Biz Tips

06/2010

Independent Contractor vs. Employee Status

Businesses hoping to reduce payroll taxes and fringe benefits may think that using independent contractors is the answer. However, the IRS will be focusing audit attention on employment tax issues, and is looking for ways to increase revenue and compliance in this area because there is tremendous opportunity for abuse through misclassification resulting in employment tax understatement.

Since 1987, the IRS has used the “20-factor test” in Revenue Ruling 87-41 in determining worker classification. (For more info see: Employees vs. Independent Contractor).

There are five key steps to ensure that your documents are in order in case the IRS challenges your position on independent contractor status:

1. Review all current independent contractor agreements (for a sample agreement see: Independent Contractors: The Legal Boundaries).

2. Establish contractor agreements in writing with all independent contractors.

3. Maintain appropriate documentation in a separate “vendor” file, instead of the employment file.

4. Review standard practices in your industry to take advantage of possible “safe harbor” provisions of standard industry practices.

5. Use arm’s-length business terms and a fair market value approach regarding all transactions with independent contractors.

Excerpted from the article by Mary Bernard, CPA, October 29, 2009 (For complete article see: Employees vs. Independent Contractor).

04/2010

Guaranteeing Loans to An S Corporation Won’t Give Owners a Tax Break…

The guarantees do not increase the owner’s deductible losses, the Tax Court says. S company owners can deduct losses only up to the amount of their investment in the firm, including any advances made. Guaranteeing a bank loan counts only when the shareholder makes good on it (Weisberg, TC Memo. 2010-75). S owners can avoid this problem by borrowing the funds themselves and then lending them to the firm. That increases their basis in the company. In this case, the S firm owner took out a loan in the year after he guaranteed a loan to the company. Only then does his basis rise and he can deduct more losses.

The Kiplinger Tax Letter Vol. 85, No. 7, April 1, 2010

02/2010

As the odds of tax rate increases on high income taxpayers improve…

You may want to reconsider the form of your business. Now, the top rate on both individuals and corporations is 35%, smoothing the income tax differences among proprietorships, partnerships, regular corporations, S companies and LLCs.

The top rate on individuals will likely top 40%. Congress is almost certain to let the Bush tax rate cuts lapse after 2010, which would make the top rate 39.6%. It could climb to 45% if a surtax being talked about by House Democrats is OK’d.

Higher rates provide a big tax incentive to operate as a regular corporation, despite the two layers of tax. With such a big spread between the maximum tax rate on corporations and individuals, many people would avoid operating businesses as S firms, partnerships or sole proprietorships. The reverse happened in 1986, when the top rate on individuals was lower than the maximum corporate tax rate.

The Kiplinger Tax Letter Vol. 84, No. 18

11/2009

No ‘Free lunch’ for tax debts…

Have you seen the ads on TV, or heard them on radio, promoting low-cost payoffs to the IRS for unpaid federal tax debts? Chances are, if something sounds too good to be true, it probably is. The IRS intends to crack down on companies that try to defraud taxpayers by promising they can dramatically reduce their debt in return for big upfront fees. The agency may impose penalties and/or criminal sanctions on offenders.

TIP: If you’re in a position where you need to offer a compromise to the IRS, consult with an experienced tax professional.

Small Business Tax Strategies – October 2009

09/2009

While campaigning during 2008, then-candidate for president Barack Obama made his hostility toward offshore jurisdictions clear:

“There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.- based corporations. That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.” It made no difference that a similar building in Wilmington, Delaware, home to his vice president, Joe Biden, houses more than 50,000 corporations. The American public is commonly misled by politicians and the press to believe that investing or engaging in any financial activity offshore should be suspected of crimes and tax evasion, even though it is legal to conduct such activities.

Just for the record, it still is legal to...
• Use an offshore bank or other financial account.
• Create and donate assets to an offshore asset protection trust or family foundation.
• Form and operate an international business corporation (IBC).
• Acquire dual citizenship and a second passport.
• Purchase offshore life insurance and annuities that allow deferred taxes.
• Invest in offshore mutual and hedge funds, precious metals and real estate.

08/2009

IRS TO IMPLEMENT TRACKING OF PAYMENTS BY PLASTIC

The IRS will be gathering even more information about the income for small businesses under a new massive reporting requirement. While this change won't take effect for several years, the new requirement has big implications for tax practitioners, accountants and bookkeepers.

Under new Code Section 6050W, any businesses who accept payment cards will receive annual statements from the banks or other organizations issuing the cards, showing the gross amount of card payments made to the business. The bank or other organization will also have to report the payments to the IRS. While the new payment card reporting requirement will not apply until 2011, a new notice from the IRS reveals some of the issues the IRS is grappling with in implementing the new rule. For example, while the law and committee reports make it clear that the new reporting rule will apply to both credit and debit cards as well as payment through third party networks such as PayPal, the IRS indicates that it is weighing how to interpret the exact definition and scope of "payment card."

The IRS is also considering whether the current Form 1099 should be used for credit card payment reporting and, if so, whether the timing of such reports should conform to the current information reporting schedule. In addition, the IRS will need to determine whether reportable payments should be reduced by discounts, fees, refunds or other amounts, as well as how to administer the system to avoid double reporting [Notice 2009-19].

Business owners may want to take a fresh look at current bookkeeping procedures. When the new reporting requirements kick in, they will need to reconcile the amounts reported by the payment card companies with their own books. Failure to do so will almost certainly be a red flag to the IRS.

By: Terry Myers, J.D. and Dee DeScherer, J.D.

05/2009

IRS LEERY OF "ROBS"

The IRS will scrutinize a type of transaction that taps 401(k) accounts and other tax-deferred retirement plans to fund business startups, the Service said in an audit guideline memo. The Service said it won’t necessarily challenge the transaction, called a “rollover business startup” or ROBS, but it will examine whether the arrangement constitutes a prohibited transaction between a profit sharing plan and its sponsor, among other possible law violations. The transaction has been promoted on the Web and at seminars as a method of funding new franchise businesses.

Typically in a ROBS, an individual creates a business or shell corporation as a C corporation that sponsors a profit sharing plan. The plan is authorized to invest in the corporation’s stock all assets attributable to rollover accounts. The individual becomes the corporation’s sole employee and plan participant. The individual rolls over a previously qualified retirement account into the new plan, investing its assets in the corporation’s stock and thus funding the business. Although the Service has issued some favorable employee plan determination letters for ROBS, the procedure raises issues of possible violations of nondiscrimination requirements and prohibited transactions stemming from deficient stock valuation and promoter fees being paid out of proceeds, the memo states. ROBS might also run afoul of rules requiring qualified plans to be permanent and operated for the exclusive benefit of employees and beneficiaries, the Service said.

Journal of Accountancy
February 2009

02/2009

HOME SALE GAIN EXCLUSION – Unforeseen Circumstances

Congress allows a generous exemption from tax on gain realized from the sale of a personal residence. Excludable gain amounts to $500,000($250,000 singles) for those who have occupied their residence for two of the last five years. If this condition is not met, the exclusion is generally denied. The following is a list of specific situations that the IRS has ruled are “unforeseen circumstances”, allowing prorata exclusion of gain. While Letter Rulings can’t be cited as precedent, they give a good idea of IRS thinking.

Description		Ltr. Rul.
Criminal activities in the neighborhood, including assault and threats to the taxpayer’s son.		200601009
Taxpayer’s move to school district where children attend school after remarriage.		200601022
Move to a new home where taxpayer’s child and grandchild could also live.		200601023
Buying a larger home to comply with state adoptions requirements.		200613009
Death threats made to a police officer.		200615011
Unmarried taxpayers sell jointly owned home that is not big enough for expected child.		200652041
Excessive airport noise where taxpayer did not receive required notice from sellers or realtor.		200702032
Buying a home to accommodate medical needs of taxpayer’s mother-in-law.		200623024
Taxpayer sells home after remarriage to buy larger home for second wife and children.		200725018

01/2009

ASSET PROTECTION FOR A PRINCIPAL RESIDENCE

From an asset protection standpoint, the use of an LLC to hold a personal residence may provide liability protection that is superior to the typical tenant by the entirety title generally used by married individuals to own a personal residence. A single person would clearly have additional protection when compared to individual ownership.

Basic estate planning for married individuals generally requires the segregation of assets in order to maximize the use of each person’s unified credit amount. The use of an LLC makes it easier to fragment ownership of personal residence without increasing exposure to possible liabilities.

While it appears that the use of an LLC to hold a personal residence may offer a variety of advantages to the property owner or owners, it is important to note that the IRS has taken a position that the period of time a personal residence is held by a partnership (including an LLC) will not qualify as a personal period of ownership under the gain exclusion rules of Sec. 121 (Letter Ruling 20119014, revoking Letter Ruling 200004022). Accordingly, consultants should analyze the owners’ tax positions carefully before putting a personal residence into a multimember LLC.

From "Asset Protection Planning With Limited Liability Companies"
by Albert B. Ellentuck, Esq.
The Tax Adviser, October, 2008

12/2008

WHY ALASKA TRUSTS HAVE AN EDGE

Several key provisions in Alaska state law adopted in 1998 encourage the use of self-settled trusts:

It is possible to change the situs (i.e., legal location) of an existing trust to Alaska. Protection from creditors is extended if some trust’s assets must be deposited in Alaska, the trust named at least one Alaska trustee, and the trust is registered in Alaska.

If a situation exists whereby a transfer to a trust defrauds creditors, only the portion that is necessary to satisfy creditors will be set aside.
Non-Alaskans may serve as co-trustees and are not considered to be doing business in Alaska.
Under an elective community property statute, married Alaska citizens can re-characterize some or all of their assets as community property. The statute also allows married non-Alaskan residents to treat the asset as community property under Alaska law. This is achieved with an Alaska Community Property Trust, which uses an Alaska trustee.

THE TAX STRATEGIST – July, 2008

11/2008

Tax Court Shows No Mercy Regarding Documentation of Charitable Contributions

In 2005, a couple donated more than $6,500 in separate checks to their church. When audited by the IRS, they produced cancelled checks, and a letter from the church, dated Jan. 22, 2008, confirming the amounts as tithes. The IRS didn’t question that the contributions were made or dispute the church’s tax exempt status, but it denied the deduction on grounds that the donations weren’t adequately substantiated. The IRS did permit a deduction for eight checks totaling $420 because none of those checks was for $250 or more (i.e., the threshold for requiring contemporaneous substantiation).

The Tax Court agreed with the IRS and stuck to the strict letter of the law. Because the couple failed to obtain a contemporaneous written acknowledgement for larger donations, their deduction was limited to only $420. A written acknowledgment is contemporaneous only if it is obtained by the earlier of the date the tax return is filed for the year of the contribution or the due date (including extensions) for filing the return for that year. It is advisable to obtain contemporaneous substantiation for all donations of cash and property at the time of the donation.

09/2008

Postponing Taxes with a Like-Kind Exchange

Normally, when a taxpayer sells an investment or business property for gain, a taxable event occurs. However, a qualifying like-kind exchange allows a taxpayer to defer – not eliminate – recognition of the taxable gain until a future time.

How It Works

With a like-kind exchange, the sale proceeds are applied to acquire a similar property. Both properties must be held for use in a trade or business or for investment. Primarily personal-use property, such as residence, does not qualify for a like-kind exchange. And like-kind exchange treatment isn’t available for inventory, stocks, bonds, notes, other securities or debt, partnership interests, or certificates of trust.

The IRS defines “like-kind” to mean property of the same nature, character, or class. In general, any kind of non-personal use real estate can be exchanged for any kind of real estate – including rental property for vacant land, as an example. But real estate cannot be exchanged for personal property, such as equipment.

Unless the exchange happens to be a simultaneous swap of one property for another, cash or another property may be involved in the exchange transaction. In that case, gain may be recognized in regard to the cash or other property received.

Time Limitations

To achieve tax deferral, two time limits must be observed. The first time requirement is that potential replacement properties must be clearly identified in writing within 45 days of the sale of the relinquished property. Second, the replacement property must be received and the exchange completed – in general – within 180 days of the sale.

Newkirk Tax Report, July 2008

06/2008

Vehicle Depreciation Limits…

The IRS has issued the depreciation limits for business vehicles first placed in service in 2008. Recent legislation allows higher limits for new vehicles that will qualify for 50% bonus depreciation. The first-year limit for new cars is $10,960; for used cars, it’s $2,960. Depreciation limits for later years are the same for both new and used cars: $4,800 in year two, $2,850 in year three, and $1,775 in all following years. The 2008 first-year depreciation limit for trucks and vans is $11,160 for new vehicles and $3,160 for used vehicles. Limits for both new and used vehicles in year two are $5,100, in year three $3,050, and each succeeding year $1,875. For details relating to your 2008 vehicle purchases, contact us.

The Tax & Business Letter, Summer 2008

04/2008

More small vehicles qualify for the
cents-per-mile method…

Firms can value employees’ personal use of company cars at 50.5 cents a mile, (as opposed to using the more complicated lease value method), but only if the auto cost $15,400 or less. For trucks and vans, the cents-per-mile method can be used if the vehicle costs $16,700 or less. For more expensive vehicles, the IRS annual lease value tables must be used (Rev. Proc. 2008-13). The service will release the updated lease value tables for 2008 soon.

Kiplinger Tax Letter, February 22, 2008

03/2008

Claiming cell phones as a tax free
fringe benefit will get easier…

Congress is prodding IRS to loosen the rules that tax personal use of employer-provided cell phones and require detailed records to be kept on business usage. Workers now must document the business purpose, time and place of calls. Lawmakers say cell phone usage should be on a par with that of company desk phones or e-mail, which needn’t be tracked. If IRS doesn’t ease the rules soon, Congress will OK legislation doing so.

Kiplinger Tax Letter, February 22, 2008

02/2008

Highlights of the New $152 Billion Stimulus Law

In an effort to boost the U.S. economy, Congress passed the Economic Stimulus Package Act of 2008 on February 7th. The legislation will provide tax rebate checks to about 130 million households, starting sometime in May.

The package also contains business tax incentives and help for distressed homeowners. Here are the major provisions in the law:

Single individuals may be entitled to receive a one-time tax rebate of up to $600; joint filers may qualify for up to $1,200. The rebate amount begins to phase out for higher-income taxpayers, beginning at $75,000 of adjusted gross income for single filers and $150,000 for joint filers (based on 2007 tax returns).
People who don’t pay income tax, may qualify for $300 rebates if they had at least $3,000 of earned income or tax liability of at least $1 in 2007. Social security income and federal payments to disabled veterans, and their widows, count as earned income for rebate purposes.
Those who qualify for the basic rebates are also eligible for an additional $300 for each dependent child under age 17.
Businesses may qualify for 50% bonus depreciation on qualifying new equipment purchases in 2008.
The Section 179 expensing limit for 2008 is increased from the previous $128,000, to $250,000, and the 2008 phase-out threshold is increased from $510,000 of total equipment purchases to $800,000.
The loan limits for Fannie Mae, Freddie Mac, and the Federal Housing Administration have been increased, a provision intended to assist taxpayers during the sub-prime mortgage crisis.

01/2008

YOU CAN NO LONGER USE YOUR IRA TO CIRCUMVENT THE WASH SALE RULE

Having your IRA quickly buy back stock that you sold at a loss will trigger this rule, IRS says. The wash-sale rule bars a deduction for a loss on the sale of a security if you purchase an identical one within 30 days before or after the sale. Also, you can’t raise your basis in your IRA by the amount of the disallowed loss according to new Rev. Rul. 2008-5. The IRS has flip-flopped on this issue in the past, initially OK’ing a loss deduction and then saying the issue was under study. Now the Service officially says no.

11/2007

Email Scams

The IRS has warned taxpayers of a new phishing scam in which a phony IRS email tells recipients they can receive $80.00 by filling out an online customer satisfaction survey. The IRS does not initiate contact with taxpayers through email.

Another recent scam involves a “Tax Avoidance Investigation” email claiming to come from an IRS Fraud Department in which the recipient is asked to complete an “investigation form.” It is believed that clicking a link to the form may activate a Trojan Horse that can take over the person’s computer hard drive and allow someone remote access.

10/2007

IRA Owners Should Steer Away From "Prohibited Transactions"

The IRS defines a “prohibited transaction” as the improper use of IRA assets by the participant, the named beneficiaries or a disqualified person under the law. For this purpose, a “disqualified person” can be another family member, and the participant’s closely held company.

The list of prohibited transactions includes:

Borrowing funds from the IRA.
Selling property to the IRA.
Using the IRA as security for a loan.
Buying personal property with IRA funds.
Receiving unreasonable compensation for managing IRA funds.

According to a new government ruling, the prohibition extends to investments in a related party’s company. When a prohibited transaction occurs, the IRS treats the IRA owner as having withdrawn his or her account’s entire balance. So, if a client violates the rules, the distribution will be fully taxed at ordinary-income rates reaching as high as 35 percent. Additionally, the participant could owe an extra 10 percent penalty tax if he or she is under age 59 ½.

05/2007

DID YOU KNOW?

The IRS will remove a tax trap for one-person S corporations. The service is working on guidance clarifying that S-firm owners in states that don’t let such firms buy one-participant group health insurance plans can deduct the premiums. The IRS had said that the above-the-line deduction applied only to policies purchased in the name of the corporation. To get the deduction, the S firm must pay the medical premium, however.

The Kiplinger Tax Letter

Washington, January 12, 2007

03/2007

IRC Section 1244 Small Business Stock Loss Available up to $50k

Under IRC Section 1244 of the tax code, you can claim a tax deduction for loss on stock from a “qualified small business corporation”. (IRC Sec. 1244(c)(3) The loss is fully deductible against ordinary income as well as any capital gains. Single filers can deduct up to $50,000 of losses from Section 1244 stock in any one year, while joint filers can deduct up to $100,000. To qualify for Section 1244 treatment: The corporation must issue the stock directly to the investors, the stock must be acquired in exchange for cash or property contributed to the corporation, the stock must be issued by a small business corporation (invested capital of $1 mil or less), and the corporation must be an actual operating company (not an investment company).

12/2006

SEVEN STEPS TO SING SING

Here are the most common criminal violations of the tax law:

Claiming false deductions
Keeping two sets of books
Overstating the amount of deductions
Hiding or transferring assets or income
Making false entries in books and records
Claiming personal expenses as business expenses
Deliberately underreporting or omitting income

Source: IRS, www.irs.gov

11/2006

Charitable Contributions:

Previously, documentation needed for cash contributions depended on whether the amount was less than $250. If under $250, recordkeeping was very minimal; if $250 or more, the taxpayer had to have a written acknowledgement from the charity that included certain information.

New IRS requirements.

Beginning in 2007, all cash gifts, regardless of amount must be substantiated by a bank record or a written communication stating the charity’s name and the amount and date of the contribution. In addition, self-created records (such as logbooks), which previously could be used to document small donations, will not be accepted. This new rule will encourage contributors to make donations by check or credit card, in order to satisfy the new requirements.

10/2006

Regarding LLC's

Generally, profits and losses are divided among the Members of an LLC relative to their ownership percentage. However, if the LLC is taxed as a partnership (not taxed as an S-Corporation or C-Corporation), the Members can choose to vary how profits are allocated each year.

For example, an LLC owned 50/50 by two members can choose to allocate profits 75/25 one year in favor of one of the members, then 25/75 in favor of the other the next year. These allocations are called “Special Allocations” and the authority to do so must be contained in the LLC’s Operating Agreement. Nevada Revised Statutes do not provide this authority—in order to have this power, the Operating Agreement must specifically provide for this contingency.

09/2006

The IRS is casting a wider net during executive pay audits

Agents are digging deeper to make sure that employers are reporting and withholding on taxable fringe benefits provided to employees. Among the perks being eyed: Spousal travel to meetings, personal use of a company-supplied automobile, cell phones and home computers, stock options (both qualified and non-qualified), educational assistance, relocation expenses, prizes and awards, and country club memberships.

07/2006

Deducting Sales Tax Now An Option…

Remember when you could deduct sales tax on your federal income tax return? That deduction was eliminated in 1987 – but its back for a limited time. Legislation passed in 2004 allows taxpayers to choose between deducting state and local sales tax or state and local income tax on their 2004 and 2005 federal tax returns, and is expected to be extended for 2006. You can base your deduction for sales tax either on actual receipts you’ve kept or on amounts given in tables provided by the IRS.

05/2006

2006 Mileage Rates Announced

The standard mileage rates have changed again. The IRS increased the rates for the final four months of 2005, but has lowered them for 2006.

The rate for business driving is 44.5 cents per mile, and the rate for medical and moving expenses is 18 cents a mile. The rate for charitable driving remains at 14 cents a mile except for driving related to hurricane recovery work.

The 2006 mileage rate for charitable driving related to the 2005 hurricanes is 32 cents a mile for deduction purposes and 44.5 cents a mile for reimbursement purposes.

03/2006

More Audits...

The IRS has stepped up its audits of high-income taxpayers (those earning $100,000 or more). In fiscal year 2004, one hundred ninety five thousand two hundred (195,200) audits were conducted. This figure represents a 40% increase in the audit rate over 2003 and a 74% increase over 2002.

12/2005

Cancelled Checks

All Companies should insist on having their bank return the Company’s cancelled checks with the monthly bank statement. Cancelled checks are Company documents and will likely need to be presented to the IRS in the event of an audit of the Company’s records.

Most banks charge significant per check fees to produce copies of cancelled checks, and may not be able to provide copies of checks that are several years old. It is currently the trend of banks to charge a monthly fee to return cancelled checks. From the Company’s perspective, this is money well spent

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