Tax Relief for "Superstorm" Sandy

by Kenneth Hoffman in , ,

Hurricane Sandy roared ashore last week, interrupting our regularly scheduled election already in progress. And yes, we'll be addressing election results shortly, especially as we get more guidance on what to expect for your taxes. But we're impressed, as always, with how a natural disaster brings out the best in Americans, and we're pleased to see both Democrats and Republicans joining together to help those most affected by the storm.

The IRS gives generous tax deductions to help make our own generous charitable gifts go further. So this week we're writing to help you make the most of efforts you might make to support storm victims -- or any other year-end charitable gifts.

  • You can deduct up to 50% of your adjusted gross income for cash gifts you make to so-called "501(c)(3) organizations," or public charities working on behalf of storm victims. These include the American Red Cross and similarly recognizable groups.
  • If you give more than $250 in any single gift, you'll need a written receipt from the recipient, dated no later than the filing date of your return.
  • Gifts of food, clothing, furniture, electronics, or household items are deductible at "fair-market value," such as the price you would get for them at a resale shop. Consider using software, available at any office-supply store, for tracking your gifts and their value. You might be surprised at how much you can save!
  • Gifts of cars, trucks, and boats are a little trickier. Congress has cracked down on inflated car and truck deductions. If you donate a vehicle, you can deduct the fair-market value only if the charity actually uses it (such as a church using a van to drive its parishioners). If the charity sells the vehicle, your deduction is limited to the amount the charity actually realizes on the sale. And if that amount is more than $500, you'll have to attach a certification to your return that states the vehicle was sold in an arms-length sale and includes the gross proceeds from that sale.
  • Donations you make by text message are deductible like any other cash gifts. You can use your phone bill to substantiate your deduction.

The IRS cautions us all to seek out qualified charities, and warns that bogus requests for charities that simply don't exist are common after natural disasters. The IRS also announced that they would give businesses and tax preparers affected by the hurricane an extra seven days to file payroll and excise tax returns that were due on October 31.

December 31 is approaching faster than you'd like, and that means time is running out for year-end tax planning. But it's not too late to take concrete steps to cut your 2012 taxes. What are your year-end financial goals? Helping the victims of the storm? Saving for your dream retirement? Helping finance your children's or grandchildren's education? Odds are good that we can help you save taxes while you do it. And remember, we're here for your family, friends, and colleagues too!

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.

Are You Missing Valuable Year-End Tax Breaks?

by Kenneth Hoffman in , , ,

December 31 is approaching fast. And while you may not associate December 31 with taxes, it’s the deadline to take advantage of some of the most valuable planning opportunities. And proactive tax planning is the key to minimizing your tax.
Here’s a quick quiz to help see if you need year-end planning. This year, did you or will you:

  •   Marry or divorce
  •   Have a baby (or adopt)
  •   Change jobs or retire
  •   Earn income from stock options or employer stock
  •   Buy or sell your home
  •   Make gifts of more than $13,000 to any one person
  •   Start or invest in a new business
  •   Close or sell a business
  •   Hire contractors or employees for your business
  •   Start using your home for business
  •   Start using your car for business (other than driving to or from work)
  •   Increase or decrease your business income
  •   Buy or lease a new car/truck for business
  •   Buy or lease business equipment
  •   Sell business assets
  •   Start receiving IRA or retirement plan distributions
  •   Reach age 70½
  •   Buy or sell stocks, bonds, or mutual funds
  •   Buy, sell, or exchange investment real estate

Did you answer “yes” to any of the questions? If so, you can probably profit from year-end tax planning. Call us at 954.591.8290 for a free analysis. We’ll find the mistakes and missed opportunities that may be costing you thousands, and show you how we can fix them.
K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.

What Happens When Bush Tax Cuts Expire

by Kenneth Hoffman in , ,

The pending expiration of the Bush tax cuts at the end of 2012 is one of the most important events in taxes since they were enacted some 10 years ago. While House Speaker John A. Boehner said the House will vote on the issue this summer and the majority of our legislators believe the cuts, in general, should be extended, the general inability of Congress to act in a timely fashion should be cause for concern among taxpayers.

It's more than likely that many of the important provisions will be extended (lower tax rates; preferential treatment for long-term capital gains; etc.), but there could be important modifications that could affect many taxpayers. Congress will have to balance the fragile economy against the looming deficit. The real danger here is that the higher taxes are automatic. All Congress has to do is fail to act.

At this time it's virtually impossible to predict which provisions will be extended unchanged, which modified, and which eliminated. In this article we'll list the most important expiring provisions and attempt to provide some guidance with respect to planning.

Tax Rates

This is probably the most important provision. The current rates of 10, 15, 25, 28, 33, and 35 percent would increase in 2013 to 15, 28, 31, 36, and 39.6 percent (if the cuts expire, the 10-percent rate would be eliminated). Even low-income taxpayers would feel a significant impact. Upper-income individual taxpayers will feel a much greater impact.

The reversion to the old rates would almost surely have a severe impact on the economy. It's likely Congress will not let the reduced rates expire completely, but somewhat higher rates are possible. On a long-range basis you might want to consider accelerating income into 2012 and delaying deductions to 2013. But you've got to be careful not to overdo it for two reasons. First, the cuts may not expire and you could find yourself increasing your taxes. Second, accelerating too much income into 2012 could put you in a higher bracket than you might find yourself in in 2013.

Capital Gains and Dividends

Capital gains on individuals and other noncorporate taxpayers (gains of S corporations, LLCs, etc. are passed through and taxed to the owners) and taxed at a maximum of 15 percent (0 percent for those in the 10 or 15-percent brackets). Without extension, the rates would go to 20 percent (10 percent for taxpayers in the 15-percent bracket). In addition, gains on assets held longer than five years would be taxed at a maximum of 18 percent (8 percent for taxpayers in the 15-percent bracket).

The higher rates would apply to proceeds received in 2013 and future years. Thus, in order to insure the lower rates, the sale must be consummated and the proceeds received in 2012. You might consider accelerating installment payments to be received in 2013 and future years into 2012.

Qualifying dividends are currently taxed like capital gains, that is at no more 15 percent for individuals in the 25-percent and higher brackets (0 percent for those in the 10 or 15-percent brackets). Should the provisions not be extended, they would be taxed at ordinary income rates.

While abandoning dividend paying stocks in your portfolio makes little sense, increasing your investment in such stocks might be delayed until the law is settled. If you do business or have an interest in a regular corporation, or an S corporation with accumulated earnings and profits, you might consider a dividend before the end of the year.

Another point. The accumulated earnings tax and the tax on undistributed personal holding company income would revert to the highest individual tax rates. Paying dividends from corporate entities subject to the tax might be considered.

Phaseout of Itemized Deductions and Personal Exemption

Without extension, higher income individuals will once again face the phaseout of their personal exemptions and certain itemized deductions. (For itemized deductions, casualty, theft, wagering losses, investment interest, and medical expenses are not subject to the provision.) The phaseout of itemized deductions would begin at about $175,000; for married individuals filing joint the phaseout of personal exemptions would begin at about $260,000.

There isn't too much planning you can do here with the possible exception of accelerating charitable contributions and taxes into 2012, and even that might not be helpful because of the effect of tax payments on the alternative minimum tax.

Other Provisions Expiring

  • Marriage Penalty. The Bush cuts included a provision that lessened the "marriage penalty" encountered by some couples. The impact of sunsetting of this provision would increase the burden on some taxpayers filing married, joint and reduce the standard deduction.
  • Child Tax Credit. The $1,000 credit for dependents under age 17 would drop to $500.
  • Child Care Credit. The child and dependent care credit would be reduced by decreasing the maximum qualifying expenses from $3,000 per child to $2,400.
  • Student Loan Interest Deduction. The expiration of the current rules would mean the deduction would be phased out at lower adjusted gross income.
  • American Opportunity Tax Credit. The expiration of this credit would mean that the Hope credit would once again provide the most credit for tuition deductions. But the benefits of the Hope credit can be considerably less. The maximum Hope credit per year is less than the American Opportunity Tax Credit (AOTC) and is only available for the first two years versus four years for the AOTC.
  • State and Local Sales Tax Deduction. This provision allowed taxpayers to deduct either state and local sales taxes or income taxes as an itemized deduction.
  • Cancellation of Mortgage Debt. This provision allowed taxpayers to exclude from income cancellation of debt income from the cancellation of a mortgage on a taxpayer's principal residence.
  • Small Business Stock Gain Exclusion. Noncorporate taxpayers can exclude a percentage of the gain on the sale of qualified small business stock in a C corporation. A portion of the excluded gain is treated as a preference item for purposes of the alternative minimum tax.
  • Exclusion of IRA Distributions for Charitable Contributions. This provision allows taxpayers to exclude from income distributions from an IRA that are directly contributed to a charitable organization.
  • Earned Income Credit. The earned income credit benefits would be reduced on the expiration of the current provisions.

Other Points

  • Alternative Minimum Tax. The current "patch" for the alternative minimum tax expires at the end of this year. It's unlikely Congress will "fix" the tax. It's expected to legislate another patch with an increased exemption amount.
  • Additional Medicare Tax. Beginning in 2013 high income taxpayers ($250,000 for married, filing joint; $200,000 for others), will face an additional medicare tax of 0.9 percent on renumeration and self-employment income.
  • Medicare Tax on Unearned Income. Beginning in 2013, the law imposes a Medicare contribution tax on unearned income of 3.8 percent. Unearned income includes interest, dividends, annuities, royalties, rents, and capital gains. The tax applies to a taxpayer whose modified adjusted gross income is in excess of $250,000 (married filing joint; $200,000 for other filers except married, separate).
  • Higher Threshold for Medical Expenses. Currently, only the amount of medical expenses in excess of 7.5 percent of a taxpayer's AGI (adjusted gross income) is deductible. Beginning in 2013, that percentage increases to 10 percent.
  • Estate and Gift Taxes. The more liberal estate and gift tax rules expire at the end of 2013. We won't go into detail here, but, unless the current provision is extended, these taxes will go back up to much earlier levels.

Tax Planning

It's probably too early take any concrete steps, but you should be aware of the problem and know what plan of action you're going to follow when the fate of the law becomes clear. For example, you might want to look for ways to accelerate income into 2012, even if you wait till the end of the year to do so. And, if you were planning to sell some investment acreage in the next few years, you might want to put it on the market now to get the process started.

Many tax planning moves here are tricky. Unfortunately, most computer tax programs won't be of much help at this point. Professional help is strongly advised.

To implement a Strategy (big tax savings) you need TIME!  It is not something you can do AFTER the year ends.  Once the year is over you have lost the opportunity.  The earlier you implement... the bigger the tax savings. Call us TODAY at 954-591-8290 to get started.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.


Time to Start Planning for Next Year's Taxes

by Kenneth Hoffman in , ,

This year's tax deadline may have come and gone already but it's never to early to start planning for next year. With that in mind, here are eight things you can do now to make next April 15 easier.

1. Adjust your withholding. Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you'd prefer more money in each paycheck this year. If you owed at tax time, perhaps you'd like next year's tax payment to be smaller.

Give us a call (954.591.8290) if you need assistance in adjusting your withholding.

2. Store your return in a safe place. Put your 2011 tax return and supporting documents somewhere secure so you'll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year's return.

3. Organize your recordkeeping. Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Review your paycheck. Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.

5. Consult a tax professional early. If you are planning to use a tax professional to help you strategize, plan and make financial decisions throughout the year, then contact us now. You'll have more time when you're not up against a deadline or anxious for your refund.

6. Prepare to itemize deductions. If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. If you need help with tax planning for 2012 give us a call. We can help you prepare an approach that works best for you.

7. Strategize tuition payments. The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires.

Each household's financial circumstances are different so it's important to fully consider your specific situation and goals before making large financial decisions.

Feel free to contact us (954.591.8290) any time you have questions or concerns. We can help you stay abreast of tax law changes throughout the year--not just at tax time.

De-Friending Uncle Sam

by Kenneth Hoffman in , ,

Last week, Facebook's initial public offering hit the market like tickets to the season's hottest concert. Shares opened at $38, unlocking billions in new wealth for founders and early investors. While shares have actually fallen below that IPO level, investors will probably "like" Facebook for quite some time!

Taxes played a lead role in Facebook's IPO. The company went public largely so founder Mark Zuckerberg could pay $2 billion in taxes to exercise options on 120 millionshares. And six insiders, including Zuckerberg, have set up annuity trusts most likely intended to minimize gift and estate taxes on transfers to future heirs. (In Zuckerberg's case, those future heirs haven't even been born -- how'sthat for advance planning!) But one Facebook founder has taken an even more drastic step to avoid tax -- he's actuallyrenounced his American citizenship!

Eduardo Saverin was born in Brazil in 1982. His wealthy father moved the family to Miami in 1993 to avoid kidnapping threats, and Saverin became a U.S. citizen in 1998. He met Zuckerberg while the two were students at Harvard and, using his family's wealth, became Facebook's first investor. But Saverin was squeezed out shortly thereafter, reportedly at the urging of more experienced backers. He sued Zuckerberg, and settled out of court for what appears to be something between 2% and 4% of the company -- worth as much as $4 billion at last week's market close. 

Now, Americans like Saverin who give up their citizenship do pay an "exit tax" on the value of appreciated assets as of the time they leave. That means, essentially, you're taxed as if you sold everything the day before you surrender your U.S. passport. You'll file Form 8854 to calculate and report your tax. If you can't afford to pay on the spot, you can even "finance" it as long as you post adequate security. 

In Saverin's case, that means he pays based on the pre-IPO value when he left in September -- but he avoids tax on any appreciation after that date. This could spell hundreds of millions in savings. And where has Saverin settled? Singapore, where he has lived since 2009, and where the tax on capital gains is zero. Zip. Zilch. Nada. The Wall Street Journal reports that Saverin has become a Kardashian-like figure in his new home: "Mr. Saverin is regularly spotted lounging with models and wealthy friends at local night clubs, racking up tens of thousands of dollars in bar tabs by ordering bottles of Cristal Champagne and Belvedere vodka, according to people present on these occasions. He drives a Bentley, his friends say, wears expensive jackets and lives in one of Singapore's priciest penthouse apartments." 

Saverin is hardly the first American to to de-friend Uncle Sam. The IRS publishes a quarterly list of Americans who leave, one that totaled 1,781 in 2011. And, while Saverin denies he left to avoid taxes, outrage has grown over his move. Senators Chuck Schumer (D-NY) and Bob Casey (D-PA) have even introduced legislation that would punish future Saverins -- their so-called "Ex-Patriot Act" ("Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy") would impose a 30% tax on future expatriates' gains after they leave our shores. 

Are you working to create the next Facebook? There are lots of ways to pay less tax when you eventually sell, and they don't require you to give up your citizenship! So call us when you're ready for your IPO -- and remember, we're here for the rest of your social network, too!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Charitable Contributions Substantiation and Disclosure Requirements

by Kenneth Hoffman in , ,

A recent summary opinion by the United States Tax Court highlights the importance of following the substantiation and record-keeping rules that the federal tax code has put in place for charitable contribution deductions. It is imperative that churches and other religious organizations do their part to comply with these requirements to ensure that their church members are eligible to receive charitable contribution deductions for their gifts and tithes.

In Gomez v. Comm’r, (T.C. Summary Op. 2008-93, 2008) a husband and wife contributed a total of $6,548.27 to their local Texas church. The taxpayers made the donations by writing 20 separate checks. Ten of the checks were each for an amount over $250. The IRS challenged the deductions related to the ten donations over $250 by arguing that the petitioners failed to meet the substantiation requirements imposed by section 170(f)(8) of the Internal Revenue Code (the “Code”).

Specifically, section 170(f)(8)(A) of the Code disallows a charitable contribution deduction of $250 or more unless the church member substantiates the contribution by a “contemporaneous written acknowledgment.” The acknowledgment must come from the church and must include the following information: (i) the amount of cash and a description (but not value) of any property other than cash contributed by the church member to the church; (ii) whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. To be “contemporaneous,” a church must provide the written acknowledgment on or before the earlier of: (i) the date on which the church member files a return for the taxable year in which the contribution was made; or (ii) the due date, including extensions, for filing the return.

Because their church did not provide the Gomez family with a contemporaneous acknowledgement, the Tax Court denied them a deduction for any of the contributions that were for $250 or more. The Tax Court determined that a letter from the church written almost three years after the contributions did not meet the federal tax law requirements for a “contemporaneous” acknowledgment. The court was careful to note that even though it was clear that the Gomez family wrote checks for tithes to their church, and the cancelled checks for these tithes were “reliable,” the failure to meet the necessary substantiation requirements required the court to disallow the claimed charitable contribution deductions for checks equal to or greater than $250. (The IRS allowed the Gomez family to deduct eight other checks that were less than $250, and the court acknowledged that this was the appropriate result with respect to those checks.)

The Tax Court again reiterated that a taxpayer cannot deduct a charitable contribution without complying with the § 170(f)(8)(A) substantiation requirements. Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012).

Mr. & Mrs. Durden contributed $22,517 to their church in 2007. Although the church provided them with a timely statement acknoweldging the $22,517 contribution, it did not state whether they had received any goods or services as required by § 170(f)(8)(A) (the “first acknowledgment”). After being notified by the IRS of this deficiency, the Durdens obtained another statement from the church acknowledging the $22,517 contribution and stating that they received no goods or services (the “second acknowedgment”)..

The Tax Court accepted the IRS’s position that both acknowledgments failed § 170(f)(8)(A): (1) the first acknowledgment did not include the required goods or services statement; and (2) the second acknowledgment was not contemporaneous within the meaning of Reg. § 1.170A-13(f)(2) because it was not received by the Durdens before they filed their 2007 return.

The issue considered by the Tax Court in Gomez is inherent in the context of church-plate offerings. Thus, it is important that both donee churches, as well as their tithing members, are aware of the recordkeeping requirements for charitable contribution deductions. In this regard, churches and other religious organizations should consider the following:

  • Churches should encourage church members to make donations using checks rather than cash. A cancelled check provides the tithing member with an appropriate “bank record” to substantiate the donation and makes it easier for the church to track and record each donation for purposes of preparing a written contemporaneous acknowledgement.
  • For church members making cash contributions, churches should provide an envelope for a donor to fill out his or her name and the date and amount of the contribution. The church can then use this envelope for providing a written communication to the church member that the member can use to meet his or her recordkeeping requirements.
  • Churches should keep ongoing records of the amounts received from each church member and update those records each week. See the IRS Publication 1771 Charitable Contributions: Substantiation and Disclosure Requirements.
  • As soon as possible after the close of each calendar year, churches should send a letter containing the following information to each tithing church member: (i) the amount of each contribution of cash (whether made in currency or by check); (ii) a statement explaining whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. Delay in sending out this letter could result in a tithing member being unable to deduct his or her tithes on his or her federal income tax return.

If your church or religious organization has additional questions concerning these or other substantiation and recordkeeping requirements for charitable contribution deductions, please contact us at 954-591-8290 or use our Contact form.

Expense Documentation

by Kenneth Hoffman in , , ,

We've often mentioned the importance of adequate documentation to substantiate a business deduction. Ideally you should have a canceled check and an invoice marked paid with the serial number of the item purchased. While that may be viable for certain big-ticket assets, realistically, that's not often the case for most expenses. And the IRS knows that. There are many other ways to document expenses that are acceptable. However, you should be able to show that payment was made (e.g., a canceled check) and the nature of the item purchased (e.g., an invoice with a description of the item).

 Travel and entertainment, auto expenses and charitable contributions. There are separate rules for these items, and they're very strict. I won't deal with them here. They'll be detailed in an upcoming blog post.

Canceled check. The check should have the payee and should show the cancellation on the back. Why the cancellation? In the case of large or unusual purchases, the IRS may check that the payee actually cashed the check.

Checks not returned. Many businesses (and individuals) no longer have their checks returned. The IRS will accept images of the check. In order to be accepted as proof of payment, the statement must exhibit a high degree of legibility and readability. If your bank doesn't send you hard copies of the images, you should be able to download PDF copies of the checks. Don't rely on the bank to save statements and check images. After a certain period of time you may not be able to retrieve them without cost. Download statements and images each month. (That's good advice for other statements where you may no longer receive hard copies such as telephone bills, etc.) You may also be able to show proof of payment by providing:

  • an invoice marked "paid",
  • a check register or carbon copy of the check, and
  • an account statement that shows the check number, date, and amount.

An account statement prepared by a financial institution showing check clearance will be accepted as proof of payment if the statement shows:

  • the check number,
  • the amount of the check,
  • the date the check amount was posted to the account by the financial institution, and
  • the name of the payee.

Credit/debit cards. If payment is made using a credit card, the IRS requires that you have an account statement that shows the amount of the charge, the date of the charge (i.e., transaction date), and the name of the payee. If payment is made using a credit card, the IRS requires that you have an account statement that shows the amount of the charge, the date of the charge (i.e., transaction date), and the name of the payee. Most likely your credit card company is already mailing you these statements monthly. Cards specifically designed for business like American Express business credit cards will also provide year-end summaries. Note, this will only provide proof of payment.

Electronic funds transfer. If you transfer funds electronically, the IRS will accept an account statement prepared by a financial institution showing an electronic funds transfer as proof of payment if the statement shows:

  • the amount of the transfer,
  • the date the transfer was posted to the account by the financial institution, and
  • the name of the payee.

Invoice. You must have an invoice or other documentation showing what you purchased. A canceled check without an invoice or some other document showing the item purchase could be a problem. Statements from a supplier may be substituted, but only if they show the item. Fortunately, since most businesses are computerized, a supplier could generate a duplicate invoice if an agent insisted on seeing one. But it's best not to rely on that. When paying invoices, write the check number and amount paid on the invoice and the invoice number on the check so that you can cross reference them later if necessary.

Save all invoices. Don't assume the IRS will accept a check written to the telephone company without an invoice. The check could have been for payment of your personal line.

What about independent contractors? Even for small jobs, ask for an invoice. In addition, make sure you give the party a Form 1099, if applicable. No 1099? You could lose the deduction or be subject to penalties. What about those cash payments to some contractors? No invoice and no record of payment probably could mean no deduction.

Cash register tapes. You go to the local hardware store to purchase some fasteners for the business and get only a cash register tape with no details of the items purchased. Will it fly? If the total is relatively small and it's not a common occurrence, and agent should accept it. Write a description of the items on the slip--1 gallon paint for repainting wall; bolts for shelving. Fortunately, most stores now print the detail on the tape.

Caution on tapes. Many businesses, including major big box retailers, use heat sensitive tape to print receipts. The life can vary widely from less than 1 month under poor conditions (the glove box of your truck) to several years under good conditions. Don't take a chance. Make photocopies of the tapes.

Reasons for purchase. The business purpose of most of your purchases may be obvious. An agent is unlikely to question a laser printer cartridge, a computer, a book on how to use a computer program, etc. But be prepared for questions if the invoice or tape shows the purchase of items that normally wouldn't be business related or could be personal as well as business. For example, the purchase of a book with no clear business relationship, power tools by a computer consulting business, etc. Don't take a chance on remembering the reason several years later when you're audited. Write the business reason on the receipt or attach a description to the receipt.

Avoid personal purchases through the business. It's convenient to use a company check or credit card to purchase personal items. Resist the urge. Your accountant may spend time making the entries to adjust your expenses. If he doesn't or misses some that an agent catches, the agent might increase his scrutiny of all your expenses. You could be liable not only for additional taxes and interest but also an accuracy-related penalty. In flagrant cases the IRS may claim fraud, particularly if other indications are present.

Checks made to cash. While you should try to avoid them at all cost, that's nearly impossible. The larger the amount, the more careful you should be. Be sure to indicate on the check what the purchase was for. This is one time when an invoice can be critical. An invoice marked paid in full would certainly help your position.

Cash expenses. Some expenses will be so small that an invoice or even a cash register tape is impractical. You may also be paying in cash rather than by using a check or credit card. Keep a diary showing the date, place, amount, and description of the item purchased or service obtained. For example, "11/20/12, Madison Hardware, $6.25, nuts and bolts for shelving".

Business standards for documentation. Any invoice, contract, etc. should be up to industry standards. For example, a receipt from a local deli for sandwich platters for the office party may be scribbled on an invoice without a number (it should, of course, be dated). But an invoice for a collision repair on the company truck should contain detailed parts and labor, since the shop normally does that for insurance purposes.

Other documentation. You should also retain other documentation that might be used in addition to or in place of an invoice. For example, a contract for services, lease on equipment or office space, warranties on equipment, service contracts, etc.

Petty cash. If you keep a petty cash fund, slips showing expense reimbursements should be sufficient to document the expenses. That's assuming the expenses are small, as one would expect. Make sure that the nature of the expense is clear from the slip. Employees should check that and, if not, write on the slip the type of expenses and the vendor.

Expense reports. We're not talking travel and entertainment here. It's not unusual for an employee to purchase office supplies, small equipment, shop supplies, maybe even items to be used on the manufacturing floor that may be critical. Officers and especially officer/shareholders often pay company expenses out of their own pocket. While it's best to avoid such situations, that's not always possible. The correct procedure is to have the employee file an expense report and attach the documentation. The company should then cut the employee a check for the amount documented. For example, you need a color printer for a rush job. An employee buys an inkjet printer with his own credit card. He should file an expense report and attach the credit card slip and any other documentation from the store.

This can be especially critical when it comes to an employee/owner/shareholder. Without the expense report the company can't take the deduction because it didn't pay for the item; the employee/owner can't take the deduction because it's not a valid deduction. Special rules apply to partnerships and there's an exception if the business has a policy of not reimbursing. Talk to your tax advisor.

Cohan rule. The last resort. It's called the Cohan (Cohen vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930)) rule because it evolved from a court case where the taxpayer was George M. Cohan. Cohan claimed travel and entertainment expenses for which he had no receipts. The court allowed him a deduction based upon the fact he was able to convince the court he incurred expenses but did not have proof of payment or the actual amount. Ironically, this rule cannot be applied to travel and entertainment expenses any longer. Now if required, no receipt, no deduction, no exception for those expenses.

How does the Cohan rule work today? If you can show you definitely incurred the expenses and are entitled to a deduction but don't have the receipts or proof of payment, the court may allow a deduction based on an estimate. But there has to be some basis on which the court can make the estimate. For example, you have no receipts to prove your fuel oil expense for 2012 because you inadvertently destroyed the bills. In addition, the company went out of business. Clearly you incurred some charges to heat your building. The court may estimate the expense based on an average of fuel bills for several years.

This is a last resort for a number of reasons. First, you may have to go to court to get the deduction. Second, the court is almost assuredly going to try and underestimate the amount of your deduction. Third, the rule will probably not be applied if you have access to the documentation but don't produce it (e.g., you could ask a vendor to produce the necessary statements, even if it cost you). Fourth, you'll still have to convince the court you incurred the expenses. It may believe your testimony; it may not. You'll be on safer ground if you have some corroborating evidence.

Finally, the court is under no obligation to assist you. Even if your records are destroyed through no fault of your own (e.g., a fire), the court can require you to reconstruct. You'll fare better if you can show the lack of records either isn't your fault or, if it is, there are extenuating circumstances. For example, you normally have excellent documentation but telephone and utility bills for one year were inadvertently discarded.

Corroborating witnesses. Sometimes you can convince the IRS or the court you incurred the expenses by producing witnesses. That may work, but if the witnesses aren't convincing or the court believes the testimony may be biased (they're employees or relatives), it doesn't have to accept their testimony. And that happens in a high percentage of cases. Again, not an approach to rely on.

Too much paper? In many cases you don't have to save paper copies. Electronic versions of statements received from vendors or others will normally suffice, but they must be readable. You can also scan documents and save them as electronic copies. If the documents are signed (e.g. a lease), you might want to retain an original copy. And consider retaining hard copies of important asset purchases. Contact us if you have questions or if you want to implement a paperless office.

Retention time. You may have heard hold canceled checks and other documents for 3 years, but it's more complicated than that. Technically it's three years from the date you filed the return. But if the IRS suspects you underreported your income, it can go back 6 years. If it believes fraud is present, there is no limit. For assets such as autos, equipment, etc. you should retain all documentation for at least 3 years after the asset is disposed of. And longer retention periods can apply to employment records. If you need a single rule of thumb, use a 7-year holding period for most records. But the best approach is to check with your tax adviser.

Documentation vital. Based on an informal analysis, it appears that more taxpayers lose in Tax Court because they can't substantiate their expenditures than for any other reason. While the IRS sometimes does show some flexibility, it's generally a stickler for records and can disallow the smallest expenditure for lack of them.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Where You Report a Deduction is Important

by Kenneth Hoffman in

Does it make a difference where you report expenses? Sometimes yes, sometimes no.

You can't deduct charitable contributions on your Schedule C. Instead, they should be deducted on Schedule A as itemized deductions. What's the difference? If deducted on Schedule C the contributions would reduce the taxpayer's self-employment tax liability.

You might be able to deduct them on Schedule C if the amounts aren't really contributions but advertising expense. For example, if you buy a 1-page ad in the local high school's yearbook. Whether or not it would be advertising could depend on a number of factors.

A similar rule applies to S corporations and partnerships. Charitable contributions are passed through to the shareholders and deducted on their individual returns, not from S corporation or partnership income.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Tax Business, Russian Style

by Kenneth Hoffman in ,

Tax Business, Russian Style

Working in the tax business is usually a pretty safe gig. You really just need an office, a computer with an internet connection, and a fast laser printer for all those piles of paper. There's not much heavy lifting -- and even less intrigue or danger. But sometimes the tax business is a different story. Just ask Pavel Petrovich Ivlev, who works (now) in suburban New Jersey.

Pavel was born in 1970 just outside Moscow. He earned a law degree from Moscow State University in 1993, studied more in Amsterdam and London, then joined an international law firm. At that point, he appeared set to become another one of a new breed of Russian lawyers, helping newly-privatized companies negotiate the awkward transition to "real" capitalism.

Pavel's clients included Yukos Oil, and its charismatic chairman, Mikhail Khodorkovsky. Khodorkovsky had started out collecting dues for the Communist Youth League. But as the Soviet Union collapsed, he rejected his old Leninist ideology. Taking advantage of glasnost and his party connections, he became an entrepreneur, published his own capitalist manifesto called The Man with the Ruble, and traded his way up to controlling 20% of Russia's lucrative oil production. For one brief shining moment, Khodorkovsky's $16 billion fortune made him the richest man in Russia and the 16th-richest man on earth.

In 1999, Vladimir Putin succeeded to Russia's Presidency. Putin had started his career in the KGB -- working counterintelligence, no less -- and he was no stranger to blunt force. (Google "Putin+thug" and you get 2,190,000 hits. 'Nuff said.) Putin quickly moved to tighten his grip on power, clamping down on elected officials and billionaire oligarchs alike. Khodorkovsky naturally pushed back, and at one point in 2003, embarrassed Putin in a nationally televised meeting of business leaders. Unfortunately, such resistance amounted to bringing the proverbial knife to a gunfight.

Eight months later, Putin had Khodorkovsky arrested, and slapped everyone else associated with Yukos with tax and fraud charges. And that's where our tax attorney friend Pavel comes back into the picture. Here's how he describes his own interrogation by government investigators. Clearly, they felt no need to screw around with the usual "good cop-bad cop" shtick -- or maybe the good cop was just off grabbing a ponchiki (Russian doughnut):

"On November 16, the lead detective in the case said to me 'Now I am going to interrogate you.'
I said, 'You can't do that, it's against the law.'
'I guess we are going to have to break the law then. Tell me all.'
'What do you want me to say?'
'You are the lawyer -- you know the penal code. Whatever you say, we'll use.'
'You want me to describe how we took sacks of cash out of Yukos and delivered them to Khodorkovsky personally?'
'But nothing like that ever happened.'
That's when he threatened to arrest me."

Pavel's momma didn't raise any dummies. He caught the next plane out of Moscow and didn't even call his wife till he landed. But he remains under indictment in his homeland for stealing $2.4 billion, laundering $810 million, and evading tax on the gain. At least he's better off than his former client -- Khodorkovsky has spent the last seven years in a series of former Soviet prisons.

Look, there's nothing fun about the IRS. And we've all met someone who went through an "audit from hell." But few people actually flee abroad to shake off the tax man! So while we gripe about how much we pay, we can at least appreciate the IRS playing on a level field. Let Pavel's story help you feel fortunate that we won't be chased out of this country for paying less tax!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

England's Tax Subsidized Style

by Kenneth Hoffman in ,

England's Tax-Subsidized Style

England's creative class is known throughout the world for the richness and variety of its work. Some is good (think Savile Row tailoring and the architecture of Sir Christopher Wren). Some is not (Princess Eugenie's royal wedding hat). And some is just sublime (the 1961 Jaguar E-type). But there's one art form the English are better at than anyone else, and that's highbrow television.

It all started with Upstairs Downstairs. Next came 1981's lavish Brideshead Revisited. And now there's yet another snooty television "programme" invading American hearts and minds -- Downton Abbey, a period drama centered on the aristocratic Crawley family and their servants, during the reign of King George V.

Yes, it's a soap opera. But oh, what a soap opera it is. You have your standard-issue improbable plot complications and ill-advised romances, naturally. But it's set against a backdrop of class, manners, and humanity that seem long lost a century later. And where else will you find a soap with Oscar- and Tony-winning actors, much less a pheasant hunt? Add in Edwardian sensibilities, amusing antique technology, and impossibly dry British wit, and you have an irresistibly compelling package.

Programs like Downton Abbey showcase British culture to the world and boost the nation's economy, too. So Her Majesty's Treasury began offering film tax credits for movies roughly 10 years ago. For 2010, they gave about £100 million in credits to support more than 200 productions -- including, of course, both Harry Potter sequels. But now, as part of their 2013 budget, officials are extending the incentives to high-end television, too. To qualify, dramas must cost more than £1 million (roughly $1.58 million), and must pass a "cultural test."

We have tax credits for movies and television here in the United States, of course. There's nothing at the federal level, but state and local governments eagerly compete for filmmakers' dollars with a vast variety of tax incentives. While Hollywood is the obvious center of the film universe, you might be surprised to learn that the next most attractive location for film production, based in part on generous tax incentives, is Louisiana. In fact, Louisiana was the first state to adopt tax incentives for filmmakers, and sparked a trend across the country. Producers get a 30% transferable tax credit on total in-state expenditures, plus a 5% labor-tax credit on payroll of employed residents.

Here in the US, you wouldn't think we'd worry too much about the quality of the productions we encourage. That, after all, is part of our uniquely American charm. But at least one state official has imposed his own informal "cultural test" in an apparent attempt to class up the joint. Last year, the New Jersey legislature approved $420,000 in credits for the producers responsible for MTV's raucous Jersey Shore -- then watched in dismay as Governor Chris Christie vetoed the bill, declaring "as chief executive I am duty-bound to ensure that taxpayers are not footing a $420,000 bill for a project which does nothing more than perpetuate misconceptions about the state and its citizens." His Lordship the Earl of Grantham would heartily approve.

If you run your own business -- or even if you're just thinking about starting a business -- you may not qualify for film credits. But you will qualify for more tax breaks than you realize. So make sure you take some time to sit down with us to plan how best to take advantage of those breaks. And let your friends, family, and colleagues know we're here to help them, too!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.