Marietta Financial Services | CPA Indianapolis

admin — Thu, 22 Sep 2011 17:54:11 +0000

September 22nd 2011 by Andrew Poulos

As the economy has taken a downturn and tax revenues have declined, Congress and the Treasury Department have put the pressure on the IRS to generate additional tax revenues. As a result, the IRS has issued its opinion regarding higher audit enforcement.

One of the areas of high enforcement is reasonable officer compensation for shareholders of Subchapter S Corporations. This topic is on the IRS hot list because, oftentimes, people misinterpret the Internal Revenue Code (IRC) and Treasury regulations. The code and regulations are vague and don’t clearly define reasonable compensation for shareholders. In other instances, shareholders of S Corporations abuse the law in order to generate a tax savings’ benefit. The consequences of misinterpretation or abuse of the law can be quite costly if a business gets under audit for reasonable officer compensation. The liability can add up to be as much as two to three times what would have been due originally – had reasonable compensation been paid.

Although the IRC does not define what constitutes reasonable officer compensation, it does state that shareholders of S Corporations are included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding. The law requires corporate officers (shareholders) who perform services for the corporation, and receive or are entitled to receive payments, to have their compensation considered wages.

In addition, courts have consistently held that officers/shareholders of S Corporations who provide more than minor services to their corporation and receive or are entitled to receive compensation, are considered employees and the payment is considered taxable for federal employment tax purposes. If this is the case, then why is the law vague as it relates to reasonable compensation? The more the gray area in tax law, the easier it is for the IRS to increase audit enforcement and generate new tax revenues during a challenging economic environment.

This article was provided by Intuit ProLine News Central

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Changes in Indiana Corporate Tax

admin — Thu, 01 Sep 2011 19:38:46 +0000

Governor Mitch Daniels a few weeks ago signed HB 1004, reducing Indiana’s corporate income tax rate from 8.5 percent to 6.5 percent, a decrease of nearly 25 percent.

The measure, sponsored by Sen. Brandt Hershman, will begin reducing the Indiana corporate tax rate by 0.5 percent per year over the next four years to a final rate of 6.5 percent.

“While other states are raising taxes to deal with major budget shortfalls, Governor Mitch Daniels and Indiana’s General Assembly were able to cut taxes and improve our state’s jobs climate, all while passing a balanced budget. Indiana’s business environment already ranks near the top of the pack in most every third-party analysis and this reduction will only strengthen our reputation as a place to invest and create jobs,” said Mitch Roob, Secretary of Commerce and chief executive officer of the Indiana Economic Development Corporation.

Indiana’s corporate income tax reduction comes just four months after neighboring state Illinois increased its business tax burden from 7.3 percent to 9.5 percent, a rate that gives the state the fourth-highest combined national-local corporate income tax rate in the industrialized world, according to the Tax Foundation.

“By reducing the tax burden for businesses we are sending a strong message to company decision-makers from coast-to-coast and around the world that Indiana is serious about competing for their business and will continue to work to make our state the best possible place to grow,” said Hershman.

Since Governor Daniels was elected in 2004, he has taken several measures to improve the state’s attractiveness for business. Among them include:

. Increased R&D tax credit – Provides a tax credit equal to 15 percent of a company’s first $1 million of qualifying R&D expenditures, giving Indiana one of the highest R&D tax credit percentages in the country. (2005)

. R&D Sales Tax Exemption – Exempts purchases of eligible research and development equipment from the Indiana state sales tax. (2005)

. Single Sales Factor Corporate Tax – The single-sales factor apportionment calculates the Indiana portion of corporate taxes based solely on the portion of a company’s sales in Indiana. (2006)

. Major Moves – Indiana is the only state in the nation with a record-breaking, fully-funded 10-year infrastructure improvement plan that includes the construction or renovation of more than 400 roads and bridges – all without raising taxes or borrowing money. (2006)

. Telecommunications Reform – Indiana’s Telecommunications Deregulation Act has made the state a national leader in telecom reform by increasing competition among carriers, resulting in lower prices, new investments and new jobs. (2006)

. Property Tax Relief – Cut property taxes by one third and established a constitutional cap on tax rates for all classes of property. (2008, 2010)

These measures, coupled with years of balanced budgets and fiscal discipline, have earned the state a AAA credit rating from all three bond rating agencies, a first in state history.

The corporate income tax reduction news comes on the same week that Amazon.com cited Indiana’s business-friendly policies as the reason it will open a 900,000-square-foot Internet order fulfillment center in Indianapolis this summer, bringing hundreds of jobs.

Nonspouse Real Estate Transfers Under Scrutiny

admin — Mon, 15 Aug 2011 16:00:55 +0000

A recent court case reveals that the IRS has discovered a pattern of taxpayers failing to file gift tax returns for real property transfers between nonspouse related parties. As a result, it launched a compliance initiative to capture data from states and counties regarding real property transfers taking place between nonspouse family members for little or no consideration during the period of Jan. 1, 2005, through Dec. 31, 2010. While the IRS has faced hurdles in attempting to force California to release the data, a number of states have voluntarily done so. These include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Thus, individuals who transferred real property to nonspouse family members should make sure that required gift tax returns were filed and file amended returns if they weren’t.

Another Appeals Court Upholds IRS’s Time Limit on Spousal Relief Requests

admin — Fri, 12 Aug 2011 16:00:52 +0000

Married joint return filers are jointly and severally liable for the tax arising from their returns. Innocent spouses may request relief from this liability in certain circumstances. An IRS regulation states that a request for equitable innocent spouse relief must be no later than two years from the first collection activity against the spouse. The Tax Court had found this regulation invalidly imposed a time limit. However, the Court of Appeals for the Fourth Circuit has reversed the Tax Court and upheld the regulation (as have the Courts of Appeals for the Third and Seventh Circuits).

IRA Trustees Weren’t Liable for Madoff Losses

admin — Wed, 10 Aug 2011 20:34:20 +0000

A district court has dismissed all claims brought by holders of self-directed individual retirement accounts (IRAs) against the IRA trustees for losses incurred by the IRAs for investments with Bernard Madoff’s firm. A number of individuals owned self-directed IRAs with IRA agreements that clearly stated that they were solely responsible for making investment decisions in connection with the funds in their IRAs, and that the IRA trustees would not provide any investment advice. Pursuant to instructions given by these IRA owners, the IRA trustees sent IRA funds to Bernard Madoff’s brokerage firm, Bernard L. Madoff Investment Securities LLC, for investment in securities. These funds were ultimately lost in Madoff’s ponzi scheme. The IRA owners sought to hold the IRA trustees responsible for their role in the losses that the IRAs sustained. The action asserted claims under federal common law based on Internal Revenue Code sections governing IRAs, and state law negligence, contract, and unjust enrichment claims. However, the court rejected all such claims.

Trust’s Investment Advice Fees

admin — Mon, 08 Aug 2011 16:00:25 +0000

The Supreme Court has held that investment advisory fees paid by a trust were deductible only to the extent that they exceeded 2% of the trust’s adjusted gross income (AGI). Thus, such expenses didn’t qualify for the exception to the 2% of AGI limit in the tax law for costs paid or incurred in connection with the administration of a trust or estate that wouldn’t have been incurred if the property weren’t held in the trust or estate. However, for the sake of administrative convenience, the IRS has provided that, until final regulations are issued, nongrantor trusts and estates will not have to “unbundle” a fiduciary fee (i.e., separate the fee into components that are subject to the deduction limit and those that aren’t). As a result, until the regulations are issued, affected taxpayers can deduct the full amount of a bundled fiduciary fee without regard to the 2% floor.

Regulations Would Toughen Tax Rules for Owners of Bankrupt Disregarded Entities

admin — Fri, 05 Aug 2011 16:22:40 +0000

A taxpayer whose debts are forgiven generally has cancellation of debt (COD) income subject to exceptions including one for bankruptcy and one for insolvency. Some taxpayers have taken the position that the bankruptcy exception is available if a grantor trust (trust used in family or business planning) or disregarded entity (e.g., a single-member limited liability company taxed directly to owner) is under the jurisdiction of a bankruptcy court, even if its owner is not.

Similarly, some taxpayers have contended that the insolvency exception is available to the extent a grantor trust or disregarded entity is insolvent, even if its owner is not. The IRS has issued proposed regulations that would clarify that the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to the bankruptcy court’s jurisdiction, and the insolvency exception is available only to the extent the owner is insolvent. They would apply to COD income occurring on or after the date they are published as final regulations.

More Courts Treating Basis Overstatements as Triggering Six-Year Limitations Period

admin — Wed, 03 Aug 2011 20:18:56 +0000

Late last year, the IRS issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income
for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that’s greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in that fashion. Recently, two Courts of Appeals (the Tenth Circuit and the District of Columbia Circuit) have upheld the regulations. While the momentum clearly is in favor of the IRS on this issue, others courts have rejected the regulations. Ultimately, the Supreme Court will have to resolve the dispute.

Real Estate Professionals Allowed Late Election to Aggregate Rental Real Estate Interests

admin — Mon, 01 Aug 2011 16:12:10 +0000

The IRS has provided guidance that allows certain real estate professionals to make a late election under the regulations to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules. This election can make it easier to currently deduct losses from real estate activities. As a general rule, the election is made by filing a statement with the taxpayer’s original income tax return for the tax year. However, under new guidance, a taxpayer meeting certain conditions can make a late election on an amended return.

Two Bonus Depreciation Deductions for One Expenditure

admin — Fri, 29 Jul 2011 20:06:44 +0000

Under IRS regulations, businesses that trade in machinery or equipment for which they claimed bonus depreciation may qualify for another bonus depreciation deduction on the remaining depreciable basis if they swap for like-kind property that also is eligible for bonus depreciation. In effect, the business gets two bonus depreciation deductions for itsexpenditure on the traded-in property.