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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
The organization can request an additional three-month extension (not automatically granted) by filing another Form 8868 and filing out the information in Part II
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. ■
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
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
Having recently visited Germany and being a CPA, I naturally was interested in their taxes. I have heard throughout my life how taxes in Europe are extremely higher than in the United States and I thought I’d do a simple comparison.
According to a KPMG report on income tax and social security rates on $100,000 USD of income, in Germany the percentage paid by individuals was 28.3% plus 9.8% in pension insurance for a total of 38.1% (this does not include the mandatory 15.5% for health insurance that we in the United States pay separately). 
In the Unites States the percentage paid was 18.2% plus 7.65% for social security for a total of 25.85% (if you live in California, add another 7% for 32.85% total). So, for somebody earning $100,000 the taxes in the United States are lower regardless of where you live.
The above result is what I figured since the United States has low marginal rates for low earners. For somebody well-off making over $1,000,000, I hypothesized that the United States would buck the stereotype and have higher rates. In Germany the top tax rate is 50.5% (which starts at $283,326 USD for a single person ). In the United States the top rate is 43.4% (starting at $406,750 USD for a single person) and would be as high as 56.7% if the income was earned in California. Further, in Germany dividends and sales of capital assets are taxed at 25% while in the United States there is a maximum of 23.8% (or up to 37.1% if you live in California).
So there you have it, if you are wealthy and live in California you are paying more income tax than people who live in the European Unions’ largest economy. Of course this is only one facet of the tax system. There are many others, like the value added tax of 19% in Germany, but Germany’s corporate tax rate is 15% while ours in 35%. If you live in California and are paying these high rates you can’t even take solace in the fact that you’re working less. In Germany the average work week is 35 hours with 24 paid vacation days and 10 paid holidays!
Have you ever wondered when and how the IRS got its start? I did and so I did a little research.
The IRS traces its origins back to the Civil War. In 1862, President Lincoln signed the Revenue Act of 1862 into effect. This law was intended to help pay for war expenses by establishing a Commissioner of Internal Revenue and the country’s first income tax. It imposed a 3% tax on income between $600 and $10,000 and a 5% tax on income over $10,000. 
In 1872, after much public disapproval and resistance, Congress allowed the law to expire and so the income tax was temporarily eliminated. According to the IRS website, from 1868 until 1913, 90% of all revenue came from liquor, beer, wine, and tobacco taxes.
In 1894, Congress attempted to reintroduce the income tax by enacting the Wilson Tariff Act and creating an income tax department within the Bureau of Internal Revenue. Congress’s success was short-lived as the Supreme Court ruled the new income tax law unconstitutional one year later in 1895. It reasoned that the income tax constituted a direct tax and, therefore, needed to be imposed in proportion to each state’s population, which it was not (i.e. apportioned). Following the Supreme Court’s decision, the income tax division of the Bureau of Internal Revenue ceased to exist.
In 1909, President Taft encouraged Congress to propose a constitutional amendment that would effectively override the Supreme Court’s decision. The amendment would permit the government to impose an income tax without apportionment. In 1913, the 16th Amendment was adopted, which reads, “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any consensus or enumeration.” Shortly thereafter, Congress enacted a 1% tax on net personal income over $3,000 with a surtax of 6% on income over $500,000. The first Form 1040 was created.
During World War I, the top income tax rate increased to 77% in 1918. 
After the war, it fell to 24% in 1929, but increased again during the Depression. During World War II, payroll withholding, quarterly tax payments, and the standard deductions were implemented. During the 1950s, the Bureau of Internal Revenue was restructured to employ professional employees and its name was changed to the Internal Revenue Service. In 1998, Congress passed the IRS Restructuring and Reform Act of 1998, which caused the most wide-ranging restructuring since the mid-century. The IRS was split into four divisions, each focused on different taxpayer needs.
Moving for your job?
Income tax deductions may help you cope with the stress of packing and the pain of leaving your home.
When you move, you can deduct two types of expenses:
The taxpayer may also deduct moving expenses of household members whose principal residence, both before and after the move, is the taxpayer’s residence.
The move must be related to starting work at a new job or associated with self-employment opportunities. The moving expense must be incurred within one year from the time the taxpayer begins work at the new job. Sometimes the Internal Revenue Service will make exceptions to this one-year rule based on the facts and circumstances of a particular case.
Some examples of traveling expenses are fees for airline tickets for the taxpayer and the taxpayer’s family and the cost of hotel accommodations if an overnight stay is required.
When you travel by car, you have a choice of deducting your out-of-pocket expense or a standard mileage rate. The standard mileage rate in 2015 is 23 cents per mile.
Moving includes the expense of transporting household goods, furnishings and personal effects of the taxpayer and members of the household, as well as expenses of packing, crating and in-transit storage and insurance for such goods and effects.
Paying a moving company to perform all of these services for you is deductible as long as the fee charged is reasonable.
To deduct any moving expense, you must meet both a time and a distance test:
➤ The distance test is met if your new principal workplace is at least 50 miles farther than your old workplace from your former home.
➤ The time test is met if you work as a full-time employee in the general area of your new workplace for at least 39 weeks during the 12-month period starting right after you move.
Moving expenses are deducted on page one of your Form 1040 return, so you do not have to itemize to receive this tax benefit.
©2015 CPAmerica International
