TAX RESOURCES

This page will give you different tax related topics useful for your business. (information provided by AIPB)

10/22 - Inconsistent records lose auto deductions

The case: C was a sole proprietor whose consulting business primarily involved traveling within 30 miles of her home to train clients in software. She kept a contemporaneous mileage log, generally recording the date or range of dates for a trip, the city, a brief description of the purpose of the trip, the number of miles driven, and the person or people she consulted with. To compute her vehicle expense deduction, she multiplied the standard mileage rate by the number of miles driven for business and added some actual operating expenses. The IRS denied all the vehicle expense deductions.

Held: For the IRS. A taxpayer cannot deduct both the standard mileage rate and actual operating expenses— it’s one or the other.

The court denied both treatments because the taxpayer did not maintain adequate records as required by §274, Disallowance of certain entertainment, etc., expenses, and the accompanying regs, which require that records establish:

(1) the amount of the expense;

(2) the time and place the expense was incurred; and

(3) the business purpose of the expense.

Also, because vehicles are “listed property”—assets that lend themselves to both personal and business use, such as cars, PCs and phones—the taxpayer must establish both total use and the proportion of business use. The travel log lacked crucial details. Many entries included multiple days of travel together. Other entries excluded required facts such as the time and place of the travel. Because the records did not comply with §274(d) requirements, all the travel deductions were denied.

[Cooney v. Commissioner, T.C. Summ. Op. 2019-10]

AIPB tip: Even if the IRS auditor believes your company or client used a vehicle for business and can determine the number of miles driven, the deduction will be denied if the records do not include all the details required by §274 for each trip.

6/18 - Canceled checks save business deductions

Many taxpayers mistakenly believe that bank or credit card statements support deductions. But the IRS demands more. There must be enough detail to support who was paid, exactly what they were paid for, and the date and amount of each payment. This is how one business successfully reported its deductions.

 The case: RD, a mason, operated a proprietorship under both his own name and Red Dirt LLC, which had a separate bank account. RD reported business income on Schedule C, deducting expenses for supplies, equipment rental and contract labor. The IRS denied the deductions.

 Held: For the taxpayer. The taxpayer’s bank statement included copies of his checks. The checks included the names of the payees, the amounts paid, and memo notes of what was purchased. The court ruled this was sufficient information to support the deductions. [Bolles v. Commissioner, T.C. Memo. 2019-42]

6/3 - Avoid final paycheck shortcuts

The case: A group of sales employees received W-2s that reported their wages and commissions.

 When they were terminated, their employer paid all of their outstanding commissions and reported them on 1099s as nonemployee compensation—then provided W-2s that reported their final noncommission wages.

 The former employees sued their employer, claiming their final W-2s were understated and that the 1099s were the employer’s attempt to avoid paying its share of FICA and other payroll taxes.

 Held: For the employees. The employer claimed that the tax code does not allow workers to sue for incorrectly classifying them as independent contractors instead of as employees. But IRC §7434(a) states that a taxpayer who willfully files a fraudulent information return with respect to payments to another person can be sued for damages by that other person.

 In this case, the former employees did not claim they were misclassified—they claimed that the employer understated their W-2 wages to avoid paying its share of the payroll taxes, effectively passing the taxes on to them in the form of self-employment tax. [Greenwald v. Regency Management Services LLC, No. 1:18-cv-00227; D.C. Md.]

3/26 - Many more business meals are deductible

New limits on meal and entertainment deductions appear to increase the number of situations in which business meals are deductible, according to recent IRS Notice 2018-76. In fact, many business meals that have not been deductible for years are now deductible, according to the notice. Under the old rules, for a business meal to be deductible, there had to be an active business discussion directly or indirectly connected to the meal. In other words, the discussion had to take place during the meal or immediately before or after it—and if you didn’t want the deductions denied under audit, you had to document the business that was discussed. But tax attorneys at a recent conference pointed out that the old requirements do not appear in the new rules spelled out in Notice 2018-76.

Bottom line: All that is required under the IRS Notice is that there be a current or potential business relationship. The business has to show only that there was some hope for a business relationship at the time, even if one never materialized.

3/11 - IRS is reading your social media accounts

Tax pros report that the IRS is singling out taxpayers for investigation and preparing cases against them not just by crunching numbers—but by searching social media. IRS agents look at social media for signs that taxpayers have more assets or income, or an IC has more clients than are reflected on their tax return. If the old method singles out you or your firm for an audit or investigation, it is now normal for the IRS to do social media searches. Add to this the fact that the IRS now uses artificial intelligence and big data (through huge quantities of transactions) to more efficiently and effectively identify taxpayers for investigation.

1/26 - Tips on your 2019 1099-MISC forms

Our goal as your national association is to raise bookkeepers’ professional status. We do this by offering self-study courses in bookkeeping, accounting and tax that increase your value to your company or clients—and by keeping you fully up to date with our member accounting and tax newsletter, The General Ledger.

Here’s just one example from this month’s issue of our member newsletter:

Independent contractors must receive 1099-MISC forms if they are not incorporated—i.e., are a sole proprietorship, partnership, disregarded entity or LLC that has elected not to be treated as a corporation—and whom you paid at least $600 in cash for services they provided to your firm in 2018. This includes:

 ·         Inside and outside corporate directors

·         Outside accountants, lawyers and salespeople

·         Auto mechanics/service stations that repair company cars

·         Plumbers, electricians, painters, carpenters, tech consultants or office cleaners

·         Equipment lessors and repairpeople

·         Office/company car lessors

 Exception: Attorneys who do business as corporations must receive 1099s.

 Triple-check IC TINs. If they don’t match IRS records, it can mean real trouble. Avoid name/TIN mismatch penalties by registering in the free, easy-to-use IRS online TIN Matching program before doing your 1099s. You can verify up to 25 on one screen.

 You can truncate a payee's TIN to 5 digits—but only on payee paper or electronic copies. The 1099 filed with the IRS must have the full TIN. Truncated TINs look like this:

·         SSNs: XXX-XX-1234 or ***-**-1234

·         EINs: XX-XXX1234 or **-***1234.

Warning: Do not truncate your firm’s EIN.

 You must complete paper forms for payees and your files, even if you file electronically with the IRS. The IRS has fillable Copies 1, B, 2, C and D online. You may use these online fillable forms for payees’ copies and your files

12/12 - Noncash gifts and prizes for employees —what’s taxable, what’s not  

Our goal as your national association is to raise bookkeepers’ professional status. We do this by offering self-study courses in bookkeeping, accounting and tax that increase your value to your company or clients—and by keeping you fully up to date with our member newsletter, The General Ledger.

Here’s just one example from this month’s issue:

 Include the fair-market value (FMV) of the gift or prize in wages subject to FIT, FITW, FICA and FUTA. [Rev. Rul. 57-18, CB 1957-1, 35]

 Nontaxable gifts. Fruit baskets, hams, turkeys, wine, flowers and entertainment tickets to a show, sporting or other event (but not season tickets) generally are de minimis (nontaxable) fringes if given infrequently.

Taxable gifts. Cash or cash in kind (gift certificates) for any amount is wages subject to FIT, FITW, FICA and FUTA—e.g., a gift certificate for a turkey is taxable; a turkey is not. [26 CFR 1.132-6(e); TAM 200437030]

Parties and picnics. The cost is 100% (not 50%) deductible to the business and nontaxable to employees and their families—if infrequent and given to promote employee health, goodwill, contentment or efficiency—e.g., holiday or cocktail parties, company picnics. [IRC §132, Rev. Rul. 2004-109 and Rev. Rul. 2004-110]

12/7 - 2018 Bonuses—what’s taxable, what’s not

A cash bonus, no matter how small, is wages subject to FITW, FICA, FUTA and applicable state/local payroll taxes. If given after FIT has been withheld from regular wages—or with regular wages but identified as separate—you can use the 25% supplemental withholding rate. If wages exceed $1 million for the year, withhold at 39.6%. [26 CFR 31.3402(g)-1]

 Discretionary (lump-sum) bonuses. To be discretionary (excludable from overtime calculations)—it must be the employer who decides when and how much to give. The bonus cannot be required by a contract, agreement or promise, or be given in a pattern so that it is expected. To be discretionary, the bonus must be a complete surprise to the employee.

 Exception: Holiday bonuses can be discretionary, even if expected each year. [29 CFR 778.211]

 Nondiscretionary bonuses are those required under a contract, agreement or promise, express or implied—e.g., for higher or faster production, as inducements to take a job or not leave—or bonuses employees have come to expect (with the exception of holiday bonuses). Nondiscretionary bonuses for hourly employees must be added to weekly gross pay for the week in which they are earned and must be included when computing the week’s O.T. [29 CFR 7788.209]

 Example: Jin earns $14/hr. One week Jin works 42 hours and earns a $50 prorated production bonus.

 Jin’s normal pay:  $588 for the week ($14 x 42 hrs.) + $50 bonus = $638 straight-time pay.

 Overtime pay: $638 for the week (including the nondiscretionary bonus) ÷ 42 hours worked = $15.19 regular rate of pay x 50% premium rate = $7.60 (rounded) x 2 hours’ O.T. = $15.20 (rounded) premium pay.

 Gross pay: $638 straight-time pay + $15.20 premium pay = $653.20 gross pay for the week.

 Signing and related bonuses. A bonus given for signing or cancelling an employment contract is wages subject to FIT, FITW, FICA and FUTA.

11/27 - Is is loan or is it an investment?

The case: Y was a party to a joint venture to construct homes. His role was to provide the capital, while the other party built and sold the homes. When the venture failed, Y deducted the capital he contributed as ordinary losses from business bad debts. The IRS disallowed the deductions.

 Held: For the IRS. To deduct a loss as a business bad debt, you must show that the debt was related to your trade or business. The taxpayer argued that his trade or business was investing in vacant lots, building homes on them and selling the homes to the public.

 But under the terms of the joint venture, the taxpayer received no compensation for services performed, was not required to perform any services, did not own any of the properties, and had no responsibility for building or marketing them.

 His involvement in the venture was to provide capital and to receive a 15% return on his capital (not interest on the money he provided), so he had the role of an investor. Managing one’s own investment capital is not a trade or business, so the losses could be deducted only as investment losses—not as bad debt. [Yaryan v. Commissioner, T.C. Memo. 2018-129]

11/7/2018 - Why these Mary Kay deductions were denied as “not a business”

The case: N had a full-time job when she joined Mary Kay and ran the new activity from her home, where she kept the beauty product inventory in a closet. She maintained books and records for the business and hired no one to do so. She had no system to track profits or cash flow. She attended weekly Mary Kay meetings but made no changes in her business based on the meetings.

Although N opened a separate bank account for Mary Kay, all business income and expenses were made through her personal bank account.

She had little revenue from the business but big expenses that she reported on a Schedule C for 3 years. The IRS audited her returns and denied all Mary Kay-related deductions.

Held: For the IRS. The taxpayer substantiated only 25% of the denied expenses that the IRS would have allowed had it been a real business. But the IRS said it was not and denied all deductions exceeding the activity’s revenues.

Most of her deductions were obvious personal expenses, such as trips with her daughter and travel to college sorority meetings.

Worse, she made no attempt to conduct the activity as a business with the intention of earning a profit, had no prior success in similar activities or sales experience, had no business plan or adequate records, took no steps to reduce the substantial losses, and did not consult with experts or modify the business to increase income or reduce losses.

Between her full-time job and frequent travel, she appeared to have little time for the activity and had no records of time spent on it or actions taken. Not only had she used her Mary Kay expenses to offset substantial other income, the expense deductions were for activities from which she derived significant personal pleasure.

The court concluded the activity was not a business. [Nix v. Commissioner, T.C. Memo. 2018-116]

10/30/2018 - Home-office storage space may be deductible —but not for this taxpayer

The case: N was a sole proprietor who operated a smog inspection station for vehicles. He rented an apartment down the street from his business.

When the state required him to keep certain documents and have them readily accessible for inspection and his inspection station lacked the space for them, he stored the records at home in his garage, along with other business supplies and equipment. He did not store any personal items in the garage, so he claimed a home office expense for the use of the garage. The IRS denied the deduction.

Held: For the IRS. A portion of a dwelling unit used on a regular basis as a storage unit is deductible as a home office only when it is used to store the taxpayer’s inventory or product samples, the dwelling unit is the sole fixed location of the business, and the business consists of selling products at retail or wholesale.

In this case, the taxpayer stored books and records, not inventory held for sale. Also, the dwelling unit where the items were stored was not the sole fixed location of the business.

10/16/18 - Cohan Rule

When books and records do not adequately document and support a tax return, the Cohan rule offers an alternative to prove most expense deductions.

 But the Cohan rule has limits.

 For example, the Cohan rule cannot override tax code requirements for specific documentation to support some types of expenses, especially travel, entertainment and other expenses under §274, Disallowance of certain entertainment, etc., expenses.

 For other expenses, the courts have requirements: There must be sufficient documentation or other evidence for a court to make reasonable, rational estimates of the expenses, and that money was expended for a specific expense item and that there is some logical basis for estimating the minimum amount spent. Even with this evidence, only that minimum amount will be allowed as a deduction.

Methods that have successfully established deductions under the Cohan rule include:

·          oral testimony;

·          previous years’ tax returns;

·          industry norms (such as from published surveys and directories);

·          other statistics establishing expenses incurred by others in the taxpayer’s business; and

·          documentation from years previous to or after the years in question (when the records for the years in question are not available) and the taxpayer can show that the firm’s operations during those other years were similar to operations in the years in question.

10/10/18 - Key factor of 100% depreciation

Under the new tax law, bonus depreciation, referred to as “100% bonus,” is taken in the first year a new or used asset is purchased and put into service after September 27, 2017. If the company takes a Sec. 179 deduction, the Sec. 179 amount is deducted before depreciation is taken.

Under the law, a company is required to take 100% bonus depreciation in Year 1 on property that has a MACRS recovery period of 20 years or less; i.e., most machinery and equipment. assets purchased after September 27, 2017.

To avoid this requirement, a company must elect not to take 100% bonus by attaching a statement to its tax return. There are reasons why a company may elect not to take either Sec. 179 or 100% bonus. For example, the company may not need that much of a deduction for the year or may not want to make its income look too low because it is applying for a loan, or for other reasons.

Key factor: If a company elects not to take 100% bonus, it must do so for all assets of the same class purchased during the year, but you should check with your CPA.

EXAMPLE: In 2018, MidCo purchases $740,000 of equipment, all 5-year property, including a used car—cars are also 5-year property—. MidCo will take a Sec. 179 deduction on all the equipment but elects out of 100% bonus for the car.

Can MidCo take 100% bonus on the equipment other than the car?

No, MidCo cannot take 100% bonus on the other equipment. When a company elects to take 100% basis for an asset, no bonus can be taken on any other assets in the same class. Because all the equipment that MidCo purchased was in the same 5-year property class, no bonus depreciation can be taken on any of it.

10/1/18 - 5 practical tips on paying part-time employees

1.    Withhold FICA on part-timers (and retirees). Even if someone who works for you part-time also has a full-time job where they have had 100% of their FICA withheld for the year, you must withhold the full amount of FICA from their pay. These individuals can obtain a refund of any overpaid FICA on their 1040. Similarly, if a retiree receiving Social Security benefits works for you, say, 1 day a week, you must withhold FICA.

 2.    Former employees who come back to work for you are most likely employees—not independent contractors. If they do the same job they did before they left, especially in the same tax year, they are employees.

 3.    Length of employment does not determine worker status. Even employees who work for only part of 1 day are still employees, and all employment taxes apply.

 4.    Giving part-timers benefits is optional. Generally, you do not have to pay part-time or summer help for holidays, and need not include temps and part-timers in health, pension and other benefits. But to exclude them, have a written plan stating which benefits are not available to these workers.

 5.    Defining “part-time” v. “full-time” employees. Federal wage-and-hour law restricts only the number of hours worked in the workweek, when overtime must be paid (for each hour worked over 40 hours in the workweek), and the number of hours that children can work. Otherwise, company policy defines part- v. full-time employees.