Reno accountants Archives - Page 15 of 18

The IRS has granted a one-year reprieve, available in parts of 38 states, for farmers and ranchers who previously were forced to sell livestock due to drought and now must replace those livestock to avoid a tax liability.

Farmers and ranchers who sell more livestock than they normally would because of drought may defer tax on the extra gains from those sales. To qualify, the livestock generally must be replaced within a four-year period. However, the IRS is authorized to extend the four-year period if the drought continues.

In Notice 2013-62, the IRS announced that a one-year extension of the replacement period generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as poultry and livestock raised for slaughter or held for sporting purposes, are not eligible.

The IRS is providing this relief to any farm located in a county, parish, city, borough, census area or district listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center (NDMC). These conditions must have been experienced during any weekly period between Sept. 1, 2012, and Aug. 31, 2013. Any county contiguous to a county listed by the NDMC also qualifies for the relief.

Farmers and ranchers in these areas whose drought sale replacement period was scheduled to expire on Dec. 31, 2013, will now have until the end of their next tax year. This extension immediately impacts drought sales that occurred during 2009.

However, because of previous drought-related extensions affecting some of these localities, the replacement periods for some drought sales before 2009 are also affected. In addition, the IRS announced that it may grant more extensions if severe drought conditions persist.

The itemized deduction for state and local sales and use taxes is scheduled to expire at the end of this year. While Congress may still act to extend the deduction into future years, there is no guarantee the extension will be approved.

For 2013, the sales tax deduction is available as an alternative to the itemized deduction for state and local income taxes. So the primary beneficiaries of the sales tax deduction tend to be individuals who live in one of the states that do not have a state income tax. However, if you are considering the purchase of a big-ticket item, such as a car or a boat, it may be advantageous to consider completing the purchase in 2013 if you can benefit from the sales tax deduction.

If you live in a state without an income tax: Consider completing a major taxable purchase during 2013 if the sales tax deduction will push your itemized deductions over the standard deduction threshold. The standard deduction threshold is $12,200 for married couples, $8,950 for heads of household and $6,100 for unmarried taxpayers or married couples filing separately.

Even if you live in a state with an income tax: Some people may not have a significant income tax obligation. For example, a retiree may owe no state income tax because her pension and Social Security benefits are exempt from state tax and she has little other income. At the same time, she may itemize her deductions because she pays real estate taxes, has deductible medical expenses, pays mortgage interest and/or makes charitable contributions.

If your sales tax already exceeds your state income tax or is only slightly less than your state income tax, accelerating big-ticket purchases into 2013 may be advantageous.

In a private letter ruling, the IRS has refused to waive the requirement to roll over IRA distributions within 60 days for an individual whose bank failed to advise her of the deadline.

The IRS determined that the taxpayer did not qualify for relief because she did not show that the bank had a duty to inform her of the 60-day requirement. The overall facts also indicated that the ability to redeposit the amount was within her reasonable control during the time period in question (PLR201339002).

Normally, there is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan. For the rollover to be tax-free, the amount distributed from the IRA generally must be re-contributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA.

A distribution rolled over after the 60-day period generally will be taxed and may be subject to a 10 percent premature withdrawal penalty tax. Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period.

The IRS may waive the 60-day rule if an individual suffers a casualty, disaster or other event beyond that person’s reasonable control and if not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver).

The IRS will consider several factors in determining whether to waive the 60-day rollover requirement. These factors may include, for example, the time elapsed since the distribution; the inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; and errors committed by a financial institution.

In the new private ruling, an individual withdrew money from three IRAs maintained at a bank (Bank A) with the intent of depositing these funds at a later time into another IRA that would yield a better rate of return. The individual opened a rollover IRA at Bank B 68 days later but was informed that the intended deposit could not be accepted as a rollover contribution because the 60-day period had expired.

The IRS declined to waive the 60-day requirement. Although one of the factors on which relief can be based is whether errors were committed by the relevant financial institutions, the taxpayer did not demonstrate that Bank A had a duty to inform her of the 60-day rollover requirement.

Instead, the IRS found that the ability to timely redeposit the money into a rollover IRA was within the reasonable control of the taxpayer. Although the bank did not tell her that she needed to redeposit the funds within 60 days, she had the ability to do so.

When it comes to the tax law, not knowing about the rules generally is an insufficient excuse for not complying with them.

In a recent case, the Tax Court allowed a music professor and self-employed musician an itemized deduction as an unreimbursed employee business expense for the travel costs associated with his musical performances.

Consider whether some of the circumstances may apply to your travel costs, even though you may be in a different profession.

Joseph Scully is a jazz musician and music professor for the City Colleges of Chicago who plays with various ensembles and travels throughout the United States to participate in jazz conferences. Scully was also pursuing a doctorate in music.

Scully traveled to rehearsals and performances – “performance activities” – to stay abreast of developments in the music profession. He claimed deductions for driving miles in relation to his performance activities both as Schedule C business expenses and as Schedule A unreimbursed employee expenses.

Scully tracked his miles by logging the date, location visited and activity at each location. He maintained a mileage log for each of the years covered by the case.

But a flood destroyed the logs for the years 2002, 2003 and 2004. The mileage log for 2006 was not destroyed. Scully used his 2006 log to reconstruct the driving logs for his 2002, 2003 and 2004 tax years.

The IRS allowed certain travel expense deductions for music events on the Schedules C but did not allow any travel expenses as unreimbursed employee expense deductions on the Schedules A.

The Tax Court determined that Scully’s claimed vehicle expense deductions were for performance activities, and most of the trips were around the Chicago area. Scully did not claim the miles he drove from home to the City Colleges of Chicago where he taught. Therefore, the court determined that Scully was not trying to deduct personal commuting expenses but only expenses that he considered to be connected with his professional activities.

The court noted that the regulations permit a deduction for education expenses that:

➤ Maintain or improve skills required in employment, or

➤ Meet the express requirements of the employer.

However, expenses that fall into either of these categories would not be deductible if the education:

➤ Is required to meet the minimum education requirements for qualification in the taxpayer’s employment, or

➤ Qualifies the taxpayer for a new trade or business.

The court observed that Scully could have claimed his mileage as deductible business expenses or as deductible unreimbursed employee expenses. The court inferred from Scully’s reporting these expenses on Schedule A that he considered the expenses to be in furtherance of his trade or business as a college professor pursuing an advanced music degree, not as expenses incurred in the trade or business of a musician.

As a result, the court required Scully to show that the expenses were directly and proximately related to the skills required in his business as a college professor. The court then determined that Scully’s performance activities were related to his skill as a professor because he translated his specific experiences as a performer into classroom lessons. Scully showed a direct correlation between the costs expended to learn more about music and teaching music to students.

The court also noted that the deduction for educational expenses is not limited to formal or institutional education. Fees for refresher courses and courses dealing with current developments are deductible if not otherwise disqualified.

Instead of solely relying on structured classes and seminars, Scully stayed abreast of new developments in his profession through active participation, which is analogous to courses dealing with current developments.

The IRS had contended that Scully’s unreimbursed employee expenses were not ordinary and necessary to his employment as a music professor because (1) he generally enjoyed performing, and (2) performance activities were not in his job description. The court pointed out that the tax law doesn’t require activities resulting in business expenses to be unenjoyable, only that they be ordinary and necessary. It stated that Scully “should not be denied deductions because he likes his job.”

The court found that the tax law does not require that the expenses be explicitly connected with activities enumerated in a job description. In other words, there is not a direct connection between formally listing the activities in a job description and the deductibility of expenses incurred while performing those activities.

In addition, the court found that Scully testified credibly that he contemporaneously created mileage logs during the 2002, 2003 and 2004 tax years but those records were later destroyed when his basement flooded. Therefore, the court allowed him to substantiate the claimed deductions by making reasonable reconstructions of the expenditures (Joseph D. Scully, Jr. v. Commissioner, TC Memo 2013-229, Sept. 30, 2013).

Most businesses assume that compensation is deductible when it is paid. However, a recent statement by the IRS raises the question of whether some upfront “signing bonuses” paid to employees who sign a multi-year employment contract must be amortized over the term of the contract, rather than deducted when paid to the employee.

Signing bonuses paid by a minor league baseball team to its players must be amortized over the term of the player contracts, according to an IRS Legal Advice Issued by Field Attorneys.

Based on its experience, the taxpayer who operates the minor league baseball team and was the subject of the Legal Advice (FAA20133901F) wanted to amortize the signing bonus over a shorter period, which historically was shorter than the term provided in the contracts.

Except when the contract’s termination clause comes into effect, the contract stipulates that the player is required to provide services to the team for seven separate baseball seasons. At the end of this seven-year term, if the player has not entered into another contract with the team, he becomes a free agent.

Under the termination clause, the player can terminate his contract only if the team is in default on its contractual obligations for more than 15 days. The team can terminate the contract for several reasons, including if the player signs a major league contract, the player is traded, the player becomes disabled, or the team judges that the player has failed to play well enough.

The team compiled a report that showed the average life of all of its minor league player contracts over a period of years and sought to amortize the signing bonuses over that average number of years.

The IRS has previously ruled (Rev Rul. 67-379) that a signing bonus paid to a player is required to be capitalized and amortized over the useful life of the player’s contract. To the IRS, the useful life for a baseball player’s contract generally is the period over which the team controls the player’s ability to sign a contract with another team.

In the Legal Advice, the IRS concluded that, because the team controls the player for the term of the contract, the useful life of the player contract is that term – seven years – and that the player bonus is amortizable over the seven-year right of the team to receive services from the player.

As you think about year-end tax planning, keep in mind that beginning in 2013, the top rate for long-term capital gains and qualified dividends was raised to 20 percent. If you are subject to the 3.8 percent surtax on net investment income, your effective top rate could be as high as 23.8 percent.

If you are in the 10 percent or 15 percent marginal tax bracket, the zero percent rate still applies.

Almost everything you own and use for personal or investment purposes is a capital asset. An example is an investment in stocks. When you sell a capital asset, the difference between the asset’s basis (usually its cost) and the amount you sell it for is a capital gain or a capital loss.

If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed as a deduction is generally the lesser of $3,000, or $1,500 if you are married filing separately. If your net capital loss is more that this limit, you can carry the loss forward to later years.

For tax purposes, it is usually advisable to hold capital assets for more than 12 months before disposing of them to avoid short-term capital gain status, unless market conditions indicate otherwise. However, if you are carrying capital losses forward from 2012, you may want to consider recognizing capital gains to the extent of the available carryover deduction.

In choosing which gains to recognize to offset capital losses for tax savings, preferably you should recognize short-term gains, if available, because otherwise they would be taxed at your ordinary income rate. Defer recognition of long-term gains in this situation since they are usually taxed at the lower long-term capital gains rate.

Carryover net capital losses from pre-2013 transactions are able to offset capital gains at the new higher rates without adjustment for the rate change.

Healthcare notices must be sent by Oct.1

By Oct. 1, 2013, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s healthcare exchanges, which will open Jan. 1, 2014.

The requirement applies to any business regulated under the Fair Labor Standards Act. Going forward, letters must be distributed to any new hires within 14 days of their starting date.

The notice requirement applies to all employers, whether or not they offer health coverage. In addition, employers must send the notice to all full-time and part-time employees, whether or not they are eligible for benefits.

Earlier this summer, the employer mandate, which states that every business with at least 50 or more full-time employees must offer workers acceptable coverage or face a $2,000 penalty per worker, per year, was pushed back until 2015.

But the Oct. 1, 2013, employee-notification deadline remains in effect.

Sample notices are available on the Department of Labor website at: www.dol.gov/ebsa/pdf/FLSAwithplans.pdf (for employers that offer a health plan to some or all employees) www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf (for employers that do not offer a health plan)

The IRS concluded that amounts paid by a U.S. corporation to its foreign parent were not deductible as interest since the U.S. corporation, in effect, borrowed from its parent to make those payments.

As explained in a Chief Counsel Advice (CCA 201334037), the U.S. corporation maintained a general account into which it deposited amounts derived from all sources, including advances from third-party banks under lines of credit, active business income and advances from its foreign parent. Funds were withdrawn from this account to pay day-to-day operating costs.

Periodically, funds were withdrawn from this account to make payments to the foreign parent. These payments were characterized as payments of interest on advances from the parent. Funds sufficient to cover these payments were obtained shortly before or shortly after the disbursement, either through additional loans from the parent or pursuant to draw-downs on one or more lines of credit with the parent.

The related-party rules of Internal Revenue Code Section 267 authorize the IRS to provide regulations that limit the deductibility of payments to foreign persons. Those regulations provide that payments to a foreign related party are not deductible until that amount is treated as paid to the foreign person.

The IRS found that the U.S. corporation’s payments were not deductible as interest because it borrowed for the purpose of paying the interest. The IRS noted that, when funds are (in form) loaned by the foreign parent to the U.S. corporation and “paid back” via return wire transfers, the resulting “U-turn” transaction is one that changes neither the economic position of the lender nor the borrower.

The Tax Court ruled in a recent case that a doctor with a minority ownership interest in a medical practice organized as an S corporation was not deprived of the economic benefit of his share of ownership – although he was excluded by the majority owner from participating in the corporation’s activities.

Accordingly, he was obligated to report his share of the corporation’s undistributed profits and interest income (Ramesh T. Kumar v. Commissioner, T.C. Memo 2013-184, Aug. 13, 2013).

Dr. Kumar owned 40 percent of the S corporation. Another doctor, who also served as president and chairman, owned the remaining 60 percent.

When a dispute arose among the two doctors, Dr. Kumar’s role in the practice was replaced by another doctor, who was an employee of the corporation. Dr. Kumar received no compensation and no distributions, and he did not take part in the operations or management of the corporation.

The corporation issued a Schedule K-1 to Dr. Kumar showing his share of the income as exceeding $200,000. The court concluded that, since Dr. Kumar had never agreed to relinquish his ownership in the corporation, he was responsible for reporting his share of the income.

There have been new developments in the aftermath of the Supreme Court decision that struck down Section 3 of the Defense of Marriage Act (U.S. v. Windsor, et. al., 111 AFTR 2d 2013-2385, June 26, 2013), which required same-sex spouses to be treated as unmarried for purposes of federal law.

Now the IRS has issued a ruling (Rev. Rul. 2013-17) concluding that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether or not the couple lives in a jurisdiction where same-sex marriage is recognized.

The ruling clarifies that same-sex couples will be treated as married for all federal tax purposes, including income, gift and estate taxes and more. The ruling applies to all federal tax provisions in which marriage is a factor. More than 200 Internal Revenue Code sections and regulations relate to laws that refer to marriage, spouse, husband or wife. Some of the provisions affected include:

➤ Filing status

➤ Claims of personal and dependency exemptions

➤ Standard deductions

➤ Employee benefits

➤ IRA contributions

➤ Earned income tax credit claims

➤ Child tax credit claims

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships, even if recognized under state law.

The ruling concludes that legally married same-sex couples:

➤ Generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status. Single filing status is not appropriate.

➤ May file amended returns for prior years, if the tax year is still open under the statute of limitations.

Note that, in some cases, filing a joint return may result in a higher tax bill than the combined tax on two unmarried returns. The ruling concludes that same-sex couples who were married in prior years may, but are not required to, file amended returns.

It is advisable to make the tax calculation both ways before deciding to amend a prior return.

Generally, the statute of limitations expires three years after the later of the original due date of the return or two years after the date the tax was paid. For most people, 2010, 2011 and 2012 are still open under the statute of limitations.

Some taxpayers may have special circumstances – such as signing an agreement with the IRS to keep the statute of limitations open – that permit them to file refund claims for tax years 2009 and earlier.

According to the ruling, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pretax and excludable from income.

The ruling applies to filings (original or amended) on or after Sept. 16. This provides a limited opportunity for same-sex married couples, who extended their 2012 tax returns and have not yet filed, to file as unmarried taxpayers until Sept. 16.