A few weeks ago, the Internal Revenue Service issued a notice stating they would be preparing regulations and guidance to clarify the treatment of income re-characterized for purposes of working around the new $10,000 cap on the state and local tax (SALT) deduction. So far, several states including New York, New Jersey, and Connecticut have passed legislation designed to enable high-income taxpayers to bypass the cap, with legislation pending elsewhere. In the notice, the IRS emphasized the “substance over form” doctrine, meaning they care about the actual substance of a payment, and not the name or form it may be given.
While the direct guidance remains to be seen, this is clearly bad news for the charitable contributions in lieu of taxes approach that California was looking into to, and will greatly reduce the itemized deductions of CA residents for 2018. The IRS has made clear in this notice that it is concerned with whether a payment is made in satisfaction of a tax liability, and not whether it is re-characterized in some other way. The impact on other workarounds, such as New York’s optional payroll tax swap or Connecticut’s entity-level tax swap, is not immediately clear, though both approaches could be at risk as well.
We should continue to practice skepticism of any SALT deduction cap avoidance schemes until we receive the IRS guidance. Most agree that existing statutes, case law, and regulations are fairly clear on this matter and states have just muddied the waters. Formal IRS guidance will help protect taxpayers, so hopefully they do not rely on state-endorsed strategies, which could result in penalties and increased liability.
In September of 2016, the IRS announced that it would start using private debt collectors to recover certain overdue federal tax debts in the spring of 2017. To implement this new program, the IRS contracted with four private collection agencies: CBE Group, Conserve, Performant, and Pioneer. In carrying out their collection efforts, these four companies are required to respect taxpayer rights and obey the consumer protection regulations established in the Fair Debt Collection Practices Act.
How does this new program work?
Considering the continual mail and phone scams that keep emerging, the IRS Commissioner warned taxpayers to be alert for new scams related to this program. When a taxpayer’s account is transferred to a private debt collection agency, the IRS will give the taxpayer written notice of the transfer. In addition, the private collection agency will then send a second, separate letter to the taxpayer verifying this transfer. The private collection agency will not ask for payments to be made on a prepaid debit card or for checks to be made out to the collection agency. All checks should be made payable to the U.S. Treasury. The IRS emphasized that even with private debt collection, taxpayers should not be receiving phone calls from the IRS insisting on immediate payment. The IRS always mails multiple collection notices before making phone calls.
There are several types of accounts that the IRS will not transfer to private collection agencies. Some of these accounts include taxpayers who are deceased, in designated combat zones, victims of identity theft, or in presidentially declared disaster areas and requesting relief from collection. If a taxpayer does not want to work with a private collection agency appointed to his or her account, he or she must notify the private collection agency in writing. Also, the IRS urges taxpayers who are unsure if they have unpaid taxes due from a previous year to check their account balances on www.irs.gov/balancedue.
For more information on private debt collection visit the Private Debt Collection page on the IRS website.
Right before this year’s tax deadline, the IRS put out a release reminding people that some of us may not have to ask for an extension. While this advice is coming a bit late from me for the current tax year, it is definitely something to keep in mind. As the IRS notes “Taxpayers in Presidentially-declared disaster areas, members of the military serving in a combat zone and Americans living and working abroad get extra time to both file their returns and pay any taxes due.”
If you are a taxpayer in a disaster area you will often have extended time to file and pay. These extensions of time also apply to other tax-related items like contributing to an IRA. The IRS states that generally any area given a disaster declaration by FEMA is provided this relief, which is extended to relief workers, businesses and anyone who has their tax records located in the disaster area.
If you are a member of the military or eligible support personnel serving in a combat zone you will have at least 180 days after you leave the combat zone to file your tax returns and pay your taxes. As with the disaster relief, this extension also pertains to other tax-related items like contributing to your IRA. The IRS suggest checking Publication 3, Armed Forces’ Tax Guide, for further details.
For U.S. citizens and resident aliens who are living and working outside the United States and Puerto Rico, you have until June 15, 2017 (for the current tax year) to file your return and pay any taxes due. This also applies for military members on duty outside the U.S. who do not qualify for the combat zone extension. The IRS does note two items with this category of extended filing: 1) Attach a statement with your return explaining which situation applies for you; and 2) interest still applies to payments received after the standard filing deadline (generally April 15). See Publication 54 for more information.
For everyone else, just remember to ask for more time by filing Form 4868.
We all know how it goes – as soon as the New Year begins the tax forms begin filling up your mailbox. Just another year to throw the 1099s and W-2s in a pile and ship them off to your accountant just in time to throw a return together and be done with it. Many people see tax time as a necessary evil which they grin and bear their way through the steps in order to get it done and over with. If you are one of these people you may benefit from doing things a little different this year and seeing where it gets you.
There are many benefits to paying attention during your tax filing process if you have never cared or take the time to understand before. It doesn’t matter whether you are a wealthy business owner or just a normal guy or gal working for your paycheck – a good CPA can help you get the most benefit not only tax wise but possibly financially as well. Taking time with your tax preparer to understand the why’s and how’s can open your eyes to things you may be able to do differently to better your tax or financial position in the future. If your accountant does not have your best interest at heart then find a new one because a good accountant takes a personal interest in their clients and wants to see them do as well as absolutely possible. A good accountant will not only be able to prepare your tax return to its fullest potential but they are able to advise you on future moves and desires.
This year, make a resolution to spend some time with your accountant, learn something new, and solidify the relationship. Having a trusted advisor as opposed to a tax preparer on your team will take you a long way and be worth every penny.
It’s hard to believe we are two-thirds of the way through 2016 already. Seems like just yesterday you were gathering all of your tax documents and filing your 2015 return (or maybe you still are if it was extended). I know for a lot of individuals and business owners taxes are the last thing on their mind right now, but if you are willing to spend a little time in September it might save you some heartburn come next tax season.
For most business owners and self-employed individuals, September 15th marks the due date for your third round of 2016 estimated tax payments. Most simply rely on the vouchers printed out with their 2015 tax return. There is nothing wrong with this, but these figures are based on your 2015 income. If you have experienced changes in 2016, whether good or bad, the amount you are planning on paying on September 15 may require some tweaking.
We are far enough in to the year to put together a good picture of where you will be at the end of the year. Doing some quick forecasting now could save you from a big cash hit on January’s estimated payment (if you tax plan at year end) or on April 15th. If you take a look at your books and notice some big changes from 2015 now is a good time to adjust your payment.
Keep in mind that as long as you make the payment amounts on your current vouchers you will have met the withholding requirements and will not be subject to estimated tax penalties, but the consequence of withholding too little or too much hits the pocketbook down the line, and we all know the lifeblood of small business is cash.
If you have any questions or would like a qualified professional to take a quick look at your numbers to make sure you aren’t going to be forking out extraordinary amounts of cash come spring, give your CPA a call. It may be well worth it.
According to the Network for Good, 30% of all online charitable contributions in 2015 were made during the month of December. This is not surprising as the gift-giving spirit around the holidays inspires many people to donate to causes near to their hearts at that time. Fortunately for us taxpayers, a donation to an IRS qualified charity can provide a tax deduction regardless of when it was made throughout the year. Summers, in particular, are a great time of year to think about donating. First, you can give cash without the stress of holiday spending. Second, you can donate non-cash items and declutter your home at the same time. Here are some tax tips on deducting charitable donations posted by the IRS on its website:
1. Make sure to donate a qualified charity. You cannot deduct donations to individuals or political organizations or candidates. Use the IRS Select Check tool to check the status of the charity to which you would like to give.
2. Be aware that your deduction may be limited. If you receive something in return for your donation, you can only deduct the amount in excess of the value of what you received in return. For example, if you donate $50 to a qualified charity and receive a ticket to a fundraising dinner valued at $30, you may only deduct $20. In addition to this rule, there are AGI limits on charitable donation deductions. Generally, donations may only be deducted up to 50% of AGI. See Publication 526, Charitable Contributions for more information.
3. If you donate non-cash items, there are several things to keep in mind. For donated property to be deductible, it must generally be in good condition. Also, the amount of the deduction for donated property is generally its fair market value. There are special rules for cars, boats, and other types of property. See Publication 526, Charitable Contributions, for more information on these rules. See also Publication 561, Determining the Value of Donated Property.
4. Be diligent with recordkeeping. There are very specific substantiation rules regarding charitable donations. The amount and type of your donation will determine what kind of record you must keep. In general, you must have a written record of any cash you give to claim a deduction. For donations of $250 (cash or property) or more, you must have a written statement from the charity stating the amount and/or a description of the property you gave and whether or not you received anything in return.
The IRS has a section on its website dedicated to information relating to charitable contribution deductions. More guidance can also be found in Publications 526 and 561.
There are a number of beneficial tax provisions that have been implemented to help military members who have been deployed to combat zones and their families. Two substantial benefits are extensions of filing deadlines and military pay exclusions. To be able to take advantage of these special tax treatments, however, specific requirements need to be met. The following takes a brief look at some of the regulations affecting military members when serving in combat zones. More information can be found on the IRS website or in IRS Publication 3 – Armed Forces’ Tax Guide.
Per IRS Publication 3, the U.S. Armed Forces comprise officers and enlisted personnel in all regular and reserve units subject to control by the Secretaries of Defense, Army, Navy, Air Force, and Coast Guard. The U.S. Merchant Marine and the American Red Cross are not included.
Per the IRS website, combat zones are specified by executive orders from the President. They are regions (including the airspace above them) in which the U.S. Armed Forces currently are or previously were engaged in combat. At this time, there are three combat zones:
In addition to these designated combat zones, the Department of Defense has ordered several other areas to qualify for combat zone tax benefits. These regions have played crucial roles in supporting military operations under either Operation Enduring Freedom or Operation Iraqi Freedom. A few examples are Pakistan, Tajikistan, Jordan, Yemen, and Somalia.
When serving in combat zones, military members and their spouses are allowed an extension to file their Forms 1040. The deadline is extended for 180 days after the service member’s last day in a combat zone. Additionally, any period of time before the regular filing deadline that the service member spent in a combat zone is added to the 180 days. For instance, if a service member deployed to a combat zone on January 15, 2016 and returned November 15, 2016, the deadline for filing his 2015 Form 1040 would be extended for 274 days (180 days plus the 94 days he was deployed prior to April 18, 2016) after he returned on November 15, 2016, making his filing deadline August 16, 2017. The IRS has listed many examples on its website and in its Publication 3 for guidance.
Enlisted members, warrant officers, and commissioned warrant officers, who serve in combat zones during any part of a month, can exclude all of their military pay for that month from their gross income. This rule applies to commissioned officers as well, but with one limitation. The amount of the income tax exclusion is limited to the highest rate of enlisted pay, plus any hostile fire or imminent danger pay received. For 2015, the exclusion amount is $8,119.50 per month ($7,894.50 for the highest enlisted pay plus $225 for imminent danger pay).
There are many other tax regulations that affect individuals serving in the military. As mentioned, the foregoing is intended to take a glimpse at some of the tax benefits received by service members deployed to combat zones. The IRS has a section on its website dedicated to giving military members tax information and, more specifically, rules regarding combat zone service. IRS Publication 3 is also a useful resource.
With all of the talk of tax deadlines switching for 2016 tax returns it’s important to go over some of the deadlines for this current tax season. The deadlines for this year are the same as they have been in the past. Here are a few of those dates, but additional guidance can be found on the IRS website.
File form 1120 or 1120S for calendar year 2015 and pay any tax due
File form 7004 for an automatic 6 month extension, and deposit estimated tax
The return or extension must be postmarked or transmitted for e-filing by Monday, April 18, 2016
Your tax payment is still due by April 18 and can be submitted with the extension form
Non-profits can request an automatic three-month extension by submitting Form 8868
For taxpayers who have over $10,000 in total in foreign bank accounts
These forms must be filed electronically and there are no extensions
If you filed for an extension, this is the final deadline to file your individual tax return for 2015
All of the deadline changes will occur in 2017 for 2016 returns.
The one-year IRS pilot program to provide relief to plan administrators who didn’t file required retirement plan returns on Form 5500-EZ expires June 2, 2015. So, anyone wanting to take advantage of the penalty relief program should act fast.
This penalty relief is available to:
➜ Certain small business (owner-spouse) plans and plans of business partnerships
➜ Certain foreign plans
Small business plans provide retirement benefits only for the owner and the owner’s spouse.
The late filing penalty for 5500-EZs is $25 per day, up to a maximum of $15,000 per return. A business being assessed the maximum penalty for four years’ worth of unfiled returns could pay as much as $60,000 in penalties if it were not for this pilot program.
Under the program, no penalty or other payment is required to be paid for late filing. The applicant must include a complete Form 5500 Series Annual Return/Report, including all required schedules and attachments, for each year that the applicant is seeking penalty relief.
All of the delinquent 5500s must be sent directly to the IRS. The businesses cannot file through the Department of Labor’s EFAST2 filing system. Filing through the EFAST2 filing system results in returns being processed as they normally would be, with applicable late-filing penalties being assessed.
Plans subject to ERISA are not eligible for this program.
A foreign plan is a retirement plan maintained outside the United States, primarily for nonresident aliens. A foreign plan is eligible for relief if the employer that maintains the plan is a domestic employer or a foreign employer with income derived from sources within the United States.
At the end of this pilot program, the IRS will consider whether it should be replaced with a permanent one. If a permanent program is established, the IRS will charge businesses a fee to take part in the program. ■
©2015 CPAmerica International
The Internal Revenue Service provides many different educational products, webinars and videos to help small businesses thrive.
Take child care services as an example. The IRS webinar “Tax-Related Guidance for Child Care Providers” provides information that would be beneficial for a provider just starting out in the business as well as anyone who is relatively new in the business.
Most small businesses employ CPAs to handle their financial needs, but having some knowledge of what is going on regarding the financial side of the business is important.
The child care webinar is broken down into four main topics:
1. Child Care Income – This section covers various types of income that must be reported. Some examples are:
➜ Income from contracts specifying charges, terms and responsibilities
➜ Late pick-up or early drop-off fees
➜ Registration fees
2. Child Care Expenses – This section focuses on what criteria must be met for an expense to be deductible. Some examples of topics covered in this section are:
➜ The business must be a for-profit activity. Remember, hobby losses are not deductible.
➜ The expense must be ordinary and necessary.
➜ An allocation must be made for business/personal expenses. Only the business portion is deductible.
➜ Personal expenses are never deductible.
3. Special Rules – A hot button for child care providers is the business use of the home. The webinar covers the special method used to compute the business use percentage of a home available only for daycare service providers.
4. Other Expenses – There are some expenses common to the daycare industry. The webinar discusses how to deal with these expenses:
➜ Food consumed by daycare recipients, including the USDA food reimbursement program
➜ Supplies such as games, books, child-proofing devices, toys and diapers
➜ Depreciation expenses
Child care is only one of several businesses that can benefit from the targeted IRS educational products. Check out the various webinars and videos at www.irsvideos.gov. ■