The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The penalty relief applies only for tax years beginning after December 31, 2017, but before January 1, 2019.

The IRS will waive the penalty only if both of the following conditions are met:

• the partner Schedules K-1 are timely filed (including extensions) with the IRS, timely furnished to the partners, and contain all other required information; and
• the person or partnership required to file the Schedule K-1 or other applicable form or statement files with the IRS, no later than one year after the original, unextended due date of the form to which the Schedule K-1 or other applicable form or statement must be attached, a schedule setting forth the information listed below for each partner for which negative tax basis capital account information is required.

The required schedule must state:

1. the partnership’s name and Employee Identification Number, if any, and Reference ID Number, if any;
2. the partner’s name, address, and taxpayer identification number; and
3. the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue.

The schedule should be captioned "Filed Under Notice 2019-20" and should accord with instructions and additional guidance provided by the IRS. The schedule should be sent to: 1973 North Rulon White Blvd., Ogden, UT 84404-7843, MS 4700, Attn: Ogden PTE.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

Interaction Between 964 and 312

The rules in Code Sec. 964(a) provide that, with an exception for a depreciation rule in Code Sec. 312(k)(4), the earnings and profits of a foreign corporation are computed according to rules substantially similar to those that apply to domestic corporations, under regulations prescribed by the Secretary. The Tax Court found that regulations reasonably could be read to include regulations under Code Sec. 312.

The Code Sec. 964 regulations required the following steps be taken before the Code Sec. 312 rules could be applied:

• preparation of a profit and loss statement;
• U.S. accounting adjustments; and
• tax adjustments.

The general rules of subpart F and Code Sec. 312applied because there were no specific rules covering the treatment of a CFC’s distributive share of partnership income, or subpart F income inclusions, specifically. Subpart F required upper-tier CFC partners to compute gross income as if they were domestic corporations. As partners in a domestic partnership, they were required to include their distributive shares of the partnership’s income, including subpart F income inclusions, from lower-tier foreign corporations.

Under the Code Sec. 312 regulations, E&P is determined by taking into account all items includible in gross income under Code Sec. 61. Because the inclusions under subpart F were included in gross income, E&P was increased by those amounts.

Dissenting Opinion

A dissenting opinion disagreed with the Tax Court’s conclusion that Code Sec. 964 incorporated the rules of Code Sec. 312 based on the reference to the depreciation rule. The dissent also disagreed with the Tax Court’s statement that Code Sec. 964 provided that the same general rules apply to E&P computations for domestic and foreign corporations because the statute referred to rules "substantially similar" to those applicable to domestic corporations.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

Reportable Sales and Payments

New reporting requirements apply to reportable policy sales and payments of reportable death benefits occurring after December 31, 2017.

New Code Sec. 6050Y imposes information reporting obligations related to certain life insurance contract transactions, including reportable policy sales and payments of reportable death benefits. The proposed regulations specify how and when the information reporting obligations must be satisfied. They also provide definitions and rules governing the application of the information reporting obligations.

New Code Sec. 101(a)(3) defines "reportable policy sale" and provides rules for determining the amount of death benefits excluded from gross income following a reportable policy sale. The proposed regulations provide definitions and guidance for determining the amount of death benefits excluded.

Proposed Regulations

The proposed regulations respond to comments generated by the IRS’s pre-regulatory guidance in Notice 2018-41, I.R.B. 2018-20, 584, and provide clarifications.

Payments. The proposed regulations clarify that a reportable policy sale payment includes any amount of the recipient’s debt assumed by the acquirer in addition to cash and the fair market value of property. They also clarify that when an acquirer makes installments payments in more than one year, the acquirer reports the total amount of all payments in the year of the policy sale. The Treasury Department and the IRS are considering whether reportable policy sale payments should be defined to exclude payments of any ancillary costs and expenses. Comments are requested regarding the types of payments made by acquirers in reportable policy sales, the recipients of those payments, and existing reporting requirements applicable to those payments.

Reportable death benefits. Reporting requirements apply to any person that makes a payment of reportable death benefits during any tax year. The proposed regulations clarify that the amounts must be attributable to an interest in the life insurance contract that was transferred in a reportable policy sale. For instance, if the original policyholder of a life insurance contract transfers a 50 percent interest in the life insurance contract in a reportable policy sale, amounts paid due to the death of the insured that are attributable to the 50 percent interest retained by the original policyholder are not reportable death benefits.

Comments are requested as to whether reportable death benefits payment recipients should include, in addition to any person that receives reportable death benefits as a beneficiary under the life insurance contract, any person that receives reportable death benefits as the holder of an interest in the life insurance contract.

Payor. The proposed regulations define "payor" to mean any person making a payment of reportable death benefits, and "reportable death benefits payment recipient" to mean any person that receives reportable death benefits as a beneficiary under the life insurance contract or as the holder of an interest in the life insurance contract. However, comments are sought on whether "payor" should be defined the same as "issue," or should also include any holder of an interest in a life insurance contract that receives reportable death benefits attributable to that interest and is contractually obligated to pay part or all of the proceeds to the beneficial owner of the interest.

Unified reporting. The proposed regulations allow for unified reporting by the acquirers in a series of prearranged transfers of any interest in a life insurance contract. A series of prearranged transfers of an interest in a life insurance contract may include transfers in which one or more persons serve as intermediaries. Such intermediaries may acquire title or possession of an interest in a life insurance contract for state law purposes as nominee on behalf of another person or persons.

Deadlines. The proposed regulations provide that an acquirer must furnish any written statement required to be provided to a reportable policy sale payment recipient no later than February 15 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations adopt this deadline because a person may be both a reportable policy sale payment recipient and a seller regarding a reportable policy sale, and the deadline for an acquirer to furnish a written statement to a reportable policy sale payment recipient coordinates with the deadline for an issuer that receives a reportable policy sale statement (RPSS) to furnish a written statement to a seller. An acquirer must furnish an RPSS to the issuer by the later of (1) 20 days after the reportable policy sale, or (2) 5 days after the end of the applicable state law rescission period. However, if the later date is after January 15 of the year following the calendar year in which the reportable policy sale occurred, the RPSS must be furnished by January 15 of the year following the calendar year in which the reportable policy sale occurred.

A payor of reportable death benefits must furnish any written statement required to be provided to a reportable death benefits payment recipient no later than January 31 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations use January 31 because it is generally the deadline for furnishing copies of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to recipients.

Forms 1099-LS and 1099-SB. The proposed regulations provide guidance to sellers of life insurance contracts in reporting gain. IRS Form 1099-LS, Reportable Life Insurance Sales, and Form 1099-SB, Seller’s Investment in Life Insurance Contract, provide specific instructions on these reporting requirements. The proposed regulations also provide guidance to payors of reportable death benefits (reportable on Form 1099-R) and how to calculate the amount of death benefits excluded from gross income.

Transition Relief

Transition relief applies for reportable policy sales and payments of reportable death benefits occurring after December 31, 2017, and before the date final regulations are published in the Federal Register.

For reportable policy sales,

• statements required to be furnished to issuers under Code Sec. 6050Y(a)(2) must be furnished by the later of the applicable deadline in the final regulations or 60 days after the date final regulations are published in the Federal Register;
• returns required to be filed under Code Sec. 6050Y(a)(1) and (b)(1) and statements required to be furnished to payment recipients and sellers under Code Sec. 6050Y(a)(2) and (b)(2)must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register;

For payments of reportable death benefits, returns required to be filed under Code Sec. 6050Y(c)(1) and statements required to be furnished to payment recipients under Code Sec. 6050Y(c)(2) must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register.

Comments. The IRS is seeking comments on a range of issues connected with these proposed regulations. Written or electronic comments must be received by May 9, 2019. A public hearing has been scheduled for June 5, 2019, at 10:00 a.m., in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For more information about having your name placed on the building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of the preamble.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Olson will retire from the position of NTA on July 31, 2019, according to a recent NTA Blog post. "I am making the announcement now because I want to prepare the Taxpayer Advocate Service for a smooth transition, and I want to participate in the selection of my successor," Olson wrote.

Critical and Priority Items Lists

Olson outlined the following "critical items" she wants to accomplish before retiring:

• publish new IRM chapters on Taxpayer Assistance Orders and Taxpayer Advocate Directives;
• finalize a regulation governing the operations of Low Income Taxpayer Clinics (LITC); and
• regain the ability to hire attorney-advisors.

Additionally, Olson has created a list of "priority items" for the IRS, which IRS Commissioner Charles Rettig requested. The list includes:

• developing an automated economic hardship risk indicator;
• developing mandatory employee training on the Taxpayer Bill of Rights;
• developing guidance and training on the identification and public disclosure of Program Manager Technical Advice (PMTA) memoranda; and
• designing rights-based notices of deficiency, collection due process hearing notices, and math error notices.

"Underlying all my actions and plans as the National Taxpayer Advocate has been a recognition that the Taxpayer Advocate Service is more than an organization – however independent – within a bureaucratic federal agency," Olson wrote. "The Taxpayer Advocate Service is a concept – an idea. It represents the proposition that taxpayers have rights and protections before the awesome taxation powers of the United States."

Only "qualified moving expenses" under the tax law are generally deductible. Qualified moving expenses are incurred to move the taxpayer, members of the taxpayer's household, and their personal belongings. For moving expenses to be deductible, however, a move must:

(1) Be closely related to the beginning of employment;

(2) Satisfy the time test; and

(3) Satisfy the distance test.

The purpose of the move must be employment. The worker must be moving to a new job. However, the worker need not have obtained the job before moving.

The time test requires that the individual work full time for at least 39 weeks in the first 12 months following the move. Self-employed persons must work full-time for at least 30 weeks in the first 12 months following the move, and at least 78 weeks in the 24 months following the move. Full-time employment is determined by the time customary in the worker's trade or business. Employment and self-employment may be aggregated. With respect to married couples, only one spouse must satisfy this requirement.

Even if the time test is not satisfied at the end of the first tax year ending after the move, the qualified moving expenses may be deducted in the move year. If the time test is ultimately not satisfied, an amended return must be filed in the subsequent year using Form 1040X, Amended U.S. Individual Income Tax Return.

The distance test must also be satisfied. The new principal place of employment must be at least 50 miles further from the old residence than the prior principal place of employment. If the worker has multiple places of employment, the principal place of employment must be determined. This test is satisfied if the individual is moving to his or her first principal place of employment.

Special rules apply to moving expenses of active duty military personnel and their families. There are also special rules that apply to moves outside the United States.

If you are planning a move and would like advice on how to structure expenses to maximize your tax savings, please give this office a call.

If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

• The amount of the expense;
• The amount of use (i.e. the number of miles driven for business purposes);
• The date of the expenditure or use; and
• The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

Under the so-called "kiddie tax," a minor under the age of 19 (or a student under the age of 24) who has certain unearned income exceeding a threshold amount will have the excess taxed at his or her parents' highest marginal tax rate. The "kiddie tax" is intended to prevent parents from sheltering income through their children.

A child with earned income (wages and other compensation) in excess of the filing threshold is a separate taxpayer who is generally taxed as a single taxpayer. If a child in one of the following categories has unearned income (i.e., investment income) in excess of the "threshold amount" ($950 in 2009) that unearned income is taxed at the parent's marginal tax rate, as if the parent received that additional income.

• A child under the age of 19;
• A child up to age 18 who provides less than half of his or her support with earned income; or
• A19 to 23 year-old student who provides less than half of his or her support with earned income.

If the child's unearned income is less than an inflation-adjusted ceiling amount ($9,500 in 2009), the parent may be able to include the income on the parent's return rather than file a separate return for the child (and which the tax based on the parent's marginal rate bracket is computed on Form 8615).

Any distribution to a child who is a beneficiary of a qualified disability trust is treated as the child's earned income for the tax year the distribution was received.

Example:  Greta is a 16-year-old whose father is alive. In 2009, she has $3,000 in unearned income, no earned income, and no itemized deductions. Her basic standard deduction is $950, which is applied against her unearned income, reducing it to $2,050. The next $950 of unearned income is taxed at Greta's individual tax rate. The remaining $1,100 of her unearned income is taxed at her parent's allocable tax rate. Assuming her father's tax rate bracket is 25 percent, her tax on the $1,100 is $275.

These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online.  While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

• Individual income tax returns (Form 1040)
• Trust and estate income tax returns (Form 1041)
• Partnership income tax returns (Forms 1065 and 1065-B)
• Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
• Estimated tax for individuals (Form 1040)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax return (Form 944)
• Private foundation returns (Form 990-PF)
• Heavy highway vehicle use returns (Form 2290)
• Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

• Individual income tax returns (Form 1040)
• Estimated income taxes for individuals (Form 1040-ES)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax returns (Form 944)
• Corporate income tax returns (Form 1120)
• S-corporation returns (Form 1120S)
• Extension for corporate returns (Form 7004)
• Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

If you own a vacation home, you may be considering whether renting the property for some of the time could come with big tax breaks. More and more vacation homeowners are renting their property. But while renting your vacation home can help defray costs and provide certain tax benefits, it also may raise some complex tax issues.

Determining whether to use your vacation home as a rental property, maintain it for your own personal use, or both means different tax consequences. How often will you rent your home? How often will you and your family use it? How long will it sit empty? Depending on your situation, renting your vacation home may not be the most lucrative approach for you.

Generally, the tax benefits of renting your vacation home depend on how often you and your family use the home and how often you rent it. Essentially, there are three vacation home ownership situations for tax purposes. We will go over each, and their tax implications.

Tax-free rental income

If you rent your vacation home for fewer than 15 days during the year, the rental income you receive is tax-free; you don't even have to report it on your income tax return. You can also claim basic deductions for property taxes and mortgage interest just as you would with your primary residence.

You won't, however, be able to deduct any rental-related expenses (such as property management or maintenance fees). And, if your rental-related expenses exceed the income you receive from renting your vacation home for that brief time, you can't take a loss. Nevertheless, this is an incredibly lucrative tax break, especially if your vacation home is located in a popular destination spot or near a major event and you don't want, or need, to rent it out for a longer period. If you fit in this category of vacation homeowners and would like more information on this significant tax benefit, call our office.

Pure rental property

Do you plan on renting your vacation home for more than 14 days a year? If so, the tax rules can become complicated. If you and your family don't use the property for more than 14 days a year, or 10% of the total number of days it is rented (whichever is greater), your vacation home will qualify as rental property, not as a personal residence.

If you rent your vacation home for more than 14 days, you must report all rental income you receive. However, now you can deduct certain rental-related expenses, including depreciation, condominium association fees, property management fees, utilities, repairs, and portions of your homeowner's insurance. How much you can deduct will depend on how often you and your family use the property. But, as the owner of investment property, you can take a loss on the ultimate sale of your rental homes, which second-homeowners can't do.

Income and deductions generated by rental property are treated as passive in nature and subject to passive activity loss rules. As passive activity losses, rental property losses can't be used to offset income or gains from non-passive activities (such as wages, salaries, interest, dividends, and gains from the sale of stocks and bonds). They can only be used to offset income or gains from other passive type activities. Passive activity losses that you can't use one year, however, can be carried forward to future years.

However, an owner of rental property who "actively participates" in managing the rental activities of his or her vacation home, and has an adjusted gross income that doesn't exceed $100,000, can deduct up to $25,000 in rental losses against other non-passive income, such as wages, salaries, and dividends. It's not all that difficult to meet the "active participation" test if you try.

Personal use for more than 14 days

If you plan on using your vacation home a lot, as well as renting it often, your vacation home will be treated as a personal residence. Specifically, if you rent your home for more than 14 days a year, but you and your family also use the home for more than 14 days, or 10% of the rental days (whichever is greater), your vacation home will qualify as a personal residence, not a rental property, and complex tax issues arise.

All expenses must be apportioned between rental and personal use, based on the total number of days the home is used. For example, you must allocate interest and property taxes between rental and personal use so that a portion of your mortgage interest payments and property taxes will be reported as itemized deductions on Schedule A (the standard form for itemized deductions) and a portion as deductions against rental income on Schedule E (the form for rental income and expenses.) You will only be able to deduct your rental expense up to the total amount of rental income.  Excess losses can be carried forward to future years though.

Proper planning

With proper planning and professional advice, you can maximize tax benefits of your vacation home. Please call our office if you have, or are planning to buy, a vacation home and would like to discuss the tax consequences of renting your property.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

1. The salary history of the individual employee
2. Compensation paid by comparable employers to comparable employees
3. The salary history of other employees of the company
4. Special employee expertise or efforts
5. Year-end payments
6. Independent inactive investor analysis
7. Deferred compensation plan contributions
8. Independence of the board of directors
9. Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.

A lump-sum of social security benefits is usually included in gross income for the year in which it is received. However, a recipient may choose to include in gross income the total amount of benefits that would have been included in gross income in the appropriate year if the payments had been received when due.

Lump-sum payments

If a recipient attributes benefits to a prior tax year, a smaller portion of the benefits may be subject to tax. This can occur when (1) a recipient's modified adjusted gross income (AGI) in the current year is more than the prior tax year's AGI or (2) a recipient used a higher base amount due to filing status in the prior year.

The IRS provides worksheets to assist recipients in determining whether they should attribute retroactive benefits to a prior tax year. Once the decision is made, IRS consent is needed to revoke it. A taxpayer who fails to attribute benefits to a prior year must include the lump-sum payment with income for the year in which the payment is received.

Repayment of benefits

When a recipient has to repay excessive benefits that were paid in error, the repayments reduce the amount of benefits taken into account for tax purposes in the year the repayment is made. Repayments are shown separately on the individual's Form SSA-1099, Social Security Benefit Statement.

If the repayment occurs during the same year the benefits are received, an adjustment is made for that year. If the repayment is made in a subsequent year, the recipient subtracts the repayment from the benefits received in the repayment year.

Example.  Shane received $7,500 in social security benefits in year 1 and $7,500 in year 2. In year 2, the Social Security Administration informed him that he should have only received $7,000 in benefits for each year. Shane immediately repaid $1000 in year 2. His taxable benefits for year 2 are as follows:

• Benefits received in year 2 = $7500,
• Repayments made in year 2 = $1000,
• Taxable benefits for year 2 = $6500 ($7500-$1000).

You may want to figure out whether attributing your retroactive benefits to a prior tax year would be more advantageous than including the benefits in gross income in the year received. If you need further assistance with this matter please give us a call.