Tax-Free Income from Renting Your Home

From Canton, Ohio, where the Pro Football Hall of Fame Weekend takes place in August, to Los Angeles, which has Haunted Hayrides to celebrate Halloween throughout October, cities small and large host special events throughout the year. Moreover, oceanfront communities attract millions of tourists in the summer while mountain regions offer winter sports each winter.

What is the common denominator? If you live in an area popular with tourists, for a season or a month or even a day, you can rent your home for a sizable amount. According to some reports, homes in the Augusta, Georgia area rent for as much as $20,000 for the week of the Masters Golf Tournament in April.

Moreover, income from such rental activity is legitimately tax-free: you don’t have to report it on your tax return. You can’t deduct any expenses incurred for the rental, but you still can take applicable mortgage interest and property tax deductions for your home with no reduction for the profitable rental period.

Fortune’s Fortnight

As you might expect, you have to clear some hurdles to qualify for this tax-free income. Perhaps most important, you must rent the home for no more than 14 days during the year. If you go over by even one day, tax-free taxation will vanish. In that case, you will have to report your rental income, and you may take appropriate deductions, but the process can become very complicated.

In addition to the 14-day limit, the IRS says that you must use the “dwelling unit as a home.” This means that you must use the property for personal purposes more than (a) 14 days or (b) 10% of the days it is rented to others at a fair price, whichever is greater.

Example 1: Jan Harrison lives in Charlotte, North Carolina, throughout the year but rents her home for a week when the Bank of America 500 race is in town. She moves in with her sister and then goes home after the weeklong rental ends. Jan lives in her home well over 300 days in the year, so claiming the tax-free rental income won’t be a problem.

You also can claim this tax break for a vacation home as long as there are at least 15 days of personal use and you keep rentals under 15 days a year. With either a primary residence or a second home, keep careful records to show that you observed the 14-day rental limit.

Proceed Prudently

Tax-free income is certainly welcome, but it shouldn’t be your only concern. Keep in mind that you are letting other people occupy your home, perhaps during a time when parties may occur. Make sure you have a formal rental agreement in place and that you collect the rent upfront, along with a deposit for possible property damage. Check with your homeowners insurance agent to see if you need special coverage, and check with local officials to find out if you need a permit for a short-term rental.

If you decide to use a service to handle the rental and save you some aggravation, ask what fees you’ll owe. In addition, ask if the rental income will be reported to the IRS. Such reports may complicate what can be a straightforward tax benefit; our office can explain the possible problems and solutions.

While it took nearly the entire calendar year for taxpayers to have certainty regarding the tax rules for 2014, it appears we now will have many of the tax incentives which expired on December 31, 2013 extended through 2014. Yesterday, the Senate passed a bill, which was also recently passed by the House, to extend numerous tax incentives for one year. The White House has indicated that the President will sign the bill.

Some key provision of the bill affecting business are as follows:

  1. Section 179 – Generally, the maximum deduction a company can make under section 179 would remain at $500,000 for 2014, with a dollar-for- dollar investment phase-out beginning at $2,000,000. This allows a taxpayer to immediately expense the cost of an investment (like equipment or software) in the year of purchase, instead of writing off the cost over the course of 3 to 15 years. This deduction can  be limited in certain circumstances. Consult with BiggsKofford on how this limitation will apply in your situation.
  2. 50 percent bonus depreciation – Bonus depreciation allows for immediate expensing of 50 percent of the cost of new equipment.
  3. Research and Development tax credit for business -the bill would extend this credit through the end of 2014. In general, the credit is equal to a percentage of wages paid for the performance of qualified research, supplies used in development efforts and payments made to third parties for design and testing.

Additionally, among the key individual incentives, for 2014 taxpayers can donate an individual retirement plan distribution to charity, up $100,000, without paying tax on the distribution.

For more information, contact BiggsKofford at (719) 579-9090

Greg Gandy

Greg Gandy

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What does an effective estate planning and what can it mean for you and your family? Effective estate planning should address wealth transfer from a practical and cost-effective approach. One estate planning strategy that families with significant wealth should consider is the Family Limited Partnership (“FLP”).

A FLP is a partnership agreement that exists between family members that divides rights to income, appreciation, and control of the FLP among the family members according to the family’s overall objectives. Under family partnership rules, family assets placed into an FLP can include real estate, investments (stocks and bonds), alternative assets (partnerships or LLC interests) or a closely held family business.

Under the most common form of the FLP, general and limited partnership interests are created. Once the partnership is established, you then gift the limited partnership interests to your children. By holding the general partnership interest, you are considered the “general partner” and maintain control of all decision making aspects of the FLP. Your children are the “limited partners,” and the limited partnership interest lets them share in the ownership of the FLP which includes rights to income, distributions and asset appreciation.

The FLP enables you to provide your children with an interest in family assets while achieving many goals. First, it removes assets from the parents’ estate, thus helping lower potential estate tax liability of the parents, if properly executed. In addition, you can transfer the limited partnership interests in increments over time, resulting in a gradual and systematic transfer of ownership. Finally, and perhaps most importantly, there may be immediate income tax benefits.

The limited partnership interests transferred to your children, including all appreciation since the transfer, escape inclusion in the parents’ estate when they die. Only the value of the taxable gifts of the limited partnership interests would be included in the parents’ estate. This results potentially large estate tax savings to the parents’ down the road.

By gifting the limited partnership interests in increments over time, you can take maximum advantage of the $14,000 annual gift tax exclusion. The exclusion increases to $28,000 if married and if each spouse elects to give the maximum amount. The annual gift tax exclusion is indexed for inflation over time.

The use of discounting, the allowable reduction of value of the gift because it is a minority interest, can lead to greater leverage of the annual gift tax exclusion and the unified credit. For instance, you may be able to discount the value of the gift by thirty percent (30%) or more. However, in order for the discount to be valid, there must be a legitimate business reason for the partnership. Generally, the consolidation of family assets for ease of investment management is a valid business purpose for the existence of the partnership.

Aside from the estate planning advantages, the FLP can result in substantial income tax saving. By including your children as partners and sharing partnership income with them, total family income tax burden may be reduced. You should be aware, however, that if the income in unearned (interest, dividends, capital gains) and the recipient is under age, kiddie tax rules could apply.

Another incentive for formation of an FLP is that it may protect assets in the event of future problems with creditors. Provided that the transfer of assets to a FLP is not a fraudulent transfer the creditors of the partner who made the asset transfer should not be able to attach the FLP’s underlying assets. Instead, such creditors limited to seeking a “charging order,” which is the equivalent of a garnishment on any distributions made by the partnership interest of the debtor partner. However, if the General Partners of the FLP elect not to make any distributions, the charging order has little or no value because the creditors have no ability to compel the General Partners to distribute FLP profits.

The benefits of the FLP can be significant. But they can only be realized if the arrangement is valid under the requirements of the Internal Revenue Code and regulations thereunder. Consult a qualified legal or tax advisor if you think your family could benefit from an FLP.

If you have questions, please contact Greg Gandy, CPA.

Greg Gandy

Greg Gandy

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Michael McDevitt

Michael McDevitt

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Deborah Helton

Deborah Helton

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(Thompson Reuters) The IRS has issued its annual data book, which provides statistical data on its fiscal year 2012 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2011 and audited in FY 2012 to returns filed in calendar year 2010 and audited in FY 2011.

What are the chances of being audited?

Of the 143,399,737 individual tax returns filed in calendar year 2011, 1,481,966 were audited. This works out to roughly 1.0%, down slightly from 1.1% the previous year. Of the total number of individual income tax returns audited in FY 2012, 487,408 (32.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 483,574 (30.9%) of all audited returns for FY 2011.Only 24.3% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That’s slightly down than the 25% figure for the previous year. The 75.7% balance of the audits were correspondence audits, slightly up from 75% for the previous year.

Following are selected audit rates for individuals not claiming the EITC:

  • For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 3.6% of returns were audited in FY 2012, down from 4.3% in FY 2011.
  • For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.4% of returns were audited in FY 2012, a decrease from 3.8% in FY 2011.
  • Of the returns showing farm (Schedule F) income, .5% were audited in FY 2012 versus .6% in FY 2011.
  • For returns showing total positive income of $200,000 to $1 million, 2.8% of returns not showing business activity were audited, and 3.7% of returns showing business activity were audited. The audit rates for such returns were 3.2% and 3.6%, respectively, for the previous year.
  • For FY 2012, the audit rate for returns with total positive income of $1 million or more was 12.1%, slightly down from the 12.5% rate for FY 2011.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 0.85% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from 1% for FY 2011), and 1.96% for those with $200,000 to $500,000 of AGI (down from 2.66% for FY 2011). Exam coverage increased to 8.9% for those with at least $1 million but less than $5 million of AGI (down from 11.8% for FY 2011). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

  • For all corporate returns other than Form 1120S, 1.5%, same as the year before.
  • For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.7%; $1-$5 million, 2.1%; and $5-10 million, 2.6%. For FY 2011, the percentages were, respectively, 1.6%, 1.9%; and 2.6%.
  • For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.8%, up slightly from 17.6% for FY 2011. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 10.5% for those with total assets of $10-$50 million (down from 13.4% for FY 2011); 22.7% for those with $250-$500 million (up from 17.4% for FY 2011); 45.4% for those with $5-20 billion (down from 50.5% for FY 2011), and 93% for those with $20 billion or more (down from 95.6% for FY 2011).
  • For partnership and S corporation returns, the audit rate was 0.5%, as compared to 0.4% for the year before.
  • IRS’s activity on other fronts.

Here’s a roundup of some of the other valuable information carried in the new IRS Data Book.

Number of returns filed.

The number of partnership returns filed (Form 1065) increased by 1.5%, and the number of S corporation returns (Form 1120S) grew by .8%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 2.2%.The number of individual income tax returns (e.g., Forms 1040, 1040A, 1040EZ) increased by 1.8%, reflecting the second consecutive increase (likely due to improvement in economic activity) after the 2% drop exhibited in FY 2010 and the 6.7% drop shown in FY 2009.

The number of estate tax returns filed in FY 2012 increased by 145.5%, following last year’s 62.1% plunge (which was attributable to the temporary repeal of the tax for deaths in calendar year 2010 before being reinstated retroactively with a $5-million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010).

Math errors on individual returns.

IRS sent out roughly 2.7 million math error notices relating to the 2011 return.Of the total math error notices, 23.9% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 15.3% related to exemption number/amount, 13.4% related to the EITC, 10.6% related to the standard/itemized deduction(s), 5.3% related to the child tax credit, and 5.2% related to the first-time homebuyer credit.

Penalties.

In FY 2012, IRS assessed 28.5 million civil penalties against individual taxpayers, slightly down from 28.75 million assessed in the previous year. Of the FY 2012 assessments, the “top three” penalties in percentage terms were 60.2% for failure to pay, 24.8% for underpayment of estimated tax, and 11.5% for delinquency. On the business side, there were a total of 995,533 civil penalty assessments (down from 1,080,027 for the year before), and the “top three” penalties in percentage terms were 51.4% for delinquency, 25.8% for failure to pay, and 20% for estimated tax.

Offers-in-compromise.
In FY 2012, 64,000 offers-in-compromise were received by IRS (versus 59,000 for FY 2011), and 24,000 were accepted (up from 20,000 for the year before).

Criminal cases.

IRS initiated 5,125 criminal investigations in FY 2012. There were 3,701 referrals for prosecution and 2,634 convictions. Of those sentenced, 81.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2011, IRS initiated 4,720 criminal investigations, there were 3,410 referrals for prosecution, and there were 2,350 convictions. Of those sentenced, 81.7% were incarcerated.

If you have any questions about this, please contact Gregory L. Gandy, CPA, Deborah Helton, CPA, or Michael E. McDevitt, CPA, for more information.

The Internal Revenue Service said last week that it was expanding its Voluntary Classification Settlement Program (VCSP). The reasoning for this expansion is to give more businesses the opportunity to reclassify workers as employees, as opposed to independent contractors, for future tax periods, offering them relief from their past payroll tax obligations.

The IRS is modifying several eligibility requirements, making it possible for many more interested employers, especially larger ones, to apply for the program. Applying for this program gives a partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court. Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement.

If you have questions on how to navigate this program, please e-mail Michael E. McDevitt, CPA, or Greg L. Gandy, CPA.

Recently, Jeff Ahrendsen at HUB International, passed on this great presentation about how Health Care Reform can affect your business.  Check it out here.

If you have questions about how this tax law might be affecting your business, please e-mail Greg Gandy, Deborah Helton or Michael McDevitt.

President Obama recently signed into law the American Taxpayer Relief Act, in which there are many new tax provisions that were enacted to avoid the impending Fiscal Cliff. Below are some of the main tax features of the Act. We will send out more information, as we get it in regard to the Act.

Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold as described above. The current 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

If you have any questions about how this will affect you and your business, please feel free to contact Greg Gandy, CPA, Mike McDevitt, CPA, or Deborah Helton, CPA.

As the end of the year approaches, here are a few things that you will want to be aware of:

2013 Inflation-adjusted Amounts: The IRS released a number of inflation-adjusted tax amounts for 2013 including, for example: (1) the amount used to reduce the net unearned income reported on a child’s return that is subject to the “kiddie tax” increases from $950 to $1,000; (2) the annual exclusion for gifts rises from $13,000 to $14,000; and (3) the foreign earned income exclusion goes from $95,100 to $97,600.

2013 Pension Plan Amounts: The IRS published cost-of-living adjustments to various pension plans and related amounts for 2013. For instance, the (1) benefit limit for defined benefit plans increases from $200,000 to $205,000; (2) defined contribution plan limit goes from $50,000 to $51,000; (3) compensation limit for determining benefits and contributions increases from $250,000 to $255,000; (4) definition of a highly-compensated employee is unchanged at $115,000; (5) elective deferral limit for employees who participate in 401(k), 403(b), and most 457 plans goes from $17,000 to $17,500; and (6) limit on contributions to SIMPLE accounts increases from $11,500 to $12,000.

Closing Agreements: The IRS explained in Chief Counsel Advice that if subsequently effective regulations change or modify the law regarding an issue covered in a closing agreement, the agreement will no longer be binding for that issue. The IRS can require the taxpayer to comply with the changed or modified law, and an IRC Sec. 481 adjustment would be calculated to take into account the taxpayer’s prior position with regard to the issue in earlier years.

Private Sector PTIN Directories: The IRS Issue Management Resolution System (IMRS) captures, develops, and responds to significant stakeholder issues. In a recent IMRS Hot Issue, the IRS noted that directories have been set up on the Internet using Preparer Tax Identification Numbers (PTINs) obtained from the IRS through the Freedom of Information Act (FOIA). Businesses have the right to obtain the listing via FOIA “and attempt to monetize it through business ventures.” The IRS cannot restrict these activities. The IRS is creating a publicly searchable database that will allow taxpayers to see if their tax preparer meets IRS standards or to find a tax preparer in their zip code area. This database will have a listing of all valid PTIN holders who have professional credentials (CPAs, enrolled agents, attorneys, and registered tax return preparers) and will be available around May 2013.

Social Security Wage Base for 2013: In 2013, the first $113,700 of wages or SE income (up from $110,100 in 2012) will be subject to the Social Security component of the FICA tax. Once again, there will be no limit on the wages or SE income subject to the Medicare component of the tax. Assuming that the Social Security payroll tax cut in effect during 2011 and 2012 is not extended, employees and employers will each pay a FICA tax rate of 7.65% in 2013 (Social Security tax rate of 6.2% plus the Medicare tax rate of 1.45%) while the self-employed will face a combined tax rate of 15.3%. To add another layer of complexity, beginning in 2013, the employee portion of the Medicare tax increases from 1.45% to 2.35% on wages (and SE income) in excess of $200,000 ($250,000 for MFJ and $125,000 for MFS).

Estate Tax—Statistics for 2010: According to a recent IRS Tax Stats Dispatch, less than half the estates that filed an estate tax return for 2010 owed tax with roughly 20% of estates claiming a charitable bequest deduction. Due primarily to increases in the filing threshold, the number of estate tax return filings decreased from more than 108,000 in 2001 to just over 15,000 in 2010.

Income Tax—Bankruptcy Exemption for Retirement Account: A state divorce court awarded an ex-wife 50 percent of her ex-husband’s 401(k) account and ordered him to pay her $43,500 of the equity in one of the houses they owned. His failure to pay the home equity amount on time resulted in that money also being removed from his 401(k). The ex-wife placed the funds in a newly established IRA. A month after opening the IRA, she filed for Chapter 7 bankruptcy. The District Court denied a bankruptcy exemption for the home equity payment because the money had been seized from a 401(k) and used to pay a debt the husband owed; thus, it no longer constituted retirement funds. 

Income Tax—Business Sale: The taxpayer owned and operated an insurance business in Harvey, North Dakota, a town of a couple thousand residents where fewer people moved in during a given year than died or moved away. The insurance market was very competitive with several independent agents in the area, but the taxpayer was the most well known. Eventually, he sold his business and began employment with a local bank that wanted to revive its insurance business. In addition to six annual installment payments of $20,000 for files, customer lists, and goodwill, the employment agreement specified a six-year deal with annual wages and deferred compensation. The Tax Court held that the wages paid were not disguised purchase-price payments because the two parties were genuinely interested in creating an employment relationship and not simply affecting tax consequences. The bank needed an experienced manager, and the taxpayer wanted guaranteed employment.

Income Tax—Deductible Restitution Payments: Taxpayers who repay embezzled funds are ordinarily entitled to a deduction in the year in which the funds are repaid. In a Private Letter Ruling, the IRS allowed a doctor to deduct restitution payments made to an insurance company in a criminal lawsuit for insurance fraud. In addition, restitution payments made to the state of New Jersey, in exchange for the dismissal of charges in its suit against the taxpayer, were deductible if no contributions from another party (i.e., the other doctor and practices that had been sued) were received and the amounts had been included in gross income in prior years.

Income Tax—ESOP’s Exempt Status Revoked: A highly-compensated employee must include, in gross income, an amount equal to his vested accrued benefit (other than the investment in the contract) in the taxable year an ESOP ends if the trust fails to remain tax-exempt because it no longer meets certain coverage and eligibility tests. In this case, the taxpayer’s S corporation sponsored an ESOP in which the taxpayer had an accrued benefit of $2.4 million. When the ESOP terminated, taxpayer’s entire account balance was transferred to an IRA. The IRS retroactively disqualified the ESOP as tax-exempt as a result of its failure to meet certain coverage and participation requirements. The limitations period for assessment had expired for all years except the year the ESOP was terminated. The Tax Court held that the entire amount of the taxpayer’s vested accrued benefit had to be included in income and not just the annual increase in the final year of the ESOP.

Income Tax—End of Filing Season Considerations: With the end of another filing season, the IRS has included a timely link entitled “After You’ve Filed” as one of the five scrolling topics on the homepage of www.irs.gov. In the information provided, the IRS reminds taxpayers that (1) the refund status of an e-filed return can be checked 72 hours after the IRS acknowledges receipt, (2) those who moved after filing their return should send Form 8822 (Change of Address) to the IRS, (3) the IRS’s online withholding calculator is a useful tool to assist employees in completing or adjusting Form W-4 (Employee’s Withholding Allowance Certificate), and (4) copies of prior year tax returns or transcripts, which include most of the line-items of a return, are available by filing Form 4506.

Income Tax—Filing Guidance for Same-sex Couples: Although the Obama administration no longer defends the Defense of Marriage Act (DOMA) and several courts have struck down key provisions, the IRS continues to defer to DOMA in its guidance to same-sex couples. The most recent guidance is provided in question and answer format. The guidance states, in part, that (1) same-sex couples, who are legally married for state law purposes, may not file as MFJ or MFS; (2) a taxpayer cannot file as HOH based solely on his or her same-sex partner; (3) either parent, but not both, may claim a dependency deduction for a qualifying child; (4) if a same-sex couple adopts a child together, each partner may claim the adoption credit in an amount equal to the qualified expenses paid, but both may not claim a credit for the same expenses or claim more than the amount he or she actually paid; and (5) if a taxpayer adopts the child of his or her same-sex partner, the taxpayer may claim an adoption credit for the qualifying expenses.

Income Tax—Involuntary Conversions: The taxpayer’s principal residence was destroyed in a presidentially declared disaster. Upon acquiring a new principal residence the next year, he failed to notify the IRS of the replacement property, as required under Reg. 1.1033(a)-2(c)(2) . He received insurance proceeds in the year of the disaster and in the following two years. In the second year, the taxpayer realized gain when the insurance proceeds exceeded his basis in the former residence, but he did not report any gain recognition. The IRS held that under the regulations, the taxpayer was deemed to have made the election to defer gain under IRC Sec. 1033 when he did not recognize gain on his tax return in the year he received insurance proceeds.

Income Tax—IRA Rollover Waiver: The taxpayer and his investment partner purchased a residential building with a mortgage and promissory note. Years later, they entered into an agreement to sell the property. But, in order to complete the sale, the promissory note had to be paid off. Unable to find a lender and faced with foreclosure if the note was not paid off by a certain date, the taxpayers withdrew money from their IRAs to pay off the note. Although delays in closing the sale extended repayment of the withdrawn funds for several months, the IRS declined to waive the 60-day rollover requirement under IRC Sec. 408(d)(3) . Taxpayers did not show that the failure resulted from (1) errors committed by a financial institution, (2) death, (3) hospitalization, (4) postal error, (5) incarceration, and/or (6) disability.

Income Tax—SIFL Rates for Employer-provided Aircraft: Under Reg. 1.61-21(g), employers can use a special computation rule to value employees’ flights on an employer-provided aircraft. The employer multiplies the Standard Industry Fare Level (SIFL) cents-per-mile rate in effect at the time of the flight by the appropriate aircraft multiple provided then adds the applicable terminal charge. For flights taken from 7/1/12–12/31/12, the SIFL rate will be $.2569 per mile for trips up to 500 miles, $.1959 per mile for trips from 501 to 1,500 miles, and $.1884 per mile for trips over 1,500 miles. The terminal charge will be $46.97.

Procedure—Penalty Abatement: It is common for the IRS to waive Failure to File (FTF) and Failure to Pay (FTP) penalties for taxpayers who have demonstrated full compliance over the prior three years. This waiver, called a First-Time Abate (FTA) is to reward past tax compliance and promote future tax compliance. A report by the Treasury Inspector General for Tax Administration (TIGTA) found that most taxpayers with compliant tax histories are not offered and do not receive the FTA waiver. For the 2010 tax year, approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief even though they qualified for the FTA waiver. In addition, taxpayer requests for penalty abatements were not always processed accurately.

Procedure—Tax Return Preparer E-file Requirement: According to a posting to the IRS Issue Management Resolution System (IMRS) Hot Issue webpage, any tax return preparer who anticipates preparing and filing 11 or more Form 1040, 1040A, 1040EZ and 1041 returns during a calendar year must use IRS e-file (unless the preparer or return is administratively exempt from the e-file requirement or the return is filed by a preparer with an approved hardship waiver). Effective 10/1/12, applications to become an IRS e-file provider must be submitted online. The IRS will no longer accept paper e-file applications.

For more information on the business implications, please contact Greg Gandy or Mike McDevitt.

(All information provided by Thomson Reuters/PPC.)

Greg Gandy

Greg Gandy

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In this day and age of social media, e-mails, texts, professional obligations and personal obligations, it seems as if there is no time to stop and smell the roses. In our fast-paced society, one of the most valuable resources that people fail to accumulate is their free time. The use of a Family Office can help you, the busy professional, regain your most valuable asset…your time.

The term Family Office is often a misunderstood term that most seem to associate with the rich and famous. While it is the rich and famous for whom Family Offices were originally created, it is a service that now is available to any professional who wants to regain their free time.  

While Family Offices take many forms and vary depending upon the individual that is being served, the most important feature that is common to all Family Offices is that there is a Trusted Advisor in place to oversee all aspects of your financial life.  For the remainder of this article, we will focus on the CPA serving the role of Financial Trusted Advisor. 

The services that a CPA can offer in a Family Office environment are that of a true Trusted Advisor, overseeing your entire financial life.

These services include:

  • Personal bill paying
  • Preparation of monthly personal financial statements
  • Personal budgeting and cash flow planning
  • Investment review and evaluation 
  • Insurance review and evaluation
  • Estate planning review and evaluation
  • Asset protection review and coordination
  • Charitable contribution planning
  • Retirement  planning review and coordination
  • Education planning review and evaluation
  • Other concierge services as requested

A CPA can also perform more services that are offered by traditional accounting firms:

  • Income tax return preparation
  • Income tax planning

As you can see from the nontraditional Family Office services that a CPA can provide, one of the key features is the review and evaluation of investments, insurance, estate and asset protection planning. This coordination means that you need only one point of contact, the CPA. Your CPA can coordinate and monitor all other members of your financial team, like your attorney, investment advisor, etc.

 Please view our Web site for more information on how your CPA can help you manage your most valuable asset…your time.

Greg Gandy

Greg Gandy

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Michael McDevitt

Michael McDevitt

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Is your business paying too much in sales tax?  In many venues, products and services purchased as part of a manufacturing or production process aren’t subject to sales tax. 

For example, one company found that its propane purchases should have been tax exempt.  The correction saved about $5,000 per year. 

Tips:

  • Get an opinion. Talk to your trusted tax advisor if the law isn’t clear.
  • Contact suppliers. They may offer advice or knowledge and may be able to credit your account.  Issue resale certificates to suppliers if neccessary.

For more information about sales tax for your business, please contact us.

Greg Gandy

Greg Gandy

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Michael McDevitt

Michael McDevitt

Director

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The IRS has expanded the use of correspondence examinations of individual income tax returns. The IRS initiates a correspondence examination by mailing either Letter 566 (CG), often termed an initial contact letter, advising the taxpayer that a return has been selected and listing the items to be verified, or a CP 2000 notice, which contains proposed adjustments based on information documents issued by third parties, such as Forms W-2, Wage and Tax Statement; 1099-MISC, Miscellaneous Income; and 1098, Mortgage Interest Statement. The examinations are handled at an IRS Service Center or campus.

Please notify us if you receive correspondence from the IRS. Do not assume the change(s) proposed in any IRS correspondence is correct. Often, it is not! Let us review the correspondence and respond on your behalf.

When the IRS receives returns, it compares them against norms for similar types of returns. The IRS develops the norms from audits of statistical random samples of returns that are selected as part of the National Research Program, which the IRS conducts to update return selection information.
The IRS typically selects returns for correspondence examinations based on data indicating that the taxpayer has not reported income, claimed improper deductions, or claimed erroneous tax credits. Some typical items for which the IRS requests verification include alimony, moving expenses, various itemized deductions, casualty losses, employee expenses, Schedule C receipts and expenses, foreign tax credits, earned income credits and education credits.

Unlike a field examination, a correspondence audit is not assigned to a specific examiner. When the IRS receives correspondence, the file is assigned to an auditor. If there is no response from the taxpayer, the process moves through an automated system. After a certain period of time, the IRS issues a second notice, and if there is no reply, it will issue a statutory notice of deficiency or a 90-day letter.

The IRS has been having workload problems in timely responding to taxpayer or practitioner letters that provide the requested information or express disagreement with proposed adjustments. Often correspondence is not assigned to the auditor who reviewed earlier documents. Correspondence tends to not be reviewed for several months, resulting in the IRS sending letters advising the taxpayer that it needs additional time to review the correspondence. When the IRS finally issues reports, in some cases the proposed adjustments are not correct because proper consideration and evaluation have not been given to the documents and substantiation furnished by the taxpayer or his or her representatives.

If you have any questions, please call your contact at BiggsKofford at (719) 579-9090.

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Greg Gandy

Greg Gandy

Director

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Michael McDevitt

Michael McDevitt

Director

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The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment and a host of retroactively resuscitated and extended tax breaks for individuals and businesses.

Here’s a look at the key elements of the package:

  • The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
  • Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
  • A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
  • Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
  • Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
  • Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
  • After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010’s or 2011’s rules.
  • Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements.
  • Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

If you have questions about this tax law, please contact Greg Gandy or Mike McDevitt.

Greg Gandy

Greg Gandy

Director

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Michael McDevitt

Michael McDevitt

Director

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This morning’s presentation on tax planning for individuals and businesses was led by Gregory L. Gandy, CPA, and Michael E. McDevitt, CPA.

You can find the PowerPoint presentation here.

If you have questions about specific tax areas where your business might need an extra focus or about the presenation, please contact Greg Gandy or Mike McDevitt.

Interested in attending our future events? Contact Stephanie Johnson.