Something to Scream About

It's one of the most recognizable images in all of art. It's Norwegian artist Edvard Munch's iconic vision The Scream: an agonized figure --little more than a garbed skull and hands -- set against a background of blood-colored sky. And last month, it sold for a record-setting price. But could it have been inspired, at least in part, by his tax return?

Munch grew up in Oslo, son of a dour priest. At 16, he enrolled in college to become an engineer. He did well, but he quickly dropped out, disappointing his father, to study painting, which he saw as an attempt "to explain life and its meaning" to himself. At 18, he enrolled at the Royal School of Art and Design of Christiana, where he began painting portraits. His personal style addressed psychological themes and incorporated elements of naturalism, impressionism, and symbolism. He wound up studying in Paris and exhibiting in Berlin before painting the first of four versions of The Scream in 1893.

In 1908, Munch suffered a brief breakdown, followed by a recovery. That recovery brightened Munch's art as well as his life, as his later work becoming more colorful and less pessimistic. He finally gained the public approval he had sought for so long; he was made a Knight of the Royal Order of St. Olav; and he hosted his first American exhibit. Munch spent the last years of his life painting quietly and alone on a farm just outside Oslo. Today, he appears on Norway's 1,000 kroner note, set against a background inspired by his work.

We remember Munch now for his art, not his life. But that life included some frustrating run-ins with the tax man. Apparently, Munch wasn't any happier keeping timely and accurate records than the rest of us. Here's part of a letter that his biographer, Sue Prideaux, quotes him as writing, in her book Edvard Munch: Behind the Scream:

"This tax problem has made a bookkeeper of me too. I'm really not supposed to paint, I guess. Instead, I'm supposed to sit here and scribble figures in a book. If the figures don't balance I'll be put in prison. I don't care about money. All I want to do with the limited time I have left is to use it to paint a few pictures in peace and quiet. By now, I've learned a good deal about painting and ought to be able to contribute my best. The country might benefit from giving me time to paint. But does anyone care?"

Even without that tortured face in The Scream, most of us can still probably relate to his frustration!

Last month, Sotheby's auction house in New York sold a pastel-on-board version of The Scream that Munch painted in 1895 for $119.9 million -- a new record for art sold at auction. The seller was Norwegian billionaire Petter Olsen; the buyer remains unknown. If the seller had been American, there could have been quite a tax to pay. "Capital gains" from the sale of appreciated property held more than 12 months are ordinarily capped at 15%. (Republican presidential candidate Mitt Romney has proposed eliminating tax on capital gains for taxpayers earning under $200,000; while President Obama has proposed raising them to 20% for taxpayers earning over $250,000.) But paintings like The Scream are classed as "collectibles" and subject to a top tax of 28%. (You would be disappointed if we didn't say that's enough to make a collector scream!)

Are you holding precious artwork or antiques that are just taking up space in your house? Call us before you call the auctioneer. We'll make sure you keep as much of your record-setting price as possible. And remember, we're here for your family, friends, and colleagues, too!

K.R. Hoffman & Co., LLC, helps individuals and businesses take control of their taxes. Discover how we can help you with your business and tax challenges; call me at (954) 591-8290 or drop me a note.

Minister Housing Allowance

Ministers must qualify to exclude a housing allowance from taxable income. Under Code Section 107 of the Internal Revenue Code, a minister who satisfies all conditions contained in Section 107 may exclude from taxable income the qualifying amount of housing allowance. While many ministers are familiar with the concept, they frequently forget the detailed terms and conditions associated with this benefit.

Only qualified ministers may receive housing allowance. The IRS reserves this benefit for ordained, licensed, or commissioned ministers of the gospel who received their credentials from a church. Generally, specialized ministerial licenses do not qualify for a housing allowance.

In addition, the minister must be performing the duties of a minister during his work time. The Internal Revenue Regulations generally define the duties of a minister. The duties of a minister employed by a church generally include leading a worship service, performing sacerdotal functions, and managing the church or some significant segment of the church. A different test applies when the minister works outside the church.

Few churches use the term sacerdotal to describe a minister’s duties. The term sacerdotal originally arose within the Roman Catholic faith to describe those duties performed by the priests. Today, most churches define sacerdotal to include those duties normally expected of a minister by that church. Certainly, sacerdotal duties include performing weddings and funerals. But it also includes prayer, Bible study, preaching, teaching, counseling, leading church services, visiting the sick and infirm, and spreading the gospel through various means and media.

Once the individual is duly qualified as a minister and is performing ministerial duties, then the mechanical parts of the housing allowance must be performed. First, out of the minister’s total compensation, the church is responsible for designating in writing an amount as a housing allowance. This amount can range up to 100 percent of the minister’s compensation. The board or compensation committee should annually pass a resolution setting a fixed dollar amount of each minister’s housing allowance. The board or compensation committee may adjust the housing allowance during the year, but the adjustment will only apply prospectively. If the church provides a parsonage for the minister, the church is responsible for setting the fair rental value of the parsonage as furnished, plus utilities, and providing that information to the minister.

Second, the minister must track all cash expenses related to owning, occupying, or maintaining his primary residence. The minister will need to retain receipts should the IRS question his housing allowance. We urge all minsiters and clergy to keep a separate checkbook to keep track of their housing allowance and expenses.

Finally, the minister must determine the fair rental value of his home as furnished, plus utilities. The minister should not use a real estate professional associated with the church where he is serving.

The minister may exclude from taxable income the lowest of the amount designated by the church, the amount spent by the minister owning, occupying, and/or maintaining his primary home, or the fair rental value of the home as furnished, plus utilities.

As a side note, the housing allowance is taxable for self-employment taxes unless the minister has elected out of Social Security.

If you have any questions about this topic, tax law changes, have questions about the IRS and your church, or want to become a client, please call us at 954-591-8290 or use our Contact form.

Churches - Unrelated Business Income

A church must make quarterly estimated tax payments if it expects an unrelated business income tax liability for the year to be $500 or more.

Use IRS Form 990-W to figure your estimated taxes. Quarterly estimated tax payments of one-fourth of the total tax liability are due by April 15, June 15, September 15, and December 15, 2012, for churches on a calendar year basis.

If you need assistance in completing Form 990-W, have any questions about this topic, tax law changes, have questions about the IRS and your church, or want to become a client, please call us at 954-591-8290 or use our Contact form.

Report Card Time

Memorial Day has come and gone, and the school year is quickly winding down, if it isn't already over. Kids are getting excited for summer vacay, and there's just one hurdle left -- the dreaded report card. (If your kids are getting nervous and antsy around mail time, you might want to pay attention!)

 Kids in school aren't the only ones who have to sweat report-card time. That's right, the IRS gets a report-card time, too. In fact, they get two. By law, National Taxpayer Advocate Nina Olson has to submit two reports to Congress each year: the "Objectives Report," which outlines goals and activities planned for the coming year, and the "Annual Report," which summarizes the 20 most serious problems encountered by taxpayers, recommendations for solving those problems, and other IRS efforts to improve "customer" service and reduce taxpayer burden.

 And how do you think our friends at the IRS are doing? Well, this year's Annual Report listed twenty-two problems, not 20. Their biggest conclusion is that the IRS is simply "not adequately funded to serve taxpayers and collect taxes." It identifies "the combination of the IRS's expanding workload and declining resources as the most serious problem facing taxpayers."

 Granted, the IRS faces an especially tough challenge. "There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims."

 And there were more specific problems, too. The IRS has to rely on computers to do most of their work, and computers don't always get things right. The IRS adjusts about 15 million returns per year -- but treats only 10% of those as "audits," so taxpayers don't always get traditional audit protections. And sometimes the IRS is just too busy to respond: they answer just 70% of taxpayer phone calls, and just 53% of written correspondence gets answered in 45 days. It's hard to ace your report card when you're missing that much of your homework!

 What can the IRS do about their report card? Well, they can't just make up their missing credit in summer school. But the Taxpayer Advocate does have two main recommendations. First, she urges Congress to "develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance." And second, she suggests codifying a "Taxpayer Bill of Rights" to clearly outline and explain taxpayer protections and and responsibilities.

 Fortunately, the news isn't all bad -- the IRS has joined the social media revolution! There's a smartphone app to help track your refund, a YouTube channel with helpful videos in English, American Sign Language, and various foreign languages, and podcasts you can download from the iTunes store. You can even follow them on Facebook and Twitter!

 Our "Plan A," of course, is to give you the concepts and strategies to help you pay the least amount of tax legally possible -- then help prepare returns that avoid IRS scrutiny. But just in case that scrutiny finds you, we're always ready with "Plan B" -- to help deal with the IRS on your behalf, and make sure you don't become another Annual Report statistic!

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

It Pays To Hire A Tax Professional

In Bilal Salahuddin et ux. (T.C. Memo. 2012-141) the taxpayers owed outstanding Federal income tax liabilities for tax years 2004, 2005, and 2006.

The IRS issued them a levy notice to collect those unpaid liabilities. The taxpayers requested a collection due process (CDP) hearing before IRS Appeals pursuant to Sec. 6330, during which they sought an installment agreement. They submitted a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, without supporting documentation. The taxpayer did not use a tax professional to assist them.

An Appeals team manager informed the taxpayers that the IRS's Philadelphia Service Center had calculated their acceptable amount for an installment agreement to be $900 to $1,000 monthly and advised them that their prior submission would be "sufficient". Without further communication with the taxpayers, the Appeals settlement officer closed the CDP hearing and sustained the proposed levy on the ground that the taxpayers had not provided sufficient financial information and that their ability to pay exceeded the proposed $900 to $1,000 per month.

The taxpayers filed a timely petition for review of that determination with the Tax Court, and the IRS moved for summary judgment. The Court held there was a genuine issue of material fact as to whether Appeals, having advised the taxpayers that their submission was "sufficient", abused its discretion in terminating the CDP hearing and rejecting their proposal for an installment agreement, rather than soliciting a satisfactory substitute proposal. The Court denied the IRS's motion for summary judgment.

If the taxpayers had consulted with a tax professional, the taxpayers may have saved themselves a lot of money, time and aggravation. A qualified tax professional would have ensured that the 433-A was properly completed and with the required documentation.  When the IRS said they wanted $900-$1000 per month, a tax professional could have invoked the "One Year Rule" as outlined in the Internal Revenue Manual, to force the IRS to accept payments the taxpayers could have afforded.  KR Hoffman & Co., LLC is that tax professional. Call us at 954.591-8290 to see how we can assist you.

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.

Proper Recordkeeping and Tax Deductions Go Hand in Hand

Recordkeeping is critical to securing a deduction. In Gabriel S. Garcia et ux. (T.C. Memo. 2012-139) the taxpayer operated two businesses that provided services to other entities.

The taxpayer paid various workers wages or contract labor expenses. Some of the payments were made by check and some of the payments were in cash. The taxpayer did not maintain complete books and records of the wages or contract labor payments he made during 2007 or 2008. Some, but not all, of the payments were reported to the IRS and to the workers as wages, and some were reported as nonemployee compensation.

Some, but not all, of the workers reported the income received from the taxpayer on their tax returns. Some of the workers provided to the taxpayer incorrect or illegible Social Security numbers. For 2007, the taxpayers reported on their tax return $356,581 as wage and contract labor expenses. The taxpayer was able to substantiate wage and contract labor expenses of only $230,291.

The IRS allowed a deduction $230,291 for 2007. For 2008, the taxpayers reported on their tax return $283,613 as wage and contract labor expenses but could substantiate expenses of only $157,190. The IRS allowed a deduction $157,190 for 2008.

The taxpayers' returns were prepared by his brother, who was not an accountant. The returns claimed erroneous, overstated or unsubstantiated deductions other than the ones for wages or contract labor. While the taxpayer testified he paid the amounts claimed, his testimony was not corroborated by any witnesses and he could not explain how he derived the amounts deducted on his tax returns in the absence of records, and his brother, who prepared the returns, did not testify.

The Court noted the taxpayer did not have any time records or other evidence from which we could estimate the amounts that he paid without substantiating documents. He did not identify any sources for cash payments to workers. The Court noted that it could have made an estimate of the expenses, but noted it could do so only when the taxpayer provides evidence sufficient to establish a rational basis upon which the estimate can be made. Without such evidence, the Court would not make an estimate. It allowed no more than the IRS allowed.

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

De-Friending Uncle Sam

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.

When Your Business Hits Hard Times

In order for companies to be successful, business owners must understand the value of staying calm during a crisis situation. When an economic or public relations crisis hits your company, your first reaction may be to panic. But when you have the right kind of support system in place via planning, a great staff, and insurance you can withstand any crisis regardless of how difficult it may seem.

There are five things every business owner or executive should know when it comes to keeping your cool in a crisis. It helps to have a stress ball on your desk to squeeze when things start to go wrong. But for a real solution, nothing beats being prepared.

Business Planning. Small business owners often forget to put together a business plan when they are starting out. A business plan is a the comprehensive blueprint you use to run, grow and finance your company. Just like any good plan, a business plan also has a section that is dedicated to reacting to a crisis.

A business crisis is something that takes up your company resources. You should never use resources unless it fits the business plan. When you create your business plan, put together sections on options during a crisis. When a crisis occurs, you have a head start on getting yourself out of it.

Surround Yourself. The first thing a good business owner should do in times of crisis is surround himself with good people. It is important to avoid surrounding yourself with "yes" men or women that will only tell you want you want to hear. That will do nothing to help you come up with good answers. You need people you can trust that will give you good advice.

You should also surround yourself with the right kind of professional assistance. If your company is having economic problems, then hire an accountant. If it is a public relations issue, then hire a public relations firm. Contract the people who have the know-how to help.

Hit it Head On. The most common response to troubled times is to hide from it and hope it goes away. That is the wrong approach. When a crisis hits your company, then you need to meet it head on and address it immediately. Create a written evaluation of the situation and see where the problem originated. This will help you to solve the problem more quickly, or at least allocate the proper resources to get the issue resolved.

Restrict Access. If your company is having financial problems, then lock down your books and access to all financial tools such as credit cards and your bank account. Some people tend to take advantage of a crisis situation, which can only make it worse. Restrict access to the important elements of a crisis and make sure that only you know what comes in and what goes out.

Business as Usual. It is important that you maintain business as usual during a crisis. Of course, you may run into some situations that would make that difficult. For example, a financial problem may mean that your vendors are not extending you the credit that you need to get materials. In that case, you will need to find alternatives.

Maintaining business as usual gives you something else to think about to help get your mind off the crisis from time to time. It also helps you keep your company afloat and make sure that you are still in business when the crisis is over.

Troubled times require precise responses. When your company hits a rough patch, be sure you are prepared and can handle the problem efficiently.

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

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.

Crowd Funding Tax Questions

If you've been looking for funding for your business, you've probably heard of it. The concept is simple. Go to a web site that facilitates a matchup between you and potential investors. Investors may contribute small amounts (e.g., $50) or make a more substantial contributions (e.g., $2,000).

A bill defining the legal limits for investors was recently signed by President Obama, The Jobs Act & Investment CrowdFunding Act But the IRS has yet to weigh in on the craze.

Will the contributions be a "gift" and not income to the business? If the business provides a service or product in return will the contribution be "income"? If the contribution is significant, it couldn't be classified as a gift and probably not income, but then is it a loan or equity capital? If it's equity, does that mean the investor is now a partner or shareholder?

If you're doing business as a partnership, LLC, or S corporation and the contribution is equity capital, you may have to send the individual a K-1 each year. You may consider the tax issues a minor problem if you're getting several large (e.g., $10,000) contributions, but not if you receive 100 small contributions and have to treat them as equity interests. Talk to your tax adviser before making a commitment.

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 between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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