IRS Identity Protection PIN Letters

We have been notified by the IRS that due to an error, taxpayers are receiving Identity Protection PIN letters with an incorrect year listed. Taxpayers and tax professionals should be advised the IP PIN listed on the CP 01A Notice dated January 4, 2016 is valid for use on all 2015 individual tax returns.

The notice incorrectly indicates the IP PIN issued is to be used for filing the 2014 tax return when the number is actually to be used for the 2015 tax return. The IRS emphasizes the IP PIN listed on the CP 01A notice is valid for the 2015 returns. Taxpayers and their tax professionals should use this PIN number for 2015 tax returns, which the IRS will begin accepting from taxpayers starting January 19, 2016.

The IRS apologizes for the confusion and any inconvenience.

Steve Eubanks, EA, NTPI Fellow

www.strategictaxgroup.com

 

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2015 PATH Act (new tax law)

Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2014, but now, in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (i.e., the 2015 PATH Act), the extenders have been revived and extended once again, but this time Congress has taken a new tack. Instead of just rolling the package of provisions over for a year or two, it actually made some of the provisions permanent and extended the remaining provisions for either five or two years, while making significant modifications to several of the provisions.

I’m writing to give you an overview of the key tax breaks for individuals that were extended by the new law. Please call our office for details of how the new changes may affect you.

The extended provisions include:

  1. tax credits for low to middle wage earners that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2017; made permanent; these tax credits are: (1) the American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education, (2) eased rules for qualifying for the refundable child credit, and (3) various earned income tax credit (EITC) changes;
  2. the $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom; made permanent; also modified, beginning in 2016, to index the $250 cap to inflation and include professional development expenses;
  3. the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income; extended through 2016; the new law also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a binding written agreement entered into in 2016;
  4. parity for the exclusions for employer-provided mass transit and parking benefits; made permanent;
  5. the deduction for mortgage insurance premiums deductible as qualified residence interest; extended through 2016;
  6. the option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes; made permanent;
  7. the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes is made permanent; the new law also extends the enhanced deduction for certain farmers and ranchers;
  8. the above-the-line deduction for qualified tuition and related expenses; extended through 2016; and
  9. the provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70 1/2 or older; made permanent.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

Know the law: Avoid political campaign intervention

Tax-exempt section 501(c)(3) organizations like churches, universities, and hospitals must follow the law regarding political campaigns. Unfortunately, some don’t know the law.

Under the Internal Revenue Code, all section 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of (or in opposition to) any candidate for elective public office. The prohibition applies to campaigns at the federal, state and local level.

Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes. Section 501(c)(3) private foundations are subject to additional restrictions.

Political Campaign Intervention

Political campaign intervention includes any activities that favor or oppose one or more candidates for public office. The prohibition extends beyond candidate endorsements.

Contributions to political campaign funds, public statements of support or opposition (verbal or written) made by or on behalf of an organization, and the distribution of materials prepared by others that support or oppose any candidate for public office all violate the prohibition on political campaign intervention.

Factors in determining whether a communication results in political campaign intervention include the following:

  • Whether the statement identifies one or more candidates for a given public office
  • Whether the statement expresses approval or disapproval of one or more candidates’ positions and/or actions
  • Whether the statement is delivered close in time to the election
  • Whether the statement makes reference to voting or an election
  • Whether the issue addressed distinguishes candidates for a given office

Example of Political Campaign Intervention

State University President Benjamin, the leader of a section 501(c)(3) organization, writes a “My View” monthly column for the alumni newsletter that is distributed to thousands of school graduates. In the month before an election, he writes, “It is my personal opinion that candidate Thornton should be reelected.”

For that one issue, President Benjamin pays from his personal funds the portion of the cost of the newsletter attributable to the column. Despite his payment, the publication is an official university publication, and the president’s endorsement constitutes campaign intervention.

Over the years, some of the specific instances of political intervention alleged and examined have included:

  • Charities, including churches, distributing diverse printed materials that encouraged their members to vote for particular candidates
  • Candidates speaking at official charity functions in their capacities as candidates
  • Charities endorsing or opposing a candidate on their websites or through links to other websites

Stephen A. Eubanks, EA
www.strategictaxgroup.com

Prohibited Transactions of Self-Directed IRA

Self-directed IRA have reached popularity in recent years that allows flexibility and choice of investments.  However, the IRS has strict rules on prohibited transactions (IRC 4795).  Keep in mind that IRAs are a completely separate entity and not following these rules can result in losing the IRA status.

Prohibited Transactions

  • sale or exchange, or leasing, of any property between a plan and a disqualified person
  • lending of money or other extension of credit between a plan and a disqualified person
  • furnishing of goods, services, or facilities between a plan and a disqualified person
  • transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan
  • act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account
  • receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan

Disqualified Persons

A disqualified person is defined as the account holder and spouse, lineal descendants (children, grandchildren, parents, grandparents, etc.), fiduciaries, trustees, investment managers and advisers; and any corporate entity in which the account holder has at least a 50 percent ownership.

An example of a prohibited transaction is when IRA purchases a rental home and your spouse is the real estate agent who receives a commission for the sale.  Another example of a prohibited transaction is having your grandson mow the lawn for compensation.

Prohibited Investments

The following are investments or assets that the IRA is not allowed to own.  For a complete list see IRS Publication 590.

  • Work of Art
  • Stamps
  • Coins (exception US Minted Gold or Silver Eagle)
  • Alcoholic Beverages (wine, Scotch)
  • Antiques
  • Rugs
  • Insurance Contracts
  • S-Corporation Stock

Salary & Distributions for S Corporation Officers/Shareholders

Courts have consistently held that S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the services rendered to the corporation.

Per the IRS as noted above, as an owner/shareholder of an S-corporation you must pay yourself a reasonable wage (through payroll). At a minimum, you should pay yourself gross wages equal to 150% of the total you take out in draws/distributions. This is known as the 60/40 rule.

Example: If you normally take $100,000 out of the business, it should be split so that $60,000 is paid as wages to yourself and the other $40,000 is paid out in distributions to yourself. You have to be able to justify your pay as “reasonable”. According to the IRS, reasonable pay is the amount that similar enterprises pay for the same, or similar, services.

Salary/Wages:

  • When you pay yourself a wage through your S Corporation, your business gets to take that amount as a deduction on the S Corporation tax return under Officer’s Compensation.
  • Your business will also have to generate payroll reports and pay payroll taxes in a timely manner including the employer portion of Social Security and Medicare, federal unemployment, and state unemployment which are all deductible payroll tax expenses.
  • You personally will have withholdings on your wages for Social Security, Medicare, federal income tax, and state income tax just as any other employee would.
  • You will receive a Form W-2 at the end of the year from your payroll provider detailing the gross income and withholding amounts. The gross pay included in Box 1 of your Form W-2 will be included as income on your personal tax return.

Draws/Distributions/Dividends:

  • When you pay yourself distributions through your S-Corporation such as dividends, rents, personal expenses, and personal tax liabilities, these amount are not included as deductions on your business tax return (Form 1120S).
  • The S-Corporation does not pay any payroll taxes on the distributions.
  • The distributions that you receive are not deducted from your S Corporation’s income. You will not receive a W-2 or a 1099 for the distribution amount. You also do not have to pay Social Security or Medicare tax on the distribution amounts.

Possible Consequences of Not Adhering to these Quidelines:

  • Possible IRS audit of the corporation’s records.
  • Loss of S corporation status and liability protection.
  • Distributions/Dividends being treated as wages with federal employment taxes being imposed and, subject to late payment penalties and interest for not paying these taxes on a timely basis.

Incorporating or Forming an LLC

The Internet is full of websites claiming that huge tax savings are available to businesses that incorporate or form a limited liability company (LLC) – in a company’s own State, or another State or Country. There are real benefits (and costs) associated with incorporation/LLC, but the decision the decision needs careful study and a discussion with a tax professional or tax attorney.

Subchapter S Election for Corporations and Limited Liability Companies

The Subchapter S election, an option available for both corporations and limited liability companies, may work well as a small business tax savings strategy.
If you operate a small business as a sole proprietorship or partnership, you pay not only income taxes on your profits, but also self-employment taxes (for 2012, roughly 15% on the first $110,000 and then roughly 3% on any amounts above $110,000.)

If a business incorporates or forms an LLC and the business files the necessary paperwork to use the Subchapter S accounting rules, the business only pays the employment taxes on the part of the profit that the business specifically labels “wages.”

Example: If a business operates as a sole proprietorship and makes $100,000, the owner will pay $15,000 in self-employment taxes. If the owner re-forms the entity as an S corporation and pays him or herself a salary of $40,000, the owner will pay $6,000 in Social Security and Medicare taxes. An S corporation in this situation saves the owner roughly $9,000 a year.

Sole proprietors and partners pay self-employment taxes. Owner-employees in an S corporation or regular corporation pay Social Security and Medicare taxes. The tax labels really don’t matter. If you are considering an S corporation and want help setting a low but reasonable salary (and that’s the secret for really saving money with an S corporation), contact your tax professional to discuss the costs and benefits.

Out–of–State and Offshore Incorporation

Incorporating in another state to avoid your home state’s taxes is a scheme that some unscrupulous online incorporation services promote. It doesn’t work. You can’t incorporate your California business in a state without income taxes and avoid California state income taxes.

Offshore incorporation fails to reduce taxes for the same reason that out-of-state incorporation does. If you’re operating in the U.S, you are liable for U.S. taxes. There is a “right” way to minimize state income taxes: relocate your business from a high-tax state to a low tax state.

Are Club Dues Tax Deductible

Like many other enterprises, your business may pay club dues to one or several types of organizations. These dues may or may not be deductible, depending on the type of organization and its purpose.

Your business generally cannot deduct dues paid to a club organized for business, pleasure, recreation or other social purposes. This disallowance rule takes in country clubs, golf clubs, business luncheon clubs, athletic clubs, and even airline and hotel clubs. However, you can deduct 50% of the cost of otherwise allowable business entertainment at a club, even if the dues you pay to the club are nondeductible. For example, if you have dinner with a client at your country club after a substantial and bona fide business discussion, 50% of the cost of the dinner is deductible as a business expense.

The club-dues disallowance rule generally doesn’t affect dues paid to professional organizations including bar associations and medical associations, or civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs. The dues paid to local business leagues, chambers of commerce and boards of trade also aren’t affected. However, an organization isn’t exempt from the disallowance rule if its principal purpose is to provide entertainment facilities to its members, or to conduct entertainment activities for them.

Finally, keep in mind that even if the general club-dues disallowance rule doesn’t apply, there’s no deduction for dues unless you can show that the amount you pay is an ordinary and necessary business expense.

Steve Eubanks, EA

www.strategictaxgroup.com