There are only a few hours left in 2009. Still, it's enough for a few year-end tax planning moves, if you hurry!
Capital losses: If you sell stock at a loss today, you can take the loss. You can deduct capital losses to the extent of capital gains, plus (if you are an individual) $3,000. This doesn't work for short sales, which are considered closed on the settlement date, rather than the trade date; also, beware the "wash-sale" rules.
Live another day. If you survive today, but not tomorrow, you may avoid estate tax altogether, assuming you have enough assets to worry about the estate tax.
Or don't. If your estate is under $3.5 million, maybe this is a good day to check out. Your estate will be too small to pay estate tax, but your heirs will benefit from a step-up in the basis of your assets to their date-of-death value.
Remember, the official position of the Tax Update is that there's no good day for dying.
You also have time to make some charitable contributions, either by getting the check in the mail today or by using your credit card. If you are feeling charitable, but you don't know what to do, here are some charities that I like:
Iowa Donor Network, the Iowa organization that gathers and allocates donor organs.
Update from the comments:
International Development Enterprises. All money donated to them goes towards developing techonology suitable for poorer countries, which is then sold in the free market. Water pumps, water purifiers and so on. Free market and by design self sustaining, as people have to choose to buy it.
Also, the Center for Agricultural Law and Taxation does a wonderful job. Unfortunately, they don't have an online credit card donation page (ahem, Roger!).
If you want some more ideas, Kay Bell has a roundup of year-end tax moves.
This is the last of our 2009 year-end tax planning tips. See you next year!
This is the last installment of the premier roundup of insurance and risk-management blog posts for the '00s. It's full of good stuff, including Hank Stern's discussion of how health care reform affects the life insurance market.
Russ Fox selects a worthy "Tax offender of the year."
Watch this space for our upcoming vote for the 2009 "taxpayer of the year." Why so late? The year isn't over!
How to solicit comments when you really don't want to hear them:
No one from the public attended a state budget hearing Wednesday - possibly because no one knew about it.
The only notice for the public hearing was tacked up inside the Iowa Capitol. A nonpartisan Capitol staffer was the only person to drop in, after spotting a notice on a bulletin board while the hearing was in progress.
So much for the age of transparency. It's a new approach from a state government that not long ago was posting social security numbrers -- including the Governor's -- on the web.
Culver's budget director, Dick Oshlo, defended how the hearing was handled when questioned by The Des Moines Register.
No tentative budget for fiscal year 2011 is available for the public yet, so he expected attendance to be low, he said.
However, he quickly scheduled another hearing for 1 p.m. Monday and said state officials will do better in making sure Iowans know about it.
Oshlo said Wednesday's hearing was meant "to take public comments." It's required by the Iowa Code, but it's usually considered a formality, he said. "Historically, few people have ever come," he said. "We followed the same process as we have in the past."
A billion-dollar deficit just might make folks a bit more interested.
"Future of biodiesel depends on federal subsidies." And our Congresscritters vow to make sure they happen.
As the tax year winds up, businesses are busy accruing year-end expenses to get the deduction into this year. They need to be careful: if you owe money to a cash-basis "related party," it's not enough to accrue the expense this year. You need to pay it to deduct it.
Code Section 267 only allows a deduction to a related party "as of the day as of which such amount is includible in the gross income of the person to whom the payment is made." That's no problem if the "related party" is on the accrual method, because they will be accruing the income at the same time you accrue the expense. But if the related party is a cash-basis taxpayer, you have to pay.
Who is "related?" It's a pretty wide net, but most problems arise with closely-held accrual-method businesses and their cash basis owners. If you have a C corporation, only owners of more than 50% of the stock, and their families (siblings, spouses, ancestors and descendants) are related. For pass-through entities -- partnerships and S corporations -- any owner is a related party, along with members of owners families and anybody related to the family members.
The broad definition of related parties for pass-throughs means that if a calendar year accrual-method S corporation accrues a bonus for a 2009 shareholder's nephew payable in January 2010, the deduction gets deferred until 2010. The same thing applies to interest expense, rental expense, or any other expense owed to a cash-basis related party.
The year is almost over. Time to review the Tax Update's 2009 year-end planning tips!
Nick Gillespie at Reason.com:
There is a looming showdown in American society between public-sector employees and the rest of us, in terms of job security and, especially, unsustainable gold-plated retirement and health benefits that are working hard to bankrupt whole states such as California, New York, and New Jersey
Remember that the next time they want to raise our taxes and we're told it's a choice between "individual greed" and "the collective good."
Mr. Geithner famously blamed TurboTax for his skipping out on $35,000 of self-employment taxes on his foreign service income, which he finally paid without penalty to buy a ticket to his new job of running the tax system.
UPDATE: More from the TaxProf.
The District of Columbia Government is paying $7 million for a company to make a 1.5 mile move
within the District.* Tax Policy Blog reports:
I'm pleased to hear that Mayor Fenty and much of the D.C. council (the vote was 7 to 5) recognize that D.C.'s taxes are high and keep businesses away. But rather than fix that problem for everyone, they are instead choosing to grant one exemption to a politically connected business in a sweetheart deal. (The $7 million is separate from $12.5 million the company may get in special tax breaks that high-tech firms but no one else are eligible for.)
A classic example of picking the taxpayers' pockets to subsidize the well-lobbied.
*Mary O'Keeffe corrects me; it's across district lines. It's still absurd.
At TaxVox, Howard Gleckman forecasts the health care outcome:
The House would fund a big chunk of health care with a 5.4 percent surtax on those making more than $500,000 ($1 million for joint filers). By contrast, the Senate would raise the Medicare tax on people making $200,000 or more, impose an excise tax on high-cost health plans, and enact a kennel full of cats-and-dogs revenue-raisers. The most likely outcome: a split-the difference compromise that will raise taxes on high-earners and, for the first time, limit the tax subsidy for some employer-sponsored insurance policies.
Notice that "doing something that makes sense" isn't on the menu.
Christopher Bergin notes the weasel-like push for "a bipartisan fiscal task force to address the nation’s long-term budget crisis."
Just remember: "bipartisanship" is what happens when the Crips and Bloods come across an untended armored car together.
S corporation health insurance is one of the most popular items on the internet, if the searches that get people to the Tax Update are a fair measure.* It seems folks are looking for guidance on how to report S corporation fringe benefits on year-end paychecks and W-2s, so let's do a quick review of how shareholders of 2% or more of an S corporation should report their health insurance and other fringes. All references to "S corporation shareholders" are to those shareholders who own 2% or more of the company's stock.
Health Insurance for S corporation shareholders is supposed to be on the shareholders' W-2. It should be subject to federal withholding, but it should not be subject to FICA or Medicare tax. It is also subject to state tax and withholding in most states (including Iowa), but not all of them (for example, Pennsylvania).
If the health insurance is properly reported on the shareholder's W-2, it should be deducted in full "above the line" on Line 29, page 1, form 1040.
The IRS takes the position that W-2 reporting is the only way to report S corporation shareholder health insurance. They say that it is improper to add it back on the shareholder K-1, and that the shareholder deduction is available only if it is reported on the W-2.
If an S corporation shareholder pays for his own health insurance, he should submit it to his company for reimbursement before year end. The reimbursement should then be included on the shareholder W-2. The IRS says this is the only way for an S corporation shareholder to deduct personally-paid health insurance expense -- again on Form 1040, line 29.
If the child, grandchild, parent, or spouse of an S corporation shareholder works for the S corporation and is covered by the corporation's insurance plan, she is considered an S corporation shareholder and is subject to the same rules as a direct stockholder.
What about Medicare premiums? Voluntary medicare premiums reimbursed or paid by the S corporation and included in the shareholder's W-2 qualify as health insurance.
If the S corporation contributes to a shareholder's health savings account, it is included on the shareholder's W-2 (but not for FICA or Medicare) and is deducted on Line 25 of Form 1040, assuming the shareholder otherwise qualifies for an HSA.
The IRS position on S corporation shareholder health insurance is spelled out in Notice 2008-1.
*I know, they aren't.
This is another installment in the Tax Update's 2009 year-end tax tips series. Collect them all!
The Governor commissions a study of Iowa's tax credit programs. The study fails to find solid evidence that even one of the 30-odd economic development credits are good for the state. So state officials take the study seriously and immediately move to repeal the credits and lower the tax rates for all Iowans. Right?
It is to laugh. The Des Moines Register reports:
State officials say they believe most of the five credit programs provide substantial benefit to the state, but several have yet to document a clear return on investment.
Proponents of the tax credits caution that the incentives trigger billions of dollars of economic activity and new jobs for the state. Some contend the credits could do much more if legislators saw fit to expand those programs.
Jack Porter, a preservation consultant with the Iowa Department of Cultural Affairs, said the state's $50 million tax credit program for historic and cultural preservation is leveraging federal spending, revitalizing main streets across Iowa and boosting property tax rolls.
No, we can't prove it, but boy, it sure is working! Give us more money!
"I don't think anyone could have predicted the demand we're seeing," Porter said. "There's almost a half-billion out there in (program applications)."
People will apply for government handouts? Who knew?
Of course, any time you subsidize remodeling an old building, you take money out of the hands of the unsubsidized landlords, not to mention the rest of us saps who pay the bill. It's not as if we would be burning the money for fun if the state wasn't taking it from us to pay handouts. Yet Mr. Porter says he spends it better than we possibly could. He's not the only one:
But Dave Roederer, executive director of the Iowa Chamber Alliance, said his organization's review of five economic development tax credits used most frequently by businesses - including for distressed "enterprise zones" to high-quality jobs to new jobs and capital investment - found the state gave up just 5.5 cents for every dollar invested by companies.
The mix of credits, issued over 6½ years leading up to this summer and worth $667 million, triggered $12 billion in investment, according to the Chamber Alliance review.
Just like Mr. Porter, Mr. Roederer ignores the way the state picks the pockets of unsubsidized businesses to pay for these credits, and all of the economic activity that would happen if Iowans didn't have to pay the taxes that finance the subsidies. Further, he assumes that none of the "investment" would have happened without the corporate welfare; in real life, businesses in the corporate welfare market often make their location decisions and then harvest whatever tax breaks might be available where they are locating. But economic development professionals like Mr. Roederer would have to find other work without our tax dollars to hand out.
Real economic growth comes from the home-grown entrepreneurs who are too busy and too small to spend their time working with fixers, lobbyists and legislators to harvest tax credits. The high tax rates needed to give money to friends of Mr. Porter and Mr. Roederer are poison to real entrepreneurs. Until something like the Tax Update's Quick and Dirty Iowa Tax Reform is enacted, entrepreneurs will continue to locate elsewhere.
Kenny Rogers famously said "You never count your money when your sitting at the table. There'll be time enough for counting when the dealing's done." The IRS has often questioned this advice, saying you should compute your gambling winnings as you go.
Russ Fox reports that the Tax Court is on Kenny's side. The court yesterday favorably quoted this IRS position:
The better view is that a casual gambler, such as the taxpayer who plays the slot machines, recognizes a wagering gain or loss at the time she redeems her tokens. We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized.
In other words, count your money when the dealing's done. But Mr. Fox, a gambling maven, adds:
There is a major caveat to this decision: You need good records. By far, the lack of backup documentation is what trips us most gamblers in audits. For those gamblers who do keep good records, the Tax Court has given you a very nice belated Christmas present.
Well, perhaps not:
Texas, with a pretty good tax code and low tax burden, just relies on advertising those facts to everyone with no special favors... What sounds like it will be more successful -- low to medium tax burdens for everyone, or the Michigan and Ohio approach of low taxes for a few politically favored businesses and really high taxes for everyone else?
Look for Iowa to continue to embrace the high-taxes-and-favors approach.
It looks like the housing market may have have a nasty withdrawal episode when the tax credits expire. Of couse, like any good junkie the housing industry will beg for just one more fix, over and over.
But of course!
Let's hope he doesn't forget the little people:
The Best Law Prof Blogger, with the best tax blogger located between 6th and 7th streets in Des Moines.
There isn't much time left in your 2009 year-end planning, but there is still time to save some real money this year. If you feel charitable towards private elementary schools, the Iowa School Tuition Organization Tax Credit makes makes certain donations to fund private elementary schools nearly free, after tax.
The STO credit is a 65 percent state tax credit. While there is no Iowa charitable deduction for STO donations, the federal deduction is unaffected. Here's how it works for a hypothetical top-bracket non-AMT Iowa taxpayer (ignoring phaseouts) in dollars and cents for a $100 gift -- a net cost after tax of $10.73:
There is a catch: Iowa limits the annual amount of gifts eligible for this credit. If the credit is oversubscribed, you may not get a full credit. Your STO may be able to give you some guidance on whether there is still room for the full credit this year. Here are some to choose from:
While these credits may be less than ideal from a policy standpoint (the Tax Update is more of a voucher fan), you go to war with the tax law you have. If this is where your charitable inclinations lie, the Iowa STO credit makes contributions to student tuition organizations a tax-efficient way to go.
As the decade winds down, wind down with the Tax Update's 2009 year-end tax tips!
Republican Rod Roberts is making it a centerpiece of his campaign, reports O. Kay Henderson:
Roberts points to states like South Dakota which do not charge corporations an income tax.
"I know folks in Sioux City would be very interested in this proposal because they have to compete with a state that has a zero corporate income tax," Roberts says. "And it’s extremely difficult for them not only to attract new businesses but to maintain the businesses that they have."
Apparently Bob Vander Plaats is also talking about repealing the corporation tax.
Repealing the corporate tax is, of course, a key part of the Tax Update's Quick and Dirty Iowa Tax Reform Plan.
While I fully support the right of consenting adults to engage in finance, however foolishly they may do so, I can't help but smile at reports that Jackson Hewitt customers may lose the opportunity to engage in some of the most expensive borrowing out there -- and that the franchise tax prep firm's stock is taking a beating as a result.
They can't all be California girls, but maybe we can all be California taxpayers -- at least if Arnold Schwarzenneger gets the Federal bailout he's begging for to pay for his state's feckless spending.
Martin Sullivan repeats the obvious: Green Subsidies Kill Job Creation.
Unless you think all of those shuttered ethanol plants littering the Iowa landscape are really a good use of our money and the time spent building them.
If you have filed a return taking a wrong position -- say, omitting income or taking a flaky deduction -- is it a bad idea to amend the return and fix it? If the IRS hasn't sniffed it out yet, Jack Townsend makes a strong case for fixing the problem with an amended return.
In this season of frantic giving, don't forget the $13,000 per-donor, per-donee gift tax exclusion. Unless you have great confidence that you will die next year AND that Congress won't restore the estate tax retroactive to January 1, 2009, anybody who is a candidate for the estate tax should consider using the gift tax annual exclusion to get money out of the estate. A couple with four kids maximizing annual giving can reduce thier taxable estates by $520,000 over five years, not even counting appreciation of the gift.
If it's worth doing, it's worth doing right. To get the gift to count in 2009, here are some tips:
- If you're writing a check, march the lucky recipient down to the bank to cash it by December 31. Checks not cashed by year-end normally won't count as 2009 gifts.
- If you are donating private company stock, make sure the corporate secretary records the transfer on the company's books by year end. Also make sure the tax returns reflect the gift - if you make a December 25 gift of S corporation stock, make sure the donee gets a K-1 showing income for the 12/25 through 12/31 period.
- If you are donating public company stock, make sure it's in the donee's brokerage account before the end of the day December 31.
- If you are giving a disused sports facility, see your attorney; you can afford one.
Remember, if you miss the 2009 annual gifting exclusion, it's gone forever. 2009 isn't coming back.
Our 2009 year-end tax planning series concludes next week. See you then!
Now that it has already squandered millions of dollars on phantom film expenses, Iowa has gotten around to "clarifying" the rules governming the program to take your money and give it to Hollywood. A FAQ issued yesterday by the Department of Economic Development "clarifies" that some of the worst abuses of an already-stupid program will no longer be tolerated:
FAQs Re: “Payment”
1. Are Deferred Payments qualified expenditures? No, the statute requires "payments," not promises to pay.
2. Are In-kind Amounts qualified expenditures. No, In-kind amounts are not "payments."
These address sleazy tricks outlined in the accountant's report on the program, where credits were allowed before money was spent, or even for non-cash "expenditures" like listing somebody in the film credits.
FAQs RE: Authorized Types of Expenditures
1. Are sponsorships paid by the film makers to other organizations qualified expenditures? No, these sponsorships are not services directly related to the registered project.
These "sponsorships" were paid in pretend money -- see "in-kind" expenditures, above.
And there's a new one that wasn't in the accountant's report:
2. Are "Marketing Fees" for Actors qualified expenditures? No, the use of marketing fees for actors is a way to avoid application of the pre-July 1 prohibition against labor and personnel payments to actors being included as qualified.
It's not a labor payment to a movie star... it's a marketing fee! That's the ticket!
The FAQ also denies credits for advertising costs, professional fees, tax credit broker fees, and interest payments. It tries to limit the use of strawmen Iowa LLCs to pretend that money being paid to Hollywood is really spent in Iowa.
And the issue that exploded the program in the first place:
5. Are vehicles qualified expenditures? Vehicles are listed among the specifically enumerated items of personal property that qualify as qualified expenditures. However, the purchase of a vehicle for short-term use of a member of the film crew or cast while the project is filming in Iowa is not appropriate and is not a qualified expenditure. The rental of a vehicle for the use by a crew or cast member during the Iowa production is most likely a qualified expenditure, if the rental is directly related to the project.
But good luck getting that Benz back, Iowa.
The IDED also issued an updated list showing the status of the various film projects under way, so you can get a warm fuzzy feeling for how Hollywood is spending your money.
TaxVox bravely narrows down a crowded field to select the ten worst tax ideas of 2009.
TaxGrrrl explains to a reader that the above-the-line deduction for new car sales tax requires that the car be "new," not just "new to you." Nice try, though.
The estate tax will go away January 1, but will spring back to life no later than January 1, 2011 -- and probably sooner. What to do? Roger McEowen has some thoughts.
Love is a many-splendored thing, but love is even better when it saves taxes. Your marital status at year-end is your filing status for the entire year, so maybe you want to run down to the courthouse and tie the knot before the ball drops before midnight January 1, local time. Sure, call me a hopeless romantic. The Tax Update just rolls that way.
A quick trip to the preacher may be in order in the following circumstances:
- One prospective spouse has a big capital gain, and the other has capital losses that would otherwise go unused.
- One of you has passive income, the other has passive losses. If you are married on the last day of the year, the losses can offset the income on a joint return.
- One of you has substantial income in 2009, and the other doesn't. If you have only one income between the two of you, you'll save taxes on a joint return because of the wider tax brackets on a joint filing.
- If you are Iowans, and one of you has pension income, marriage will enable you to exclude up to $12,000 from your Iowa income tax return. A single filer can only exclude $6,000.
There are a wide variety of other special circumstances that could lead you to tie the knot. A good tax marriage results whenever one partner has tax attributes, like capital losses, that can be used on a joint return but would not be useful on a single return. Other such items could include tax credit carryforwards and investment interest carryforwards, among others
Of course these things apply to couples pondering divorce, too, but that's too sad to dwell on this time of year. Oops, I just did. And some couples, particularly those where both have good incomes, are better off postponing marriage, or (shudder) accelerating divorce.
Anyway, you should marry for the right reasons. But if you can both be in love and cut your taxes, why not let IRS help pay for your honeymoon?
This may be the most romantic of our 2009 year-end planning tips. But we're not done yet!
The TaxProf reports on the predictable consequences of using the IRS as the Swiss Army Knife of public policy:
IRS Cannot Verify Taxpayer Eligibility for 2/3 of $325 Billion of Stimulus Tax Benefits
The Treasury Inspector General for Tax Administration today publicly released its review of the IRS’s ability to verify taxpayer eligibility for tax benefits and credits provided by the American Recovery and Reinvestment Act of 2009.
The Recovery Act contains 56 tax provisions with a potential cost of more than $325 billion that are intended to provide tax relief for individuals and businesses. These include 20 provisions for individuals that provide tax relief to working or retired Americans and their families. Thirty-six additional provisions provide tax relief and incentives for businesses, including provisions that encourage investment in sources of renewable energy and promote the hiring of unemployed veterans. They also allow for the sale of bonds to provide for construction, financing, environmental and manufacturing improvements.
TIGTA found that the IRS is unable to verify taxpayer eligibility for the majority of Recovery Act tax benefits and credits at the time a tax return is processed. This includes 13 of the 20 benefits and credits for individual taxpayers and 26 of the tax provisions benefiting businesses.
It's hard enough for the IRS just to determine the correct taxable income and collect the tax of millions of individuals and businesses. When you ask the IRS to also to run economic stimulus, coordinate national energy policy, function as the national directory of industrial research, act as national low-income welfare administration, and now act as national health care administration, it's not going to work out well.
A Los Angeles Rabbi who ran purported "contributions" through offshore accounts, where they were returned to the "donors" minus a money-laundering fee, received a two-year sabbatical yesterday courtesy of the IRS. NBC News-Los Angeles reports:
The 61-year-old rabbi, Naftali Tzi Weisz, pleaded guilty last August to criminal conspiracy charges before U.S. District Judge John F. Walter.
"I'm embarrassed beyond words,'' Weisz told the judge. "My remorse is deep and heartfelt.''
You really feel it when you stand before those big prison gates.
Prosecutors said Weisz and other sect members helped donors avoid paying federal income taxes by having them make contributions to charitable groups run by Spinka, a Brooklyn, N.Y.-based Orthodox Jewish group led by the rabbi...
According to court documents, Weisz and Zigelman secretly refunded up to 95 percent of the charitable contributions through several methods.
In some cases, the contributors received cash payments through an underground money transfer network involving various participants, some of whom owned businesses in downtown Los Angeles' jewelry district.
A second method involved wire transfers from Spinka-controlled entities into accounts secretly held at a bank in Israel, prosecutors said.
In a way it is similar to other scams, like Anderson's Ark, where taxpayers send money overseas as purported business expenses but then get most of the money back through offshore accounts. It's a good way to get a lovely Duluth vacation.
The Section 199 deduction can be a cash-free writeoff for those with manufacturing or farm income. Paul Neiffer explains how this works for farmers.
Criminal tax defense attorney Jack Townsend tells of a lawyer who failed to file his tax returns for ten years. He lost his license to practice law for a year, in spite of his work for death row inmates and his contributions to his college:
n the within matter, while there are some mitigating factors, we find aggravating factors vastly more compelling. Specifically, while at his law firm and receiving a substantial income, respondent purchased a five bedroom house in New Jersey and a four bedroom house in Florida. He also owned a Lincoln Town car, a Nissan Mini Van, a BMW SUV, and paid for his children to attend private school. In addition, respondent lied to his wife by telling her that tax matters had been taken care of and did not notify his partners of the pending criminal investigation before resigning from the firm to take a position as president of two corporate entities engaged in energy operations in the Philippines.
The Moral: If you have time to be a corporate president, donate to your alma mater, and help out guys on death row, you have time to do your taxes.
The IRS has issued (Rev. Rul. 2010-01) the minimum required interest rates for loans made in January 2010:
-Mid-Term (loans from 3-9 years): 2.45%
-Long-Term (over 9 years): 4.11%
The Long-term tax-exempt rate for Sec. 382 ownership changes during January 2010 is 4.14%
The Tax Update has been taking an extended weekend in an undisclosed remote location, one where they have a congenial view of "temperance." We will be back at World Headquarters tonight ahead of the expected Christmas Blizzard.
When you're spending money to get a tax deduction for your business by the end of the year, you might as well make sure the deduction will hold up when your friendly neighborhood IRS agent comes calling.
If you're a cash-basis taxpayer - if you aren't sure, check your business tax return or your 1040 schedule C or schedule F - you will need to show that you spent the money to claim the expense this year. Some things to remember:
If you are an accrual-basis taxpayer, your big year-end issues come from related-party payments. For example, a C corporation can only deduct payments to an over-50 percent owner if the payment is made before year-end. If you and a family member both own stock, you combine your ownership to see if you own over 50 percent. For C corporation personal service corporations -- doctors, lawyers, consultants, and accountants -- that pay all of their earnings out as salary, this is a critical issue; any earnings left at year-end get taxed at a flat 35 percent federal rate. S corporations and partnerships are related to all of their owners for purposes of taking deductions. They are also related to anybody in the owner's family up to kissing cousins, more or less, including ancestors, lineal descendants, spouse and siblings.
If you are looking for a deduction from buying equipment or fixed assets -- say, a Section 179 deduction or a bonus depreciation deduction -- make sure that your asset isn't just purchased, but placed in service too, before year-end. It doesn't count if it's sitting on the dock in the packing cases.
Russ Fox has a nice rundown on how Reidcare has evolved through the
bribery and shakedown legislative process. Cosmetic surgery is patriotic again.
Thank again. TaxVox explains why it might be premature to plan your end in 2010.
There's a new Cavalcade of Risk up!
You can welcome winter with a new collection of insurance and risk-management posts over at My Wealth Builder. Among the posts this Cavalcade is Hank Stern on the cancer-fighting benefits of beer(!). But there may be a catch...
If that isn't enough insurance for you, check out Lara Utter's new post on bonding at IowaBiz.com.
It appears there was a good reason that the "april15dotcom" blog stopped posting. Russ Fox reports:
About a year ago I discover a tax blog called Apirl15.com. I doubt we’ll be seeing any more of this blog; according to an affidavit from an IRS Special Agent, the proprietor of the blog has admitted to embezzling $8.5 million.
William Murray, a CPA from Sacramento, allegedly told his clients to pay their taxes through a “trust account” system. This “service” would help the clients and make things easier for them. Mr. Murray also allegedly had clients send money that he would allegedly “loan” to other clients.
Sadly, accountants stealing from clients is an old story. Remember, your accountant is your accountant, not your money manager or banker.
The Tax Policy Blog weighs in on the massive jobs project dumped on the east coast over the weekend. I especially like the spoons proposal.
Among the foolish provisions in the foolish Harry Reid healthcare bill, the 10-percent tax on tanning bed services is getting the most attention. The late night drafters of Reidcare also managed to increase a tax that had not even been enacted yet; they boosed the proposed "Medicare tax" on high-wage earners and self-employeds to .9%, from the .5% originally proposed.
The TaxProf has a very personal item for your tax holiday gift list. No indication whether there is an electronic-filing version of the product.
I have been invited to be a contributor at "Going Concern," a finance and accounting industry blog. My first contribution, where I rail against the tyranny of the Sec. 409A deferred compensation rules, is up.
Just as a fair chunk of Iowa's corn crop is still in the fields, lots of us have tax losses waiting to be harvested in our taxable investment portfolios. While farmers have to wait for the deep snow to go away to get their corn, you can harvest your tax losses with a call to your broker, or the touch of a cursor on your E-trade screen.
Remember, individuals can deduct capital losses to the extent of your capital gains, plus $3,000. If you have sold stock at a gain this year or have capital gains from mutual fund distributions, tax on them is optional to the extent you can sell stocks at a loss before the end of the year. It's a gimmee deduction if you keep a few tips in mind:
- You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn't help you.
- Normally the "trade date" is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2009 1040.
- Watch out for the wash sale rules. If you buy the same stock within the 30 days preceding or following the sale of a loss stock, your loss is disallowed. This is true even if you sell from a taxable account and buy in an IRA.
Another installment in the Tax Update's 2009 year-end tax planning series!
It looks like the legislature will respond to the negligent management of Iowa's corporate welfare tax credits by changing them as little as possible. Mike Glover reports:
Senate Majority Leader Michael Gronstal, D-Council Bluffs, said it's not clear that lawmakers will scale back on the amount they spend on tax credits but said it's clear that changes are needed.
"I don't think there's a decision made to cut back on tax credits, but I think it's abundantly clear that Iowans want and demand and need accountability in our tax credits and we've got close to zero," Gronstal said.
This makes it look like they want to continue to spend money on the well-lobbied through the tax law, with only cosmetic changes.
Most of the tax credits the state has created have significant political support. A tax credit for restoring historic districts was key to a renovation of a large portion of downtown Dubuque, and House Speaker Pat Murphy, D-Dubuque, said his constituents feel the impact.
"Those are probably people who wouldn't be working if we didn't do this," Murphy said.
Gronstal said lawmakers likely will take a more moderate approach to the issue, building more accountability into the incentives while leaving most in place.
Of course, thousands more jobs never are created in Iowa in the fist place because of the the high rates and complexity that apply to businesses that don't have the lobbyists to donate money to campaign funds. The Tax Update's Quick and Dirty Iowa Tax Reform Plan would be better for the state's economy, especially for all of us without lobbyists, but there just aren't a lot of photo ops in low rates and simple tax returns.
Because the above-the-line deduction for new car sales and excise taxes expires December 31.
A " nationally known self-proclaimed psychic and spiritual medium" is either a fake or surprisingly careless in her business dealings:
An East Arlington woman was sentenced in federal court Wednesday to serve 18 months in prison for wire fraud and filing a false tax return.
Denise M. Hall, 51, of East Arlington, agreed to a plea deal in June. She was charged with one count of wire fraud and one count of filing a false tax return, after taking about $153,000 from her employer, Rosemary Altea of Dorset, according to Assistant U.S. Attorney William Darrow.
Hall was employed by Altea, a nationally known self-proclaimed psychic and spiritual medium, who has appeared on "Oprah" and "Larry King Live," between 2001 and 2008 as an office manager and bookkeeper.
I think they mean Ms. Hall was the office manager and bookkeeper, though that sentence makes it look like Altea appeared as a bookkeeper and office manager on Oprah, which would make for exciting television. But if you really are psychic, your third eye should be able to divine whether your bookkeeper is a thief. That should be on your hiring checklist, right there with getting the W-4 and I-9 filled out.
The IRS is conducting a sweep of real estate investors that challenges deductions investors have been taking as a routine part of business for years. The sweep is based on an IRS belief that there is a “compliance gap” in this area.
Mr. Panitz says the IRS is looking for taxpayers who claim they are "materially participating rental real estate professionals" under the Sec. 469(c)(7) exception to the rule that makes most real estate losses "passive." He has some sound advice for documenting your qualification for real estate losses.
Hat tip: Peter Pappas.
A North Dakota businessman who pleaded guilty to using company funds for personal expenses got a 37-month sentence this week:
"I am very sorry for the whole thing," Micheal Fisher told U.S. District Judge Daniel Hovland during his sentencing hearing.
I'm sure he is sorry. Especially that he got caught.
Hovland sentenced Fisher to 37 months in prison, fined him $90,000 and ordered him to pay $308,069 to make up for taxes he avoided by having his family’s company, Fisher Sand & Gravel Inc., pay almost $1.2 million of his personal expenses from 2001 through 2004.
Fisher used company funds to build a home, renovate a Dickinson truck stop he owned, pay bills for himself and family members and take an African vacation.
Running personal expenses through the business is a universal temptation for business owners. The IRS knows that, and IRS audit programs routinely look for these things. While such cases don't always turn into criminal investigations, there's no telling when the IRS will choose to make an example of someone, to, er, encourage others to not cheat.
It's not just company owners that can get in trouble in these cases:
The investigation also resulted in charges against Amiel Schaff, Fisher Sand & Gravel’s former chief financial officer; Clyde Frank, the company’s former comptroller; and Fisher Sand & Gravel itself.
Schaff and Frank were sentenced earlier this year to probation after pleading guilty to one felony conspiracy charge as part of an agreement with prosecutors. Fisher Sand & Gravel agreed to pay $1.16 million in back taxes, fines and penalties and cooperate with IRS tax audits.
If you are a finance officer at a company and the boss is using you to help cheat, you may want to look elsewhere, quick.
At least Mr. Fisher may get to spend his sentence in a familiar climate:
Hovland said he would recommend Fisher serve his sentence at a minimum-security federal prison camp at Duluth, Minn., and agreed to give Fisher more than a month to report there. He must begin his sentence by 1 p.m. Feb. 26.
The Moral? Don't use company funds for personal stuff. If the boss wants you to help him do so, ask him if he how he feels about winters in Duluth, without the snow sports.
One of the many prosecutions for stock option backdating that were in the news three years ago was thrown out this week. The case against two Broadcom execs was dismissed as a result of prosecution misconduct. The Federal Tax Crime Blog has the details.
Mike Gronstal says so:
“I’ve got to say I’m tired of people bad-mouthing Iowa,” Gronstal said. “I think Iowa’s a great state to do business in. If you want to quote US News & World Report to show us it’s 49, you’re doing a disservice to Iowa.”
Shut up, he explained, unless you are only going to say happy things.
The tax law has a menu of tax-favored retirement plans for entrepreneurs. The simplest ones, SEPs and IRAs, can be set up for 2009 as late as the tax return deadline -- in the case of SEPs, the extended tax return deadline. But the most potentially lucrative plans -- qualified pension or profit-sharing plans -- have to be in place by year-end for contributions to be deducted on 2009 returns.
For a profitable entrepreneur with no employees, the "Solo-401(k)" may be the most lucrative retirement plan option. If you are profitable enough, you can make a deductible 2009 contribution to such a plan of the first $16,500 of your earnings, plus 20% of your earnings, if you are a Schedule C entrepreneur. The $16,500 piece makes for bigger contributions than would be available from SEPs or other plans for those with earnings under $245,000. That's a nice deduction for just taking money from one pocket and putting it in your other pocket.
If the plan is fully executed in 2009, it can be funded as late as the extended due date of your 2009 return.
There are downsides to such plans. They are much more expensive to maintain than a SEP, and the benefits either have to be foregone or shared if you add employees. You don't want to just jump into a qualified plan, but if you want to look into one for this year, you need to act quickly.
This is another installment in the 2009 Tax Update year-end tax tip series.
Defenders of tax credits always point to the jobs on credit-financed projects as proof the credits work. Their defense, like that given by the Dubuque mayor in the tax credit hearing held in Cedar Rapids yesterday, always skips over an important point: that money could have been spent somewhere else.
Money for tax credit projects doesn't spring into existence out of nowhere when the tax credit investors file their tax returns. It comes from other taxpayers who have to pay extra taxes in place of the credits claimed on the tax credit project.
They also miss another point. When the government subsidizes a real estate project with tax credits, it pays the developer to take tenants from other landlords or landowners. A subsidized commercial rehab project takes tenants away from a developer who didn't get subsidies. A subsidized low-income housing project punishes the landlords who don't get handouts. When Jim Cownie gets a subsidy, the struggling do-it-yourselfer who buys a duplex to fix and lease out gets a powerful subsidized competitor.
Occasionally Iowa will land a corporate welfare-seeking company by throwing money at it. By increasing taxes to do so, it drives out the small entrepreneurs that do the heavy lifting of job creation. But they never invite politicians to ribbon cuttings, so as far as economic development officials are concerned, they don't count.
Suzanne Somers parleyed a long sitcom run into an infomercial empire with the Thighmaster. But firm thighs only get you so far in Tax Court.
Ms. Somers and her husband got involved in a Son-of-Boss basis-shifting tax shelter to reduce taxes on their Thighmaster earnings. The shelter involved offsetting currency positions and a partnership, generating a tax loss of over $5 million (see the "read more" part of this entry for an IRS description of the mechanics of these shelters). The Tax Court said that the shelter didn't work:
Petitioner has not introduced credible evidence to establish that Palm Canyon had a legitimate nontax business purpose for entering into the MLD transaction, and the transaction did not have a reasonable prospect of achieving a pretax profit. A review of the MLD transaction reveals a prearranged set of transactions that were not imbued with any meaningful economic substance independent of tax benefits.
Not only did Ms. Somers lose the case, she and her husband also were hit with 40-percent valuation misstatement and 20-percent negligence penalties.
The Moral: don't trust shortcuts to either fitness or tax savings.
Description of Son-of-boss basis shifting, IRS Notice 2000-44:
In another variation, a taxpayer purchases and writes options and purports to create substantial positive basis in a partnership interest by transferring those option positions to a partnership. For example, a taxpayer might purchase call options for a cost of $1,000X and simultaneously write offsetting call options, with a slightly higher strike price but the same expiration date, for a premium of slightly less than $1,000X. Those option positions are then transferred to a partnership which, using additional amounts contributed to the partnership, may engage in investment activities.« Close It
Under the position advanced by the promoters of this arrangement, the taxpayer claims that the basis in the taxpayer's partnership interest is increased by the cost of the purchased call options but is not reduced under §752 as a result of the partnership's assumption of the taxpayer's obligation with respect to the written call options. Therefore, disregarding additional amounts contributed to the partnership, transaction costs, and any income realized and expenses incurred at the partnership level, the taxpayer purports to have a basis in the partnership interest equal to the cost of the purchased call options ($1,000X in this example), even though the taxpayer's net economic outlay to acquire the partnership interest and the value of the partnership interest are nominal or zero. On the disposition of the partnership interest, the taxpayer claims a tax loss ($1,000X in this example), even though the taxpayer has incurred no corresponding economic loss.
You can put appreciated assets into a partnership tax-free. You can take cash out of partnership tax free. If you could both at the same time, you could indefinitely defer your gain on a sale assets by running it through a partnership. That's why the tax law has "disguised sale rules" that treat such deals as taxable sales if run through a partnership; if cash comes out to the partners that contributed appreciated assets within two years of the contribution, the tax law assumes a sale has taken place unless the partners prove otherwise.
A New Jersey U.S. district court this week ruled that GAF corporation ran afoul of these rules in an elaborately-structured $450 million transaction (via the TaxProf). UPDATE: I should have noted that the taxpayer avoided the tax because the IRS assessment was untimely.
Cub fans will find this interesting because the sale of the Cubs this year was also done through an elaborate partnership structure designed to finesse the disguised sale rules. Fortunately for Cub fans, if the transaction blows up -- and it might not -- the taxes will probably be the Tribune's problem, rather than the new owners, leaving the Cubs with the cash they will need to get somebody to take Milton Bradley.
In blog comments, writing in all capital letters IS TREATED LIKE SHOUTING! (See how that works?). Does that explain this strange statement by a tax defendant recounted by The Tax Lawyer's Blog:
For the record, my Christian name is Randy Lee, and my family name is Oliver. That is spelled capital R, lower case, a-n-d-y, capital L, lower case e-e, capital O, lower case l-i-v-e-r.
Actually, no. He's just a tax protester who has adopted a variant of the funky punctuation defense. With predictable results.
...the first installment of the annual "12 blogs of Christmas" feature. What could be more festive?
One of the most common tax planning tricks is to pay in December taxes that are otherwise due in January and April. For income taxes, this is usually done by sending the taxes in as additional estimated payments. For property taxes, you just send the check in early.
Does this make sense? Maybe, if you meet some conditions:
- If you are prepaying state and local taxes, you need to itemize. Many folks, especially those over 65, have a big enough standard deduction that they don't need to itemize.
- If you are subject to alternative minimum tax in 2009, a deduction for state and local taxes probably does you no good (though in some cases, taxpayers with capital gain income can get a benefit even if they are in AMT).
- If you are prepaying federal taxes, you have to live in Iowa or another state that allows a deduction for federal taxes paid.
- Of course, you have to expect to owe some taxes.
Assuming you meet these conditions, you still have to take into account that by prepaying taxes you are giving up interest you could otherwise earn on the money. The chart below measures whether getting the deduction sooner is worthwhile at different tax brackets, assuming that you can take the deduction in either year; a green number means prepayment is good.
As you can see, prepaying your 4th quarter taxes always pays if the deduction counts in either year. The value of prepaying declines as the ultimate due date of the return goes further out, and it never makes sense to prepay a tax due next September, like your second 2010 Iowa property tax payment.
Of course, the chart doesn't tell the whole story. You have to apply some common sense. For example, if you know you will be in AMT next year, you may want to pay a bunch of state taxes this year because the value of the deduction next year is probably zero. Unless, of course, that triggers AMT this year.
This is another installment of our exciting 2009 Year-end tax tips series!
Iowa will spend $450 million on tax credits this fiscal year, and darned if anyone can tell that they do any good. That's the short version of the much-awaited analysis of Iowa's tax credits that came out yesterday.
After the Iowa Film Credit program blew up in scandal this fall, the Governor asked the state agency heads in charge of running Iowa's tax credit programs to put together a report listing the state's "return on investment" on the credits. One looks in vain at their 123-page report for a straight answer to that question for even one of the 30-odd economic development credits. The report punts for most credits by saying "It is not possible to quantify a return on investment at this time." -- even though some of these credits have been around for 8 or more years. That was the only analysis provided for $48 million Research Credit, which is certainly popular among its recipients. The report shows one unnamed big company got a $16.7 million research credit for 2007; because that was almost certainly well in excess of that company, the state wrote them a check for the difference, courtesy the rest of us taxpayers.
The lack of any quantifiable benefit for the taxpayers sent the loophole lobbyists scrambling to defend their subsidies:
"We applaud the effort to put this forward, but we certainly want to be sure they continue to look at the credits more in depth," said Ed Wallace, president of the Iowa Taxpayers Association, whose 154 members use many of the state's incentive programs. "These are really, really important programs to many companies. There are thousands of jobs at stake ... and millions of dollars in capital investment in different parts of the state."
No doubt the company that got that $16.7 million check really thinks it important to continue to get more of our money.
The report describes the benefits of the notorious film credit program:
Fiscal benefit to the state treasury is limited, however, other intangible and/or more localized benefits may exist. Growth in existing film, media and video infrastructure (personnel, technical expertise, etc.) has occurred over the past two years in Iowa. Even with these benefits considered, positive fiscal impact to the State treasury is not expected under current program structure
The lobbyists will certainly say we shouldn't be hasty about getting rid of these credits until we know whether they provide a benefit when the hearings on the credits open today. That's a funny way of looking at things. Most people like to know what the benefits are before they commit to spending another $566 million.
No doubt some folks will say that we need these credits to remain competitive, that we have no choice. For these people, I recommend the Tax Update's Quick and Dirty Iowa Tax Reform.
The U.K. and France are on an anti-banker tax frenzy; Britain has imposed a 50% tax on banker bonuses.
Tax Vox explains why this is folly, and why managing executive compensation through the tax law just causes more problems.
Roger McEowen explains the estate planning implications of recent decisions blessing a technique that gives charity the benefit of IRS adjustments to the value of property held at death.
Russ Fox explains.
The IRS Commissioner says tax season is a form of economic stimulus because of all the tax refunds (Via the Tax Lawyer's Blog):
Never mind that the refunds are a result of overwithholding, or anti-stimulus, the rest of the year. Actually, in a way, it underlines how all "stimulus" spending really works: it takes our money all year, and we're supposed to feel stimulated when they give a little of it back.
Instead of stimulus, try Stimulis:
The Iowa Department of Cultural Affairs has a touching faith in the effectiveness of the Historic Rehabilitation Tax Credit, according to the report issued today on Iowa's tax credit system:
While the DCA fully believes the return on investment is much greater than the aggregate cost of the tax credits, until a sufficient number of survey forms are returned upon project completion, there is insufficient data to back up this claim.
The credit has been in place since 2001, and the state has passed out millions of dollars in tax credits, but the jury is still out. Still, the Department "fully believes" that the credits work. So now all they have to do is click the heels of their ruby slippers together, and all will be well.
The end of the year is a tricky time to buy mutual fund shares in a taxable account. The tax law forces mutual funds to distribute their recognized capital gains annually, and they often do so through a big December distribution. This means you can buy an entire year's worth of tax liabilty for a mutual fund share in a single day.
Fortunately, many funds, including the Vanguard family of funds, let you know when they plan to drop the capital gain bomb. It's worth a few minutes to check these figures before invest that check from Grandma.
This is another installment in our 2009 Year-end planning series. Accept no substitutes!
Some of the 300 happy practitioners at the ISU Center For Agricultural Law and Taxation Farm Tax School this morning in Ames. This is our last school for the year. Thanks to everybody who has seen us in Ames, Sheldon, Mason City, Waterloo, Griswold, Ottumwa, Muscatine and Denison!
When the Iowa film tax credit scandal exploded in September, it raised an obvious question: were the other 30-odd Iowa economic development tax credits managed any better than the film credit?
The answer: maybe not. The Des Moines Register reports:
A Des Moines Register review of some of the state's biggest tax credit incentives found state leaders had reason to worry about runaway costs, lack of transparency and waste long before Iowa's botched attempt at using tax breaks to jump-start a film industry made international news.
That review found the state auditor had identified almost identical oversight problems in another tax credit program; state law required almost no outside oversight of some of the biggest credit programs; and authorities already knew that a portion of projects that tapped the most widely used programs had problems...
The report points out that the legislature and the state executive agencies have done little to monitor the credits:
Iowa's Department of Economic Development is the state agency responsible for administering the job-training and film tax credit programs, as well as several others. The auditor's report on the job training program identified some of the same sloppy record-keeping and oversight failings by IDED that were discovered four months later when mismanagement in the film office became public.
A state panel completed a report on Iowa's tax credits last Thursday, but the report has not been released to give the state time to
spin "digest" it in advance of hearings on the credits that get underway tomorrow. (UPDATE, 12/14/09: the report was released today.)
The Register article goes on to discuss companies that have failed after taking tax credit money. The credits are budgeted to cost over $450 million this year -- an amount that will dwarf the $186 million in estimated corporation tax receipts for the year. While the Register's story has the obligatory "success stories" from folks who insist that it really does make sense for the state to tax the rest of us to give them money, it does a better job of detailing the problems of the state credits than anything the state has been willing to release so far.
Iowa has issued a policy letter that confirms that the Iowa has finally backed off from their (absurd) position that investment income of Iowa-based investment partnerships is "business income" taxable in Iowa:
In your scenario, the activities of A, LP are not being conducted by the nonresident in Iowa. Therefore, the nonresident is not considered to be conducting a trade or business within Iowa, and the interest, dividend and capital gain income would not be considered Iowa source income. Since the nonresident partners of A, LP do not have any other activity in Iowa, there is no requirement for the nonresident partners to file an Iowa individual income tax return.
Iowa is still issuing such partnerships lengthy questionaires to detect a whiff of "business income"; partnerships should answer those with care.
Another foredoomed tax evasion defense from a dentist who shopped for tax advice at the same place Wesley Snipes did. Russ Fox has the scoop.
Mutual fund investors know all about high "loads" for investing in popular funds. It would be nice to have a fund vehicle where you receive a load, rather than pay one.
Actually, there is one vehicle that works that way: Iowa's "College Savings Iowa" Section 529 plan. Iowa law provides an "above the line" deduction for contributions up to $2,800 per donor, per donee. That means a married couple can deduct CSI contributions for each child of $5,600 on their Iowa return (there is no such deduction on the Federal 1040). For a top-bracket Iowan, the resulting tax savings are like getting a 6+% negative "load" on your investment.
The funds can be withdrawn free of Federal and Iowa tax for qualified higher education expenses, while accumulating income tax-free in the meantime.
Iowa invests through Vanguard "life-cycle" funds, which move to safer investmets as college age approaches -- a feature I learned to appreciate this year as my son began college. His CSI accounts were unscathed by the 2008 market collapse.
If you want to get a 2009 CSI deduction, you need to get the funds paid before December 31. If you don't have an account, you get the paperwork going at the CSI website.
This is another installment in our 2009 year-end tax planning series.
So Justin goes to a party. He thought he'd have a few drinks, so he arranged to get a ride there and back. Sure enough, he has a few, but all goes well because he has a ride.
Then Justin gets home. He decides he's sobered up enough to drive, so he heads off in his $40,210.65 Ford F-350 pickup. He wrecks the truck, blows .09, and gets a DUI citation. The insurance company denies coverage because of the DUI, so he takes a $33,629 casualty loss on his Schedule A.
The IRS didn't care for the deduction. The IRS said that the loss wasn't allowable because the DUI constituted "willful negligence."
Tax Court Judge Gerber was more sympathetic:
While petitioner's decision to drive after drinking was negligent, that alone does not automatically rise to the level of gross negligence...
Petitioner's level of intoxication and the manner in which he drove do not suggest that he was consciously indifferent to the hazards of drunk driving. Unlike the defendant in People v. Bennett, supra, petitioner was less impaired and not severely intoxicated when he chose to drive. At the time of the accident petitioner's blood-alcohol level was 0.09 percent, which is slightly over California's legal limit of 0.08 percent. See Cal. Veh. Code sec. 23152 (West 2000). Further and significantly distinguishing petitioner's situation from that in People v. Bennett, supra, petitioner made arrangements not to drive immediately after consuming alcohol. He arranged for transportation home and thus allowed some time for his body to process the alcohol before driving. If petitioner truly did not care what happened, he would not have gone to the trouble to arrange for transportation.
Likewise, there is no evidence in the record that petitioner was aware his actions would result in injury. In addition, there was no evidence that excess speed or alcohol directly caused petitioner's accident. On brief, petitioner claimed he lost control of his vehicle because of the windy conditions on the road, and no evidence was presented at trial as to what the precise cause of petitioner's accident was.
So the IRS tried another tack, saying that allowing a casualty loss for a DUI accident would "frustrate public policy." The court said there are plenty of other public policy tools that oppose drunk driving, including jail time and fines, and that the casualty loss deduction doesn't diminish them. Decision for taxpayer.
The Moral? Driving drunk is still a bad idea. The deduction was worth $6,230 in tax savings -- not much consolation for wrecking a $40,000 truck, losing your license, and all the other headaches of a DUI conviction.
UPDATE: The TaxProf has more.
Good luck with that, says TaxMama. If you take a stock loss, you can't purchase other shares of the same stock within the preceding or following 30 days from the trade date.
TaxVox points out how tax breaks, like those in the House "extender" bill, often work at cross-purposes:
Finally, there are my favorites—the contradictory energy breaks. The bill tries to encourage the use of alternative fuels by extending a subsidy for hybrid trucks at the same time it attempts to keep the cost of fossil fuels low by continuing breaks for marginal oil wells. This, I guess, is symbolic of the entire exercise. It only makes sense if you are in Congress.
Outside the extender bill, there are lots of examples of this sort of thing; for example, the Homebuyer Credit to increase demand for unsold homes while the low-income housing credit increases the supply. One credit works to keep homes from becoming more affordable, the other tries to provide affordable housing. Go figure.
Dell chumps North Carolina, reports David Brunori at Tax.com:
Curious development in North Carolina. Apparently, Dell Inc., the giant computer manufacturer is refusing to pay the state back money it recieved as incentive. Dell, as many know, received millions of dollars in tax breaks and direct grants from North Carolina when it promised to build a plant in Forsyth County. It built the plant, received millions, but then closed it down after only four years. North Carolina says that Dell is obligated to pay the state back a lot of the cash. Dell says go pound salt. Actually, Dell says it complied with the terms of the incentive package by opening up a facility in the state.
At least Dell is still around to fight over the tax credits, which is more than you can say about the tax break-financed ethanol companies going belly-up across Iowa.
Entrepreneurs are restless. It's not unusual for them to have a lot of things going on, with a different S corporation for each business. When one business has losses, the entrepreneur takes funds out of the successful businesses to finance them. But when the entrepreneur runs low on basis in the money-losing S corporation, this can lead to problems. You can only deduct S corporation losses if you have basis in S corporation stock or debt.
The man who started the successful Dart Transportation business had this problem a few years back. He borrowed money from his S Corporation A and then loaned it to S Corporation B to get basis to deduct the losses. S Corporation B then loaned the funds back to S Corporation A, and the money was all back where it started.
The IRS didn't like this, and after a long court battle, the IRS won. The courts said, in effect, that because the cash ended up where it started, the intervening steps -- the loans -- didn't count.
Even if the loans do count, an S corporation owner can get surprised with taxable income if the corporation repays shareholder loans before the corporation has had enough profit to restore basis used to take losses.
An S corporation holding company can avoid these problems. S corporations can own other S corporations if they own 100% of the stock and make a Qualified Subchapter S Subsidiary (QSUB) election. The QSUBS retain their identity under state law, but they are "disregarded entities" for computing taxes. This structure allows you to put all of your S corporation stock basis in one place, eliminating the need to throw money around at year end to deduct losses. Your corporations remain separate legal entities, protecting them from each other's problems. But if you want to do this by year-end, get together with your lawyer and tax pro right away, because time is short this year.
This is another installment in our 2009 year-end tax planning tips series. Don't miss a one!
The House of Representatives approved the extension of 45 "expiring" provisions for 2010. These provisions include tax breaks ranging from the Research Credit to seven-year depreciation for "qualified motor sports facilities."
One tax scholar says temporary provisions like this are a good idea because they allegedly make Congress reconsider them every year. Unfortunately for that theory, Charlie Rangel was just too darned busy this year to take a hard look at any of them, so they all just passed them all for another year. Worse, the House bill has a permanent tax increase on hedge funds and private equity funds to "pay for" a temporary extension of tax goodies. Because Nascar is more important for economic recovery than private equity.
The bill still has to clear the Senate; while it will take awhile, it's likely to happen.
A Minnesota bluesman had a great day job. Unfortunately, he neglected to pay the taxes. Startribune.com reports:
Steven Mark Renner, 53, was found guilty by a jury of four counts of tax evasion.
According to the indictment and evidence presented at trial, Renner diverted substantial amounts from his Internet-based money transmission business, Cash Cards International (CCI), between 2002 and 2005 to pay personal expenses as well as make investments in coins, oil wells, art, stamps and vintage musical instruments.
He also was accused of using CCI money to promote his band, Stevie Renner and the Renegades.
He never got around to filing tax returns for 2001 through 2005.
This video shows him in happier times:
As the father of a music major, it's nice to see that he has potential to make enough money to owe $300,000 in taxes someday. On the other hand, I hate to see that the guy had to use the day job to promote the band. But we can't all be accountants.
Creating fake home-based business deductions is a scam that never goes out of style, but that doesn't make it a good idea, as a Tennessee man learned yesterday:
The former tax director of Topeka-based Renaissance, The Tax People, Inc., has been sentenced to 78 months in federal prison for tax fraud.
61-year old Daniel Joel Gleason of Franklin, Tennessee was also ordered to pay more than $3 million in restitution and barred from preparing tax returns.
Gleason admitted assisting in the preparation of 56 false income tax returns - either falsely inflating or falsely creating business deductions for personal living expenses.
Renaissance - The Tax People was in some ways the essence of multi-level marketing tax scams. While many folks use the pretext of marketing vitamins or household items for deducting personal expenses, RTP in effect just marketed the tax scam. RTP people tried to get downstream people to explain to other downstream people the the benefits of taking deductions for personal expenses.
RTP had a "dream team" of tax professionals, including a former IRS District Director. Their dream has created a tax nightmare for them and for those gullible enough to believe their claims.
From the International Tax Blog:
Taxation depends on actual events, not on what might have happened.
J.E. Seagram Corp, f.k.a. Seagold Vineyards Holding Corporation v. Commissioner 104 TC 75 (January 24, 1995)
Keep that in mind with your year-end planning.
S corporations are popular for many good reasons. One of them is the ability to deduct corporate losses on the owners' 1040s. It's been a rough year for a lot of folks and many taxpayers are looking forward to a nice tax refund from their 2009 business losses. If you are one of them, make sure you don't lose your loss deduction for lack of basis in your S corporation; shareholders can only deduct losses to the extent of their basis.
A taxpayer's initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses.
A shareholder can also deduct losses of an S corporation to the extent of loans to the S corporation. The loans have to be loans made by the taxpayer; guarantees of debt do not work.
EXAMPLE: Wally starts an S corporation. He contributes $10,000 to the corporation in exchange for 100% of its stock. The corporation borrows $5,000 from Wally and $50,000 from the bank, guaranteed by Wally. The S corporation loses $20,000 in its first year. Wally can deduct $15,000 of losses this year, based on his $10,000 cash contribution and his $5,000 personal loan. The guarantee from the bank does nothing to enable Wally to deduct losses.
LESSON: Wally could have borrowed the bank loan personally and loaned it to the company; this "back-to-back" loan would have given him enough basis to deduct the remaining $5,000 S corporation loss.
Taxpayers need to be careful in dealing with S corporation basis. A few points to keep in mind:
Basis is only one hurdle S corporation shareholders need to clear before they can deduct losses. Taxpayers also need to be "at-risk" for their basis and the losses can't be "passive" under the "passive activity" rules. It's time to project your year end income and visit your tax pro to make sure you can deduct those 2009 tax losses.
The TaxProf reports that the House will vote today on extending for one year 45 expiring tax provisions, including the all-important seven-year depreciation for qualified motor sports facilities. They will "pay" for this temporary extension of these provisions with a permanent increase in tax on hedge funds and private equity partnerships. Because Nascar is more important to the economy than private equity.
While the temporary bonus depreciation and $250,000 Sec. 179 deduction provisions are not in the extender bill, President Obama yesterday said he would include these in his newest stimulus proposal, so there is a good chance they will continue through 2010. TaxVox is underwhelmed by Stimulus II.
If you're looking for something to do while snowed in, you could do worse than Robert D Flach's "Buzz" roundup of tax blog posts.
My driveway this morning:
The Roth & Company offices are closed today, but the Tax Update continues operations from an undisclosed basement location. The numbers:
Source: National Weather Service
All the schools and government offices are closed. The coffee is hot, I can get the office network from here, the wind is howling out there -- I'm staying in.
So I chickened out and headed home, taking this picture on the way. I have enough provisions, remote network access, computer equipment and work to keep busy and productive through tomorrow, if necessary -- and considering the blizzard warning, foot of snow, and 40 mph winds predicted, it may be necessary. Now for the self-discipline to actually work, instead of, say, posting pictures...
While year-end asset purchases can be a great way to reduce taxes, sometimes they can backfire.
The tax law normally computes depreciation for fixed assets (other than buildings) as if they were placed in service at the mid-point of the tax year. But if more than 40% of fixed assets are placed in service in the last three months of the tax year, the assets are all treated as placed in service in the middle of the quarter in which they were purchased.
Say Joe, Inc., a calendar-year taxpayer, bought $2.4 million of new computers in July 2009 and 1,599,000 in October 2009. His depreciation for these assets for the year would be $2,399,400: $1,999,500 in "bonus" depreciation and $399,900 in regular depreciation.
But now Joe buys and installs another $2,000 computer in December. Suddenly his purchases in the last 3 months of the year are 40.0149% of fixed asset purchases for the year, and the mid-quarter convention applies. Joe's depreciation is now $2,230,525 for his 2009 additions:
- $2,000,500 in bonus depreciation
- $180,000 non-bonus depreciation for property placed in service in the third quarter, and
- $ 50,025 non-bonus depreciation for property placed in service in the fourth quarter.
The $2,000 December addition reduced depreciation expense by $168,875 for the year.
The moral: be careful in your year-end fixed asset purchases. Sometimes a little more assets can mean a lot less deductions.
Follow all of the Tax Update's 2009 year-end planning tips!
So much for transparency and tax credits. The Des Moines Register reports:
Gov. Chet Culver's office does not intend to release reports expected this week on tax credit programs that affect thousands of Iowa workers and businesses before holding public hearings next week that will help decide the incentives' fate.
Erin Seidler, the governor's communications chief, said policy advisers in the governor's office decided the analyses of about 30 tax incentives - to be completed by Thursday - should be kept confidential until public hearings next Tuesday and Wednesday.
Yes, you wouldn't want the public to have any information ahead of the public hearings. They might want to ask questions or something.
The move means the public will not have access to the agency chiefs' own research on overall cost benefit, oversight, transparency and use before being asked to provide input.
A state official who monitors compliance with Iowa's open-government laws said the decision runs counter to common practice elsewhere in government. Other branches of government routinely release reports as they are released to panel members, such as city council members or county supervisors.
Well, we're only talking about $450 million or so of taxpayer money being funnelled to special interests, out of a $6 billion budget, or $150 for every man, woman and child in Iowa. Why would we want the public to know about that?
The tax code has achieved uprecedented levels of ugly in the last 15 years, and targeted tax credits are the reverse cosmetic surgery behind much of it. The conceit is that by careful rewarding certain behaviors with tax credits, Congress can make the world a better place. The reality is much messier. Dan Meyer explains how this works out with the "Hope Credit" for college costs:
The Treasury Inspector General for Tax Administration (TIGTA) asserted that the Hope credit for underclass (freshman and sophomore) college students probably allowed hundreds of millions of dollars in undeserved credits because of two significant defects in the administration of the credit. The first defect is that a given taxpayer could in practice claim the credit for the same student for more than the two permissible years. TIGTA estimates that nearly $600 million in excess credits were taken based on that defect. A second flaw is that many colleges failed to report the amount of tuition and other school-related expenses that qualified for the credit; allowing taxpayers to claim more than the permissible amount.
While TIGTA says the problem is with the administration of the credits, the real problem is in believing these things can ever be accurately targeted. They are complicated -- even tax pros have to keep going back to their books when they claim these -- and errors are inevitable. The IRS barely can process the returns with its creaky computers, let alone catch all of the mistakes. Colleges have proven hopeless in meeting their information reporting requirements, without which the IRS is helpless in enforcing the limits. As Robert D Flach says today in another context,
Many government programs and subsidies are administered through the Tax Code – and this should not be. The purpose of the Tax Code is to raise revenue. Period.
It's hard enough just for the IRS to compute taxable income and process returns. Now the IRS is supposed to manage health, education, research, energy policy, antipoverty efforts -- you name it. It's not surprising that it's a mess; it's a surprise they can function at all.
The weather soothsayers say we're going to get buried with a foot or so of snow today and tomorrow, followed by blizzard winds. Warm up the hot chocolate, then, and cozy up with Kay Bell's Carnival of Taxes! There's always warm reading at the blog worlds roundup of the latest and greatest tax posts.
For many businesses, a new piece of equipment can be more just a good investment; it is often the easiest way to knock down an income tax liability. Changes in the tax rules that take effect after this year make fixed-asset planning especially important this year.
Bonus Depreciation: "Stimulus" legislation allows taxpayers who buy new property to get "bonus" depreciation equal to half of the cost of the property in the year it is placed in service, with the balance depreciated over the regular life of the property. For five-year property, this lets taxpayers recover 60% of the cost in the property's initial year. For most property (aircraft is a limited exception), this rule expires for property placed in service after December 31.
Section 179 allows taxpayers to deduct currently property that would otherwise be capitalized and depreciated. Under the "stimulus" legislation, taxpayers can elect Section 179 treatment for up to $250,000 of property for year. Unless Congress acts -- which isn't imminent -- this number goes down to $134,000 in 2010.
These provisions give taxpayers some flexibility to manage their 2010 taxable income, but they need to keep some things in mind:
- Bonus depreciation only applies to new property; Section 179 applies to both new and used equipment.
- Bonus depreciation can create or increase a net operation loss, enabling taxpayers to recover taxes paid in prior years; Section 179 is limited to active business income.
- While Section 179 starts to phase out dollar-for-dollar as property placed in service in the year exceeds $800,000, there is no such limit for bonus depreciation property additions.
- Neither Section 179 nor bonus depreciation are allowed for buildings.
- "Placed in service" isn't the same as "bought" or "ordered." It's probably not enough to have the equipment sitting in shipping containers on your loading dock at year-end. It needs to be put together and ready to go.
- Iowa does not recognize bonus depreciation or the $250,000 Section 179 limits; the Iowa Section 179 limit for 2009 is $133,000.
Remeber that there is a potential trap for some taxpayers who rush property into service before year-end: the "mid-quarter convention" rules. We'll disuss them tomorrow.
This is part of the Tax Update's series of 2009 year-end tax tips. Collect them all!
Flickr image by infraredhorsebite,
It's a beautiful, cold snowy morning in Denison in Western Iowa, where a fast freight races through the Loess Hills. This picture is taken from the back patio of The Boulders Conference Center, where I am a speaker at the seventh sesson of this year's Iowa State University Center for Agricultural Law and Taxation Farm Tax School. There are still a few spots available for the final session next week in Ames!
Tax protest pied piper William Benson has reached the end of the road in his efforts to keep his "reliance defense" tax reduction business alive. The Supreme Court last week denied a hearing to his appeal of a permanent injunction against his:
...promoting, organizing, or selling (or helping others to promote, organize, or sell) any other tax shelter, plan, or arrangement that incites or assists others to attempt to violate the internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities or unlawfully claim improper tax refunds.
Mr. Benson is author of "The Law that Never Was," a book that argues that the 16th Amendment was never properly ratified, invalidating the income tax. Courts routinely dismiss the argument as frivolous.
The new Cavalcade of Risk is up! The blog world's roundup of insurance and risk management is at Insurance Copywriter.
I like the InsureBlog story of a patient whose trips to a strip show cost her disability benefits.
Iowa State State Sen. David Hartsuch, R-Bettendorf, faces a primary challenge this year. It seems so wrong. Sen. Hartsuch was the only legislative Republican to vote against the Film Tax Credit program that blew up in corruption, scandal and outrageous expense this year. He was joined by only two Democrats. For that alone, all three should have a pass on the current election, if not an automatic promotion to higher office.
We're more than 90% done with 2009. What you do with the remaining 10% can have a lot to do with how happy you will be when taxes come due in April. Some items for your game plan:
Look at the scoreboard. You need to see what your taxable income is so far. Make special note of your business income and your capital gains. You can't know where you are going unless you know where you are.
What will happen between now and year end? Will you get a bonus? Will there be a big customer order paid before the end of the year? Do you have a big expense coming due?
What income and expense items can I switch between 2009 and 2010? These are key tax planning tools. Do you have a pending equipment purchase? Can you accelerate a bill collection to move income up if you want to? Can you sit on an invoice to defer collection? Do you have capital losses that you can take between now and the end of the year?
Have you done your gifting for the year? If you are charitably-minded, you might be able to do some year-end gifts to reduce your income. If you've had a bad year in your business, maybe 2010 is a better year to give to charity. If you have enough assets to make estate planning an issue, have you made full use of the $13,000 annual per-donee gift exclusion?
With these tools your tax pro can help you navigate the rest of the year. Decisions you should evaluate include:
- Payment of state and federal estimated taxes before year-end.
- Acceleration of capital asset purchases to reduce taxable income or maximize operating losses.
- Paying cash-basis business expenses before year-end.
- Using capital losses to offset year-to-date capital gains.
- Contribute to the College Savings Iowa Sec. 529 plan, if you are an Iowa taxpayer.
- Year-end charitable contributions of stock or appreciated property.
- Contributions to S corporation capital, or making loans to your S corporation, to ensure that you have basis to deduct corporate losses.
We'll be covering these and other year-end planning moves between now and year-end.
Tax scofflaw and Ways and Means Chair Charlie Rangel proposes to "pay for" the extension of forty five tax provisions that expire every year or so with an increase on the taxes on hedge funds and private equity funds.
Among the 45 provisions are special depreciation rules for "motorsports entertainment complexes" and an "alternative motor vehicle credit for heavy hybrids." Because heaven knows we need NASCAR and heavy hybrids more than we need private equity investment.
Of course, these are permanent tax increases, to pay for temporary provisions. They are only passed one-year at a time so Congress can pretend that they cost much less than they do. They have no intention of actually letting these things expire.
Those of you who were planning to die next year to take advantage of the scheduled one-year repeal of the estate tax may need to make other plans. The House of Representatives yesterday voted to permanently extend the 2009 rules, with their 45% rate and $3.5 million lifetime exclusion.
The bill is a long way from passing. The Senate seems to want to make some changes in the estate tax, including lower rates, higher exemptions, and indexing. Let's hope the final bill also includes some simplification, including carrying over unused exemptions to widowed spouses and matching the gift tax exclusion, currently $1 million lifetime, to the $3.5 million estate tax exclusion.
A compulsive gambler whose betting records disappeared with his tax preparer was allowed his gambling losses anyway in Tax Court yesterday. The court reviewed the record, decided the guy was a compulsive gambler and a sad sack, and that he surely blew more at the track than he won. The court almost certainly got it right.
Still, it took a trip to Tax Court to win this battle. As gambling tax maven Russ Fox points out:
Do note that it is far easier to win at an audit if you have contemporaneous records, and you usually won’t need to go through the expense of a case at Tax Court.
A question in the comments of an old post:
I have been talking with an insurance professional, and she has told me that I can deduct my life insurance premiums through my S corp. She has mentioned doing this through owner distributions (draws). The life insurance is in my name and my wife and I each own 50% of the business and are active participants. What is she talking about?
I would say "I have no idea what she's talking about," but it's more accurate to say that about the agent. The only way for an S corporation to get a deduction for life insurance on its owner is to put it on the owner's W-2 -- creating an offsetting income amount, and a payroll tax liability to boot. As the IRS web site says,
You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. See Regulations section 1.264-1 for more information.
The Moral? An insurance agent can tell you a lot about coverage, but they can be excessively optimistic about the tax effects of their products. Check what they say with your tax pro.
From an IRS news release:
Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
* 50 cents per mile for business miles driven
* 16.5 cents per mile driven for medical or moving purposes
* 14 cents per mile driven in service of charitable organizations
Governor Culver needs more time to ponder what tax credits are all about. The Des Moines Register reports:
A review of Iowa’s tax credits has been extended by a week to give departments more time to conduct a comprehensive analysis, Gov. Chet Culver announced today.
Culver, last month, ordered a review of 30 state tax credit incentives in the wake of a criminal probe into Iowa’s film program, a dire budget forecast and an explosion in the tax breaks’ costs.
The credits are projected this fiscal year to cost the state $489 million in tax revenue, growth that has added pain to an already bleak budget forecast. Any programs deemed to have little or no return on taxpayer investments are likely to see cuts in the upcoming legislative session, lawmakers said.
They have an insoluble puzzle. By any conventional measure there is no return at all on these "investments." There's no way the state government earns more in taxes from corporate welfare recipients than it spends on the tax credits. As politicians hate to give up power, or admit they're wrong, they will use some nebulous "jobs created or saved" measure and deem most of the tax credits wonderful. They will pass up the opportunity to scrap a failed system and replace it with something sensible.
Meanwhile, South Dakota shows how to do economic development without tax credits -- in fact, without an income tax at all. Russ Fox reports:
From the Leonard Letter and the South Dakota Department of Tourism and Economic Development comes word of a small firearms manufacturer named Bar-Sto Precision Machine. Located in Twentynine Palms (near Palm Springs), Bar-Sto makes auto-pistol barrels primarily for law enforcement. The company employs about 18 individuals.
But the continued increases in state taxes along with California’s high regulatory burden have impacted the privately held firm. Irv Stone, the owner of Bar-Sto, had enough. Instead of continuing in business at a lower profit margin he’s taking action. The business will be relocating to Sturgis, South Dakota.
"South Dakota is really a great place to do business," said Irv Stone, second-generation owner of Bar-Sto. “The differences in the tax climates between California and South Dakota are night and day, and we have been treated real well by the GOED (Governor’s Office of Economic Development) and the Sturgis Area Economic Development.
The 18 jobs are going to South Dakota despite Iowa's 30-odd economic development incentives. Low and simple taxes work better than high rates and "targeted" loopholes for smaller businesses. The small businesses are the ones that really generate jobs and growth, and they are the ones least able to negotiate a swamp of tax credits designed for companies with lots of tax lawyers and lobbyists.
You usually think of bankers when you think of the requirements to report large tax payments to the Treasury. It's a common issue for bankers, but the cash reporting rules apply to all businesses, as TaxGrrrl points out:
You file a form 8300 any time that you receive cash in the amount of $10,000 or more from a single source as part of one transaction or a series of related transactions during the course of business. Cash would include bills and coins from any country, a cashier’s check, bank draft, traveler’s check, or money order. Personal or business checks are not considered cash.
The fine for willful failure to file the form starts at $25,000, which makes it a pretty expensive form to skip.
Remember how Wile E. Coyote would defy gravity for a moment off the edge of a cliff, his legs spinning in the air, before plunging? The Farm CPA Today blog says farm land prices might be doing that.
A poignant and sad post from Janell Greiner, one of the earliest tax bloggers. Keep her in your thoughts.
It's common for procrastinators to get their returns on April 15, sign them without a second glance, and go on their way. That got expensive for a California couple yesterday.
The preparer had left their Social Security benefits off their 2005 1040. The IRS computers noticed, and the IRS sent a bill and a penalty notice to the couple for failure to report. The couple attemped to get out of the penalty based on reliance on the preparer, but the Tax Court wasn't buying (citations omitted):
"The general rule is that the duty of filing accurate returns cannot be avoided by placing responsibility on an agent." Taxpayers have a duty to read their returns to ensure that all income items are included. Reliance on a preparer with complete information regarding a taxpayer's business activities does not constitute reasonable cause if the taxpayer's cursory review of the return would have revealed errors. "Even if all data is furnished to the preparer, the taxpayer still has a duty to read the return and make sure all income items are included."
The Moral? If you don't have time to read your return before April 15, get an extension.
Some taxpayers just can't get their arms around the concept of "business" expenses, like one who lost in Tax Court yesterday:
For example, petitioner is not permitted to deduct his traffic tickets, dentist's fees, or mint proof coin purchase. In addition, he cannot deduct rent payments for the apartment he lived in because, among other things, petitioner also maintained and worked at an external office.
Darn. I like mint proof coins.
The TaxProf rounds up more news on the foolish push for a "war tax" to fund the Afghanistan troop surge. Until they also support a "Pimp your neighbor's pickup truck" tax, it will be hard to take "war tax" supporters seriously.
The heydey of Iowa energy independence.
Ramona Cunningham's favorite rubber stamp was retired by Des Moines voters yesterday.
Tom Vlassis, a longtime Des Moines city councilman, cemented his place in Iowa legend with his testimony that he functioned as a "rubber stamp" when, as a member of the board of the looted Central Iowa Employment and Training Consortium, he was in charge of reviewing her expense vouchers. Ms. Cunningham is now serving her seven-year sentence for the looting, which is a lot worse than losing an election to a 23-year old.
The passive loss rules restrict losses from most businesses unless a taxpayer "materially participates." Rental real estate losses are always passive unless the taxpayer is a "real estate professional," who spends at least 750 hours, and more than half of his or her working hours, working in real estate.
A couple with Massachussetts real estate learned the hard way that the courts won't take your word for how much time you work on your real estate:
Mr. Kibiro testified that he and his wife did not keep "meticulous records" regarding the rental properties, and petitioners produced no such records at trial. Although Mrs. Njoroge testified that she traveled to the Springfield property two or three times a week, there is no indication of the number of hours she spent working on the rental properties. Consequently, petitioners have not established that they meet the requirements of either section 469(c)(7)(B)(i) or (ii). Because petitioners have failed to establish that either spouse qualifies as a real estate professional under section 469(C)(7)(B), their rental real estate activity is per se passive under section 469(c)(2)
If it's not your full-time job, you really need to track your time on your business. Keep a daily calendar of your time, and don't put it together the day the IRS agent comes to audit you.
MATERIAL PARTICIPATION BASICS
The regulations say you achieve "material participation" in non-real estate activities for a tax year if:
-You participate at least 500 hours; or
-You participate at least 100 hours and at least 500 hours in that and other "100 hour" activities; or
-You participate at least 100 hours and more than anybody else, or
-You are the only participant; or
-You materially participated in five of the past ten years )or in any three years for a service activity).
There is also a "facts and circumstances" test, but don't count on it.
A special rule apples to real estate. If you are not a "real estate professional," losses are normally passive no matter what, unless you provide "extraordinary" personal services.
If you are a "real estate" professional," you can apply the normal material participation rules to determine whether you have a passive activity. To be a real estate professional, you have to spend at least half your working hours - not less than 750 hours annually - in "real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade."« Close It
There's one segment of the healthcare industry that has avoided the soaring prices of the rest of the system -- cosmetic surgery. Congress can't stand an example of how health care can actually work when the government and insurance companies aren't involved, so they want to tax tummy tucks. Stacie's More Tax Tips tells Congress to back off.
The President's all-star tax reform panel has indefinitely postponed its report, originally due December 4. They say they need more time. They also say that they won't make actual recommondations; they will just present a laundry list of proposals. Tax Vox notes:
The White House statement says the board has not yet had time to review the hundreds of ideas it has received from the public. At the time same time, it asked for more suggestions. Yet, it is hard to believe that the panel is going to hear much new. After all, the ground of simplification and enforcement has been pretty well-plowed for years. And, as one observer asks, "How long does it take to type a laundry list?"
They need to be kept busy awhile longer, apparently.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to