John R Dundon II - Federally Authorized Tax Practitioner

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Tax Tips for Selling Your Home

February 20, 2012 John R. Dundon II Capital Gain, Capital Loss, Rental Real Estate, Tax Guidance & Preparation

Generally you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale. If you have a gain from the sale of your main home, you may be able to exclude [...]

2011 IRS Changes

February 13, 2012 John R. Dundon II Tax Guidance & Preparation, Tax Preparer, Taxpayer Advocate

Be sure to check out the IRS - Fact Sheet 2012-01 2011 Changes Offer Tax Benefits to Almost Everyone. The following are excerpts worthy of note: Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April [...]

Claim IRS Tax Credit for Hiring Veterans

February 9, 2012 John R. Dundon II Employment Tax, Tax Credit, Veteran

The VOW to Hire Heroes Act of 2011, provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations. IRS Notice 2012-13, posted today on IRS.gov, and the instructions for IRS Form 8850 provide details in support of the following… According [...]

IRS Form 1040 Schedule C: Profit or Loss from Business

February 7, 2012 John R. Dundon II Accounting Method, Business Expense, Business Income, Car expense, Depreciation, Disallowed Expenses, Employee Business Expense, Entity Classification, FICA, Health Insurance, Hobby, Home Office, Husband/Wife, Medicare, Net Operating Loss, NOL, Passive Activity, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Start up costs, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests

The sole proprietorship or Limited Liability Corporation (LLC) is in my opinion the easiest type of business entity to set up and begin operating. It is not separate from its owner with the income and expenses reported on IRS Form 1040 Schedule C. Some people have instant success with a venture that is profitable from the [...]

The Optimum Tax Rate Enticing Job Creation … and other tax musings.

February 6, 2012 John R. Dundon II Self Employ, Small Business

From my perspective an overall tax rate somewhere between 25 and 30 percent for all federal and state taxes combined is the point where my clients generally are enticed to invest more money in their business and create jobs. When their real total tax rate gets any higher than this they tend to just hold [...]

IRS Proposes New Treatment of LLC Members, Limited Partners Under Passive Loss Rules

February 3, 2012 John R. Dundon II LLC, Partnership, Passive Activity

In November 2011 the IRS issued proposed regulations (REG-109369-10) that would redefine “interest in a limited partnership as a limited partner” for purposes of determining material participation under the Sec. 469 passive loss rules. What that means in plain terms is that historically under Sec. 469(h)(2), losses from an interest in a limited partnership have [...]

IRS Failure to File Penalty Abatement for Partnerships

February 2, 2012 John R. Dundon II IRS Penalties, IRS Penalty and Interest Abatement

IF your partnership failed to timely file its IRS Form 1065 and you get penalized by the IRS you seek relief from or abatement of this penalty under IRS Revenue Procedure 84-35 if your partnership meets the following criteria 1. A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined [...]

IRS Interim Guidance for Streamlined Installment Agreements

February 1, 2012 John R. Dundon II Installment Agreement

Check out the Interim Guidance offered up by the US DEPARTMENT OF THE TREASURY http://www.irs.treas.gov/pub/foia/ig/sbse/sbse_05-0112-013.pdf Effective immediately the primary changes to the Streamlined Installment Agreement criteria are: • The dollar threshold increases from $25,000 to $50,000 aggregate unpaid balance of assessment • The time frame to full pay increases from 60 months to 72 months. Based [...]

Tax Tips for Selling Your Home

February 20, 2012 John R. Dundon II Capital Gain, Capital Loss, Rental Real Estate, Tax Guidance & Preparation

Generally you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
If you can exclude all of the gain, you do not need to report the sale on your tax return.
If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
You cannot deduct a loss from the sale of your main home.
Worksheets are included in IRS Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using IRS Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year’s tax return.
When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use IRS Form 8822, Change of Address, to notify the IRS of your address change.

No comments Home Sale

2011 IRS Changes

February 13, 2012 John R. Dundon II Tax Guidance & Preparation, Tax Preparer, Taxpayer Advocate

Be sure to check out the IRS - Fact Sheet 2012-01 2011 Changes Offer Tax Benefits to Almost Everyone. The following are excerpts worthy of note:

Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.

New forms.In most cases, you must report your capital gains and losses on the new IRS Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new IRS Form 8938, Statement of Foreign Financial Assets, with your return.

Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the early half of the year and 23 ½ cents in the latter half.

Standard deduction and exemptions increased. The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status. Also the amount you can deduct for each exemption has increased $50 to $3,700 for 2011.

Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.

Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).

Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.

Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.

Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.

First-time homebuyer credit. The credit expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.

Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.

Mailing a return. The IRS changed the filing location for several areas. If you’re mailing a paper return, see the Form 1040 instructions for the correct address.

No comments IRS Form 8938, Tax Law Changes

Claim IRS Tax Credit for Hiring Veterans

February 9, 2012 John R. Dundon II Employment Tax, Tax Credit, Veteran

The VOW to Hire Heroes Act of 2011, provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations. IRS Notice 2012-13, posted today on IRS.gov, and the instructions for IRS Form 8850 provide details in support of the following…

According to the IRS the credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors including:

* the length of the veteran’s unemployment before hire,

* the hours a veteran works and

* the amount of first-year wages paid.

Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

Normally, an eligible employer must file IRS Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But according to the new IRS guidance, employers have a little more time with definitive expiration.

In an effort to streamline the certification requirements, the IRS will allow the use of electronic signatures and fax when gathering the IRS Form 8850 for transmission with state work force agencies willing to work in this fashion.

Businesses claim the credit on their income tax return. The credit is first figured on IRS Form 5884 and then becomes a part of the general business credit claimed on IRS Form 3800.

This credit is also available to certain tax-exempt organizations by filing IRS Form 5884-C. The guidance released today also provides instructions and a new set of forms for tax-exempt organizations to claim the credit.

No comments Employment Tax, IRS Form 3800, IRS Form 5850, IRS Form 5884, IRS Notice 2012-13, Veteran Tax Benefit

IRS Form 1040 Schedule C: Profit or Loss from Business

The sole proprietorship or Limited Liability Corporation (LLC) is in my opinion the easiest type of business entity to set up and begin operating. It is not separate from its owner with the income and expenses reported on IRS Form 1040 Schedule C.

Some people have instant success with a venture that is profitable from the very beginning. However it is more common to be unprofitable in the first 24 to 36 months of operation. If you are loosing money it is important to remember that you MUST REPORT A PROFIT IN 2 OUT OF THE PREVIOUS 5 TAX YEARS TO AVOID BEING CONSIDERED BY THE IRS TO BE REALLY ENGAGED IN A HOBBY. For more details on the specifics of hobby versus business see my post at: http://johnrdundon.com/how-to-determine-what-is-a-business-vs-what-is-a-hobby/

When it comes to losses the other thing to keep in mind is that they can be limited basically in three different ways:

1. By the amount of your investment or basis limitation;
2. By the amount you have at risk or at-risk limitation; and
3. By the passive activity loss limitation.

Basis limitations do not apply to sole proprietors as they would with an S corporation shareholder or partner in a partnership. A sole proprietorship is predominantly financed by the proprietors own assets. Two obstacles must be overcome before a Schedule C loss is deductible as addressed in this particular order:

1. The at-risk limitations of IRC Sec. 465; and
2. The passive activity loss limitations of IRC Sec. 469.

The at-risk limitations apply before any loss is limited due to lack of material participation which is a threshold criteria of a passive activity. The proprietor’s at-risk limitation is calculated on IRS Form 6198. If a taxpayer cannot verify a material-participation level with respect to the Schedule C activity, then being at-risk for the loss is essentially immaterial. The at-risk concept is one that looks at the source of funds for the business. Usually sole proprietors would not be at-risk when:

• The business was financed with non-recourse loans – except for holding real property;
• A valid guarantee or stop-loss agreement is in force; or
• Amounts borrowed for use in the business are from a person with an interest in the business, other than a creditor, or who is
related to a person having an interest in the business under IRC Sec. 465(b)(3)(C).

Most all small businesses with gross receipts of $1 million or less are allowed to use the cash method of accounting (Rev. Proc. 2001-10). New proprietors generally begin using the cash method of accounting immediately. An existing business may qualify to change its accounting method by filing IRS Form 3115 – Application for Change in Accounting Method with its tax return under the automatic consent procedures. When changing from an accrual to a cash method of accounting usually a negative IRC Sec. 481(a) adjustment is deducted in the year of the change and a positive IRC Sec. 481(a) adjustment is generally reported in income over a four-year period.

Items withdrawn for contributions to charitable organizations are reported via to IRS Form 8283 Non-cash Charitable Contributions and finally to Schedule A Itemized Deductions.

Office-in-home deduction items are detailed separately on IRS Form 8829 Expenses for Business Use of Your Home rather than on the expense lines for rent, utilities, interest, etc.

Proper deduction of vehicle expenses includes a decision for utilizing the cents-per-mile deduction or the actual method. Both methods require maintaining a mileage log and an understanding
of which miles are business miles.

Additionally, an understanding of depreciation methods available, which includes knowing the weight of the vehicle, are important. IRC Sec. 179 deductions are limited to income, but regular depreciation, including bonus depreciation, can actually assist in creating or increasing an net operating loss (NOL).

No comments MMLLC, Schedule C, SMLLC, Sole Proprietor

The Optimum Tax Rate Enticing Job Creation … and other tax musings.

February 6, 2012 John R. Dundon II Self Employ, Small Business

From my perspective an overall tax rate somewhere between 25 and 30 percent for all federal and state taxes combined is the point where my clients generally are enticed to invest more money in their business and create jobs. When their real total tax rate gets any higher than this they tend to just hold on to proﬁts and take care of their own, batten down the hatches, trench in, maintain the status. Stop taking risks.

When a ﬂat economy persists like the one we face now people tend to crave ANY SIGN of long-term certainty to have the courage to borrow money for growth. However when these people see that their hard work and risk taking will be eaten up in taxes their motivation wanes. Some people chose to hang on to existing operations and survive. Most people fall into the trap of spending their proﬁts and leaving no cash for taxes. Indeed when you plan no cash for taxes the death spiral begins.

For those in the private sector fortunate enough to thrive these are the three ideas I espouse to create jobs:

• Allow privately held C corporations a tax deduction for dividends paid so as to encourage payment of excess capital back into the marketplace.

• Withhold taxes on ALL flow of funds to encourage owners to not fall into bad habits of taking money out of the business without considering tax implications until it is too late.

• Eliminate itemized deductions. Instead adjust personal exemptions and a standard deduction to some reasonable level to protect the lower income levels, but after that, make it simple and non-tax motivated.

No comments Entrepreneur, job creation, tax

IRS Proposes New Treatment of LLC Members, Limited Partners Under Passive Loss Rules

February 3, 2012 John R. Dundon II LLC, Partnership, Passive Activity

In November 2011 the IRS issued proposed regulations (REG-109369-10) that would redefine “interest in a limited partnership as a limited partner” for purposes of determining material participation under the Sec. 469 passive loss rules.

What that means in plain terms is that historically under Sec. 469(h)(2), losses from an interest in a limited partnership have been treated as passive losses because essentially no limited partner in a limited partnership is treated as materially participating in the management of the investment.

With these proposed regulations, the IRS is more narrowly defining when a partner’s interest will be treated as a limited partnership interest for purposes of the passive activity rules which I believe to be good. Under the proposed regulations, an interest in an entity will be treated as an interest in a limited partnership under Sec. 469(h)(2) if:

The entity is classified as a partnership for federal tax purposes; and
The holder of the interest does not have rights to manage the entity at all times during the entity’s tax year under the law of the jurisdiction in which the entity was organized and under the entity’s governing agreement. Rights to manage include the power to bind the entity.

The IRS emphasizes that these rules are provided solely for purposes of the passive activity rules and not for any other provision that makes a distinction between a general partner and a limited partner. The IRS requested the change evidently because under the Revised Uniform Limited Partnership Act of 1985, many states have adopted laws that allow limited partners to participate in the management and control of the partnership without losing their limited liability. In addition, under state LLC laws, LLC members do not lose their limited liability by management participation in the LLC’s business. Nevertheless, the IRS has historically treated members of LLCs as limited partners for purposes of this rule. Various courts have disagreed with the IRS and have allowed LLC members to be treated as general partners and therefore allowed them to prove material participation under the passive loss rules.

Comments on the proposed changes are due Feb. 27, 2012. The regulations would apply to tax years beginning on or after the date of their publication in the Federal Register.

No comments Limited Partner, LLC, passive activity loss

IRS Failure to File Penalty Abatement for Partnerships

February 2, 2012 John R. Dundon II IRS Penalties, IRS Penalty and Interest Abatement

IF your partnership failed to timely file its IRS Form 1065 and you get penalized by the IRS you seek relief from or abatement of this penalty under IRS Revenue Procedure 84-35 if your partnership meets the following criteria

1. A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231(a)(1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.

2. Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each partner’s interest in the capital and profits are not owned in the same proportion, or where all items of income, deductions, and credits are not allocated in proportion to the prorata interests, do not come within the exception provisions of section 6231(a)(1)(B) of the Code and, are subject to the penalty.

3. If a partnership of 10 or fewer partners happens to not be automatically excepted from the penalty imposed the partnership may show other reasonable cause for failure to file a complete or timely partnership return.

4. In determining whether a partner has fully reported the partner’s share of the income, deductions, and credits of the partnership, the nature and materiality of any error or omission will be considered. IF de minimis the penalty may not be asserted. If a substantially material error or omission is found it will be.

If you have 10 or fewer partners you appeal this penalty following your appeal rights taking particular care at drafting a letter asking for abatement under IRS Revenue Procedure 84-35.

No comments IRS Revenue Procedure 84-35, Rev. Proc. 84-35

IRS Interim Guidance for Streamlined Installment Agreements

February 1, 2012 John R. Dundon II Installment Agreement

Check out the Interim Guidance offered up by the US DEPARTMENT OF THE TREASURY

http://www.irs.treas.gov/pub/foia/ig/sbse/sbse_05-0112-013.pdf

Effective immediately the primary changes to the Streamlined Installment Agreement criteria are:

• The dollar threshold increases from $25,000 to $50,000 aggregate unpaid balance of assessment
• The time frame to full pay increases from 60 months to 72 months.

Based on these new criteria, when working accounts where the aggregate unpaid balance of assessment (SUMRY balance) is $25,000 or less, the ONLY criterion that changes is that the taxpayer now has 72 months instead of 60 months to full pay.

However, when working accounts where the aggregate unpaid balance of assessment (SUMRY balance) is $25,001 – $50,000, the streamlined Installment Agreement criteria become more specific. The criteria for these accounts include:

• Payable within 72 months
• No lien determination or managerial approval required
• Agreement must be established as a Direct Debit Installment Agreement (DDIA);and
• Ability to pay verified by securing a Collection Information Statement (CIS)

Streamlined IAs may not be granted where the first payment on the agreement is a lump sum payment that is made to pay down the balance to meet the $50,000 or less aggregate unpaid balance of assessment (SUMRY balance) threshold. Taxpayers must meet the $50,000 aggregate unpaid balance of assessment (SUMRY balance) threshold at the time the Streamlined Installment Agreement is granted.

However, for a Streamlined Installment Agreement, taxpayers with a liability greater than $50,000 can be considered if they pay down the liability to $50,000 or less prior to the agreement being granted.

The key changes in treatment for a Streamlined Installment Agreement (SLIA) when the aggregate unpaid balance of assessment (SUMRY balance) is $25,001 – $50,000:
• Type of taxpayer can ONLY be an individual (IMF) or an Out of Business – Sole Proprietor;
• Agreement must be established as a Direct Deposit Installment Agreement; and
• Ability to pay verified by securing a Collection Information Statement (CIS)

The new SLIA will use the base Allowable Living Expenses (ALE) standards to determine whether the taxpayer has sufficient income to sustain the minimal IA payment at a particular debt level for 72 months.

The “Streamlined Installment Agreement Calculator” (SLIAC) is the verification tool that validates whether the taxpayer has adequate income to support the proposed Installment Agreement payment. If the SLIAC indicates a higher payment can be made, the proposed payment amount will still be accepted.

No comments Installment Agreement

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