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Summertime is a busy time for weddings, which can raise concerns about finances.
A few helpful tax tips can make things much easier come tax return filing time:
The IRS website provides many useful tools including YouTube videos and podcasts.
Some of the related YouTube videos are:
Some of the related podcasts include:
Getting married is one of the biggest days of your life – and can be one of the most stressful. Make things easier at tax time by following a few helpful hints. ■
As I get ready to head off on vacation, I ran across a couple of articles on CFOs taking more working vacations. Robert Half Management Resources performed a study as to how often CFOs check in with the office during summer vacation. The percentage of time is increasing from their responses in 2012. It’s so easy now with everyone being so plugged in. Only 32% don’t anticipate checking in at all.
Robert Half Management Resources offers suggestions for allowing yourself to get away:
I’m a bit of an “all in or all out” person. When I’m in town I’m tied to my work. Some call me a workaholic. However, when I’m gone, I’m usually “gone.” Why? Because I do trust my team to take care of things. Our firm involves other staff in client relationships so that they can handle matters when the key contact person is out. I don’t worry when I’m gone.
We promote work-life balance because it’s meaningful to the Millennials, but we all need an opportunity to take some time to recharge. Sure, we may pay for it by putting in extra time before we leave and then on our return. 
But I do believe it is important to recharge. Your perspective is much better when you’ve had a chance to clear your mind and enjoy some personal relationship time.
I’m heading off to spend some quality travel time with my future daughter-in-law. One to one time. How often will that opportunity happen?
So, even as I feel guilty about taking off, it won’t last long. Until I return.
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. ■
It might seem like driving expenses to some, but to the IRS, it’s commuting.
Lonnie Bartley, a construction supervisor for Far West Contractors Corp. in California, was denied a deduction for nearly $25,000 in business expenses because the Tax Court said they were actually nondeductible commuting expenses.
Bartley’s job required him to travel to various job sites in the metropolitan Los Angeles area, mainly Redondo Beach and El Segundo.
Far West did not provide Bartley with a vehicle, nor did it reimburse him for mileage.
On his 2010 Form 1040 return, Bartley claimed $24,448 in auto-related expenses on Form 2106 EZ, Unreimbursed Employee Business Expenses. He also had $2,482 in other unreimbursed expenses.
The IRS sent Bartley a deficiency letter regarding the 2010 return. It was challenging the large amount of deductions on the Form 2106. In this situation, the taxpayer bears the burden of proof and must substantiate the deductions.
When expenses involve passenger automobiles and traveling while away from home, deductions are not allowed unless the taxpayer substantiates by adequate records or sufficient evidence the following three items:
1. The amount of the expenditure or use
2. The time and place of the expenditure or use
3. The business purpose of the expenditure or use
The business purpose test is usually not met if commuting is involved. There are two exceptions to this general rule.
The first exception permits a taxpayer to deduct transportation expenses incurred in going between a taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer normally lives and works.
The second exception permits a taxpayer to deduct commuting expenses between the taxpayer’s residence and a temporary work location, regardless of distance, if the taxpayer also has one or more regular work locations away from the taxpayer’s residence.
Bartley did not meet the first exception to the commuting rule because he both lived and worked in the metropolitan Los Angeles area. He did not meet the second exception because the two job sites where he worked were determined by the court not to be temporary work locations because he already had worked at both the Redondo Beach and El Segundo locations for well over a year. Temporary work locations are usually job sites worked at for less than a year.
Bartley did not meet one of the exceptions to the commuting rule. Therefore, he did not meet the business purpose part of the three-part test that must be met to deduct automobile expenses.
The court ruled the $24,448 in auto-related expenses was nondeductible (Lonnie J. Bartley and Kimberly A. Bartley v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-23, March 31, 2015). ■
©2015 CPAmerica International
A Lockheed Martin employee who participated in the company’s retirement plan was ordered to pay tax on distributions because he couldn’t provide documentation that he had rolled over the account in time.
Balvin A. McKnight was required to include in income two early distributions from his qualified retirement plan because he could not prove to the Tax Court that he had actually rolled that money over into another account within 60 days of the distributions.
McKnight was a participant in the Lockheed Martin Salaried Savings Plan, a qualified retirement plan. State Street Retiree Services was the custodian of McKnight’s account.
During 2011, State Street Retiree Services issued to McKnight two Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
The first Form 1099-R reported a gross distribution of $4,984, which was also the taxable amount. There was no federal withholding on this amount. The distribution was classified as an early distribution, with no known exception.
The second Form 1099-R reported a gross distribution of $206,515, which was also the taxable amount. Federal income tax of $48,303 was withheld. The distribution was classified as an early distribution, with no known exception.
When McKnight filed his 2011 Form 1040 return, he listed retirement distributions of $206,516 and $48,304 as the taxable amounts.
The IRS examined his return and determined that the first distribution amount of $4,984 was not picked up as income on his return. They also determined that the entire amount of both distributions, which equaled $211,499, was taxable.
Under IRS code, any amount distributed from an employee’s trust account is taxable to the person who receives the distribution. The facts establish that $211,499 was actually distributed to McKnight in 2011 by State Street Retiree Services, the custodian for Lockheed Martin’s employee retirement trust account. This amount is taxable unless an exclusion applies.
An IRS code section provides a “rollover” exception to the general rule. It excludes from gross income any portion of a distribution that is transferred to an eligible retirement plan made within 60 days of the distribution.
McKnight claims that he rolled over $95,000 of the distribution but was unable to provide the IRS or the court with any documentation of this rollover. Because McKnight didn’t offer the court any proof of the rollover, the entire distribution of $211,499 was determined to be taxable income (Balvin Anthony McKnight v. Commissioner, U.S. Tax Court, T.C. Memo 2015-47, 109 T.C.M. 1224, March 16, 2015). ■
©2015 CPAmerica International
A New York couple who had received an enterprise zone credit for property taxes were required to pay taxes on the amount because of the tax benefit rule.
Yigal and Bonnie Elbaz were required to include in income $54,507 received in 2008 from a refund of New York state income taxes as a result of the tax benefit rule. The entities receiving the benefits were actually flow-through entities.
The Elbazes owned three different companies organized as flow-through entities – in which income passes on to the owners or investors.
They had a 50 percent interest in all three of the entities. Superflex Management, LLC, was treated as a partnership for federal income tax purposes. Superflex Realty, LLC, was treated as an LLC for federal income tax purposes.
The state of New York provides tax benefits to businesses that invest in certain designated areas of the state. One of these benefits is the Qualified Empire Zone Enterprise credit for real property taxes.
In calculating this credit, the amount of property taxes paid or incurred by a business is a major factor. All three of the businesses owned by the Elbazes qualified for this credit.
The Elbazes’ three businesses deducted the share of property taxes that they had paid or incurred during 2007. These expenses decreased the amount of income allocated to them on their respective K-1 schedules. This is where the tax benefit comes in.
The taxpayers report less income on their 1040 return as a result of the businesses having deducted the property taxes paid or incurred.
The $54,507 refund received in 2008 by the taxpayers was a direct result of the Qualified Empire Zone Enterprise credit. The credit was calculated using the property taxes paid or incurred by the three flow-through entities owned by the taxpayers.
Therefore, the $54,507 was the receipt of a refund of a previously deducted tax and was fundamentally inconsistent with the previous treatment to the extent that the Elbazes benefited from the decreased pass-through income. Thus, the $54,507 is considered to be taxable income (Yigal Elbaz and Bonnie Elbaz v. Commissioner, U.S. Tax Court, T.C. Memo 2015-49, March 17, 2015). ■
To deduct your elderly parent as a dependent on your income tax return, you must first meet four tests.
The tests are:
1. “Not a qualifying child” test
2. Member-of-household or relationship test
3. Gross income test
4. Support test
The first test is the easiest to meet. By definition, a qualifying child is a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister or descendant of any one of them.
As you can see from this definition, your mother and father do not fit this defined terminology. So your parents cannot be your qualifying child.
To meet the member-of-household or relationship test, the person must have lived with you the entire year or be part of a group of persons not required to live with you.
The IRS publishes a list of persons who are not required to live with you. Your father and mother are on that list, so you can meet this test without having either one or both of your parents live with you at any time during the year. Your parents must be citizens, nationals or residents of the United States or residents of Canada or Mexico.
This rule is very helpful to you if you want to deduct your elderly parents as dependents on your tax return despite the fact that your parents are in a nursing home or some other type of care facility.
The gross income test is met if a person’s gross income for the year is less than the personal exemption amount – $3,950 in 2014 and $4,000 in 2015. Gross income is all income in the form of money, property and services that is not exempt from tax.
The gross income test works out well in a situation where the elderly parent has only Social Security income or minimal sources of other income in addition to Social Security. In this situation, all of the Social Security income is generally nontaxable income, allowing the elderly parent to meet the gross income test.
The support test is met if you provide more than half of your elderly parent’s support. Total support includes amount spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. The IRS provides taxpayers with a worksheet to help in making this calculation.
If you make a lump-sum advance payment to a nursing home to take care of your elderly parent for life, and the payment amount is based on the parent’s life expectancy, the amount of support provided each year is the lump-sum payment divided by the parent’s life expectancy.
If you are making monthly payments to the nursing home facility, this monthly amount times 12 months would be considered part of the support you provided.
If you are helping to support an elderly parent who is in a nursing home or some other type of care facility, take the time to look into the gross income and support tests. You might discover you are entitled to a dependency exemption deduction that you have never before realized.
©2015 CPAmerica International
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
