As individuals prepare to file their 2016 income tax returns, they should remember that if they are the parents of dependent children, they may qualify for certain benefits that can reduce their taxable income. It is important to remember, however, that many of these tax credits and deductions may be limited based upon a taxpayer’s income, filing status and other unique circumstances.
Child Tax Credit. Parents with children who are under the age of 17 and who live with the parent for at least one-half of the calendar year may claim a tax credit of up to $1,000 for each qualifying dependent. The credit is limited by the amount of income tax and alternative minimum tax (AMT) parents owe and will be completely unavailable for parents whose income exceed $110,000 for married couples, $55,000 for couples filing separately and $75,000 for all other taxpayers.
Child and Dependent Care Credit. A parent who paid for someone else to care for his or her qualifying dependent child while the parent worked or looked for work in 2016, may qualify for a tax credit to cover a percentage of the expenses paid to the caregiver. A qualifying dependent may include a child who is under the age of 13 who lives with the taxpayer for more than half of the year or an individual of any age who is unable to care for him or herself. For 2016 and 2017, the dollar limit on the amount of expenses used to calculate the credit is $3,000 for the care of one dependent or up to $6,000 for two or more qualifying dependents. The allowable percentage of the credit depends on the taxpayer’s adjusted gross income.
Adoption Credit. Depending on their income, taxpayers who adopted a child in 2016 may claim a credit of up to $13,460 per child to cover the costs of qualifying adoption expenses. The amount of the nonrefundable credit will be reduced if taxpayers’ modified adjusted gross income (MAGI) falls between $201,920 and $241,920; taxpayers’ with MAGI of more than $241,920 will not be entitled to apply the credit.
Dependent Deduction. Taxpayers with children who were under the age of 19 at the end of 2016 (or 24 if the children are full-time students) may claim a dependent deduction up to $4,050 for each qualified child. The amount of the deduction may be reduced or eliminated entirely when taxpayers’ income exceeds certain limits based on their filing status.
Student Loan Interest Deduction. A taxpayer may deduct up to $2,500 in interest they paid towards education and student loans during the tax year. The amount of the deduction will decrease when taxpayers’ MAGI exceeds certain levels. The credit is not available to single filing taxpayers whose MAGI exceeds $80,000 or married filing jointly filers with MAGI above $160,000.
Self-Employed Health Insurance. Entrepreneurial taxpayers who own their businesses and paid for health insurance coverage for a child under age 27 may deduct from their taxable income the amount of annual premiums they paid.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at firstname.lastname@example.org.
In its ongoing efforts to ensure compliance with an already complex tax system, the IRS’s Large Business and International (LB&I) division in January 2017 issued a new audit strategy that focuses on what it considers to be red flags of potential tax evasion among high-net-worth individuals and businesses with more than $10 million in assets. Taxpayers affected by this strategy include individuals, land developers, partnerships, S Corporations, other domestic businesses with operations abroad, and foreign entities conducting business in the U.S.
Under these “campaigns”, the IRS intends to “treat”, or resolve, high-risk activities by updating regulatory guidance, developing issue-based practice units, improving IRS agent training, issuing warning letters to non-compliant taxpayers, and conducting issue-based IRS examinations, when warranted.
Following are the 13 initial issues that the IRS has focused in its crosshairs. Affected taxpayers should be on alert and meet with their accountants to prepare and respond accordingly.
S Corporation Losses Claimed in Excess of Basis. The Internal Revenue Code allows shareholders in S Corporations to pass business income, losses and other items through to their personal income tax returns. However, the IRS has found that some shareholders erroneously claim losses and deductions in excess of their basis in a corporation, to which they are not entitled.
Land Developers Applying the Completed Contract Method (CCM) of Accounting. Large land developers that construct residential communities may be improperly using the Completed Contract Method (CCM) of accounting when their average annual gross receipts exceed $10 million, but their contracts do not call for the construction of residential homes as required by the Internal Revenue Code. According to the IRS, some developers are improperly deferring all gain until the entire development is completed.
Domestic Production Activities Deductions for Multi-Channel Video Program Distributors (MVPD) and TV Broadcasters. MVPDs and TV broadcasters often claim an Internal Revenue Code Section 199 Domestic Production Activity Deduction, asserting that they are the producers of qualified U.S. films when “distributing channels and subscription packages that often include third-party produced content”. Additionally, these entities often claim the deduction erroneously by maintaining that their qualifying activities provide customers with online access and direct use of computer software.
Energy Credits. Only those businesses that apply for and receive approval from the Department of Energy (DOE) and the IRS may claim a tax credit equal to 30 percent of their investment to “re-equip, expand or establish a manufacturing facility for the production of” seven qualifying advanced energy-production properties. The IRS implies that there are a significant number of businesses that are claiming the credit without pre-approval from the agency or the DOE.
Related Party Transactions. This campaign focuses on mid-market businesses that are potentially noncompliant with regulations that govern how commonly controlled entities conduct transactions between each other, including transferring funds from corporations to related pass-through entities or shareholders.
Tax Equity and Fiscal Responsibility Act (TEFRA) Linkage Plan Strategy. The IRS regularly revises processes for accessing tax on terminal investors in partnerships. This campaign aims to identify, link and assess taxes on those investors that pose the most significant audit-compliance risk.
Micro-Captive Insurance. Transactions in which a taxpayer attempts to reduce aggregate taxable income using contracts it treats as insurance contracts and a related company that the parties treat as a captive insurance company must comply with an arm’s-length standard and sound business practices. When this is not the case, each entity that the parties treat as an insured entity under the contracts cannot claim deductions for insurance premiums.
Deferred Variable Annuity Reserves and Life Insurance Reserves Industry Issue Resolution (IIR). The IRS agreed to accept the Deferred Variable Annuity Reserves and Life Insurance Reserves issued in the IIR program under Revenue Procedure 2016-19 to address issues it identified relating to, among other things, the amounts to be taken into account when determining tax reserves for Life Insurance Contracts and tax-deferred variable annuities with guaranteed minimum benefits.
Basket Transactions. Taxpayers attempting to defer ordinary income and short-term capital gain from a structured financial transaction and treat it as long-term capital gain may do so only when they treat the option or another derivative as “open” and when they do not record current period gains until the contract terminates.
Offshore Voluntary Disclosure Program (OVDP) Declines and Withdrawals. This campaign applies to individual U.S. taxpayers who volunteered to disclose and file previously unreported foreign income and required informational returns under the OVDP but subsequently withdrew from the program or received a notice denying them access to it. The IRS intends to bring these individuals up-to-date in their compliance with relevant tax laws.
Repatriation. The IRS aims to crack down on what it refers to as “different repatriation structures being used for purposes of tax-free repatriation of funds into the U.S. in the mid-market population.” Taxpayers have a responsibility to report repatriations as taxable events on their tax returns.
Form 1120-F Non-Filer. Based on external data sources, the IRS has found that a significant number of foreign companies doing business in the U.S. are not meeting their obligation to file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation.
Inbound Distributors. The IRS implies that U.S. distributors of products sourced from foreign related parties have erroneously incurred losses or small profits that are not commensurate with the functions performed and the risk assumed. In some cases, the taxpayer should qualify for higher taxable returns in arms-length transactions.
The advisors and accountants with Berkowitz Pollack Brant work with individuals and businesses to meet their domestic and international regulatory compliance obligations, optimize profitability and build wealth while maintaining tax efficiency.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business and tax consulting services to real estate entities, multi-national companies and their owners. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
In one of the most important like-kind-exchange court cases in decades, “reverse” like-kind exchanges just became a new tax deferral play for real estate developers.
Section 1031 of the Internal Revenue Code has long been one of the most taxpayer-friendly provisions for real estate investors. It allows taxpayers to defer taxes, in whole or in part, on the sale of appreciated U.S. real estate when they reinvest sales proceeds through a Qualified Intermediary (QI) in other U.S. real estate of equal or greater value. Qualifying for favorable tax treatment on these “deferred exchanges”, also known as “forward exchanges,” is a fairly simple exercise for real estate investors, as long as they meet statutory requirements from a mechanical standpoint and ensure that the relinquished and replacement properties are not considered property held for sale in the ordinary course of business (e.g. condos and single-family homes).
So what has changed, and why is this important for developers of real property? The answer lies in a recent court case that effectively opens the door for real estate developers to engage in “reverse exchanges” (or “parking transactions”) for properties under development when they use an agent who nominally owns the property during the development period, although the IRS has nonacquiesced to the court case.
Reverse Exchange Safe Harbor
As background, the IRS in 2000 issued rules providing a safe harbor for “reverse exchanges,” which occur when a taxpayer purchases a replacement property before the sale of a relinquished property. More specifically, the safe harbor permits taxpayers to qualify for tax deferral on “reverse exchanges” when they 1) “park” a replacement property with an agent who is a qualified “Exchange Accommodation Titleholder” (EAT), 2) identify relinquished property within 45 days that they will sell up to 180 days later through a QI, and 3) use the sales proceeds to purchase the parked property from the EAT.
While this safe harbor has been beneficial to real estate investors, it tended to limit a developer’s ability to “park” a development project, because the construction period for a development project typically runs longer than the 180 days allowed in the safe harbor. Under the safe harbor it’s relatively easy to “park” an already built replacement property with a qualified third party and sell an existing property up to 180 days later to finance the purchase of the “parked” property from the taxpayer’s agent. However, a “parked” development deal qualifies under the safe harbor only to the extent of costs incurred within the 180 days, which, often times, is much less than the total cost of the development project.
The general consensus among the real estate tax community was that a reverse exchange outside of the safe harbor would require developers to transfer to an unrelated third party the “benefits and burdens” of ownership in a development project during the construction period. In other words, it was presumed that the third party could not be the taxpayer’s agent when the parking period exceeded 180 days, but rather had to expose itself to business risk during the parking period. As a result, there were few safe harbor reverse exchanges involving development deals, and those that were done limited the dollar amount of replacement property to only 180 days of costs. If there were entitlement or other issues that delayed development, this 180-day restriction could severely restrict the utility of the section 1031 reverse exchange safe harbor, resulting in partial taxation on the sale of a relinquished property.
Enter the Estate of Bartell
In its decision, the Tax Court in Estate of Bartell allowed a third-party agency relationship for a non-safe harbor reverse exchange (with a two-year parking period) instead of imposing a “benefits and burdens of ownership” test. Because of this case, it is now possible, with careful tax planning, to swap into a “parked” development project when it is complete and shelter income from the sale of other appreciated real estate owned by the taxpayer. More specifically, a non-safe harbor parking transaction now allows taxpayers to do the following:
· Loan money to a third-party agent to fund development;
· Supervise the development of a property on behalf of the nominee titleholder;
· Arrange for third-party construction financing;
· Guarantee the third-party debt; and
· Pre-lease the property.
The Tax Court in Estate of Bartell essentially blessed all of these activities that were previously thought to disqualify a reverse exchange. The bottom line is that developers may now swap into properties they always planned to develop, and use the full cost of the development as replacement property in a 1031 exchange.
With proper tax planning and documentation, taxpayers can develop property using a third-party agent as a nominee titleholder, and swap into it whenever they are ready to sell another appreciated property of equal or smaller size. Taxpayers should understand that the IRS has issued a nonacquiescence to the Estate of Bartell case, and may very well challenge the tax treatment of a non-safe harbor reverse exchange upon examination in a tax audit. Nonetheless, this is the biggest news in the like-kind exchange arena in some time.
About the Author: Arthur Lieberman is a director in the Tax Services practice of Berkowitz Pollack Brant, where he works with real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
In an effort to uncover the true identities and related tax liabilities of foreign individuals and corporations behind domestic disregarded entities, the IRS in December issued final regulations that create new reporting requirements.
Effective January 1, 2017, U.S. disregarded entities, including single-member Limited Liability Companies with a foreign owner, are required to obtain an employer identification number (EIN) and report to the U.S. government any transactions between the entity and its foreign owner or persons related to the foreign owner. This information must be reported annually to the IRS via Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engage in a U.S. Trade or Business. In order to meet the new reporting requirements, disregarded entities must establish and maintain accurate records of reportable financial transactions between the entity and its owner, including “the performance of any services for the benefit of, or on behalf of” another taxpayer.
Information-reporting and record-maintenance requirements have long applied to domestic and foreign corporations owned by foreign persons. However, there were exceptions that excluded small businesses and de minimis transactions from record-maintenance obligations. These exceptions do not apply to domestic disregarded entities. As a result, these entities may encounter substantial burdens creating records to comply with the new reporting obligations, especially when considering that, due to their disregarded nature, they may not have kept separate entity books previously.
Prior to the final regulations, a foreign individual could establish a single-member LLC and avoid reporting to the IRS when it did not earn U.S. source income and had no income effectively connected with a U.S. trade or business. Similarly, these single-member LLCs could also escape reporting requirements in the individual member’s home country, since these structures are often considered separate companies under foreign law. As a result, the strategy became popular among money launderers, kleptocrats and other unsavory individuals who sought to hide assets from their local governments while remaining anonymous to the IRS.
Under the final regulations, however, these entities will be treated as domestic corporations, separate from the owners, for Form 5472 reporting purposes. Failure to file a Form 5472 will result in a penalty of $10,000 for each unreported transaction as well as an additional $10,000 penalty for failure to maintain appropriate records. These penalties will increase if non-compliance continues more than 90 days after the entity receives notification from the IRS.
The advisors and accountants with Berkowitz Pollack Brant’s International Tax practice work extensively with foreign-owned businesses and U.S. entities to maintain tax efficiency and comply with complex tax laws across international borders.
About the Author: Arthur Dichter, JD, LLM is a director of International Tax Services with Berkowitz Pollack Brant, where we works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Taxpayers who failed to contribute to an Individual Retirement Account (IRA) before December 31, 2016, still have time to do so and have it count for the 2016 year.
The deadline for making a 2016 IRA contribution and allowing it to grow tax free, along with income, dividends and capital gains generated from the account investments, is April 18, 2017, the due date of individuals’ annual tax return filings.
Participation Qualifications and Contribution Limits
For 2016, the maximum amount qualifying taxpayers may contribute to a traditional tax-deferred IRA or a tax-exempt Roth IRA is $5,500.
Taxpayers older than 50 years of age may contribute an additional $1,000 to a Roth IRA whereas individuals with traditional IRAs may make these catch-up contributions only when they were younger than 70 ½ on the last day of 2016. At that age, account owners must begin taking taxable required minimum distributions (RMDs) from their traditional IRAs, which will subsequently increase the amount of income that is subject to income taxes.
In order to establish an IRA, individuals must receive taxable income from wages and salaries, net self-employment income, tips, commissions, bonuses or alimony. For married couples, both spouses may contribute to an IRA as long as one of the two has taxable income.
Saver’s Tax Credit
Low- and middle-income taxpayers who contribute to retirement savings accounts may qualify for a Retirement Savers Contribution Credit, which can reduce their taxes up to $2,000 when filing a joint tax return.
Rollovers of Retirement Plans and IRA Distributions
The IRS allows savers to roll over distributions they receive from their retirement plans into other retirement plans and generally avoid paying taxes on that amount until they withdraw the funds from the new plan. To qualify for this benefit, taxpayers must complete the rollover within 60 days, and they cannot make more than one rollover from one IRA to another one within a one-year period, no matter how many IRAs the taxpayer owns, unless the rollover qualifies as an allowable exception.
About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Berkowitz Pollack Brant’s Tax Services practice, where he works with individual taxpayers and entrepreneurs on estate planning, tax structuring and business consulting. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email firstname.lastname@example.org.
It has been eight years since Bernie Madoff was arrested and charged with operating one of the largest Ponzi schemes in history. Victims, who lost an estimated $17.5 billion in initial investment principal, have recovered 65 percent of those losses and have had the benefit of an IRS safe harbor theft-loss deduction that may still, to this day, uncover hidden gems of future tax savings.
Initial IRS Relief
In response to the devastating and widespread impact of the Madoff scheme, the IRS issued in 2009 a tax relief plan that allowed victims to make a safe-harbor election and claim theft-loss deductions for a portion of their initial investments of principal. Specifically, victims who invested directly with Madoff had the ability to deduct on their 2008 tax returns 95 percent of a computed amount of their initial investment, plus net income reported due to the investment in the scheme (phantom or not), less their withdrawals and any actual or potential recovery. Victims who invested through third-parties received a 75 percent deduction on that amount. After deducting the appropriate percentage of Madoff losses in 2008, many victims were left with a net operating loss (NOL) carryback to apply against their income for years 2005 through 2007. Unabsorbed carry backs could then be carried forward until the victims fully utilized the NOLs generated by their investments.
The Challenge Today
For some investors, the carryforward of net operating losses was fully utilized in recent years, leaving them with the question of how to treat their remaining losses of 5 percent and 25 percent in net unrecovered investment that was not deductible under the IRS’s safe-harbor provision.
Other investors were left with the dilemma of what to report in connection with any recovery amounts received through third-party efforts. These issues are often confounded and problems are compounded when investors switch tax advisors and fail to keep alive the discussion about Madoff losses. For example, with eight years past the original safe harbor election to deduct Ponzi scheme losses, a taxpayer may be unaware of any remaining NOLs to which he or she may be entitled; most people simply are not tracking these losses. The taxpayer who does not expect to recover the remaining five or 25 percent of previously un-deducted losses from the Madoff estate may report an additional theft loss that he or she may use to create an NOL to carry forward into the 2016 tax year and beyond.
The impact of the Madoff Ponzi scheme offers an important lesson for taxpayers to heed, especially when changing accountants. Because the tax code includes many provisions that can be carried forward or carried back to apply to additional tax years, it is up to the taxpayer to stay informed. Keeping old discussions alive with new advisors can ensure maximum tax efficiency and compliance as well as optimal use of tax benefits that taxpayers are entitled to use from year to year.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at email@example.com.
As the 2016 income tax filing deadline nears, taxpayer will be looking for ways to reduce their taxable income. In addition to deductions for making contributions to retirement accounts and charities, prepaying property taxes or harvesting investment losses to offset capital gains, certain taxpayers may claim exemptions and deduct from their taxable income $4,050 for themselves and each of their dependent children.
Personal Exemptions. Taxpayers are allowed one personal exemption for themselves, unless they may be claimed as a dependent on another individual’s tax return, even when that individual does not actually exercise the claim. A married taxpayer may claim one exemption for him or herself and one for his or her spouse only when filing a joint tax return. When married taxpayers file separate returns, an exemption for a spouse may be claimed only when that spouse has no gross income, is not filing a tax return and does not qualify to be claimed as a dependent on another individual’s tax return. This is true for spouses who are considered for tax purposes as U.S. nonresident aliens.
Dependent Exemptions. The tax code allows individual taxpayers to claim an exemption for each “qualifying dependent,” which includes a child who meets the following criteria:
- Is a child, step child, foster child, brother, sister, step-brother, step-sister or descendent of the taxpayer
- Is at the end of the year either under the age of 19, a student under the age of 24, or an individual of any age if he or she is permanently disabled.
- Has lived with the taxpayer for longer than half of the year
- Has not provided more than half of his or her own support for the year
- Is not filing a joint tax return (unless doing so to claim a refund of withheld income tax or estimated taxes already paid)
Special rules will apply for children of parents who are separated or divorced.
Dependent exemptions are also available for taxpayers who have a qualifying dependent relative who has less than $4,050 in gross income for the year and receives more than have of his or her annual support from the taxpayer. The qualifying dependent must be related to the taxpayer, but he or she need not live with taxpayer during any portion of the year.
As is the case with many tax benefits, tax exemptions begin to phase out when taxpayers adjusted gross income (AGI) exceeds certain thresholds. For single filers, the exemption is reduced once AGI reaches $259,400, for married couples filing jointly, the dollar amount of the exemptions is reduced by 2% for each $2,500 that one’s AGI exceeds $311,300.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at firstname.lastname@example.org.
With the incidence of identity theft on the rise, especially during tax season, the IRS is taking steps to validate the identity of taxpayers who initiate contact with the agency.
Should an individual contact the IRS via telephone, he or she must be prepared to provide the following personal information in order to receive answers to questions about his or her tax account:
- Social Security Number
- Date of Birth
- Individual Taxpayer Identification Number (ITIN) issued by the IRS
- Filing status indicated on last year’s tax return (e.g. Single, Head of Household, Married Filing Joint or Married Filing Separate)
- Information contained in an individual’s 2015 tax return, including his or her 2015 adjusted gross income and a 16-character code found on Form W-2.
Taxpayers should also remember that the IRS will never contact them directly via telephone or email. Therefore, taxpayers should take special care to avoid disclosing personal information to anyone claiming to be from the IRS.
If the IRS identifies it has received a suspicious tax return from a taxpayer, it will issue a Letter 4883C to the individual and request that he or she phone the agency to verify his or her identity. In these situations, taxpayers should have the following information handy:
- The IRS letter
- A copy of the prior year tax return filed
- A copy of the current year tax return, if filed
- Supporting documents, including copies of Form W-2, 1099s, Schedule C, etc.).
For many individuals, working directly with the IRS can be challenging. Therefore, taxpayers should consider engaging the assistance of qualified accountants and CPAs who have years of experience working with these IRS to resolve personal and business tax account matters.
About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at email@example.com.
Taxpayers who own businesses or work as independent contractors have different tax filing and reporting requirement than other employers and employees. Following are answers to common questions for self-employed taxpayers.
Do I qualify as a Self-Employed Independent Contractor or am I an Employee?
The IRS considers a taxpayer to be self-employed when he or she:
- carries on a trade or business as a sole proprietor or independent contractor, or
- is a partner in a trade or business, or
- is otherwise in business for him or herself either full-time or part-time.
Complicating this definition is the assessment taxpayers must make to determine whether they are in fact independent contractors who “control or direct the financial aspects of their operations and only the result of the work they do, and not what will be done and how it will be done”. Under this definition, many freelance “gig” workers in today’s sharing economy would qualify as independent contractors. When this is the case, self-employed taxpayers are responsible for paying their income tax, Social Security tax and Medicare tax obligations as well as self-employment tax, which includes the business’s share of Social Security and Medicare tax that would have otherwise been paid by an employer.
Conversely, “employees” would have these taxes withheld and deducted automatically from the paychecks they receive from their employers. Moreover, self-employed taxpayers are responsible for paying self-employment tax, which includes the business’s share of Social Security and Medicare tax that would have otherwise been paid by an employer.
What are my Filing Requirements as a Self-Employed Business Owner?
Self-employed business owners who made or received payments during the tax year in the form of money, goods, property, or services, have obligations to file annual tax returns and report the income or loss from their businesses on Schedule C or Schedule C-EZ, depending on the total amount of their expenses. The income tax form a business owner must file will depend on the business’s structure. For example, a Corporation will typically file Form 1120, whereas a partnership will file Form 1065. In addition, business owners may be required to report their individual share of the business’s profit and loss on their Form 1040 personal income tax returns.
How do I Pay my Share of Tax Liabilities?
Self-employed independent contractors, who may include Uber drivers or individuals who rent out their properties on services such as Airbnb, may make quarterly estimated payments to prepay their tax liabilities for the year. This includes income tax, self-employment tax, alternative minimum tax (AMT) and other taxes that are not subject to withholding, such as interest, dividends capital gains and more. If a taxpayer fails to prepay enough of his or her required tax liabilities each quarter, he or she may be charged a penalty, even if they qualify for a tax refund.
Are there Opportunities for me to Reduce Self-Employment Income that is Subject to Tax?
Taxpayers who operate a business may deduct certain expenses from their taxable income. More specifically, deductions may be taken for “ordinary” expenses that are common in the taxpayer’s line of business or “necessary” expenses that are helpful and appropriate for the taxpayer’s trade. Examples include employee salaries, contributions to retirement plans, loan interest and certain insurance products.
For many entrepreneurs, their businesses are closely tied and often overlap into their personal lives. It is important, however, that business owners separate their business expenses from those that are incurred for personal use. For example, taxpayers who work from their homes may be able to deduct a percentage of their household expenses, and those who use their cars for business purposes may deduct a portion of the expenses they incur for maintaining the vehicle. In both of these situations, taxpayers will need to calculate how much of their home or automobile is used for business use compared to personal use.
About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and high-net-worth individuals. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.
Businesses, non-profits, federal and state entities and any organization that issues W-2s to their workers must be on alert for a new email phishing scam that the IRS has identified as “one of the most dangerous” scams resulting in “large scale theft of sensitive data.”
In this scheme, cybercriminals use spoofing techniques to disguise emails to appear as if they are from an organization executive. They send the emails to employees in the payroll or human resources departments, requesting a list of all of the organization’s employees and their Forms W-2. Workers, who receive the email and assume it came from an individual within their organizations, mistakenly comply with the request and ultimately put their co-workers at risk of identity theft. In a new twist, cybercriminals posing as organization employees now ask victims to make wire transfers to fraudulent accounts, which can result in thousands of dollars in losses.
According to the IRS, this scam has been circulating to a broad range of organizations, including school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare and shipping and freight. In addition, businesses that received the scam email last year also are reportedly receiving it again this year.
How Entities Can Protect Themselves
The first step organizations should take to avoid becoming victims of an email scam is to educate their employees about cyber risks and the various forms of cyberattacks. Protecting sensitive data and keeping it out of the hands of criminals also requires organizations to put into place appropriate security policies and internal controls.
When asked to provide confidential information via telephone, text or email, employees should think twice before responding. Taking an extra minute to call the person claiming to have sent the message or creating a new and separate email to confirm his or her request will go a long way toward keeping organizations, their data, their people and their systems safe.
About the author: Joseph L. Saka, CPA/PFS, CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.
The phrase “long-term investor” as defined by taxpayers is not in sync with the Internal Revenue Service’s definition. The consequences of this disconnect can be quite costly. Profits from real estate sales can expose taxpayers to unexpectedly large tax liability if they behave more like a property “dealer” than an “investor,” at least in the eyes of the IRS.
If the IRS determines that a taxpayer is a “dealer” in real estate, he or she would be liable for ordinary-income tax on profits from property sales up to a maximum rate of almost 40 percent. On the other hand, an “investor” who profits from the sale of real estate held more than one year would pay the capital gains tax, which has a maximum rate of 20 percent plus the 3.8% net investment income tax.
The IRS often goes to court to dispute taxpayer claims that they should pay the capital gains tax instead of the ordinary income tax on profits from real estate sales. Learning how the IRS distinguishes a dealer from an investor is one way to minimize tax liabilities and legal expenses alike. But in a legal context, this distinction can be difficult to discern. The United States Tax Court has observed what it called an “indistinct line of demarcation between investment and dealership.”
There are some simple ways to fortify an individual’s tax status as a real estate investor. Taxpayers who are part of a real estate partnership or LLC, for example, should have anoperating partnership agreement stating that its purpose is holding investments that will appreciate. Include the word “investment” or “investors” in the name of the partnership and avoid using the word “development” or “developers.”
The partnership’s tax return should list its business activity as investment, not sales, and its balance sheet should label real estate holdings as investment assets, not inventory.
Some taxpayers have both investments and developments in their real estate portfolios, so segregating them under the ownership of different entities is another way to avoid over-taxation. It’s a good idea to put a development business in a corporation and an investment business in a partnership.
Property transfers from partnerships to corporations with common ownership are more likely to qualify for capital gains tax treatment than transfers between, say, two commonly owned partnerships. Section 1239 of the federal tax code prevents capital gain treatment of sales between related parties unless the transfer involves such non-depreciable property as land.
The United States Tax Court has various tests to determine how to treat proceeds from sales of real estate. Capital gains treatment applies if the real estate sales failed to form the basis of a trade or business. Capital gains treatment also applies if the taxpayer bought real estate with the intention of holding it for appreciation and then sold it due to such events as unfavorable zoning, public condemnation of the property, or a natural disaster.
However, no rule governs the number of lots that an land owner can sell as investments without raising the selling activity to the level of a “dealer.” So multiple sales of parcels alone may be insufficient evidence of dealership activity. In a court fight known as the Byram case, the Fifth Circuit Court of Appeals ruled that a taxpayer acted as an investor in selling 22 parcels of land over a three-year period, noting that the sales were too infrequent to suggest anything but an investment purpose and that the seller spent relatively little time finding buyers.
Indirect ownership of real estate might qualify investors for capital gains treatment, even if the property holding period is less than a year. Imagine a group of investors who form a limited liability company, or LLC, in January 2012. The LLC buys a piece of land in April 2012. Then the owners sell all of their LLC shares to a development company in February 2013. The sellers may qualify for capital gains treatment of any profit from their 13-month investment in the LLC shares, even though the LLC had owned the land for only 10 months. But beware: The IRS could challenge the use of a partnership or corporation to extend an asset holding period if the obvious motivation was tax-related.
Convincing the IRS that a piece of real estate is a capital asset, not an inventory item, has a potential downside. If a taxpayer sells a real estate investment at a loss, his or her ability to deduct the loss for tax purposes is limited. Capital losses can offset capital gains only, not ordinary income, and the maximum deduction from capital losses is $3,000 a year. In some court cases, the IRS has contested assertions by taxpayers that they incurred ordinary losses on property held for sale, arguing instead that the taxpayers incurred capital losses because their properties were held for investment. Interest paid in connection with the purchase of real estate provides limited deductibility, too, because it offsets investment income only, such as interest or dividend payments, not ordinary income.
Our real estate tax services group is very experienced in providing advice to new and established property investors. We are here to help.
About the Author: Steve Messing CPA is a senior tax director in the Real Estate Tax Services practice of Berkowitz Pollack Brant, where he focuses on tax issues for real estate partnerships, developers and landholders. He can be reached in the Miami CPA office at (305) 379-7000 or e-mail firstname.lastname@example.org.
In January 2017, the Internal Revenue Service (IRS) issued tax guidance relating to the estates of married same-sex couples. More specifically, the guidance relates to gifts, bequests and generation-skipping transfers between same-sex couples when applying the Supreme Court’s landmark Windsor decision that grants lawfully married same-sex gay and lesbian couples equal rights, recognition, benefits and protections under the law.
IRS Notice 2017-15 allows same-sex couples and executors of their estates to recalculate a taxpayer’s remaining applicable exclusion amount and remaining generation-skipping transfer (GST) exemptions when transfers were made between spouses prior to Windsor decision in 2013. More specifically, affected taxpayers may automatically elect to establish that pre-2013 transfers between same-sex spouses did in fact qualify for a marital deduction and are therefore permitted to recover these amounts and qualify for the marital deduction on previously filed tax returns, even when the limitation periods on those returns have expired. However, the ruling specifies that “qualification for the marital deduction or a reverse qualified terminable interest property (QTIP) election would require a QTIP, qualified domestic trust (QDO) or reverse QTIP election” would require taxpayers to formally request relief to make such an election.
The LGBT Business and Families practice with Berkowitz Pollack Brant works individuals and same-sex domestic partnerships and married couples to navigate complex tax issues related to estate planning and tax compliance and planning in a challenging and changing environment. Its professionals work closely with advisors in the firm’s other practice areas, including real estate services, business taxes and employee benefits planning.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business and tax consulting services to real estate entities, multi-national companies and their owners. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Posted on March 02, 2017 by
The IRS estimates that more than 1.5 million taxpayers may be missing out on a valuable tax credit that can potentially reduce or eliminate entirely their federal tax liabilities. The Earned Income Tax Credit (EITC) applies to various members of the public, including the following:
- Individuals earning less than $53,930 in annual wages and filing jointly,
- Members of the U.S. military who elect to include their non-taxable combat pay in their taxable income,
- Taxpayers who receive disability benefits or retired on disability prior to reaching the minimum retirement age, and
- Taxpayers who have a child with a disability
The credit, which could be as high as $6,269 for a qualifying family, is fully refundable, meaning that eligible taxpayers may receive a refund from the IRS, even when they have no tax liabilities for the year. Moreover, an EITC-related tax refund will not disqualify individuals from receiving public benefits, such as Social Security and Medicaid. This is especially important for taxpayers who have a disability or who have a child with a disability, for whom public benefits provide the financial assistance required to pay for the child’s ongoing care.
The one caveat that taxpayers should remember for the 2016 tax season is that the IRS will delay distributions of EITC-related refunds until February 15, 2017, in an effort to reduce tax-related fraud. Understanding one’s eligibility for the Earned Income Tax Credit and his or her filing requirements often requires the assistance of a qualified tax accountant who has experience in these matters.
About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she focuses her practice on tax strategies for business owners and high-net-worth individuals and families. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
The IRS recently issued final regulations regarding the treatment of intangible transfers of property by U.S. persons to foreign corporations. The regulations, proposed in September 2015, aim to prevent U.S. companies from attempting to avoid U.S. taxes on transfers of foreign goodwill and going concern value (FGGCV).
Under Internal Revenue Code Section 367, an outbound transfer of appreciated tangible property by a U.S. person to a foreign corporation generally triggers recognition of a gain, unless the transferred property is used in an active trade or business outside of the United States (Sec. 367(a)). Conversely, when a U.S. person transfers intangible property, such as patents, copyrights, trademarks and customer lists, to a foreign corporation, he or she may treat it as a royalty and recognize the gain, commensurable as income, over the intangible property’s useful life (Sec. 367(d)), which may not exceed 20 years. According to the IRS, the “need to distinguish value attributable to nominally distinct intangibles that are used together in a single trade or business… makes any exception to income recognition for the outbound transfer of goodwill and going concern value unduly difficult to administer and prone to tax avoidance.”
As a result, the final IRS regulations include the following changes to clarify the treatment of outbound transfers of FGGCV. These rules apply to all outbound transfers on or after September 14, 2015.
- Eliminate favorable treatment of FGGCV by narrowing the scope of Section 367(a)’s active trade or business exception,
- Allow U.S. taxpayers to apply Sec. 367(d)’s royalty regime to certain transferred property that would otherwise be subject to gain recognition under Sec. 367(a),
- Provide a 20-year useful life safe harbor to recognize the gain,
- Remove the exception that previously allowed the transfer of certain property denominated in foreign currency to qualify for the active trade or business exception, and
- Change the Sec. 367 valuation rules to better coordinate with the Treasury regulations under Secs. 367 and 482, which deals with the allocation of income and deductions related to controlled transactions.
About the Author: Ken Vitek, CPA, is a senior manager with Berkowitz Pollack Brant’s International Tax Services practice, where he provides income and estate tax planning and compliance services to high-net-worth families and closely held businesses with an international presence. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.