In a study done last year, the nonpartisan Congressional Budget Office disclosed that the total amount of federal debt held by the public equaled 74% of the gross domestic product. While it represents one of the highest levels in history, the CBO projects that, if the current laws remain unchanged, the publicly-held federal debt would exceed 100% of GDP by 2039. The CBO says “Beyond the next 25 years, the pressures caused by rising budget deficits and debt would become even greater unless laws governing taxes and spending were changed.”
While the CBO projects the federal debt held by the public will decline slightly over the next few years, the picture gets darker after that. The CBO reports the rising debt levels and growing budget deficits result from increased spending for Social Security and health care entitlements. They say, “Barring changes to current law, that additional spending would contribute to larger budget deficits toward the end of the 10-year period that runs from 2015 to 2024, causing federal debt, which is already quite large relative to the size of the economy, to swell even more.”
To curb this path of unsustainability, the CBO suggests significant changes to tax and spending policies, such as “reducing spending for large benefit programs below the projected levels, letting revenues rise more than they would under current law, or adopting some combination of those approaches”.
Senator Rob Portman, R-Ohio said “when it comes to the real fiscal problems we face, when it comes to the mandatory spending that is driving our country towards bankruptcy and threatening to undermine programs like Social Security, Medicare, and Medicaid – on which millions of Americans rely – we have done nothing. Today’s report is another reminder that we cannot continue to kick the can down the road. We need reform, and we need it now.”
House Representative Steny H. Hoyer, D-Md. tells us that the CBO study “ought to be a stark reminder that Congress must work together to promote fiscal sustainability over the long term. If we fail to do so” he says “the result will be fewer opportunities for American families.”
Many people think that tax season is over until next year, but in reality taxes and accounting need to be year long processes and continually addressed throughout.
Having your accounting processes and procedures in place during the summer months and into next year helps reduce the stress and expense of trying to accomplish everything at year end…or even later!
And for those individuals that received an extension, it is even more important to stay on top of the process to avoid another rush in September or October.
Several significant changes occurred during the past tax season that will affect the way business owners will account for repairs, maintenance, materials, and reimbursement for health coverage. In order to stay in compliance (and avoid possible fines) with new regulations, now is as important a time as ever (and possibly the most accessible time) to get in contact with your accountant to discuss these new regulations and how they will affect your business in the coming years.
The next few months should be utilized as an opportunity to get ahead, not to rest and push responsibilities off until later. Whether you are looking to make a new equipment purchase, invest in income producing property, or to determine if you have enough funds for a well-deserved vacation, having your accounting correct and up to date will provide you will the tools for informed decision making and the reduced chance of surprises coming down the pipeline.
It might seem like driving expenses to some, but to the IRS, it’s commuting.
Lonnie Bartley, a construction supervisor for Far West Contractors Corp. in California, was denied a deduction for nearly $25,000 in business expenses because the Tax Court said they were actually nondeductible commuting expenses.
Bartley’s job required him to travel to various job sites in the metropolitan Los Angeles area, mainly Redondo Beach and El Segundo.
Far West did not provide Bartley with a vehicle, nor did it reimburse him for mileage.
On his 2010 Form 1040 return, Bartley claimed $24,448 in auto-related expenses on Form 2106 EZ, Unreimbursed Employee Business Expenses. He also had $2,482 in other unreimbursed expenses.
The IRS sent Bartley a deficiency letter regarding the 2010 return. It was challenging the large amount of deductions on the Form 2106. In this situation, the taxpayer bears the burden of proof and must substantiate the deductions.
When expenses involve passenger automobiles and traveling while away from home, deductions are not allowed unless the taxpayer substantiates by adequate records or sufficient evidence the following three items:
1. The amount of the expenditure or use
2. The time and place of the expenditure or use
3. The business purpose of the expenditure or use
The business purpose test is usually not met if commuting is involved. There are two exceptions to this general rule.
The first exception permits a taxpayer to deduct transportation expenses incurred in going between a taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer normally lives and works.
The second exception permits a taxpayer to deduct commuting expenses between the taxpayer’s residence and a temporary work location, regardless of distance, if the taxpayer also has one or more regular work locations away from the taxpayer’s residence.
Bartley did not meet the first exception to the commuting rule because he both lived and worked in the metropolitan Los Angeles area. He did not meet the second exception because the two job sites where he worked were determined by the court not to be temporary work locations because he already had worked at both the Redondo Beach and El Segundo locations for well over a year. Temporary work locations are usually job sites worked at for less than a year.
Bartley did not meet one of the exceptions to the commuting rule. Therefore, he did not meet the business purpose part of the three-part test that must be met to deduct automobile expenses.
The court ruled the $24,448 in auto-related expenses was nondeductible (Lonnie J. Bartley and Kimberly A. Bartley v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-23, March 31, 2015). ■
©2015 CPAmerica International
A Lockheed Martin employee who participated in the company’s retirement plan was ordered to pay tax on distributions because he couldn’t provide documentation that he had rolled over the account in time.
Balvin A. McKnight was required to include in income two early distributions from his qualified retirement plan because he could not prove to the Tax Court that he had actually rolled that money over into another account within 60 days of the distributions.
McKnight was a participant in the Lockheed Martin Salaried Savings Plan, a qualified retirement plan. State Street Retiree Services was the custodian of McKnight’s account.
During 2011, State Street Retiree Services issued to McKnight two Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
The first Form 1099-R reported a gross distribution of $4,984, which was also the taxable amount. There was no federal withholding on this amount. The distribution was classified as an early distribution, with no known exception.
The second Form 1099-R reported a gross distribution of $206,515, which was also the taxable amount. Federal income tax of $48,303 was withheld. The distribution was classified as an early distribution, with no known exception.
When McKnight filed his 2011 Form 1040 return, he listed retirement distributions of $206,516 and $48,304 as the taxable amounts.
The IRS examined his return and determined that the first distribution amount of $4,984 was not picked up as income on his return. They also determined that the entire amount of both distributions, which equaled $211,499, was taxable.
Under IRS code, any amount distributed from an employee’s trust account is taxable to the person who receives the distribution. The facts establish that $211,499 was actually distributed to McKnight in 2011 by State Street Retiree Services, the custodian for Lockheed Martin’s employee retirement trust account. This amount is taxable unless an exclusion applies.
An IRS code section provides a “rollover” exception to the general rule. It excludes from gross income any portion of a distribution that is transferred to an eligible retirement plan made within 60 days of the distribution.
McKnight claims that he rolled over $95,000 of the distribution but was unable to provide the IRS or the court with any documentation of this rollover. Because McKnight didn’t offer the court any proof of the rollover, the entire distribution of $211,499 was determined to be taxable income (Balvin Anthony McKnight v. Commissioner, U.S. Tax Court, T.C. Memo 2015-47, 109 T.C.M. 1224, March 16, 2015). ■
©2015 CPAmerica International
A New York couple who had received an enterprise zone credit for property taxes were required to pay taxes on the amount because of the tax benefit rule.
Yigal and Bonnie Elbaz were required to include in income $54,507 received in 2008 from a refund of New York state income taxes as a result of the tax benefit rule. The entities receiving the benefits were actually flow-through entities.
The Elbazes owned three different companies organized as flow-through entities – in which income passes on to the owners or investors.
They had a 50 percent interest in all three of the entities. Superflex Management, LLC, was treated as a partnership for federal income tax purposes. Superflex Realty, LLC, was treated as an LLC for federal income tax purposes.
The state of New York provides tax benefits to businesses that invest in certain designated areas of the state. One of these benefits is the Qualified Empire Zone Enterprise credit for real property taxes.
In calculating this credit, the amount of property taxes paid or incurred by a business is a major factor. All three of the businesses owned by the Elbazes qualified for this credit.
The Elbazes’ three businesses deducted the share of property taxes that they had paid or incurred during 2007. These expenses decreased the amount of income allocated to them on their respective K-1 schedules. This is where the tax benefit comes in.
The taxpayers report less income on their 1040 return as a result of the businesses having deducted the property taxes paid or incurred.
The $54,507 refund received in 2008 by the taxpayers was a direct result of the Qualified Empire Zone Enterprise credit. The credit was calculated using the property taxes paid or incurred by the three flow-through entities owned by the taxpayers.
Therefore, the $54,507 was the receipt of a refund of a previously deducted tax and was fundamentally inconsistent with the previous treatment to the extent that the Elbazes benefited from the decreased pass-through income. Thus, the $54,507 is considered to be taxable income (Yigal Elbaz and Bonnie Elbaz v. Commissioner, U.S. Tax Court, T.C. Memo 2015-49, March 17, 2015). ■
To deduct your elderly parent as a dependent on your income tax return, you must first meet four tests.
The tests are:
1. “Not a qualifying child” test
2. Member-of-household or relationship test
3. Gross income test
4. Support test
The first test is the easiest to meet. By definition, a qualifying child is a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister or descendant of any one of them.
As you can see from this definition, your mother and father do not fit this defined terminology. So your parents cannot be your qualifying child.
To meet the member-of-household or relationship test, the person must have lived with you the entire year or be part of a group of persons not required to live with you.
The IRS publishes a list of persons who are not required to live with you. Your father and mother are on that list, so you can meet this test without having either one or both of your parents live with you at any time during the year. Your parents must be citizens, nationals or residents of the United States or residents of Canada or Mexico.
This rule is very helpful to you if you want to deduct your elderly parents as dependents on your tax return despite the fact that your parents are in a nursing home or some other type of care facility.
The gross income test is met if a person’s gross income for the year is less than the personal exemption amount – $3,950 in 2014 and $4,000 in 2015. Gross income is all income in the form of money, property and services that is not exempt from tax.
The gross income test works out well in a situation where the elderly parent has only Social Security income or minimal sources of other income in addition to Social Security. In this situation, all of the Social Security income is generally nontaxable income, allowing the elderly parent to meet the gross income test.
The support test is met if you provide more than half of your elderly parent’s support. Total support includes amount spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. The IRS provides taxpayers with a worksheet to help in making this calculation.
If you make a lump-sum advance payment to a nursing home to take care of your elderly parent for life, and the payment amount is based on the parent’s life expectancy, the amount of support provided each year is the lump-sum payment divided by the parent’s life expectancy.
If you are making monthly payments to the nursing home facility, this monthly amount times 12 months would be considered part of the support you provided.
If you are helping to support an elderly parent who is in a nursing home or some other type of care facility, take the time to look into the gross income and support tests. You might discover you are entitled to a dependency exemption deduction that you have never before realized.
©2015 CPAmerica International
A Florida woman was denied a first-time homebuyer credit of $7,500 because the U.S. Tax Court determined that she had never actually purchased the home.
On Jan. 22, 2007, Ada Mae Pittman entered into a lease contract with an option to buy with James Piotrowski Jr. Pittman was required to meet certain conditions to exercise the option to purchase the house. She was required to:
➜ Close on the purchase of the home by Jan. 31, 2008
➜ Pay a $1,250 option fee
➜ Pay an additional $150 per month, which would be applied against the purchase price of the home if the option were exercised
Pittman paid the $1,250 option fee and made the $150 per month payments.
However, she did not exercise the right to purchase the house by Jan. 31, 2008, because she was unable to obtain the financing needed to close the purchase.
No sales documents were ever prepared.
When Pittman timely filed her 2008 federal income tax return, she claimed the $7,500 first-time homebuyer credit. The IRS subsequently sent her a letter of deficiency disallowing the credit.
Generally, under Internal Revenue Code Section 36, a transfer is complete upon the earlier of the transfer of title or the shift of the benefits and burdens of ownership.
An option to purchase a home in Florida does not give the person with the option an equitable interest in realty until the option is exercised.
IRC Section 36 is quite clear. A taxpayer must actually acquire a property to claim the first-time homebuyer credit.
Pittman did not provide any documentation substantiating her purchase of the residence.
In addition, she never exercised the option to purchase. Therefore, Pittman is not entitled to the claimed first-time homebuyer credit (Ada Mae Pittman v. Commissioner, T.C. Memo 2015-44, March 16, 2015).
©2015 CPAmerica International
An eye surgeon who had received a $2 million bonus in 2007 was told by the U.S. Tax Court that half of it was unreasonable compensation.
Dr. Afzal Ahmad was president and 100 percent shareholder of Midwest Eye Center, an ophthalmology surgery and care center practice with four locations. The center, organized as a C corporation for tax purposes, had paid him the bonus.
He held many positions for the business, including surgeon, chief executive officer, chief operating officer and chief financial officer. These various positions required him to perform different managerial tasks.
During 2007, Ahmad was paid total compensation of $2.78 million, of which $2 million was paid out in the form of a bonus. All of the bonus money was paid in November and December 2007 in four separate checks of $500,000 each.
Ahmad’s workload increased quite a bit in 2007 because one surgeon quit, and Ahmad had to take over that surgeon’s scheduled surgeries during the second half of the year. Because another surgeon had a reduced workload, Ahmad also had to take over some of that surgeon’s responsibilities.
On Ahmad’s corporate income tax return for 2007, $2.78 million was deducted as officer compensation.
The U.S. Tax Court agreed with the IRS, disallowing $1 million of the bonus as unreasonable compensation (Midwest Eye Center, S.C. v. Commissioner, T.C. Memo. 2015-53, March 23, 2015).
IRS Code Section 162 deals with this issue and “allows taxpayers to deduct ordinary and necessary expenses, including a reasonable allowance for salaries or other compensation for personal services actually rendered.” This means compensation is deductible only if it is:
➜ Reasonable in amount
➜ Paid or incurred for services actually rendered
Whether amounts paid as wages are reasonable compensation for services rendered is a question decided on the basis of the facts and circumstances of each case.
Some IRS published rules and some court cases conclude that, to determine reasonable compensation, taxpayers must look at factors other than return on equity. They have to look at what other similar professionals are earning in comparison to their overall compensation package.
Ahmad produced no evidence of comparable salaries. Instead, he said that there are no like enterprises or similar circumstances with which to compare.
Ahmad felt he was entitled to the large compensation amount because of the many different administrative hats he wore for his business.
The burden of proof was on Ahmad to show that the amount paid to him was not unreasonable. The doctor provided no such proof.
©2015 CPAmerica International
Employers should already be preparing to comply with next year’s Affordable Care Act reporting requirements regarding their employee healthcare benefits.
Self-insuring employers and employers with 50 or more full-time employees are required under the Affordable Care Act to file information with the IRS about health insurance coverage provided – or not provided – to their employees.
The required reporting with respect to calendar year 2015 begins with providing an information return to the IRS by Feb. 29, 2016, or March 31, 2016, if reporting electronically. (Normally, the deadline is Feb. 28 each year, but 2016 is a leap year.) But employers should have already begun pulling together the 2015 health coverage information for each month.
Self-insuring employers must file an information return with the IRS using Form 1095-B, Health Coverage, and Form 1094-B, Transmittal of Health Coverage Information Returns, each year, providing information about minimum essential coverage for each individual receiving the coverage. The forms must be filed by Feb. 28, or March 31 if reporting electronically.
Minimum coverage is defined as a healthcare plan designed to pay at least 60 percent of the total cost of medical services for a standard population. Most employer-sponsored health coverage qualifies as “minimum essential coverage.”
However, specialized coverage, such as vision and dental care, workers’ compensation, disability policies and coverage for only specific health issues, does not qualify.
The required information return must contain the following:
➜ Name, address and taxpayer identification number of the primary insured, as well as the name and taxpayer identification number of any family members of the primary insured who are also covered under this policy.
➜ Dates during which individuals were covered under minimum essential coverage during the year.
➜ Whether the health insurance is a qualified health plan in the small group market offered through an exchange. In a situation where employers are providing minimum essential health insurance coverage during the year, they must provide information regarding whether the coverage is a qualified health plan offered through a healthcare exchange and how much the amount of the advance payment is, if any.
➜ Any additional information the IRS requires.
If the minimum essential coverage is provided by the employer through a traditional group health plan, a return is still required to be filed by the deadline.
The return must contain the following information:
➜ Name, address, and employer identification number of the employer maintaining the plan
➜ Portion of the premium, if any, required to be paid by the employer
➜ Any other information the IRS requires
Employers providing health insurance coverage are also required to furnish related information about the coverage to each individual. For calendar year 2015, the information is due to individuals by Jan. 31, 2016.
These statements must provide the following information:
➜ The name and address of the employer maintaining the plan, and a contact name and phone number that the employees can access if they have any questions
➜ The information required to be reported on the return with respect to such individual
Large employers, those with 50 or more full-time or full-time equivalent employees, must file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Return, with the IRS by Feb. 29, 2016, or March 31 if reporting electronically. This information return reports the terms and conditions of the healthcare coverage they provided to their employees for the calendar year.
The employers must also provide related information to their employees by Jan. 31, 2016.
The information return must include the following:
➜ Employer’s name and identification number
➜ Certification of whether the employer offers full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan
➜ Number of full-time employees for each month of the calendar year
➜ Name, address and taxpayer identification number of each full-time employee employed by the employer during the calendar year and any months during which the employee and any dependents were covered under the eligible employer-sponsored plan during the calendar year
➜ Any other information the IRS requires
Large employers that offer employees the opportunity to enroll in minimum essential coverage are required to report:
➜ Duration of any waiting period for the coverage
➜ Months during the calendar year when coverage was available
➜ Monthly premium for the option that cost the lowest amount in each enrollment category
➜ Employer’s share of the total allowed costs of benefits under the plan
©2015 CPAmerica International
Do you have a “junk drawer” as a catchall where you toss items that don’t seem to have a specific place?
The IRS provides Line 21, Other Income, of Form 1040 as a kind of catchall used to report any taxable income not reported elsewhere on your return or other schedules.
This line is where you list the type and amount of miscellaneous, or other, income. Some examples of income to report on Line 21 include the following:
1. Most prizes and awards
2. Jury duty pay
3. Gambling winnings, including lotteries and raffles
4. Recoveries of items deducted in earlier years, for example, various itemized deductions
5. Income from the rental of personal property if you were engaged in the rental for a profit but were not in the business of renting such property
6. Income from an activity not engaged in for profit
7. Taxable distributions from a Coverdell education savings account or a qualified tuition program
8. Taxable distributions from a health savings account or an Archer medical savings account
9. Canceled debts on something other than your personal residence, for which canceled debt is not taxable
10. Net operating loss (NOL) deduction
11. Alaska Permanent Fund dividends
Jury duty pay, recoveries, gambling winnings and NOL are some of the more common items to include on Line 21. All are income items except for NOL, which reduces the amount of income on this line.
NOL is a net operating loss from a prior year carried forward. It means you had more losses than income in a particular year. You are allowed to carry forward a loss for 20 years or until it is used up.
For more detailed information, refer to the 1040 instructions for Line 21.
©2015 CPAmerica International