A Special Tax Break for Songwriters

Posted on August 27 2015 by admin

Finally, a break for the starving artist! Well, a tax break that is. And this tax break is not for all artists, but only for songwriters.

Generally, those who purchase and sell the rights to songs or music catalogs get capital gains treatment on the sale. However, when a songwriter sold a song, it was taxed at higher ordinary rates instead of capital gains rates. Songwriters fought to have the same treatment as those publishers or investors who received capital gains treatment. As a result, the Songwriters Capital Gains Tax Equity Act of 2006 amended the Internal Revenue Code to include certain “self-created musical works” as capital gains assets. This means when a songwriter sells the rights to a song or music catalog, they may be eligible to be taxed at lower capital gains rates rather than ordinary tax rates.

So, what constitutes a self-created musical work? This would be a musical composition created by the personal efforts of the songwriter. Keep in mind, this only includes music with a copyright by the songwriter and would not include music the songwriter was hired to create for a specific job in which the hiring company holds ownership of the created work.

A songwriter or other owner of a musical composition or copyright may decide to donate the musical work rather than sell it. Usually when capital assets are donated to a qualified charitable organization, the donor is able to deduct the fair market value of the asset as a charitable deduction. However, when donating musical compositions or copyrights, the donor must use the donor’s adjusted basis as the charitable deduction rather than the fair market value. So, even if the work was considered a capital asset when sold, the work is considered noncapital for charitable contribution purposes.

Please note the information above is only general in nature and should not be construed as any form of tax advice and should not be relied upon in any way.

By Jill A. Helm, CPA

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Foreign Pensions from a U.S. Tax Perspective

Posted on August 26 2015 by admin

As the IRS continues to increase their focus on exposing hidden foreign accounts of U.S. taxpayers, it is important to be aware of all filing requirements and be in compliance to avoid excessive penalties. One area that is commonly missed is foreign pensions. Many taxpayers assume if they hold a foreign pension that has no distributions and is not taxed in their home country, it will be tax-free in the U.S. as well. Many times this is not the case.

Depending on the plan, and absent a treaty exception, U.S. taxpayers may be taxed currently on the plan’s accretion of benefits and/or the employer’s contributions. In many cases, the local country will defer taxation on the contributions and accretion, thus causing a mismatch of foreign tax credits on the distributions.

In addition to reporting the income from certain pensions, taxpayers will need to review the reporting requirements for forms FinCen 114, 8938, 8621, and 8891. If the pension plan is considered a foreign grantor trust, forms 3520 and 3520-A may also be required. In general, pension plans are set up like trusts in that a fiduciary holds and administers the pension plan assets for the benefit of the plan’s participants and beneficiaries. If the private pension plan is characterized as a foreign trust under IRC 679, forms 3520 and 3520-A will need to be filed and the taxpayer will need to pay tax on the accretion of income earned in the plan each year. There may be exceptions if the plan is non-discriminatory and the plan holder is not a highly compensated employee.

Certain countries have taxpayer friendly treaty articles that specifically allow for the deferral of qualified pension income. As this is a highly complex topic, please consult with a knowledgeable tax professional if you have a foreign pension plan to determine your reporting requirements.

By Jill A. Helm, CPA

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IRS “Get Transcript” Fiasco Gets Worse

Posted on August 25 2015 by admin

Following the Sarbanes Oxley Act more than a decade ago, security and fraud have been two of the cornerstone focuses of the accounting profession. Proper and secure system controls have become a necessity, not only for auditors and tax accountants, but for every profession in business. This may lead one to believe that the IRS, who is very closely related to all of those matters, may have the strongest and most secure system second to no one. That would be an incorrect assumption.

Back in May, the IRS reported that their Get Transcript feature had been breached. At the time, they approximated that 100,000 accounts had been hijacked, leading to identity theft, tax refund fraud, and everything in between. That estimate has now grown to over 300,000. Attempts were originally thought to have begun in February but are now confirmed to have started as early as November of last year.

The hackers used sensitive information such as date of birth, home address, and social security number, gained from outside sources, in order to access individual accounts on the IRS’ website. After these accounts had been breached, past and present tax records opened doors to all sorts of identity theft.

The IRS is now in the process of contacting all parties affected by the breach and will continue to provide free credit monitoring, as they announced in May. A new program is also now being offered which assigns victims identification numbers which will be used to access accounts, rather than using date of birth or street address.

With this more than tripling the victim count on just this matter alone, the IRS, as expected, is working hard to create and strengthen controls in hopes to avoid similar attempted hacks in the future.

By Mark McInnis

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Pushing for Tax Reform – Retirement Plans

Posted on August 20 2015 by admin

The American Institute of Certified Public Accountants (AICPA) has participated in U.S. House of Representatives, Committee on Small Business hearings on tax reform with the goal of ensuring that main street isn’t left behind. One area of focus in this regard has to do with retirement plans. Small businesses are especially burdened by the overwhelming number of rules inherent in adopting and operating a “qualified retirement plan”.

The AICPA has been encouraging congress to consider a number of measures to simplify the operation of retirement plans. For instance, currently there are four employee contributory deferral plans: 401(k), 403(b), 457(b), and SIMPLE plans (which, by the way, aren’t always that simple). The AICPA is pushing for the creation of a uniform type plan to replace these.

Another proposal is to eliminate certain nondiscrimination tests on employee pre-tax and Roth deferrals for 401(k) plans matching contributions, as they may artificially restrict the amount higher-paid employees are entitled to save for retirement by creating limits based on the amount deferred by lower-paid employees in the same plan. Although the 403(b) plan is of a similar design, there is no comparable test on deferrals for this type of plan.

Eliminating “Top Heavy Rules” would also simplify things because they constrain the adoption of 401(k) and other qualified retirement plans by small employers. Determining the status can be difficult and the required 3% minimum contribution is often made for safe harbor 401(k) plans as a result. Without these rules, the AICPA contends more small businesses would adopt plans to benefit their employees.

By Dale F. Jensen, CPA

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Overpaying the Affordable Care Act Individual Mandate

Posted on August 19 2015 by admin

According to a report from the National Taxpayer Advocate, more than 300,000 taxpayers overpaid the Individual Shared Responsibility Payment (ISRP) for health insurance on their tax returns processed through the end of April 2015. Most of those taxpayers were charged the ISRP, also known as the individual mandate, because they did not have health insurance that complied with the Affordable Care Act during all of 2014.Many taxpayers who paid the penalty didn’t actually owe it as they were eligible for an exemption due to low income. The report found that the average ISRP overpayment was a little over $110 per return.

The National Taxpayer Advocate recommended that the IRS issue refunds to the affected taxpayers without requiring them to file amended returns. Since the majority of taxpayers rely on paid preparers, most would probably spend more than the $110 average overpayment amount in prepare fees if amended returns were required.

The Taxpayer Advocate suggested that the IRS make the adjustment on its own, without the need for taxpayers to respond to a notice. “By placing the burden on taxpayers, some taxpayers may not respond and will end up paying more tax than they owe.” The IRS Office of Chief Counsel advised the IRS that the agency has the legal authority to return the overpayments, but The IRS has yet to announce what procedures it will require taxpayers to follow to obtain their refunds. The Taxpayer Advocate acknowledged that the IRS is operating in a low-budget environment with limited resources for developing procedures to refund the overpayments in a proactive manner.

How to determine if you overpaid the ISRP? If your household income in 2014 was below the threshold for triggering the penalty and you included an amount on Line 61 of Form 1040, you should be eligible for a refund of the amount included on Line 61. The IRS is considering sending “soft notices” to affected taxpayers and adjusting accounts in collection proceedings by the amount of the overpaid tax, but it is likely that they’ll continue stalling on issuing refunds for taxpayers who are not in collection status. It is left to the affected taxpayers to decide if it is worth the time and expense to file amended returns to request refunds.

Looking ahead to 2015 filing season, there is an online tool available to help taxpayers estimate the ISRP they may have to pay if they did not have minimum essential coverage during the year. The Am I Required to Make an Individual Shared Responsibility Payment? tool is available through the IRS website. In order to use the calculator, you will need your filing status, number of dependents, adjusted gross income, and adjusted gross income of your dependents. The calculation is estimated to take approximately fifteen minutes. The tool provides only an estimate of the taxpayer’s ISRP. To determine the payment when filing an actual return, instructions for completing Form 8965 should be used.

By Janet Berry-Johnson, CPA

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Mid-Year Tax Planning Strategies

Posted on August 18 2015 by admin

As summertime winds down and the kids head back to school, it’s the perfect time to take a few minutes to review you taxes and do some smart mid-year tax planning. People often wait until December to start thinking about their tax bill, but implementing changes now may have a greater effect on your overall tax bill, and provides the luxury of additional time to consider and plan for changes.

  • Finish your 2014 tax return – Has your 2014 tax return been filed? If you received an extension back in April, you have until October 15, 2015 to get it filed. But why wait if you have all of the information to complete your return now. In fact, trying to finish it up in a rush, whether it’s the April 15th deadline or the October 15th deadline, may very well result in errors and the potential of paying too much tax by missing valuable deductions and credits.
  • Adjust your withholding – Now that you have filed your 2014 tax return, did you receive a large refund or did you have to write a large check to the U.S. Treasury? Are your income and tax conditions about the same in 2015 as they were in 2014? If so, you may want to review your withholding and adjust it either down to reduce your refund, or up to prevent having to write a large check next year, particularly if the payment included an underpayment penalty. Usually, your goal is to have just enough tax withheld – not too much and not too little.
  • Evaluate your estimated taxes – Estimated tax payments are required if you earn income not subject to withholding. Estimated tax payments ensure that you pay your tax as you earn your income. This is a great time to review the 2015 estimated tax payments you have already made to determine if your payments are still on track and adjust your remaining quarterly payments, if necessary.
  • Make charitable donations – Your favorite non-profit is happy to take your money or unwanted household items. Many charities struggle through the summer, so why not make your donation now rather than waiting until the end of the year? Be sure to get a receipt from the charity for your donation.
  • Contribute to your retirement plan – The sooner you start contributing to a retirement plan the better. If your employer offers a 401(k) plan and you haven’t taken advantage of it, check on the enrollment requirements. If your employer matches your contributions to your 401(k) plan, increase your contributions to at least the maximum your employer will match. Consider contributing to a traditional IRA or a Roth. If you are already contributing to any of these plans, consider increasing the amount of your contributions up to the maximum limits. If you currently have a traditional IRA and you expect 2015 income to be significantly less than future years, or you have a net operating loss in 2015, you may want to consider rolling at least part of your traditional IRA to a Roth.
  • Evaluate your investments – This is a good time to sit down with your investment adviser and review your investments. Are you paying the 3.8% net investment tax which was created to help fund health care reform? Are there capital gains or losses that can be recognized, trying to net your gains as close to zero as possible? Evaluate your investments on an after-tax basis to ensure you are maximizing your investments and income while paying the lowest tax possible.
  • Get organized – Your tax organization system does not need to be elaborate. An accordion file works well for many people, or it can be as elaborate as scanning and saving your documents to files on your computer and tracking your income and expenses in a financial program such as Quicken. The key is to pick a system that you are comfortable maintaining and allows you to easily locate receipts and other documentation. Once you find a system that works for you, stick with it. At the end of the year, you will need to total up all of the different types of expenses such as medical, charitable, business, etc. And if your receipts are already organized, it will make your job much faster and easier when you sit down to organize your information for your tax return.

By Pamela Wheeler, EA

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The Federal Tip Credit: An Overlooked Tax Benefit for Restaurant Owners

Posted on August 12 2015 by admin

A common topic of discussion and sometimes heated debate – many restaurant patrons do not see eye to eye on the cultural practice of tipping. When to tip? How much? Should you tip on drinks? Do you tip based on the pre-tax or after-tax bill? There are as many questions as there are differing opinions. To quote the 1992 film Reservoir Dogs, “I don’t tip because society says I have to. I’ll tip if someone really deserves it. But this tipping automatically, it’s for the birds.”

Unfortunately, I can’t settle the great tipping discussion today, but I can inform restaurant owners about a tax benefit that they should be taking advantage of. That advantage is the Federal Tip Credit. Filed with the annual tax return on Form 8846, the tip credit is a dollar-for-dollar reduction of tax liability for Social Security and Medicare taxes paid by the employer on tips received by employees. In order to qualify for the tip credit, restaurants must meet the following criteria:

  1. Have employees who received tips from customers for providing, delivering, or serving food or beverages for consumption
  2. Paid or incurred employer Social Security and Medicare taxes on these tips

Taxpayers should note that the credit is available only on tips received by food and beverage employees, and not on any other tipped employees. For example, the credit cannot be applied to tips received by valet workers, or any other non-food and beverage employee.

The credit is calculated based on reported tips over and above the minimum wage earned by employees. For purposes of the tip credit, the minimum wage can vary depending on the state and municipality that the restaurant operates in. Due to the potential complexities of the calculation, we recommend that restaurant owners consult their tax adviser for assistance with filing the credit.

Thanks for reading, and remember, tip your servers!

By Austin Bradley, CPA

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AZ Releases New Form 290 Request for Penalty Abatement

Posted on August 11 2015 by admin

Often penalties are assessed by a taxing agency and the taxpayer has grounds for asking the government to forgive the penalties based on “reasonable cause”. Some typical reasonable cause requests for penalty reduction or “abatement” are serious illness or death of the taxpayer, fire, casualty or natural disaster, and errors by the taxing authority.

The Arizona Department of Revenue (ADOR) has released a new form, Arizona Form 290 Request for Penalty Abatement for taxpayers to use to request an abatement of non-audit related penalties. Per the instructions, Form 290 should not to be used if the penalty at issue is the result of an audit.

Form 290 can be found on the ADOR Website here and can be used for individual income tax, transaction privilege and use tax, corporate income tax, withholding tax, and other taxes, such as waste tire. Taxpayers have to provide identifying information as well as the specific tax period(s) they want considered for abatement and the dollar amount for which they are requesting abatement.

Taxpayers also need to explain in detail their reason(s) for requesting the abatement, including an explanation as to why there is reasonable cause for the tax returns and/or payments being late, and provide documentation that supports the basis for their request.

You can mail or fax Form 290 to the ADOR. The mailing address is Penalty Review Unit, Division 9, Arizona Department of Revenue, 1600 W Monroe St, Phoenix, AZ 85007-2612. The fax number is (602) 716-9912.

By Melinda Nelson, CPA

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Plan B for Paying Your Taxes When You’re Short on Cash

Posted on August 6 2015 by admin

Whether you accidentally withheld too little on your paycheck, your business made more money than you expected, or you just really didn’t plan so well this year, circumstances sometimes arise when your individual income tax bill is higher than you anticipated. So what are your options when you owe the IRS, but cash flow is tight?

The IRS expects you to pay your tax liability in full by April 15th, regardless of whether or not you are filing an extension. An extension after all, is only an extension of time to file, not an extension of time to pay. So even if you can’t pay everything, make sure to file your return on time so you don’t incur failure-to-file penalties. After making sure to timely file, you have several options for paying your tax obligation.

Able to pay full amount within a short time after the deadline

If you are unable to pay your full tax liability by the deadline, but are able to pay the full balance within a couple months of the deadline, it’s best to pay as much as you can by the due date to reduce any potential penalties and interest. From there, the IRS will issue you a notice of balance due at which point you can pay the remainder. The cost of paying this way is that the IRS will charge interest on the unpaid balance at the federal rate plus a late payment penalty of 0.5% monthly (not to exceed 25% of the total tax outstanding).

Able to pay within 120 days of the deadline

Another option for paying late is to request a short-term payment extension with the IRS if the full balance can be paid within 120 days. This can be accomplished by calling the IRS directly to set it up over the phone, by having your tax preparer set it up if they have the proper Power of Attorney form signed, or going online to the IRS website here. The short-term extension allows taxpayers who owe $50,000 or less and have filed all required tax returns to set up a payment plan via direct debit, payroll deduction, etc. There is no set-up cost involved with this option, but you may be charged penalties and interest as noted above.

Owe more than $50k or need more than 120 days?

If paying within 120 days is not doable for you, you can enter into a longer payment plan with the IRS. If you have filed all required tax returns and owe $50,000 or less, you can set up an online payment plan using the same website above. You should receive instant notification of acceptance and are allowed to make payments for up to 6 years depending on what plan you set up. Another benefit of this option is that you can log in to your account at any point and make certain changes to your agreement.

If you don’t qualify for the online payment agreement, you can apply for an installment agreement using Form 9465. If you owe more than $50,000, you must also attach Form 433-F which requires you to disclose more in-depth financial information.

Whether setting up a long-term payment agreement online or through Form 9465, you will be charged an initial set-up fee ranging from $43 – $120. You will also incur late payment penalties and interest until the balance is paid in full.

Undue hardship

If you are unable to pay your tax liability because doing so would cause undue hardship, you can apply for a 6-month extension of time to pay using Form 1127. In order to have your request accepted, you must be able to prove that you are unable to sell assets or borrow money without severe loss and provide a detailed explanation of the undue hardship that would result. You must also provide supporting documentation to substantiate your claim. If approved, you will not be charged late payment penalties, but interest may still accrue.

A couple other things worth mentioning

Since most all options outlined above include penalty fees, there are certain instances when you can request a waiver of these penalties by writing a letter to the IRS. You must provide reasonable cause or request a waiver under the First Time Abate (FTA) policy.

As always, if you need help with these issues, your tax adviser is a great resource for getting you on back on track with your taxes.

By Kristen Janik, CPA

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New Due Dates for Tax Returns – How Does This Affect You?

Posted on August 5 2015 by admin

If you read about the due dates of all of the different types of tax returns changing, you are probably wondering how these changes affect you.

If you have a C Corporation, the due date is pushed back to the fourth month following the end of the year. This will change the due date of tax payments as well. Likely, you will want to proceed with business as usual to stay on top of potential tax owed and get the books cleaned up so you can move on to the next year.

If you have a partnership, these will be due a month sooner than usual. This could cause potential problems for investment partnerships, in particular, as some brokerage Forms 1099 are not available until after the due date. Hopefully those 1099s arrive quickly to get a good estimate of tax owed by the April 15th due date of the owner(s). Obviously, a regular partnership will need to adjust its calendar a bit to file on time. No tax is paid with partnership returns, and the owners’ returns are not due until April 15th.

Since the tax deadline for trusts was not changed, there is still a need for trusts to get done ahead of the April 15th deadline to get an income number or estimate to beneficiaries, or to pay tax at the trust level. The trusts that own interests in partnerships will be better off, however, because the K-1s should arrive earlier, as long as the partnership return is filed by its original due date. The extended due date for partnerships remains on the same date – September 15th for calendar-year-ends, and the extended due date for trusts changes to September 30th (or 5 ½ months after the original due date of the return). This change in the extended due dates for trusts allows K-1s to arrive from partnerships for completion of the trust return, plus time to get the trust K-1 to individuals to file by their extended due date.

For individuals having signature authority over a foreign bank account, the FinCEN Form 114 is due April 15th, much sooner than the current June 30 due date. However, it can be extended until October 15th.

We will be on top of these changes and let our clients know how they are affected specifically, but it is always good to be aware ahead of time.

By Julie K. Weissmueller, CPA

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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.

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