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Proposed Regs Address Deductibility of Entertainment and Food or Beverage Expenses
The IRS issued proposed regulations which (1) address the elimination of the deduction under Code Sec. 274 for expenditures relating to entertainment, amusement, or recreation activities, and (2) provide guidance for determining whether an activity is of a type generally considered to be entertainment. Taxpayers may rely on the proposed regulations, as well as the guidance in Notice 2018-76, prior to the issuance of final regulations. REG-100814-19.
In general, Code Sec. 274 limits or disallows deductions for certain meal and entertainment expenditures that otherwise would be allowable as an ordinary and necessary trade or business expense. Code Sec. 274 was amended by the Tax Cuts and Jobs Act (TCJA) to revise the rules for deducting expenditures for meals and entertainment, effective for amounts paid or incurred after December 31, 2017. Under Code Sec. 274(n)(1), the deduction for food or beverage expenses generally is limited to 50 percent of the amount that would otherwise be allowable. Prior to the TCJA, under Code Sec. 274(n)(2)(B), expenses for food or beverages that were excludable from employee income as de minimis fringe benefits under Code Sec. 132(e) were not subject to the 50 percent deduction limitation under Code Sec. 274(n)(1) and could be fully deducted. The TCJA repealed Code Sec. 274(n)(2)(B) so that expenses for food or beverages excludable from employee income under Code Sec. 132(e) are subject to the Code Sec. 274(n)(1) deduction limitation unless another exception under Code Sec. 274(n)(2) applies.
Under Code Sec. 274(k)(1), in order for food or beverage expenses to be deductible the food or beverages must not be lavish or extravagant under the circumstances and the taxpayer or an employee of the taxpayer must be present at the furnishing of the food or beverages. However, under Code Sec. 274(e)(2), (3), (4), (7), (8), and (9), there are six exceptions to the limitations on the deduction of food or beverages in Code Sec. 274(k)(1) and Code Sec. 274(n)(1) and the proposed regulations explain how those exceptions apply.
Code Sec. 274(a)(1)(A) generally disallows a deduction for any item with respect to an activity of a type considered to constitute entertainment, amusement, or recreation (entertainment expenditures). However, before the amendment by the TCJA, Code Sec. 274(a)(1)(A) provided exceptions to that disallowance if the taxpayer established that: (1) the item was directly related to the active conduct of the taxpayer's trade or business (directly related exception), or (2) in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), the item was associated with the active conduct of the taxpayer's trade or business (business discussion exception). Code Sec. 274(e)(1) through (9) also provides exceptions to the rule in Code Sec. 274(a) that disallows a deduction for entertainment expenditures. The TCJA did not change the application of the Code Sec. 274(e) exceptions to entertainment expenditures.
Last Updated by Admin on 2020-02-25 07:35:09 PM
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Section 199A Qualified Business Income Deduction
The Code Sec. 199A qualified business income (QBI) deduction is another potentially big deduction for clients with a qualified trade or business. The deduction is available to sole proprietors, partners in a partnership, members of an LLC taxed as a partnership, S corporation shareholders, or trusts and estates. Whether a client is eligible for the deduction depends on whether the client has a qualified trade or business and the client's taxable income.
Qualified trades or businesses include trades or businesses for which the taxpayer is allowed a deduction for ordinary and necessary business expenses under Code Sec. 162. In general, to be engaged in a trade or business under Code Sec. 162, the taxpayer must conduct the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit. If a taxpayer owns an interest in a pass-through entity, the trade or business determination is made at that entity's level. Material participation under Code Sec. 469 isn't required for the QBI deduction. Qualified trades or businesses do not include activities conducted by C corporations and the performance of services as an employee.
Additionally, specified service trades or businesses (SSTB) aren't qualified trades or businesses if the taxpayer has taxable income above a certain threshold (before the QBI deduction). An SSTB is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business. The thresholds above which an SSTB will not fully qualify for the QBI deduction are $160,725 if married filing separately; $321,400 if married filing jointly; $160,700 for all others. Above those thresholds a partial deduction may be available before the deduction is fully phased out.
The first step in determining the QBI deduction is to determine the QBI component, which is generally 20 percent of the taxpayer's QBI from the taxpayer's trades or businesses. Where the taxpayer's taxable income (before the QBI deduction) exceeds the applicable thresholds, a reduction to the QBI deduction is phased in until the deduction is entirely eliminated. In this case, the QBI for each of trade or business may be partially or fully reduced to the greater of 50 percent of W-2 wages paid by the qualified trade or business, or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of qualified property from the qualified trade or business. The partial or full reduction to QBI is determined by the taxpayer's taxable income. If taxable income (before the QBI deduction) is: (1) at or below the threshold, there is no need to reduce QBI; (2) above the threshold but below the phase-in range (more than $160,725 but below $210,725 if married filing separately; $321,400 and $421,400 if married filing jointly; $160,700 and $210,700 for all others), the reduction is phased in; or (3) above the threshold and phase-in range, the full reduction applies.
If the taxpayer is a patron of an agricultural or horticultural cooperative, the taxpayer must reduce cooperative QBI by the lesser of: 9 percent of the QBI allocable to qualified payments, or 50 percent of W-2 wages from the trade or business allocable to the qualified payments.
With respect to S corporations and partnerships, QBI does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer, or any guaranteed payment (or other payment) to a partner in a partnership for services rendered with respect to the trade or business. Qualified items do not include specified investment-related income, deductions, or losses, such as capital gains and losses, dividends and dividend equivalents, interest income other than that which is properly allocable to a trade or business, and similar items.
If the net amount of QBI from all qualified trades or businesses during the tax year is a loss, it is carried forward as a loss from a qualified trade or business to the next tax year (and reduces the QBI for that year).
In the case of a partnership or S corporation, the business income deduction applies at the partner or shareholder level. Each partner in a partnership takes into account the partner's allocable share of each qualified item of income, gain, deduction, and loss, and is treated as having W-2 wages for the tax year equal to the partner's allocable share of W-2 wages of the partnership. Similarly, each shareholder in an S corporation takes into account the shareholder's pro rata share of each qualified item and W-2 wages.
Compliance Tip: While there was no tax form to file last year with respect to the Code Sec. 199A deduction, there will be forms for 2019 tax returns. In October, the IRS released draft forms (Form 8995, Qualified business Income Deduction Simplified Computation, and Draft Form 8995-A, Qualified Business Income Deduction), as well as draft instructions for the forms.
Retrieved 11/6/19 Parker's Tax Bulletin
Last Updated by Admin on 2019-11-06 07:45:18 PM
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As the year winds to a close, it's time to start thinking of any last-minute strategies that could benefit clients. While there was no new tax legislation of note this year, the ramifications of the Tax Cuts and Jobs Act of 2017 (TCJA) are still around and will be for years, absent any new legislation to unwind its provisions. Probably one of the most important areas of year-end tax planning is ensuring that your client has had enough income taxes withheld, or has made enough estimated tax payments, to avoid any underpayment of tax penalties. Last year saw a number of taxpayers taken by surprise when their returns showed taxes due rather than the refund they were expecting. Many of those situations resulted from the TCJA reducing tax rates and thus withholding taxes while also reducing deductions taxpayers had taken in prior years (e.g., unreimbursed business expenses and limitations on state and local taxes) thus leaving taxpayers with higher taxable income.
Practice Aid: See ¶320,123 for a comprehensive year-end letter for individuals.
The following options are worth reviewing to determine if they could reduce a client's tax bill for 2019.
Bunching Deductions into 2019
As a result of the TCJA increasing the standard deduction for all taxpayers, many taxpayers are not getting a tax benefit from itemizing their deductions. And even those that are, experience significant limitations on what they can deduct, given the $10,000 ($5,000 for married filing separately) limitation on the state income and property tax deduction and the elimination of miscellaneous itemized deductions such as unreimbursed employee business expenses.
However, if a client is near the threshold of receiving a benefit from itemizing deductions rather than taking the standard deduction, it may make sense to bunch expenses for which an itemized deduction is available into alternating years. Such expenses might include property taxes, mortgage interest, charitable contributions, or medical expenses. For example, if a single taxpayer, whose standard deduction in 2019 is $12,200 has mortgage interest of $5,000 for 2019, as well as $5,000 in state and local income and property tax deductions, and the taxpayer typically makes charitable donations of $2,000 per year, bunching two years' worth of charitable deductions into 2019 and taking the standard deduction in 2020 would yield a bigger tax savings than just taking the standard deduction each year.
Medical Expenses and Health Savings Accounts
If a client has significant medical expenses but is unable to meet the threshold for deducting such expenses because they don't exceed 10 percent of the taxpayer's adjusted gross income, a health saving account (HSA) could be an attractive alternative. If the client is eligible to set up such an HSA, he or she can deduct the amount contributed to the account in computing adjusted gross income and not have to worry about exceeding the medical expense deduction threshold. Because the annual contribution limits for 2019 are $3,500 for an individual with self-only coverage and $7,000 for an individual with family coverage, this could result in significant tax savings.
Home Office Expenses
Because the TCJA eliminated the miscellaneous itemized expense deduction, employees can no longer deduct home office expenses. However, taxpayers with their own business can still file a Schedule C and take a home office expense deduction if part of the home is used for that business. Besides deducting mortgage interest allocable to the portion of the home used for business, an allocable portion of state income taxes and property taxes, that may otherwise be limited to $10,000, are also deductible, along with utilities and any applicable home improvements relating to the space being used. Nailing down the percentage of the home used for business before year end will provide a more accurate estimate of the taxpayer's taxable income for 2019.
Taxpayers subject to the "kiddie tax" are now taxed at the trust and estate tax rates. Although the trust and estate tax rates are similar to the individual tax rates, the tax brackets are much lower, meaning higher rates of tax apply to lower levels of income. Taxpayers with children subject to this tax can elect to include the child's income on their tax return. However, whether that is advisable needs to be evaluated in light of the parent's other net investment income with an eye toward whether adding the child's investment income to the parent's income could subject the parent to the 3.8 percent net investment income tax.
Child-Related Expenses and Credits
Taxpayers with children and child-related expenses can qualify for significant deductions and credits. When the TCJA eliminated the personal and dependent exemption deductions, it increased the child tax credit and the income levels over which a taxpayer becomes ineligible for the credit. Thus, for 2019, taxpayers filing a joint return with modified adjusted gross income (MAGI) of $400,000 or less, are eligible for a $2,000 child tax credit for each qualifying child. Taxpayers filing as single, head of household, or married filing separately, are eligible for the child tax credit if their MAGI is $200,000 or less. For taxpayers with income above those levels, a pro rata credit may be available depending on total MAGI. Taxpayers with income below certain thresholds may be eligible for a refundable child tax credit.
Child and dependent care expenses can also take up a big chunk of a parent's budget and the dependent-care credit of up to 35 percent of employment-related expenses can result in substantial tax savings. The amount of employment-related expenses used to calculate the credit is generally limited to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. Expenses that may qualify for the credit include costs of a day camp (but not an overnight camp), costs paid to a dependent care provider to transport a child to or from a place where care is provided, costs of providing room and board for a dependent child's caregiver, payroll taxes for caregivers, and fees paid to an agency to find a child care provider.
Education-Related Deductions and Credits
Another big area where deductions and credits should not be overlooked is education. While the tuition and fees deduction and the miscellaneous itemized deduction for work-related education expenses are no longer available, other education-related tax deductions, credits, and exclusions from income may apply for amounts paid in 2019. This includes the exclusion from income for distributions from a qualified tuition program of up to $10,000, the exclusion from income for education savings bond interest; the deduction for student loan interest of up to $2,500; and the lifetime learning credit of up to $2,000.
Charitable Contribution Deductions
With respect to charitable donations, clients may reap a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles the taxpayer to a charitable contribution deduction but also avoids the capital gains tax that would otherwise be due if the taxpayer sold the stock.
Additionally, because taxpayers 70 1/2 years old and older who own an individual retirement account (IRA) must take minimum distributions from that account each year and include those amounts in taxable income, a special provision allows such taxpayers to make a charitable contribution directly from their IRAs to a charity. This has several benefits. First, since charitable contributions deductions are usually only available to individuals who itemize, a taxpayer who takes the standard deduction can benefit from this rule. Second, by making a contribution directly to a charity, the donation counts towards the taxpayer's required minimum distribution but that amount is not included in income and thus reduces taxable income and adjusted gross income (AGI). A lower AGI is advantageous because it increases the taxpayer's ability to take medical expense deductions that might not otherwise be available. In addition, the reduction in AGI decreases the amount of the taxpayer's social security income subject to income tax and possibly the 3.8 percent net investment income tax if the taxpayer has a lot of investment income.
Rental Real Estate
Finally, one of the most important new deductions that came about as the result of the TCJA is the Code Sec. 199A deduction. For individuals who own rental real estate, this deduction may apply if certain criteria are met. For example, the taxpayer's rental activity must be considerable, regular, and continuous in scope. In determining whether the taxpayer's rental real estate activity meets those criteria, relevant factors include, but are not limited to, the following:
- the type of rented property (commercial real property versus residential property);
- the number of properties rented;
- the taxpayer's or taxpayer's agent's day-to-day involvement;
- the types and significance of any ancillary services provided under the lease; and
- the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).
Under a safe harbor issued by the IRS, a rental real estate activity will be treated as a business eligible for the special deduction if certain requirements are satisfied, such as:
- separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;
- for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);
- contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services; and
- certain compliance requirements are met.
For taxpayers that may be eligible for this deduction, it's important to determine if the safe harbor is met and, if not, determine whether it can be met by year end. Alternatively, even if the taxpayer doesn't meet the safe harbor requirements, actions can still be taken to ensure that the taxpayer falls within the "trade or business" guidelines for taking the deduction.
Net Investment Income Tax
For high net-worth clients, the 3.8 percent net investment income tax may apply and steps for reducing its impact should be considered. Some of the options include:
- donating or gifting appreciated property rather than selling it;
- replacing stocks with state and local bonds that generate tax-exempt interest;
- determining if an outright sale of appreciated assets can instead be structured as an installment sale;
- giving consideration to selling stocks with values below their cost this year to generate a loss in the current year; and
- determining whether a planned sale of real estate can be structured as a like-kind exchange.
Finally, it's always advisable to revisit a client's retirement planning to see if there is any extra income that can be put aside for retirement, while cutting current year taxes.
Where a taxpayer's employer has a 401(k) plan and the taxpayer is under age 50, up to $19,000 of income can be deferred into that plan. Catch-up contributions of $6,000 are allowed if the taxpayer is 50 years or older. With a SIMPLE 401(k), the maximum pre-tax contribution for 2019 is $12,500, and $15,500 if the taxpayer is 50 or older. Contributions to an individual retirement account (IRA) may also be deductible. For taxpayers under 50, the maximum contribution amount for 2019 is $6,000. If the taxpayer is 50 or older but less than 70 1/2, the maximum contribution amount is $7,000. Contributions exceeding the maximum amount are subject to a 6 percent excise tax. Even if a taxpayer is not eligible to deduct contributions to an IRA, contributing after-tax money to an IRA may be advantageous because it will allow the taxpayer to later convert that traditional IRA to a Roth IRA and subsequently withdraw the money free of tax.
For taxpayers with a traditional IRA, it may be worth evaluating whether it is appropriate to convert it to a Roth IRA this year. Of course, this option only makes sense if the tax rates when the money is withdrawn from the Roth IRA are anticipated to be higher than the tax rates when the traditional IRA is converted. And if a taxpayer has a traditional 401(k), 403(b), or 457 plan that includes after-tax contributions, those amounts can generally be rolled over to a Roth IRA with no tax consequences. A rollover of a SIMPLE 401(k) into a Roth IRA may also be available. As with all tax rules, there are qualifications that apply to these rollovers that must be considered before any actions are taken.
A taxpayer that makes qualified retirement savings contributions during 2019 could be eligible for a retirement savings credit of up to $1,000 (single or head of household) or $2,000 (joint filers) if taxpayer income is below certain thresholds.
Finally, self-employed individuals or small business owners can contribute as much as 25 percent of net earnings from self-employment, up to $56,000, for 2019.
Retrieved from Parker's Federal Tax Bulletin, Issue 208 on 10/28/19
Last Updated by Admin on 2019-10-28 01:09:34 PM
Posted in general
No Casualty Loss Deduction for Stigmatization Resulting from Flood Damage
The Tax Court held that a taxpayer was not entitled to a casualty loss deduction under Code Sec. 165 for damage the taxpayer's home sustained as the result of a hurricane. The court noted that physical damage to property is a prerequisite to deducting a casualty loss and the appraisal of the taxpayer's property after the hurricane relied heavily on the decline in value resulting from the stigmatization of the property due to a flooded basement and deductions on the basis of a temporary decline in market value are not permitted. Taylor v. Comm'r, T.C. Memo. 2019-102.
In 1998, Robert Taylor bought a home in the River Oaks neighborhood of Houston, Texas. Taylor paid $9,250,000 for the property and bought it in an as-is, unwarranted condition. The property included a house, a three-car garage, a cabana, a guardhouse, and a 635-square-foot basement wine cellar in which Taylor stored 6,889 bottles of wine and computer equipment with customized wine database software. Taylor listed the property for sale in 2007 for $18.5 million.
On September 13, 2008, Taylor's property sustained significant damage in Hurricane Ike, a category 2 hurricane. The property incurred tree and fence damage, broken windows, and water damage inside the house. The basement wine cellar was flooded two to three feet deep and mold formed because of the standing water. In addition, the ducts and pipes in the basement, which were wrapped in asbestos, began to deteriorate in the flood water. Taylor spent several months repairing the property. The 6,889 bottles of wine were cleaned in a specialized decontamination process to preserve the labels, the wine quality, and their respective wooden crates. After the wine was removed, the basement was remediated for asbestos and mold.
Taylor filed an insurance claim for the hurricane damage. A salvage agent determined that the wine was a total loss, but Taylor kept 21 bottles. Overall, Taylor received a total of $2,386,293 in insurance proceeds, including $1,573,947 for the value of the wine. Taylor took the property off the market for the remainder of 2009 in order to make all needed repairs. He eventually sold it in 2014 as unimproved property for $12 million.
On his tax return for 2008, Taylor claimed a casualty loss deduction of $888,445. Taylor's return included a Form 4684, Casualties and Thefts, on which he reported a basis in the property of $6.5 million, insurance reimbursements of $2,303,614, a fair market value before the casualty of $15,442,059, and a fair market value after the casualty of $12,250,000. The pre-casualty fair market value was based on the 2009 listing price, adjusted for the time the property spent on the market. No explanation of the post-casualty fair market value was provided. The return was prepared by an accounting firm and reviewed by a CPA. In a 2012 notice of deficiency, the IRS determined that Taylor was not entitled to a casualty loss deduction and applied an accuracy-related penalty of $80,735 for an underpayment due to negligence or a substantial understatement. Taylor challenged the notice in the Tax Court.
In 2016, Taylor supplemented his Tax Court petition with a retrospective appraisal prepared by Gayle Woodum, a licensed real estate appraiser. Woodum determined that the property's fair market value was $18,468,000 before the hurricane and $11,081,000 after it. Woodum's post-casualty valuation consisted of $10,650,400 for the land and $430,600 for the house and other improvements, representing a 40 percent decline in total fair market value but a 95 percent decline in value to the house and other improvements. At trial Woodum further opined that the property was "stigmatized" as a result of the flood and said that part of the stigmatization was attributable to the discovery of asbestos during the post-flood remediation process.
Casualty Loss Deductions
Before 2018 and after 2025, Code Sec. 165 allows a deduction for any loss of property sustained during the tax year and not compensated for by insurance or otherwise that arises from fire, storm, or other casualty. Code Sec. 165(h)(5) provides that during 2018-2025, personal casualty loss deductions are limited to losses attributable to a federally declared disaster. Reg. Sec. 1.165-7(a)(2) specifies two alternative methods for computing a casualty loss deduction with respect to years in which such losses are allowed. The taxpayer must either provide a competent appraisal establishing the property's fair market value before and after the casualty or, if the taxpayer has repaired the property, the taxpayer may use the cost of repairs to prove the loss of value from the casualty. Under Reg. Sec. 1.165-7(b)(1), the casualty loss deduction is limited to the taxpayer's basis in the property. Reg. Sec. 1.165-7(b)(3) requires the taxpayer to reduce the amount of the deduction by any compensation received for the loss.
The Tax Court denied Taylor's casualty loss deduction because it found that he failed to establish the loss under either method provided in Reg. Sec. 1.165-7(a)(2). In the court's view, Taylor did not establish that the valuations reported on his 2008 Form 4684 were based on competent appraisals. The court also found that Woodum's retrospective appraisal was not a reliable measure of Taylor's loss because her post-casualty valuation relied heavily on the stigmatization of the property due to the flooded basement. The court explained that physical damage to property is a prerequisite to deducting a casualty loss and that deductions are not allowed on the basis of a temporary decline in market value. The court cited previous decisions in which it denied deductions for purported immediate buyer resistance to purchases in a flood damaged area in the absence of post-flood sales of comparable properties. The court noted that Woodum did not include any post-hurricane sales of comparable properties in her analysis.
The court also noted that Woodum factored in the stigmatization of the property due to the discovery of asbestos in the basement. The court found that a casualty event occurs as a result of an unexpected, accidental force, and noted that, while asbestos was discovered when the basement flooded, Taylor bought the property in an as-is, unwarranted condition and the asbestos was present when he bought it. According to the court, any diminution in value attributable to the discovery of the longstanding asbestos was not part of Taylor's casualty loss.
Addressing Taylor's costs of repairs, the court noted as an initial matter that Taylor failed to establish his basis in the wine collection or computer equipment. The court said that where a taxpayer's basis is not established, his or her loss cannot be computed. Although Taylor generally would be entitled to a casualty loss deduction equal to the cost of the repairs in excess of his basis, the court found that Taylor did not argue that he made repairs to the property that were not compensated by insurance. The court further noted that Taylor bought the property in 1998 for $9,250,000, but reported the basis on his Form 43684 as $6.5 million and did not provide an explanation of the difference. The court also found that Taylor's insurance payments were well in excess of the cost of repairs he would otherwise be entitled to deduct as a casualty loss.
The Tax Court did not uphold the imposition of penalties because it found that by relying on his CPA and the accounting firm to prepare his 2008 return, Taylor acted in good faith and with reasonable cause.
For a discussion of determining the amount of a casualty loss, see Parker Tax ¶84,530.
Retrived from Parker's Federal Tax Bulletin- Issue 205 (9/19/19)
Last Updated by Admin on 2019-09-19 02:18:06 PM
Posted in general
Under the Tax Cut and Jobs Act, bonus depreciation was increased from 50 to 100 percent for property acquired after September 27, 2017. Unfortunately, the IRS did not provide explanation until August 2018 in REG-104397-18. At this point, many tax payers had already filed, and practitioners did not have enough time to thoroughly analyze the regulations. Therefore, the IRS is offering relief through Rev. Proc. 2019.33. So tax payers do not have to file amended returns, the IRS is offering tax payers to revoke or make late elections pertaining to the bonus depreciation change.
If you have any questions on how this may affect you, please call us at 904-281-9924!
Last Updated by Admin on 2019-08-14 02:13:40 PM
Posted in general
The Tax Court held that a taxpayer who worked at various locations in the United States during 2014 and 2015 as a contract employee was not entitled to unreimbursed employee business expense deductions because he was an itinerant and was not "away from home" within the intent and meaning of Code Sec. 162(a)(2). However, because the taxpayer was required to have both cell phone and internet access for his employment, and because he provided a reasonable basis for the court to accept his estimated expenses for such items, the court allowed those deductions. Krishnan v. Comm'r, T.C. Summary 2019-14.
Sunderam Krishnan entered the United States in 2008 as an international exchange student. He completed his bachelor's degree in Milwaukee, Wisconsin, before beginning graduate studies in San Antonio, Texas, in 2010. Krishnan graduated with a master's degree in electrical engineering from the University of Texas, San Antonio, in 2012. In March 2013, Krishnan was hired by Cambay Consulting Services, LLC (Cambay), headquartered in Katy, Texas. A year later, Krishnan began work for Cambay's sister company SoftNice, Inc. (SoftNice), which is headquartered in Allentown, Pennsylvania. Cambay and SoftNice are consulting companies that contract to provide technical staff to their clients on a project-by-project basis. In accordance with corporate policy, neither company reimbursed Krishnan for relocation, rent, meals, telephone, internet, equipment, traveling, or commuting costs while he was working on contract projects for its clients. Krishnan was offered his first contract project in September 2013 and worked on five client contracts from September 2013 through August 2019.
Krishnan lived with his uncle in San Antonio from 2010 to 2012 while pursuing his master's degree, and continued to store his belongings at his uncle's house after that time. However, for the years at issue, 2014 and 2015, Krishnan rarely visited or stayed at his uncle's house. He generally lived and paid rent where he was stationed for work. From September 2013 until May 2014 he rented a shared apartment in Malvern, Pennsylvania. From June through November 2014, Krishnan lived and worked in Tulsa, Oklahoma. Although he listed the San Antonio residence as his address while working remotely for SoftNice from January through May 2015, he visited the residence twice for an estimated total of two weeks' time. The remainder of the assignment was spent visiting friends and relatives in Kansas City, Missouri, and Miami and Fort Lauderdale, Florida, in addition to three months spent working at the in-house project site in New Jersey. Krishnan rented an apartment in California beginning in May 2015 and has lived and paid rent in California since that time.
Krishnan hired a tax return preparer to prepare his 2014 and 2015 tax returns. The returns reported unreimbursed employee expenses of $15,590 and $12,580 for 2014 and 2015, respectively. The IRS denied the unreimbursed employee business expense deductions in full for both years after determining that Krishnan did not establish that they were ordinary and necessary to his business or that the expenses were paid or incurred during the years in issue.
Observation: For tax years before 2018 and after 2025, an employee's travel expenses are deductible as miscellaneous itemized deductions, subject to the 2 percent of adjusted gross income floor, if paid or incurred in connection with a temporary work assignment. As a result of changes made by the Tax Cuts and Jobs Act of 2017, no deduction is allowed for unreimbursed employee business expenses for years 2018 through 2025.
Krishnan argued that, because of the transitory and temporary nature of his contract work during the years in issue, his uncle's house in San Antonio was his tax home. Therefore, he asserted that his expenses while working in various locales should be considered incurred "away from home." The IRS countered that Krishnan had no tax home during the years at issue and should be considered an itinerant.
"Away from Home" Expenses
For years beginning before 2018 and after 2025, Code Sec. 162(a)(2) permits taxpayers to deduct all ordinary and necessary travel expenses, including meals and lodging, incurred while "away from home" in the pursuit of a trade or business. Such expenses must be incurred while away from home overnight. The purpose of the "away from home" deduction is to mitigate the burden of the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses.
Numerous court decisions have denied traveling expense deductions where a taxpayer is an itinerant. Courts have examined the following objective factors set forth in Rev. Rul. 73-529 to determine whether a taxpayer has a tax home: (1) whether there exists a business connection to the location of the alleged tax home; (2) whether the taxpayer incurs duplicate living expenses while traveling and maintaining the alleged tax home; and (3) whether personal connections exist to the alleged tax home.
The Tax Court denied most of Krishnan's unreimbursed expense deductions. First, the court considered whether Krishnan had any business connection to San Antonio. The court noted that Krishnan was not required to live in San Antonio by his employer after he gained employment in March 2013 and that, although he identified his location as San Antonio from January 2015 through May 2015 while working on an in-house project for SoftNice, Krishnan spent only a total of two weeks in San Antonio. For the remainder of the project he chose to work from various locations around the country. Thus, the court concluded that Krishnan had no real business connection to San Antonio.
Second, the court considered whether Krishnan incurred duplicate living expenses and found that he had not provided any evidence other than his own testimony that he paid rent, utilities, or any other household expenses at the house in San Antonio during the tax years in issue. Thus, he did not prove to the court that he incurred a duplication of living expenses while working at his contract sites.
Third, the court considered whether Krishnan provided sufficient evidence that he maintained personal connections to San Antonio. The court noted that Krishnan made infrequent visits to the San Antonio house after gaining employment, despite the fact that his uncle's family continued to live there. Although he stored certain personal belongings at the house, he did not live in the house during 2014 and 2015. Thus, the court concluded that Krishnan did not maintain sufficient personal connections to San Antonio for the purposes of Code Sec. 162(a)(2).
However, because Krishnan was required to have both cell phone and internet access for his employment, and because he provided a reasonable basis for the court to accept his estimated expenses for such items, the court allowed an unreimbursed employee business expense deduction of $1,140 for each of 2014 and 2015.
Finally, the court sustained the penalty assessments after concluding that Krishnan failed to establish reasonable cause for the positions he took on his returns and did not make a reasonable good-faith effort to correctly assess his tax liability, particularly in regard to his claim of duplicate expenses "away from home" when he was not paying regular or significant rent or utilities at his uncle's San Antonio home.
For a discussion of the deductibility of unreimbursed employee business expenses incurred while away from home, see Parker Tax ¶85,105.
Received from Parker's Federal Tax Bulletin, Issue 201, July 16, 2019
Last Updated by Admin on 2019-07-16 06:39:40 PM
Posted in general
IRS Provides Luxury Auto Depreciation Limits and Lease Inclusion Amounts for Autos Placed in Service in 2019
The IRS issued its annual guidance providing (1) tables of limitations on depreciation deductions for owners of passenger automobiles (which includes trucks and vans), first placed in service by the taxpayer during calendar year 2019, and (2) a table of amounts that must be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2019. The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by Code Sec. 280F(d)(7). Rev. Proc. 2019-26.
For owners of passenger automobiles (defined for purposes of Rev. Proc. 2019-26 to include trucks and vans), Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. For passenger automobiles placed in service after 2018, Code Sec. 280F(d)(7) requires the IRS to increase the amounts allowable as depreciation deductions by a price inflation adjustment amount that is determined using the automobile component of the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) published by the Department of Labor.
Code Sec. 168(k)(1) provides that, in the case of qualified property, the depreciation deduction allowed under Code Sec. 167(a) for the tax year in which the property is placed in service includes an allowance equal to the applicable percentage of the property's adjusted basis (referred to as the Code Sec. 168(k) additional first year depreciation deduction). Under Code Sec. 168(k)(6)(A), the applicable percentage is 100 percent for qualified property acquired and placed in service after September 27, 2017, and placed in service before January 1, 2023, and is phased down 20 percent each year for property placed in service through December 31, 2026.
Under Code Sec. 168(k)(8)(B)(i), the applicable percentage is 30 percent for qualified property acquired before September 28, 2017, and placed in service in 2019. For qualified property acquired and placed in service after September 27, 2017, Code Sec. 168(k)(2)(F)(i) increases the first year depreciation allowed under Code Sec. 280F(a)(1)(A)(i) by $8,000. For qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer during 2019, Code Sec. 168(k)(2)(F)(iii) increases the first year depreciation allowed under Code Sec. 280F(a)(1)(A)(i) by $4,800. The Code Sec. 168(k) additional first year depreciation deduction does not apply for 2019 if the taxpayer: (1) did not use the passenger automobile during 2019 more than 50 percent for business purposes; (2) elected out of the Code Sec. 168(k) additional first year depreciation deduction pursuant to Code Sec. 168(k)(7) for the class of property that includes passenger automobiles; or (3) acquired the passenger automobile used and the acquisition of such property did not meet the acquisition requirements in Code Sec. 168(k)(2)(E)(ii).
Code Sec. 280F(c)(2) requires a reduction to the amount of deduction allowed to the lessee of a leased passenger automobile. Under Code Sec. 280F(c)(3), the reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Under Reg. Sec. 1.280F-7(a), this reduction requires a lessee to include in gross income an amount determined by applying a formula to the amount obtained from a table provided by the IRS in published guidance.
Rev. Proc. 2019-26
Under Code Sec. 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the C-CPI-U automobile component for October of the preceding calendar year exceeds the automobile component of the CPI (as defined in Code Sec. 1(f)(4)) for October of 2017, multiplied by the amount determined under Code Sec. 1(f)(3)(B). The amount determined under Code Sec. 1(f)(3)(B) is the amount obtained by dividing the new vehicle component of the C-CPI-U for calendar year 2016 by the new vehicle component of the CPI for calendar year 2016, where the C-CPI-U and the CPI for calendar year 2016 means the average of such amounts as of the close of the 12-month period ending on August 31, 2016. Code Sec. 280F(d)(7)(B)(ii) defines "C-CPI-U automobile component" as the automobile component of the Chained Consumer Price Index for All Urban Consumers as described in Code Sec. 1(f)(6).
The product of the October 2017 CPI new vehicle component (144.868) and the amount determined under Code Sec. 1(f)(3)(B) (0.694370319) is 100.592. The new vehicle component of the C-CPI-U released in November 2018 was 101.318 for October 2018. The October 2018 C-CPI-U new vehicle component exceeded the product of the October 2017 CPI new vehicle component and the amount determined under Code Sec. 1(f)(3)(B) by 0.726 (101.318 - 100.592). The percentage by which the C-CPI-U new vehicle component for October 2018 exceeds the product of the new vehicle component of the CPI for October of 2017 and the amount determined under Code Sec. 1(f)(3)(B) is 0.722 percent (0.726/100.592 x 100 percent), the automobile price inflation adjustment for 2019 for passenger automobiles. The dollar limitations in Code Sec. 280F(a) are therefore multiplied by a factor of 0.00722, and the resulting increases, after rounding to the nearest $100, are added to the 2018 limitations to give the depreciation limitations applicable to passenger automobiles for calendar year 2019. This adjustment applies to all passenger automobiles that are first placed in service in calendar year 2019.
Tables 1 through 3 of Rev. Proc. 2019-26 provide the depreciation limitations for passenger automobiles, other than leased passenger automobiles, that are placed in service by the taxpayer in calendar year 2019. These limitations continue to apply for each tax year that the passenger automobile remains in service. Table 1 provides depreciation limitations for passenger automobiles acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer during calendar year 2019, for which the Code Sec. 168(k) additional first year depreciation deduction applies. Table 2 provides depreciation limitations for passenger automobiles acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2019, for which the Code Sec. 168(k) additional first year depreciation deduction applies. Table 3 provides depreciation limitations for passenger automobiles placed in service during calendar year 2019 for which no Code Sec. 168(k) additional first year depreciation deduction applies.
Table 4 of Rev. Proc. 2019-26 applies to leased passenger automobiles for which the lease term begins during calendar year 2019. Lessees of these passenger automobiles must use Table 4 to determine the income inclusion amount for each tax year during which the passenger automobile is leased.
For a discussion of the depreciation limitation for passenger automobiles, see Parker Tax ¶94,910. For a discussion of income inclusion amounts on leased passenger automobiles, see Parker Tax ¶94,915.
Retrieved from Parker's Federal Tax Bulletin, Issue 198, on 6/4/2019
Last Updated by Admin on 2019-06-04 05:43:13 PM
Posted in general
CPEOs Can't Be Used to Transform Self-employed Individuals and Partners into Employees
The Chief Counsel's Office advised that payments made to an individual by a CPEO for services the individual's sole proprietor business performs for a firm of which the individual is a full-time employee are not "employee" wages and must be reported as payments to a self-employed individual under Code Sec. 6041; however, payments the CPEO makes to the individual for the services performed at the firm where he works as a full-time employee are employee wage payments reportable on Form W-2. Similarly, payments made by a CPEO to a partner in a partnership are not employee payments and are not reported on Form W-2. CCA 201916004.
The Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act of 2014 added new Code Sec. 3511 and Code Sec. 7705 relating to the federal employment tax consequences and certification requirements, respectively, of a certified professional employer organization (CPEO).
Practice Tip: By hiring a CPEO rather than a professional employer organization (PEO), a taxpayer can avoid liability for unpaid federal employment taxes where paying such taxes is the responsibility of the CPEO. If the taxpayer hires a PEO to take care of payroll, the taxpayer is still ultimately responsible for ensuring that payroll taxes are paid, and paying them if they are not.
In 2016, the IRS issued final, temporary, and proposed regulations (T.D. 9768 and REG-127561-15), upon which taxpayers could rely immediately, relating to CPEOs. The proposed regulations provide general guidance regarding the federal employment tax consequences under Code Sec. 3511 for persons certified as CPEOs and their customers, as well as certain definitions under Code Sec. 7705 that are necessary to implement Code Sec. 3511. Specifically, Prop. Reg. Sec. 31.3511-1 clarifies the following terms: customer, covered employee, work site employee, work site, and self-employed individual. Prop. Reg. Sec. 31.3511-1 also provides that, in the case of a covered employee who is a work site employee, no person other than the CPEO is treated as the employer of the work site employee for purposes of federal employment taxes imposed on remuneration remitted by the CPEO to the work site employee.
Chief Counsel's Clarifications on the Self-Employed Provisions Relating to CPEOs
In CCA 201916004, the Office of Chief Counsel stated that it had received some questions concerning language in the preamble to the CPEO proposed regulations dealing with the treatment of self-employed individuals who receive remuneration from a CPEO. According to the Chief Counsel's Office, some tax practitioners asked for clarification of the language addressing how payments from CPEOs to self-employed individuals should be treated for employment tax purposes. The Chief Counsel's Office began by noting that the reporting of amounts paid to self-employed individuals is provided for in Code Sec. 6041. CPEOs must report remuneration they pay to self-employed individuals in accordance with the rules under Code Sec. 6041 and other applicable provisions. Code Sec. 3511(f), for instance, provides that a self-employed individual is not a work site employee with respect to remuneration paid by a CPEO to the self-employed individual. Code Sec. 3511(c) provides that a CPEO is not treated as an employer of a self-employed individual. Consistent with these two provisions, the Chief Counsel's Office noted, Prop. Reg. Sec. 31.3511-1(f)(2) provides that Code Sec. 3511 does not apply to any self-employed individual.
The Chief Counsel's Office then noted that Prop. Reg. 301.7705-1(b)(14) defines a "self-employed individual" as an individual with net earnings from self-employment (as defined in Code Sec. 1402(a) and without regard to the exceptions thereunder) derived from providing services covered by a CPEO contract, whether such net earnings are derived from providing services as a non-employee to a customer of a CPEO, from the individual's own trade or business as a sole proprietor customer of the CPEO, or as a partner in a partnership that is a customer of the CPEO, but only with regard to such net earnings. Accordingly, any remuneration from the CPEO to such self-employed individuals, in their capacity as a non-employee providing services to a customer of the CPEO, a sole proprietor customer of the CPEO, or a partner in a partnership that is a customer of the CPEO, is not wages and must not be treated as such for reporting purposes.
Under the Code Sec. 6041 regulations, payments to self-employed individuals are reported on information returns such as Form 1099-MISC, Miscellaneous Income, and not on Form W-2. The Chief Counsel's Office noted that the proposed regulations' preamble discussion of the definition of "work site employee" under Prop. Reg. Sec. 301.7705-1(b)(17) provides that a self-employed individual, whether an independent contractor to the customer, a sole proprietor customer of the CPEO, or a partner in a partnership customer of the CPEO, is not considered to be a work site employee under Code Sec. 3511(f) with regard to such earnings, but also provides that in the limited case in which such an individual also is paid wages by a CPEO under a CPEO contract with the customer, the individual may nevertheless be a work site employee with respect to such wages. According to the Chief Counsel's Office, this latter language addresses the very uncommon situation in which one individual is receiving payments from the CPEO in two separate capacities. For instance, a common law employee of a marketing firm receives wages from a CPEO for services the employee performed for the marketing firm under a contract between the firm and a CPEO. This employee also owns a part-time cleaning business as a sole proprietor and this cleaning business is contracted by the marketing firm to clean its offices. Payments to the cleaning business for its cleaning services are also managed by the CPEO under its contract with the marketing firm. The Chief Counsel's Office advised that payments made to the individual by the CPEO for the services the individual's sole proprietor cleaning business performs for the marketing firm are not wages and must be reported as payments to a self-employed individual under Code Sec. 6041. However, the Chief Counsel's Office also advised that the CPEO is treated as the employer of the individual for employment tax purposes with respect to the payments the CPEO makes to the individual for the services the individual performs as a common law employee of the marketing firm and these payments are reported as wages by the CPEO.
The Chief Counsel's Office contrasted the situation above with the provision in the proposed regulations which states that any payment made by a CPEO to a partner in a partnership under a contract between the partnership and the CPEO must always be treated as a payment to a self-employed individual and reported as such under Code Sec. 6041. Under Rev. Rul. 69-184, the Chief Counsel's Office stated, bona fide members of a partnership are not employees of the partnership for employment tax purposes. Such a partner who devotes his time and energies in the conduct of the trade or business of the partnership, or in providing services to the partnership as an independent contractor, is, in either event, a self-employed individual rather than an individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. Thus, the Chief Counsel's Office stated, remuneration received by a partner from the partnership is not "wages" with respect to "employment." So, the Chief Counsel's Office concluded, whether an individual partner in a partnership is receiving payments from the CPEO for services performed in the conduct of the trade or business of the partnership, or receiving payments from the CPEO for services performed as an independent contractor of the partnership, the payments are payments to a self-employed individual and should be treated as such for reporting purposes as provided by Code Sec. 6041.
Observation: The bottom line is that a CPEO can't be used to transform a self-employed individual or a partner in a partnership, who are not entitled to receive fringe benefits that are limited to employees, into an employee eligible to receive such benefits. Self-employed individuals or partners in a partnership should not be receiving Form W-2s from a CPEO since they are not employees.
For a discussion of the tax treatment of payments by CPEOs, see Parker Tax ¶218,100.
Retrieved 5/8/2019 from Parker's Federal Tax Bulletin, Issue 196
Last Updated by Admin on 2019-05-08 03:32:51 PM
Posted in general
The IRS modified previous guidance, which had waived the penalty under Code Sec. 6654 for the underpayment of 2018 estimated individual income tax. Notice 2019-25 supersedes Notice 2019-11and (1) reduces the percentage threshold for penalty relief to individuals whose total withholding and estimated tax payments equal or exceed 80 percent of their total tax liability for 2018, (2) provides updated procedures for requesting the penalty waiver, and (3) provides procedures for taxpayers who paid the penalty for tax year 2018, but who qualify for relief, to request a refund. Notice 2019-25.
Generally, taxpayers must pay federal income taxes as they earn income and, to the extent these taxes are not withheld, a taxpayer must pay estimated income tax on a quarterly basis. Code Sec. 6654provides that, in the case of an individual, estimated income tax is required to be paid in four installments and the amount of any required installment is 25 percent of the required annual payment. Generally, under Code Sec. 6654(d)(1)(B), the required annual payment is the lesser of (1) 90 percent of the tax shown on the return for the tax year, or (2) 100 percent of the tax shown on the taxpayer's return for the preceding taxable year (110 percent if the individual's adjusted gross income on the previous year's return exceeded $150,000), so long as the preceding tax year was a full 12 months long. However, an individual may not use the tax for the preceding tax year to calculate the required estimated tax payments if that tax year was not 12 months long, or the individual did not file a return for that preceding tax year.
Under Code Sec. 6654(d)(2), the amount of the required installment is the annualized income installment for those taxpayers who establish that such amount is lower than 25 percent of the required annual payment determined under Code Sec. 6654(d)(1). Pursuant to Code Sec. 6654(g), income taxes withheld from wages are deemed to be paid evenly throughout the tax year, unless the taxpayer establishes the dates on which the amounts were actually withheld. Code Sec. 6654(a) imposes an underpayment of estimated tax penalty for failure to make a sufficient and timely payment of estimated income tax.
An individual taxpayer is not subject to the underpayment of estimated tax penalty if an exception or waiver provision applies. Under Code Sec. 6654(e)(1), the underpayment penalty is not imposed on an individual taxpayer if the taxpayer owes less than $1,000 in tax, after subtracting tax withheld on wages. Under Code Sec. 6654(e)(2), an individual is not subject to the underpayment penalty if the individual did not have any tax liability for the previous year, the preceding tax year was 12 months, and the individual was a citizen or resident of the United States throughout the preceding tax year. In addition, the IRS is authorized by Code Sec. 6654(e)(3)(A) to waive the underpayment of estimated tax penalty if it determines that, by reason of casualty, disaster, or other unusual circumstances, the imposition of such penalty would be against equity and good conscience.
As a result of the numerous changes made by the Tax Cuts and Jobs Act of 2017, the IRS released an updated Withholding Calculator on IRS.gov and a new version of Form W-4 to help individual taxpayers determine the appropriate amount of 2018 tax withholding. According to the IRS, despite the release of the updated Withholding Calculator and new Form W-4, some individual taxpayers may have been unable to accurately calculate the amount of their required estimated income tax payments for the 2018 tax year. Accordingly, the IRS is providing additional relief to individual taxpayers by waiving certain penalties if taxpayers meet the applicable requirements.
Waiver of Underpayment of Estimated Tax Penalty for Some Taxpayers for 2018 Returns
In Notice 2019-25, the IRS provides that the underpayment of estimated tax penalty for the 2018 tax year for payments otherwise required to be made on or before January 15, 2019, is waived for any individual whose total withholding and estimated tax payments made on or before January 15, 2019, equal or exceed 80 percent of the tax shown on that individual's return for the 2018 tax year.
Compliance Tip: To request this waiver, an individual must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his or her 2018 income tax return. The form can be filed with a return filed electronically or on paper. Taxpayers should complete Part I of Form 2210 and the worksheet included in the form instructions to determine if the waiver in Notice 2019-25 applies. If the waiver applies, check the waiver box (Part II, Box A), include the statement "80% Waiver" next to Box A, and file page 1 of Form 2210 with the return. This waiver is in addition to any other exception that Code Sec. 6654 provides to the underpayment of estimated income tax.
Taxpayers who qualify for relief under Notice 2019-25 may have already paid penalties under Code Sec. 6654 for tax year 2018. If the waiver under Notice 2019-25 applies and the taxpayer has already paid the penalties for the 2018 tax year, the taxpayer may claim a refund by filing Form 843, Claim for Refund and Request for Abatement. Taxpayers should complete the form and include the statement "80% Waiver of estimated tax penalty" on Line 7.
If neither the waiver provided by Notice 2019-25 nor any other exception applies to an individual taxpayer, the amount of the addition to tax is determined by applying the underpayment interest rate established under Code Sec. 6621 to each required installment of estimated tax that was underpaid for the period that the installment is underpaid. The period of the underpayment runs from the due date for the installment to the earlier of April 15, 2019, or the date on which the underpayment is paid. Notice 2019-25 has no effect on determining the amount of each required installment for an individual whose total withholding and estimated tax payments do not equal or exceed 80 percent of the tax shown on that individual's return for the 2018 tax year.
For a discussion of the penalties on underpayments of estimated taxes, see Parker Tax ¶262,110.
Retrieved 3/26/16 from Parker's Federal Tax Bulletin, Issue 193
Last Updated by Admin on 2019-03-26 06:44:31 PM
Posted in general
IRS No Longer Intends to Amend RMD Rules: In Notice 2019-18, the IRS informed taxpayers that it no longer intends to amend the required minimum distribution (RMD) regulations under Code Sec. 401(a)(9) to address the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan a temporary option to elect a lump-sum payment in lieu of future annuity payments. The IRS had previously said, in Notice 2015-49, that it intended to propose amendments to the RMD regulations under Code Sec. 401(a)(9) to address the use of lump-sum payments to replace ongoing annuity payments under a qualified defined benefit plan
Retrieved 3/13/19 from Parker's Tax Bulletine, Issue 192
Last Updated by Admin on 2019-03-13 01:41:15 PM
Posted in general
IRS Provides Safe Harbor Accounting Method for Automobile Depreciation Deductions
The IRS has provided a safe harbor method of accounting for determining depreciation deductions for passenger automobiles that qualify for the 100 percent additional first year depreciation deduction under Code Sec. 168(k) (as amended by the Tax Cuts and Jobs Act of 2017 (TCJA)) and that are subject to the luxury automobile depreciation limitations under Code Sec. 280F(a) (as amended by the TCJA). According to the IRS, the safe harbor mitigates the anomalous result that occurs in tax years after the placed-in-service year and before the first year succeeding the end of the recovery period for a passenger automobile. Rev. Proc. 2019-13.
The Tax Cuts and Jobs Act of 2017 (TCJA) amended Code Sec. 168(k) to extend and modify the additional first year depreciation deduction (i.e., bonus depreciation) for qualified property acquired and placed in service by a taxpayer after September 27, 2017, and placed in service by the taxpayer before January 1, 2027.
Code Sec. 168(k)(1) provides that, in the case of qualified property, the depreciation deduction allowed under Code Sec. 167(a) for the tax year in which the property is placed in service includes an allowance equal to the applicable percentage of the property's adjusted basis. Under Code Sec. 168(k)(6)(A), the applicable percentage is 100 percent for qualified property acquired and placed in service after September 27, 2017, and placed in service before January 1, 2023 (the "bonus depreciation deduction"). The applicable percentage is phased down by 20 percentage points each year for qualified property placed in service after December 31, 2022, and through December 31, 2026.
Code Sec. 168(k)(7) permits a taxpayer to elect out of the bonus depreciation deduction with respect to any class of property that is qualified property placed in service during the tax year. Code Sec. 168(k)(10) allows a taxpayer to elect to deduct 50 percent, instead of 100 percent, bonus depreciation for all qualified property acquired after September 27, 2017, and placed in service during the taxpayer's first tax year that includes September 28, 2017.
For owners of passenger automobiles, Code Sec. 280F(a), as modified by TCJA, imposes dollar limitations on the depreciation deduction for the year the taxpayer places the automobile in service and for each succeeding year. For a passenger automobile that is qualified property under Code Sec. 168(k) and for which the 100 percent bonus depreciation is allowable, Code Sec. 168(k)(2)(F)(i) increases the first year limitation amount under Code Sec. 280F(a)(1)(A)(i) by $8,000. In April 2018, the IRS issued Rev. Proc. 2018-25, which provided the dollar limitation amounts provided in Code Sec. 280F(a)(1)(A)(i) that apply to passenger automobiles first placed in service by the taxpayer during calendar year 2018.
Under Code Sec. 280F(a)(1)(B), the unrecovered basis of any passenger automobile is treated as an expense for the first tax year after the recovery period, subject to the annual limitation of $5,760 under Code Sec. 280F(a)(1)(B)(ii). Code Sec. 280F(d)(1) provides that any deduction allowable under Code Sec. 179 for a passenger automobile is subject to the limitations of Code Sec. 280F(a) in the same manner as if it were a depreciation deduction allowable under Code Sec. 168. Code Sec. 280F(d)(7) provides that the limitations of Code Sec. 280F(a) will be adjusted for inflation for any passenger automobile placed in service by the taxpayer after 2018.
In mid-February, the IRS issued Rev. Proc. 2019-13, which provides a safe harbor method of accounting for determining depreciation deductions for passenger automobiles that qualify for the bonus depreciation deduction. Rev. Proc. 2019-13 applies to a passenger automobile (other than a leased passenger automobile):
(1) That is acquired and placed in service by the taxpayer after September 27, 2017;
(2) That is qualified property under Code Sec. 168(k) for which the 100 percent additional first year depreciation deduction is allowable;
(3) That has an unadjusted depreciable basis (as defined in Reg. Sec. 1.168(b)-1(a)(3), except that there is no reduction by reason of an election to expense any portion of the basis under Code Sec. 179) exceeding the first year limitation amount under Code Sec. 280F(a)(1)(A)(i); and
(4) For which the taxpayer did not elect to treat the cost (or a portion of the cost) as an expense under Code Sec. 179.
If the unadjusted depreciable basis of a passenger automobile for which the 100 percent additional first year depreciation deduction is allowable exceeds the first year limitation amount under Code Sec. 280F(a)(1)(A)(i), the excess amount is the unrecovered basis of the automobile for purposes of Code Sec. 280F(a)(1)(B)(i) and is therefore treated as a deductible expense in the first tax year succeeding the end of the recovery period subject to the limitation under Code Sec. 280F(a)(1)(B)(ii).
Safe Harbor for Section 280F(a) Limitations on Passenger Automobiles
To mitigate the anomalous result that occurs in the tax years subsequent to the placed in service year and before the first tax year succeeding the end of the recovery period for a passenger automobile within the scope of Rev. Proc. 2019-13, the IRS has provided a safe harbor method of accounting. A taxpayer adopts the safe harbor accounting method by applying it to deduct depreciation of a passenger automobile on the tax return for the first tax year succeeding the automobile's placed in service year.
The safe harbor method operates as follows:
- The taxpayer must use the applicable optional depreciation table for computing the depreciation deductions;
- For the placed in service year, the taxpayer deducts the first year limitation amount under Code Sec. 280F(a)(1)(A)(i) (see Table 2 of Rev. Proc. 2018-25 for the first year limitation amount for a passenger automobile placed in service in calendar year 2018 for which the 100 percent additional first year depreciation deduction is allowable. Further guidance will be issued to provide the limitation amounts for passenger vehicles placed in service after 2018);
- For the 12 month tax year subsequent to the placed in service year, and for each succeeding 12 month tax year in the recovery period, the taxpayer determines the depreciation deduction by multiplying its remaining adjusted depreciable basis by the annual depreciation rate for each tax year subsequent to the placed-in-service year specified in the applicable optional depreciation table, subject to the limitation amounts under Code Sec. 280F(a)(1)(A);
- The adjusted depreciable basis of the passenger automobile as of the beginning of the first tax year succeeding the end of the recovery period is treated as a deductible depreciation expense for the first tax year succeeding the end of the recovery period, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii). Any excess is treated as a deductible depreciation expense for the succeeding tax years, subject to the limitation under Code Sec. 280F(a)(1)(B)(ii); and
- If Code Sec. 280F(b) applies in a tax year subsequent to the placed in service year, the safe harbor method of accounting ceases to apply beginning for the first year in which Code Sec. 280F(b) applies. Any passenger automobile that is not predominantly used in a qualified business use for any tax year is subject to Code Sec. 280F(b) for such tax year and any subsequent tax year.
Example 1: In 2018, Tom, a calendar year taxpayer, purchased and placed in service for use in his business a new passenger automobile that costs $60,000. The automobile is five-year property and qualified property for which the bonus depreciation deduction is allowable. The automobile is used 100 percent in Tom's trade or business. Tom depreciates the automobile under the general depreciation system by using the 200 percent declining balance method, a five-year recovery period, and the half-year convention. Tom adopts the safe harbor method of accounting provided in Rev. Proc. 2019-13. As a result, Tom must use the applicable optional depreciation table that corresponds with the 200-percent declining balance method of depreciation, a five-year recovery period, and the half-year convention for determining depreciation deductions (Table A-1 in Appendix A of IRS Publication 946). For 2018, Tom deducts $18,000, the depreciation limitation for 2018. The remaining adjusted depreciable basis of the automobile as of January 1, 2019, is $42,000 ($60,000 unadjusted depreciable basis less $18,000 depreciation deduction claimed for 2018).
For 2019 through 2023, the total depreciation allowable for each tax year is determined by multiplying the annual depreciation rate by the remaining adjusted depreciable basis of $42,000, subject to the annual limitation. Accordingly, for 2019, the total depreciation allowable is $13,440 (32 percent of $42,000). Because this amount is less than the depreciation limitation of $16,000 for 2019, Tom deducts $13,440 as depreciation on his 2019 tax return. For 2020, the total depreciation allowable is $8,064 (19.2 percent of $42,000). Because this amount is less than the 2020 depreciation limitation of $9,600, Tom deducts $8,064 as depreciation on his 2020 tax return. As of January 1, 2024 (the beginning of the first tax year succeeding the end of the recovery period), Tom's adjusted depreciable basis in the automobile is $8,401 ($60,000 unadjusted depreciable basis less the total depreciation allowable of $51,999 for 2018-2023).
Accordingly, for the 2024 tax year, Tom deducts depreciation of $5,760 (the lesser of the adjusted depreciable basis of $8,401 as of January 1, 2024 or the limitation amount of $5,760). As of January 1, 2025, the adjusted depreciable basis of the automobile is $2,641 ($8,401 adjusted depreciable basis as of January 1, 2024, less the $5,760 of depreciation claimed for 2024). For the 2025 tax year, Tom deducts depreciation of $2,641 (the lesser of the adjustable depreciable basis in the automobile or the limitation amount of $5,760).
Example 2: The facts are the same as in Example 1 except Tom elects to treat $18,000 of the cost of the automobile as an expense under Code Sec. 179. As a result, the automobile is not within the scope of Rev. Proc. 2019-13 and the safe harbor method does not apply. For 2018, the 100 percent bonus depreciation deduction and the Code Sec. 179 deduction is limited to $18,000. For 2018, Tom deducts $18,000 for the automobile and deducts the excess amount of $42,000 beginning in 2024, subject to the $5,760 annual limitation.
Retrieved from Parker's Federal Tax Bulletin Issue 191, 2/26/2019
Last Updated by Admin on 2019-02-26 08:44:30 PM
Posted in general
The IRS issued a Publication 535 Draft Worksheet for tax year 2018. The publication reviews the computations necessary to calculate a taxpayer's Code Sec. 199A deduction and includes several worksheets to help with such computations, and also lists the additional information that partnerships and S corporations will need to prepare for their partners' and shareholders' 2018 Schedule K-1s.On December 20, the IRS released Publication 535 Draft Worksheet that, when finalized, can be used by taxpayers to calculate their qualified business income (QBI) deduction under Code Sec. 199A for 2018 tax returns. This draft section ofPublication 535, Business Expenses, is 11 pages and includes the following schedules and worksheets to assist taxpayers in calculating the new QBI deduction that is available for tax years beginning after 2017:
- Schedule A - Specified Service Trades or Businesses (SSTBs);
- Schedule B - Aggregation of Business Operations;
- Schedule C - Loss Netting and Carryforward; Worksheet 12-A - Qualified Business Income Deduction Worksheet; and
- Schedule D - Special Rules for Patrons of Agricultural or Horticultural Cooperatives (Coop).The instructions to the draft publication note that a taxpayer will use the Qualified Business Income Deduction - Simplified Worksheet in the Form 1040 instructions instead of the schedules listed above if the taxpayer (1) has QBI, qualified REIT dividends, or qualified PTP income; (2) has taxable income before QBI of $157,500 or less ($315,000 or less if married filing jointly); and (3) is not a patron in a specified agricultural or horticultural cooperative.Under Code Sec. 199A, individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20 percent of their QBI from a trade or business, including income from a pass-through entity (but not from a C corporation), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction is subject to multiple limitations, such as the type of trade or business, the taxpayer's taxable income, the amount of W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. The deduction can be taken in addition to the standard or itemized deductions.S corporations and partnership are not eligible for the deduction. Instead, those entities pass through the necessary information to their shareholders or partners so they may calculate their deduction. As a result, S corporations and partnerships will have to report each shareholder or partner's share of the following items, for each qualified trade or business, on Schedule K-1 so that shareholders and partners can calculate their own QBI deduction:
- Section 199A QBI
- Section 199A W-2 wages
- Section 199A UBIA
- Section 199A Qualified REIT dividends
- Section 199A Qualified PTP income
- QBI allocable to qualified payments received from a specified cooperative
- Passed-through domestic production activities deduction (DPAD) under Code Sec. 199A(g) from a specified cooperativeAlthough estates and trusts may compute their own QBI deduction, they must reduce the amounts reported as QBI, W-2 wages, and UBIA to reflect the portion of those amounts that were allocated to beneficiaries.According to the draft publication instructions, in order to be engaged in a trade or business for purposes of the QBI deduction, a taxpayer must be involved in the activity with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit. If the taxpayer owns an interest in a pass-through entity, the trade or business determination is made at that entity's level. In addition, the ownership and rental of real property doesn't, as a matter of law, constitute a trade or business, and the issue is ultimately one of fact in which the scope of the taxpayer's activities in connection with the property must be so extensive as to give rise to the stature of a trade or business. However the rental or licensing of property to a commonly controlled trade or business is considered a trade or business under Code Sec. 199A.For a discussion of the calculation of the QBI deduction under Code Sec. 199A, see Parker Tax ¶96,300.Retrieved from Parker's Federal Tax Bulletin, Issue 187, 1/2/2019
Last Updated by Admin on 2019-01-02 06:21:47 PM
Posted in general
IRS Guidance Clarifies Certain TCJA Property-Related ChangesThe IRS clarified, and provided additional guidance with respect to, certain provisions involving amendments by the Tax Cuts and Jobs Act of 2017 relating to (1) the modification of the definition of qualified real property that qualifies as Code Sec. 179 property eligible for expensing; (2) the modification of depreciation rules under Code Sec. 168 which require certain property held by an electing real property trade or business to be depreciated under the alternative depreciation system (ADS), as well as changes to the recovery period under ADS from 40 to 30 years for residential rental property; and (3) the requirement under Code Sec. 168 that certain property held by an electing farming business be depreciated under ADS. The revenue procedure also modifies Rev. Proc. 87-57 to provide an optional depreciation table for residential rental property depreciated under ADS with a 30-year recovery period. Rev. Proc. 2019-8.BackgroundThe Tax Cuts and Jobs Act of 2017 (TCJA) -
- amended Code Sec. 179 by modifying the definition of qualified real property that may be eligible as Code Sec. 179 property under Code Sec. 179(d)(1);
- amended Code Sec. 168 by (i) requiring certain property held by an electing real property trade or business, as defined in Code Sec. 163(j)(7)(B), to be depreciated under the alternative depreciation system (ADS) in Code Sec. 168(g), and (ii) changing the recovery period under ADS from 40 to 30 years for residential rental property; and
- amended Code Sec. 168 by requiring certain property held by an electing farming business to be depreciated under the alternative depreciation system.In response to practitioners' questions involving these amendments, the IRS issued Rev. Proc. 2019-8.TCJA Changes to Code Section 179TCJA amended the definition of Code Sec. 179 property to provide that, at the taxpayer's election, Code Sec. 179 property may include qualified real property as defined in Code Sec. 179(f). The TCJA also amended Code Sec. 179(d)(1) to allow property used predominantly to furnish lodging or in connection with the furnishing of lodging as described in Code Sec. 50(b)(2) to be Code Sec. 179 property. These amendments apply to property placed in service in tax years beginning after December 31, 2017.Before amendment by the TCJA, Code Sec. 179(f)(2) defined "qualified real property" as meaning qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property described in Code Sec. 168(e)(6), Code Sec. 168(e)(7), and Code Sec. 168(e)(8), respectively, as in effect on December 26, 2017. TCJA amended Code Sec. 179(f) by defining qualified real property as (1) any qualified improvement property described in Code Sec. 168(e)(6), and (2) any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. These amendments apply to property placed in service in tax years beginning after December 31, 2017. Subsequent to the enactment of TCJA, the Consolidated Appropriations Act, 2018 removed Code Sec. 179(e), which provided special rules for qualified disaster assistance property, and redesignated Code Sec. 179(f) as Code Sec. 179(e).In response to inquiries relating to the correct procedures to use in electing to treat qualified real property as Code Sec. 179 property, Rev. Proc. 2019-8 provides that a taxpayer may elect to expense under Code Sec. 179(a) the cost, or a portion of the cost, of qualified real property placed in service by the taxpayer during any tax year beginning after 2017 by filing an original or amended federal tax return for that tax year in accordance with procedures similar to those in Reg. Sec. 1.179-5(c)(2) and Section 3.02 of Rev. Proc. 2017-33. If a taxpayer elects or elected to expense under Code Sec. 179(a) a portion of the cost of qualified real property placed in service by the taxpayer during any tax year beginning after 2017, the taxpayer can increase the portion of the cost of such property expensed under Code Sec. 179(a) by filing an amended federal tax return for that tax year.TCJA Changes to Code Section 168(g)Before TCJA, depreciation was determined under ADS for: (1) any tangible property that during the tax year is used predominantly outside the United States; (2) any tax-exempt use property; (3) any tax-exempt bond financed property; (4) any imported property covered by an Executive order under Code Sec. 168(g)(6); and (5) any property to which an election under Code Sec. 168(g)(7) applied. TCJA amended Code Sec. 168(g)(1) to require ADS to be used for the following additional property: (1) nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business as defined in Code Sec. 163(j)(7)(B), and (2) any property with a recovery period of 10 years or more that is held by an electing farming business as defined in Code Sec. 163(j)(7)(C). These amendments apply to tax years beginning after December 31, 2017, without regard to when the property is or was placed in service.As a result of these changes, some electing real property trades or businesses and electing farming businesses questioned how depreciation is changed from the general depreciation system under Code Sec. 168(a) to ADS under Code Sec. 168(g) for property placed in service in tax years beginning before 2018. In Rev. Proc. 2019-8, Section 4.02, the IRS outlines the procedures that an electing real property trade or business or an electing farming business must take under code Sec. 163(j)(7)(B) or Code Sec. 163(j)(7)(C), respectively, must take in changing depreciation of property to the alternative depreciation system. Rev. Proc. clarifies that such a change is not a change in method of accounting but is, instead, a change in use. Thus, there is no Code Sec. 481 adjustment that must be taken into income. However, if an electing real property trade or business or an electing farming business fails to change to make the change to ADS, then that trade or business has adopted an impermissible method of accounting for that item of property. As a result, a change from that impermissible method of accounting to the straight-line method, the applicable recovery period, and/or the applicable convention under the ADS for that item of MACRS property is a change in method of accounting subject to adjustments under Code Sec. 481.Additionally, before amendment by the TCJA, the table of recovery periods under Code Sec. 168(g)(2)(C) provided that the recovery period was 40 years for residential rental property. TCJA amended that table by providing that the recovery period is 30 years for residential rental property. This amendment applies to property placed in service after December 31, 2017. Some practitioners inquired whether residential rental property placed in service before 2018 has a recovery period of 30 or 40 years under ADS. In Rev. Proc. 2019-8, the IRS advised that the recovery period under the table in Code Sec. 168(g)(2)(C) is 40 years for residential rental property placed in service by the taxpayer before 2018.New Optional Depreciation Table under ADSRev. Proc. 87-57 contains optional depreciation tables that may be used by certain taxpayers in lieu of computing depreciation deductions in the manner otherwise described in Rev. Proc. 87-57. The optional depreciation tables specify schedules of annual depreciation rates to be applied to the unadjusted basis of the property in each tax year. If a taxpayer uses an optional depreciation table to compute the annual depreciation deduction for any item of property, the taxpayer must use the table to compute the annual depreciation deductions for the entire recovery period of such property. However, a taxpayer may not continue to use the table if there are any adjustments to the basis of such item of property for reasons other than (1) depreciation allowed or allowable, or (2) an addition or an improvement to such property that is subject to depreciation as a separate item of property.The IRS had not previously published an optional table for property depreciated under ADS with a recovery period of 30 years and the mid-month convention. Some practitioners requested the IRS to provide an optional depreciation table for residential rental property that is placed in service after December 31, 2017, and depreciated under ADS using the straight-line method, the new 30-year recovery period required by the TCJA, and the mid-month convention. As a result, the IRS has provided such an optional depreciation table in Rev. Proc. 2019-8.
Last Updated by Admin on 2019-01-02 06:17:09 PM
Posted in general
Country Club Can't Deduct Nonmember Event Losses from Investment Income
The Sixth Circuit affirmed a Tax Court decision disallowing a tax-exempt country club from using losses from unprofitable nonmember events to avoid paying tax on its investment income. Although the Sixth Circuit disagreed with the Tax Court's reasoning that, under Portland Golf Club v. Comm'r, 497 U.S. 154 (1990), the country club was required to show evidence of profitability to prove its intent to profit and could not consider the hobby loss factors in Code Sec. 183, the Sixth Circuit concluded that, even applying the hobby loss factors, the country club's long history of consistent and unexplained losses overwhelmed all other evidence of its intent to profit from the events. Losantiville Country Club v. Comm'r, 2018 PTC 353 (6th Cir. 2018).
Losantiville Country Club (Losantiville) is a private country club in Ohio operating as a Code Sec. 501(c)(7) tax exempt organization. Like other social clubs, Losantiville derives income from several sources: membership dues and member expenditures on food and drink, facility rentals to nonmembers, and interest and dividends on club investments. These last two sources of income are taxable as unrelated business income.
Between 2002 and 2015, Losantiville hosted nonmember events to generate additional sales revenue and attract new members. Gross receipts from these events always exceeded the cost of services provided but, every year, the club reported a net loss after deducting general operating costs attributable to the nonmember sales.
Between 2010 and 2012, Losantiville offset its investment income with its purported Code Sec. 162 losses on the nonmember events and avoided paying any income tax. Eventually, the club's streak of losing money on its nonmember sales and its consistent Code Sec. 162 deductions drew IRS scrutiny. In 2013, the IRS determined that Losantiville did not intend to profit from its nonmember sales, could not deduct those losses, and therefore owed unrelated business income tax on its investment income. The IRS also assessed accuracy-related penalties.
Before the Tax Court, Losantiville argued that the IRS focused too closely on the club's lack of profitability and that the club's intent to profit should be determined by applying the hobby loss factors in Reg. Sec. 1.183-2(b). The club also defended itself against the penalties the IRS assessed, arguing that it relied on its accountant's preparation of the club's returns. The Tax Court rejected these arguments, finding that the hobby loss factors did not apply to Code Sec. 501(c)(7) organizations and that, under the Supreme Court's decision in Portland Golf Club v. Comm'r, 497 U.S. 154 (1990), Losantiville had to show profitability to evidence an intent to profit from the activity. The Tax Court also determined that Losantiville failed to prove it relied in good faith on its tax preparers. Losantiville appealed to the Sixth Circuit.
Under Code Sec. 162(a), a social club generally may deduct losses from nonmember activities against other taxable gains so long as the activities are trades or businesses. In Portland Golf Club, the Supreme Court held that, because a profit motive is the most important indicator of a trade or business, a social club must prove that it intended to profit from an activity before deducting Code Sec. 162 losses from that activity. The IRS applies the nine hobby loss factors in Reg. Sec. 1.183-2(b) to distinguish between losses of for-profit activities, which are deductible, and losses of not-for-profit hobbies, which are not deductible. These hobby loss factors analyze, among other considerations, whether the taxpayer has another major source of income, keeps complete books and records, seeks advice from an expert, and previously succeeded in similar ventures.
On appeal, Losantiville contended that the Tax Court incorrectly interpreted Portland Golf Club and should have considered evidence other than the club's lack of profitability. Losantiville claimed that a holistic view of its business practices revealed its intent to profit, and that if the Tax Court had applied the hobby loss factors, it would have decided that the club operated with a valid profit motive. Specifically, Losantiville pointed to two factors: the businesslike way the club planned and conducted nonmember events and the appreciation of the value of its land.
The Sixth Circuit affirmed the Tax Court's decision and held that Losantiville was not entitled to deduct the nonmember event losses because it did not intend to profit from the nonmember sales. While finding that the Tax Court incorrectly concluded that the hobby loss factors were inapplicable, the Sixth Circuit found that any error on the Tax Court's part in discounting those factors was harmless because Losantiville failed to show an intent to profit from the nonmember sales. The Sixth Circuit understood the Tax Court's reluctance to apply the hobby loss factors to determine the profit motive of a tax-exempt social club, noting that the hobby loss rules generally apply to high earning taxpayers attempting to reduce their taxes by reporting losses from extravagant side jobs, such as horse breeding or auto racing.
According to the Sixth Circuit, Portland Golf Club held that a taxpayer can meet the intent-to-profit requirement without showing consistent profitability, but the decision only hinted at other acceptable indicia. The Sixth Circuit noted that, in one footnote, the Supreme Court discussed how the club could have demonstrated an intent to profit by reference to the hobby loss factors, but another footnote stated that the factors did not apply to nonprofit social clubs. The Sixth Circuit found that, despite this tension, courts have allowed the principles from Code Sec. 183 to guide their profit motive analyses, and some courts have applied the factors even when they were inapplicable because they offered a functional metric for distinguishing deliberately unprofitable businesses from those merely ineptly run.
The Sixth Circuit noted that demonstrating a profit motive without profitability is difficult, and found that such taxpayers generally must show that their intent to profit was somehow thwarted. In the court's view, establishing an intent to profit when an organization is consistently unprofitable is even more difficult. A long history of consistent and unexplained losses, the court found, can overwhelm all other factors.
The Sixth Circuit found that Losantiville never presented any evidence that it attempted to stem its flood of losses or that it expected to eventually profit. The court rejected the club's argument that it operated in a businesslike manner, finding that the club cited no concrete evidence that it adopted any new techniques or abandoned unprofitable methods in a manner consistent with an intent to improve profitability. Losantiville also failed, in the court's view, to demonstrate that it owned real estate primarily with the intent to profit from the increase in its value or that its nonmember events reduced the net cost of carrying the land for its appreciation in value. The court explained that deductions and income from separate activities may be aggregated only when the undertakings are sufficiently connected. Taxpayers cannot, the court concluded, deduct large losses simply by conducting an unprofitable activity on a piece of land that is appreciating independently or in spite of the activity.
Turning to issue of penalties, the Sixth Circuit found that Losantiville produced no evidence that its reliance on its tax preparers was objectively reasonable or in good faith. The court noted that Losantiville submitted no opinion letters and no correspondence detailing advice or suggestions that its accountants provided. To the contrary, the court found that Losantiville conveyed its own opinions about the club's tax obligations to its accountants. The Sixth Circuit also found that Losantiville lacked substantial authority for its decision to take an unauthorized deduction. In the court's view, Losantiville marshalled virtually no evidence supporting its arguments for the underpayment, even under its argument for a novel application of Portland Golf Club.
Retrieved from Parker's Federal Tax Bulliten, Issue 182
Last Updated by Admin on 2018-10-30 01:15:56 PM
Posted in general
Social Security Benefits to Increase 2.8 Percent in 2019; Maximum Wage Base for OASDI Increases by $4,500
The Social Security Administration (SSA) issued cost-of-living information for the 2019 social security and supplemental security income (SSI) benefits. According to the SSA, such benefits will increase 2.8 percent in 2019 and 67 million Americans will be affected by the increase. The SSA also announced that maximum amount of earnings subject to the social security tax will increase to $132,900 in 2019. SSA website.
The Social Security Administration (SSA) issued a press release in which it stated that social security and supplemental security income (SSI) benefits for more than 67 million Americans will increase 2.8 percent in 2019. The 2.8 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 62 million social security beneficiaries in January 2019. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2018. The SSA noted that some people receive both social security and SSI benefits.
For 2019, the maximum amount of earnings subject to the social security tax (taxable maximum) will increase to $132,900 (up from $128,400).
The earnings limit for workers who are younger than "full" retirement age (age 66 for people born in 1943 through 1954) will increase to $17,640. The SSA deducts $1 from benefits for each $2 earned over $17,640. The earnings limit for people turning 66 in 2019 will increase to $46,920. The SSA deducts $1 from benefits for each $3 earned over $46,920 until the month the worker turns age 66. There is no limit on earnings for workers who are "full" retirement age or older for the entire year.
(Retrieved 10/25/2018 from Parker's Federal Tax Bulletin, Issue 182)
Last Updated by Admin on 2018-10-25 03:05:28 PM
Posted in general
The Tax Court held that an aerospace engineer who provided consulting services to a company through a temporary employment agency was a statutory employee, even though he received a Form W-2 indicating that he was a common law employee, and thus could report business income and expenses on Schedule C and avoid the Schedule A limitations on the deduction of unreimbursed employee business expenses and the phaseout of itemized deductions. However, the Tax Court disallowed the taxpayer's deductions for business and other expenses due to the taxpayer's failure to adequately substantiate the expenses. Fiedziuszko v. Comm'r, T.C. Memo 2018-75.
In 2012, Slawomir Fiedziuszko was a semiretired aerospace engineer who worked as a consultant for Space Systems Loral (Loral). Fiedziuszko found consulting work by attending conferences and traveling to visit potential clients. He provided services to Loral through West Valley Engineering Co., a temporary employment agency. Fiedziuszko's contract with Loral began in 2011 and ended in July 2012. He worked primarily from home on a satellite development project.
West Valley processed Fiedziuszko's weekly pay and withheld income, social security and Medicare taxes. West Valley did not offer any benefits other than a deferred compensation plan. On Fiedziuszko's 2011 Form W-2, West Valley checked the box indicating that he was a statutory employee. However, West Valley did not check that box on Fiedziuszko's 2012 Form W-2.
Mr. Fiedziuszko and his wife, Alicia, filed a joint tax return for 2012 on Form 1040, which they prepared themselves. The Fiedziuszkos took the position that Mr. Fiedziuszko was a statutory employee and claimed deductions on Schedule C, Profit or Loss from Business, for expenses related to Mr. Fiedziuszko's consulting business. These expenses included $2,000 for supplies, $5,000 for travel (including meals and lodging), $9,500 for insurance, and $2,000 for advertising. They also claimed a deduction of $29,000 for self-employed health insurance.
Mrs. Fiedziuszko was diagnosed with morbid obesity in 2011; Mr. Fiedziuszko was also considered obese and displayed prediabetic indications. On the advice of their doctor, the Fiedziuszkos entered a medically supervised weight loss program designed by Health Management Resources (HMR) and administered through a healthcare provider. The Fiedziuszkos reported approximately $16,000 of deductible medical expenses for the cost of the HMR program, as well as expenses for other medical services. In total, the Fiedziuszkos claimed over $19,000 of medical expense deductions for 2012.
The Fiedziuszkos also claimed charitable contribution deductions in 2012 of $2,800 in cash contributions and over $27,000 in noncash contributions. Mr. Fiedziuszko claimed he made cash contributions to a church and noncash contributions to Goodwill consisting of furniture, clothing, and miscellaneous household goods.
The Fiedziuszkos received pension and annuity payments in 2012 totaling over $72,000 and reported on Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. They included only $37,000 of the payments in income, although the Forms 1099-R indicated that all of the income was taxable.
The IRS issued a notice of deficiency in 2015 determining a deficiency of over $31,000 and applying a substantial underpayment penalty of $6,200. The IRS determined that Mr. Fiedziuszko was not a statutory employee for 2012, and therefore could not report business income and expenses on Schedule C. All of the Fiedziuszkos' deductions were disallowed on the basis that they were not adequately substantiated. The notice further determined that the Fiedziuszkos failed to report all of their pension income, and applied a Code Sec. 6662(a) penalty for a substantial understatement. The Fiedziuszkos challenged the notice in the Tax Court.
To substantiate the Fiedziuszkos' expenses, Mr. Fiedziuszko prepared for trial statements of fact outlining his business expenses. He also prepared a statement listing the dates and amounts of payments for the HMR weight loss program. Mr. Fiedziuszko's cash contributions to the church were documented by calendar pages with handwritten notes, some of which were illegible. A list of the items donated to Goodwill showed each item's claimed fair market value, which was simply the listed sale price for a similar item on EBay or Amazon as of October 2014.
The Tax Court held that Mr. Fiedziuszko was a statutory employee in 2012 and thus was entitled to report business income and expenses on Schedule C and avoid the Schedule A limitations on the deduction of unreimbursed employee business expenses and the phaseout of itemized deductions. However, the court denied all of the Fiedziuszkos' claimed business and medical expense deductions due to lack of substantiation. The court also held that Mr. Fiedziuszko's pension income was includible in income, and upheld the substantial understatement penalty.
The court found that the totality of the circumstances showed that Mr. Fiedziuszko was a statutory employee in 2012. The fact that his Form W-2 did not indicate he was a statutory employee was, in the court's view, a mistake. His Form W-2 for 2011 indicated he was a statutory employee and the court found that nothing changed between 2011 and 2012, because Mr. Fiedziuszko was providing services under the same contract. Further, the facts showed that Mr. Fiedziuszko and Loral intended to form an independent consulting relationship. Mr. Fiedziuszko worked out of his home office, advertised his services to several companies, and was hired through a temporary staffing agency. The relationship was a temporary assignment, and the weekly payroll deposits and withholdings were consistent, in the court's view, with a consulting contract.
The court, however, disallowed all of Mr. Fiedziusko's business expenses due to lack of substantiation. Mr. Fiedziuszko's travel, lodging and meal expenses did not meet the heightened substantiation requirements of Code Sec. 274(d) because the court found that the calendar and statement of facts provided by Mr. Fiedziuszko did not provide a sufficient basis for determining the amounts of the expenses. Moreover, while Mr. Fiedziuszko provided a total amount he claimed he spent on supplies, he did not provide any supporting documentation other than checking account statements, which did not specify for what services the payments were made or allocate between business and personal use.
The Tax Court also found that, while the Fiedziuszkos incurred expenses for medical care under Code Sec. 213, they failed to adequately substantiate the expenses. In the court's view, a statement that Mr. Fiedziuszko prepared for trial was not an itemized statement from the medical care provider as requested by the IRS. Nor was his statement and testimony sufficient substitutes for an itemized statement, because there was no additional corroborating documentation for the payments.
The court found that the Fiedziuszkos failed to substantiate their charitable contributions. They produced no evidence of the cash contributions other than cryptic calendar entries. The Fiedziuszkos also failed to present reliable written records of their noncash contributions or evidence of the condition of the items donated. With respect to the clothing and household items, the court found that the Fiedziuszkos did not establish that their condition was in good used condition or better.
The court found that Mr. Fiedziuszko's pension income that the couple received was taxable in full based on the Forms 1099-R. The Tax Court also held that the Fiedziuszkos did not show reasonable cause for the underpayment of tax and upheld the assessed penalty because they failed to explain the understatement or to adequately substantiate their expenses.
For a discussion of determining employment status, see Parker Tax ¶210,110. For a discussion of substantiation requirements of expenses, see Parker Tax ¶91,130. For a discussion of the penalty for a substantial understatement of tax, see Parker Tax ¶262,120.10.
Last Updated by Admin on 2018-06-12 01:20:17 PM
Posted in general
If you are one of the many Americans who are in a second marriage, you may need to revisit your estate strategy.¹
Unlike a typical first marriage, second marriages often require special consideration that should address children from a prior marriage and the disposition of assets accumulated prior to the second marriage.
Here are some ideas you may want to think about when updating your estate strategy:
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.
Last Updated by Admin on 2017-07-20 02:35:22 PM
Posted in general
Property Transferred to Family Limited Partnership Was Included in Decedent's Gross Estate
The Tax Court held that a decedent's gross estate included the excess of the fair market value of cash and securities contributed to a family limited partnership over the value of the partnership interest received. Because a purported gift of the decedent's partnership interest was held void or revocable under state law, the value of the partnership interest was also included in the gross estate; however, gift tax did not apply. Estate of Powell.v. Comm'r, 148 T.C. No. 18 (2017).
Nancy Powell died on August 15, 2008. Her son, Jeffrey, was the executor of her estate. On August 8, 2008, cash and securities worth approximately $10 million were transferred from a revocable trust owned by Mrs. Powell to a limited partnership, NHP, in exchange for a 99 percent limited partnership interest. NHP had been formed two days earlier by Mr. Powell, who was the general partner of NHP. The limited partnership agreement gave Mr. Powell sole discretion to determine the amount and timing of distributions and allowed for the partnership's dissolution with the written consent of all partners.
On August 8, 2008, Mr. Powell, purportedly acting on his mother's behalf under a power of attorney (POA), assigned Mrs. Powell's interest in NHP to a charitable lead annuity trust (CLAT). The POA authorized Mr. Powell to take specified actions on his mother's behalf in the event of her incapacitation. On August 7, 2008, two doctors expressed their opinion that Mrs. Powell was incapacitated and could not act on her own behalf. The terms of the CLAT gave an annuity to the Nancy H. Powell Foundation, a nonprofit corporation, of a specified amount for the remainder of Mrs. Powell's life. On her death, the remaining assets in the CLAT were to be divided equally between two trusts for the benefit of Mr. Powell and his brother. The POA granted Mr. Powell the ability to deal in all property owned by Mrs. Powell. It also authorized him to make gifts on Mrs. Powell's behalf up to the annual federal gift tax exclusion amount. A ratification provision stated that Mrs. Powell ratified and confirmed all actions by Mr. Powell under the POA.
Mrs. Powell's 2008 gift tax return reported a taxable gift of approximately $1,600,000 as a result of the purported transfer to the CLAT of her 99 percent limited partner interest in NHP. The value of the gift - specifically, the remainder interest in the CLAT given to Mrs. Powell's sons - was computed based on an appraised value of the interest in NHP of approximately $7.5 million. That value reflected a 25 percent discount for lack of control and lack of marketability to the approximate value of $10 million for the interest in NHP.
The IRS issued notices of deficiency for both estate and gift tax. In the gift tax notice, the IRS determined that Mrs. Powell's interest in NHP was worth approximately $8.5 million on August 8, 2008, and that her sons' remainder interests in the CLAT were worth approximately $8.3 million. The IRS valued the remainder interests based on the fact that Mrs. Powell was terminally ill when the gift was made. The estate tax notice increased the value of Mrs. Powell's estate by approximately $12.9 million; approximately $10 million of that was for the value of the cash and securities transferred to NHP. The remaining increase of approximately $2.9 million resulted from a gift tax deficiency for the purported transfer of Mrs. Powell's interest in NHP to the CLAT.
Under Code Sec. 2036(a), the value of a decedent's gross estate includes the value of transferred property if the decedent retained, either for life or for a time not ascertainable without reference to the decedent's death or for any period which does not in fact end before the decedent's death, the possession, enjoyment or right to the income from the property or the right to designate the beneficiaries of the property. An exception for bona fide sales applies, in which case the property is not included in the estate if the decedent transferred the property for full and adequate consideration. When property is included in an estate under Code Sec. 2036 and it was transferred for less than full consideration, its value under Code Sec. 2043 is the excess of its fair market value at the time of death over the value of the consideration at the time of the transfer. Under Code Sec. 2038, the value of a gift made by a decedent is included in the gross estate if the gift is subject to the decedent's power to amend or revoke it.
The IRS argued that the cash and securities Mrs. Powell transferred to NHP should be included in her gross estate under Code Sec. 2036 for two reasons. First, the IRS asserted that the transfer was subject to an implied agreement under which Mrs. Powell retained the possession or enjoyment of the transferred property. Second, according to the IRS, Mrs. Powell, acting with her sons, had the power to dissolve NHP and then decide who would take possession of the property. The IRS argued that the bona fide sale exception did not apply because there was no significant nontax purpose for the creation of NHP and, due to the estate's claimed valuation discount of the partnership interest, the transfer was not made for full and adequate consideration.
Regarding the purported gift of Mrs. Powell's interest in NHP to the CLAT, the IRS argued that the gift was revocable because it was invalid under California law. That is, Mr. Powell's authority under the POA allowed him to make gifts only up to the federal gift tax exclusion amount, and the gift of the partnership interest to the CLAT exceeded that authority. Because the gift was invalid, the IRS argued that value of the partnership interest therefore had to be included in Mrs. Powell's estate under Code Sec. 2038(a).
The estate did not deny that Mrs. Powell's ability to dissolve NHP with the consent of her sons constituted a right, in conjunction with others, to designate the persons who could possess or enjoy the property she transferred to the partnership or the income therefrom within the meaning of Code Sec. 2036(a)(2). However, the estate argued that Code Sec. 2036 did not apply to the transfer of cash and securities to NHP because Mrs. Powell did not retain the right to designate beneficiaries of the assets for the remainder of her life, and that the brief period for which she held the right was not ascertainable without reference to her death. Regarding the gift of Mrs. Powell's interest in NHP to the CLAT, the estate argued that Mr. Powell's authority to make the gift derived not from any specific provision in the POA but from a general grant of authority to deal in Mrs. Powell's property. According to the estate, the gift was consistent with Mrs. Powell's history of charitable giving and with the provisions of her estate planning documents.
The estate also asserted that, even if the POA did not provide the authority to make gifts in excess of the gift tax exclusion amount, the gift was nonetheless valid under the POA's ratification provision.
Tax Court's Decision
The Tax Court held that the excess of the fair market value of the cash and securities over the value of the partnership interest Mrs. Powell received in exchange for the cash and securities was includible in the gross estate. First, the court found that the purported gift of Mrs. Powell's interest in NHP to the CLAT was either void or revocable because Mr. Powell did not have the authority under the POA to make a gift in excess of the gift tax exclusion amount. The transfer of the partnership interest to the CLAT was therefore disregarded. Second, the court found that Code Sec. 2036(a)(2) applied because Mrs. Powell's ability to dissolve NHP with the cooperation of her sons constituted a right in conjunction with others to designate the beneficiaries of the cash and securities transferred to NHP or the income from them.
The Tax Court distinguished the Supreme Court's decision in U.S. v. Byrum, 408 U.S. 125 (1972), which held that a decedent's right to vote shares he placed in a trust for his children did not cause them to be included in his estate under Code Sec. 2036(a)(2) because, as the controlling shareholder, his fiduciary duties to minority shareholders limited his influence over the company's dividends. The Tax Court, following its previous decision in Estate of Strangi, T.C. Memo. 2003-145, aff'd, 417 F.3d 468 (5th Cir. 2005), found that the fiduciary duties applicable to a family limited partnership are not equivalent to those implicated in Byrum. The Tax Court noted that in addition to his duties as general partner, Mr. Powell owed duties to Mrs. Powell that he assumed either before he created the partnership or at about the same time. The Tax Court saw no reason to believe that Mr. Powell would have exercised his power as the general partner in ways that would have prejudiced Mrs. Powell's interests. Further, because Mrs. Powell owned 99 percent of NHP, any fiduciary duties Mr. Powell owed would be almost exclusively to Mrs. Powell. Finally, the court saw no evidence that NHP conducted any meaningful business operations; it was simply an investment vehicle for Mrs. Powell and her sons. Any fiduciary duties that might limit Mr. Powell's power over NHP's distributions were, in the Tax Court's view, illusory.
Having held that Code Sec. 2036(a) required the inclusion of the cash and securities in Mrs. Powell's estate, the Tax Court then determined that the amount of the inclusion had to be reduced by the value of the partnership interest received by Mrs. Powell. Under Code Sec. 2043(a), the value of the property included in the estate is the excess of the value of the transferred assets on the date of death over the value of the consideration received in exchange, as of the date of the transfer. The court said that the inclusion must take into account any discounts applied in valuing the partnership interest and any increase or decrease in the value of the transferred assets between the date of transfer and the date of death.
On the issue of the purported gift of Mrs. Powell's interest in NHP to the CLAT, the Tax Court held that under California law, general grants of authority to convey property do not provide the power to make gifts, and that an express grant of authority is required. Further, the estate's ratification argument was rejected. The court found that the ratification provision in the POA only ratified acts done by virtue of the POA, and not acts done outside the authority granted by the POA. Interpreting the ratification provision to authorize a gift in excess of the gift tax exclusion amount would conflict with the California rule that the power to make gifts must be expressly granted. Because the Tax Court found that the gift was either void or revocable, the gross estate included the value of the partnership interest, including any applicable discount for lack of marketability. However, the estate was not liable for any gift tax deficiency on the purported gift
Observation: In a concurring opinion, seven judges disagreed with the court's application of Code Sec. 2043(a), which in their view was an untried new theory that could invite overly aggressive tax planning. Rather, the concurring judges would have disregarded the purported transfer of the cash and securities to the partnership under Code Sec. 2036(a)(2) and held that their full value was included in the gross estate. Under this approach, Mrs. Powell's partnership interest would have been treated as an alter ego with no value other than the cash and securities, so there would be no double inclusion problem as a result of including both the cash and securities and the partnership interest in the gross estate.
For a discussion of the inclusion in a gross estate of transfers with a retained life interest, see Parker Tax ¶225,510. For a discussion of inclusions of revocable transfers, see Parker Tax ¶225,910.
Last Updated by Admin on 2017-05-31 02:12:51 PM
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House Passes Health Care Bill by Slim Margin; Senate Hints That It Will Rewrite the Bill
On May 4, 2017, the House passed The American Health Care Act of 2017 (AHCA) by a vote of 217 - 213. The bill would repeal all of the Affordable Care Act's (ACA) tax provisions except for the "Cadillac tax" on high cost employer-sponsored health plans. Most of the tax changes would be effective beginning in 2017 or 2018, but the repeal of the individual and employer mandates would be retroactive to January 1, 2016. The bill would replace the ACA's means-tested premium tax credit with an age-based health insurance credit. H.R. 1628 (May 4, 2017).
Tax Provisions in Healthcare Bill
The following are the AHCA's tax changes:
Repeals the tanning tax, effective for services performed after June 30, 2017.
The following is a summary of some of the AHCA's other key provisions:
CBO Estimates and Potential Senate Action
The Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation are in the process of preparing a cost estimate for the House-passed version of the AHCA. The CBO anticipates being able to release that estimate the week of May 22.
In the meantime, initial work on healthcare legislation has begun in the Senate. Some Senators have indicated that the Bill coming from the House will have to be substantially reworked. "I think it needs a lot of improvement," said Sen. Shelley Moore Capito (R-W.Va.). While Sen. John Cornyn (R-Texas) promised a Senate healthcare bill this year, Senate Majority Leader Mitch McConnell (R-Ky.) cautioned that getting healthcare legislation through the Senate would be "a big challenge."
Last Updated by Admin on 2017-05-19 12:39:18 PM
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In a new revenue procedure addressing certain provisions enacted in 2015, the IRS provides rules for making a Code Sec. 179 election on an amended return, clarifies how the Code Sec. 168(k)(5) election relating to additional depreciation for certain plants interacts with the Code Sec. 179 election; and discusses the types of air conditioning or heating units that qualify as Code Sec. 179 property. Rev. Proc. 2017-33.
The Protecting Americans From Tax Hikes Act of 2015 (PATH Act) amended Code Sec. 179 by -
(1) making permanent the treatment of qualified real property as Section 179 property under Code Sec. 179(f);
(2) making permanent the permission granted under Code Sec. 179(c)(2) to revoke without IRS consent any election made under Code Sec. 179 and any specification contained in that election; and
(3) allowing certain air conditioning or heating units to be eligible as Code Sec. 179 property under Code Sec. 179(d)(1).
The PATH Act also amended Code Sec. 168(k) by (1) extending the placed-in-service date for property to qualify for the additional first year depreciation deduction; (2) modifying the definition of qualified property under Code Sec. 168(k)(2); (3) extending and modifying the election under Code Sec. 168(k)(4) to increase the alternative minimum tax (AMT) credit limitation in lieu of the additional first year depreciation deduction; and (4) adding Code Sec. 168(k)(5), which allows a taxpayer to elect to deduct the additional first year depreciation for certain plants.
The Path Act also added Code Sec. 168(k)(5), which allows a taxpayer to elect to deduct additional first year depreciation for any specified plant that is planted before January 1, 2020, or grafted before that date to a plant that has already been planted, by the taxpayer in the ordinary course of its farming business, as defined in Code Sec. 263A(e)(4). If the taxpayer makes this election, the additional first year depreciation deduction is allowable for any specified plant for the tax year in which that specified plant is planted or grafted and that specified plant is not treated as qualified property under Code Sec. 168(k) in the plant's placed-in-service year. The percentage of the additional first year depreciation deduction is (1) 50 percent for any specified plant planted or grafted after 2015 and before 2018; (2) 40 percent for any specified plant planted or grafted during 2018; and (3) 30 percent for any specified plant planted or grafted during 2019.
Code Sec. 168(k)(5)(B) defines a specified plant as (1) any tree or vine that bears fruits or nuts, and (2) any other plant that will have more than one yield of fruits or nuts and that generally has a pre-productive period of more than two years from the time of planting or grafting to the time at which such plant begins bearing fruits or nuts. The term "specified plant" does not include any property that is planted or grafted outside of the United States. Code Sec. 168(k)(5) applies to specified plants that are planted or grafted after December 31, 2015.
As a result of the above changes, practitioners questioned
(1) whether a Section 179 election could be made on an amended return without IRS consent;
(2) how the Code Sec. 168(k)(5) election relating to additional depreciation for certain plants interacted with the Code Sec. 179 election; and
(3) what types of air conditioning or heating units qualified as Code Sec. 179 property.
The IRS issued Rev. Proc. 2017-33, which is effective April 20, 2017, to address these questions.
Taxpayers Can Elect Section 179 on an Amended Tax Return Without IRS Consent
In Rev. Proc. 2017-33, the IRS provides that, for any tax year beginning after 2014, a taxpayer can make a Code Sec. 179 election with respect to any Section 179 property without the IRS's consent on an amended federal tax return for the tax year in which the taxpayer places in service the Section 179 property. The IRS said it is going to amend Reg. Sec. 1.179-5(c) to incorporate this guidance.
Interaction of Code Sections 168(k)(5) and 179
With respect to the interaction of Code Sec. 168(k)(5) and Sec. 179, Section 4.05 of Rev. Proc. 2017-33 provides that, if a taxpayer makes the Code Sec. 168(k)(5) election for a specified plant (1) the additional first year depreciation deduction provided by Code Sec. 168(k) is allowed for that specified plant for regular tax and alternative minimum tax purposes for the tax year in which the specified plant is planted or grafted by the taxpayer; (2) that specified plant is not treated as qualified property under Code Sec. 168(k) in its placed-in-service year, and (3) the depreciation deductions under Code Sec. 168 for that specified plant, after deducting the additional first year depreciation, are allowed for its placed-in-service year and subsequent tax years. Further, pursuant to Code Sec. 263A(c)(7), Code Sec. 263A does not apply to any amount deducted under the Code Sec. 168(k)(5) election.
Compliance Tip: The Code Sec. 168(k)(5) election must be made by the due date, including extensions, of the federal tax return for the tax year in which the taxpayer plants or grafts the specified plant to which the election applies. Generally, the election is made in the manner prescribed on Form 4562, Depreciation and Amortization, and its instructions. However, special procedures apply if the taxpayer did not make the Code Sec. 168(k)(5) election for a specified plant planted or grafted by the taxpayer after December 31, 2015, on its timely filed federal tax return for its tax year beginning in 2015 and ending in 2016 or its tax year of less than 12 months beginning and ending in 2016. In this case, the taxpayer is treated as making the election for that specified plant if the taxpayer (i) on that return, deducted the 50-percent additional first year depreciation for that specified plant; and (ii) did not revoke the deemed election provided under this provision within the time and in the manner described below.
Generally, the Code Sec. 168(k)(5) election, once made, may be revoked only with the written IRS consent. In order to obtain such consent, the taxpayer must submit a request for a letter ruling pursuant to Rev. Proc. 2017-1 (or successor). If a taxpayer made, or would be treated as having made, the Code Sec. 168(k)(5) election for a specified plant, an automatic extension of six months from the due date, excluding extensions, of the taxpayer's federal tax return for the tax year in which such specified plant is planted or grafted is granted to revoke that election, provided the taxpayer timely filed the taxpayer's federal tax return for that taxable year and, within this six-month extension period, the taxpayer, and all taxpayers whose tax liability would be affected by the Code Sec. 168(k)(5) election, files an amended federal tax return for that taxable year in a manner that is consistent with the revocation of the election.
If a taxpayer makes the Code Sec. 168(k)(5) election for a specified plant, the adjusted basis of that specified plant is reduced by the amount of the additional first year depreciation deduction allowed or allowable under Code Sec. 168(k), whichever is greater. This remaining adjusted basis is the cost of the specified plant for purposes of Code Sec. 179, before the application of Code Sec. 179(d)(3) and Reg. Sec. 1.179-4(d).
Air Conditioning or Heating Units That Qualify as Section 179 Property
In Rev. Proc. 2017-33, the IRS provides that an air conditioning or heating unit qualifies as Code Sec. 179 property if such unit is Code Sec. 1245 property, depreciated under Code Sec. 168, acquired by purchase for use in the active conduct of the taxpayer's trade or business, and placed in service by the taxpayer in a tax year beginning after 2015. The IRS cites portable air conditioners, such as window air conditioning units, and portable heaters, such as portable plug-in unit heaters, that are placed in service by the taxpayer in a tax year beginning after 2015, as units that may qualify as Section 179 property. Generally, an example of an air conditioning or heating unit that will not qualify as Section 179 property is any component of a central air conditioning or heating system of a building, including motors, compressors, pipes, and ducts, whether the component is in, on, or adjacent to a building.
If a component of a central air conditioning or heating system of a building meets the definition of qualified real property, as defined in Code Sec. 179(f)(2), and the component is placed in service by the taxpayer in a tax year beginning after 2015, the component may qualify as Code Sec. 179 property if the taxpayer elects to apply Code Sec. 179(f).
For a discussion of property that qualifies for the Code Sec. 179 election, see Parker Tax ¶97,710. For a discussion of how the election is make, see Parker Tax ¶94,750.
Last Updated by Admin on 2017-05-08 12:29:51 PM
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Last Updated by Admin on 2017-02-02 07:57:34 PM
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With sharply increased information reporting penalties in their second year (as high as $260 per late Form 1099), timely issuance of Form 1099s has become a critical imperative for many businesses. The urgency for timely reporting is compounded by the continued presence of questions on Forms 1065, 1120, 1120S, and 1040, asking whether the taxpayer made any payments in 2016 that would require the taxpayer to file Form(s) 1099. Starting this year, taxpayers also face earlier deadlines for reporting W-2 and 1099 information to the Social Security Administration and the IRS.
Practice Aid: See ¶320,690 for a client letter that explains the requirement to file Form 1099 and the significance of the Form 1099 question on the various returns.
Penalties for Failing to File Correct 1099s
Information reporting penalties apply if a payer fails to timely file an information return, fails to include all information required to be shown on the return, or includes incorrect information on the return. The penalties apply to all variations of Form 1099.
The amount of the penalty is based on when the correct information return is filed. For returns required to be filed for the 2016 tax year, the penalty is:
For purposes of the lower penalty, a business is a small business for any calendar year if its average annual gross receipts for the three most recent tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5 million.
Observation: Last year's increase in information return penalties represents the second time in just a few years that Congress has enacted sharp increases. For Form 1099s filed after August 1 or not filed at all, taxpayers face a 500% increase in the per-item penalty compared with the pre-2010 amount.
Last Updated by Admin on 2017-01-17 01:20:13 PM
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By winning the White House and holding on to their majorities in the House and Senate, Republicans put themselves in a position to fulfill campaign promises to reduce individual and corporate tax rates, repeal healthcare taxes, repeal the estate tax, and possibly implement broad, substantive tax reform.
With a Republican government seated for the first time in a decade, it's anticipated that 2017 will bring extensive tax changes. Among the most likely to pass:
A large increase in standard deduction amounts and a sharp curtailment of itemized deductions will also be on the table, along with broad corporate tax reform.
The proposed changes were centerpieces of the Trump campaign and were also featured in a tax reform plan put forward last summer by House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady ("Ryan-Brady plan").
Last Updated by Admin on 2017-01-12 01:54:20 PM
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Last Updated by Admin on 2016-12-23 06:21:53 PM
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The Tax Court determined that a taxpayer was entitled to a mortgage interest deduction for his residence, but denied his home office expense deductions. The court noted that a Form 1098 obtained by the IRS from the mortgage company, was sufficient evidence that the taxpayer paid the interest, despite the fact that the mortgage company had also issued a Form 1099-C in the same year, reporting that a substantial amount of interest on the debt had been forgiven. Alexander v. Comm'r, T.C. Memo. 2016-214.
Malcom Alexander owned two houses during 2010. The first house was in Washington, D.C., and the second was his principal residence in Gaithersburg, Maryland (Gaithersburg house). According to Alexander, he purchased the Gaithersburg house primarily for use in his multilevel network marketing business, and three of its 11 rooms - a first-floor office, a second-floor office, and a "presentation room" - regularly and exclusively for his business.
In 2010 Alexander paid to American Star Financial, Inc. (American Star), mortgage interest of $57,220 in connection with the Gaithersburg house. Also in 2010, American Star issued him a Form 1099-C, Cancellation of Debt, reporting that the company canceled $100,665 of debt relating to the Gaithersburg house, including $52,746 of interest.
On his 2010 income tax return, Alexander claimed a $57,220 deduction for the interest paid on the Gaithersburg house, and claimed he was entitled to a home office expense deduction for the use of 27.27 percent of the house. The IRS audited the return, and denied the deductions.
Code Sec. 163(h) generally allows taxpayers to deduct "qualified residence interest," which includes amounts paid or accrued during the taxable year on acquisition indebtedness (such as a mortgage).
Under Code Sec. 280A(c)(1), taxpayers can deduct expenses attributable to a home office if the expenses are allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for the taxpayer's trade or business.
The Tax Court stated that at trial Alexander testified credibly that he paid $57,220 in mortgage interest to American Star in 2010, noting that a Form 1098, Mortgage Interest Statement, the IRS subpoenaed from the company showed that it received $57,220 of mortgage interest from Alexander in 2010 in connection with the Gaithersburg house.
The IRS argued that American Star canceled Alexander's mortgage interest for 2010 and therefore he did not pay the interest reported as received by American Star on the Form 1098. The court stated it was not persuaded by the IRS's argument for several reasons. First, the court said, the IRS presented no evidence that the reported cancellation of indebtedness was connected to the interest payments American Star reported having received. Second, the court noted the amount of interest reported as canceled on the Form 1099-C ($52,746) was not the same as the amount of interest reported as received by American Star on the Form 1098 ($57,220). Furthermore, the court observed, the IRS conceded before trial that Alexander wasn't liable for the cancellation of indebtedness income reported on the Form 1099-C. Accordingly, the court held that Alexander was entitled to his claimed $57,220 mortgage interest deduction.
With regard to Alexander's claimed home office expense deductions, the court noted that in order to substantiate that he used 3 of 11 rooms (i.e., 27.27 percent) of the Gaithersburg house regularly and exclusively for business purposes, Alexander offered into evidence copies of photographs depicting rooms, folding chairs, and social gatherings. However, the court stated, the copies of photographs did not establish whether the rooms were used regularly and exclusively for the network marketing business. In addition, the court stated that even if Alexander established that he used certain rooms regularly and exclusively for business purposes, he provided no testimony or documentation concerning the size of the house and rooms which would allow it to properly allocate costs. Accordingly, the court sustained the IRS's disallowance of a home office expense deduction.
Last Updated by Admin on 2016-12-09 08:57:20 PM
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The tangible property regulations allow taxpayers that pay or incur amounts to acquire, produce, or improve tangible or personal property to elect to apply a de minimis safe-harbor expensing for amounts that they also expense for financial accounting purposes. The amounts allowable under the de minimis safe harbor are $2,500 or $5,000, depending on whether the taxpayer has an applicable financial statement (AFS). Taxpayers with an AFS may use this safe harbor to deduct amounts paid for purchases and/or improvements of tangible property for up to $5,000 per invoice or item, provided that this accounting procedure is in writing. Non-AFS taxpayers may use the safe harbor to deduct up to $2,500 per invoice or item. Non-AFS taxpayers are not required to have written accounting procedures, but they must expense amounts on books and records in accordance with accounting procedures existing at the beginning of the tax year.
If a taxpayer's policy is to expense items above the $2,500 threshold for non-AFS taxpayers, it should still elect the de minimis safe harbor on the federal return because this will ensure that the IRS will not question the deduction of the items costing $2,500 or less.
Taxpayers must apply their applicable threshold to their books and records to benefit from this election and eliminate any book-to-tax differences when deducting assets or improvements that fall under their applicable threshold.
To elect the de mnimis safe harbor, the taxpayer should attach a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to the timely filed federal tax return including extensions for the tax year in which the de minimis amounts are actually paid. The annual election does not require the filing of Form 3115, Application for Change in Accounting Method.
Last Updated by Admin on 2016-11-16 01:43:58 PM
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The IRS has provided the 2016-2017 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. Notice 2016-58.
In Notice 2016-58, the IRS issued the annual update on special per diem rates used in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. Specifically, the notice provides: (1) the special transportation industry meal and incidental expenses rates (M&IE rates), (2) the rate for the incidental expenses only deduction, and (3) the rates and lists of high-cost localities for purposes of the high-low substantiation method.
Taxpayers using the rates and the list of high-cost localities provided in Notice 2016-58 must comply with Rev. Proc. 2011-47, which provides rules for using a per diem rate to substantiate, under Code Sec. 274(d) and Reg. Sec. 1.274-5, the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.
For purposes of the high-low substantiation method, the per diem rates are $282 for travel to any high-cost locality and $189 for travel to any other locality within the continental U.S. (up from $275 and $185, respectively). The amount of the $282 high rate and $189 low rate that is treated as paid for meals for purposes of Code Sec. 274(n) is $68 for travel to any high-cost locality and $57 for travel to any other locality within the continental U.S.
The per diem rates for the meal and incidental expenses only substantiation method are $68 for travel to any high-cost locality and $57 for travel to any other locality within the continental U.S. (same as last year).
Notice 2016-58 is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only that are paid to any employee on or after October 1, 2016, for travel away from home on or after October 1, 2016. Rates for the period of October 1, 2015 through September 30, 2016, can be found in Notice 2015-63.
Last Updated by Admin on 2016-10-27 01:11:02 PM
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Hurricane Matthew victims in much of North Carolina and parts of South Carolina, Georgia and Florida have until March 15, 2017, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today. This includes an additional filing extension for those with valid extensions that run out at midnight tonight, Oct. 17.
The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for either individual assistance or public assistance. Moreover, taxpayers in counties added later to the disaster area will automatically receive the same filing and payment relief.
The IRS is taking this step due to the unusual factors involving Hurricane Matthew and the interaction with the Oct. 17 extension deadline.
The tax relief postpones various tax filing and payment deadlines that occurred starting on Oct. 4, 2016. As a result, affected individuals and businesses will have until March 15, 2017, to file returns and pay any taxes that were originally due during this period. This includes the Jan. 17 deadline for making quarterly estimated tax payments. For individual tax filers, it also includes 2015 income tax returns that received a tax-filing extension until today, Oct. 17, 2016. The IRS noted, however, that because tax payments related to these 2015 returns were originally due on April 18, 2016, those are not eligible for this relief.
A variety of business tax deadlines are also affected including the Oct. 31 and Jan. 31 deadlines for quarterly payroll and excise tax returns. It also includes the special March 1 deadline that applies to farmers and fishermen who choose to forgo making quarterly estimated tax payments.
In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Oct. 4 and before Oct. 19 if the deposits are made by Oct. 19, 2016. Details on available relief can be found on the disaster reliefpage on IRS.gov.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.
In addition,the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.
Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2016 return normally filed next year), or the return for the prior year (2015). See Publication 547 for details.
Currently, the following areas are eligible for relief:
North Carolina: Beaufort, Bertie, Bladen, Brunswick, Camden, Carteret, Chowan, Columbus, Craven, Cumberland, Currituck, Dare, Duplin, Edgecombe, Gates, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lenoir, Martin, Nash, New Hanover, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Pitt, Robeson, Sampson, Tyrrell, Washington, Wayne and Wilson counties.
South Carolina: Beaufort, Berkeley, Charleston, Colleton, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Jasper, Marion, Orangeburg and Williamsburg counties.
Georgia: Bryan, Camden, Chatham, Glynn, Liberty and McIntosh counties.
Florida: Brevard, Duval, Flagler, Indian River, Nassau, St. Johns, St. Lucie and Volusia counties.
Last Updated by Admin on 2016-11-16 01:57:35 PM
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The Internal Revenue Service announced today that it plans to begin private collection of certain overdue federal tax debts next spring and has selected four contractors to implement the new program.
The new program, authorized under a federal law enacted by Congress last December, enables these designated contractors to collect, on the government's behalf, outstanding inactive tax receivables. As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act. The IRS has selected the following contractors to carry out this program.
These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working their accounts. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.
The IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency. The agency will then send a second letter to the taxpayer and their representative confirming this transfer.
Private collection agencies will be able to identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act and must be courteous and respect taxpayer rights.
The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continual phone scams where callers impersonate IRS agents and request immediate payment.
Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to the IRS, not the private collection agency.
Last Updated by Admin on 2016-11-16 01:46:30 PM
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The Tax Court held that a physical education teacher, who taught at multiple schools each day, was entitled to deductions for the use of her home office. The court determined that the nature of the taxpayer's work required her to use portions of her home as her principle place of business in order to complete administrative and management activities, and found she did so for the convenience of her employer. The court disallowed the taxpayer's claimed deductions for unreimbursed vehicle and travel expenses, finding that she was not able to substantiate those expenses. Czekalski v Comm'r, T.C. Summary 2016-56.
Diana Czekalski has been employed by the Hayward Unified School District (Hayward USD), part of the California public school system, for 31 years as an adapted physical education teacher. Her primary responsibilities include planning, developing, and implementing physical education programs for students with special needs.
On an average day, Czekalski drove her personal vehicle from her home to several schools where she used specialized physical education equipment, portable sound systems, and other devices (which she transported in her car) to engage students with special needs in appropriate physical education activities. At the end of the day, Czekalski returned home where she prepared various reports (e.g., progress and time and attendance reports) that she submitted to Hayward USD. In 2011 Czekalski was the sole adapted physical education teacher in school district, and she instructed as many as 96 students weekly.
Czekalski lives in a two-story residence with a two-car garage comprising a total of approximately 1,462 square feet of space. In 2011 Czekalski used an upstairs bedroom (80 square feet of space) as an office where she prepared routine reports and performed other administrative tasks related to her work for Hayward USD, and she devoted approximately one-half of her garage (144 square feet of space) to storing physical education equipment owned by Hayward USD.
In November 2011 Czekalski traveled to Long Beach, California, to attend a conference for educators working with children with disabilities. Before the trip, she had been informed by a Hayward USD representative that she would not be reimbursed for her travel expenses because of budget constraints.
On her 2011 income tax return, Czekalski claimed deductions for real estate taxes, home mortgage interest, depreciation, and the business use of her home. In addition, she claimed deductions for unreimbursed employee expenses, including vehicle and travel expenses. Following examination, the IRS disallowed the majority of Czekalski's deductions for lack of substantiation, determining a deficiency of $7,147 in her income tax for 2011 and an accuracy-related penalty of $1,429 pursuant to Code Sec. 6662(a).
Under Code Sec. 280A(c)(1), taxpayers can deduct expenses attributable to a home office if the expenses are allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for the taxpayer's trade or business. A taxpayer's home office may qualify as her principal place of business if she uses it exclusively and regularly for administrative or management activities of her business and if there is no other fixed location suitable for the taxpayer to conduct those activities. If the taxpayer is an employee, the deduction is allowed only if the exclusive use of the space is for the convenience of the taxpayer's employer.
Code Sec. 274(d) prescribes strict substantiation requirements for deductions for expenses related to travel, including meals and lodging. To satisfy these requirements, a taxpayer generally must maintain adequate records and documentary evidence which, in combination, are sufficient to establish the amount, date, and business purpose for the expenditure (Reg. Sec. 1.274-5T(b)(6)).
The Tax Court determined that Czekalski used the bedroom office and a portion of her garage (together, approximately 15 percent of her living space) on a regular and exclusive basis to conduct administrative and management activities for her work, and did so for the convenience of her employer. The court found that there was no fixed location other than those locations where Czekalski was able to conduct these activities, because the nature of her employment required her to consistently travel to multiple schools within the district during the work day and she was required to provide storage space for specialized equipment owned by Hayward USD.
Finding that Czekalski had established that she paid approximately $3,420, $876, and $888 annually for home owner's association dues, utility charges, and trash collection fees, respectively, the court held that she was entitled to a deduction of $778 for the business use of her home (i.e., 15 percent of the total of the expenses listed above). The court also disallowed her claimed depreciation deductions because she failed to identify the underlying property. The court did not include in its calculations the property taxes and mortgage interest Czekalski paid in 2011, noting that the IRS had already allowed deductions for those expenses.
With regard to Czekalski's claims for unreimbursed employee business expenses, the court observed that she did not produce any records of her vehicle expenses (including parking fees and tolls) that would satisfy the strict substantiation requirements of Code Sec. 274(d), concluding that she was not entitled to deductions for those expenses. In addition, the court noted that other than her hotel charges, Czekalski failed to substantiate any expenses, such as airfare and meal expenses, relating to her attendance of the educators conference in November 2011 for which she was not reimbursed by Hayward USD.
The court affirmed the accuracy related penalties, finding that Czekalski did not have reasonable cause with respect to the understatements.
Last Updated by Admin on 2016-10-03 04:28:00 PM
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The Tax Court held that although a pastor took a vow of poverty, payments for his well-being and living expenses made by his church on his behalf were included in his income. The court noted that poverty vows only exempt ministers from federal income tax liability where the minister remits money received from third parties to his church, not where the minister seeks to exclude payments received from the church itself. White v. Comm'r, T.C. Memo. 2016-168.
Ronald White has been a pastor for over 30 years. In 1983, he established the World Evangelism Outreach Church (WEOC) in DeFuniak Springs, Florida. As WEOC's pastor, White ministered from the pulpit and at nursing homes, helped build churches on foreign soil, established a feeding program for children, and supported widows and orphanages.
In 2001, White recommended to WEOC's board of advisers that the church be restructured to include a corporation sole as an office of the church. The board of advisers unanimously agreed with the recommendation, and later that year a domestic nonprofit corporation sole of WEOC registered as "The Office of Presiding Head Apostle, of Ronald Wayne White" was created.
In November 2001, White signed a document entitled "Vow of Poverty" detailing that he agreed to divest his property and future income to WEOC and in turn WEOC would provide for his physical, financial, and personal needs. WEOC then established an apostolic bank account, and granted White signatory authority over the account for his use.
White did not file an income tax return for 2006, 2007, 2008, and 2009. The IRS prepared a substitute for return for each year and determined that White had unreported income for payments various entities made directly to him or on his behalf.
Before the Tax Court, White acknowledged that for the years at issue WEOC or its related entities made payments on his behalf for his personal expenses, but argued that his vow of poverty insulated him from being taxed on the compensation he received for his services to WEOC.
It appeared to the court that White was relying on the IRS's original official public pronouncement regarding the vow of poverty, O.D. 119, which was published in 1919. In part, the court said, O.D. 119 stated that "A clergyman is not liable for any income tax on the amount received by him during the year from the parish of which he is in charge, provided that he turns over to the religious order of which he is a member, all the money received in excess of his actual living expenses, on account of the vow of poverty which he has taken." The court observed that Rev. Rul. 77-290 had superseded O.D. 119 and provides that income earned by a member of a religious order on account of services performed directly for the order or for the church with which the order is affiliated and remitted back to the order in conformity with the member's vow of poverty is not includible in the member's gross income.
The court also noted that it had previously held - in Cortes v. Comm'r, T.C. Memo. 2014-181, Rogers v. Comm'r, T.C. Memo. 2013-177, and Gunkle v. Comm'r, T.C. Memo. 2012-305 - that a vow of poverty does not insulate a pastor from tax liability when the pastor receives funds directly from his church in exchange for services rendered if the pastor does not remit those funds to the church in accordance with his vow of poverty, has control over the funds, and uses the funds for personal expenditures.
The court stated that the critical element in the instant case was that White did not remit his income to WEOC pursuant to his vow of poverty. The court observed that White had signatory authority over the church's apostolic bank account and the payments made on his behalf served only to benefit White in meeting his living expenses. The court found that White's reliance on O.D. 119 was misguided, and that his case was not distinguishable from its holdings in Cortes, Rogers, and Gunkle. Accordingly, the court determined that White's vow of poverty did not exempt him from federal income taxes.
For a discussion of ministers' employment tax reporting obligations, including the vow of poverty exception, see Parker Tax ¶15,560.
Last Updated by Admin on 2016-09-23 04:58:41 PM
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The IRS has issued proposed regulations, effective beginning January 1, 2017, that would increase the fee taxpayers are required to pay in order to enter into an installment agreement with the IRS. The regulations also establish new fees for taxpayers entering into such agreements online. REG-108792-16 (8/22/16).
Code Sec. 6159 authorizes the IRS to enter into an agreement with any taxpayer for the payment of tax in installments, if the IRS determines that the installment agreement will facilitate the full or partial collection of the tax. Installment agreements are voluntary, and taxpayers may request an installment agreement in person, by completing the appropriate forms and mailing them to the IRS, online, or over the telephone. The terms of an installment agreement generally require the taxpayer to timely pay a minimum monthly payment, file all required tax returns, and pay all taxes in-full.
Since the enactment of the installment agreement program, the IRS periodically develops new ways for taxpayers to enter into and pay for installment agreements, such as through online payment agreements and direct debit online payment agreements. These installment agreement types have not had their own separate user fee, but instead have been included in the existing user fee structure.
To bring user fee rates for installment agreements in line with the current costs to the IRS, proposed regulations would increase the user fee for the existing installment agreement types and introduce new fees for online payment agreements and direct debit online payment agreements. Five of these proposed user fee rates are based on the full cost of establishing and monitoring installment agreements, while the sixth rate is for low-income taxpayers.
New and Increased User Fees for Installment Agreements
For regular installment agreements, taxpayers contact the IRS in person, by phone, or by mail and sets up an agreement to make manual payments over a period of time either by mailing a check or electronically through the Electronic Federal Tax Payment System (EFTPS). The proposed fee for entering into a regular installment agreement is $225 (increased from $120).
For direct debit installment agreements, taxpayers contact the IRS by phone or mail and sets up an agreement to make automatic payments over a period of time through a direct debit from a bank account. The proposed fee for entering into a direct debit installment agreement is $107 (increased from $52).
For online payment agreements, taxpayers set up an installment agreement through the IRS website and agree to make manual payments over a period of time either by mailing a check or electronically through the EFTPS. The proposed fee for entering into an online payment agreement is $149 (new for 2017).
For direct debit online payment agreements, taxpayers set up an installment agreement through the IRS website and agree to make automatic payments over a period of time through a direct debit from a bank account. The proposed fee for entering into a direct debit online payment agreement is $31 (new for 2017).
For restructured or reinstated installment agreements, taxpayers modify a previously established installment agreement or reinstate an installment agreement on which the taxpayer has defaulted. The proposed fee for restructuring or reinstating an installment agreement is $89 (increased from $50).
The low-income rate is a rate that applies when a low-income taxpayer enters into any type of installment agreement, other than a direct debit online payment agreement, and when a low-income taxpayer restructures or reinstates any installment agreement. The proposed low-income rate is $43 (no change, but would now apply to restructured or reinstated agreements).
The proposed regulations provide that the increased fees are set to take effect for tax years after January 1, 2017.
Last Updated by Admin on 2016-09-16 05:23:29 PM
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In an effort to minimize taxpayers' timing difficulties with filing dates for several common types of returns and reporting forms, Congress included provisions in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, revising original and extended due dates for tax years starting after Dec. 31, 2015 (e.g., 2016 returns prepared during 2017).
Form 1065, U.S. Return of Partnership Income (calendar year end)
Form 1041, U.S. Income Tax Return for Estates and Trusts (calendar year end)
Form 990, Return of Organization Exempt From Income Tax (calendar year end)
Regarding Forms 1120 filed for corporations using June 30 as their tax year, corresponding changes are made for taxpayers that use a fiscal year as their tax year. Thus, partnerships and S corporations with a noncalendar fiscal year have a return date of the 15th day of the third month following the close of the fiscal year. C Corporations with a noncalendar fiscal year ending on any day other than June 30 have a due date of the 15th day of the fourth month following the close the fiscal year.
Form 1120, U.S. Corporation Income Tax Return (calendar year end)
Form 1120 (June 30 year end)
Form 1120S, U.S. Income Tax Return for an S Corporation (calendar year end)
In addition, other important due date modifications for tax years beginning after Dec. 31, 2015, include:
1. FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), will be due on April 15 and may be extended until Oct. 15.
2. Information returns (e.g., Forms W-2 and 1099) must continue to be furnished to recipients by Jan. 31 and filed with the IRS and Social Security Administration (where required) by the last day of February for paper forms and March 31 if filed electronically.
Last Updated by Admin on 2016-11-16 01:47:03 PM
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Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.
Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.
Social Security and Medicare taxes
If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:
The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).
Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.
Unemployment and federal income taxes
If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.
The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.
You don’t have to withhold federal income tax or, usually, state income tax unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).
As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).
After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.
Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.
Last Updated by Admin on 2016-11-16 02:02:36 PM
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When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.
For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.
Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.
But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)
In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.
Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.
Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.
Last Updated by Admin on 2016-11-16 01:47:59 PM
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With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.
Pros and cons
Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:
Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.
You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.
Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.
Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.
If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.
Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.
Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.
The right move
Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.
Last Updated by Admin on 2016-11-16 01:45:29 PM
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While most couples go to great lengths to ensure that their wedding day is perfect, far fewer think about how their nuptials will impact their tax liability. The truth is, the moment you get married, no matter what time of the year it is, in the eyes of the government you are considered to have been married for the entire tax year. With this in mind, here are some tax tips to consider as you prepare to walk down the aisle:
Don’t let tax stress put a damper on your big day. Take a few moments to talk about taxes with your partner before your wedding, or schedule some time to consult with one of our professionals after the honeymoon.
Last Updated by Admin on 2016-11-16 01:48:33 PM
Posted in general
Getting Comfortable With The Home Office Deduction
One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you've done that, another good idea is getting comfortable with the home office deduction.
To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusivelyin connection with your business. What's more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you're an employee, your use of the home office must be for your employer's benefit.
The only option to calculate this tax break used to be the actual expense mehod. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don't have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addtion, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.
But now there's an easier way to claim the deduction. Under the simplified method, you mulitply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate $5 per square foot. You can claim up to $1500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax.
Questions? Please give us a call.
Last Updated by Admin on 2016-11-16 01:46:04 PM
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It’s fair to say that the recent ‘Brexit’ vote by Britons to exit the European Union (EU) has shaken global financial markets to their core, at least in the short-term. Financial analysts say that it’s too early to tell what the long-term impact of this historic vote will be. But one thing is for certain, the Brexit offers several important lessons that individual investors and business owners can take to heart as they review their own situation at mid-year.
It is likely to be years before we know how the Brexit will affect the financial strength of our domestic and world markets. This makes it more important than ever to keep the above tips in mind, and to consider doing some proactive mid-year planning to protect your own individual and business finances this year, and in the years to come. Need help with your mid-year planning? Contact our firm today, we look forward to assisting you.
Last Updated by Admin on 2016-11-16 01:49:03 PM
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One of the most (if not the most) important indicators of business health is its cash flow. Even if your business is profitable and growing, if you don't have a consistent stream of cash coming in, you'll run into financial trouble. Lack of cash flow is the primary reason that more than one quarter of new businesses fail—29 percent to be exact. Here are some smart strategies that can help ease the cash flow crunch.
With the stakes so high in today’s economy, it's not surprising that many new businesses struggle with cash flow issues. However, by implementing the strategies above and working with our professional team, you'll have a better chance to keep the cash coming in and your business going strong.
Last Updated by Admin on 2016-11-16 01:49:31 PM
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With a rise in IRS phone scams, the Agency changed its policy on contacting taxpayers whose tax records are subject to an audit. The new policy instructs IRS agents to contact affected taxpayers only by mail—never by phone (which used to be the IRS’ go-to method of contact). As such, we urge all of our clients to adhere to the following guidelines should you receive a call from someone claiming to be from the IRS and you’ve NOT received a contact letter prior:
If you have any questions about the risks related to tax and financial scams, please contact our office.
Last Updated by Admin on 2016-11-16 01:49:58 PM