Author Archives: Bruce - Your Host at The Tax Nook

A Sole Proprietorship May Be The Easiest Route to Travel for SOME Businesses!

A lot of people think that the first step to starting a business is incorporating or organizing a Limited Liability Company (LLC). While both types of entities can provide your business with additional protection, they’re not the answer for everyone. And that protection comes at a cost. I’ve created a list of some factors that should be reviewed before deciding on an LLC, a corporation, or a sole proprietorship. For the sake of this post, I will assume that your business, at least in the beginning is a one-person show with no partners and no employees. While that leaves out many startups, it encompasses many more.

The Words 'Sole Proprietorship'.

Here Are Some Points to Consider:

Potential Liability. If you’re designing and importing a children’s toys, you will need all the protection you can get. On the other hand, if you’re a carpenter your insurance should be able to handle most liability issues. Many professionals are likely to be sued personally even if the business is incorporated. Things quickly change if you have employees. If that’s the case a corporation or LLC can protect you personally.

Business Debts. In earlier times the corporate form was used mostly to protect owners from being personally liable for corporate debts. Today, it’s used for personal protection from a range of lawsuits. But for most small businesses, owners will be required to personally guarantee any bank, etc. loans. The only advantage to a corporation or LLC may be avoiding accounts payable on a default. And even a corporation or LLC won’t protect you if don’t respect the formalities of the entity.

Cost. If you do it yourself, the cost of setting up (and dissolving if it doesn’t work out) a corporation or LLC may be relatively small (generally between $125 and $800). Using an attorney will add to the cost. There may be annual fees such as filing fees and franchise taxes. These vary widely. Not much of an issue if the business is nicely profitable, but a burden if you’re suffering losses. If you do business as a corporation (S or C) you’ll have a separate return to file. That is a consideration if you have a professional prepare it.

LLC vs. S Corporation. While you could do business as a regular C corporation, you could find yourself subject to double taxes. Most small businesses elect S corporation status where profits and losses are passed through to the shareholders. An LLC with only one member is a separate entity for legal purposes, but is disregarded for federal tax purposes. That is, instead of filing a partnership return (the normal return for an LLC with more than one member (owner)), a single-member LLC reports its income and expenses on the owner’s Schedule C. That, plus the fact no balance sheet is required, can save some preparation costs at tax time.

DBA. If you’re doing business as a corporation or LLC you will decide on a name when filing with the state. While you could use your own name (e.g., Ralph Kramden, Inc.) that’s usually not the case. As a sole proprietorship, the default is to use your own name. That’s fine if you’re Ralph Kramden, Attorney-at-Law, but not so attractive if you want to brand the business. The solution is filing with your state for a Doing Business As (DBA) to do business under an assumed name (e.g., Ralph Kramden doing business as Brooklyn Auto Body). You have to decide if you want the extra work of a DBA.

Transactions Between You and Entity. If you’re doing business as a separate entity, you’ve got to respect the formalities. Business assets are purchased and titled in the name of the entity. Assets transferred to shareholders or LLC members should be accounted for on the books and for tax purposes. Loans are taken out in the name of the entity. Not in your name personally. Paying a corporate loan (or other expense) with a personal check won’t get you a deduction. The proper approach is either to make a loan or equity contribution to the business so the business can pay the expense and get the deduction. Alternatively you can submit an expense report and have the business reimburse you. Paying personal expenses with a business check as well as not respecting other formalities such as making customers, creditors, etc. aware that you’re doing business as an LLC or corporation can allow outsiders to challenge the existence of the corporation or LLC. It sounds simple enough, but most small business owners don’t follow through. A sole proprietorship doesn’t have these problems.

Switching Entities. If you start a business as a sole proprietorship and later decide to incorporate or change to an LLC, doing so is relatively straightforward and there are generally no tax consequences. Going in the other direction can be more complicated, particularly if you have fixed assets. In some cases there may be tax consequences.

The Best Approach? If you have or will have shortly, owners in addition to yourself, you might as well use a corporation or LLC from the businesses inception. If additional owners are unlikely (at least for some time) a sole proprietorship should be considered if the liability protection of an LLC or corporation isn’t needed. You should discuss the issue with your attorney and with your tax advisor.

Keep in mind that this discussion is in no way inclusive of all factors to be considered in starting a business.

So, if you are considering starting a business (or already have a business) give us a call for a consultation. Your business will thank you.

We can be reached at: (845) 344-1040. You can also learn more about us at our website:
SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Uh-Oh! The IRS is Riding the Debt Collector Train. Again!

Sooooooo, the IRS has recently announced (on September 26) that it plans to begin a private collection program (authorized by the Fixing America’s Surface Transportation Act) for certain overdue federal tax debts next spring and has selected four contractors to implement the new program.

A 1040 tax return with the word 'Overdue' stamped on it.

The IRS Has Hired Private Debt Collectors to Collect Back Tax Debt.

The IRS has attempted to use private contractors twice in the past, both times finding it not cost effective. Now, under the law, the IRS is required to use qualified contractors to collect inactive receivables. An inactive receivable is one that meets one of the following requirements:

  1. At any time after assessment, the Internal Revenue Service removes such receivable from the active inventory for lack of resources or inability to locate the taxpayer,
  2. More than 1/3 of the period of the applicable statute of limitation has lapsed and such receivable has not been assigned for collection to any employee of the Internal Revenue Service, or
  3. In the case of a receivable which has been assigned for collection, more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection of such receivable.

Certain receivables are not eligible for collection using private collectors. They include:

  • Those subject to a pending or active offer-in-compromise or installment agreement,
  • Those classified as an innocent spouse case,
  • Those involving a taxpayer identified by the IRS as being:
    1. Deceased,
    2. Under the age of 18,
    3. In a designated combat zone,
    4. A victim of tax-related identity theft,
    5. Currently under examination, litigation, criminal investigation, or levy,
    6. Subject to pending or active offers in compromise,
    7. Subject to a right of appeal, or
    8. In a presidentially declared disaster areas and requesting relief from collection,
  • those currently under examination, litigation, criminal investigation, or levy, or
  • those currently subject to a proper exercise of a right of appeal under this title.

The new program, authorized under a federal law enacted by Congress last December, enables these designated contractors to collect, on the government’s behalf, outstanding inactive tax receivables. As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act. The IRS has selected the following contractors to carry out this program:

    • CBE Group 1309 Technology Pkwy Cedar Falls, IA 50613
    • Conserve 200 CrossKeys Office park Fairport, NY 14450
    • Performant 333 N Canyons Pkwy Livermore, CA 94551
    • Pioneer 325 Daniel Zenker Dr Horseheads, NY 14845

These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working their accounts. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.

The IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency. The agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Private collection agencies will be able to identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act and must be courteous and respect taxpayer rights.

The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continual phone scams where callers impersonate IRS agents and request immediate payment.

Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.

If you owe back taxes to the IRS, give Solid Tax Solutions a call (we are open year-round) at: (845) 344-1040.

We are also on the web at: SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

The IRS Has Proposed Increases in Installment Agreement Fees.

The IRS is proposing a revised schedule of user fees that would take effect on Jan. 1, 2017, and apply to any taxpayer who enters into an installment agreement.

The proposal, which is one of several user fee changes made this year, reflects the law that federal agencies are required to charge a user fee to recover the cost of providing certain services to the public that provides a special benefit to the recipient. Although some installment agreement fees are increasing, the IRS will continue providing reduced-fee or no-cost services to low-income taxpayers.

Installment Agreement Fees

The revised installment agreement fees of up to $225 would be higher for some taxpayers than those currently in effect, which can be up to $120. However, under the revised schedule any affected taxpayer could qualify for a reduced fee by making their request online using the Online Payment Agreement application on IRS.gov website. In addition, there would be no change to the current $43 rate that applies to the approximately one in three taxpayer requests that qualify under low-income guidelines. These guidelines, which change with family size, would enable a family of four with total income of around $60,000 or less to qualify for the lower fee. Also, for the first time, any taxpayer regardless of income would qualify for a new low $31 rate by requesting an installment agreement online and choosing to pay what they owe through direct debit.

The top rate of $225 applies to taxpayers who enter into an installment agreement in person, over the phone, by mail or by filing Form 9465 with the IRS. But a taxpayer who establishes an agreement in this manner can substantially cut the fee to just $107 by choosing to make their monthly payments by direct debit from their bank account.
Alternatively, a taxpayer who chooses to set up an installment agreement using the agency’s Online Payment Agreement application will pay a fee of $149. Similarly, they can cut this amount to just $31 by also choosing direct debit.

Proposed Fees

Here is the proposed schedule of user fees:

  • Regular installment agreement: $225
  • Regular direct debit installment agreement: $107
  • Online payment agreement: $149
  • Direct debit online payment agreement: $31
  • Restructured or reinstated installment agreement: $89
  • Low-income rate: $43

Further details on these proposed changes can be found in proposed regulations (REG-108792-16 in case you were wondering), now available in the Federal Register. The IRS welcomes comment on these changes, and a public hearing on the regulations will take place in Washington, D.C. For details on submitting comments, just take a look at the proposed regulations.

By law, federal agencies are required to charge a user fee to recover the cost of providing certain services to the public that confer a special benefit to the recipient. Installment agreements are an example of a service that confers a special benefit to eligible taxpayers. Agencies must review these fees every two years to determine whether they are recovering the costs of providing these services.

In the past, the IRS often charged less than the full cost for many services in an effort to make them accessible to a broader range of taxpayers. But given current constraints on agency resources, the IRS can no longer continue this practice in most cases.

Nevertheless, the IRS intends to continue providing reduced-fee or no-cost services to low-income taxpayers. For that reason, the IRS will continue subsidizing part of the cost of providing installment agreements to low-income taxpayers.

You can find out more information, on the IRS’ website, about the IRS User Fee Program.

If you are contemplating an Installment Agreement or have other issues regarding back taxes owed the IRS, give us a call at (845) 344-1040. We are here year-round to help you.

You can find out more about us on our website => SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

The House Has Passed Legislation Regarding the Itemization of Medical Expenses!

Hello Everyone! I just wanted to share some good news with you about a possible change regarding itemizing medical expenses.

The U.S. House of Representatives Voted on a Bill That Could Affect Your Taxes.

The U.S. House of Representatives Voted on a Bill That Could Affect Your Taxes.

So, last week (September 13 to be exact), the U.S. House of Representatives passed a bill titled ‘Halt Tax Increases on the Middle Class and Seniors Act’ (the bill is H.R. 3590 which you can view right here => H.R. 3590), by a vote of 261 to 147, that would lower the Adjusted Gross Income (AGI) threshold for an itemized deduction for unreimbursed medical expenses—from 10% to 7.5%—for all taxpayers, regardless of age under the Affordable Care Act (ACA).

Under the ACA, taxpayers may deduct from their AGI, to reach their taxable income, the cost of unreimbursed medical expenses that exceed a certain percentage of their AGI. Following a law change in 2013, individual taxpayers under the age of 65 could only deduct medical expenses when they totaled at least 10% of their AGI – the value of expenses above this 10% threshold can be deducted.

The Bill passed by the House of Representatives would prevent a change to the threshold for those over 65 years of age, which from the end of this year (2016) would have increased the threshold applying to this category of taxpayers from the current 7.5% to 10%.

The House Ways and Means Committee Chairman Kevin Brady (R – Texas) welcomed the Bill, he said: “Before Obamacare, Americans could find some relief in their ability to deduct high-cost, out-of-pocket medical expenses on their taxes. … This Obamacare provision is a tax hike, plain and simple. It makes paying for care even more difficult for individuals, families, and seniors who may already be struggling to afford the care they need.”

The National Taxpayers Union added that the Bill would “have an enormous impact on the budgets of American families. … Over 10 million taxpayers every year use this deduction to cushion the burden of medical expenses and this tax increase would cause an undue financial burden to seniors and those struggling with chronic medical conditions.”

However, the Center on Budget and Policy Priorities noted that “Congress has already delayed the medical device tax, the health insurance tax, and the excise tax on high-cost health plans (the so-called Cadillac tax). Repealing the increase in the medical expense deduction threshold would encourage efforts to scale back still other revenue provisions of health reform.”

Ways and Means Committee Ranking Member Sander Levin (D – Michigan) also criticized the unfunded nature of the legislation, and pointed out that it would reduce revenues by $32.7 billion over 10 years, according to the Joint Committee on Taxation. He went on to say, “approximately two-thirds of the tax benefit from [the bill] will accrue to taxpayers earning $100,000 or more.”

Mr. Levin noted that the White House has issued a Statement of Administration Policy that “strongly opposes” the Bill and confirmed that it would be vetoed if presented to President Obama for his signature. The Statement added that the Bill “would repeal a provision of the Affordable Care Act that limits a regressive, poorly targeted tax break for health care spending.

If you would like to see the results of the final House vote for this bill you can view them here.

Do you think this has any chance of actually becoming law?

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Politics! You’ve Got to Love It.

Running for office presents candidates with a number of opportunities to slip up. This is particularly a problem when the issue is a complicated one. As an example, let us take a look at taxation (surprise. surprise, surprise). Taxation can present traps for unwary candidates who are not careful with how they articulate their position.

Recently, there has been a call for exempting the value of Olympic medals from gross income. Some people think it’s wrong to require winning athletes to pay taxes on pieces of metal symbolizing their achievements. I will stay neutral on this, but the point of this post isn’t whether an Olympic medal exemption makes sense. It’s to point out what happens when that issue becomes campaign fodder.

Senator Charles Schumer of New York, a Democrat, has introduced legislation that would add an Olympic medal exemption to the Internal Revenue Code. According to this news story, his Republican opponent, Wendy Long, has criticized both Schumer and the proposal. She called the proposal “another example of cronyism in the tax code.” She went on to say, “It makes no sense. My contention is that giving tax breaks as he does to his favored ones – the Broadway stars, the Olympic medalists, the hedge funders – means that a greater burden is placed on the average New Yorkers who toil in obscurity but work just as hard and are as deserving of a tax break.” She made mention of members of the military, asking “Where’s the tax break for them? Even if they come home victorious and have won a war, instead of the 400 meter freestyle, no tax break for winning?”

So, three thoughts ran across my mind when I read that article. All three, thoughts, kind of “didn’t make sense”.

First, the Broadway tax break to which Long apparently was referring is not a tax break for Broadway stars. It is a tax break for those who invest in live theater productions, making available to them the same tax break already in existence for television and movie productions. On top of that the measure in question was the extension of the tax break, which had been enacted previously with an expiration date. I’m not necessarily a fan of this particular tax break, but I’m even less of a fan of a tax break that treats television and movie productions more favorably than live theater. What matters is that this tax break accelerates tax deductions for investors who, Ms. Long states, are not members of “….the middle class that Schumer pretends to champion.” Therefore it is a tax break pretty much for the wealthy among us, a tax break in line with many others supported by the political party under whose flag Long is running. It would be great if she made it clear that she opposes the long-standing pattern of Republican tax breaks for the wealthy, but if she is elected she might find herself at odds with at least some of her political colleagues in the Senate. But still, describing the tax break as one for the actors casts the issue in the wrong spotlight.

Second, the tax break for hedge funds has been attacked primarily by Democrats and although some Republicans have joined in the criticism, perhaps seeking something that dresses them in populism, most Republicans and their supporters have opposed any attempt to change the tax break. Some even demand lower taxes for carried interest, as described in this article. Again, it is great to see another tax break for the wealthy coming under attack from a Republican, but what happens to Long’s Senatorial career if she is elected? And what happens to Schumer, a Democrat, who breaks ranks with his party and opposes elimination of the tax break for carried interests? Politics is a strange, wacko world and, in this instance, the two candidates are taking positions contrary to their labels. Perhaps they should switch parties? Hmm!

Third, there exists a variety of tax breaks for members of the military. Long is playing on emotions when she suggests there are no tax breaks for them. Internal Revenue Code (IRC) Section 112 excludes from gross income compensation paid to members of the Armed Forces for serving in a combat zone, or was hospitalized on account of injuries incurred while serving in a combat zone. IRC Section 122 excludes from gross income certain portions of retirement pay way too complex to describe in one sentence. IRC Section 134 excludes from gross income the value of most allowances or in-kind benefits provided to a member or former member of the Armed Forces. I am not aware of any instance in which the IRS has required a member of the Armed Forces to include in gross income the value of any military honor, medal, badge, bar, or ribbon awarded to that person. Making it appear as though there are no federal tax breaks for members of the military does not nurture confidence in a candidate’s tax policy prowess.

So, I feel that there are far better ways to criticize an exclusion for Olympic medals than to confuse the issue with references to tax breaks for Broadway stars, hedge funds, and members of the military. The merits, or lack thereof, of an Olympic medal exclusion are, and should be, a separate matter.

Just my 2 cents.

What do you think?

___________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

How Often Should Business Income Be Taxed?

A recent post (August 26, 2016) on the Tax Justice website was titled:  Why We Must Close the Pass-Through Loophole? Well that ‘kinda’ caught my attention as I was trying to think what the “loophole” might be?  A loophole is a provision that can be used beyond its intended purpose because the rule is not written specifically enough. When a rule is being used as intended, it is not a loophole. So, for example, sometimes the mortgage interest deduction is called a loophole, but it is not. People deducting interest on the mortgages on their primary and vacation homes are using the rule as intended.

A figurine struggling to hoist a barbell with the word tax written on each end of the barbell.

Double Taxation! Is It Necessary?

The “loophole” that was the subject of that blog post is large businesses operating as partnerships rather than as corporations. Partnerships, S-Corporations and Sole Proprietors do not pay corporate income tax. Instead, the income is taxed directly to the owners and only one level of income tax is paid at the federal level (and state level). In contrast, C corporations pay the corporate income tax AND when they distribute earnings (dividends) to shareholders, the shareholders pay income tax. Therefore, C corporation income is taxed twice.

That just happens to be the way it works in our (i.e., the United States for readers abroad) tax system. It doesn’t have to work that way and not all countries double tax corporate income. In the U.S., there is some relief in that ‘qualified dividends’ received by individuals are subject to the lower capital gains tax rate.

Over the years, there have been numerous studies by the government and various organizations on how to ‘integrate’ the corporate tax. In other words to have corporate income taxed only once.  There are numerous ways this can be done.  Two easy ones would be to not have a corporate tax (only tax dividends) or not tax dividends (only tax corporate income at that level when earned).  Neither is ideal because not all corporations pay dividends and not all corporate shareholders are taxable (a lot of corporate stock is owned by tax-exempt organizations).

The Tax Reform Act of 1986 called for the United States Treasury to study corporate taxation. This resulted in two reports issued in 1992 on corporate integration (January 1992 and December 1992).  Most recently, Senator Orrin Hatch, chair of the Senate Finance Committee (SFC) reported that he is working on a plan for corporate ‘integration’ and the SFC held two hearings on an approach called the ‘Dividends Paid Deduction’ model (May 17, 2016 and May 24, 2016. You can also see the Joint Committee on Taxation report prepared for the hearings right here.

Some of the advantages of corporate ‘integration’ include:

  • Treats all business entities similarly (although this also depends on the corporate versus individual tax rates applicable to business income).
  • Removes or lessens a corporation’s tax preference for debt over equity.

So, I will ask the question a bit differently from the The Tax Nook blog post: why not eliminate double taxation of corporate income and find a way to tax all business entities similarly?

So, what do you think?

_________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Employment-Related Identity Theft and the IRS!

Identity theft has so many ways to rear it’s ugly head and and it has, over the years, found its way into the employment sector.

A shadowed person wearing a hooded sweatshirt.

Do You Have an Employment Clone That You Don’t Know About?

Having known people who have fallen victim to this type of debilitating scam I decided to look to see how that can affect a person’s taxes and what the IRS either has done or is doing to counter or at least make the victim aware.

Well I found that the IRS does not currently notify taxpayers it identifies as victims of employment-related identity theft, nor has it established an effective process to ensure that it sends the required notice to the Social Security Administration (SSA) to alert the SSA of earnings not associated with a victim of employment-related identity theft.

These are two significant findings in an audit report by the Treasury Inspector General for Tax Administration (TIGTA). Employment-related identity theft occurs when someone uses the identity of another person to gain employment. So, taxpayers may first realize that they are victims of this type of crime when they receive an IRS notice of a discrepancy in the income they reported on their tax return. The IRS’s Automated Underreporter (AUR) program identifies such discrepancies when it matches taxpayer income reported on third-party information returns (e.g., Form W-2, Wage and Income Statement) to amounts that taxpayers report on their individual income tax returns.

The TIGTA conducted this audit to evaluate the IRS’s AUR processes to identify and assist victims of identity theft. During the period February 2011 to December 2015, the IRS identified almost 1.1 million taxpayers who were victims of employment-related identity theft. In April 2014, the IRS started a pilot initiative to begin notifying taxpayers that they may be a victim of employment-related identity theft. The TIGTA’s review of the pilot notification initiative found that the IRS did not sufficiently design the pilot to include a representative sample of employment-related identity theft victims. Furthermore, the TIGTA found that the IRS has not established an effective process to ensure that it sends the required notice to alert the SSA of earnings not associated with a victim of employment-related identity theft.

If you would like to read the full report you can access it here => www.treasury.gov/tigta/auditreports/2016reports/201640065fr.pdf.

Do you think that budget cutting of the IRS has made this agency laggard in being pro-active in this ongoing fight?

If you ever receive a notice from the IRS (or even the State) don’t go it alone. Don’t wait….Time is of the Essence. Give Solid Tax Solutions a call at (845) 344-1040. We are available year-round.

You can also find out more about us through our website: SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Do You Need to ‘Timely’ Send Out Your Tax Return?

Hi all! For those of you who want to send tax returns to the IRS by Private Delivery Service (i.e., don’t or can’t e-file) but wonder if the tax return will reach the IRS in a ‘timely’ manner and can you use just any ole’ PDS……well the answers are right below.

In most cases the IRS considers ‘timely mailing as timely filing’. That is, if the tax return, payment, election, etc. is mailed on or before the due date, the IRS considers it filed on time, regardless of when it arrives. Prior to 1997, this rule only applied to the U.S. Postal Service. Thus, if you mailed your return by a private delivery service, the IRS considered it filed on time only if it arrived on time. Now, certain private delivery services are afforded the same status as the post office. The delivery services and the type of service are:

The list of designated PDSs effective April 11, 2016 is as follows:

DHL Express

  • DHL Express 9:00
  • DHL Express 10:30
  • DHL Express 12:00
  • DHL Express Worldwide
  • DHL Express Envelope
  • DHL Import Express 10:30
  • DHL Import Express 12:00
  • DHL Import Express Worldwide

Federal Express (FedEx)

  • FedEx First Overnight
  • FedEx Priority Overnight
  • FedEx Standard Overnight
  • FedEx 2 Day
  • FedEx International Next Flight Out
  • FedEx International Priority
  • FedEx International First
  • FedEx International Economy

United Parcel Service (UPS)

  • UPS Next Day Air Early AM
  • UPS Next Day Air
  • UPS Next Day Air Saver
  • UPS 2nd Day Air
  • UPS 2nd Day Air A.M.
  • UPS Worldwide Express Plus
  • UPS Worldwide Express

FedEx and UPS are not designated with respect to any type of delivery service not identified above. Therefore, for UPS regular ground service doesn’t qualify.

Notes:

Only the services listed above for each carrier qualifies for this special rule. Other services provided by these carriers are not covered.

You may still want to use the postal service. The rules for substantiating the “postmark” on private delivery services varies. Don’t forget, it’s not just the mailing but proving the date of mailing that counts. Check with the delivery service on their policy for the various types of delivery. Obtaining a proof of mailing from the U.S. Postal Service may be more convenient.

In addition, just keep in mind that the rules for  the states vary. Check the individual state. For example, at least one state accepts delivery by the above carriers, but to a different address than if you’re sending the return or other item by U.S. Postal Service. And, as of the writing of this blog post, one state has not accepted the updated list.

References:

  • Notice 2016-30
  • Notice 2015-38
  • Notice 2004-83
  • Notice 2002-62
  • Notice 2001-62
  • Notice 1998-47
  • Notice 1997-50
  • Rev. Proc. 97-26
  • Rev. Proc. 97-19

___________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Are You Making Money With Pokémon Go? The IRS Is Watching!

Pokémon GO has been downloaded an estimated 30 million times since its release on July 5 with more daily active users than the mobile versions of Pandora, Twitter, and Netflix . Millions of users every day log in and attempt to catch different types of Pokémon, ranging from Pidgey to Charmander to Squirtle and, of course, the most recognizable Pokémon, Pikachu.

pokemon-go-money-6819527Q

Last month, I touched on the Pokémon GO phenomenon. You can read that article here.

The amount of money being spent is mind-blowing with millions of dollars being generated every day. Nintendo, which controls one third of Pokemon, has seen its stock value double and because of the way iPhone charges users, Apple is said to be in a position to make billions. Not surprisingly, entrepreneurs are looking for ways to crack the Pokémon GO market, too. Here are a few ideas generating interest:

  • Drive: One cab driver in Mexico came up with the idea of driving customers around to help them “hunt” for Pokémon. Emilio Cacho, a 29-year-old cab driver, started calling his cab “Poketaxi” after offering his services to players. Mr. Cacho, who charges by the hour as a “Pokémon hunter”, has received more than 20 calls since he got started. BUT WAIT! Do you want to hear the irony? Cacho doesn’t even play the game, saying, “I don’t even know how to play, but I downloaded the app to help my clients.” And Cacho isn’t alone – there’s also a Pokémon bus.
  • Walk: You don’t even have to be a cab driver to earn extra cash You can just use your feet. You can take a user’s Pokémon GO account for a walk. Those users that are too busy to catch creatures on their own or maybe don’t want to deal with the heat are willing to pay. Ads are showing up online like this one on Craigslist in Houston (will walk for $15/hour).
  • Write: If you’ve figured out all of the best spots and strategies for catching Pokémon, why not share your expertise? You can write your own “how to” guide to help new users figure out the game. You can post your tips online via the web, newsletter, or eBook to sell or monetize.
  • Make a Video: If writing isn’t your strong suit, why not share your expertise? “How to” videos are popping up online every day telling users how to find the best creatures, what to spend money on (and what to avoid), and master tips. Monetizing those videos with ads can bring in extra revenue.
  • Promote: Small businesses have figured out that advertising Pokéstop locations can be a great advertising tool: attaching specials to Pokéstop locations can bring in new customers. Some businesses are even using lures (you have to buy these) to attract Pokémon to woo customers. New ideas for promotion are constantly bouncing around the internet. The possibilities are practically endless.

If you’re hoping to pick up some extra cash in the Pokemon GO craze, here’s what you need to keep in mind from a tax perspective (Oh, you didn’t think it would be that easy…….did you?):

  1. Income is Income. It doesn’t matter if your extra income is from walking Pokémon accounts or investing in the stock market, income is reportable unless it’s otherwise excluded.
  2. Understand What’s Business and What’s Just for Fun. Income may be income but how it’s reported can vary depending on whether you’re engaged in a business or a hobby. Hobbies and businesses are reported on differently on your Federal Income Tax return and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income – there’s no loss for a hobby. So if you spend more than you make, you’re out of luck. If, however, you earn income in the pursuit of a business, you can not only offset the income with deductions, you can carry any losses forward or backward. These rules are sometimes referred to as the “hobby loss rules” and they are important. To distinguish a bonafide business from a hobby, the Internal Revenue Service (IRS) looks at a bunch of different factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business). So how seriously you treat your new pursuit will matter. For more on distinctions between a hobby and a business, click here.
  3. Keep Good Records. It may seem like all good fun when you’re chasing a Pikachu, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously. If you’re working by the hour, keep a log of your time. Save your invoices and document income. When it comes to expenses, keep receipts and describe the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). But, don’t get rid of those receipts immediately after Tax Day. You can read an article from our blog describing how long to keep your tax records by clicking here.
  4. You May Need to Prorate Some Expenses. Typically, you can only deduct expenses that are primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost. You can typically deduct the business portion of the expense. To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage. If, at the end of the year, you find, for example, that 30% of the use was for business, then you can typically deduct 30% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline personal, even if you jump up and down all the while swearing that it’s used solely for business). And, be careful, cars can be tricky.
  5. You May Need to Make Estimated Payments. The extra few hundred dollars you earn from walking or ad revenue might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead. If you expect to owe more than $1,000 at tax time from your extra efforts, you’ll want to make estimated payments. Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.
  6. Consider Hiring a Tax Professional. Don’t assume that hiring a good tax professional will be complicated or expensive. If your tax situation becomes more complicated from your side business, especially since all of your income will no longer be reported by your employer on a form W-2, you may need help. Don’t hire just on cost.

Sometimes, a side business is just that. But if it turns out to be something more, don’t ignore the business side of things.

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

 

THE IRS MAY TAKE SOCIAL SECURITY BENEFITS TO SATISFY TAX DEBTS!

To satisfy tax debts, the IRS may levy a taxpayer’s Social Security benefits. However, a provision of the Internal Revenue Code requires the IRS to release levies that cause economic hardship.

An IRS Building.

Social Security Recipients Who Have Tax Debts May Receive a Visit From the IRS!

In addition, taxpayers have the right to claim an exemption against the levy, which allows them to receive a minimum amount of the Social Security payment and prevent all or part of the levy.

The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS appropriately applied manual levies to Social Security benefits. IRS Revenue officers make levy determinations of Social Security benefits on a case-by-case basis and exercise judgment in making the determination to levy. While there are special procedures and thresholds for levying Individual Retirement Accounts (IRA) and 401(k) retirement accounts, there are no special considerations or procedures for revenue officers when levying Social Security benefits. In these cases, the revenue officers follow procedures for levying assets in general. In most cases, revenue officers are compliant with these general IRS procedures when levying Social Security benefits. However, for 15 percent of the audit’s sample, TIGTA found that IRS revenue officers took levy action on Social Security recipients that likely caused or exacerbated economic hardship. These levies may be due in part to a change in collection policies that appears to give equal weight to nonlegal considerations (such as whether taxpayers are “cooperative” within the subjective determination of revenue officers) and the legal requirement to release the levy when the IRS determines that the levy is creating an economic hardship for the taxpayer. In these cases, revenue officers could have discerned from the facts that the taxpayers were experiencing economic hardship.

In Addition, while existing procedures allow revenue officers to manually levy up to 100 percent of Social Security benefits, taxpayers have the right to claim an exemption from the levy. However, in 28 percent of the sampled cases, IRS revenue officers used the wrong form to levy Social Security benefits. As a result, the IRS did not consider exemption amounts before establishing the levy. Of these cases, 6 percent involved taxpayers who suffered greater Social Security levies than allowed by law.

The TIGTA believes the IRS needs to adjust its policies and procedures to allow revenue officers, with appropriate discretion, not to levy if facts and circumstances clearly show that taxpayers are in or on the threshold of an economic hardship.

If you would like to see the complete report (ah yes, nice summertime reading), go to: www.treasury.gov/tigta/auditreports/2016reports/201630043fr.pdf.

Is this an example of to much force used by the IRS? Is it misguided?

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).