Tax Update Blog: June 2008 Archives
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IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS
June 30, 2008
We just received an e-mail from Mark Schuling, Director of the Iowa Department of Revenue, saying that the Department has extended its deadline relief for flood estimated tax payments to cover individual income taxes. Individual taxes had been omitted from Iowa's relief package as recently as last Friday, when Iowa gave disaster-area taxpayers until July 26 to make filings and payments otherwise due between May 25 and July 23. The Department website now reflects the updated deadlines.
So if you have an Iowa second quarter estimated tax payment due today, and you live in one of the Iowa weather disaster areas, you now have until July 28 to get it in the mail.
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
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WAYS AND MEANS HOLDS IRA HEARINGS
June 30, 2008
The House Ways and Means Committee is pondering IRAs. The recently-revived Benefits Blog reports:
The bottom-line, of course, is that people generally aren't saving enough, small employers are not offering retirement plan vehicles for their employees, and Congress is looking at ways to encourage savings. It is no surprise that the GAO Report indicates IRAs are being used primarily as a "parking spot" for individual rollovers from employer-sponsored retirement plans, rather than as a savings vehicle. However, mandating that small employers must offer some type of automatic IRA program, as discussed in the hearing, is definitely not the answer.
She's right, of course.
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IF YOU ARE GETTING AUDITED, REMEMBER: NO TIPPING
June 30, 2008
An IRS agent chose to privatize the examination process. Tax Analysts reports ($link) that IRS Agent Robet Rosner pleaded guilty last week to soliciting a $5,000 bribe to issue a "no change" letter. Unfortunatly for the agent, the taxpayer wore a microphone for one of his discussions with the agent, according tothe indictment. Just another data point for those who argue that only official unionized government employees can be trusted with taxpayer data.
UPDATE: The TaxProf has more.
Elswhere on the fraud beat, Russ Fox has a tax miscreat roundup, including another tax-evading strip-club owner, along with something completely different: Rabbi and banker plead guilty in tax-evasion scam. So a rabbi, a banker, and an IRS agent walk into a bar...
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DON'T FORGET: IOWA INDIVIDUAL 2ND QUARTER PAYMENTS ARE DUE TODAY, COME HELL OR HIGH WATER
June 30, 2008
UPDATE, 6/30: IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS. This means disaster-area taxpayers now have until July 28 to file their second quarter payments, in case you haven't yet made it to the post office.
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
As we noted Saturday, Iowa has not extended the due date for second quarter individual estimated tax payments in the flood disaster areas, so they are due today. In contrast, the IRS has extended the deadline for such payments to July 28.
So it's time for a new motto for the Iowa Department of Revenue: "A little water never hurt anyone."
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STATE FUNERAL?
June 30, 2008
The insighfully-vulgar State 29 Blog will disappear forever this week, according to its anonymous author. He's gone away before, but I think he means it this time.
While State 29 sometimes goes overboard with the profanity and vitriol, it is by far the best and most entertaining Iowa political blog. I'll miss it.
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IOWA FURTHER EXTENDS TAX DEADLINES FOR DISASTER AREAS, EXCEPT FOR HUMANS.
June 28, 2008
See June 30 Update Below.
The Iowa Department of Revenue yesterday further extended the deadlines for taxpayers in the flood disaster areas to file returns and make payments. Now taxpayers in presidentially-declared flood disaster areas get until July 28, 2008 to file returns and pay taxes otherwise due between May 25 and July 23. Until yesterday the relief only applied to returns and payments due up to June 26.
The extension applies to these taxes:
* Withholding tax
* Corporation income tax
* Franchise tax
* Sales and use tax, including the automobile rental excise tax and the special equipment tax
* Hotel and motel tax
* Environmental protection charge
* Inheritance tax, including the generation skipping transfer tax and the qualified use inheritance tax
* Motor fuel and special fuel tax
* Cigarette and tobacco tax
What's missing? Just individual income taxes. If you have a second quarter individual tax payment, it's still due this coming Monday. Even if your home, your office, or your tax preparer's office looked like this two weeks ago:
It's good that Iowa made their disaster relief more like federal disaster relief - even better in a way, as Iowa provides better relief for employment taxes. Still, not providing relief for individual tax payments is strange and lame.
UPDATE, 6/30: IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS. This means disaster-area taxpayers now have until July 28 to file their second quarter payments, in case you haven't yet made it to the post office.
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MAKING OTHERS PAY FOR YOUR GOOD INTENTIONS
June 27, 2008
You're just starting a small business. You're working 18 hour days to try to keep the doors open, paying the rent, and meeting your payroll. You know what you need? You need to have to sponsor individual retirement accounts for your employees!
That's what two congressmen think, anyway. From Tax Analysts ($link):
A bill that would require business owners to offer individual retirement accounts to employees has a decent chance of becoming law within the next year, the taxwriter who introduced the bill said at a June 26 congressional hearing.House Ways and Means Select Revenue Measures Subcommittee Chair Richard E. Neal, D-Mass., argued that his bill, H.R. 2167, the Automatic IRA Act of 2007, would be a relatively painless way to boost personal savings.
Subcommittee ranking member Phil English, R-Pa., a cosponsor of the bill, attested to its bipartisan appeal. "Clearly we need to do more to encourage all Americans to save for retirement, and we need to work together to find creative solutions," English said.
"We"? Congressman English isn't going to have to do the paperwork to run these plans. The business owner will. This scheme would make it that much harder for a small business to keep going. It would push the small employer to either not hire, or to only hire independent contractors and temps.
This is a "we" in the sense that "you do what I tell you, or else" means "we." It won't solve the savings "problem," not while the government continues to spend like there's no tomorrow. But it will help the congresscritters' self-esteem. And that's what matters.
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POLITICIANS, TAXES AND THE FINE PRINT
June 27, 2008
The two big tax policy think-tanks, the Tax Foundation and the Tax Policy Center, have been looking at the Obama tax plans.
The center-right Tax Foundation says that the Obama plan would accelerate the narrowing of the federal tax base to high income taxpayers. This creates an obvious policy shortcoming: if the income tax only applies to small segment of the voters, the majority has no incentive to exercise fiscal restraint because someone else picks up the tab.
The center-left Tax Policy Center illustrates the unintended consequences of sticking it to big corporations. The Obama plan eliminates income taxes on elderly households with income under $50,000, but it actually would increase their tax burden:
On average, low-income older people own some capital—stock in their retirement funds, homes, or maybe mutual funds—and that capital bears some of the corporate tax. Obama’s plan would increase corporate taxes and poor older couples would bear some of the cost—not all of them and not much of the cost but enough to make their average federal tax bill rise.
The Tax Policy Center notes that some academics say corporate employees, rather than shareholders, bear much of the burden of corporation taxes. That means a higher corporate tax either hurts workers or old people. That's a political winner!
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MIGHT THERE POSSIBLY BE ANOTHER FACTOR?
June 26, 2008
Not-a-blogger Brian Gongol posts:
Iowa Why Sioux City and Sioux Falls have turned out so differently The two towns, about an hour apart, started off in roughly the same condition in the 1960s. But Sioux Falls has grown well while Sioux City has had a much rougher time, economically. The biggest difference is that Sioux City depends heavily upon manufacturing, while Sioux Falls has moved away from heavy industry. That should be a lesson for those who obsess over manufacturing jobs as a political issue. Manufacturing still matters, but it can't be the only thing happening in a city's economy.
That's fine as far as it goes, but why is it that those financial industry jobs have been drawn to the South Dakota side of the river, rather than to the Iowa side?
Anyone?
Iowa's top corporation income tax rate is 12%. The rate in South Dakota is zero.
Iowa's top individual income tax rate is 8.98%. The top rate in South Dakota is zero.
But other than that, I have no idea.
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NEW FAQ ON HEALTH SAVINGS ACCOUNTS
June 26, 2008
The IRS has issued Notice 2008-59 to provide an updated Q&A on how Health Savings Accounts work. As a new round of premium increases hits, the lower premiums of HSAs look more and more attractive. It includes information related to new HSA rules enacted in late 2006.
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HOW MUCH SHOULD YOU BE IN A STATE BEFORE IT CAN TAX YOU?
June 26, 2008
State taxes are a big headache for a small business. The states are all over the place in determining when you cross the line to have "nexus" making you subject to tax. Once they decide you're in, some states aren't above highway robbery as collection tool.
This week the a House of Representatives Committee has been holding hearings on H.R. 5267, the Business Activity Tax Simplification Act of 2008 (BATSA):
BATSA would establish that businesses could only be subject to tax burdens in states where they have property and employees for at least 15 days in a year. This "physical presence" standard was reaffirmed most recently in the 1992 Supreme Court case Quill Corp. v. North Dakota, which remains binding precedent. Many states, however, are pushing for "economic presence" standards, which tax businesses based on where customers are located.
The BATSA standard would save the little guy a world of hassle, cost and uncertainty. It certainly would have helped Al Franken. Naturally state governments think its a bad thing, and they have the imaginary numbers to prove it. The National Governors Association also testified against the bill. And what's more important anyway - your crummy little livelihood, or the budgeting convenience of your governor?
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WASH SALES AND MUTUAL FUNDS
June 26, 2008
If you sell a stock at a loss and buy the same stock within 30 days before or after the loss sale, the "wash sale" rules of the tax law disallow the loss. But what if you sell a Vanguard S&P 500 index fund at a loss and buy a Fidelity S&P index fund within 30 days? The Tax Tips Blog ponders the question.
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WHAT'S GOOD FOR GM IS GOOD FOR YOU!
June 25, 2008
General Motors is preparing to roll out a new electric car, the $40,000 Chevy Volt. But they want to offer it with an attractive discount: a $7,000 tax credit:
If congressional leaders agree to GM's recommendation, the Volt could have a "real" price to consumers closer to the originally reported $30,000. However, since GM is suggesting basing the tax credit not just on battery size, but also on the potential quantity of petroleum avoided, lawmakers could conceivably balk at the tax implications as more alternative fuel vehicles enter the market.
That's funny. An electric car already gets a credit based on the amount of gasoline avoided. The average federal and state gas tax combined is 47 cents per gallon; if your electric car saves you 10 gallons a week, you have a "credit" of just shy of $1,000 over four years. Apparently that just doesn't transfer enough tax money to GM.
(Via Instapundit)
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THE TAX LAW DOES IT ALL
June 25, 2008
The tax law does the great and small. The tax law does it all.
It solves the energy crisis, one wood pellet at a time:
Collins indicated she favors a similar bill introduced later in the week by Sen. Chuck Grassley, R-Iowa, that would extend expiring energy credits, create new tax credits for clean-burning wood and wood-pellet stoves, and address the AMT issue.
It dries up floods:
Washington, D.C. - Senators from flood-stricken states are banding together to push for tax relief for flood victims.The Midwestern Disaster Tax Relief Bill is similar to legislation proposed following Hurricane Katrina in 2005 and a Kansas tornado in 2007.
Iowa's two senators, Democrat Tom Harkin and Republican Charles Grassley, are co-sponsors.
Or at least it dries out retirement accounts:
Under it, taxpayers could make early withdrawals of up to $100,000 from their retirement plans without being subject to a penalty.
So when you lose everything but your retirement account in the flood, you can lose that, too!
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IN DEPTH ON IRAS
June 25, 2008
The Congressional Joint Committee on Taxation has issued a comprehensive look at how IRAs work. From the overview:
IRAs play a significant role in retirement savings. For 2005, individuals contributed approximately $57.4 billion to IRAs and rolled over $231.3 billion into IRAs. At the end of 2005, approximately 51.5 million taxpayers held $3.5 trillion in IRAs, based on fair market value.There are two basic types of IRAs under present law: traditional IRAs, to which both deductible and nondeductible contributions may be made, and Roth IRAs. The principal difference between these two types of IRAs is the timing of income tax inclusion. For a traditional IRA, an eligible contributor may deduct the contributions made for the year, but distributions are includible in gross income. For a Roth IRA, all contributions are after-tax (no deduction is allowed) but, if certain requirements are satisfied, distributions are not includable in gross income. Both types of IRAs grant consumption tax treatment to retirement savings, and thetwo types are generally economically equivalent.
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DAVID CAY JOHNSTON STARTS TAX NOTES COLUMN
June 25, 2008
Former New York Times tax reporter David Cay Johnston has begun writing for Tax Analysts. His first column went online today ($link). He says he will continue to address the themes covered by his books "Perfectly Legal" and "Free Lunch":
The hard truth this column will explore is that our tax system is working against us. It is slowly making us poorer. And it is also making some of the already rich much richer, a perversion of historic proportions that few Americans grasp.
I expect to disagree with much of what he has to say, but I'm sure he'll make me think. It's unfortunate that his work now will only be fully available to Tax Notes subscribers.
The TaxProf has more.
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NOTE TO KENNETH KIES: DON'T OPEN YOUR OWN FED-EX PACKAGES
June 24, 2008
This is a dazer:
Kenneth Kies, a Washington tax lawyer and lobbyist whose firm has been paid $540,000 by UPS since 2002, sent Ohio officials a 562-page report in December 2006 alleging that FedEx misclassified truck drivers as contractors. A copy of the report, including a cover letter in which Kies asked for confidentiality, was released to Bloomberg News by Ohio officials.
So much for the confidentiality thing.
With the new federal mandatory award system for big-dollar tax informants, this could very well catch on. Shaft the competition and get paid by IRS - where do you sign up?
Via the TaxProf.
Related: A TAX SNITCH BLOG
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'SON OF MAN' ARRESTED AT ED BROWN'S FORTRESS
June 24, 2008
The Lord truly works in mysterious ways:
PLAINFIELD – A man who says God, not the United States Treasury, owns the former home of Ed and Elaine Brown was arrested at the concrete-fortified residence Sunday morning after he set up camp on the front porch.Dressed in white, the long-haired man identified himself to police only as "Son of Man" and said he worked for a priest named "Lord's Body" as part of a church called "House of Israel," according to court documents.
The Browns are the tax-protesting couple that holed up in their house to avoid imprisonment after being convicted of tax evasion. They were arrested in their house after a long standoff by federal agents posing as sympathizers.
When you are on a mission from God, you should perform better than this:
Police allege the man activated an ADT security alarm system installed by federal agents after they seized the 401 Center of Town Road property and arrested the Browns last October on warrants connected with their January 2007 convictions on federal tax evasion charges.
If you truly are on a divine mission, you should be able to disable a security alarm.
When the other officers arrived, Sonneosman consented to a search of his belongings. Inside his Bible, police found two airplane tickets from now-defunct, Hawaii-based Aloha Airlines that identified the man as "Sonne, Israel" and "Sonneosman, Israel."In his backpack, they found a government no trespassing sign, an ADT sign, and receipts from the West Lebanon Wal-Mart for a bicycle and vegetable seeds.
West Lebanon Wal-Mart? I would have thought it would been closer to Nazareth. If you are too snooty to shop at Wal-Mart, just be aware that the Highest Authority does business there.
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FOREIGN ACCOUNT JUNE 30 DEADLINE LOOMS
June 24, 2008
Do you have a foreign bank account? Do you have signature authority over a foreign bank account at work? If so, you may have a deadline coming up.
The IRS has a friendly reminder:
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, each year if they have a financial interest in or signature authority or other authority over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.
These things can surprise you. Some online gaming accounts qualify for this reporting, for example. Also, a U.S. employee who can sign checks on the company's Candian bank account may also need to file this form. The June 30 due date cannot be extended.
Why file?
Civil and criminal penalties for non-compliance with the FBAR filing requirements are severe. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.
In other words, failing to file FBAR may leave you FUBAR.
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IMAGINARY TWINS DEDUCTED FOR 10 YEARS
June 24, 2008
I thought the IRS social security number matching system was more efficient than this:
MISSOULA, Mont. (AP) - A Belgrade woman admits that, for more than a decade, she claimed non-existant twin children as dependents on her income tax returns.Ruth Amende pleaded guilty this week in Missoula federal court to five counts of tax evasion and one count of misusing a Social Security number. The 57-year-old woman admitted her purported twins - Victor and Victoria - did not exist.
Amende says she made them up to receive larger income tax refunds from both the federal and state governments.
When the government first required taxpayers to report dependent social security numbers on returns, the number of reported dependents suddenly dropped by 7 million. Yet apparently there remain a few who exist only in the taxpayer's 1040.
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IRS BUSINESS MILEAGE RATE GOES TO 58.5 CENTS JULY 1
June 24, 2008
The IRS has made an unusual mid-year change to the standard auto business mileage reimbursement rate. The rate will increase by 8 cents, to 58.5 cents per mile, starting July 1.
The rate for moving and medical mileage will also increase 8 cents, to 27 cents. The 14 cent mileage rate for charitable mileage remains unchanged.
Lots of coverage of this:
TaxGrrrl
Don't Mess With Taxes
Taxable Talk
The Wandering Tax Pro
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IGOR'S BANKER FLIPS
June 23, 2008
Former UBS banker Bradley Birkenfeld pleaded guilty to helping real estate mogul Igor Olenicoff evade $7.2 million in taxes last week. He supposedly will be spilling the beans on UBS's alleged high-end tax evasion boutique. The TaxProf has a roundup. Linda Beale links to the "statement of facts" for the plea deal that spells out how the schemes worked (Jewelry smuggling? How... common). UBS stock fell about $2 last week, to about $22.
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TAX CRIME ROUNDUP
June 23, 2008
After a long weekend, it's always nice to brace up for a week of tax practice by seeing how people get in trouble. Russ Fox starts our perp walk with some sad sacks who used the Aegis trust tax scam to get into serious trouble. He also reports on a Georgia-based construction company whose owners fell into the time-dishonored trap of using their company to pay personal expenses, including visits to strip clubs. I'd love to see the receipts they turned in for reimbursement.
Somehow Russ missed this Chicago-area case: Alleged psychic fraud charged with tax evasion:
A DuPage County grand jury has returned a two-count indictment against Tracy M. Tan for failure to file federal tax returns in 2006 and 2007.Tan, 37, remains held in the DuPage County Jail on $100,000 bond for an alleged Tarot card scam police say she and her husband ran out of their Naperville home, bilking thousands of dollars in cash and jewelry from clients who were made to believe they were cursed.
Once again, it appears that clairvoyance isn't all it's cracked up to be. Why would you skip filing your returns when you know this will happen?
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NICE DAY CAVALCADE
June 23, 2008
There's a new Cavalcade of Risk up. The current edition of the recurring roundup of insurance and risk management blog posts. As always, the Insureblog's contribution, on how "free" govenrnment health care kills, is worth the visit.
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GEORGE CARLIN, RIP
June 23, 2008
There's no information as to what his last seven words were. Kay Bell covers the tax angle, while State 29 pays homage.
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APPLICABLE FEDERAL RATES (AFR) FOR JULY 2008 RELEASED
June 23, 2008
The IRS has issued (Rev. Rul. 2008-33) the minimum interest rates for loans made in July 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 2.42%
-Mid-Term (loans from 3-9 years): 3.45%
-Long-Term (over 9 years): 4.60%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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SEND IT IN WET
June 20, 2008
A Cedar Rapids business acquaintance forwards this picture taken inside his office at the Alliant Tower last Thursday, June 12.
It's too bad for them if they had payroll taxes due June 12. While the IRS has extended deadlines in the flood zones for most taxes through July 28, the extension to remit payroll and excise taxes expired June 9. Next time they should plan their flood a week earlier.
If this wet office belonged to an accounting firm, its individual clients would all get until July 28 to pay their second quarter Federal tax estimates originally due June 15. But Iowa won't brook that sort of nonsense. Iowa's disaster deadline waiver doesn't cover individual second quarter individual estimated tax payments due June 30. So if your CPA got washed out and hasn't given you second quarter Iowa vouchers, Iowa says that's just your bad luck.
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IOWA EXTENDS INCOMPLETE FLOOD RELIEF
June 20, 2008
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
The Iowa Department of Revenue has issued its version of flood deadline relief. Iowa's relief is less generous than Federal relief in two important ways.
Iowa will automatically extend deadlines for returns and payments due from May 24 through June 26 to July 28, 2009. This is much less generous than the federal relief, which applies to payments due from May 24 though July 28.
The relief is also less generous in that it does not extend the deadline for the 2nd quarter individual estimated tax payment.
The Iowa release is reproduced in full below.
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IRS CLARIFIES FLOOD DISASTER TAX DEPOSIT DEADLINE
June 20, 2008
Responding to our query about some nonsensical dates in their Iowa flood disaster tax deadline relief web site, the IRS sent us the following (my emphasis):
Thank you for contacting the IRS Web Site Help Desk.Thank you for notifying us of a typo in the article on Iowa flood relief (http://www.irs.gov/newsroom/article/0,,id=183404,00.html).
There is indeed a typo in the sentence you quoted. The sentence you sent us said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 28, 2008, provided the taxpayer made these deposits by June 9, 2008.' You suggested that the last date should read June 29 instead of June 9 to make sense. The correct sentence should have said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 9, 2008, provided the taxpayer made these deposits by June 9, 2008.' That is, it was the date of June 28 in the middle of the sentence that was incorrect, not the mention of June 9 at the end of the sentence, which is in fact the correct date. We have now corrected the text on the Web site.
Again, thank you for pointing out that there was an error in the sentence.
While that clarifies things, it's rather harsh. Many offices in Downtown Cedar Rapids, for example, were destroyed in the floods, and taxpayers are just now getting back to them more than a week after they went under. It's strange to cut off deadline relief just at the point Cedar Rapids was drowned.
For filings and tax payments other than payroll and excise tax deposits, taxpayers in Iowa disaster areas have until July 28 to make payments otherwise due between May 24 and July 28.
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DEFENDING YOUR DEDUCTIONS
June 19, 2008
If a canceled check were all you needed to satisfy an IRS agent that you are entitled to a business deduction, audits would hold few terrors. Unfortunately, it's not enough to just spend money to get a deduction. You need to show that it is a business deduction. Paperwork matters.
If you are in a regular profit-seeking business with a decent accounting system, most of this takes care of itself. Your accounting records will generate the purchase orders, invoices and payroll records for most of your day-to-day deductions. (And if you don't have a good accounting system, you should get one, and tax is the least of the reasons you need to). But some deductions require support beyond what you might normally get from your bookkeeping records.
If you want to deduct travel or meals and entertainment expenses, the tax law requires you to keep records that show:
- the amount of the expense;
- the time and place of the travel or entertainment;
- the business purpose;
- for business entertainment, the business relationship with the person being entertained.
If you want to deduct a charitable contribution, you at least need a canceled check or credit card statement for a gift up to $200. For larger gifts, a written receipt from the recipient listing the amount of the gift and the value, if any, received for the donation is required. Special rules apply when you make gifts of property; if you donate property worth over $5,000, other than publicly-traded securities, you need to get a qualified appraisal.
The IRS has more on documenting travel, meal and entertainment expenses. To learn more about documenting your contributions, visit the Tax Girl.
(This entry originally appeared at IowaBiz.com. Your regular posting resumes tomorrow).
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DON'T TRY THIS AT HOME!
June 18, 2008
Sometimes small businessmen must feel that they shouldn't so much as go to the bathroom without checking in with their professionals. No, you don't have to raise your hand, just go.
But sometimes you should call your tax guy. Anything involving the ownership of your business is one of those times.
An old friend called sometime back and told me he had put the ownership of his business in an S corporation. And it's doing great, it really has increased in value, and it generated enough funds that he had his corporation invest in another venture. Oh, and he gave an ownership interest in his corporation to a principal in that new venture. What did he have to do to make sure that the co-owner didn't get any income from the old venture?
Short answer: it was too late. Longer and more expensive answer: he has to undo what he did and restructure the ownership of his company, possibly incurring taxable gain to himself or his co-venturer.
Sadly, it would have been easy to achieve my friend's goals by doing things right in the first place, either by having the S corporation make a tax-free distribution of funds for the new venture, or by structuring the new venture as a partnership with the co-owner as a partner. But once the paperwork for the old corporation has been signed and checks have been cashed, suddenly there is potential tax all over the place when you try to undo it.
The moral? When you mess with the ownership of your business, it's a lot cheaper to call a good business lawyer and a tax guy before you do the deal; it costs a lot more to repair a deal than to do it right in the first place.
(Originally posted at Iowabiz.com)
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BRIEF BREAK
June 18, 2008
I am taking two days off for a maritime excursion to Eastern Iowa (Yes, I really go all out for a 20th wedding anniversary). To keep you coming back until Monday, I will have a scheduled post or two, including a couple of pieces you may have missed from the defunct IowaBiz blog. If this isn't enough excitement for you, check out the Tax Nerds and other worthly blogs on the right side of your screen.
See you Friday!
flickr photo of Downtown Cedar Rapids by Looondawg
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HOW YOUR BUSINESS INSURANCE RECOVERY IS TAXED
June 17, 2008
You've been hit hard by the floods and storms. The building with your business was wiped out. You paid $200,000 for the building long ago. After depreciation, the building basis was only $50,000. The building had gone up in value and was insured for $1,000,000, and the insurance company is writing you a check for the whole amount.
What does it mean for your taxes?
The tax law normally treats a business casualty loss as an "involuntary conversion." The insurance proceeds are normally taxable, but Sec. 1033 lets you avoid current tax if you invest the insurance proceeds in "like-kind" property by the end of the second year following the year the recovery is paid. The tax law allows you exclude gain if you reinvest the insurance proceeds in property "similar or related in service or use," but only if you file an election under Sec. 1033.
What does "similar or related in service or use" mean? Unfortunately, the tax law is fuzzy on this. If you invest the proceeds in continuing the same business that you were in before, that should be fine. If you decide to invest in a different line of business, that can be trouble.
The requirements for tax deferral are easier for businesses in a presidentially-declared disaster area. Such taxpayers only need to re-invest insurance proceeds in tangible property to be used in any trade or business, under the special rule of Sec. 1033(h)(2).
The catch? To the extent you avoid recognizing gain under the Sec. 1033 involuntary conversion rules, you don't get basis for the property purchased with the insurance proceeds. The taxpayer who used $1,000,000 in proceeds to buy a building and equipment, and who elected not to pay tax on the proceeds, would only get to depreciate the $50,000 basis that was in the old building. What are the rules for depreciating the replacement property? We'll save that for another post.
Links:
IRS Publication 547, Casualties, Disasters and Thefts
IRS 2007 Disaster Losses Kit for Businesses.
List of Iowa's Presidentially-declared disaster areas.
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WE REMAIN DOOMED. OR NOT.
June 17, 2008
Doomed? Professor Maule makes the case.
John Tierney at the New York Times argues the other side:
Before any other readers post another comment about “overpopulation” and doomsday scenarios, I suggest they take a look at my colleague Donald McNeil’s excellent article on Malthusian mistakes. As he notes, the current forecasts of energy and food disasters sound just like the ones made during the 1970s. Similar apocalyptic forecasts were made in the 1940s (in books like “Our Plundered Planet”) and in other eras by prophets following in Malthus’ tradition.These prophets have always claimed to be seeing the big picture, but they ignore thousands of years of history during which the prices of natural resources fell and the wellbeing of humans improved. Yes, there were sometimes shortages; yes, there were plagues and wars and natural disasters. But while empires came and went, humans overcame problems and gradually improved their lot.
(via Instapundit)
Now that the water is receding, I'm feeling more optimistic. If you want to see some good pictures of the flooding in Iowa City and the University of Iowa campus, go to John Deeth's blog and scroll down. I got the pointer from Side Notes, whose posts give an idea of how complicated little things, like getting to work, keeping appointments and meeting deadlines can be when all the roads are closed and the bridges are all out.
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TUESDAYS WITH PROF. MAULE
June 17, 2008
Villanova tax professor Jim Maule has a lengthy discussion of the execrable Sec. 409A deferred comp rules passed in response to the Enron and WorldCom scandals. It addresses the difficulties for the IRS in administering a totally botched piece of legislation:
Though it's difficult to oppose Treasury and IRS "bailouts" of Congress in at least some of the situations in which they have done so, the temptation is oh, so strong, to let Congress reap what it sows, just to teach the it and the nation that electis it a lesson or two. Imagine if the tax law were administered by the IRS as literally drafted. It could be a nightmare and then some. It might just spark some genuine change in how Congress does business and it might just bring the quality of Congressional work product to a professional level.
The worse, the better? Well, at least with tax legislation, we're sure giving the worse a try.
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LOW MILEAGE, ONE OWNER
June 16, 2008
As the floodwaters recede, it's time to take the dry, slightly-used sandbags to wherever you take such things. This was the lunchtime scene outside Tax Update World Headquarters today.
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DISASTER CASUALTY LOSS REFUNDS
June 16, 2008
If you have uninsured losses from the Iowa floods and are in a covered disaster area, you might be able to get some needed rebuilding cash by deducting this year's loss on last year's return. The tax law permits taxpayers in disaster areas to choose to deduct their casualty losses on either the return for the disaster of the return for the prior year. That means a calendar year business could file an amended 2007 return to claim the loss and generate a refund. They could also claim it on an extended 2007 return that has not yet been filed.
Remember, personal casualty losses are subject to a $100 deductible and a 10% of AGI floor.
Links:
IRS page on Disaster Assistance and Emergency Relief for Individuals and Businesses
IRS Publication 547, Casualties, Disasters and Thefts.
The sandbagged entrance to the Vaudeville Mews on Fourth Street in downtown Des Moines Sunday morning
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DEADLINE RELIEF FOR IOWA STORM DISASTER AREAS
June 16, 2008
6/20/08: SEE UPDATE BELOW
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
The IRS has extended tax deadline relief to additional counties in Iowa as a result of the recent storms and flooding. The relief is available to:
...individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose books, records, or tax professionals’ offices are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area are eligible for relief.
Affected taxpayers can make tax payments and file returns that would otherwise be due between May 25 and July 28, 2008 as late as July 28 without penalty.
The following counties are covered:
Adams, Benton, Black Hawk, Bremer, Buchanan, Butler, Cedar, Cerro Gordo, Delaware, Fayette, Floyd, Hardin, Johnson, Jones, Linn, Louisa, Marion, Muscatine, Page, Polk, Story, Tama, Union and Winneshiek.
The IRS says they will automatically apply the relief to taxpayers in the affected areas who make filings or payments that otherwise would be late.
The IRS will also waive penalties for affected taxpayers for late payment of employment tax deposits due between May 25 and June 28 June 8 if the payments are made by June 29, 2008 (the IRS release says June 9, which is obviously a typo).
UPDATE: After inquiring with the IRS about the original IRS release, which said that employment tax payments made between May 25 and June 28 could be made by June 9, I received the following response (my emphasis):
There is indeed a typo in the sentence you quoted. The sentence you sent us said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 28, 2008, provided the taxpayer made these deposits by June 9, 2008.' You suggested that the last date should read June 29 instead of June 9 to make sense. The correct sentence should have said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 9, 2008, provided the taxpayer made these deposits by June 9, 2008.' That is, it was the date of June 28 in the middle of the sentence that was incorrect, not the mention of June 9 at the end of the sentence, which is in fact the correct date. We have now corrected the text on the Web site.Again, thank you for pointing out that there was an error in the sentence.
An Iowa Department of Revenue representative told us that the department is considering whether it will extend filing deadlines for storm-affected taxpayers.
Iowa has also extended limited disaster relief. The Iowa relief includes withholding taxes, but does not include individual estimated taxes. This is a lame and baffling omission.
Link: IRS release on Iowa storm relief.
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BACK IN BUSINESS
June 16, 2008
We were able to re-install the network equipment yesterday, and we are open as usual this morning. We are very lucky, as the downtown levees held.
Our neighbors in the Birdland area weren't so fortunate. North High suffered heavy water damage, as did many homes and businesses.
Things are much worse in eastern Iowa. The Cedar Rapids business district was devastated, and much of Iowa city is underwater, including Hancher Auditorium on the University of Iowa campus. You might want to consider a donation to the Salvation Army, as they have been working hard to take care of the many folks flooded out; or you can call the Iowa Concerns Hotline at 800-477-1985
UPDATE: I am remiss in not acknowledging the kind words from the TaxProf, Kay Bell, Russ Fox and Robert D. Flach about our office bug-out. Thanks for thinking about us.
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WE INTERRUPT THIS OFFICE
June 13, 2008
The City of Des Moines has asked business downtown to clear out, as it is touch and go tonight on the levees. We will be taking our network down this afternoon, so we might be hard to reach by e-mail or phone. If you need to reach Joe Kristan, try joekristan -at - mac - dot - com.
We should be back in business sometime this weekend, either at the office or at our backup site.
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EXPECT DELAYS AT 7TH AND MLK
June 13, 2008
It's a bit deeper than yesterday.
The bed of the Raccoon River used to be about where Martin Luther King drive is downtown. It must want to return home.
Compared to Cedar Rapids and other places in Iowa, we've been very fortunate so far.
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IN HER MAJESTY'S SNEAKY SERVICE
June 13, 2008
The British tax authorities put a tax evasion hotline in place. It hasn't been a roaring success:
Her Majesty's Revenue and Customs new tax evasion hotline has been flooded with calls making malicious and unfounded allegations, MPs have been told.One woman made 68 calls to report her husband - none of which had led to an investigation, the House of Commons Public Accounts Committee was told.
Dave Hartnett, acting chairman of HMRC, said he was 'disappointed by the quality' of calls to the line aimed at catching income tax cheats.
Not her "Ex" husband? That must be a fun relationship.
He said HMRC investigators used 'data matching' techniques but also scanned the Yellow Pages for new nail bars rather than waiting for local tax inspectors to report them.
Translation: "Nail Bar" is not a place where you go to get, er, nailed. Here we call them manicure salons. I think.
Inspectors also went after high value tax evaders by keeping an eye on individuals who were buying expensive cars or boats.
Implying that the only way you can have enough money after taxes to buy a boat is to cheat. Nice.
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TAKING IT DEEP
June 13, 2008
Parking will be a problem for tonight's scheduled I-Cubs game at Principal Park.
No word on whether there will be ferry service to the ticket windows.
They just might need to reschedule.
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SNEAKING INTO CENTER FIELD
June 12, 2008
The Des Moines river creeps over the levee to the edge of Principal Park (with the blue roof), home of the AAA Iowa Cubs, in a picture taken from Tax Update World Headquarters.
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THINGS LIKE THIS MAKE YOU NERVOUS
June 12, 2008
Water is backing up from the sewers on both lanes of 7th Street at MLK on the south side of Downtown Des Moines.
Meanwhile, nearly two inches of rain has raised the Raccoon River 2 1/2 feet upstream at Van Meter, to 5 1/2 ft over flood stage.
It's coming this way to meet the expected record crest of the Des Mones River, right here downtown. Oh, boy.
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PREPARING FOR THE WORST
June 12, 2008
While several of Iowa's larger towns have been already hammered by floods, Des Moines still awaits the worst. The crack Tax Update news team investigated preparations downtown last night. Some of our findings:
The Des Moines river is high, for one thing. Notice the tops of the lampposts just sticking out of the water where the Simon Estes Amphitheater usually is. They are just as tall as the ones you can see further up on the bank.
This new wine shop and wine bar on Court Avenue was preparing for its grand opening.
Steps are being taken to preserve essential services.
If there's one thing we've learned over the years, it's that you have to take disaster preparation into your own hands -- like this well-prepared couple. We assume that FEMA will provide floaties and snorkels so we can all get to our FEMA housebouts.
The news isn't reassuring:
Indeed, officials said the next 24 hours could be the most important in Des Moines' 157-year history.The possibility of massive flooding from the Des Moines and Raccoon rivers, coupled with heavy rain that began early Thursday, greatly increased the chance of widespread damage and set the stage for a prolonged recovery that will be made even more difficult by closed streets, filled basements and watery obstacles for police officers and firefighters.
and:
Flood-control officials predicted the Des Moines River on Saturday will surpass 1993's record height, a level five feet higher than what was predicted a day earlier. Moreover, the river is expected to hover near that record for at least three days.
On the good side, walking up to the 14th floor if the floods take out the electricity would be excellent exercise.
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TAX THE ENERGY PROFITEERS!
June 12, 2008
The price of fuel is soaring, enriching the politically-entrenched industry that is reaping billions thanks to government policy and high prices. The Tax Policy Blog has a solution: a windfall profits tax.
According to some in Congress, a windfall profits tax on oil companies would lower the price of gasoline (which is ludicrous). Then by that logic, wouldn't a windfall profits tax on farmers also lower the price of food?
It does have a certain alien logic.
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TAX POLICY CENTER OUTLINES CANDIDATE PLANS
June 12, 2008
The center-left Tax Policy Center has produced an analysis of the Obama and McCain tax plans. The TPC Blog, TaxVox, summarizes:
In the first detailed analysis of the Barack Obama and John McCain tax plans, the Tax Policy Center has run their proposals through the Big Computer and discovered that their schemes are, well, painfully predictable. Each would raise the national debt by trillions of dollars. Obama would use the money to provide modest tax cuts to low- and moderate-income people while imposing stiff tax hikes on the very wealthy. McCain would cut taxes a bit for the working-class and a lot for the rich.
The only comfort is that they are both politicians, so there's a good chance they are lying.
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INTANGIBLE INCOME TAX NEXUS IN IOWA?
June 12, 2008
Can you be required to pay Iowa corporation income tax if your only presence in Iowa is bits and bytes? A memo released this week by the Department of Revenue says "yes."
The memo deals with a taxpayer that licenses software used to prepare some unspecified government reports to Iowa users. From the memo:
As noted in the example, it does not matter if the fee is considered a royalty or something else. If the fee is received for the use of the software, then it was earned from intangible property located or having a situs in Iowa. Therefore, this activity would be sufficient to create Iowa corporation income tax nexus.
So another happy customer gets to pay Iowa's highest-in-the-nation corporation income tax.
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BECAUSE IT WORKED SO WELL THE LAST TIME
June 12, 2008
"Taxwriters Again Turn Attention to Housing Stimulus"
Headline in Tax Notes Today this morning ($link)
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VENICE ON THE PRAIRIE
June 11, 2008
2nd and Court, looking Southeast, Downtown Des Moines, around lunchtime today.
UPDATE: Eyewitness reports say this was a sewer backup that has drained back out.
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FLOOD WARNING
June 11, 2008
The "surge" from the opening of the dam gates upstream from Des Moines should get here around noon. We can hardly wait.
Meanwhile, from the "great moments in ad placement" department, look at this from the DesMoinesRegister.com story on the flood warning:
Fish Iowa! Right in your own backyard! Or maybe even your living room.
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S CORPORATION HEALTH INSURANCE: SHOULD YOU BOTHER WITH THE PAPERWORK?
June 11, 2008
A reader comments on the old post "S CORPORATION HEALTH INSURANCE: READER QUESTIONS":
For the 2007 tax return 1040 with a subchapter s corporation (husband/wife) our 27-year accountant listed health care premiums on line 29 of the 1040. I've advised him of the 2008-1 requirements from your website that the premiums need to go through the payroll and appear on the W-2, Box 1. He states this is easier and we get the deduction anyway, why put us through that hassle! Is he right?
Well, Notice 2008-1 doesn't say it's optional:
In order for the 2-percent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee’s Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040, U.S. Individual Income Tax Return.
While it isn't 100% clear that the IRS would win if pushed in court, it is clear what they say you "must" do - have the S corporation pay or reimburse the amount with after-tax dollars. The notice doesn't say "you can ignore this and get the deduction anyway." If you fail to follow the instructions in Notice 2008-1 and an agent finds it, you can be confident that she will write it up. Then you have to waste time and money fighting, and you might lose anyway, so you lose either way, even if you ultimately get the deduction.
While it is a minor hassle to follow the rules, it's very minor, especially if you don't have to do it retroactively. In the long run, it's a lot easier than fighting it on an exam.