Gift And Estate Tax Exemption Increase
The tax-cut law significantly increased the amount of money that’s exempt from the estate and gift taxes, but only for 2018 through 2025. The exemption amount for an individual was $5.49 million in 2017, under the old tax code, and is $11.18 million in 2018. Stakeholders had questions about whether someone who made a large gift between 2018 and 2025 but then died after 2025 would have the gift subject to the estate tax at the lower-exemption level.
The IRS said that under the proposed rules, those who plan to make gifts between 2018 and 2025 could do so without worrying that they’ll lose the tax benefits of the higher exemption amount after 2025, when the estate tax changes in the Trump tax law are set to expire. The proposed rules would take effect once they are finalized.
Uniform Application of Sec. 108 To Qualified Real Property Business Indebtedness (QRPBI)
Real property developed and held by a taxpayer for lease in its leasing business is “real property used in a trade or business,” but real property held primarily for sale to customers in the ordinary course of business is not “real property used in a trade or business,” under Sec. 108(c)(3)(A).
Real property developed and held by a taxpayer for lease in its leasing business is “real property used in a trade or business” for purposes of Sec. 108(c)(3)(A). The COD income is excluded from gross income in the tax year of discharge, and the property’s basis is reduced by the same amount. On the contrary, real property developed and held by a taxpayer primarily for sale to customers in the ordinary course of business is not real property used in a trade or business for purposes of Sec. 108(c)(3)(A).
A diverse community is a resilient community, capable of adapting to changing situations.Fritjof Capra
Certified Public Accountants
The Tax Cuts and Jobs Act (TCJA) does very little to these regimes except to exempt a number of taxpayers from them due to the size of their estates. Under the TCJA, for decedents dying, or gifts made, after Dec. 31, 2017, and before Jan. 1, 2026, the basic exclusion amount was increased from $5 million to $10 million, indexed for inflation occurring after 2011. For 2018, the basic exclusion amount is $11,180,000.
The TCJA also addresses the possible “clawback” issue in case a taxpayer uses up his or her applicable exclusion amount during life, the TCJA sunsets, and the basic exclusion amount returns to $5 million, indexed for inflation. Readers may remember that this same issue arose when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) temporarily increased the applicable exclusion amount through 2012 to $5 million and, but for this provision being made permanent by the American Taxpayer Relief Act of 2012, would have sunset, returning the applicable exclusion amount to $1 million. While the TCJA does not resolve the clawback issue, newly added Sec. 2001(g)(2) directs Treasury to issue regulations to address any difference between the applicable basic exclusion amount in effect at the time of the decedent’s death and with respect to any gifts made by the decedent.
Surprisingly, the TCJA does not change the top estate tax rate of 40%, continues to allow “portability” of a deceased spousal unused exclusion (DSUE) amount, and does not change the basis step-up rules in Sec. 1014 — all provisions that seemed likely to change under early blueprints put forth by Congress and the president. As previously stated, the change in the basic exclusion amount will exempt more estates from paying estate tax. However, for taxpayers who will still have taxable estates, estate planning will continue much in the same way it always has, with the exception that more modest estates subject to the estate tax might focus more on maximizing the income tax benefits that may come from the increase in the applicable exclusion amount, such as having assets transferred to someone in an older generation to get a step-up in basis without causing an estate tax liability to the older generation.
November 12 – Veterans Day Bank Holiday
Texas Franchise Tax (except if located in a federally declared disaster area)
November 22 Happy Thanksgiving!
The first principle is that you must not fool yourself-and you are the easiest person to foolRichard Feynman
Filing ‘Optional’ Partnership Return
Married couples that jointly own a business may choose to treat the business as a partnership, which requires the business to file a partnership return. However, in many cases, treating the business as a partnership and filing partnership returns is optional.
Often, the default choice is to treat the business as a partnership and prepare a separate return for the business. This choice may be made for a variety of reasons, including a desire to not report gross income on an individual return because of the potential increased audit risk, or to provide liability protection for the owners.
However, there are alternatives. If the business is unincorporated and both spouses materially participate in its operation, the Small Business and Work Opportunity Tax Act of 2007, allows for the spouses to make a qualified joint venture election, under which the business will not be treated as a partnership. Rather, the spouses are treated as maintaining two sole proprietorships for all federal tax purposes, including income tax and self-employment tax.
The treatment of a business as a qualified joint venture can have several beneficial results. The business does not have to file a partnership income tax return or comply with the recordkeeping requirements imposed on partnerships and their partners. As a qualified joint venture, the business will not be subject to potential penalties for failure to file partnership tax returns. Additionally, each spouse is credited for his or her share of the earnings for self-employment tax purposes, and therefore each is eligible to make a separate qualified retirement plan contribution.
The qualified joint venture election is made by simply preparing and attaching separate Schedules C,Profit or Loss From Business (or Schedules F, Profit or Loss From Farming), and Schedules SE, Self-Employment Tax, for each spouse with a timely filed joint individual income tax return.
Alternatively, married couples living in community property states may also treat a co-owned business entity as a disregarded entity for federal tax purposes. By electing this treatment, the owners are again relieved of the partnership tax return filing requirements.
The advantage of non partnership tax treatment was spelled out recently in Argosy Technologies, LLC, T.C. Memo. 2018-35. In Argosy Technologies, a limited liability company (LLC) was owned 50% each by a husband and wife. The IRS proposed a levy to collect unpaid income tax liabilities of the owners and imposed a penalty against Argosy for failure to timely file after the business filed Forms 1065, U.S. Return of Partnership Income, for 2010 and 2011 after the due dates. The returns included Schedules B-1, Information on Partners Owning 50% or More of the Partnership, reporting the spouses as owning 100% of Argosy.
The taxpayers later petitioned the Tax Court and argued that they were actually a single-member LLC, not a partnership, and therefore were not required to have filed a partnership return.
The Tax Court held that since the LLC had represented itself as a partnership on its tax returns, it could not argue that it was another entity and disclaim its validity as a partnership. The court further noted that there was no evidence of an election under Sec. 761(f) for treatment as a qualified joint venture. Accordingly, the penalties against Argosy were upheld.
Had the partnership returns not been prepared and a qualified joint venture or disregarded-entity election properly made, the penalties would have been avoided.
Offshore Account Holders Should Beware: The IRS Is Still Coming
For most of the past decade, the IRS has maintained a safe harbor for taxpayers who want to disclose offshore account holdings that may otherwise expose them to criminal penalties, and over the years, tens of thousands of taxpayers have availed themselves of the program. But on Sept. 28, the world changed for those who have not yet revealed their foreign accounts to law enforcement.
Citing waning taxpayer participation, the IRS ended the Offshore Voluntary Disclosure Program (OVDP) at the end of September. Yet taxpayers would be wrong if they think the program’s closure will dampen the agency’s resolve to go after those it believes are hiding taxable income overseas.
In fact, the IRS last year bragged about its enhanced digital tools for sniffing out those it believes are skirting tax laws (see Cohn, “IRS Criminal Investigation Chief Plans New Enforcement Programs,”Accounting Today (Aug. 2, 2017), and the Department of Justice’s Tax Division boasts a 91.5% conviction rate for tax crimes (IRS, Criminal Investigation 2017 Annual Report, p.7). Since 2009, more than 1,500 people have been indicted for crimes related to international activities, according to the IRS (IR-2018-52 (3/13/18)).
Though time has run out for taxpayers to make a complete disclosure and avail themselves of those program benefits, they can still voluntarily reveal their offshore assets.
Leasing Property To A Corporation
| Avoiding payroll taxes: Rental income from real estate is not subject to the self-employment (SE) tax; a lease of real estate to a closely held corporation represents the ability to withdraw funds from the corporation without incurring Federal Insurance Contributions Act (FICA) taxes (i.e., Social Security and Medicare) or SE tax.
· Avoiding corporate-level gain: Retaining ownership of real estate and other valuable tangible or intangible assets outside the corporation avoids the potential for triggering a gain within the corporation upon a distribution or liquidation of the assets. Conversely, if appreciated assets (i.e., those with a fair market value (FMV) in excess of adjusted tax basis) are distributed from a corporation, whether in liquidation or other form of distribution, gain must be recognized (Secs. 311(b)(1) and 336(a)).
· Retirement cash flow: Retaining valuable assets outside a controlled corporation allows the shareholder-lessor to continue to receive a cash flow stream from the corporation in the form of rents or royalties, even though the shareholder is not employed by the corporation. This can allow a portion of the corporate income to flow to a retired shareholder or a shareholder who is uninvolved in the business operations.
· Business transition: Retaining assets outside the corporation allows the ownership of the business operation and the ownership of business assets to be segregated. For example, a controlling shareholder-lessor may want to divest ownership and control of the business operations by disposing of some or all of the corporate stock but retain a significant portion of the business assets for lease to the entity. This can help transfer ownership and control to the successor generation by minimizing the value of the corporation (e.g., where the corporation contains only operating assets such as receivables and inventory, with fixed assets retained by the founder).
Final 2017 Income Tax Returns
Due October 15, 2018
Individual: Form 1040
C Corporations: Form 1020
Employee Benefits Plans-5500
Gift Tax: Form 709
Since light travels faster than sound, some people appear bright until you hear them speak.unknown
Non Cash Contribution Lesson From The Tax Court:The Substantial Substantiation Rules
Non Cash Contribution Lesson From The Tax Court:
The Substantial Substantiation Rules
George Carlin on the problem of stuff. “My wife and I have too much stuff. My wife, however, hates yard sales. And we cannot afford a bigger house. So we give a lot of stuff away. “
The requirement of a proper contemporaneous receipt, as the recent case of Estelle C. Grainger v. Commissioner, demonstrates the need for substantiating and valuing non cash charitable contributions.
Fair market value (fmv) is what a willing buyer would pay a willing seller, neither under a compulsion to buy or sell and both having knowledge of the relevant facts.
If the fmv is greater than the taxpayer’s basis in the property, §170(e) requires, in certain circumstances, that the taxpayer must reduce the value of the contribution to the taxpayer’s basis amount. When the fmv is less than basis, however, there is no corresponding rule that allows taxpayers to increase the value of the contribution. Taxpayers must use fair market value. Accordingly buying items at a discount and then deducting them at the undiscounted value is not permitted under the law.
Two substantiation rules are (1) the aggregation rule and (2) the Form 8283 rules. In general, the substantiation rules get stricter and stricter as the value of a taxpayer’s donations increase. For all donations of either money or personal property, taxpayers have to maintain adequate records to show the date, location and valuation of all such donations. For each donation of either money or personal property that exceeds $250, the taxpayer must also obtain a contemporaneous written acknowledgement that meets several requirements. For donations that aggregate more than $5,000, the taxpayer must also provide a qualified appraisal that supports the value claimed for the donated property.
Remember, the statute applies these substantiation requirements not only to individual and discrete donations of personality but to aggregate donations of “similar items of property” to “1 or more” charity. Treasury Regulations tell us that “similar items of property” mean property of the same generic category or type and lists a bunch of categories. One of the categories is just this word: “clothes.”
How To Handle Sales Tax
First a sales tax permit is required, it’s against the law to collect sales tax without one.
If your business has a physical location (or locations), you’ll need to configure your checkout system to charge the appropriate sales tax for each location.
You can file your taxes and submit your payments online with each state, but be sure to check the requirements. Depending on the size of your business, or how much revenue you have in a particular state, you might have to file monthly or quarterly. If you collect very little tax, you might only need to file once a year. But even if you don’t collect any tax for a given period, in many states you still need to file.
Some states offer a discount if you file on time.
Corporations & Partnerships
Tax Return Deadline
September 17, 2018
Taking a chance and stepping beyond the safety of the world we've always known is the only way to grow .Wil Wheaton
Reality check: Virtual Currency And Its Tax Ramifications
Virtual currencies are created by “mining,” in which the miner, using powerful computers, authenticates a transaction in the blockchain, a digital ledger of transactions. Besides bitcoin, the most familiar virtual currency, hundreds of others have been created, with more appearing all the time. Digital currency can be traded on third-party digital trading platforms such as Coinbase, used as payment for goods and services, held for investment, and loaned to others.
Although IRS guidance on virtual currency is sparse, Notice 2014-21 lays out some ground rules. Chief among them is that virtual currency is treated as property for tax purposes, and transactions involving virtual currency are governed by the general tax principles for property transactions. When paid as employee compensation, the fair market value (FMV) of the virtual currency (at the time it is paid) must be included in the employee’s W-2 wages, and the employer must withhold income and employment taxes. Similar rules apply when virtual currency is received as payment for services provided as an independent contractor.
Trade Or Business Treatment And Its Impact On Investment Partnerships
In Lender Management LLC, T.C. Memo. 2017-246, the Tax Court concluded that a taxpayer was engaged in the trade or business of providing investment management services and, therefore, could benefit from having its expenses treated as fully deductible business expenses under Sec. 162 rather than being treated as expenses for the production of income under Sec. 212 subject to the Sec. 67(a) 2%-of-adjusted-gross-income floor for miscellaneous itemized deductions. The court ruled that the operations of the company consisted of activities that were beyond those of an investor even though the clients it provided investment management services to were primarily family entities, and its primary source of income was an allocation of profits (i.e., an incentive allocation, or carried interest) from various partnerships to which it provided these services.
During the years covered in the case (2010-2012), Lender Management provided direct management services to three limited liability companies (LLCs) taxed as partnerships for federal income tax purposes. The only members in these three LLCs were the families.
Each LLC had a distinct investment strategy, with one investing in private equities, one investing in public equities, and the third investing in hedge funds. The end-level owners of the three LLCs were, in all cases, children, grandchildren, or great-grandchildren.
To consider an activity as a trade or business, “the taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer’s primary purpose for engaging in the activity must be for income or profit.”
Given the familial relationship of the owners of Lender Management and the investors of the investment LLCs, the court reviewed the economic arrangement between the entities with a heightened scrutiny. Specifically, the court examined whether the arrangement was a bona fide business relationship or an arrangement due to the familial relationship. Applying this heightened scrutiny, the court noted: (1) There was no requirement or understanding that Lender Management would remain the manager of the assets held by the LLCs indefinitely; (2) investors could withdraw their individual money at any time (subject to the LLC’s liquidity restrictions); (3) Keith, as one of the investors in the LLCs, would still have benefited from the investment returns of ownership of the LLCs if he did not work for Lender Management, and any additional income to him was due to the services he provided to Lender Management; and (4) while each investor was a member of the Lender family, the members did not act collectively and, in some cases, did not know each other or were in conflict with each other. The Tax Court found that even though the investors were all members of the Lender family, Lender Management provided investment advisory services and managed investments for each of its clients individually.
Ultimately, the Tax Court held that the activities of Lender Management rose to the level of a trade or business, and it was entitled to deduct its expenses under Sec. 162.
Lender Management affirms the position that an investment adviser can be in a trade or business even if the primary source of its income is from the allocation of profits from underlying managed partnerships. In considering these structures, it is critical that taxpayers and their advisers consider the specific facts and circumstances of each particular situation for the structure to be respected.
IRS issues HSA contribution limits for 2019
The IRS issued the calendar year 2019 inflation-adjusted figures for the annual contribution limits for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans.
For 2019, the annual limit on deductible contributions is $3,500 for individuals with self-only coverage (a $50 increase from 2018) and $7,000 for family coverage (a $100 increase from 2018).
Due June 15, 2018
Individual Estimated Tax
Payments and Overseas Filers
There is little difference in people, but that little difference makes a big difference. That little difference is attitude. The big difference is whether it is positive or negative.W. Clement Stone
Understanding the new Sec. 199A business income deduction
- Sec. 199A allows taxpayers other than corporations a deduction of 20% of qualified business income earned in a qualified trade or business, subject to certain limitations.
- The deduction is limited to the greater of (1) 50% of the W-2 wages with respect to the trade or business, or (2) the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (generally, tangible property subject to depreciation under Sec. 167). The deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.
- Qualified trades and businesses include all trades and businesses except the trade or business of performing services as an employee and “specified service” trades or businesses: those involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business’s principal asset is the reputation or skill of one or more owners or employees.
- Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are effectively connected with the conduct of a business in the United States. However, some types of income, including certain investment-related income, reasonable compensation paid to the taxpayer for services to the trade or business, and guaranteed payments, are excluded from qualified business income.
- The W-2 wage limitation does not apply to taxpayers with taxable income of less than $157,500 for the year ($315,000 for married filing jointly) and is phased in for taxpayers with taxable income above those thresholds. Income from specified service businesses is not excluded from qualified business income for taxpayers with taxable income under the same threshold amounts.
- The new law also reduces the threshold at which an understatement of tax is substantial for purposes of the accuracy-related penalty under Sec. 6662 for any return claiming the deduction, from the generally applicable lesser of 10% of tax required to be shown on the return or $5,000 before the new law, to 5% of tax required to be shown on the return or $5,000.
The law’s many yet-unclear points include its application to rental property, the netting of qualified business income and loss for taxpayers with multiple qualified trades or businesses, determining the deduction for tiered entities, allocating W-2 wages among businesses, and whether compensation paid to an S corporation shareholder is included in W-2 wages for purposes of that limitation.
Income taxation of trusts and estates after tax reform
Rate reduction and thresholds: The law provides, for tax years 2018 through 2025, a new table under Sec. 1(j)(2)(E) of ordinary income tax rates and thresholds for trusts and estates (subject to adjustment for inflation for years after 2018) as shown in the chart below.
Ordinary income tax rates
The law retains the preferential rates for qualified dividend and long-term capital gain income under Sec. 1(j)(5) but adjusts the thresholds as illustrated in the chart below.
Capital gains and qualified dividend rates
Application of Sec. 641(b): Generally, under Sec. 641(b), the taxable income of an estate or trust is computed in the same manner as for an individual. This means that many of the amendments to the Code applicable to individuals are also relevant to calculating the adjusted total income of trusts and estates:
Sec. 164, state and local taxes: The law amends Sec. 164(b) to limit the aggregate deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes to a maximum of $10,000 per year. This limitation does not apply to any real property taxes or personal property taxes incurred by a trust or estate in carrying on a trade or business, or an activity under Sec. 212.
Sec. 67, miscellaneous itemized deductions: The law amends Sec. 67 by suspending all miscellaneous itemized deductions. Trusts and estates will not be permitted to deduct investment fees and expenses and unreimbursed business expenses, among others. On its face, the law does not appear to impact Sec. 67(e), which does not apply the 2% limitation to administration expenses incurred solely because the property is held in a trust or estate (i.e., trustee fees); however, this is an area where clarification will be required.
Sec. 642(b), personal exemptions: The law amends Sec. 151 to suspend the personal exemptions for individuals; however, trusts and estates remain entitled to their personal exemptions under Sec. 642(b). The amounts of the personal exemptions for trusts and estates remain unchanged.
Alternative minimum tax (AMT) — Sec. 55: The law did not amend the AMT for trusts and estates. The exemption of $24,600 and phaseout threshold of $82,050 for trusts and estates (for 2018) were not changed. These amounts will continue to be adjusted for inflation under Sec. 55(d)(3).
Income distribution deduction (IDD) under Sec. 651: Under Sec. 651(b), simple trusts are entitled to an IDD, which is limited to the lesser of fiduciary accounting income (FAI) or distributable net income (DNI). In the past, FAI has generally been greater than DNI for simple trusts, so the IDD for simple trusts usually equals DNI. This is because all expenses were allowed in calculating DNI, while some expenses were allocated to principal when calculating FAI.
As trusts and estates lose the deductions discussed above, the adjusted total income (ATI) will increase. As ATI increases, DNI increases. FAI will remain the same, as the allocation of expenses for FAI is controlled by a trust’s governing document or the applicable state’s Principal and Income Act. As such, this may result in FAI becoming the more common IDD limitation, which may result in trusts and estates paying more income tax at the trust level than before the Tax Cuts and Jobs Act was enacted.
Certified Public Accountants
Casualty (Hurricane) Losses
Legislation enacted on Sept. 29, 2017, provided benefits for victims of hurricanes Harvey, Irma, and Maria. For qualified disaster-related personal casualty losses from those hurricanes, the act removes the requirement that personal casualty losses must exceed 10% of the taxpayer’s AGI to be deductible and allows nonitemizers to increase their standard deduction by the amount of their net disaster loss. Additionally, victims of the hurricanes can use their 2016 income to calculate the 2017 earned income tax credit and refundable portion of the child tax credit. The legislation waives the 10% penalty on pre-age-59½ retirement account payouts of “qualified hurricane distributions” of up to $100,000 in a tax year, and the income tax due on those distributions can be spread over a three-year period. Any amounts recontributed to the account during the three-year period will be treated as rollovers, and any tax previously paid on those amounts can be recovered by filing an amended Form 1040, U.S. Individual Income Tax Return. Victims with Sec. 401(k) accounts can borrow up to the lesser of $100,000 or 100% of the account balance, and loan repayments can be deferred.
Due April 17, 2018.
Individual, Trust, C Corporation Returns and Foreign Bank Account Reporting
The possible’s slow fuse is lit by the imagination.Emily Dickinson
Offshore Voluntary Disclosure Program To End In September
The IRS announced that it is closing the 2014 Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018. It also said it was announcing OVDP’s closure now so taxpayers with undisclosed foreign accounts who want to participate will be aware that they have to act to take advantage of it.
“All along, we have been clear that we would close the program at the appropriate time, and we have reached that point,” said Acting IRS Commissioner David Kautter in a prepared statement. “Those who still wish to come forward have time to do so.”
The IRS Criminal Investigation division has indicted 1,545 taxpayers for criminal violations related to international activities and it continues to fight offshore tax avoidance. The Criminal Investigation Voluntary Disclosure Program continues to exist, as do procedures for submitting delinquent FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, and delinquent international information returns.
Taxpayers who were unaware of their filing obligations can continue to use the Streamlined Filing Compliance Procedures, although the IRS said it may end this program as well sometime in the future.
The IRS Is Auditing A Lot Fewer Americans
The IRS audited 1 in about 160 individual tax returns in 2017, the lowest since 2002 and the sixth consecutive year that audits have declined, as budget cuts have reduced the number of staff at the federal agency.
The Internal Revenue Service—which has lost nearly a third of its enforcement employees since a 2010 peak, when it audited 1 in 90 individual returns—audited 0.62% of individual returns in the fiscal year that ended Sept. 30, according to IRS data.
The spending bill that Congress recently passed contains just over $11 billion for the IRS.
The bill appropriates $2.5 billion to the IRS for taxpayer services (compared with $2.2 billion last year), $4.9 billion for IRS enforcement activities (similar to last year).
The IRS also gets $3.6 billion for its operations (similar to last year).
For business systems modernization, the IRS gets $110 million (a cut from last year’s $290 million). The bill directs the IRS to make improvements to its 1-800 help line a priority and to allocate resources to improve its response time when communicating with taxpayers, “particularly with regard to victims of tax-related crimes.”
The bill also makes $320 million available to the IRS for carrying out changes made by last year’s tax overhaul legislation, but the IRS must submit to the House and Senate appropriations committees a spending plan for those funds before it can spend them.