IRS
Steinbrenner’s estate tax feat
Wednesday, July 14th, 2010 | tax | No Comments
Yankees owner George Steinbrenner’s death this week is a sad occasion for his family and friends. But because it happened this year, it resulted in a huge tax savings for his heirs. As explained in this Wall Street Journal article, the 2001 Bush tax cuts left a quirky Federal estate tax repeal for this year only. Congress did nothing to fix this anomaly.
With Mr. Steinbrenner’s estate estimated at $1.1 billion, that means his heirs will inherit as much as $600 million that would have gone into the Federal treasury, based on the rate when the estate tax resumes in 2011 (55% maximum on estates over $1 million). He joins another high-profile billionaire whose passing we wrote about a few weeks ago.
Here’s a morbid thought: Will death become the ultimate tax-planning tool this year? I shudder at the thought.
Payroll tax credit
Wednesday, July 7th, 2010 | tax | No Comments
It is time to prepare your second quarter payroll tax returns, due August 2, 2010 (July 31 falls on Saturday). If your company or tax-exempt organization has hired employees this year, you may be eligible for the HIRE Act new hire tax credit. You should check before filing Form 941. We previously posted about this and other tax credits in the spring.
Here is a checklist (but consult your tax adviser for specifics related to your situation):
- Was the new worker hired to fill a new position, or to replace someone who quit voluntarily or who was terminated for cause? The new worker may not be related to you or to another owner of the business.
- Was he/she hired after February 3, 2010, and before January 1, 2011?
- Did he/she work less than 40 hours during the 60 days ending on the hire date?
- Did he/she sign and give you the required Form W-11 certifying these facts? (Do not send this form to the IRS.)
If all of the above conditions are met, you qualify for an exemption of 6.2% (the employer share of Social Security tax) of wages paid between March 19 and December 31, 2010. This reduces the amount of your tax deposits for this year. It does not affect amounts withheld from the employee’s pay.
Form 941 has been modified to report wages to qualified employees starting with the second quarter. The IRS has provided more information in the instructions to the forms, and in a question-and-answer format at their website.
Renting to relatives
Monday, June 28th, 2010 | consulting, tax | No Comments
Renting property to your relatives can be a good thing. You know them, and you probably have a good idea of how they will take care of the property. You may consider renting to your retired parents or to your children attending college. You must play by IRS rules to retain the tax advantages of renting out property. If you don’t, the deductions will be disallowed while the income is taxed - a double tax hit. You may also suffer unfavorable tax consequences when you sell the property.
Special rules apply to rental of a residence (rental house or apartment) and to vacation home rental.
You must charge a fair rent to your relative on a residence to avoid having that property reclassified as a second home (and losing rental deductions).
- Prove fair rent by collecting third-party documentation about rents for similar properties in the area from the want ads and craigslist. Letters from property managers and independent appraisals are good evidence to support fair rent.
- Do not make gifts to help your tenant pay the rent. The gift will be deemed to reduce the rent, putting it below fair value and jeopardizing the rental claim.
- One alternative for your relative who needs rent money is gifting business assets and having your company lease them back so that your tenant receives rental income. Another option is to hire your relative, although that generates payroll taxes.
- You may consider a good-tenant discount of no more than 10%. One justification for this discount is that there is no need for a rental management company, passing the savings to the tenant.
- If you wish to set up a rent-to-own situation, you must follow the rules for a shared-equity financing agreement for the rental to stand.
- Your relative must use the rental property as a principal residence.
If you have a vacation home that you rent for part of the year and also use personally, the tax code provides a break on rental income. Your personal use of the vacation home must not exceed the greater of 14 days or 10% of rental days per year. If your relatives use the vacation home, their use counts toward these limits even if you charge fair rent. If your combined use exceeds these limits, the property becomes a second home, which makes the rent income taxable while eliminating the usual rent expense deductions.
If you are considering renting to relatives, a call to us will help ensure that everything is done in a way that secures the greatest tax advantages and best financial outcome for your family.
IRS gives some solace in a sad story
Friday, June 18th, 2010 | tax | No Comments
About five years ago, a police officer and his wife decided to use their retirement money to build their dream home in the Smokies. They bought a pretty lot and a log home kit, and contracted with a local builder to erect it. From the beginning, the construction process went terribly wrong. Errors compounded so much that they stopped work and had the unfinished house inspected. The inspection revealed that if the house was finished, it would be so unsafe that it would not receive a certificate of occupancy. The only solution would be to tear it down and start over, which the couple could not afford to do. It was a total loss.
They came to us for help. We calculated the casualty loss on the structure and reported it on their tax return, which created a net operating loss for the year. We took their story all the way to the appeals level, where the deduction was allowed. Having won that battle, we carried the net operating loss back to the years prior to the casualty loss. Last week, we received word that the carrybacks were allowed on appeal.
Our clients had to go back to work to make the mortgage payments on their shattered dream, but we were able to recover over $38,000 in taxes to help ease the pain of their experience. For all the horror stories you hear about the IRS, sometimes they do right by the taxpayer.
Fraud and Embezzlement
Tuesday, May 25th, 2010 | consulting | No Comments
Workplace fraud is an age-old problem in all types of businesses. Whether it takes the form of financial statement fraud, corruption, or misappropriation of company assets, the cost to businesses is estimated at seven percent of annual revenues, according to the Association of Certified Fraud Examiners (ACFE). Their new report, to be released June 2, indicates that almost 90% of workplace fraud consists of misappropriation of assets. This may range from pilfering office supplies to complicated large scale schemes. Frauds may continue for years before they are detected. In forty percent of cases, the fraud is revealed by a tip. This report shows a snapshot of workplace fraud and how it is detected.
Small businesses are especially vulnerable to occupational fraud because internal controls often are not robust enough and because various duties must be combined and carried out by the smaller staff.
We are presenting at a small business seminar in Morristown, TN on June 8 sponsored by First Tennessee Bank. We will show how workplace fraud and embezzlement can happen right under the owner’s nose. We will also give attendees some practical ways to improve their companies’ internal controls.
In another presentation that day, we will talk about the increase in IRS audits and what business owners can do to make sure their books and records will withstand IRS scrutiny.