Recently, there have been a number of cases disallowing bad debt deductions, particularly for loans to shareholders and related parties. If a related party loan becomes worthless, it is treated no differently from a debt to an unrelated party. Of course, this assumes the related party loan meets the bona fide debt standard. In order for a debt to be considered bona fide debt, the creditor/debtor must be able to show that at the time of the transaction, it had a real expectation of repayment and intent to enforce the collection of the indebtedness.
Often times, taxpayers’ advances to a closely-held entity are not documented or are ruled to be below-market loans. Loans to or from shareholders or other related entities should always be represented by a formal note. The note should bear a fair rate of interest and should be documented in the corporate minutes. Factors that the courts consider in determining whether a bona fide debt exists as the result of a transfer between related parties include:
- Documentary evidence of the transaction such as an executed note
- Whether there is a fixed schedule for repayment, including a maturity date
- Whether interest is being charged on the outstanding debt
- Whether collateral is obtained or requested
- Whether demand for repayment is made
- Whether any repayments have been made, and
- Whether the transaction is reflected as a debt in the books and records of the parties
So, it is good practice to document loans. This is easy to disregard with respect to related parties or shareholders. Even though repayment is intended, changes in financial conditions or other circumstances may affect repayment ability. Having an executed note will help support bad debt deductions.
By Kelly Lynch, CPAPosted on September 10 2014 by admin
If you’ve found yourself making career changes this year, you may be able to deduct some of the job hunting expenses that you incurred on your next tax return.
Deductible job search costs can include:
- Resumé costs – any expenses related to the preparation and mailings of your resumé are tax deductible. So go ahead, splurge on that fancy paper and next-day delivery!
- Travel expenses – if your job search takes you to far-away places (or even just across town) you may be able to deduct the cost of these travels. As long as your trip is primarily for job search purposes, the cost of transportation to and from your destination is a deductible expense.
- Employment agency fees – any fees paid to an employment agency in order to facilitate your job search are considered deductible.
There are a few caveats, however. The primary one is that your new job must be in the same line of work as your previous job. For example, a surgeon looking for a new position within the medical field would qualify for deducting his job search costs. On the other hand, a lawyer attempting to make that elusive career change to professional athlete would be out of luck, at least as far as tax deductions go.
A few other restrictions include:
- First job – costs related to finding one’s very first job are not deductible. So don’t get any ideas, high school readers! Uncle Sam won’t be footing your bill this time.
- Break between jobs – so you took a long, well-deserved sabbatical after your last job. Hope it was great! Unfortunately, that means the costs of your new job search will likely not be deductible. The IRS states that you cannot deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
- Reimbursed expenses – any costs that are reimbursed to you are, of course, not deductible.
- Miscellaneous itemized deduction – deductible job search costs are typically claimed as a miscellaneous itemized deduction on Schedule A. Unfortunately, this means that only the cumulative portion of miscellaneous itemized deductions that are greater than 2% of your adjusted gross income will be deductible.
As always, be sure to save your receipts if you plan to take advantage of deductible job search costs. For more information on deducting your job search costs and other miscellaneous itemized deductions, check out IRS Publication 529.
By Austin Bradley, CPAPosted on September 9 2014 by admin
Oftentimes employees will be asked to pay for job-related expenses out of pocket. Some companies have a reimbursement plan where the employee will submit an expense report with all necessary documentation (receipts, mileage log, etc.) and will receive a check for these expenses. For ordinary and necessary business expenses that are not reimbursed, an individual is able to report these expenses on his or her individual tax return.
The IRS defines an ordinary business expense as one that is common or appropriate for your business. Such expenses can include safety equipment, mileage, and travel. CAUTION: One is expected to keep records that prove the business purpose of the trip in order to deduct travel expenses. The same goes for mileage. It is also required that one keeps a mileage log to prove the business purpose for all mileage claimed.
The expenses are reported on Form 2106 of the tax return. Since these expenses relate to a job where an individual receives a W-2 from an employer, the deduction will flow through to the individual’s Schedule A, becoming part of his itemized deductions. In order for the deduction to reduce tax liability, the total itemized deductions must be more than the standard deduction provided. In 2014 the standard deduction is $12,400 for married filing jointly and $6,200 for single filers. If you are one who does not normally itemize for tax purposes, your unreimbursed business expenses (after the haircut that all miscellaneous itemized deductions are subject to) would need to be more than the standard deduction in order to reduce your tax liability further.
By Julie DuleyPosted on September 4 2014 by admin
The IRS has made several recent changes to their offshore compliance programs in order to assist taxpayers who wish to come into compliance, as well as ease the resulting tax burden. These streamlined filing procedures are designed only for individual taxpayers and their estates, and are available to taxpayers residing inside or outside of the United States.
In order to enter the streamlined offshore procedures, the taxpayer must officially certify that their failure to report all income, pay all tax, and file all required information was due to non-willful conduct. The IRS has recently made available two new forms that simplify this certification process, Forms 14653 and 14654. Form 14653 is to be filed by U.S. persons residing outside of the United States, while Form 14654 is to be filed by U.S. persons residing within the United States.
In conjunction with filing the appropriate certification form, a taxpayer entering the streamline program must submit delinquent and/or amended tax returns for each of the most recent three tax years. Delinquent FBARs for the prior six tax years must also be filed. These returns must be complete and accurate, and accompanied by full payment of taxes, interest, and applicable penalties.
Full details on eligibility requirements for the streamline program can be found on the IRS web page.
By Austin Bradley, CPAPosted on September 3 2014 by admin
If you’re a member of the U. S. Armed Forces, likely the last thing on your mind is taxes. Be aware though, there are many special tax benefits available to members of the armed forces. Following are six of those benefits:
- Deadline Extensions. Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.
- Combat Pay Exclusion. If you serve in a combat zone, certain combat pay you get is not taxable. You won’t need to show the pay on your tax return because combat pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Service in support of a combat zone may qualify for this exclusion.
- Earned Income Tax Credit. If you get nontaxable combat pay, you may choose to include it to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay stays nontaxable.
- Moving Expense Deduction. You may be able to deduct some of your unreimbursed moving costs. This applies if the move is due to a permanent change of station,
- Uniform Deduction. You can deduct the costs of certain uniforms that military regulations prohibit you from wearing while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.
- Signing Joint Returns. Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse. In other cases when your spouse is absent, you may need a power of attorney to file a joint return.
Above are just a few of the benefits offered to members of the Armed Forces. More benefits can be found on IRS.gov and in Publication 3, Armed Forces’ Tax Guide.
By Becky Barnett, EAPosted on September 2 2014 by admin
Life is full of surprises, or as you may have heard – “Life is what happens to you while you are making plans”. But what if these life changes have an impact on your taxes and it is the middle of the year? Then what do you do?
Well, in regards to taxes, you adjust accordingly. If you have reason to believe that your tax liability will be higher than it was in the prior year, then you can look at making estimated tax payments. Estimated tax payments are generally due on April 15th, June 15th, September 15th and January 15th (following the tax year of the liability). But what if something happens in July – and you have not made an April 15th and a June 15th payment?
Well, that is fine – it is never too late to start making estimated tax payments. The payment that you make for September 15th can be the first one for the year. You can find the blank forms on IRS.gov and the instructions will let you know where to send the money.
But safe harbors are built into the tax system. It may be a possibility that there may be no penalty for underpayment, if your tax withholdings are equal to a certain percentage – 100% of your prior year tax (unless you are in a higher tax bracket and it is 110%). If that is the case – don’t sweat making an estimated tax payment for the windfall stock you inherited from your grandmother and sold for a big gain – the tax may not be due until April 15th.
Just be aware, if you do wait to pay, then don’t spend the money!
However, just to be certain of where you fall taxwise, you may want to consult your tax adviser. Or – if you don’t have a tax adviser, and you have a life change, make another change and find yourself a good adviser – they may be able to turn life’s lemons into lemonade.
By Donna H. Laubscher, CPAPosted on August 28 2014 by admin
Paying taxes is never fun, but it has just become a little easier since the launch of the new IRS Direct Pay system. The link is found on the IRS website at Direct-Pay. You can use Direct Pay to make payments on an individual tax bill or to make estimated payments online. There is no fee or pre-registration required and the system provides instant confirmation that your payment has been made.
Direct Pay payments come directly from your checking or savings account and Direct Pay does not retain bank information in the IRS systems after payments are made. It’s a good option if you’re behind schedule and are concerned about a late payment notice or if you’re looking for a quicker alternative to regular mail.
Just a reminder, Direct Pay is only available to individuals. Business payments still need to be made using EFTPS or using a credit card or debit card through a payment processing company on the IRS website.
If you are interested in other online payment options, the IRS website includes information regarding credit or debit card payment processors at Pay-Taxes-by-Credit-or-Debit-Card.
Information regarding using the Electronic Federal Tax Payment System is at EFTPS-The-Electronic-Federal-Tax-Payment-System.
Be sure to contact us if you have questions about tax payments or for solutions to all your financial questions.
By Melinda Nelson, CPAPosted on August 27 2014 by admin
The IRS never contacts you via email. However, they have been known to contact taxpayers on the telephone.
And the latest round of scammers are taking that information and using it to their (criminally-inclined) advantage.
The latest phone scam has the victims being told that they owe money to the IRS. And if they do not pay via wire transfer or pre-loaded debit card, the threats begin. And not just any threat – the victims are threatened with arrest, deportation or revocation of your driver’s license.
The phone scammers have these following characteristics:
- Use of fake names and IRS badge numbers. Generally, the names are fairly common names and surnames that they use to identify themselves.
- They may already have the last four digits of your social security number.
- The IRS toll-free number is spoofed to appear to be real.
- Occasionally, bogus emails are also sent to help build up the big lie.
- There may be background noise, mimicking a call center.
- After the initial call, another person may follow up and pretend to be from the local police department of DMV, with caller ID supporting this claim.
If you are contacted by phone from a person identifying themselves as being with the IRS, please hang up and call 1.800.829.1040 immediately. That is the actual number for the IRS. If you don’t believe that any monies are actually due to the IRS, then report the scammer to the TIGTA at 1.800.366.4484.
By Donna H. Laubscher, CPAPosted on August 26 2014 by admin
Have you been challenged to dump a bucket of ice water on your head? If you have no idea what I am talking about, you must not be on social media, or any Internet sites, and therefore I don’t know how you got to my blog post. BUT… there is a challenge going around social media sites like Facebook, Instagram and Twitter, and it goes a little something like this: Someone challenges you to dump a bucket of ice water over your head within 24 hours (usually proven by posting videos on these social media sites), and if you fail to do so, you must donate $100 to the ALS Association. The videos are fun to watch, and you think, really, these people are avoiding contributing to a good cause? Well, some people are doing both, but yes, it is fun, and the ALS Association has gotten incredible exposure (and likely a lot of contributions) from this one quick-starting, fun way of free advertising.
However, what if you are the person who dares not or cannot accept the ice bucket challenge and would rather give the money to the ALS Association? Do you get a charitable deduction? There is a stipulation in the tax laws, looking to the “donative intent” of the contribution. In the Tax Court’s decision in Estate of O. J. Wardwell, 35 T.C. 443, it said “If a payment proceeds primarily from the incentive of anticipated benefit to the payor beyond the satisfaction which flows from the performance of a generous act, it is not a contribution or gift.” This could lead to someone believing that maybe no, my donation is not tax deductible because I get a benefit – not having to dump ice water over my head! However, courts have more recently applied a “quid pro quo test” to this concept, which states that the donor must assume they will receive a financial benefit from the contribution equal to his or her donation, to lack donative intent. Not dumping freezing cold water over your head definitely gives you no financial gain, only a physical one.
Worry not if you elect to forego the freezing cold shower that could only be found after dumping an ice bucket over your head. Donate to a good cause and rest easy in the most recent court cases that no financial gain was received by you to make a donation, and therefore your contribution is tax deductible. Who is up for the challenge??
By Julie K. Weissmueller, CPAPosted on August 21 2014 by admin
We all assume that we can deduct interest paid on our personal residence, but that is not always the case. Personal versus business interest generally is not deductible. Section 163(h) prohibits an individual taxpayer from claiming a deduction for personal interest. One of the limited exceptions to this general rule is a deduction for home mortgage interest. However, there are specific rules to be considered “qualified” residence interest.
Qualified residence interest is interest that is paid during the tax year on acquisition and/or home equity indebtedness with respect to any qualified residence. A qualified residence includes the taxpayers’ principal residence and one other residence, for example, a vacation home. Acquisition indebtedness means indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence. Secured debt means:
- The residence is security for the payment of the debt.
- In the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust.
- The debt is recorded in accordance with applicable State law.
In a recent court case, a couple was denied a deduction for mortgage interest. They borrowed funds from a parent and signed a mortgage note on their primary residence. The document was not notarized or recorded. They later signed a document with a bank for another mortgage. The bank was unaware of the existence of the other indebtedness. The bank mortgage was secured by the property and that mortgage was recorded. Failure to record the first mortgage exposes the mortgage to potential defeat by third parties without actual notice of the mortgage. The taxpayers in this case did not satisfy the second and third elements of a secured debt. They lost the deduction for $19,230 of interest paid to the parent. They were only entitled to a deduction of $1,138 reported by the bank on Form 1098, Mortgage Interest Statement.
Be especially careful with a related party loan. It may be presumed to be a gift rather than a loan. Proper documentation and recording of the debt is essential.
By Andrea L. Hejnal-Hilger, CPA-- Older Entries »
There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne, LLP we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.
Before posting a comment on a blog post please be aware that we do not give free tax advice to non-clients by email, comment response, or phone. Thank you!
- Establishing that Debt is Bona Fide Debt
- Deducting Job Hunting Expenses
- Understanding Unreimbursed Employee Business Expenses
- New Forms Simplify Streamlined Offshore Compliance Program
- Armed Forces Members and Tax Benefits
- Oh, No! Life Changes and Taxes
- How to Make Your Tax Payments to the IRS Online
- The IRS is NOT Issuing Arrest Warrants
- Dodging the Ice Bucket Challenge for a Charitable Contribution?
- When Mortgage Interest May Not be Deductible