Walther CPA Newsletter March 2019

Walther CPA Newsletter March 2019

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Gross receipt aggregation rules 

For a business to be eligible for small business taxpayer treatment, the taxpayer must not be considered a tax shelter and can’t have average annual gross receipts of greater than $25 million. All persons treated as a single employer are treated as a single person for purposes of measuring gross receipts.

The gross receipts of all organizations that are part of a “parent-subsidiary group,” a “brother-sister group” or a “combined group” under common control are required to be aggregated for purposes of applying the $25 million gross receipts test. An organization can include a corporation, partnership, trust, estate or sole proprietorship that conducts a trade or business and can only be a member of one group. If an organization is a member of more than one group, the organization can attach a statement to its timely filed return indicating in which group it will be included. Otherwise, the IRS can choose the group in which the entity will be included.

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Morale is when your hands and feet keep on working when your head says it can’t be done.”

Benjamin Morell
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Reminder on return due dates for owners and beneficiaries of foreign trusts and gifts from foreign persons

 Two forms related to foreign trusts, Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, are required to be filed separately from the income tax return of the owner and beneficiary. Many foreign pension plans are deemed to be foreign trusts and require Forms 3520 and 3520-A to be filed. However, exemptions include Canadian Registered Retirement Savings Plans (RRSPs).

Form 3520

U.S. owners (or executors of estates of U.S. decedents) of foreign trusts and U.S. persons receiving a large gift from a foreign person are required to file Form 3520 by April 15. U.S. beneficiaries of foreign trusts are also required to file Form 3520 in any year in which the beneficiary receives a distribution from the foreign trust. Loans and certain other transactions between foreign trusts and U.S. persons must also be reported on Form 3520. Substantial penalties apply for noncompliance.

If a taxpayer files an extension for their individual return, they will receive an automatic extension to Oct. 15 on their Form 3520. Currently, Form 3520 can’t be extended independently of Form 1040 or Form 1041. Thus, if Form 3520 can’t be filed by April 15, the taxpayer must request an extension to file Form 1040 or Form 1041 to extend the due date for filing Form 3520.  

Form 3520-A

Form 3520-A is due March 15. A taxpayer can only extend it by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, separately from the Form 1040. An extension cannot be made by simply extending the due date for Form 1040. The extension is for six months until Sept. 15. Often, the taxpayer misses the March 15 deadline and the separate extension.

The penalty for failure to file Form 3520-A in a timely matter is the greater of $10,000 or 5% of the value of the portion of the trust treated as owned by the U.S. person. A foreign grantor trust with a U.S. owner must file a Form 3520-A, and it is generally filed by the trustee of the foreign trust. However, it’s ultimately the U.S. owner’s responsibility to ensure that the foreign trust files Form 3520-A and furnishes the required annual statements to all U.S. owners and U.S. beneficiaries. If the trustee of the foreign trust doesn’t file Form 3520-A, the U.S. owner must file the return.

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Walther CPA Newsletter Feburary 2019

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Five Steps To Follow In A Sales Tax Audit

  1. Treat the auditor with respect.  Provide them with adequate space to perform their work and have your sales tax records organized in advance.
  2. Presume you need to collect the tax.  On June 21, 2018, the Supreme Court of the United States ruled physical presence is not  a requisite for sales tax collection.  Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, as economic nexus.  That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.
  3. Have complete and accurate exemption certificates.  If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge – plus penalties and interest.
  4. Keep accurate records.  Be certain that all sales are taxed unless a valid exemption is on file.  Provide reconciliations of tax billed and collected from customers to amounts remitted to the taxing authority.
  5. Pay what is due.  Remit timely, many states provide discounts for early payments.

 

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  • Qualified Small Business Stock Gets More Attractive

     Sec. 1202(a) provides that a non corporate shareholder can exclude 50% of the gain from the sale of qualified small business (QIS) stock that has been held for five years.  QIS stock must be stock in a C corporation; thus, Sec. 1202 is generally not available to exclude gain on the sale of S corporation stock or a partnership interest.

    The 50% exclusion percentage was increased to 75% for stock acquired from Feb. 18, 2009, to Sept 27, 2010, and then again to 100% for stock acquired on or after Sept. 28, 2010.  The 100% exclusion, unlike many other tax breaks, is permanent.

    This ability to exclude 100% of the gain on the sale of stock – stock sold for cash, moreover – is virtually unmatched throughout the Code.                                                            

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IRS To Waive Tax Penalties For Under Withholding And Underpayment

 Internal Revenue Service (IRS) has indicated that it would generally waive the tax penalty for any taxpayer who paid at least 85% of their total tax liability last year through federal income tax withholding, quarterly estimated tax payments or a combination for the two.

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Walther CPA Newsletter January 2019

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IRS Announces 2019 Mileage Rates 

The Internal Revenue Service (IRS) has issued the 2019 standard mileage rates.  Beginning on January 1, 2019, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 58 cents per mile for business miles driven (up from 54.5 cents in 2018)
  • 20 cents per mile driven for medical or moving purposes (up from 18 cents in 2018)
  • 14 cents per mile driven in service of charitable

     organizations (currently fixed by Congress)

Keep in mind that, under tax reform, taxpayers can no longer claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.  That deduction was eliminated from Schedule A alongside similar deductions like the home office deduction.

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Clarification Of Itemized Deductions For Trusts And Estates

 Treasury and the IRS intend to issue regulations providing clarification of the effect of newly enacted Sec. 67(g) on the ability of trusts and estates to deduct certain expenses. Sec. 67(g), suspends miscellaneous itemized deductions for tax years 2018-2025.

The pending regulations are anticipated to clarify that the costs of trust or estate administration that are deductible under Sec. 67(e)(1) are not miscellaneous itemized deductions and, therefore, their deductibility has not been suspended by Sec. 67(g).

Expenses that are paid or incurred in the administration of an estate or trust and that would not have been incurred if the property were not held in such an estate or trust are deductible under Sec. 67(e)(1). Expenses deductible under Sec. 67(e) include costs paid for tax preparation fees for most returns, appraisal fees, and certain fiduciary expenses, as outlined in Regs. Sec. 1.67-4. Costs that are not deductible under this section are those that customarily would be incurred by a hypothetical individual holding the same property, such as ownership costs (e.g., homeowners association fees, insurance, and maintenance).

 

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People often say motivation doesn't last. Well neither does bathing-that's why we recommend it daily.

Zig Zigler

Net Operating Losses 

Most taxpayers no longer have the option to carryback a net operating loss (NOL).  For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward.  The 2-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017.  Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company.  Also, for losses arising in taxable years beginning after December 31, 2017, the net operating loss deduction is limited to 80% of taxable income (determined without regard to the deduction).

 

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Walther CPA Newsletter December 2018

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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.

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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).

 

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A diverse community is a resilient community, capable of adapting to changing situations.

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Walther CPA Newsletter November 2018

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Estate Taxes

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.

Questions or comments? Email us at gary.walther@waltherpartners.com

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Highlights

November 12 – Veterans Day Bank Holiday

November 15th

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 fool

Richard Feynman

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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.

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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.

                                                                                       

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Walther CPA Newsletter October 2018

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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).

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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.

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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.”

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