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Just in time for small business owners’ 2014 tax returns, a procedure for easier compliance with final tangible property repair regulations was announced by the IRS last week.
The simplified procedure is now available starting with the 2014 income tax return, which taxpayers or their tax professionals are currently preparing. In general, for the first taxable year beginning on or after Jan. 1, 2014, small businesses may change the method of accounting on a prospective basis.
The simplified procedure is available:
➤ To small businesses, including sole proprietors;
➤ With assets totaling less than $10 million; or
➤ With average annual gross receipts totaling $10 million or less.
Small businesses that intend to use this new procedure for 2014 taxes will not have to file a Form 3115, Application for Change in Accounting Method. Previously a requirement, the IRS decided to waive the filing of this form after receiving many requests from small business owners and tax professionals.
However, check with your accountant about certain circumstances that may still require a Form 3115.
The IRS is “pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” IRS Commissioner John Koskinen said in making the announcement.
To read more details in Revenue Procedure 2015-20, click here. ■
©2015 CPAmerica International
You have a choice between using the business standard mileage rate or actual expenses when calculating the fixed and operating costs of an automobile. Once you select a method, you must use that method for the entire tax year.
There are some limitations on the eligibility to use the business standard mileage rate. A taxpayer cannot choose the standard mileage rate and:
Items 2 through 5 above relate to a situation in which the vehicle owner was claiming actual business auto expenses but then wanted to change to the business standard deduction method. Although you are allowed to change back and forth each year between the standard deduction method and the actual expense method, you cannot do so if items 2 through 5 pertain to you.
If that is the case, you must stay with the actual expense method.
The business standard mileage rate generally changes each year as the cost of operating a vehicle changes. The business standard mileage rate for 2014 was 56 cents per mile. That rate has been increased to 57.5 cents per mile for 2015.
The fluctuating cost of gasoline is one of the reasons for the rate change, as well as the increase in the cost of vehicles. The IRS sends out a notice toward the end of each year informing the general public of the new rate for the upcoming year. ■
Taxpayers who claim one or more qualifying children as dependents may be entitled to a child tax credit of $1,000 per child.
The definition of qualifying child for purposes of the child tax credit is the same as that for a dependency exemption – except that the child must not have attained age 17 by the end of the tax year. The relationship, support, joint return and principal place of abode tests are the same as those for the dependency exemption.
The qualifying child must be either a U.S. citizen, national or resident of the United States.
This credit is allowed only for tax years consisting of 12 months. It is calculated by using a worksheet in the instruction booklet for the Form 1040 return.
There are income limitations on qualifying for the child tax credit. The child tax credit begins to phase out when taxpayers’ modified adjusted gross income (MAGI) reaches $110,000 for joint filers, $55,000 for married taxpayers filing separately and $75,000 for single taxpayers.
The credit is reduced by $50 for each $1,000, or fraction thereof, of MAGI above the threshold amount. For example, at $95,000 of MAGI, the credit is no longer available for a single person with one child. However, a single person with more than one child would still be able to claim a portion of the credit.
Generally, the child tax credit is considered to be a nonrefundable personal tax credit in 2014. All nonrefundable personal tax credits are allowed to the full extent of the taxpayer’s regular tax liability – reduced by the foreign tax credit – and alternative minimum tax liability.
An individual taxpayer with qualifying children may be eligible for a refundable additional credit in 2014 if:
➤ The taxpayer’s tax liability doesn’t fully absorb the otherwise allowable credit, and
➤ The taxpayer has earned income in excess of $3,000.
Taxpayers should discuss the details of the child tax credit with their tax preparer. ■
©2015 CPAmerica International
The U.S. Tax Court recently found that Nichelle Perez, a 29-year-old single woman, performed a service for infertile couples when she donated her eggs. Therefore, the compensation she received was taxable income to her.
The facts of the case reveal that Perez, after discovering The Donor Source
International, LLC, website, became a prospective egg donor. The Donor Source is a for-profit California company that has been in business since 2003, supervising egg donation cycles for its customers.
Perez went through an initial screening process and passed. She became a potential donor with an online profile, which included a picture, a description of her family history and other personal data.
After a couple selects a donor from the profiles, the donor signs two contracts. One contract is signed with The Donor Source, the agent. The other contract is signed with the intended parents.
These contracts give the parents the right to terminate the relationship with the donor up until the time the donor begins receiving egg-stimulation medication. If the contract is terminated at this point, the donor is owed no compensation.
The contract Perez signed with The Donor Source in February 2009 read as follows: “Donor and intended parents will agree upon a Donor Fee for Donor’s time, effort, inconvenience, pain, and suffering in donating her eggs. This fee is for Donor’s good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs, and the quantity or quality of eggs retrieved will not affect the Donor fee.”
This contract meant that, if Perez kept her side of the deal, but produced unusable eggs or no eggs at all, she would still be paid the contract price. The parties agreed that the funds would not in any way constitute payment to the donor for her eggs.
The agreement did not instruct any of the parties on the issue of taxation of any payment made or received under this agreement or any agreement with The Donor Source.
Perez went through a number of painful procedures in March 2009. The process included stomach injections of hormones.
On the retrieval date in March 2009, 15 to 20 of Perez’s eggs were removed. She was paid her promised fee of $10,000. In August 2009, she signed a second $10,000 contract to go through the process again.
At the end of the year, Perez received a Form 1099 from The Donor Source for $20,000. Despite receiving the 1099, Perez did not claim the $20,000 as income on her 2009 income tax return.
She received a notice of deficiency from the IRS and ended up in Tax Court.
Perez argued that the $20,000 she had received from The Donor Source was in exchange for the pain, suffering and physical injuries she endured as part of the process. The IRS argued that Perez received taxable compensation.
According to Perez, she had relied on Section 104 of the Internal Revenue Code, which excludes from gross income the amount of money paid that is considered damages received because of physical injuries.
The court disagreed with Perez’s interpretation of the code and found that the physical pain and injuries were a byproduct of performing a service contract. It found that the payments were made, not to compensate her for an unwanted invasion against her bodily integrity, but to compensate her for services rendered (Nichelle G. Perez v. Commissioner, U.S. Tax Court, Jan. 22, 2015).
The $20,000 is taxable compensation. ■
©2015 CPAmerica International
In a divorce situation, make sure you have an appropriate agreement in place. Otherwise, you will not be able to claim a deduction for any payments made to your former spouse.
The U.S. Tax Court recently made this clear in a case in which it denied Franklin Rex Milbourn a tax deduction for alimony payments he had made to his ex-wife (Franklin Rex Milbourn v. Commissioner, U.S. Tax Court, T.C. Memo 2015-13, Jan. 21, 2015).
Milbourn made payments to Brenda Ann Marshall, his ex-wife, totaling $37,000 in 2006. In June 2006, the family and probate court granted Marshall a decree of divorce. The court deferred on working out the other important details of the divorce, including the amount of alimony, until a later date.
In June 2007, the family and probate court issued an amended final decree of divorce. The amended decree spelled out in writing that the amount of alimony payments would be $4,500 per month. Both Milbourn and Marshall signed the amended decree.
Milbourn had filed his 2006 individual income tax return late, not sending it to the IRS until Sept. 19, 2011. On the return, Milbourn claimed an alimony deduction of $36,000. He listed Marshall as the person to whom the alimony was paid and included her Social Security number in the appropriate spot on his tax return.
Despite the fact that Milbourn had documented payments of $37,000 to his ex-wife, one of these payments was in dispute, so he claimed only $36,000 of payments as a deduction for alimony on his tax return.
The IRS subsequently sent him a notice of deficiency disallowing the $36,000 alimony deduction.
Milbourn responded in a timely fashion to the IRS’s letter, disputing the agency’s position. He claimed that the alimony payments were valid and paid under the terms of a marital dissolution agreement drafted by Marshall’s attorney. This draft was not signed by either party because they could not agree on a monthly amount of alimony.
An IRS code section spells out a four-part test that must be met for a payment to be considered alimony. One of the parts of the test states that “such payment is received by a spouse under a divorce or separation instrument.”
The problem in this case was that Milbourn was paying alimony based on an unsigned draft of a marital dissolution agreement and not a signed copy that specified the amount of alimony to be paid each month. The draft was not considered to be an official divorce decree.
In addition, Milbourn stated during testimony that no separate maintenance agreement existed between Marshall and him in 2007.
Because one of the four tests was not met, the payments were deemed by the Tax Court not to be alimony payments, and Milbourn’s deduction was denied.
©2015 CPAmerica International
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
Hold off on filing your income tax return until all Forms 1099 are received. Otherwise, you might be amending your return.
Various types of Forms 1099 are used to report different types of activities. Three of the more popular types of 1099’s are:
1099-Div
Some people are familiar with the 1099-Div. Most commonly, this form is used to report dividend income. The general rule is that it must be sent out to anyone who has received $10 or more in dividend income, including capital gain dividends and exempt-interest dividends.
1099-Int
Most people are familiar with the 1099-Int. The most common use of this form is to report interest income. The general rule is that it must be sent out to anyone who has received $10 or more in interest income.
Most taxpayers have either an interest-bearing checking account or some type of interest-bearing savings account. These are the most common types of accounts that trigger the preparation of a 1099-Int.
1099-Misc
The most common use of this 1099 is to report payments of $600 or more for rents or services in the course of a trade or business. Some examples of uses of this form are:
The most common use of this form is to report compensation to a non-employee for services. If the non-employee is performing these services as a corporate entity, issuing a 1099 is not required – unless the payment is for legal services. Legal services to corporate and noncorporate persons or entities must be reported if they exceed the $600 threshold.
All of these Forms 1099 must be sent to the recipient by Jan. 31 of the year following the calendar year in which the income was received.
A good idea is to wait until after Jan. 31 to prepare your income tax return so that you can be sure you are including all of the income that needs to be reported on your return. A lot of people prepare their returns early, only to realize that they had some sources of income reported on a 1099 that they did not include.
©2015 CPAmericaInternational
Disability income is taxable for a military veteran – despite not being taxable in earlier years.
The U.S. Tax Court ruled that disability retirement pay received by Kevin M. Campbell was taxable income despite the fact that, in previous years, the Internal Revenue Service had treated it as nontaxable (Kevin M. Campbell and Pamela J. Campbell v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2014-109, Dec. 22, 2014).
Campbell enlisted in the Coast Guard on July 12, 1987. He was forced into disability retirement in 1990 because he was diagnosed with insulin-dependent diabetes and determined to be unfit for duty.
At first, Campbell received temporary disability status. A letter from the Coast Guard dated Sept. 20, 1990, informed him that he would receive monthly retirement pay equal to his base pay multiplied by his disability rating. His disability rating was 40 percent.
The Coast Guard also informed Campbell that it would withhold federal income taxes on the gross amount of the retirement/disability pay. At the end of each year, the Coast Guard sent him a Form 1099-R for the gross amount of retirement/disability pay he had received.
Campbell’s accountant reviewed the 1099-R when preparing his client’s income tax return. The accountant never included any of the 1099-R amounts on the tax return because he and his client felt that these amounts were nontaxable income.
Through the years, the IRS sent Campbell letters threatening to increase his taxable income by the amount of the Coast Guard retirement pay. Campbell forwarded these letters to his accountant.
The accountant contacted the IRS to explain that this income was nontaxable. A short time later, Campbell would receive a “no change” letter from the IRS, accepting his tax return as filed.
On April 6, 1995, Campbell received a letter from the Coast Guard informing him that his diabetes qualified as a permanent physical disability. His disability rating was determined to be 60 percent, an increase from the 40 percent rating he had received back in September 1990 when he had temporary disability status.
The Coast Guard again informed Campbell that this retirement pay was taxable and that it would withhold federal income tax on the pay.
Fast forward to 2012 when Campbell timely filed his 2011 income tax return. Coast Guard retirement pay of $9,210 was omitted from the taxable portion of the return as it had been in prior years. The IRS sent a letter of deficiency for the 2011 tax year.
The IRS has a general rule for military retirement pay. The rule states that amounts received as a pension, an annuity or a similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country are not included in gross income.
But the IRS has a limitation to this general rule. The limitation provides that the amount of military retirement pay considered nontaxable shall not be less than the maximum amount the individual would receive from the U.S. Department of Veterans Affairs as disability income.
Because the court had no evidence in the record that Campbell had applied to the VA for disability income, it considered the amount Campbell would receive from the VA as zero. Therefore, the court determined that all of the retirement pay from the Coast Guard for tax year 2011 was taxable and properly included in Campbell’s income.
If Campbell had documentation that he had applied for VA disability benefits and could show the court the amount of disability benefits the VA had determined that he was entitled to, this result might have been different. Unfortunately, Campbell had no such documentation.
©2015 CPAmericaInternational
A taxpayer was disallowed dependency exemptions for his son, daughter and grandchild in a January 2015 U.S. Tax Court case. The court also denied him head-of-household filing status.
This decision (Gregory McBride v. Commissioner, U.S. Tax Court, T.C. Memo. 2015-6, Jan. 8, 2015) cost the taxpayer $3,540 in additional federal income taxes and penalties of $708.
During 2010, Gregory McBride and his son, daughter and granddaughter all lived together in McBride’s home.
On Feb. 28, 2011, McBride’s son filed his Form 1040 income tax return, claiming himself as a personal exemption. Also on that date, McBride’s daughter filed her Form 1040. She claimed $11,892 in gross income.
McBride’s daughter claimed a personal exemption for herself and a dependency exemption for her daughter. She received a refund of $5,290, due mostly to a refundable credit of $4,450.
McBride had requested a filing extension for his 2010 return. He timely filed his return on May 23, 2011, claiming head-of-household filing status and dependency exemptions for his son, daughter and granddaughter.
A taxpayer can claim a dependency exemption for someone who is a qualifying child or a qualifying relative.
The IRS requires a taxpayer to meet a five-part test to claim an exemption for a qualifying child. The taxpayer must meet the requirements of all five parts to claim this exemption. One of the parts is an age test.
The dependent child must be under the age of 19 or a student and under the age of 24 as of the end of the tax year, which in this case was Dec. 31, 2010. The facts in this case stipulated that both the son and the daughter were over the age of 24, so the age test was not met and McBride would not be able to claim his children as dependents.
There is an exception – which did not apply in this case – for an individual who is permanently and totally disabled.
McBride could claim neither his daughter nor his son as qualifying relatives because he did not present any evidence that he provided more than 50 percent of their support during the year. A taxpayer must meet the support test to claim someone as a dependent relative. In the case of his daughter, McBride did not meet the support test.
McBride could not claim his granddaughter as a dependent because the mother had already claimed her. The Internal Revenue Code has a special “tie-breaker rule” when multiple taxpayers are claiming the same child as a qualifying child. In these cases, the child is treated as the qualifying child of the taxpayer who is the parent – in this case, the mother.
The court denied McBride’s claim for head-of-household status. To claim this status, a taxpayer must be unmarried at the end of the tax year and provide a home for a dependent for at least half of the year.
Because the son, daughter and granddaughter were not considered to be dependents by the court, McBride did not meet the criteria for head-of-household filing status. Therefore, the court disallowed all three dependency exemptions and the head-of-household filing status.
©2015 CPAmericaInternational
Be careful when filling out your W-4 form.
The Internal Revenue Service requires that employees fill out a Form W-4 on or before the first day of employment. The W-4 form determines how much federal income tax an employer will withhold from an employee’s wages. The information on the W-4 is used when calculating the employee’s first payroll check from the employer.
But use caution. There is a $500 civil penalty for employees claiming excess withholding allowances on Form W-4. Criminal penalties can apply when an individual willfully supplies false withholding information or fails to supply withholding information.
Employees are entitled to claim dependency exemptions for themselves and for each of their dependents, including their spouse. Employees who can be claimed as a dependent on someone else’s tax return may not claim a withholding exemption for themselves.
Employees with more than one job may not claim an exemption that is currently in effect with another employer. So, for example, if you are a single person with no dependents and you have two jobs, you would be allowed to claim one exemption on your W-4 form for one of the jobs. Then you would have to claim zero dependents on the W-4 form for the second job.
These rules do not apply if the wages from the second job are $1,500 or less.
If an employee does not fill out a W-4 form, the withholding must be computed as if the employee were single and claiming no other exemptions.
Employees who certify to their employer that they had no income tax liability for the preceding tax year, and don’t anticipate any tax liability for the current year, may claim to be exempt. No federal income tax will be withheld from their wages. They should fill out and file a W-4 form with the employer each year that they are in this situation.
©2015 CPAmerica International
