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Friday
Jun122015

The Important of Conducting a Business Like a Business

When in business do as business’ do is an important idea for a person entering business to grasp and act on. As an accountant with a growing tax practice people retain my service to prepare returns and many times represent them before the IRS. Usually after not conducting their profit motivated activity like a business. A recent tax case illustrates the importance of acting like a business as a business.

A Mr. Boneparte, an employee of the NY and New Jersey Port Authority claimed on his federal tax return to be a professional gambler. The treatment of gambling losses for a professional gambler is to deduct the losses to the extent of winnings directly from the winnings. Much as a merchant deducts the cost of goods sold from the sales proceeds from those goods. Casual gamblers deduct the losses as a miscellaneous expense subject to the 2% floor on Schedule A to the extent of winnings. The ability to deduct the losses directly from the winnings has huge tax implications. Primarily a lower Adjusted Gross Income (AGI), a number used in many critical tests for various credits and deductions and for a self-employed person a lower SE tax.

When the losses are deducted subject to the 2% floor on Schedule A AGI is higher and the deduction may not be used if less than the standard deduction leading to a higher tax on total income.

The Tax Court looked at the facts of Mr. Boneparte’s return and relevant law and ruled the taxpayer was not a professional gambler. The court’s questioned if Mr. Boneparte had as an objective of being a gambler a profit motive. A profit motive is evidence partly by the fact the taxpayer maintains complete and accurate books and records. (Reg. §1.1832(b)(1))

Central to the Tax Court’s ruling was Mr. Boneparte’s failure to keep complete and accurate records of his gambling activities. Mr. Boneparte maintained a running total of winnings and losses in his head. He did not record where, when, and the amount of each wager or each day of gambling activity. The handwritten notes he provided to the auditor were created while the audit was in progress. Part of the complete and accurate records requirement is that the records be contemporaneous to the activity meaning “originating, arising, or being formed or made at the same time; marked by characteristics compatible with such origin.” (Merriam –Webster) A classic example is the receipt showing the name of the vendor, the date and time, the amount paid or received.

Mr. Boneparte could not demonstrate he had a profit motive in being a gambler and lost the deduction of his losses directly against his winnings. Keep the receipts, keep books showing a detailed accounting of income and expenses using those receipts.

Friday
Jun052015

Prepare for a Disaster – Plan to Keep Your Tax Records Safe

June 1st is the start of the Hurricane season and recent rains have demonstrated the very real potential of flooding. The IRS urges taxpayers plan to keep tax records safe and this firm agrees. The savings in time, aggravation, and money make protecting tax records sensible. The following are suggestions to help make that plan.

  • ·         Use Electronic Records. Banks, brokerage houses, and other financial service providers provide and maintain financial records in electronic format available online for download. With home scanners you can make your own scans of records. Either way you can keep an additional set of records electronically. Download the files to an external hard drive, USB flash drive, o burn them onto a CD or DVD. Prepare a second copy to place some place other than your home; a safe deposit box, self-storage unit, or trusted family, friend, or your attorney in the event your home is affected. You may not be able to retrieve the copy held at your home in a disaster covering a large area so consider places outside your home area.
  • ·          Original Paper Copies. Keep the original paper records and consider keeping a second set in a waterproof container away from the originals. Fireboxes are designed and built to protect the contents from fire, not water. Water will enter a firebox and wreck documents, usually within seconds of submersion.
  • ·         CPAs. CPAs maintain records for clients indefinitely, often outside the immediate area of their office. Firms have moved or are moving rapidly to paperless offices choosing to store documents electronically. Electronic records are easier to access and retrieval and with the falling costs of electronic storage more years are maintained.
  • ·         What records to keep? Keep copies of; mortgage contracts, sales documents on properties, vehicles (including boats), insurance contracts, tax returns for current and prior years and the documents used in their preparation, birth certificates, identifications such as driver licenses and social security, business and personal credit card accounts numbers, equipment ID numbers and statements, bank statements and canceled checks, photographs, videos, lists of valuables, descriptions of them, and photographs of the valuables including business equipment. Keep lists of the documents backed up to help in gathering documents and keeping them updated. Label and date the containers, hard drives, USB flash drives to make it easier to find what you are looking for. After a disaster you will want quick access to many of these documents.

Hopefully you will have no need to access the stored documents. If you do need to you will glad you prepared.

Friday
Jan092015

Under Reporting the Mortgage Interest Deduction?

Bank of America has asked a Federal judge to dismiss a nationwide class action lawsuit. Bank of America is accused of intentionally and fraudulently under reporting interest collected by the bank on the Form 1098 Mortgage Interest Statement. The suit was brought under IRC §7434 which provides for civil damages for fraudulent filing of information returns. The lawsuit is centered on homeowners who fell behind on mortgage payments owing both principle and interest and then received a modified loan from Bank of America. The modifications basically added the interest to the balance of the mortgage principle.

To illustrate, assume a homeowner facing foreclosure has mortgage principle of $300,000on a 15 year mortgage issued by Bank of America. At the time the modification is initiated the homeowner may owe $15,000 in delinquent interest. After the modification, the homeowner has a 30 year mortgage and owes Bank of America $315,000 consisting of the original principle amount of $300,000 plus the $15,000 in back interest.

The homeowner is not permitted to take the $15,000 interest as a mortgage interest deduction at the time the loan is modified. The courts have upheld the IRS disallowance of the interest deduction for back interest due in the year of modification.  This is consistent with IRS and IRC rules and regulation permitting deduction only when the cash has been paid by a cash basis taxpayer.

When the homeowner pays the delinquent interest over the course of the modified loan, the delinquent interest plus the interest paid on the modified $300,000 mortgage give rise to a home mortgage deduction under §163 in each year of payment.  Here is the crux of the suit, since the homeowner may not deduct the delinquent interest until it is paid in future years and Bank of America failed to include the delinquent interest in subsequent Form 1098s to its borrowers, the borrowers have overpaid on their taxes because the mortgage deduction reported was under reported on the Form 1098. Because of IRS regulations limiting the time an amended return may be filed many homeowners will not be able recover the taxes paid.

There are additional elements to the lawsuit; a claim by the borrower’s attorneys that Bank of America knowing the practice was wrong but intentionally under reported the interest to minimize its reporting of income. Interest is deductible to the taxpayer paying and income to the taxpayer collecting the payment. Principle is not deductible or reportable as income. Counter claims by the bank the plaintiffs are seeking to make the bank their tax preparer as no statue or rule requires lenders to track payments of interest that has become part of the loan’s principle balance.

Given the number of home mortgage modifications following the 2008 and 2009 housing debacle the potential exists that many or all lenders have followed the same practice as Bank of America. There is no information as yet on what if anything homeowners can or should do to determine if they have overpaid taxes as a result of Bank of America’s and other lenders conduct.

I recommend homeowners with loan modifications consult with their tax advisor on how to best handle the potential tax consequences of a lender’s treatment of the delinquent interest under a loan modification.

Article link 1 Thomas Rueters article covering the classaction suit.

Article Link 2 Procedurly Taxing blog post discussing the legal and tax implications of the suit.

Wednesday
Dec172014

Congress passes tax extender legislation.

Detail list at bottom. LINK

By Alistair M. Nevius, J.D. 
December 16, 2014

The Senate passed a bill to retroactively extend more than 50 expired tax provisions through 2014, by a vote of 76–16 on Tuesday evening. The extender bill passed the House of Representatives on Dec. 3, and it now goes to President Barack Obama for his signature. The Joint Committee on Taxation estimates that the one-year extension of the expired provisions will cost the government almost $42 billion in lost revenue over 10 years.

Among the highlights of the bill: The research and development (R&D) credit, first-year bonus depreciation, and the increased Sec. 179 expensing limits are all extended.

The bill, H.R. 5771, known as the Tax Increase Prevention Act of 2014, temporarily extends a host of expired individual, business, and energy tax breaks, as well as certain provisions relating to multiemployer defined benefit plans. The bill also makes some technical corrections to prior legislation.

H.R. 5771 includes another bill, the ABLE Act of 2014, which provides for tax-favored accounts that will allow disabled individuals to save money to pay for their disability expenses.

The bill contains various offsets, designed to pay for the anticipated revenue lost from the creation of ABLE accounts. Among these offsets are:

  • Amending the definition of personal holding company income to exclude dividends received by U.S. shareholders from controlled foreign corporations;
  • Instituting inflation adjustments for certain civil penalties (see below);
  • Enacting a new Sec. 3511, allowing for certified professional employer organizations, which will be treated as an employer for work-site employees performing services for customers of the organization for employment tax purposes.

Earlier proposals to permanently extend some expired provisions, or to extend all provisions two years, through 2015, were not adopted.

Tax incentives for individuals

Tax incentives for individuals that are extended through 2014 include:

  • The Sec. 62 deduction for certain expenses of elementary and secondary school teachers;
  • The Sec. 108 exclusion from gross income of discharge of qualified principal residence indebtedness;
  • The Sec. 132 provision providing parity between employer-provided mass transit and parking benefits;
  • The Sec. 163 treatment of mortgage insurance premiums as qualified residence interest;
  • The Sec. 164 deduction for state and local general sales taxes;
  • The Sec. 170 special rule for contributions of capital gain real property made for conservation purposes;
  • The Sec. 222 above-the-line deduction for qualified tuition and related expenses; and
  • The Sec. 408 provision allowing tax-free distributions from individual retirement plans for charitable purposes.

Tax incentives for businesses

Business tax incentives extended through 2014 include:

  • The Sec. 41 R&D credit;
  • The Sec. 42 temporary minimum low-income housing tax credit rate for nonfederally subsidized buildings;
  • The military housing allowance exclusion for determining whether a tenant in certain counties qualifies as low-income under the Housing Assistance Tax Act of 2008, P.L. 110-289;
  • The Sec. 45A Indian employment tax credit;
  • The Sec. 45D new markets tax credit (and carryovers of the unused limitation are extended through 2019);
  • The Sec. 45G railroad track maintenance credit;
  • The Sec. 45N mine rescue team training credit;
  • The Sec. 45P employer wage credit for employees who are active duty members of the uniformed services;
  • The Sec. 51 work opportunity tax credit;
  • Sec. 54E qualified zone academy bonds;
  • The Sec. 168 provision classifying certain race horses as three-year property;
  • The Sec. 168 provision allowing 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
  • The Sec. 168 provision allowing a seven-year recovery period for motorsports entertainment complexes;
  • The Sec. 168 provision allowing accelerated depreciation for business property on an Indian reservation;
  • Sec. 168 bonus first-year depreciation (for certain property with longer production periods, the property must be placed in service before Jan. 1, 2016);
  • The Sec. 168 election to accelerate the alternative minimum tax credit in lieu of bonus depreciation (and special rules were added for round 4 extension property);
  • The Sec. 170 enhanced charitable deduction for contributions of food inventory;
  • The increased expensing limitations and treatment of certain real property as Sec. 179 property;
  • The Sec. 179E election to expense mine safety equipment;
  • The Sec. 181 special expensing rules for certain film and television productions;
  • The Sec. 199 deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
  • The Sec. 512 modification of tax treatment of certain payments to controlling exempt organizations;
  • The Sec. 871 treatment of certain dividends of regulated investment companies (RICs);
  • The Sec. 897 treatment of RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act, P.L. 96-499;
  • The subpart F exception for active financing income;
  • The Sec. 954 lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
  • The Sec. 1202 exclusion of 100% of gain on certain small business stock;
  • The Sec. 1367 allowance for basis adjustments to stock of S corporations making charitable contributions of property;
  • The Sec. 1374 reduction in S corporation recognition period for built-in gains tax;
  • Sec. 1391 empowerment zone tax incentives;
  • The Sec. 7652 temporary increase in the limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands; and
  • The American Samoa economic development credit under the Tax Relief and Health Care Act of 2006, P.L. 109-432.

Energy tax incentives

Various energy tax provisions extended through 2014 include:

  • The Sec. 25C credit for nonbusiness energy property;
  • The Sec. 30C credit for alternative fuel vehicle refueling property;
  • The Sec. 40 second-generation biofuel producer credit;
  • The Sec. 40A incentives for biodiesel and renewable diesel;
  • The Sec. 45 production credit for Indian coal facilities placed in service before 2009;
  • The Sec. 45 credits with respect to facilities producing energy from certain renewable resources;
  • The Sec. 45L credit for energy-efficient new homes;
  • The Sec. 168 special allowance for second-generation biofuel plant property;
  • The Sec. 179D deduction for energy-efficient commercial buildings;
  • The Sec. 451 special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities; and
  • The Secs. 6426 and 6427 excise tax credits relating to certain fuels.

Pension plan provisions

Finally, two provisions affecting multiemployer defined benefit pension plans are extended through 2015:

  • The Sec. 431 automatic extension of amortization periods; and
  • The shortfall funding method and endangered and critical rules under the Pension Protection Act of 2006, P.L. 109-280.

Inflation-adjusted civil penalties

The following penalties will be adjusted for inflation after 2014:

  • The Sec. 6651 penalty for failure to file a tax return or pay tax;
  • The Sec. 6652(c) penalty for failure to file certain information returns;
  • The Sec. 6695 return preparer penalty;
  • The Sec. 6698 penalty for failure to file a partnership return;
  • The Sec. 6699 penalty for failure to file an S corporation return;
  • The Sec. 6721 penalty for failure to file correct information returns; and
  • The Sec. 6722 penalty for failure to furnish correct payee statements.

 Alistair M. Nevius ( anevius@aicpa.org ) is the JofA’s editor-in-chief, tax.

Wednesday
Dec172014

Another List of Things Successful People Do.

American Express Open Forum

 

The two things I have seen on all of these lists are: #5. They Are Willing to Fail and #2. They Exercise Incredible Drive. These are in my opinion central to all the other elements of success going hand in hand like a married couple. A willingness to risk loss is central to any advance be it scientific, business, political, militarily, or personal relationships. It is the acceptance to pay a price for wanting more.  The second item, #2. They Exercise Incredible Drive is the mate to the first one.  It is the long hard work the successful give to reach their goal.  And that long hard work, that effort may require sacrificing personally in time with family and friends and even sacrificing relationships that work counter to their goal. Without guarantee of succeeding. Those are high personal costs in the one thing that cannot be bought for any price, time.  People will forgive, forget, accept the failings of others but time will not return to be spent again.

One can work hard and never be successful because the acceptance of failure was not present. One can accept failure and never pay the price in effort. If you choose to do one would it not be good to do the other?