Mortgage Interest Deduction Allowed for Home Never Built

The Journal of Accountancy is reporting - -

The Tax Court held that a couple could deduct interest paid on a loan incurred to purchase property on which they intended to construct a new home but never did. According to the court, a qualified residence was deemed to be under construction when an existing home was demolished and when other preparatory work, such as planning and acquiring permits for the new home, occurred. Furthermore, the court stated, the relevant Treasury regulation does not require that the residence under construction ever be occupied.

Taxpayers may deduct mortgage interest related to acquiring, constructing or substantially improving a qualified residence, defined as their principal residence and one other qualified dwelling. A residence under construction can be treated as a qualified residence for up to 24 months if, at the time the residence is ready to be occupied, it is a qualified residence (Temp. Regs. Sec. 1.163-10T(p)(5)(i)).

Continue readng at The Journal of Accountancy.

Charitable Contribution of Services

 A contribution of your time isn't deductible, but if you incur out-of-pocket expenses in connection with a contribution of your services, you may be entitled to a deduction. Car and truck expenses are the most common example, but you might also have to buy a uniform, pay for a hotel room for an overnight stay, etc. The cost of transportation and stay at a convention you're required to attend would be another example. If you make a single contribution of more than $250 in unreimbursed expenses in order to perform donated services for an organization, then you must obtain a written acknowledgment from the organization containing:

• a description of the services you provided
• a statement of whether or not the organization provided goods or services in return for the contribution
• a description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution
• a statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (if that was the case).

In addition, you must maintain adequate records of the unreimbursed expenses.

If you have any questions please contact us 954-591-8290 or use our Contact form.

IRS Denies Taxpayer Losses

In Wayne Lasier Wilmot (T.C. Memo. 2011-293) the IRS denied the taxpayer losses related to his photography business, asserting it was a not-for-profit activity (i.e., a hobby).

The taxpayer had a full-time job as an oceanographer working for NOAA. He took college courses in photography and hoped to pursue advertising and commercial photography. He traveled to Europe to take photos using models to build a portfolio. On his 2004 tax return he claimed expenses of $57,691 on Schedule C. He showed no income from the activity. Expenses included legal and professional of some $12,836, office for $11,048, supplies for $10,204, and travel for $20,949.

The taxpayer had detailed records of his expenses, but, as the Tax Court noted, it appeared the records were kept for securing a tax deduction rather than for business purposes and he had no written business plan.

The Court examined the nine factors used to determine whether an activity is engaged in with a profit objective. The Court noted the taxpayer did not advertise, and even turned down some work that he thought undesirable. Even the factor that is based on the taxpayer's success in carrying on other similar or dissimilar activities were of no help to the taxpayer. The Court noted that the skills he developed in his success in an oceanographic consulting business were not readily transferable to a photography activity. The Court weighed the factors and sided with the IRS in denying the Schedule C losses.

If you have any questions about your business qualifying as a for-profit business or a hobby, please contact us 954-591-8290 or use our Contact form.

January 2012 Tax Due Dates

January 1, 2012

Form W-5, employers must stop advance earned income credit payments for employees who fail to file new W-5.

 

January 10, 2012

Form 4070, tip reporting to employer.

January 17, 2012

Employment tax deposits (for December 2011) due for monthly depositors.

Form 1040-ES, 4th installment of estimated tax for 2011 for individuals due.

Form 1041-ES, 4th installment of estimated tax for 2011 for trusts due.

January 31, 2012

Form 1099s for prior year must be mailed to recipients of dividends, interest, original issue discount, miscellaneous income, rent, certain other distributions, and certain other payments made in 2011.

Form W-2 must be mailed to 2011 employees.

Form 941, due for 4th Quarter 2011.

Form 940, (FUTA) due for 2011.

Form 945, due for 2011 (to report withholding on nonpayroll payments.

FUTA, $100 or more in undeposited tax at end of 4th quarter last day to deposit tax.

Form 8308, statement to transferor and transferee involved in exchange of partnership interest.

Statement to payer in transaction involving more than $10,000 cash during 2011.

Note: For Forms 940, 941, 945, taxpayers who deposited taxes in full and on time the filing deadline is February 10.

Semi-Weekly Employment Tax Deposit Schedule for January:

5, 6, 11, 13, 19, 20, 25, 27

Special Rule: Employers must deposit taxes on next banking day after date employment tax liability exceeds $100,000.

January 1, 2012

Form W-5, employers must stop advance earned income credit payments for employees who fail to file new W-5. January 10, 2012
Form 4070, tip reporting to employer.

January 17, 2012

Employment tax deposits (for December 2011) due for monthly depositors.Form 1040-ES, 4th installment of estimated tax for 2011 for individuals due.Form 1041-ES, 4th installment of estimated tax for 2011 for trusts due.

January 31, 2012

Form 1099s for prior year must be mailed to recipients of dividends, interest, original issue discount, miscellaneous income, rent, certain other distributions, and certain other payments made in 2011.Form W-2 must be mailed to 2011 employees.Form 941, due for 4th Quarter 2011.Form 940, (FUTA) due for 2011.Form 945, due for 2011 (to report withholding on nonpayroll payments.FUTA, $100 or more in undeposited tax at end of 4th quarter last day to deposit tax.Form 8308, statement to transferor and transferee involved in exchange of partnership interest.Statement to payer in transaction involving more than $10,000 cash during 2011.Note: For Forms 940, 941, 945, taxpayers who deposited taxes in full and on time the filing deadline is February 10.

Semi-Weekly Employment Tax Deposit Schedule for January:

5, 6, 11, 13, 19, 20, 25, 27

Special Rule:

Employers must deposit taxes on next banking day after date employment tax liability exceeds $100,000.

2011 Charitable Contributions

Donors must deliver checks on or by December 31 in order to claim a charitable contribution deduction for 2011. Checks that are placed in the church offering during the first worship service in 2012 will not qualify for a charitable contribution deduction in 2011, even if the check is predated to 2011 or was actually written in 2011. However, checks that are written, mailed, and postmarked in 2011 will be deductible in 2011 though they are not received by a church until 2012.

We're Number One!

We're Number One!New Year's day is almost here, and for millions of Americans, that means college football bowl games. Fans and alumni across the country are gearing up to root for their favorite school. LSU fans cry "Geaux Tigers!" 'Bama fans chant "Roll, Tide, Roll!" But only one team will be champion come January 9.

Regardless of which gridiron gladiators we support for the BCS championship, Americans are #1 in another competition. That's right, Americans cheat their government out of more tax dollars than the citizens of any other country in the world!

A recent study by the Tax Justice Network, a British think-tank dedicated to transparency in international finance, shows the U.S. government lost $337 billion annually to tax evasion. We're followed by Brazil ($280 billion), Italy ($238 billion), Russia, Germany, France, Japan, China, U.K., and Spain. Overall, the study finds that worldwide tax evasion tops $3 trillion, or 5% of the world's economy.

However, while Americans are #1 in absolute dollars lost to cheating, we're not actually the biggest fibbers. The report attempts to quantify the size of each country's "shadow economy" that hides from official view to avoid tax. Russia is the biggest loser here, with 44% of its Gross Domestic Product (GDP) lurking underground and evading tax. Brazil is next, with 39% of its economy hiding in the shadows. Our own shadow economy, at 8.6% of GDP, is actually the smallest of those top ten tax evaders listed above.

Looking at it from a different perspective, next to the cost of financing government, the cost of financing health care is perhaps our country's biggest fiscal challenge. The Tax Justice Network's report draws an interesting contrast between each country's cost of tax cheating and cost of health care. Worldwide tax evasion costs an average of 55% of worldwide health care costs. But that average encompasses an enormous range. Here in the U.S., for example, tax evasion drains the equivalent of just 15% of our national health care budget. By contrast, in Bolivia, where the "shadow economy" accounts for 66% of GDP, tax evasion costs that nation more than four times the amount of their annual health care spending.

American tax cheats may even show a conscientious side. The Charities Aid Foundation, a British organization dedicated to encouraging efficient charitable giving, just released their World Giving Index 2011 report. They found that the U.S. is #1 in charitable giving, out of 153 countries surveyed. "Using data from Gallup's Worldview World Poll," the report says, "the results show that the USA is officially the most charitable nation in the world." Now there's something we can all take pride in this holiday season!

The irony here is that there are so many legal ways to pay less tax that nobody needs to cheat. Proactiveplanning is the key to paying less tax without having to hide in the shadows. As 2012 dawns, remember that we're here to deliver that planning -- for you, and for your family, friends, and colleagues as well.

More Money for Millionaires

Last year's federal budget deficit topped $1.48 trillion. With money so tight, you'd expect government to focus its efforts on those who really need the help. But that's far from the case, according to Oklahoma Senator Tom Coburn. Last month, he released a 37-page report entitled Subsidies of the Rich and Famous, outlining "sheer Washington stupidity" that he claims costs taxpayers billions of dollars every year.

The first part of Coburn's report focuses on direct payments like Social Security and Medicare benefits, unemployment benefits, and farm subsidies. (NBA star Scottie Pippen, rocker Bruce Springsteen, and billionaire broadcaster Ted Turner have all gotten federal farm subsidies.) But Coburn also heaps his scorn on specific tax breaks that he calls a "reverse Robin Hood style of wealth distribution." He claims he's not interested in raising rates on anyone. And he cautions against demonizing "those who are successful." But he does want to means-test benefits, close loopholes, and limit deductions that pamper millionaires with "unnecessary welfare to create an appearance everyone is benefiting from federal programs."

What sort of tax breaks have Senator Coburn so upset? Here are three:

• "Subsidizing Millionaires' Mansions": For 2009, 143,441 out of the 235,413 taxpayers reporting incomes over $1 million claimed mortgage interest deductions, averaging $30,995 each.
• Rental Expense Deduction: 69,074 of those million-dollar earners claimed a total of $12.5 billion in rental property expenses, including mortgage interest, cleaning and maintenance, and depreciation.
• Gambling Losses Deduction: Finally, 8,225 of the top earners reported a total of $4.2 billion in gambling losses.

Coburn's points seem reasonable at first glance. Does Oprah Winfrey really "need" a tax break for her $50 million California mansion? Should Vegas high-rollers count on us to bail them out when the dice come up snake eyes? On closer look, however, his objections may not hold up. The mortgage interest deduction, for example, is already limited to interest on $1 million of "acquisition indebtedness" on a primary residence and one additional residence, plus $100,000 of home equity indebtedness. Coburn would ditch the deductions for second homes and home equity interest, and drop the overall cap to $500,000 of indebtedness. But critics respond that over 11% of American homes are valued over $500,000, and limiting the deduction would cut home prices off at the knees at a time when they need all the support they can get.

Coburn's objections to deducting rental real estate expenses and even gambling losses seem to make less sense. Paying tax on gross rents and gambling winnings? Rental real estate losses are already limited by "passive activity" rules. If millionaires can't deduct their rental real estate expenses, they won't invest in real estate at all. That would drag prices down in the same way as limiting mortgage interest deductions. And gambling losses are deductible only to the extent of gambling winnings. Is it fair to tax anyone, millionaire or not, on gross winnings without letting them net out losses?

As the economy continues to struggle, Washington gridlock intensifies -- just look at the bickering over the payroll tax cut extension, which both parties say they want. And the 2012 presidential election draws near, we can expect to hear more rhetoric like Coburn's. What do you think? Do tax breaks for millionaires offend your sense of fairness? Or should millionaires get to take advantage of the same rules as the rest of us?

How to Overcome the Holiday Revenue Blues

Attorney Lee Rosen over at Divorce Discourse has a good post on how to overcome the holiday revenue blues.

In my practice, where we charge fixed fees for everything, December can be difficult. Revenues are affected by the holidays. My revenue anxiety often disrupts my holiday sleep. I wake up dreaming of bankruptcy judges and debtor’s prison.

Continue reading here.

Planning: Employee Business Expenses

Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.

 In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:

• Travel, transportation, meal, or entertainment expenses
• Safety equipment, small tools, or supplies
• Uniforms required by your employer that are not suitable for everyday wear
• Required protective clothing
• Dues to professional organizations
• Subscriptions to professional journals
• Certain job hunting expenses
• Certain expenses for the business use of your home
• Computer costs
• Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. Please contact our office at your earliest convenience to schedule an appointment.

2011 Planning: Tax Solutions for S Corporations

An S corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.

 In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

 These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

 Other key points to consider when developing your comprehensive tax strategy include:

• the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
• reporting requirements for the domestic production activities deduction;
• the tax treatment of fringe benefits;
• below-market loans between shareholders and S corporations; and
• IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you in identifying and maximizing the potential tax savings. Please contact our office at your earliest convenience to arrange an appointment.