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It’s almost time to begin gathering your tax information. You should receive most of your 2013 tax documents by early to mid-February 2014.
Whether you expect to prepare your own return or use the services of a professional, it pays to be organized.
Probably the most important document you need to locate is a copy of last year’s tax return. The tax situation of most individuals does not change dramatically from year to year. So the information shown on last year’s return is a good guide to what you need to look for this year.
On the other hand, if you experienced a life event during 2013, your tax situation could be in for a big adjustment. Life events include marriage, divorce, birth of a child, retirement, a business startup or a change in employment.
Everyone’s situation is different, but most people receive some common tax documents in the mail:
You may receive other income tax-related forms as well:
All of these forms will be needed to see whether you qualify to itemize your deductions. If you are self-employed, you will also need to gather receipts for all deductible business expenses. Check out IRS Publication 535 for more information about business expenses.
Looking ahead to next year at this time, while you’re digging up all these records, sort everything and create files to hold:
Then keep items sorted as they come in during 2014. That way, next year’s income tax return should be easier to prepare.
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
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
You have until April 15, 2014, to make your 2013 IRA contributions, but there are five important points to consider prior to year-end:
Paid directly from your IRA (not an ongoing SEP or SIMPLE IRA);
You can use a qualified charitable distribution to satisfy the required minimum distribution for your IRA for the year. However, you cannot deduct this amount as a charitable contribution on your tax return. ■
The Fast Track Settlement program is now available nationwide.
Fast Track Settlement (FTS) is designed to help small businesses and self-employed individuals who are under examination by the IRS’s Small Business/Self Employed (SB/SE) Division to more quickly settle their differences with the IRS. The IRS announced the program’s nationwide availability in Information Release 2013-88.
Originally launched as a pilot program for small businesses and self-employed individuals in September 2006, FTS was expanded in January 2011 to specified cities and areas: Chicago, Ill.; Houston, Texas; St. Paul, Minn.; Philadelphia, Pa.; central New Jersey; and San Diego, Laguna Niguel and Riverside, Calif.
While not all disputes with the IRS are eligible for consideration, the FTS program is designed to expedite case resolution.
It uses alternative dispute resolution techniques to save time and avoid a formal administrative appeal or lengthy litigation. As a result, audit issues can usually be resolved within 60 days rather than months or years.
The IRS emphasizes that taxpayers choosing this option lose none of their rights because they still have the right to appeal if the FTS process is unsuccessful.
Either the taxpayer or the IRS examination representative may initiate Fast Track for eligible cases. The goal is to complete cases within 60 days of acceptance of the application.
©2013 CPAmerica International
