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With the housing market beginning to show signs of coming off life support, you may begin to think about moving. The good news is that, even if you make a profit from the sale of your home, you may not have to report it as income.
Here are 10 tax tips to consider when planning a sale of your principal residence:
©2013 CPAmerica International
A business’s tax deduction hinged on whether assembling a gift basket was merely a packaging activity or was actually producing a distinct product.
A federal district court in California has determined that the 9 percent domestic production activities deduction (DPRD) is available to a corporation whose production process involved packaging gift baskets of various food and wine items.
To qualify for the DPRD, the company must be engaged in the lease, rental, license, sale, exchange or other disposition of qualified production property (including tangible personal property and computer software) manufactured, produced, grown or extracted (MPGE) by the taxpayer in whole or in significant part within the United States.
Under the regulations, MPGE includes manufacturing, producing, growing, extracting, installing, developing, improving and creating qualified production property. It also includes manipulating, refining or changing the form of an article, or combining or assembling two or more articles.
However, activities do not qualify as MPGE if the business packages, repackages, labels or performs minor assembly of qualified production property and engages in no other MPGE activity with respect to that property.
In this case, the company designed, assembled and sold gift baskets. The production process included selecting the basket and the items, such as candy or wine, to be placed inside. The gift baskets were shrink-wrapped and decorated with bows.
The IRS asserted that the company merely packaged and repackaged the items in its gift baskets and was not entitled to the DPRD. The court found that the activities qualified as MPGE.
The court determined that the company’s production process may qualify as manufacturing or producing but may also be packaging or repackaging (a nonqualified activity). The court found that the company’s production process produced a final product that is distinct in form and purpose from the individual items inside (United States v. Timothy J. Dean, et. al., 112 AFTR 2d 2013-5164, May 7, 2013).
Essentially, the court concluded that the company produced a new product with a different market demand than the individual components.
©2013 CPAmerica International
A federal district court has determined that an individual prosecuting a lawsuit was engaged in a trade or business, allowing him to claim a deduction for his attorneys’ fees as a business expense.
Richard Bagley brought the lawsuit against his former employer under the provisions of the federal False Claims Act (FCA). The FCA imposes civil liability on any person who presents to the federal government “a false or fraudulent claim for payment or approval.” Under the whistleblower provisions of the FCA, individuals may sue in the name of the government as a “relator” and receive an award of 15 percent to 25 percent of the amount recovered by the government.
Bradley’s case against his former employer, which stretched for almost nine years, resulted in his being awarded over $36 million, about one-half of which went to his attorneys. Bradley reported the $36 million as business income on Schedule C and deducted the attorneys’ fees as a business expense.
The IRS contended that the $36 million was “other income” – not derived from a trade or business – and that the attorneys’ fees were deductible only as an itemized deduction.
The court found that Bagley’s activities while pursuing the lawsuit were a trade or business and his litigation expenses were deductible as ordinary and necessary business expenses (Richard D. Bagley v. United States, 2013-2 USTC ¶50,462, Aug. 5, 2013).
The court noted that Bagley spent more than 5,900 hours investigating and prosecuting the FCA claim. He actively participated in the prosecution of the case, reviewing documents, attending meetings and providing his attorneys with his particular expertise regarding the regulations governing federal contracts and pricing.
After applying the various tests for an activity not engaged in for profit, the court concluded that Bagley’s activities were not a hobby or an activity engaged in for pleasure or amusement.
©2013 CPAmerica International
A new form is in the works to implement a portion of the healthcare law related to net investment income.
The IRS has released the first draft of Form 8960, Net Investment Income. Form 8960 will be used to report the new 3.8 percent Medicare tax on net investment income. The form will be attached to the 2013 Form 1040, U.S. Individual Income Tax Return, and the 2013 Form 1041, U.S. Income Tax Return for Estates and Trusts.
Beginning this year, individuals, estates and trusts whose modified adjusted gross income exceeds the threshold amount will be subject to the new 3.8 percent tax.
The threshold amounts are:
Net investment income (NII), for purposes of the 3.8 percent tax calculation, includes the following:
NII is the income after deductions for expenses that are “properly allocable” to the income, such as investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, etc. Investment income does not include wages, active business income, pension/IRA distributions or tax-exempt income.
Many of the entries on Form 8960 refer to instructions that the IRS expects to release later in the year.
©2013 CPAmerica International
There are many signs that the economy is strengthening and expanding. What could this mean for businesses?
Some people are expecting the Federal Reserve to begin to back off quantitative easing during the upcoming months. From a tax standpoint, economic improvement may mean the end of the line for several stimulus-type tax breaks that are scheduled to expire Dec. 31, 2013.
If you own or operate a business, a number of favored depreciation tax breaks may not be available next year, including:
In addition, the Code Section 179 expensing limit – $500,000 in 2013 – is slated for a drastic reduction next year.
Although the above benefits may be extended beyond 2013, there is no guarantee. If your business is planning to purchase machinery and equipment or invest in eligible real estate assets in the next year, you should consider accelerating your buying plans if it makes sound business sense. You may be able to lock in the accelerated deductions by buying qualifying assets this year and placing them in service by year-end.
Check with your tax adviser to be sure your planned purchase qualifies for an enhanced write-off.
©2013 CPAmerica International
At the request of Senators Carl Levin (D-Michigan) and Tom Coburn (R-Oklahoma), the Government Accounting Office (GAO) recently conducted a study of the actual tax rates paid by companies that had $10 million or more in assets, a recent article from The Hill has reported.
The subsequent report revealed that in 2010 these large, profitable corporations paid an effective federal tax rate of 12.6% in spite of the fact that the statutory rate was 35%. 
Even when adding in local, state and foreign taxes, the rate paid climbs to only 17%.
How can that be, you ask. The answers lie buried in the Internal Revenue Code, which happens to be about 10 times the size of the Bible. Therein, savvy tax professionals find plenty of exemptions, deferrals, tax credits and other incentives which enable large corporations to dramatically reduce the actual taxes they must pay to Uncle Sam. 
Of course, the tax burden thus avoided gets shifted onto hardworking families and small businesses, many of whom at that point are paying a higher effective rate than the big boys.
According to Coburn, “giveaways and loopholes” bolster the case for comprehensive tax reform. I, for one, am skeptical whether any meaningful reform will ever see the light of day, but one never knows.
http://thehill.com/blogs/on-the-money/domestic-taxes/308781-gao
In an interesting recent article “Your Clients and Their Children: The Problems With Joint Bank Accounts” by Andrew Rice there is a recurring question that pops up during elder and estate planning: should I add my child to my bank account? 
When a senior begins to lose their ability to manage their finances like paying the bills, these accounts can seem like a viable option. However, the article outlines five risks that both the parent and child should consider:
1. Withdrawal Rights: Each person on a joint bank account is legally considered a full owner when it comes to withdrawing money from the account. This means the child can fully deplete the bank account at any point in time should they choose to do so.
2. Creditor Issues: The bank account becomes an asset for both parties on the account. If the child should get into financial difficulties and has a creditor with a judgment against them, the creditor could legally garnish the entire bank account regardless of the parent’s involvement.
3. Divorce and Legal Issues: As noted above, the account becomes an asset of the child; therefore, it is also subject to potential claims by a divorcing spouse of the child or a lawsuit/judgment against the child.
4. Bypassing the Will
: Joint bank accounts bypass the will of a deceased person, and the will does not impact the money in a joint bank account. This could create a dispute among other beneficiaries as the child on the joint account would get the entire proceeds from the account after the parent’s death, whether or not other assets stipulated in the will were to be divided equally.
5. Gift Taxes: adding a child to a parent’s bank account is indirectly making a gift, which may or may not be subject to gift tax for the parents.
One alternative to a joint bank account is a type of account commonly referred to as a “convenience account.” Certain states allow these accounts, which let others have access to the account and make deposits and withdrawals. The account legally obliges the helper to act as the elder’s agent, and any money in the account becomes part of the elder’s estate, to be divided in accordance with a will or the law. 
If there is a need for someone to provide this type of assistance to an elderly person and the children are not a viable option, your trusted accountant can always provide this service as well.
When I advised my clients to complete their transactions in 2012, it was apparent that the effects of the actions our elected officials were going to take to avoid the “fiscal cliff” could only have a negative effect on taxes. 
At the twelfth hour, Mitch McConnell, Republican Senate Minority Leader bypassed Nevada’s own Harry Reid and reached out to Vice President Joe Biden with whom he had worked with when Biden was in the Senate. They worked out a compromise that was passed in the Senate and the House on January 1.
How does this affect you?
The tax rate for taxpayers with income over $450,000 married and $400,000 single increased from 35% to 39.6%. The tax rate on capital gains and dividends increase from 15% to 20% also applies to this threshold. When combined with the 3.8% healthcare tax, that tax rate on capital gains and dividends becomes 23.8%.
Some of you may be breathing a sigh of relief that the tax rate increase will apply only to those taxpayers. However, the 3.8% healthcare tax on investment income will hit those of you with taxable over $250,000 married and $200,000 single (see my blog in November 2012 regarding the healthcare tax of 3.8%). Also, itemized deductions are phased out at $300,000 for joint filers and $250,000 for singles, effectively raising their taxes.
Interestingly, the bill does not say whether the $400K/$450,000 threshold refers to adjusted gross income (AGI) or taxable income. AGI doesn’t include subtractions for itemized deductions, while taxable income does. With so many phase-outs of itemized deductions for taxpayers in the higher brackets, this may not be of much consequence to most of these affected taxpayers.
The payroll tax holiday reducing payroll taxes and self-employment taxes by 2% is over. 
The tax rate increases from 4.2% to 6.2%. That means for an individual earning the maximum 2013 cap of $113,700 or more, the increase would be $2,274, or nearly $200 per month.
The alternative minimum tax (AMT) still effectively eliminates many tax breaks for the higher income tax brackets. AMT was created in 1969 to ensure that wealthy taxpayers pay at least some minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent. Under the new deal, Congress has finally created a permanent inflation “patch” that would allow millions to escape AMT. Without the patch, the AMT would have hit 31 million taxpayers this year, reaching deeply into the middle class.
What the bill did not include:
The bill only addressed the revenue side of the budget question and deferred action on the spending side for two months. Additionally, the agreement does not address any increase in the nation’s debt ceiling.
A strong economy depends upon predictable behavior and decision-making by the government. The competitive environment is unpredictable enough without our government making it more unpredictable. This has been lost on our elected officials much to the consternation of almost everyone: businessmen, employees, bankers, homeowners, and investors. Get ready for the budget and spending standoff two months from now.
Many large companies are determining how they will handle the changes coming in January 2014 with the Affordable Care Act. For a company who employs 50 or more full-time employees that is already offering health care benefits, one option that I am reading about over and over is:
Employers would terminate their current health insurance plan; pay the penalty for each employee, (approx $2,000); and force employees to shop in the state and federal exchanges. While this may seem cheaper, companies need to consider that they will lose their tax deduction for providing health insurance benefits not to mention the consequences on employee morale and recruiting efforts.
Another option that has emerged is to continue to offer health insurance but through a Corporate Exchange instead. According to the Wall Street Journal, both Sears Roebuck and Darden Restaurants (which operates Olive Garden, Red Lobster and other dining establishments) announced in October they had signed on to Aon Hewitt’s Corporate Exchange. Sears has approximately 90,000 employees while Darden has about 45,000 that will be participating in the exchange. Through the Corporate Exchange, not only can an employee pick different insurance coverage, but they can pick different insurance providers. These options are similar to the ones that will be available under the public exchanges, but large companies with more than 100 employees are not eligible to participate in the public exchanges at least until 2017.
Under this option, there is no penalty as the group health plan is still fully compliant with the Affordable Care Act. The employer then decides how much of a subsidy to provide employees to purchase coverage. Ideally, this subsidy provided to employees would be evaluated annually to keep up with the potential increase in cost of coverage. The employee then takes their subsidy and can evaluate various provider options and levels within the exchange and pick the best plan for them. The more exchange participants, the greater the economies of scale. 
This type of exchange will supposedly keep costs for the employers lower because insurers are forced to compete with one another to attract members in the exchange to their plan. Besides the potential cost savings for the employer, employees are happier under exchanges because they can pick the type and level of insurance that they want. A single person in their 20’s can choose a relatively less expensive plan while someone in their 50’s can opt for more coverage.
This is a novel concept that if it works as Aon plans, will sure to be replicated and remain a viable option for employers.
It has been known for quite some time that women make up most of the purchasing decision power in households but their increasing presence in the workforce is becoming nearly as significant. 
According to a recent post by XYZ University, these are a few of their interesting statistics:
Even from only 10 years ago, these are huge changes and these trends do not show any indication of reversing. This impacts today’s businesses in two major areas: employees and customers.
Having more female employees brings new skills as well as challenges to the table. Many studies have shown that women tend to have a management style that is more consensual and inclusive which can be an advantage with today’s increasing social and crowd sourcing business methods. Also with more women working, maternity leave and child care, for example, will become bigger issues that companies must face and deal with. Further with more women in leadership roles, more men will take on more responsibilities at home leaving them less willing to sacrifice family for work.
As more women take on leadership roles and more men take on larger family roles, the change in these gender roles may change who has been the dominant purchasing power of households. Additionally, the upwardly mobile urban single woman may become a significant customer in areas of serious investments such as homes and travel.
