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S – Corp Charitable Donations

The most intriguing aspect of maintaining this tax blog is the pleasure of meeting and engaging a wide variety of successful people all with the courage to take the risk

Application for Automatic Extension of Time To File U.S. Individual Income Tax Return – IRS Form 4868

Everyone starts getting a little freaked out this time of year because of personal income tax reporting and paying obligations due on April 15th. I have found through the years

Retirement Plan Recharacterization

Retirement Plan Recharacterization means according to Reg. Sec. 1.408A-5 that if you make a contribution to one type of IRA you may be able to treat the contribution as though it had been

Tax Treatment of Virtual Currencies

As many of you know who follow this tax blog I enjoy dabbling in the uncharted waters of the US Tax Code. It helps keep me fresh. One of the

Corporate and Partnership Automatic Extension Request: IRS Form 7004

The Business and Partnership Tax deadline is coming up fast. Don’t sweat it. File IRS Form 7004 and apply for Automatic Extension of Time to File Certain Business Income Tax. If

Top 8 Free US Tax Research Sites

The best free US tax research sites in my opinion are: 1. For actually referencing the US Tax Code – Cornell University Law School as they seem to do the

Understanding Your Odds with IRS Audit Technique Guides

Many taxpayers fear that aggressive deductions wave flags in front of IRS auditors and quite often I am asked what the chances are of being audited as if my opinion

Tax Implications of Installment Sales

More and more taxpayers it seems are finding themselves compelled to engage in a structured installment sale of closely held business assets or rental real estate and I couldn’t help

Allowable Nontaxable IRA Rollovers Contributions Interpreted To Mean One Per Taxpayer Per Tax Year in US Tax Court Case – Bobrow v. Commissioner

In Bobrow v. Comm’r, T.C. Memo. 2014-21, the Tax Court relied on IRC 408(d)(3)(B) regarding the limits and frequency of nontaxable rollover contributions elected by the taxpayer noting that the one-year limitation

What is a ‘Qualifying Relative’ for US Tax Purposes: IRC 152

Wading through the convolution required to identify specifically who qualifies as a relative for income tax reporting purposes oftentimes can be difficult, not because the actual tax code is difficult

Tax Implication of Publicly Traded Partnerships: Why Purveyors or the US Tax Code Snarl at Investment Brokers

My friend Roger Botterbusch recently put together a most excellent presentation on the tax implications of owning Publicly Traded Partnerships (PTPs), also commonly referred to as Master Limited Partnerships (MLPs). As

IRS Released “Get Transcript” Application for Real Time Downloading of Information on Your Tax Account

My friend Bill Nemeth from Georgia informed me this morning of the IRS’ new application roll out that allows any individual taxpayer to view, print or download their own transcripts on-line in Real-Time using

IRS Stakeholder Liaison Meeting – Denver

The following is a summary of the IRS’ most recent Stakeholder Liaison Meeting in Denver Colorado as prepared by Ann Burton, IRS Senior Stakeholder Liaison.  It is jam packed with

2014 Tax Fears & Advice

With my family snugly content midst a long holiday season I felt compelled to pen some thoughts regarding the ubiquitous US Tax Code and all its myriad of seemingly scary

TAS – The Decline and Fall of a Once Great Department Inside the IRS

Last week I read that the Taxpayer Advocate Service’s (TAS) case load has been growing substantially and this once great department inside the IRS does not have the resources to

New Office In Home (OIH) Deduction Review IRS Form 8829 & Revenue Procedure 2013-13

According to IRS Revenue Procedure 2013-13 in addition to claiming the traditional office in home (OIH) or home office deduction on IRS Form 8829 there is now a new simplified option

The Intersection of ‘Trafficking under IRC 280(E)’ & Cost of Goods Sold (COGS) Relevant to Taxable Income for Marijuana Distributors in Colorado

As many of you who follow me and/or this tax blog know I have been actively tracking a handful of select medical marijuana dispensaries in Colorado who have been denied

Colorado Disaster Relief from the IRS – Publication 2194

If you have been impacted by a disaster in your area like many of my friends most recently here in Colorado due to flooding as defined by FEMA and identified by

General Rules for S-Corporation Distributions A Random Walk Down IRC 1368

Unless you elect different treatment, for shareholder income tax purposes S corporation distributions are applied in the following order: 1. To reduce the Accumulated Adjustment Account (AAA) determined without regard

IRS Office of Appeals Handling Of Collection Due Process Cases – STILL INADEQUATE!

If you have ever been a victim of IRS lien or levy action you know first hand that it can be unilaterally devastating on many levels and take literally years

Tax Audit Musings

If you chose to represent yourself in an IRS Examination realize the IRS Revenue Agent (RA) or Tax Compliance Officer (TCO) assigned your file is trained very thoroughly to advocate on

Final IRS Regulations on Deduction and Capitalization of Tangible Assets

The IRS has issued final regulations affecting all taxpayers that acquire, produce, or improve tangible property. The final regulations define materials, supplies, de minimus, safe harbor and related repairs as well

Trends in IRS Compliance Activities

The Treasury Inspector General for Tax Administration produce a report on trends in compliance activities through 2012. The report states: “During Fiscal Years 2011 and 2012, the IRS encountered challenges

Colorado Individual and Business Taxpayers Impacted by Storms Receive IRS Relief

According to the IRS: “certain taxpayers in the counties of Adams, Boulder, Larimer and Weld will receive tax relief, and other locations may be added in coming days following additional

Prepare for Indefinite IRS CLOSURE Starting October 1, 2013

According to the National Association of Enrolled Agents most recent newsletter, ”October 1st, which marks the beginning of FY14, is 18 days from now. The House was supposed to vote earlier

Individuals Exempt from the Affordable Care Act (Obama Care) Mandate

US citizens are required to carry minimum essential health insurance coverage beginning January 1st 2014. This is also commonly referred to as the ‘individual mandate’ and some people are exempt

Investor or Trader

I have another new client who is a day trader and wow is he good at it! Even though he has another job he makes so much more money as

Affordable Care Act Final Regulations Regarding Minimum Essential Coverage Maintenance

The IRS released final regulations regarding minimum essential coverage maintenance required under the Affordable Care Act for individual taxpayers under IRC 5000A governing the shared responsibility payment. The document is 75

Small Businesses Receive IRS Letter 5036 – Under Reporting of Income

The IRS has over the last week or so started sending Letter 5036 to small businesses questioning the possible under reporting of income. The letter looks intimidating as it’s header states “Notification

Sophy v. Commissioner – Reviewing Mortgage Interest Deduction Limitations

Taxpayers living in Vail Colorado contacted me most recently to represent them in an IRS audited covering tax years 2009, 2010 and 2011 relevant to several small items but specifically

Notes From the July IRS Stakeholder Liaison Meeting

The following is a compilation of the presentations given at the last IRS Stakeholder liaison meeting as prepared by IRS Senior Stakeholder Liaison Debra Rodgers complete with some very pointed

Transfers of Property to a Corporation Internal Revenue Code Section 351

According to IRC 1001 you generally recognize a gain or a loss when you sell or dispose of property. However, there are a number of exceptions, specifically transfers of property

Traders in Securities

If you are an individual who buys and sells securities you may qualify as a “trader in securities,” for tax purposes. This post attempts to explain how traders must report

Income Tax Filing Status for Same Sex Married Couples

The following states recognize same sex marriages:  Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and District of Columbia.  In the most recent

US Supreme Court DOMA Throw Down – Progress or Kabuki Theater?

The fact of the matter is that the IRS will continue to define marriage for US Taxpayers everywhere in that only one man and one woman married to each other

Tax Treatment of IRC 351 Nonrecognition Transactions aka Corporate Reorganizations

Check out the following 5 lessons I learned this week regarding IRC 351 nonrecognition transactions: 1. The basis assigned to stock received generally is the same as the basis in

Tax Treatment of Liabilities Assumed by a Corporation IRC 357 – What is Boot?

According to IRC 357(a) if property transferred to a corporation in an IRC 351 nonrecognition transaction is subject to a liability, the assumption of that liability by the corporation generally is not

Requirements for Nonrecognition of Gain (or Loss) on Transfer of Property to a Corporation IRC 351

If property is transferred to a corporation by one or more people solely in exchange for stock in the corporation and immediately after the exchange the person or people engaged

Online Tool for Taxpayers with International Tax Filing Requirements

A new online tool has been created by the IRS for taxpayers with international tax filing requirements that is worth checking out.  Here are some relevant links: A Acceptance Agents

IRS Criminal Investigation Annual Report

IRS Criminal Investigation (CI) released its Annual Report for fiscal 2012. Investigations initiated (5,125) and prosecution recommendations were both up in fiscal 2012 compared to the prior year. Filings of indictments

ObamaCare’s Health Insurance Premium Tax Credit Proposed Regulations

The Affordable Care Act or ObamaCare was passed almost three years ago with the goal of extending quality health insurance coverage to more Americans and it becomes fully effective January 1st

Disaster Losses Including Casualty and Theft IRS Publication 547 – IRS Form 4684

If you take one look at FEMA’s website, it’s clear that we are going to see a significant increase in the number of casualty losses going forward. Should you find yourself a victim of

It has been QUITE a tax season! A Review of IRS Activity

According to the newly released 2012 IRS Data Book, the IRS collected almost $2.5 trillion in federal revenue and processed 237 million returns, of which almost 145 million were filed electronically.

What is an Enrolled Agent (EA) and Why is this Designation Superior to Certified Public Accountant (CPA)

The Enrolled Agent (EA) is arguably the longest standing professional tax designation.  Although at times overshadowed by other tax professionals EA’s are the only federally licensed tax practitioners who specialize

IRS Publication 3 – Armed Forces Tax Guide

According to IRS Publication 3, Armed Forces’ Tax Guide, the Armed Forces Tax Council (AFTC) oversees the military tax programs offered worldwide. AFTC partners with the IRS to conduct outreach to

IRS Form 7004 Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

If your corporation, partnership or estate operates on a calendar year basis the tax return is due March 15th which is coming up! If you need additional time to file

IRS Notice 2008-1 Health Insurance Costs of 2% Shareholder-Employees

Under IRS Notice 2008-1, if you are an owner of more than 2% of an S corporation and you have a health insurance policy in your name with premiums paid by the

Health Insurance Premium Tax Credit

The IRS has issued final regulations, TD 9611, relating to the health insurance premium tax credit enacted by the Patient Protection and Affordable Care Act and the Health Care and

How to calculate stock and loan basis in an S Corp for tax purposes

If you are a shareholder of an S corporation you are responsible for keeping track of your own basis (investment value) in the S corporation of which you own shares.  Tracking shareholder basis

IRS Targets – Don’t Be One.

In 2013, the IRS will focus the significant majority of their enforcement budget and subsequent activity in my opinion on three specific areas: 1. Abusive transactions and under reported income

Trafficking under IRC § 280E

The Internal Revenue Code is a complex beast.  In the lunacy of it all I’ve been asked to define ‘trafficking’ as it relates to 26 USC § 280E – Expenditures in

Denver Colorado IRS Stakeholder Meeting Notes

Bessie Castro-Zepeda, Colorado Department of Revenue Tax Practitioners only helpline; M-F 8am – 430pm (303) 232-2419 Capital Gain Subtraction: For 2012 returns, the department will make every effort to verify

New IRS Procedures for Obtaining Individual Taxpayer Identification Numbers (ITIN)

First of all make sure you find an IRS Certifying Acceptance Agent (CAA) that has completed the newly required forensic training. The required forensic training should aid in identifying fraudulent

Centennial Anniversary of the 16th Amendment to the US Constitution is approcahing

Most anniversaries are celebrated with joy and jubilation.  But on February 3rd, 2013, I doubt that anyone will be celebrating this anniversary or should I say centennial – after all,

Loving v. IRS deals blow to IRS Regulation of Tax Return Preparers

In Loving v. IRS the IRS’ authority to regulate commercial tax return preparers has been successfully challenged. United States District Court for the District of Columbia Judge James E. Boasberg granted Loving’s

The New Home Office Deduction Safe Harbor – IRS Rev. Proc. 2013-13

The Internal Revenue Service announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their

Tax-Free Transfers to Charity in January 2013 Can Still Count for 2012 For IRA Owners 70½ or Older

Act now! According to the IRS IRA owners age 70½ or older have until Thursday, Jan. 31 2013 to make a direct transfer, or alternatively, if they received IRA distributions

American Taxpayer Relief Act 2012

The American Taxpayer Relief Act of 2012 makes permanent many otherwise expiring tax provisions. The following is my summary of what I believe to be relevant provisions: Ordinary income above

Withholding Tax for Social Security Goes to 6.2% of Wages

Contrary to the manufactured ‘news’ dribbling out of the main stream media to sell advertising, last week the IRS published updated employer’s withholding guidance clearly stating that employers are to now withhold Social Security

The ‘Fiscal Cliff’ and Your Tax Obligations

Our esteemed President has proven to me to be extraordinarily disingenuous with his statements about the middle class and their purported tax obligations as pretty much everyone’s taxes will go

S Corp Late Filing Penalty Excused IRC 6699 Ensyc Technologies v. Commissioner

Considering the scope of the reasonable cause language to the Code Sec. 6699 penalty for late filing of an S corporation return, the Tax Court determined that the failure to timely file

Moving Expenses and Military Duty – IRS Publication 3, Armed Forces Tax Guide Vs. IRS Publication 521, Moving Expenses

According to IRS Publication 3, Armed Forces Tax Guide if you are a member of the Armed Forces on active duty and you move because of a permanent change of station,

YIKES! IRS Issues Proposed Regulations on New 3.8% Net Investment Income Tax

A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income

Gift Tax on Transferred Real Estate

The person or entity transferring a property has a capital gain to the extent that the amount realized exceeds the adjusted basis of the property. However according to Reg §

IRS Can Levy More Than 15% of Social Security Benefits According to Bowers V. US

The distinction of how this is possible distills down to understanding the nuanced difference between a ‘Continuous’ and a ‘One Time’ IRS tax levy. Under Code Sec. 6331(h) once a tax

IRS Form 1040 Line 21 and Subsequent CP2000 Notices

IRS CP2000 notices are annoying for a wide variety of reasons but mostly because the IRS assumes that most all items reported on line 21 of IRS From 1040 are

Are You A Trader or an Investor? Van Der Lee v. Commissioner TC Memo 2011-234

While many individual taxpayers claim to be traders in securities as compared to investors, in Henricus C. van der Lee, et ux. v. Commissioner TC Memo 2011-234 we learn in my humble opinion that

Tax Treatment of a Reverse Mortgage

A reverse mortgage is generally a loan where a lender pays a lump sum, a monthly advance, a line of credit, or a combination of all three to you while you continue

Tax Treatment of Charitably Donated Artwork

Please refer to IRC 170 as well as Publication 526, Charitable Contributions (PDF), Publication 561, Determining the Value of Donated Property (PDF), and Publication 1771, Charitable Contributions Substantiation and Disclosure Requirements (PDF) for detailed information on charitable

IRS Standards for Continuing Education Providers and Accrediting Organizations

The Internal Revenue Service announced the standards to become an IRS-approved Continuing Education (CE) Provider and the requirements to become an IRS CE Accrediting organization.  The guidance paves the way

US v. Home Concrete Reinforces IRS’ Limited Audit Authority

Generally, the IRS has a three year statute to audit a return. However this changes to six years if there is a substantial understatement of income, when 25% of more

When Several Different People Provide Support IRS Form 2120 – Multiple Support Declaration

It seems that more and more children are providing support to parents living on fixed income. Quite often several brothers and sisters collectively are providing support and when this collective

IRS Treatment of Social Security Benefits – SSA Form 1099

If you receive Social Security benefits (checks) you should also receive a Form 1099-SSA from the Social Security Administration. Use the data on this form to help determine if your

Reporting Non-Reimbursed Partnership Expenses

In regards to the correct treatment of deductible expenses incurred by a partner essentially the partnership agreement, or the general practice of the partnership, should clearly represent that the partners

The Self-Employment Contributions Act

The Self-Employment Contributions Act (SECA) imposes two taxes on self-employed individuals: an old-age survivors and disability insurance tax (OASDI) commonly referred to as Social Security tax, and a hospital insurance or Medicare tax

How To Report Gains and Losses from Securities Transactions – IRS Form 8949

The requirements for reporting short-term and long-term transactions on separate IRS Form 8949‘s by type A, B or C are still required. When the totals on brokerage statements include both

Determining Tax Basis and Holding Period

According to IRS Publication 544 holding period is generally speaking the length of time a capital asset is owned. It is important because of the tax benefits of long term capital

IRS Form 982 – Reducing Tax Attributes of Depreciable Property for Cancelled Debt

If debt is canceled in a bankruptcy case or during insolvency you must use the excluded amount of debt to reduce certain “tax attributes” including the basis of certain assets

Self Employed Health Insurance Insurance Deduction: Worksheet v. IRS Publication 535

If you qualify to take the deduction, use the Self-Employed Health Insurance Deduction Worksheet to figure the amount you can deduct. However use IRS Publication 535 instead if any of the following

IRC 108 Tax Obligations in Bankruptcy

First off regarding income, do not include a canceled debt in gross income if any of the following situations apply: The cancellation takes place in a bankruptcy case under the

Taxes, Insolvency and the Bankruptcy Estate

You are insolvent when your liabilities exceed the Fair Market Value (FMV) of your assets. It is important to determine your liabilities and the FMV of your assets immediately before the

Ranking Tax Debt in Bankruptcy

According to IRS Publication 908, Bankruptcy Tax Guide, generally the automatic stay rules prevent a creditor from taking actions to collect debts incurred before a bankruptcy petition is filed. However

Exemption from IRS Filing in Bankruptcy

Here is the hard part, to qualify: 1. The corporation must have ceased business operations and must have neither assets nor income for the tax year. 2. The exemption request

IRS Notice 2006-83: The Bankruptcy Estate

When an individual files a bankruptcy petition under chapter 7 or 11 of the bankruptcy code a bankruptcy estate is established. The bankruptcy estate is treated as a separate taxable

What is a Dependent Qualifying Relative?

According to IRS Publication 501, Exemptions, Standard Deductions and Filing Information. a dependent qualifying relative can be any person who lives with you all year, is not a qualifying child of another taxpayer,

IRS Form 3949-A Information Referral – PROBLEMS

After it was learned that thousands of identity theft ‘Information Referrals’ reported on IRS Form 3949‑A were not being processed the Treasury Secretary General for Tax Administration (TIGTA) investigated and published a

Failure to File IRS Form 1099 Penalty

I have a client who failed to file 1099-misc for contract labor and am dealing with an examiner who denied all contract labor expenses because of a lack of IRS Form

IRC Section 1398 Election: Banruptcy and the Creation of a Short Tax Year

If you are an individual debtor in a chapter 7 or 11 bankruptcy case you may be able to elect to close your tax year for the year in which

IRS Restrictions on Contacting Taxpayers

I’ve worked with many good people inside the IRS on a wide variety of cases. So please do not get me wrong I’m not bashing ALL IRS employees. However like

IRS Publication 503 – Dependent Care Expenses

A taxpayer came to me today for verification on dependent care expenses. Their basic profile may be similar to yours. A husband and wife with two children in day care.

Dependency Exemption and the American Opportunity Tax Credit

A new client came to me this week – husband/wife – filing a joint tax return.  Their son a full time 21 year old student with some earned income but

Tax Court Rejects Conclusions of Cost Segregation Study – Amerisouth Vs. Commissioner

This blog is my personal tax research tool. Pursuant to the rules of professional conduct set forth in US Treasury Circular 230 nothing contained in this blog was intended to be used

IRS Compliance Requirements and the Bankruptcy Code

This blog is my personal tax research tool. Pursuant to the rules of professional conduct set forth in US Treasury Circular 230 nothing contained in this blog was intended to be used

IRS’ Taxpayer Advocate Service Changed Case Acceptance Criteria

The Taxpayer Advocate Service (TAS) at the Internal Revenue Service changed the cases it will consider going forward. As of essentially today IRS TAS will generally NOT accept cases involving problems

Injured v. Innocent Spouse Tax Relief

You may be an injured spouse if you file a joint tax return and all or part of your portion of a refund was, or is expected to be applied

IRS Publication 526 – Charitable Contributions

This post is a brief review of IRS Publication 526. Basically if your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Don’t get

IRS Publication 225, Farmer’s Tax Guide

This post is a brief overview of IRS Publication 225, Farmer’s Tax Guide. According to this IRS Publication you are in the business of farming if you cultivate, operate or manage a

S – Corp Charitable Donations

The most intriguing aspect of maintaining this tax blog is the pleasure of meeting and engaging a wide variety of successful people all with the courage to take the risk of venturing out on their own professionally in pursuit of dreams and aspirations. Sharing with me the lessons learned through experiences chalked up to enduring hard knock after hard knock I have learned from my readers and subscribers along the way of which I am profoundly thankful.

I couldn’t help but notice that many of my friends and clients alike, particularly those of you in the business of providing services to the community, have become successful beyond anyone’s wildest expectations and are now more prepared than ever to accept the significance of gifting in the greater scheme of life’s affairs.  Because people that read my tax blog are smart however they want their gifts to both maximize a positive impact on the community but also offer the most tax advantages on the way.  This is often referred to in my circles as intelligent gifting with purpose.

Most astute businesses are structured as Limited Liability Companies (LLC’s) and have elected to be treated as an S-Corporations for income tax purposes. Charitable contributions originating from S Corporations is nuanced and can appear at first somewhat complex to report but is fully legal and advisable. In order for expenses to be deductible as a charitable contributions they must be:

(1) un-reimbursed (aka not deducted elsewhere);

(2) directly connected with the services;

(3) incurred only because of the services provided; and

(4) not personal, living, or family expenses as defined under (Reg. Sec. 1.170A-1(g))

The Pension Protection Act of 2006 amended Internal Revenue Code Section 1367(a)(2) to provide that the decrease in shareholder basis under Internal Revenue Code Section 1367(a)(2)(B) by reason of a charitable contribution is equal to the shareholder’s pro rata share of the adjusted basis of the donation. This rule does not apply to contributions made in tax years beginning before January 1, 2006, and after December 31, 2013.

THIS IS WHERE THE RUBBER HITS THE ROAD!

For contributions made in tax years after December 31, 2013, the amount of the reduction is the shareholder’s pro rata share of the fair market value of the contributed property. 

Example: Brian is the sole shareholder of Gymnastics Gym, Inc, an S corporation. Brian’s basis or investment in Gymnastics Gym’s stock is $1,000,000. In 2013, Gymnastics Gym made charitable contributions with a basis of $10,000 (basically the fixed and variable expenses of hosting gymnastics parties) and a fair market value of $20,000 (basically the usual or customary charge assessed to the general public or, more ideally, the amount acknowledged on the letter from the recipient charitable organization).

In this scenario Brian as a shareholder of Gymnastics Gym is treated as having made a 2013 charitable contribution equivalent to the cost basis ($10,000) of the donation.  In 2014 on wards the donation value of the birthday parties will be the equivalent of the fair market value ($20,000) of the donation. Up until the end of tax year 2013 this charitable donation for income tax reporting purposes is generally treated as a cost of operating a business more so than a reduction in basis or investment in Gymnastics Gym stock.

If that same charitable contribution were to be made in 2014 however then Gymnastics Gym would deduct as ordinary operating expense the $10,000 cost of hosting gymnastics parties. Additionally Brian as the sole shareholder of Gymnastics Gym could choose to take up to the difference between the $10,000 deductible operating costs and the $20,000 Fair Market Value (FMV) of the gift (or $10,000) as a pass through charitable donation by reducing his basis in Gymnastics Gym stock dollar for dollar with the amount of claimed charitable donation.

How to report: Gymnastics Gym incurred usual and customary operating expenses to host birthday parties that happened to be donated to a charitable organization.  These expenses are included on the income statement and offset gross receipts in arriving at net income.  Separately and distinctly from that, Brian as a shareholder of Gymnastics Gym has a basis or investment in his shares of Gymnastics Gym.

The charitable donation amount of the parties (after accounting for operating expenses as you need to take care to not double dip on expenses) passes through Gymnastics Gym’s 1120-S via line 12.a. of Schedule K which carries over to box 16 schedule K1 labeled as ‘C’ (reduction in basis) and then carries to his personal 1040 Schedule A as part of his itemized deductions.

Two Cavaets

Caveat 1: Charitable contribution deductions on the 2013 1040 Schedule A (regardless of where they originate) begin to phase out when Adjusted Gross Income (AGI) exceeds $300,000 for married taxpayers filing joint returns so be sure to run the phase out calculation found in IRS Publication 526, Charitable Contributions.

Caveat 2: Special rules of Internal Revenue Code Section 170(e) should be considered in other files you take on in these regards but the application is narrowly specific.

It was difficult for me to wrap my arms around the concept at first and subsequently compiled the following facts.

Generally the value of a taxpayer’s time or services is not deductible as a charitable contribution according to Treasury Regulation Section 1.170A-a(g).

However, according to Parker Tax Publishing un-reimbursed expenditures made incident to rendering services, such as for example hosting a gymnastics party, the contributions to which are deductible, are indeed deductible contributions according to TC Saltzman v. Comm’r, 54T.C. 722,(1970); AND Babilonia v. Comm’r, T.C. Memo. 1980-207.

Most importantly though the expenses of rendering services are deductible because they constitute contributions “to” the charitable organization according to Rockefeller v. Comm’r, 676 F.2d 35,(2d Cir. 1982).

In conclusion in 2014 forward you can claim the Fair Market Value of of any charitable deduction out of your S-Corp as a pass through by offsetting it against basis after backing out the corporation’s cost of making the charitable donation.

 

Application for Automatic Extension of Time To File U.S. Individual Income Tax Return – IRS Form 4868

Everyone starts getting a little freaked out this time of year because of personal income tax reporting and paying obligations due on April 15th. I have found through the years that this kind of pressure causes people in all walks of life to make poor judgments and less than fully informed decisions just to hit a deadline.

The point of this post is to inform you that it is okay to file an application for a 6 month automatic extension of time to file your US individual income tax return and to NOT WORRY IF YOU ARE BEHIND THE CURVE THIS YEAR. There are many reasons why you may need an extension of time to file your taxes that are all fully legitimate including:

1. life changing events

2. partnerships or other pass through entities and trusts that are not prepared to report and even

3. lack of personal organization.

It is all okay. To file an extension request all you need to do is fill out and submit IRS Form 4868 and provide:

1. Your name and spouse’s name (if you’re filing jointly) and address;

2.Your Social Security number and spouse’s Social Security number (if you’re filing jointly);

3. An estimate of total tax liability for 2013;

4. Total of what you have already paid in 2013 (including withholding and estimated payments); and

5. The amount you’re paying with the extension, if anything.

Remember that an extension of the time to file is simply that. It is not an extension of time to pay as INCOME TAX PAYMENTS ARE DUE IN FULL ON APRIL 15TH.

What this means is if you think you might owe taxes and you’re filing for extension, you should make a payment with your extension request simply to avoid interest and penalty assessments later. The interest rate is currently 3% per year, compounded daily, and the late-payment penalty is normally 0.5% per month. In other words you should estimate what the taxes due are and if you over estimate rest assured you will be entitled to a tax refund.

This is super easy to do if you just take a minute to gather your thoughts and honestly estimate your liability. Once you’ve done this you can either mail in IRS Form 4868 with an estimated payment taking care to post mark the envelope by April 15th; use the IRS’ free file service or contact me and I’ll have one of my trusted lieutenants walk you through it or take care of this for you as you see fit.

 

Retirement Plan Recharacterization

Retirement Plan Recharacterization means according to Reg. Sec. 1.408A-5 that if you make a contribution to one type of IRA you may be able to treat the contribution as though it had been made to a different type of IRA. This is basically considered a correction if you will which can be significant for a wide variety of reasons.

One common reason that I’ve seen is if you converted a traditional IRA to a Roth IRA you may want to recharacterize the Roth IRA back to a traditional IRA if the value of the assets in the Roth IRA has declined between the conversion date and the due date for the tax return reporting the conversion.

This is because the amount you would have to include in income as a result of the conversion to a Roth IRA is based on the value of the account at the time of the conversion and does not take into account the decline in value between the conversion date and the due date of the return including extensions.

However a most common issue for recharacterization purposes occurs when you receive a distribution from a traditional IRA in one tax year and roll it over into a ROTH IRA in the next tax year but still within 60 days of the distribution from the traditional IRA. In this case you treat the contribution to the ROTH IRA as though it occurred in the year of the distribution from the traditional IRA.

You recharacterize a contribution or IRA conversion in either of two ways, a trustee-to-trustee transfer or simply by re-designating the first IRA as the second IRA, rather than transferring the account balance.

If you elect to recharacterize an IRA contribution you must report the recharacterization, and you must treat the contribution as having been made to the second IRA instead of the first IRA, on your income tax return for the tax year for which the recharacterized contribution was made to the first IRA. There are 2 types of recharacterizations that I’ll address.

1. You made a contribution to a traditional IRA and later recharacterized part or all of it to a Roth IRA.

If you recharacterizes only part of the contribution and the contribution included nondeductible amounts, you must report any nondeductible portion that remains in the traditional IRA on Part I of Form 8606, Nondeductible IRAs. If you recharacterize the entire contribution you do not report the contribution on Form 8606. See IRS Form 8606 Instructions for further information.

In either case, you must attach a statement to your tax return explaining the recharacterization.

For example if you contributed $4,000 to a new traditional IRA on May 27, 2013 and on February 24, 2014, you determined according to the active participant rules that your 2013 modified adjusted gross income will limit your traditional IRA deduction to $1,000. The value of your traditional IRA by that time grew to $4,400. You decided to recharacterize $3,000 of the traditional IRA contribution as a Roth IRA contribution, and have $3,300 ($3,000 contribution plus $300 related earnings) transferred from your traditional IRA to a Roth IRA in a trustee-to-trustee transfer and subsequently deduct the $1,000 traditional IRA contribution on Form 1040.

In this case you do not have to file Form 8606, but must attach a statement to your return explaining the recharacterization.

The statement indicates that you:

(a) contributed $4,000 to a traditional IRA on May 27, 2013;

(b) recharacterized $3,000 of that contribution on February 24, 2014, by transferring $3,000 plus $300 of related earnings from the traditional IRA to a Roth IRA in a trustee-to-trustee transfer; and

(c) that all $1,000 of the remaining traditional IRA contribution is deducted on Form 1040.

You do not report the $3,300 distribution from the traditional IRA on her 2013 Form 1040 because the distribution occurred in 2014. You do not report the distribution on your 2014 Form 1040 either, because the recharacterization related to 2013 and was explained in an attachment to her 2013 return.

2. You rolled over an amount from a qualified retirement plan to a Roth IRA in 2013 and later recharacterized all or part of the amount to a traditional IRA.

If you recharacterizes only part of the amount rolled over, you must report the amount not recharacterized on Form 8606, Nondeductible IRAs. If you recharacterizes the entire amount you do not report the recharacterization on Form 8606.

In either case, you must attach a statement to your tax return explaining the recharacterization and you must include the amount of the original rollover on the line for “pensions and annuities” on Form 1040, Form 1040A, or Form 1040NR. If the recharacterization occurred during the year for which the return is being filed, you must also include the amount transferred from the Roth IRA on the line for “IRA distributions” on Form 1040, Form 1040A, or Form 1040NR.

If the recharacterization occurred in the following year, you report the amount transferred only in the attached statement, and not on his or her return for the preceding year or for the year in which the recharacterization occurred.

For example you rolled over $50,000 from your 401(k) plan to a new Roth IRA on July 20, 2013. On March 25, 2014, you decided to recharacterize the rollover. The value of the Roth IRA on that date is $49,000. You recharacterize the rollover by transferring that entire amount to a traditional IRA in a trustee-to-trustee transfer and report $50,000 as an amount received from pensions and annuities on the line for “IRA distributions” on your 2013 Form 1040. You do not include the $49,000 as an IRA distribution on line 15a because it did not occur in 2013. You also do not report that amount on his 2014 return because it does not apply to the 2014 tax year. You do not have to file Form 8606, but you must attach a statement to his 2013 Form 1040 explaining that:

(a) you made a rollover of $50,000 from a Code Sec. 401(k) plan to a Roth IRA on July 20, 2013, and

(b) you recharacterized the entire amount, which was then valued at $49,000, to a traditional IRA on March 25, 2014.

Transfer of Allocable Earnings

One of the more difficult aspects of recharacterization for taxpayers to pick up on is the fact that if you recharacterizes a contribution or a Roth IRA conversion amount you must include in the transfer any earnings allocable to the contribution or conversion being recharacterized according to Reg. Sec. 1.408A-5.

If you recharacterize a contribution you must include in the transfer any earnings allocable to the contribution. If there was a loss, the amount transferred must be reduced by the amount of the loss. In most cases, the amount of the earnings that needs to be transferred is determined by the IRA trustee or custodian.

If you have a transfer agent as inept as Mass Mutual for example that lacks the professional acumen to calculate earnings on recharacterizations you may determine the amount of earnings allocable to an IRA contribution and the total amount to be recharacterized by following these steps:

Step 1: Determine the amount of the IRA contribution to be recharacterized.

Step 2: Determine the IRA’s adjusted closing balance which is the IRA’s fair market value at the end of the “computation period” plus the amount of any distributions, transfers, and recharacterizations made from the IRA during the computation period.

The computation period is the period beginning just before the time the particular contribution being recharacterized is made to the IRA and ending just before the recharacterizing transfer of the contribution.

Step 3: Determine the IRA’s adjusted opening balance.

The adjusted opening balance is the fair market value of the IRA at the beginning of the computation period plus the amount of any contributions or transfers (including the contribution that is being recharacterized under Code Sec. 408A(d)(6) and any other recharacterizations) made to the IRA during the computation period.

Step 4: Subtract the adjusted opening balance in Step 3 from the adjusted closing balance in Step 2.

Step 5: Divide the amount in Step 4 by the adjusted opening balance in Step 3, and enter the result as a decimal rounded to at least three places.

Step 6: Multiply the amount in Step 1 by the decimal determined in Step 5. This is the net income attributable to the contribution to be recharacterized.

Step 7: Add the amounts in Step 1 and Step 6. This is the amount of the IRA contribution, plus the net income attributable to it, to be recharacterized.

Lessons I’ve Learned

The following are some important lessons I’ve learned in defending (and preparing) tax returns for people who engaged this concept of recharacterization:

1. Generally, both the election to recharacterize and the transfer must take place on or before the due date for filing the tax return for the year for which the contribution or conversion was made to the first IRA.

2. To add even more salt to the water special procedures are available that allow someone who has already filed a timely tax return to recharacterize contributions for up to six months after his or her tax return’s due date exclusive of extensions.

3. If you elect to recharacterize an IRA contribution or Roth IRA conversion amount you must report the recharacterization, and must treat the contribution or conversion as having been made to the second IRA instead of the first IRA, on your income tax return for the tax year for which the recharacterized contribution was made to the first IRA

4. To recharacterize a contribution, you generally must have the contribution transferred from the first IRA to the second IRA in a trustee-to-trustee transfer. Generally, the transfer to the second IRA must be made by the due date of your tax return for the year during which the contribution to the first IRA was made.

5. Recharacterizations made with the same trustee can be made by re-designating the first IRA as the second IRA, rather than transferring the account balance.

6. After the transfer has taken place, the election to recharacterize is irrevocable. When you recharacterizes a contribution you must:

(a) include in the transfer any net income allocable to the contribution

(b) report the recharacterization on your tax return for the year during which the contribution was made; and

(c) treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.

7. You must also notify both the trustee of the first IRA and the trustee of the second IRA that you elected to treat the contribution as having been made to the second IRA rather than the first by the date of the transfer.

Only one notification is required if both IRAs are maintained by the same trustee and include:

(a) the type and amount of the contribution to the first IRA that is to be recharacterized;

(b) the date on which the contribution was made to the first IRA and the year for which it was made;

(c) a direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA;

(d) the name of the trustee of the first IRA and the name of the trustee of the second IRA; and

(e) any additional information needed to make the transfer.

8. The election to recharacterize can be made on behalf of a deceased IRA owner by the executor, administrator, or other person responsible for filing the decedent’s final income tax return.

9. Generally, any amount that has been moved from one IRA to another in a tax-free transfer, such as a rollover, cannot be recharacterized. However, a taxpayer who mistakenly rolls over or transfers an amount from a traditional IRA to a SIMPLE IRA can later recharacterize that amount as a contribution to another traditional IRA.

10. If you receive a distribution from traditional IRA and contribute the entire amount to a different traditional IRA in a rollover contribution you cannot elect to recharacterize the contribution by transferring the contribution amount, plus net income, to a Roth IRA, because an amount contributed to an IRA in a tax-free transfer cannot be recharacterized. However, you can convert (other than by recharacterization) the amount in the second traditional IRA to a Roth IRA at any time, provided it satisfies the requirements for a qualified rollover contribution.

11. Employer contributions including elective deferrals under a SEP or SIMPLE plan cannot be recharacterized as contributions to another IRA. However, an amount converted from a SEP IRA or SIMPLE IRA to a Roth IRA can be recharacterized to a SEP IRA or SIMPLE IRA, including the original SEP IRA or SIMPLE IRA.

12. You cannot deduct any loss that occurred while the funds were in the first IRA. Also, no deduction is allowed for a contribution to a traditional IRA if the amount is later recharacterized.

13. The recharacterization of a contribution is never treated as a rollover for purposes of the one-year waiting period even if the contribution would have been treated as a rollover contribution by the second IRA if it had been made directly to the second IRA rather than as a result of a recharacterization of a contribution to the first IRA.

14. Timing of recharacterization. Generally, both the election to recharacterize and the transfer must take place on or before the due date (including extensions) for filing the tax return for the year for which the contribution to be recharacterized was made. If you miss the election deadline you can still elect to recharacterize a contribution if:

(1) your tax return was timely filed for the year the election should have been made; and

(2) you take appropriate corrective action within six months from the due date of the return, not including extensions consisting of: notifying the trustee of the taxpayer’s intent to recharacterize; providing the trustee with all necessary information; and having the trustee transfer the contribution.

After taking the necessary corrective action, you must amend your tax return to show the recharacterization. In addition to reporting the recharacterization, you must write on the amended return, “Filed pursuant to section 301.9100-2

Excess contributions actually made for a prior year and deemed to be current-year contributions for purposes of the Code Sec. 4973 excise tax on excess contributions may be recharacterized only if recharacterization would still be timely with respect to the tax year for which the contributions were actually made. This rule applies to any excess contribution, whether made to a traditional or a Roth IRA.

For more information see IRS Publication 590 – Individual Retirement Arrangements.

 

Tax Treatment of Virtual Currencies

As many of you know who follow this tax blog I enjoy dabbling in the uncharted waters of the US Tax Code. It helps keep me fresh. One of the many areas that this includes is the tax treatment of virtual currencies.

With the most recent run up in the price of Bitcoins there were a handful of very fortunate people that quite literally amassed multi-generational wealth over just a few short weeks cashing out their Bitcoins all the way to $1,000 per coin. You know who you are. May God bless you on your journey that you use this new found wealth for good.

Fortunately in your favor the IRS produced Notice 2014-21 explaining how existing general tax principles apply to transactions using virtual currencies, including Bitcoin. The following are some interesting points worth attention that I pulled from the Notice:

Q – What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

A – The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See IRS Publication 544 for more information about capital assets and the character of gain or loss.

What this means from my perspective generally speaking is that if you get paid in virtual currency you will need to record the value of the virtual currency on the date it is received as though it were a capital asset.  Then when you go to convert the virtual currency you will be subject to a capital gain or (loss) depending on the value of the virtual currency at the time of the conversion.

Basically if you are going to accept payment in Virtual Currency you better keep detailed records of the value of the currency by day end closing prices each day the currency is received.

Q. Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?

A. Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.

When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.

See the Third Party Reporting Center for more Information.

So don’t think that you can hid these gross receipts simply because they are virtually received.

Corporate and Partnership Automatic Extension Request: IRS Form 7004

The Business and Partnership Tax deadline is coming up fast.

Don’t sweat it. File IRS Form 7004 and apply for Automatic Extension of Time to File Certain Business Income Tax.

If you happen to be compelled feel welcome to check out the instructions for IRS Form 7004.

If you need help contact me and one of my trusted lieutenants will take care of this for you.

 

Top 8 Free US Tax Research Sites

The best free US tax research sites in my opinion are:

1. For actually referencing the US Tax Code – Cornell University Law School as they seem to do the best job with updates and maintenance and at the end of the day the only thing you can seem to rely on is the actual tax code.

2. Of course there is the US Government Printing Office Code of Federal Regulations which most people tend to believe to be a little more difficult to navigate.

3. Legal Bitstream has been live on the internet since 2003, and is owned and operated by Mayfield Publishing Company, a privately held corporation based in Houston, Texas. Usually anything produced in Texas appears suspect in my reality nevertheless this is a wonderfully efficient first resource.

4. Tax Almanac is a website designed by Intuit, the makers of professional tax preparation and financial software. It is not necessarily a good consumer tax question site but provides a good first stop.

5. The IRS’ Taxmap that actually began in 2002 as an IRS prototype to address the business need for improved access to tax law technical information for IRS phone operators that has grown into a database designed to organize information around subjects of interest to taxpayers.

6. The IRS’ Electronic Reading Room where records are available for public inspection and copying under Subsection (a)(2) of the FOIA ( 5 U.S.C. § 552, as amended) including:

  1. Final opinions, including concurring and dissenting opinions, as well as orders, made in the adjudication of cases;

  2. Those statements of policy and interpretations which have been adopted by the IRS and are not published in the Federal Register;

  3. Administrative staff manuals and instructions to staff that affect a member of the public;

  4. Copies of records previously released under the FOIA, which the IRS determines may become or are likely to become the subject of future requests for substantially the same records.

7. The United States Tax Court site is always a hit. Be sure to have a stiff cocktail on the ready as the legal ease is enough to make the head spin.

8. Of course there is no way I’m going to let you go without plugging my own personal tax research site outlining some of my most memorable experiences.

So before you decide to hire a tax pro or simply want to know a little bit more about what you are up against start by checking out these sites.

 

Understanding Your Odds with IRS Audit Technique Guides

Many taxpayers fear that aggressive deductions wave flags in front of IRS auditors and quite often I am asked what the chances are of being audited as if my opinion is some sort of a benchmark. The fact of the matter is that every tax return electronically filed is subject to some form of matching protocol, inspection, examination or audit.

Today’s historically connected engagement electronically between the US Government and its citizens has eroded privacy by subjecting us all to some form of unnoticed scrutiny. But at the same time incremental audit rates of substance seem to have proportionally decreased which mean that any particular taxpayer’s odds of attracting attention are slim unless you are a complete moron or behaving overtly fraudulent. Basically the simple answer is that if you properly documented legitimate deductions, you have little to fear.

If however you want to know how aggressive you can get I suggest referring to the IRS’ own audit techniques guides for over 50 specific industries from Alaskan commercial fishermen to pizza restaurants and coin-operated laundries.

Keep in mind that penalties are essentially assessed based on whether you have a “reasonable” basis for taking a position which is loosely defined as more than one chance in three of being accepted by the IRS. In fact if the audit technique guides and the Internal Revenue Code prove inconclusive and you remain concerned you can still file the claim and protect yourself somewhat by filing IRS Form 8275 or IRS Form 8275-R to disclose positions you believe to be contrary to law or regulations. Beware though as these forms tend to attract scrutiny.

Historically audits peaked in 1972 at one out of every 44 returns. As of 2012, the rate has dropped to one out of every 100.1 Roughly half focused on a single issue: the Earned Income Tax Credit claimed by roughly one in seven filers. The IRS focuses the rest of its efforts on three main targets:

  1. Small businesses, particularly sole proprietors operating cash businesses, who underreport income and skim receipts. (These make up the bulk of audit targets.)

  2. Individual taxpayers who fail to report pass-through income from partnerships, limited liability companies, S corporations, trusts, and estates. (In 2002, the IRS launched a program matching income from those sources to recipients.)

  3. Phony trusts, churches, home-based businesses, and similar frauds and protests.2 (These account for most tax prosecutions — and while the IRS has lost a couple of high-profile criminal prosecutions, no court has upheld any of these theories.)

The table below, taken from the 2010-2012 IRS Data Books, summarizes audit data for those years:

Filer

 FY 2010

 FY 2011

 FY 2012

Form 1040 (by “Total Positive Income”)

 $0 – 199,999

1.1%

0.7%

0.9%

 $200,000 – 999,999

2.7%

3.3%

3.1%

 $1,000,000+

8.4%

12.5%

12.1%

Schedule C (by Gross Receipts)

 $0 – 24,999

1.2%

1.3%

1.2%

 $25,000 – 99,999

2.5%

2.9%

2.4%

 $100,000+

4.1%

4.1%

3.5%

“C” Corp. (Form 1120)

1.4%

1.5%

1.6%

“S” Corp. (Form 1120S)

0.4%

0.4%

0.5%

Partnerships (Form 1065)

0.4%

0.4%

0.5%

Tax Implications of Installment Sales

More and more taxpayers it seems are finding themselves compelled to engage in a structured installment sale of closely held business assets or rental real estate and I couldn’t help but notice that there are some common misconceptions about the associated tax implications, particularly if ‘related parties’ are involved in a transaction. So this is what I am telling people:

Report installment sales on IRS Form 6252

Report interest from installment sales on Schedule B

Report capital gains from installment sales on Schedule D.

For more details refer to IRS Publication 537 or IRC 453

Beware of some pitfalls. For example if you elect installment treatment on a sale to a relative (spouse, child, grandchild, parent, grandparent, sibling) and they resell the property within two years of the original sale date, you’ll owe tax on the entire remaining unpaid balance the year the relative sells the property.

Another pitfall to be aware of is if you like installment sale tax advantages, but you’re worried your buyer might default on payments, consider a “structured sale,” where you take part or all of your proceeds in the form of commercial annuity payments. Here’s how it works:

  1. You negotiate a traditional installment sale with your buyer.

  2. Your buyer assigns the right to make payments to an independent third-party and pays the purchase price, in cash, to that third party. (Using a third party avoids the “constructive receipt” which would make the sale immediately taxable.)

  3. The third party uses the buyer’s cash to buy an immediate annuity from a top-rated life insurance company.

  4. You pay taxes on your gain as you receive those annuity installments.

Installment sales where you receive payments in more than one tax year let you defer tax on sales until you actually receive those payments. Tax is divided among the actual installments and due as you receive them. Here’s how it works:

  1. Calculate your gain on the sale.

  2. Calculate the percentage of your total sale price consisting of basis and the percentage consisting of taxable gain.

  3. Multiply each installment by your profit percentage to figure taxable gain from that installment.

  4. You have to charge adequate interest on each installment. Otherwise the IRS can re-characterize part of each installment as interest, taxed at ordinary rates, instead of capital gain. The minimum rate is generally the “applicable federal rate” in effect at the time of the sale. Interest on unpaid installments is taxed as ordinary income.

For example, generally speaking, if you buy a building for $600,000 then sell it for $1 million. 40% of your sale price is gain, so 40% of each installment is taxed as capital gain.

Beware of these rules for special circumstances:

  • If you sell depreciated property, you’ll owe tax on recaptured depreciation at ordinary rates, and on “un-recaptured Section 1250 gain,” capped at 25%, in the year of sale.

  • You can’t elect installment sale treatment for depreciable property you sell to a business you control or a to trust with you or your spouse as a beneficiary.

  • If you sell property with no fixed price, such as an “earnout” sale of a business or property for a fixed percentage of sales or rent, divide the property’s basis into the term of the installments, then pay tax on any gain above that amount.

  • If the total of installment payments owed to you in any year tops $5 million, you’ll owe interest at the federal underpayment rate on the balance exceeding $5 million.

  • If your buyer assumes a mortgage, subtract that debt from the gross sale price before figuring gain on the sale.

  • If your buyer unexpectedly prepays installments, you’ll owe tax as soon as you receive them. Consider using a structured sale to avoid this unpleasant surprise.

Allowable Nontaxable IRA Rollovers Contributions Interpreted To Mean One Per Taxpayer Per Tax Year in US Tax Court Case – Bobrow v. Commissioner

In Bobrow v. Comm’r, T.C. Memo. 2014-21, the Tax Court relied on IRC 408(d)(3)(B) regarding the limits and frequency of nontaxable rollover contributions elected by the taxpayer noting that the one-year limitation addressed in this section of the US Tax Code applies to all IRAs maintained by the individual taxpayer.

So there you have it, as a result going forward I am now advising US Taxpayers to engage only one IRA rollover per tax year and to be the absolute safest one rollover every 366 days.

 

What is a ‘Qualifying Relative’ for US Tax Purposes: IRC 152

Wading through the convolution required to identify specifically who qualifies as a relative for income tax reporting purposes oftentimes can be difficult, not because the actual tax code is difficult to understand in these regards or even subject to much interpretation.  No, it is difficult because the subject matter is best addressed with discretion gained only through experience, particularly in mixed company. In fact I charge hazard pay for the pleasure as the topic usually tends to incite cockles.

Today a husband/wife came in and the husband asked point blank whether “that mouth being feed across the table every night is a qualifying relative” for federal tax purposes. After picking myself up off the floor I proceed to explain as gracefully as possible that a qualifying relative is an individual who meets all of the following requirements:

  1. Is a specified relative of the taxpayer or if unrelated has the same principal residence of the taxpayer for the entire tax year. [§152(f)(3)];

  2. Whose gross income is less than the personal exemption amount for 2013 of $3,900. [§152(d)(4)];

  3. Whether the taxpayer provided over one-half the support for the tax year. [§Reg. 1.152-1(a)(2)];

  4. Whether the child in question could potentially be a qualifying child of any other taxpayer for the year.