I recently came back from a 3 ½ week vacation from Taiwan, Hong Kong and China.
We were traveling in a group tour in both Taiwan and China. I was very impressed with the tour guides who provided us with information about the various places we were visiting as well as stories from previous tours they headed. One particular story told pertains to the new wealth of some Chinese from mainland China.
Shopping at various stores are part the each tour. A Chinese tourist was in a group that went to a jewelry store as part of the tour. The store clerk was trying to get this particular tourist to purchase a Rolex watch from a tray of various Rolex watches. The Chinese tourist said to the clerk, “Bring me more expensive ones, these look cheap.” So the store clerk brought out another tray with maybe thirty very expensive Rolex watches. The Chinese tourist pointed out three or four of the thirty or so watches. To the pleasant astonishment of the store clerk, the three or four were watches that the Chinese tourist did not like and ended up purchasing the rest of the watches in the tray.
The power in the all hotel rooms we stayed at in Taiwan, Hong Kong and China were controlled by our room key. There’s a slot by the door where the room key is inserted to turn on the electricity in the room. I thought this was a very environmentally sound method of conservation.
We are used to having toilet paper in every stall and plenty of paper napkins at all eating places. Some of the public restrooms in Taiwan and China had a spot where one would grab some toilet paper before entering a stall. And then there are some that don’t provide toilet paper at all. Paper napkins at restaurants sometimes were just Kleenex, not what we are accustomed to. Of course, the expensive restaurants catering to the wealthy and the westerners had the paper or cloth napkins.
We were warned not to drink the tap water without boiling it first. Bottled water was provided in all the hotel rooms. We drink bottled water in the states by choice and not because we must.
Overall, I came home with a feeling of how good we have it in the United States and how much we take for granted.
Christine Peterson was an independent beauty consultant for Mary Kay, Inc. She earned commissions on wholesale purchases of Mary Kay products by her network of independent beauty consultants.
Peterson and Mary Kay entered into a nonqualified deferred compensation arrangement, whereby Peterson would continue to receive a portion of her commissions after retirement.
Christine Peterson and her husband formed a partnership under which they created a defined benefit retirement plan for her. The partnership reported the post retirement payments from Mary Kay as income and deducted contributions to the retirement plan.
The Tax Court agreed with the IRS that the payments made by Mary Kay under the nonqualified deferred compensation arrangement were subject to self-employment tax. Moreover, since the partnership was not engaged in a trade or business, it could not deduct contributions made to the defined benefit retirement plan (Christine C. Peterson and Roger V. Peterson v. Commissioner, TC Memo 2013-27, Nov. 25, 2013).
©2013 CPAmerica International
The Tax Court has determined that payments to a qualified settlement fund may be deducted by an accrual method S corporation only when economic performance occurs and payments are actually made to the fund.
A qualified settlement fund (QSF) is a fund, account or trust established under governmental order or approval to resolve or satisfy claims resulting from events that gave rise to certain liabilities.
In this case, Vidal Suriel owned all of the shares of an S corporation, Vibo Corp. Vibo sold cigarettes. Although Vibo did not own any cigarette manufacturing or packaging equipment, it contracted production with an unrelated Colombian company.
Vibo used the accrual method of accounting for tax purposes. It claimed deductions for unpaid obligations, both principal and interest, owed to the Tobacco Master Settlement Agreement (TMSA) fund, a QSF. The IRS disallowed the deductions on the basis that economic performance had not occurred until payment was actually made into the TMSA fund.
Vibo argued that its obligation arose from the sale of cigarettes by the Colombian company to Vibo. As such, economic performance occurred as the Colombian company provided cigarettes to Vibo.
In essence, Vibo argued that it was assuming the Colombian company’s TMSA payment obligations as a cost of purchasing cigarettes. Vibo said that it should be allowed to deduct the payment obligations as an ordinary and necessary business expense or cost of goods sold.
The IRS argued that Vibo was required to make the payments to the QSF and that economic performance did not occur until Vibo actually made the payments.
The court agreed with the IRS and held that Vibo was not entitled to deductions for unpaid TMSA obligations because economic performance does not occur until the obligations are actually paid. Under Reg. Section 1.468B-3(c), economic performance occurs with respect to a liability to a qualified settlement fund to the extent the obligor pays into the fund to resolve the liability.
Further, because the special rules governing QSFs do not differentiate between interest and principal, no deduction was allowed for the unpaid interest portion (Suriel v. Commissioner, 141 TC No. 16, Dec. 4, 2013).
©2013 CPAmerica International
The IRS has issued final and proposed regulations on the calculation of the new 3.8 percent tax on net investment income that took effect Jan. 1, 2013.
The new tax, also known as the “3.8 percent Medicare surtax,” or “net investment income tax,” can affect joint filers and surviving spouses with modified adjusted gross income (MAGI) over $250,000, married couples filing separately with MAGI of more than $125,000 and others with MAGI above $200,000. Trusts and estates will also be subject to the new tax if they have income taxed in the highest marginal tax bracket – $11,950 for 2013.
Consider the following example: For 2013, a married couple has net investment income (NII) of $100,000 and MAGI of $270,000. They pay the surtax only on the $20,000 amount by which their MAGI exceeds their threshold amount of $250,000 because that is less than their NII of $100,000. Thus, the surtax is $760 ($20,000 × 3.8%).
Because the $250,000 and $200,000 thresholds are not adjusted for inflation, it is likely that more people will become subject to the surtax in future years as their income rises because of inflation and other factors.
For purposes of the surtax, NII is investment income less properly allocable deductions. Investment income is:
The surtax applies to a trade or business only if it is a passive activity or a trade or business of trading in financial instruments or commodities.
Investment income does not include amounts subject to selfemployment tax, distributions from tax-favored retirement plans (for example, qualified employer plans and IRAs), or tax-exempt income (for example, interest earned on state or local obligations).
The surtax does not apply to trades or businesses conducted by a sole proprietor, partnership or S corporation. But income, gain or loss attributable to an investment of working capital is not treated as derived from a trade or business and thus is subject to the tax.
Gain or loss from a disposition of an interest in a partnership or S corporation may be taken into account by the partner or shareholder as NII. This gain or loss is considered a part of the owner’s NII only to the extent the gain or loss from the deemed sale of the entity’s assets would have been NII if the partner or shareholder had owned and sold those assets himself/herself. For smaller taxpayers, a simplified calculation of the gain subject to the surtax is available.
The fact that self-employment income is not subject to the surtax does not result in a benefit to the self-employed. Beginning Jan. 1, 2013, the Medicare tax rate on earned income, including self-employment income, was also raised by 0.9 percent.
As a result, most people with MAGI above the $250,000/$200,000 thresholds will see an increase in their taxes for 2013.
The IRS released Notice 2013-80 containing the standard mileage rates for 2014.
Beginning Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups and panel trucks) will be:
➤ 56 cents per mile for business miles driven (down a half cent from 2013)
➤ 23.5 cents per mile for medical or moving purposes (down a half cent)
➤ 14 cents per mile for charitable mileage driven (unchanged from 2013)
©2013 CPAmerica International
With only a few days remaining in 2013, it is time to complete your year-end tax planning and make your New Year’s resolutions.
Here are planning points you might want to consider:
Gather your tax information and get it to your tax preparer early in the filing season. With all the tax changes that took place for 2013, you do not want to be unpleasantly surprised just before the due date by a higher amount of tax due.
©2013 CPAmerica International
As many of my clients and friends reading my blogs may know, I serve as Nevada’s only elected representative to the governing Council of the American Institute of Certified Public Accountants (AICPA). This is a position that I am pleased and honored to hold as it offers me the opportunity to provide a voice in the national forum that represents our profession with respect to standard-setting as well as giving me a glimpse of all that goes on behind the scenes when it comes to being an advocate for our collective interests as practitioners and clients on the national stage. I attend two national Council meetings and one regional meeting each year. These meetings are packed with Council business and often other interesting topics that promote thought leadership in areas you wouldn’t always expect. My last meeting was no exception.
The 2013 Fall Meeting of the AICPA Council was held in late October in Los Angeles, California. As is always the case at the Council meetings, AICPA President and CEO Barry Melancon, gave a masterful presentation outlining the current issues facing our profession. Near the conclusion of his presentation, Mr. Melancon provided a few remarks regarding the evolution of the CPA’s learning environment pointing out that the general trend in learning is becoming more focused on measuring competency rather than the time spent. This was to become one of the major focuses in this meeting.
In conjunction with the topic of the future of learning, the AICPA had arranged for a presentation by Sal Khan, Founder – Khan Academy. Many of you may be familiar with Mr. Khan as he has been in the spotlight recently having been on CBS’s news magazine 60 Minutes and can be seen on a commercial currently running on TV describing his organization and its partnership with Bank of America. For those of you who are not familiar with him, Sal Khan is the founder and faculty of the Khan Academy— a not-for-profit organization with the mission of providing a free world-class education to anyone, anywhere. It now consists of self-paced software and, with over 1 million unique students per month, the most-used educational video repository on the Internet (over 30 million lessons delivered to-date). All 2000+ video tutorials, covering everything from basic addition to advanced calculus, physics, chemistry and biology, have been made by Mr. Khan.
Prior to the Khan Academy, Mr. Khan was a senior analyst at a hedge fund and had also worked in technology and venture capital. He holds an MBA from Harvard Business School, an M.Eng and B.S. in electrical engineering and computer science from MIT, and a B.S. in mathematics from MIT.
During his presentation to the Council, Khan gave an energetic, often humorous, background story on how he founded his not-for-profit organization. It was a fascinating presentation and I would encourage everyone, especially parents of school-aged children, to learn more about this organization and its revolutionary approach to learning. I now know where I will turn to brush up on my algebra, calculus physics and biology, all of which baffled me during my formative years!
The holiday season is here, and for many people that means it is time for Christmas shopping. Many people take advantage of the sales on “Black Friday” to kick off their holiday shopping. This year was no different with large crowds trying to find the best sales. People could even start earlier this year, as many of the stores opened on Thanksgiving Day to get a head start on the Black Friday competition. This year people not only took advantage of the in-store savings, but they also shopped heavily online on “Cyber Monday”. According to IBM, Cyber Monday sales increased 20.6% from 2012, which made it the biggest online shopping day in history. Many stores are offering extended sales to keep the online spending going including products, services, and deals that may not have been available to us otherwise.
However, online shopping can be risky so it is important to have good online shopping habits to protect yourself from online retail scams. Here is a list of tips for safe online shopping:
Use these tips when shopping online to keep your information secure this holiday season!
If you’ve been making energy improvements around your house, be sure to consider the available residential energy tax credits.
To claim a credit for 2013, the improvements must be installed by the end of this year. Some residential energy tax credits are scheduled to expire at the end of 2013, while others will remain in effect for a few more years.
The credits, which are aimed at homeowners installing energy-efficient improvements such as insulation, new windows (including skylights), certain roofs, furnaces and hot water boilers, ranged from $50 to $1,500 in years past and now are limited to a lifetime maximum of $500, depending on the type of property placed in service.
In Notice 2013-70, the IRS provides additional guidance on the types of property that qualify for the credits.
Code Sec. 25C allows a credit in an amount equal to the sum of:
The credit is allowed for qualifying property placed in service through Dec. 31, 2013. For property placed in service in tax years beginning in 2009 and 2010, Code Sec. 25C allowed a maximum aggregate credit of $1,500. For other years, the credit is limited to the excess of $500 over the aggregate credits allowed for all prior tax years ending after Dec. 31, 2005 (including credits claimed in 2009 and 2010).
The credit under Code Sec. 25C may be limited depending on the type of property placed in service. For example, the maximum credit allowed for any tax year is $50 for any advanced main air-circulating fan; $150 for any qualified natural gas, propane or oil furnace or hot water boiler; and $300 for any item of energy-efficient building property. In the case of amounts paid for exterior windows, including skylights, the credit is limited to the excess of $200 over the aggregate maximum amount of the credits allowed for exterior windows for all prior tax years ending after Dec. 31, 2005.
Code Sec. 25D allows a credit for qualified expenditures made for residential energy-efficient property placed in service before Jan. 1, 2017. The IRS defines qualified expenditures for residential energy-efficient property to include:
You may rely on a manufacturer’s certification that property is eligible for either credit – so long as the IRS has not withdrawn the manufacturer’s right to make the certification. ■
©2013 CPAmerica International
The Tax Court determined in a recent case that a mortgage broker was not in the trade or business of trading securities because she didn’t execute enough trades.
The court upheld the IRS’s disallowance of over $800,000 in expenses claimed in connection with these activities over two tax years. It also determined that Sharon Nelson, the sole stockholder of a corporation engaged in the mortgage broker business, was liable for accuracy-related penalties.
John Zabasky, who lived with Nelson, was the chief executive officer and sole stockholder of a different corporation. Zabasky had been involved in the trading of stocks, bonds and currencies for approximately 25 years. Nelson executed securities trades through an online investment account. Zabasky also executed securities trades through the same account.
During 2005, there were 250 available trading days. On a total of 121 days (48.4 percent of the total available trading days), 535 trades were executed through Nelson’s account. The purchases for 95 of those trades occurred in the one-week period from Sept. 27 to Oct. 3. The holding period for the securities traded on the account during 2005 ranged from one to 48 days.
Over the course of the year, there were eight periods of at least seven days when no purchases or sales occurred through the account. The 2005 trades generated $470,472.90 of net short-term capital gain for that tax year.
During 2006, there were 250 available trading days. On a total of 66 days (26.4 percent of the total available trading days), 235 trades were executed through the account. The holding period for the securities traded on the account during 2006 ranged from one to 101 days.
During 2006, there were only two trading days on which trades were executed through the account during the period from Jan. 27 to May 4, and there were seven periods of at least seven days when no purchases or sales occurred. The 2006 trades generated $36,852.28 of net short-term capital gain for that tax year.
Nelson reported her trading activities on Schedule C, Profit or Loss From Business. The IRS disallowed all of the expenses that Nelson claimed on the Schedules C – $504,217 and $303,910 for 2005 and 2006, respectively – and imposed accuracy-related penalties.
The Tax Court initially noted that it was unclear what portion of the trades for each year was in fact executed by Nelson. However, it found that, even if it were to assume that she executed all of them, she still would not carry her burden of establishing that she was a trader for both years. Specifically, the number of trades was not sufficient to constitute a “substantial” amount for either year.
The court noted that, while the amount of money involved each year (with purchases and sales ranging from $24.2 million to $32.9 million) was “considerable,” it was not determinative of whether the activity was substantial. Finally, the court found that the total number of days spent trading – and extended periods of inactivity – belied Nelson’s claim that she was a trader.
Accordingly, the court found that Nelson was not entitled to deduct under any of the expenses claimed as Schedule C expenses. The court also upheld the IRS’s imposition of accuracy-related penalties (Sharon Nelson v. Commissioner, TC Memo 2013-259, Nov. 13, 2013).
©2013 CPAmerica International
The IRS is working to better train its small business auditors and do a better job of selecting small business returns for audit, according to Faris Fink, who represents the Small Business/Self-Employed Division of the IRS.
CFO Magazine reported on Fink’s presentation at the American Institute of Certified Public Accountants tax conference in early November. Fink referred to the fuel-tax reporting compliance project, which began in July 2012. The IRS is looking at more than 1,000 tax returns, with 600 of those returns in the field right now for examination, the report said.
Next on the agenda is an effort to better train examiners to audit partnership returns, Fink said. Understanding how to audit partnerships “will be a point of emphasis for the next 12 months and, I guarantee you, beyond that.”
©2013 CPAmerica International