts of approximately $35 or less. The silver lining for this rule is that if it is taxable to an employee, it is also deductible by the employer. In addition, that rule also has a favorable exception within it: the employer may deduct the cost of a de minimis gift or the cost of a general holiday office party (subject to the entertainment deduction limitations).
To sum up, a taxable holiday gift occurs when the total value of all gifts, both of money and property, to an individual over the course of a year, excluding direct payments for medical and educational expenses, exceeds the exclusion amount, which is currently $13,000. When given with a business context, however, it is the recipient and not the giver who is generally subject to tax. Nevertheless, certain important exceptions apply within that general rule. If you need further assistance in sorting out the tax repercussions of holiday gift giving, please feel free to contact this office.
Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?
Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?
A. Because computers and peripheral equipment are viewed as more susceptible than other business property to unwarranted deductions for personal use, they are subject to special scrutiny under the tax law. This scrutiny comes from their classification as "listed property," which limits the amount that may be deducted each year.
A computer as listed property only becomes an issue if it is not used exclusively in business. If a computer is used exclusively at the taxpayer's regular business establishment or in the taxpayer's principal trade or business, the listed property limitations don't apply at all.
Any computer that you use predominately for pleasure may not be written-off over its life nearly as quickly as exclusive-use computers. If your business usage does not meet the predominant use test, you are relegated to using a much slower depreciation method (the ADS, straight-line method) over the longer-ADS recovery period.
Your computer will meet the predominant use test for any tax year if its qualified business use is more than 50% of its total use. You must review your computer's usage and determine the percentage usage for each of its various uses (business, investment, and personal). When computing the predominant use test, any investment use of your computer cannot be considered as part of the percentage of qualified business use. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property. It's up to you to prove business use to the IRS; the IRS does not need to prove personal use to reject your deductions.
In order to claim your computer expenses, you must meet the adequate records requirements by maintaining a "log" or other documentary evidence that sufficiently establishes the business/investment percentage claimed. The log should be similar to a log you would keep to track your auto expenses, indicating date, time of usage, business or nonbusiness, and business reason. Good documentation is always the key to success if your return is ever audited.
Finally, what about application of these rules to PDA's? The shorter the designated "life" of the property, the faster you can write-off its cost. Cell phones are generally considered 7-year property (the cost is depreciated over seven years). Computers are generally considered 5-year property, and computer-software normally is 3-year property. PDA's are generally classified as 5-year property, being considered wireless computers. If a PDA includes a cell phone feature, as long as that feature is not predominant and removable, it continues to fall under the 5-year property rule. Software that you may download to your PDA is 3-year property. Software that you buy already loaded into the PDA, however, is 5-year property. Monthly charges for a wireless service provider are deductible as paid each month, just as your business would deduct any phone or internet service bill.
Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.
Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.
Traditional and Roth IRAs
Two types of individual retirement accounts are the traditional IRA and the Roth IRA. To contribute to an IRA account, whether it's a traditional or a Roth, an individual must have earned income. In general, the maximum amount that can be deposited in either type of IRA is $3,000 in 2004; $4,000 in 2005 through 2007.
Contributions to a traditional IRA are tax deductible. Amounts earned in a traditional IRA are not taxed until a distribution is made. If money is withdrawn from a traditional IRA before the individual reaches age 59 1/2, a 10 percent penalty applies to the principal. Mandatory withdrawals are required when the individual reaches age 70 1/2.
Contributions to Roth IRAs are not tax deductible, but all earnings are tax-free when the money is withdrawn from the account, if certain requirements are met. Tax-free withdrawals are a big advantage to the Roth IRA that will likely outweigh the lack of a tax deduction on contributions. Qualified distributions from a Roth IRA are not included in the individual's income if a five-year holding period and certain other requirements are met; otherwise, the 10 percent penalty applies. Unlike the traditional IRA, individuals can make contributions to a Roth IRA even after age 70 1/2.
Penalty flexibility
Both the traditional and the Roth IRAs offer some flexibility on the 10 percent penalty. Early withdrawals, without penalty, are allowed if the money is used for:
--College expenses;
--First home purchase (up to $10,000);
--Medical insurance in case of unemployment for a certain amount of time; or
--Expenses attributable to disability (Roth IRA).
Although designed for retirement planning, flexibility in how the money can be used makes IRAs very attractive for young family members.
Kid with a job
In order to contribute to an IRA, however, the child or young adult must have earned income. In other words, the kid needs a W-2, a 1099 or some other "proof" that wages were earned. Although occasional baby-sitting or lawn-mowing generally doesn't count, the money made on those jobs could qualify as earned income if adequate receipts and records are kept.
Working for the parents
Some moms and dads, who own their own businesses, are taking the "kiddy IRA" concept a step further: their sons and daughters come to work for the family business. The child earns income, making him or her eligible to contribute to an IRA. The parents, as their employers must pay employment tax and issue a W-2, but they can also make a business deduction for the child's wages, just like for any other employee. Parents should be mindful that the wage their child earns for the work performed is comparable to the going rate. If the child's wage is too large, the IRS will disallow the deduction.
Let's make a deal
The tough part of the plan may be getting the young person to "lock away" his or her hard-earned cash. After all, retirement is much harder to imagine compared to more pressing, front-burner issues like college expenses or a car. Some parents, however, are convincing their kids to put their earnings to work for their future in an IRA by promising to match their child's pay as an extra incentive to save. For example, if Susan earns $3,000, her dad promises to put $3,000 in her IRA. Susan keeps the money she made. There's no rule that restricts the origin of the IRA contribution, so long as the IRA owner earned at least that amount and the contribution doesn't exceed the cap for that year.
Conclusion
Individual retirement accounts for children and young adults are a growing part of family financial planning. A potential hazard, however, is that the money in the IRA belongs to the child. The child, or young adult, has the right to do whatever they wish with the IRA and its assets, including making a withdrawal for a new car or exotic trip. Parents do not "own" the IRA, even if they contributed the dollars as a match to their child's earnings. Families who utilize IRAs for their offspring will have to consider the risk and stress to the youngsters that the money is better off in the IRA. Through investing in an IRA, a young person's earnings from working part-time at the local ice cream parlor, or a summer job loading trucks, can have lasting effects.
Please feel free to contact this office for advice more specific to your family situation.
With the exception of some city ordinances, companies are not required to offer benefits to a domestic partner of an employee. One major change occurs on January 1, 2005 when California will start requiring employers to offer domestic partner benefits. Recent legislation in California extends the rights and duties of marriage, including the right to employee benefits, to persons registered as domestic partners. It may signal a trend that other states will follow.
Generally, no. With the exception of some city ordinances, companies are not required to offer benefits to a domestic partner of an employee. One major change occurs on January 1, 2005 when California will start requiring employers to offer domestic partner benefits. Recent legislation in California extends the rights and duties of marriage, including the right to employee benefits, to persons registered as domestic partners. It may signal a trend that other states will follow.
Even so, an increasing number of companies voluntarily offer domestic partner benefits. Why are they doing it? Offering domestic partner benefits can strengthen a company's image as an innovative employer and foster diversity in the workplace. These can translate into greater employee loyalty and engagement. Some surveys suggest that about one-third of America's largest companies offer domestic partner benefits.
Many employers offer the same benefits to domestic partners that they offer to employees' spouses and on the same terms. Alternatively, employers may choose to limit the offerings to health insurance or specific benefits, such as bereavement leave.
Eligibility
You need to define who is a domestic partner. Should benefits be limited to domestic partners who cannot marry under state law or should benefits be offered to all partners? Remember, not all domestic partners are same-sex couples. A man and woman may prefer not to marry and live as domestic partners for economic reasons.
Typically, employers offering domestic partner benefits require that domestic partners:
--Be over age 18
--Have an exclusive, committed relationship;
--Reside in the same home (sometimes for a minimum period of time);
--Share financial obligations; and
--Plan to remain each other's sole domestic partner indefinitely.
Verification
You may want proof of the relationship. Some employers require employees to submit a written affirmation of the partnership or documents that confirm the partners reside at the same address. Employers should be careful that proof of the relationship is relative and not an invasion of privacy.
Tax treatment
Domestic partner benefits will be tax-free if the employee's partner qualifies as a dependent. Otherwise, the benefits are taxable to the employee.
Qualifying as a dependent is not easy. Generally, a dependent is a family member who receives more than one-half of his or her support from the taxpayer. To qualify as a dependent, four tests must be satisfied. They are similar to the characteristics of a domestic partner relationship.
--The employee provides more than one-half of his or her partner's annual support;
--The domestic partner is a member of the employee's household;
--The domestic partner's principal abode is the employee's residence; and
--The relationship between the employee and the domestic partner does not violate local law.
Several bills have been introduced in Congress to make domestic partner benefits tax-free. Benefits provided to an employee's domestic partner would be treated the same as benefits provided to an employee's spouse. The proposed legislation would not require employers to offer domestic partner benefits; only change the tax treatment of those benefits.
If you are contemplating extending benefits to domestic partners of your employees, give our office a call. The laws affecting domestic partners vary from state to state and change from year to year. We can help you understand the rules and craft a policy that best fits your company and your employees.
Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.
With mortgage rates at the lowest level in years, you may be debating whether to refinance your adjustable-rate or higher-interest fixed-rate mortgage to lock in what looks like a real bargain. Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.
Boom in refinancing
Escalating home prices in many parts of the country have motivated many homeowners to refinance their existing mortgages. Many people are refinancing to secure cash for home improvements or to pay debts. These are often called "cash-out" refinancings because you receive cash back from the lender based upon the difference between the old and new mortgages.
Example. You have an existing mortgage of $195,000. Your home is valued at $325,000. You refinance and take a new mortgage for $225,000. You receive $30,000 from the lender and use the money to pay for home improvements.
Cash-out refinancings account for more than one-half of all refinancings. Some estimates pegged the value of "cash-out" refinancings at more than $100 billion in 2001.
Original mortgage points
The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a mortgage. Generally, for individuals who itemize, points paid by a borrower at the time a home is purchased are immediately deductible as interest if they are charged solely for the use or forbearance of the lender's money. Points for this purpose include:
- Maximum loan charges; and
Amounts paid for services provided by the lender, however, are not deductible as interest. These services include:
- Credit investigation charges;
Refinancing points
Unlike points paid on an original mortgage, you cannot immediately deduct points paid for refinancing. However, if refinancing proceeds are used to refinance an existing mortgage and to pay for improvements, the portion of points attributable to the improvements is immediately deductible.
With interest rates so low, many homeowners are refinancing for the second or even third time. If you are refinancing for a second time, you may immediately deduct points paid and not yet deducted from the previously refinanced mortgage.
Example. You refinanced your home mortgage several years ago and used the proceeds to pay off your first mortgage. Your refinancing mortgage (loan #2) was a 30-year fixed-rate loan for $100,000. You paid three points ($3,000) on the refinancing. Because all of the loan proceeds were used to pay off the original mortgage and none were used to buy or substantially improve your home, all of the points on the refinancing loan must be deducted over the loan term. This year, you refinance again (loan #3) when there's a remaining (not-yet-deducted) points balance of $2,400 on loan #2. You can deduct the $2,400 as home mortgage interest on your 2003 return.
Deducting interest
Generally, home mortgage interest is any interest you pay on a loan secured by your home. The loan may be a first mortgage, a second mortgage, a line of credit, or a home equity loan.
The interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. Usually, this information is available from lenders. You may deduct points only for those payments made in the tax year.
Example. You paid $2,000 in points. You will make 360 payments on a 30-year mortgage. You may deduct $5.65 per monthly payment, or a total of $66.72, if you make 12 payments in one year.
Refinancing is anything but simple. There may be additional complications if there are several mortgages on your home or if you own a vacation home as well as a principal home. Please contact this office if you are considering refinancing now or in the near future.
If you want to withdraw funds from either your company retirement plan or your individual retirement account, there is a 10% additional tax (penalty) if you make withdrawals before the age of 59 ½. There is an exception to this rule if you make withdrawals from your account of a series of "substantially equal periodic payments."
If you want to withdraw funds from either your company retirement plan or your individual retirement account, there is a 10% additional tax (penalty) if you make withdrawals before the age of 59 ½. There is an exception to this rule if you make withdrawals from your account of a series of "substantially equal periodic payments."
Three methods
The IRS allows three acceptable methods of calculating "substantially equal periodic payments":
1. The required minimum distribution method: Under this method, the annual payment withdrawn from your account each year is determined by dividing the amount in your retirement account by a number from a designated life expectancy table. Under this method, the annual dollar amount of each payment is redetermined on a year-by-year basis.
2. The fixed amortization method: The annual amount you withdraw from your retirement account for each year is determined by dividing your account balance into equal amounts over a specified number of years from a chosen life expectancy table and a chosen interest rate. Under this method, the annual payment that you withdraw from your account remains the same each year.
- Note: The life expectancy tables and interest rates for Methods 1 and 2 are provided by the IRS.
3. The fixed annuitization method: Using this method, the annual payment that you withdraw from your account each year is determined by dividing the account balance by an annuity factor. This annuity factor is taken from a table provided by the IRS. Under this method, the annual payment remains the same each year.
Current problem
If you are taking a series of substantially equal periodic payments and you change the amount you withdraw at any time in during the first five years, the IRS will go back and impose the penalty for early withdrawals against you. If you calculated your payment using Method 1 this is not a problem. Many people who started taking a series of substantially equal periodic payments in the last few years are encountering a problem. The amount they are withdrawing is based on a retirement account with a higher value than they currently have due to the decline in the stock market.
When they continue withdrawing this high amount out of their retirement accounts each year they end up in danger of depleting their account too soon. The IRS is giving all taxpayers in this position a one-time opportunity to change their calculation method to Method 1.
If you have questions about how you calculate annual payments in order to avoid the penalty for early withdrawal from your account, please feel free to contact this office.
You have just been notified that your tax return is going to be audited ... what now? While the best defense is always a good offense (translation: take steps to avoid an audit in the first place), in the event the IRS does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.
You have just been notified that your tax return is going to be audited ... what now? While the best defense is always a good offense (translation: take steps to avoid an audit in the first place), in the event the IRS does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.
Relax. It is a normal reaction upon receiving notice of an audit to panic and feel particularly singled out, however, as in most situations, panic can be counterproductive. A better course of action is to contact an experienced professional to get additional guidance as to how best to proceed to prepare for the audit as well as to get reassurance that everything will be fine.
Be professional. In the event that you have any type of communication with the IRS prior to your audit -- written or verbal, it's important that you act in a professional, business-like manner. Verbally abusing the auditor or becoming defensive is not a good way to start off your relationship with him or her.
Organization is very important. Before the audit, take the time to gather all of your documents together and consider how they will be presented. While throwing them all into a box in a haphazard fashion is certainly one way to present your documents to your auditor, this method will also be sure to raise at least one eyebrow ... and encourage him or her to dig deeper.
As you gather your data, you may need to re-create records if no longer available. This may involve calls to charities, medical offices, the DMV, etc., to obtain the written documentation required for verification of deductions claimed. Once you are confident that you have all of the necessary documentation, organize it in a binder, separated by category as shown on your return. This will allow quick and easy access to these records during the actual audit, something that the auditor will appreciate and will give him/her the impression that you are organized and thorough.
Leave the face to face to a professional. Make sure that you retain the services of a tax professional, most likely the person who prepared your return. Having a tax professional appear on your behalf for your audit is beneficial in a number of ways.
- A tax professional is emotionally detached from the return and less likely to become angry or defensive if questioned.
- A tax professional can serve as a "buffer" between you and the IRS -- indicating that he/she will need to get back to the auditor on certain issues, can buy you extra time to prepare for an issue raised you didn't consider.
- A tax professional can keep an auditor on track, making sure all inquiries are relevant to the return areas being audited.
If you disagree, appeal. If you disagree with the outcome of the audit, you still have the right to send your case to the IRS Appeals division for review. Appeals officers are usually more experienced than auditors and are more likely to negotiate with you, if necessary.
As for the "best defense is a good offense" comment? In this case, this old adage applies to how you approach the tax return preparation process throughout the year, year-in and year-out.
- Good recordkeeping is key. Maintaining complete and accurate records throughout the year reduces the chance that you will forget to provide important information to your tax preparer, which can increase your chances of audit. Good recordkeeping will also result in a more relaxed reaction to notification of an audit as most of your upfront audit work will be complete -- this is especially true if you audit pertains to a tax year several years in the past! Tax records should be retained for at least 3 years after the filing date.
- Provide ALL relevant information to your tax preparer. When your tax preparer is fully informed of all tax-related events that occurring during the year, the chances for errors or omissions on your return dramatically decrease.
- Keep a low profile. Error-free, complete tax returns that are filed in a timely manner don't have the tendency to raise any of those infamous "red flags" with the IRS. During the year, if the IRS does send you correspondence, it should be responded to immediately and fully. Don't hesitate to retain professional assistance to help you "fly under the radar".
While the odds of your tax return being audited remain very low, it does happen to even the most diligent taxpayers. If you are contacted about an examination by the IRS, take a deep breath, relax and contact the office as soon as possible for additional assistance and guidance.
When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
Dependents
One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.
The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.
Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.
A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.
Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.
Alimony
Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.
Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.
There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.
Property
Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.
Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.
Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.
Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.
Retirement
When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.
Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.
Tax Prepayment and Joint Refunds
When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.
Legal and Other Expenses
To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.
Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.
Q. I've just started my own business and am having a hard time deciding whether I should buy or lease the equipment I need before I open my doors. What are some of the things I should consider when making this decision?
Q. I've just started my own business and am having a hard time deciding whether I should buy or lease the equipment I need before I open my doors. What are some of the things I should consider when making this decision?
A. Deciding whether to buy or lease business property is just one of the many tough decisions facing the small business owner. Unfortunately, there's not a quick answer and, since every business has different fact patterns, each business owner will need to assess every type of business property separately and consider many different factors to make a decision that is right for his or her particular circumstances.
While there are advantages and disadvantages to both buying and leasing business property, the business owner should carefully consider the following questions before making a final decision either way:
How's your cash flow? If you are just starting a business, cash may be tight and a hefty down payment on a piece of equipment may bust your budget. In that case, since equipment leases rarely require down payments, leasing may be a good choice for you. One of the biggest advantages of leasing is that you generally gain the use of the asset with a much smaller initial cash expenditure than would be required if you purchased it.
How's your credit? Loans to new small businesses are hard to come by so if you're a fairly new business, leasing may be your only option outside of getting a personal loan. As a new business, you will definitely have an easier time getting a company to lease equipment to you than finding someone to extend you credit to make the purchase. However, if you have time to search for credit well in advance of needing the equipment, you may want to purchase the equipment to begin establishing a credit history for your company.
How long will you use it? A general rule of thumb is that leasing is very cost-effective for items like autos, computers and other equipment that decrease in value over time and will be used for about five years or less. On the other hand, if you are considering business property that you intend to use more than five years or that will appreciate over time, the overall cost of leasing will usually exceed the cost of buying it outright in the first place.
What's your tax situation? Don't forget that your tax return will be affected by your decision to lease or buy. If you purchase an asset, it is depreciated over its useful life. If you lease an asset, the tax treatment will depend on what type of lease is involved. There are two basic types of leases: finance and true. Finance leases are handled similarly to a purchase and work best for companies that intend to keep the property at the end of the lease. Payments on true leases, on the other hand, are deductible in full in the year paid.
The answers to each question above need to be considered not individually, but as a group, since many factors must be weighed before a decision is made. Buying or leasing equipment can have a significant effect on your tax situation and the rules related to accounting for leases are very technical. Please contact our office before you make any decisions regarding your business equipment.
We've all heard the basic financial planning strategy "pay yourself first" but paying yourself first doesn't simply mean stashing money into your savings account - debt reduction and retirement plan participation also qualify. Paying yourself today can result in a more comfortable and prosperous future for you and your family.
We've all heard the basic financial planning strategy "pay yourself first" but paying yourself first doesn't simply mean stashing money into your savings account - debt reduction and retirement plan participation also qualify. Paying yourself today can result in a more comfortable and prosperous future for you and your family.
Here are some easy ways to "pay yourself first":
Pay off your credit card debt and student loans. Paying off your debt will probably give you one of the highest returns for your money compared to any investments, and it is guaranteed! If you are carrying a $1,000 debt at 17 percent, by paying it off, you will get a comparable 17 percent return.
Pay a little extra on your monthly mortgage. By paying just $20 to $50 extra per month on your mortgage payment, you can not only shave months or even years of payments off your loan, you can also save a substantial amount of money on interest. Contact your lender regarding the easiest way to do this.
Pay off your car loan. Just because you have a five-year loan, doesn't necessarily mean you have to take five years to pay it off. Check your agreement for any prepayment clauses, and if you have the extra cash, consider paying it off sooner.
Sign up for the 401(k) plan at work. If your company offers a 401(k) plan and you can afford it, contribute up to your company's matching point to maximize your dollars. This can be a great way to save and can decrease your taxes at the same time. Be sure to read and understand all plan material, especially matters related to investment options and any penalties for early withdrawals.
Have money automatically deposited into your savings account. You won't miss it and you will be surprised at how quickly it accumulates. Put aside as much as you can each pay period and don't touch it. Consider it a present to yourself.
If you would like more information, as always, we are here to help you set up a realistic financial plan. Feel free to contact us for more savings ideas.
Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.
Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.
An LLC is a legal entity existing separately from its owners that has certain characteristics of both a corporation (limited liability) and a partnership (pass-through taxation). An LLC is created when articles of organization (or the equivalent under each state rules) are filed with the proper state authority, and all fees are paid. An operating agreement detailing the terms agreed to by the members usually accompanies the articles of organization.
Choosing the LLC as a Business Entity
Choosing the form of business entity for a new company is one of the first decisions that a new business owner will have to make. Here's how LLCs compare to other forms of entities:
C Corporation: Both C corporations and LLCs share the favorable limited liability feature and lack of restrictions on number of shareholders. Unlike LLCs, C corporations are subject to double taxation for federal tax purposes - once at the corporate level and the again at the shareholder level. C corporations do not have the ability to make special allocations amongst the shareholders like LLCs.
S Corporation: Both S corporations and LLCs permit pass-through taxation. However, unlike an S corporation, an LLC is not limited to the number or kind of members it can have, potentially giving it greater access to capital. LLCs are also not restricted to a single class of stock, resulting in greater flexibility in the allocation of gains, losses, deductions and credits. And for estate planning purposes, LLCs are a much more flexible tool than S corporations
Partnership: Partnerships, like LLCs, are "pass-through" entities that avoid double taxation. The greatest difference between a partnership and an LLC is that members of LLCs can participate in management without being subject to personal liability, unlike general partners in a partnership.
Sole Proprietorship: Companies that operate as sole proprietors report their income and expenses on Schedule C of Form 1040. Unlike LLCs, sole proprietors' personal liability is unlimited and ownership is limited to one owner. And while generally all of the earnings of a sole proprietorship are subject to self-employment taxes, some LLC members may avoid self-employment taxes under certain circumstances
Tax Consequences of Conversion to an LLC
In most cases, changing your company's form of business to an LLC will be a tax-free transaction. However, there are a few cases where careful consideration of the tax consequences should be analyzed prior to conversion. Here are some general guidelines regarding the tax effects of converting an existing entity to an LLC:
C Corporation to an LLC: Unfortunately, this transaction most likely will be considered a liquidation of the corporation and the formation of a new LLC for federal tax purposes. This type of conversion can result in major tax consequences for the corporation as well as the shareholders and should be considered very carefully.
S Corporation to an LLC: If the corporation was never a C corporation, or wasn't a C corporation within the last 10 years, in most cases, this conversion should be tax-free at the corporate level. However, the tax consequences of such a conversion may be different for the S corporation's shareholders. Since the S corporation is a flow-through entity, and has only one level of tax at the shareholder level, any gain incurred at the corporate level passes through to the shareholders. If, at the time of conversion, the fair market value of the S corporation's assets exceeds their tax basis, the corporation's shareholders may be liable for individual income taxes. Thus, any gain incurred at the corporate level from the appreciation of assets passes through to the S corporation's shareholders when the S corporation transfers assets to the LLC.
Partnership to LLC: This conversion should be tax-free and the new LLC would be treated as a continuation of the partnership.
Sole proprietorship to an LLC: This conversion is another example of a tax-free conversion to an LLC.
While considering the potential tax consequences of conversion is important, keep in mind how your change in entity will also affect the non-tax elements of your business operations. How will a conversion to an LLC effect existing agreements with suppliers, creditors, and financial institutions?
Taxation of LLCs and "Check-the-Box" Regulations
Before federal "check-the-box" regulations were enacted at the end of 1996, it wasn't easy for LLCs to be classified as a partnership for tax purposes. However, the "check-the-box" regulations eliminated many of the difficulties of obtaining partnership tax treatment for an LLC. Under the check-the-box rules, most LLCs with two or more members would receive partnership status, thus avoiding taxation at the entity level as an "association taxed as a corporation."
If an LLC has more than 2 members, it will automatically be classified as a partnership for federal tax purposes. If the LLC has only one member, it will automatically be classified as a sole proprietor and would report all income and expenses on Form 1040, Schedule C. LLCs wishing to change the automatic classification must file Form 8832, Entity Classification Election.
Keep in mind that state tax laws related to LLCs may differ from federal tax laws and should be addressed when considering the LLC as the form of business entity for your business.
Since the information provided is general in nature and may not apply to your specific circumstances, please contact the office for more information or further clarification.
Owning property (real or tangible) and leasing it to your business can give you very favorable tax results, not to mention good long-term benefits. There are some drawbacks, however, and you should consider all factors before structuring such an arrangement.
Owning property (real or tangible) and leasing it to your business can give you very favorable tax results, not to mention good long-term benefits. There are some drawbacks, however, and you should consider all factors before structuring such an arrangement.
BENEFITS
Since you own the property personally, it is protected from the creditors of the Company should it be sued or run into financial difficulty.
Real estate leasing outside of the corporation will offer better tax and financial advantages compared to the rental of personal property such as equipment. These advantages can include the avoidance of corporate double tax on the appreciation of the real estate, along with estate planning advantages from the step up in basis if the property is owned by the individual or partnership.
Allows the individual taxpayer to remove earnings from the company without payment of employment taxes or increasing the possibility of unreasonable compensation issues.
DRAWBACKS
If you are a non-corporate lessor and leasing personal property (machinery, equipment, etc.), you will have to comply with special rules in order to claim the Sec. 179 expense deduction.
You need to charge a fair rental for your real estate or equipment. Inflated rental rates may be recharacterized as dividends if coming from a corporation.
Leasing property to your own C Corporation cannot generate passive income. Income will be reclassified as "active" while losses will remain "passive", removing the ability to use this transaction to offset other "passive" losses.
Proper planning and knowledge of the various tax issues is important when considering this type of arrangement. Feel free to contact us for a better understanding of how these situations would effect you before you proceed.
