Walk to Defeat ALS

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Last weekend HKA participated in the Evansville, IN Walk to Defeat ALS in support of a family member battling the disease. Because of the donations we and others were able to raise, our team was the number one fundraiser and we were privileged to lead the walk down the beautiful Ohio riverfront.

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Tax Tips for the Self-Employed

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When you are self-employed, it typically means you work for yourself as an independent contractor, or you own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

  1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.
  2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.
  3. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment Tax.
  4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.
  5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ‘capitalized.’ This means you can deduct a portion of the expense each year over a period of years.
  6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

If you have any questions please call our office at 314-993-4285.

FAQs on Disaster Recovery Income and Deductions

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The states of Louisiana and Mississippi are responding to the recent flooding first with guidance on disaster recovery payments and income taxes.  This guidance alerts us to their state revenue bulletins for details on these programs.  Our prayers continue to be with you and your families.

From CCH State Tax Review, Vol 77, Issue 35:

The Louisiana Department of Revenue provided answers to frequently asked questions about personal income tax aspects of disaster recovery payments and income. Among other things, the answers addressed donations to or payments from a”GoFundMe” or other crowdfunding website; time spent as a volunteer; providing living space and meals for displaced persons; donating clothing, food, household goods, or other similar items; records required to substantiate a charitable deduction; casualty and theft losses for damaged or destroyed homes, household items, and vehicles; mitigation or qualified disaster relief payments; FEMA payments; and insurance payments. Revenue Information Bulletin No. 16-048, Louisiana Department of Revenue, August 22, 2016

The Mississippi Department of Revenue has announced that it will follow federal extensions granted to Louisiana residents directly affected by the severe storms and flooding that took place on August 11, 2016. Taxpayers residing in Louisiana counties designated as federally declared disaster areas have until January 17, 2017 to file individual income, corporate income and pass-through entity tax returns due on or after August 11, 2016, and before January 17, 2017. The department automatically provides interest and penalty relief on original or extended filing and payment due dates, including extended filing or payment due dates, that fall within the postponed period. Therefore, taxpayers residing in affected Louisiana counties do not need to contact the department to get relief. Relief does not provide an extension for payments on prior liabilities. Notice 80-16-003, Mississippi Department of Revenue, August 18, 2016

If you have any questions or would like guidance on this matter, please contact our office at 314-993-4285.

Foreign bank account filing responsibility is a real thing!

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September 11, 2001 changed everything.

The Patriot Act changed everything.

What changed?  Among other things, foreign bank account reporting and failure to file penalty.  If you are a U.S. citizen, it is incredibly important for you to contact us immediately if you have a foreign bank account, regardless of the size of the account, and you have not disclosed this to us previously.

After years of penalty abatement the IRS stance for forgiveness is that they will not charge you with the felony or throw you in jail, both of which are allowed under the law.  The penalty is $10,000 per occurrence.

It’s simple.  Call us if you have a foreign bank account. 314-993-4285.

Income Tax: Guidance Provided on Impact of Wynne

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To all of our friends, but especially to those of you in OH, the Wynne case from MD is beginning to gain traction in many tax advocacy groups around the country.  In the Wynne case the Supreme Court held that a state tax system that did not allow for an offset of income tax paid in another state against the resident state tax was unconstitutional.  Although this guidance is directed at IN taxpayers, it is good to note this case should help fix many issues in other states, but it will take time.  Our OH clients are especially hard hit by municipal taxes on income derived in a nonresident municipality as their local municipalities do not allow for a credit for the tax paid against this same income.  Pure double taxation, if I were the Don of municipality taxes it would be a beautiful thing!  Note, the Supreme Court case did not go as far down to the municipality level of taxation.

From CCH State Tax Review, Vol 77, Issue 35:

The Indiana Department of Revenue has issued a Commissioner’s Directive providing guidance on the impact of Comptroller of the Treasury of Maryland v. Wynne, U.S. Supreme Court, Dkt. 13-485, May 18, 2015, to personal income taxpayers and to demonstrate why Indiana is not in a similar situation to Maryland. The Wynne decision holds that under a Maryland law an income tax credit for taxes paid to a different state should recognize both income or earnings taxes imposed by the other state and local governments of the other state. Unlike Maryland, Indiana allows credits for out-of-state taxes at both the state and local levels. Indiana allows a credit for out-of-state income taxes against Indiana’s state income tax and a credit for out-of-state local income taxes against local income taxes owed in Indiana. According to the Supreme Court, had Maryland offered credits for out-of-state taxes, Maryland’s tax system would have survived constitutional scrutiny. Further, Indiana allows credits at both the state-to-state level and the county-to-county level. Finally, Indiana does not permit out-of-state state income taxes to offset Indiana county income taxes or allow out-of-state local income taxes to offset Indiana state income taxes. Thus, the department reasons that Indiana’s tax regime meets the internal consistency test set forth in Wynne.

If you have any questions or would like to discuss this further, please give us a call at our office, 314-993-4285.

FLSA Overtime Changes

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To All:

We used to use the words, Significant Legislation, Landmark Legislation to preempt our interpretations of recent regulatory and tax law changes.  Today is more Significant Interpretation Enactment.  In 2014, President Obama directed the Secretary of Labor to update the DOL policy as regards overtime.  This is a truly a sea change!  The executive summary looks like this:  If your employee is making less than $47,476 annually, they are now required to receive overtime at 1.5X their annual rate of pay.  Do not be fooled into believing your exempt employees do not count!  This covers exempt and non-exempt employees.  Please raise a flag to your HR staff to ensure you will pass these new regulations.  Penalty per occurrence is $10,000.  The final rule takes effect December 1, 2016 and does NOT change any of the normal tests associated with employee classification testing, except add the annual income standard.

If you have any questions or would like more information, please do not hesitate to give us a call at our office, 314-993-4285.

Tax Practitioners Warned Against New E-mail Phishing Scam

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The IRS has alerted tax professionals in several states (California, Ohio, Oklahoma, Virginia) to a phishing scam, where scammers posing as tax software providers send e-mails asking recipients to click on an embedded link to download and install an “important software update.” The downloaded file’s naming convention uses the actual name of the tax professional’s software followed by an “.exe extension.” Upon completion, tax professionals mistakenly believe they have downloaded a software update when actually they have loaded a program designed to track their key strokes to steal login information, passwords and other sensitive data. (CCH State Tax Review, Vol 77, Issue 35)

A warning to all of our clients in all of our states, scammer technology, infrastructure, and intelligence is only constrained by our ability to heed the warnings of our advisors.  Life learned pearls of wisdom:

  • Never run with scissors;
  • Never talk with your mouth full;
  • Always look the other person in the eye;
  • Never respond to voicemail messages from anyone purporting to be with the IRS or state revenue agency;
  • Never respond (avoid opening if you can) to email from anyone purporting to be with the IRS or state revenue agency;
  • Never panic if the IRS or state revenue agency is threatening you.

In all above cases please call our office at 314-993-4285 and we are ready to help you out, (I’ll be sending you to my mom for the first three, she’s really good at those).

Rental Losses Not Automatically Nonpassive Due To Status As Real Estate Professional

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HKA has always believed that you must materially participate in a rental activity even if you hold a realtor license.  Court affirms the stance.

The Court of Appeals for the Ninth Circuit has found that a taxpayer’s rental losses were not automatically nonpassive because of her status as a real estate professional. The court rejected the taxpayer’s argument that she did not need to show material participation in the rental property.

Take away. The Ninth Circuit noted that the Tax Court has held that caselaw clearly requires that a taxpayer claiming deductions for rental real estate losses must meet the material participation’ requirement.

Background

The taxpayer worked as a licensed real estate agent. The taxpayer deducted losses from rental properties she owned on her 2006 and 2007 returns. The IRS disallowed the rental losses. The IRS determined that the taxpayer had failed to show she materially participated in the rental properties. The taxpayer countered that her status as a real estate professional made her rental losses per se nonpassive. A federal district court ruled against the taxpayer and she appealed to the Ninth Circuit.

Court’s analysis

The court first found that Code Sec. 469(c)(1) provides the general rule that any activity in which a taxpayer does not materially participate is passive. The term “passive activity” means any activity which involves the conduct of any trade or business, and in which the taxpayer does not materially participate. Further, Code Sec. 469(c)(2) establishes that rental activity is per se passive, regardless of whether the taxpayer materially participates; however, Code Sec. 469(c)(7) provides an exception for real estate professionals. Reg. §1.469-9(e)(1) provides that a real estate professional can treat rental losses as nonpassive, but only so long as he or she materially participates.

A taxpayer performs qualifying services in real property businesses if: (1) More than half of the personal services performed in a trade or business by the taxpayer are performed in real property businesses in which the taxpayer materially participates; and (2) The taxpayer performs more than 750 hours of services during the tax year in real property businesses in which the taxpayer materially participates. A taxpayer who meets the preceding requirements is commonly referred to as a real estate professional for purposes of the passive loss rules.

Compliance Alert

The court noted that the exception to the passive loss rules for rental activities of taxpayers who are involved in a real property business applies for tax years beginning after December 31, 1993.

The court found that even taxpayers who establish real estate professional status must separately show material participation in rental activities (as opposed to other real estate activities) before claiming any rental losses as nonpassive. Only the participation of the taxpayer with respect to the rental real estate may be used to determine if the taxpayer materially participates in the rental real estate activity under the material participation safe harbor provisions. Taxpayers who qualify as real estate professionals still must show material participation in rental activities before deducting rental losses, the court concluded.

Compliance Pointer

The court declined to address the taxpayer’s new argument that undated notes estimating the total hours spent on rental properties satisfied the burden of showing material participation.

If you have any questions or would like to discuss this further, please do not hesitate to give us a call at our office, 314-993-4285.

This information was received from CCH Federal Tax Weekly, Issue No. 33.