Harvard Business Review OnPoint’s Summer 2015 issue includes an article on “How Star Women Build Portable Skills” suggesting that women, in their efforts to maneuver in a male oriented environment, actually build skills that are more portable than men. The research study was conducted on stock analysts starting several years back.
Strategy #1 – Build an external network
Strategy #2 – Scrutinize prospective employers
Men tend to concentrate on compensation. Women are more likely to weigh multiple considerations such as attitudes of the research director and the existence of female colleagues and role models. Women look at the culture of a department in terms of how women fit in along with its value, atmosphere, and tone.
Have things changed much? Awareness, maybe, resulting in a more concerted effort to develop and implement women’s initiatives within organizations. The HBR story line emphasized what can be learned from this study:
For employees, the decision to change jobs should be made strategically, not only with an eye toward promotions and raises, but also from an informed awareness of the new firm’s resources and culture.
For organizations, the focus should be on building talent from within and taking measures to retain the stars they create.
Balance internal and external relationships. Your life changes as you move up the ladder. To succeed you must develop peer relationships at the firm. That’s how things get done. That’s how trust evolves. Whether they are internal or external “trusted relationships” are the key.
If you have something called qualified dividend income, it receives special tax treatment.
Qualified dividend income is defined as dividends received during the tax year from a domestic corporation or a qualified foreign corporation. It is taxed at the lower preferential capital gains tax rates.
A domestic corporation is a corporation incorporated within the United States. A qualified foreign corporation is a corporation incorporated in a possession of the United States or a corporation eligible for benefits of a comprehensive income tax treaty with the United States that the secretary of the Internal Revenue Service determines is satisfactory.
In contrast, ordinary dividends are fully includable in gross income. An ordinary dividend is any distribution made by a corporation to its shareholders whether in money or property. The amount of the dividend is the amount of cash received plus the fair market value of any property received, if applicable.
You pay tax on ordinary dividends at your ordinary income tax rates. Your tax bracket determines the rate of income tax that you pay. There are currently seven ordinary income tax rates or brackets.
However, if the corporation’s dividends meet the criteria for qualified dividend income treatment, the lower preferential tax rates apply, as shown in the table below:
Ordinary Income Tax Rate Qualified Dividend Rate
These rates are applicable for individuals, estates and trusts.
Investments in tax-deferred retirement vehicles such as a regular IRAs, 401(k)s and deferred annuities do not receive any benefit from the preferential rate reduction.
Distributions from these accounts are taxed at ordinary income tax rates even if the funds represent dividends paid on the stocks held in these accounts.
There is a 60-day holding period requirement to qualify for the preferential qualified dividends rate. You have to hold a stock at least 60 days within a 121-day period, which begins 60 days before the ex-dividend date and ends 60 days after.
The ex-dividend date is the day after the date of record, which is the date on which all shareholders who own a particular stock will receive a dividend for that period of time.
Obviously, following the rules and qualifying for the preferential qualified dividends rate can result in a substantial tax savings. ■
©2015 CPAmerica International
Ordinary and necessary business expenses are not deductible when a trade or business consists of trafficking in controlled substances prohibited by federal law, under a recent decision by the 9th U.S. Circuit Court of Appeals.
Martin Olive owns a business called the Vapor Room, located in San Francisco, Calif.
He appealed the Tax Court’s decision to disallow the deduction of all of his business expenses for 2004 and 2005. The Vapor Room had $236,502 of business expenses in 2004 and $417,569 of business expenses in 2005.
The Internal Revenue Code (IRC) defines “gross income” and allows a business to deduct from its gross income all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on the business. The difference between the two items is the business’s net income.
The IRC also has some exceptions to what is deductible as an ordinary and necessary business expense. One exception is IRC Section 280E, which disallows the amount paid or incurred during the taxable year for the purpose of carrying on any trade or business consisting of trafficking in controlled substances.
The test for determining whether an activity constitutes a trade of business is whether the activity was entered into with the dominant hope and intent of realizing a profit.
The Tax Court in applying the profit test determined that the only business activity that was engaged in by the Vapor Room was the sale of medical marijuana. Medical marijuana, while legal to sell in the state of California, is still considered to be a controlled substance for federal government purposes.
The Tax Court found that the only income-generating activity in which the Vapor Room engaged was its sale of medical marijuana. Marijuana was the only item for which the Vapor Room charged a fee.
It offered other services and amenities for which it did not charge a fee. For example, it provided vaporizers, food, drink, yoga, games, movies and counseling. The business offered the free items hoping to lure in customers to its dispensary to buy its medical marijuana.
Because marijuana is a controlled substance, IRC Section 280E disallows the deduction of any expenses related to this activity.
Thus, the appeals court affirmed the Tax Court’s decision to deny the Vapor Room a deduction for what it had considered the ordinary and necessary business expense associated with its operation (Martin Olive v. Commissioner, U.S. Court of Appeals, Ninth Circuit, No. 13-70510, July 9, 2015). ■
©2015 CPAmerica International
The IRS recently lost a lawsuit to Public.Resource.Org, Inc., but its loss may result in greater protection of sensitive taxpayer information.
The U.S. Court of Appeals for the Ninth Circuit in California found that, under the Freedom of Information Act, the IRS was required to provide Public.Resource.Org, a nonprofit corporation that provides public access to information, with a small set of Forms 990. The IRS raised objections to doing this based on cost concerns, but the court ordered the agency to comply anyway.
The problem is that certain information contained on Form 990 (Return of Organization Exempt from Income Tax) is considered to be sensitive and of a personable nature. For this reason, it must be protected from public distribution.
In complying with the court’s decision, the IRS had to manually copy certain portions of the Forms 990, which are available to the public. They then had to assemble this information and send it out to the interested party. This procedure is time-consuming and expensive.
As it stands right now, if the IRS were to send an electronic file to an interested party to comply with the law, that electronic file would contain all of the information on the Forms 990, including the sensitive and personal information that is not to be released to the public.
In response to the court’s requirement to provide the Forms 990, the IRS announced that it was considering using new technology to produce electronic versions of the publicly available portions of exempt organization returns in machine-readable form. Machine-readable is not a format that the IRS has historically used to make Forms 990 available.
With the new technology, the IRS will be able to send the whole electronic file to the interested party, which will be able to print out only the information on the return that is approved for public disclosure. The sensitive personal information will be kept confidential. The interested party will not be able to access this information or print it out.
Using the new technology will allow the IRS to meet the reporting requirement in a timely and cost-effective manner. ■
©2015 CPAmerica International
The tax treatment for renting out your vacation home depends on the number of days it’s rented.
If you don’t use your vacation home all the time and are considering renting it out for a portion of the year, you have three possible situations – all with different tax ramifications:
The first situation is the easiest and most straightforward. You own a second home as a vacation property. You do not rent out that property at all during the year. You would be able to deduct the mortgage interest and real estate taxes that you paid during the year as Schedule A itemized deductions.
If you use your vacation home for personal use at least 15 days and rent it out for fewer than 15 days, the IRS considers the primary function of the property to be personal and not a rental. Therefore no rental income or rental expenses should be claimed on Schedule E, Supplemental Income or Loss, of Form 1040.
You are not required to report the rental income and rental expenses from this activity. The expenses that you are able to deduct include mortgage interest and real estate taxes, which would be deducted on Schedule A as itemized deductions.
The third situation is a little more complicated. If you used the vacation home as a home and rented it out 15 days or more during the year, you would be required to include all of your rental income as income on Schedule E. Because you used the home for personal purposes, you must allocate your expenses between business and personal use.
When allocating your expenses, you should follow these two rules:
The numerator for allocation purposes would be the number of days that the vacation home was rented out at a fair market rental price during the year. The denominator would be 365 days.
Crunching these numbers will give you the business-use percentage. You would then multiply all of your various business/rental expenses by this percentage to arrive at the deductible amount of your expenses.
The deductible amount of your expenses is then entered on Schedule E. The IRS provides a worksheet to help you calculate the amount of your deductible business/rental expenses. Unallocated mortgage interest and taxes (the personal part) still goes on Schedule A.
If you follow these simple rules when renting out your vacation home, you can avoid unintended consequences.
©2014 CPAmerica International
On June 22, 2015, Washoe County announced that it was the first in Nevada, along with the Nevada Humane Society, to team up with Finding Rover, an app that uses facial recognition to help identify lost dogs. Finding Rover consists of a free mobile app and website and is very easy to use. It has been extremely beneficial in assisting dog owners reunite with their lost pets in a timely manner. Here is how it works:
The app and website use a lost and found dog notification system that sends out push notifications to users within a 10-mile area. When a potentially lost dog is identified, the user takes a picture of the dog, either within the app or uploads the picture from his or her device’s photo album, and Finding Rover’s facial recognition software determines whether or not the uploaded picture matches one of the lost pets on file. Once a dog has been identified through the software, the finder receives information on how to contact the dog’s owner.
Washoe County Regional Animal Services and the Nevada Humane Society are now using the Finding Rover app to help Washoe County residents find their lost dogs. Both shelters now upload pictures of all newly found or admitted dogs to Finding Rover, which not only matches up found dogs with lost dogs submitted by users, but also allows users to browse the shelters’ listings of found dogs right from their phones or computers. In addition, the Nevada Humane Society now registers all newly adopted dogs with Finding Rover at the time of adoption, which could prove to be an extremely valuable resource in the event that a dog goes missing.
For more information on the app, visit Finding Rover’s website at www.findingrover.com
According to an article on CNBC this week, this year millennials will surpass baby boomers and GenXers to become the largest generation in the American workforce. Adults age 18 to 34 now make up 1 in 3 American workers. There have been numerous articles, seminars and training sessions built around how to effectively lead and work with different generations in the work force. At every conference I’ve gone to in the past 3 to 5 years, there has been at least one session on the issue and at each of those sessions, there is always at least one person in the room that seems frustrated with their millennial generation employees and trying to “figure them out”.
So what are the current issues important to millennials? According to the Hartford’s 2014 Millennial Leadership Survey, millennials noted that work-life balance (or more importantly work-life integration) stood as one of the top issues of importance. Millennials also want to know that their work is a place of growth and development, and they are accustomed to open communication and accessibility.
As a millennial myself, I happen to agree with the above survey results, and I have witnessed the impact of my generation within the company I work for. When career and advancement paths were not clearly defined or established within my firm, I personally asked for that clarification so I could understand my opportunities for advancement and how I could go about getting there. Now, career paths are defined and documented for everyone to see. What was once mandatory Saturdays during tax season turned into a flexible work schedule where the staff could work which days and hours they pleased as long as the hours were met.
Not every millennial meets the stereotype of a millennial, and the best way to find out what is important to your employees of any generation is to simply ask. I have found that my generation is usually more than willing to be honest and open with what priorities are important to us.
The IRS allows taxpayers to use an optional safe harbor method when claiming a home office deduction.
The safe harbor method saves the taxpayer from having to substantiate, calculate and allocate deductible home office expenses, a procedure that is part of the nightmare taxpayers have to go through if they want to use the old actual expense method.
With the optional method, the taxpayer simply calculates the number of square feet used for the office and multiplies that number times $5. The maximum square footage that can be used is 300, so the maximum home office deduction at the present moment is $1,500.
The IRS can adjust the $5 rate as warranted.
The safe harbor deduction may not exceed the gross income from the business. If it does, the excess may not be carried forward.
Taxpayers using the safe harbor method will not be able to depreciate the portion of their home used in the trade or business. But the advantage is the taxpayer may deduct mortgage interest, real estate taxes and any casualty loss as itemized deductions on Schedule A of Form 1040.
The taxpayer would still be allowed to deduct, to the extent allowed by the Internal Revenue Code and regulations, any trade or business expenses unrelated to the qualified business use of the home for that taxable year. Some examples would be advertising and office supplies.
If reimbursed by an employer for the home office expenses, a taxpayer cannot use the safe harbor method.
The taxpayer may elect from taxable year to taxable year whether to use the safe harbor method or to calculate and substantiate actual expenses for the purpose of the home office deduction. A method is elected simply by using the particular method for that tax year. A method once selected for that tax year cannot be changed. ■
©2014 CPAmerica International
Nonemployee compensation received in exchange for services rendered is taxable income, despite tax protester arguments to the contrary.
Stephan Foryan, a resident of the state of Washington and an apparent tax protester, did not file a tax return for 2009. He also did not make any estimated tax payments for the 2009 tax year.
Foryan admits to having received nonemployee compensation for services rendered, but he told the U.S. Tax Court that the compensation was not taxable. He mistakenly relied on a court case from 1920 to support this argument. Unfortunately for him, a 1955 Supreme Court case superseded the 1920 case, making it not applicable to the present matter.
Internal Revenue Code Section 61(a) provides that “gross income means all income from whatever source derived,” including compensation for services.
Using information obtained from third parties, the IRS had calculated Foryan’s income for 2009 to be $137,282. Against this income, Foryan was allowed a self-employment income tax deduction of $8,460, a standard deduction of $5,700 and a personal exemption of $3,650.
Foryan had been involved in a prior court case a few years earlier regarding a tax matter. He lost that case, and the court put him on notice regarding raising tax protester arguments.
The same situation arose in this case. The court rejected Foryan’s arguments as frivolous tax protester arguments. In addition, the court fined him $1,000 because it felt that his position in this case was frivolous or groundless.
Therefore, the court agreed with the IRS in this case, finding that Foryan had received $137,282 in compensation for services performed at various farms during the year and including that amount in his gross income for 2009. He was allowed the deductions calculated by the IRS (Stephan Foryan v. Commissioner, U.S. Tax Court, T.C. Memo 2015-114, June 22, 2015). ■
©2015 CPAmerica International
The IRS has announced that it will issue estate tax closing letters only on request for estate tax returns filed on or after June 1, 2015.
Prior to this change, CPAs and clients anxiously awaited the closing letter for filed estate tax returns. A very large portion of returns are audited. Receiving the closing letter meant that the IRS had accepted the return (Form 706, United States Estate Tax Return) as filed and it would not be audited.
The IRS recommends waiting at least four months after filing your Form 706 return before requesting a closing letter.
If you filed your estate tax return before June 1, 2015, the IRS will continue its policy of issuing closing letters provided the return is accepted as filed and has no other errors or special circumstances. Expect to wait four to six months to receive the letter.
Not all returns filed before June 1, 2015, will receive a closing letter. The IRS will not issue a closing letter for any return that was filed after Jan. 1, 2015, but before June 1, 2015, that did not meet the filing threshold for an estate tax return and whose taxpayer portability election was rejected by the IRS.
The filing threshold simply means the gross value of the estate. Those numbers are indexed for inflation and are as follows:
2015 – $5,430,000
2014 – $5,340,000
2013 – $5,250,000
A portability election allows a deceased spouse to transfer the estate’s unused exclusion amount to the surviving spouse.
The IRS gives a great deal of attention to the estate tax return when a portability election is made, so the election must be made properly.
For returns filed after Jan.1, 2015, and before June 1, 2015, the IRS will still issue a closing letter if the estate met the filing threshold. In addition, if the filing threshold was not met, but no portability election was made, you will still receive a closing letter.
If you have any questions about estate tax closing letters, please contact your CPA. ■