In previous seasons, processing of tax returns without the health care coverage box checked slowed down processing of returns but it didn’t halt processing. In many situations, the taxpayer received a letter asking for payment of the health care penalty or proof that the penalty was not owed. That was typically after any refund due, without taking into account a penalty, was already paid.
In 2017, health care reporting will be enforced on all returns whether e-filed or paper filed.
The taxpayer will have to indicate on their tax return that they and everyone claimed on their return had health care coverage, or qualified for an exemption for coverage, or will make a shared-responsibility payment.
For e-filed returns, I would guess that the software will prevent e-filing unless the above conditions are met.
For paper filed returns, the IRS will not accept returns that omit this information. So, for returns where there is a tax owed, the return will be considered unfiled and late payment and late filing penalties will be assessed. For returns where a refund is expected, no refund will be paid as the return will not be processed.
Penalties for not having health care in 2017 are assessed as follows:
There are 2 ways to calculate the penalty and you pay whichever is highest.
1) Percentage of income,which is:
2.5% of household income up to the total yearly premium for the national average price of a Bronze plan sold through the Obamacare marketplace, or
2) per person,calculated as
- $695 per adult and $347.50 per child under 18 up to a maximum of $2,085
As many are aware, it is often cheaper to pay the penalty rather than purchase the health insurance. Obviously this is a risky strategy but a common one, especially for young people.
What will happen when and if Obamacare is repealed remains to be seen. Trump’s executive actions allowing purchase of health plans across state lines in the case of affiliated businesses and/or allowing a reduction in mandates will not be implemented for some time. Lawsuits and state bureaucracies will certainly result in long lead times before any benefits begin to be seen.
AFS Tax Preparation
Just read a great article from RE/MAX on why realtors should incorporate.
But it is not just realtors that should heed this advice. We have been providing this advice to our small business clients for many years. Incorporation with an S Corp status election gives you some control over how much self-employment tax you have to pay. Our clients typically see about $1000 in reduced tax liability for every $20,000 in profit.
This flexibility is not available with partnerships or sole proprietorships or LLC’s taxed as either of those entities.
There are a few things that are done differently as a corporation, such as home office expenses (use a reimbursement plan) and deducting health insurance premiums can be tricky but, for most businesses, these deductions are still available as are other business deductions you are used to taking, such as rent, office supplies, advertising, and so on. S Corps do not pay taxes but instead are considered a pass-thru entity, with profits or losses flowing to the owners personal tax returns.
You can’t take all of your profit as a distribution. By incorporating, you become an employee of your corporation. You have to pay yourself a nominal salary subject to FICA and Medicare because a corporation is an entity in and of itself and someone has to do the work, that being you, the employee. But a large portion of your profit can be taken as a distribution, which is not subject to self-employment tax. That is where a large part of your tax savings come from.
There are additional costs with this strategy but generally we see a break-even point around $3000-$5000 of profit depending on particular circumstances for each business. For sole proprietorships or LLC’s taxed as a sole proprietorship (Schedule C), the break even point is where the benefits of using this strategy outweigh the additional costs occurred. That is a pretty low threshold.
And the benefits occur annually. You’ve got to love that.
If you would like to read the entire article that prompted this post, go to https://joinremaxaction.wordpress.com/2013/02/11/realtors-should-incorporate/.
For a free consultation on whether or not an entity change would be beneficial for your business, give Bill a call at AFS.
AFS – USE THE BEST FOR LESS
Taking a deduction for home office expenses is trickier for an S Corp business but it it still a legitimate deduction if done properly. It is important that you carefully structure the relationship between yourself and the S corporation. Done properly, the deduction is available to those who use a portion of their homes regularly and exclusively for conducting business and for whom the home is their principal place of business.
Unlike a sole proprietorship or a partnership, the business owner is an employee of the corporation. Because of that, there are additional tests the S Corp must meet to take the deduction legitimately. First, the business must use the property for the convenience of the employer. Second, the employee cannot rent any part of the home to the employer. Rent payments for home use have been specifically disallowed by the tax courts.
That being said, there are 2 ways the S corporation owner can claim a deduction for home office expenses. The first is to claim a miscellaneous deduction for unreimbursed employee expenses. Their are two problems with this approach. First, this deduction is claimed on Schedule A and is only available if you itemize. Second, if you do itemize, the deduction is limited to that expense which exceeds 2% of your adjusted gross income, reducing its benefit.
The second way is to have the S corporation reimburse the expenses that are allocable to the business use of home. If the S corporation has set up a valid reimbursement plan, the taxpayer can exclude those reimbursements from income on his personal tax return under the fringe-benefits provisions of the tax law.
This requires good record keeping showing expenses submitted to the corporation and payments made to the business owner as support for the deduction if audited by the IRS, as well as a written reimbursement plan as mentioned above. The payments are not taxable to the owner and are deductible to the business.
Note that if the deduction generates a loss in any given year, it is not deductible in that year but must be carried forward.
The business owner should also have a letter from the corporation to the owner stating why the business use of the property is for the convenience of the employer.
Incorporating and electing to be taxed as an S corporation can be a great way to pay less in taxes on business income. If you are wondering if an S corporation is right for you, let us take a look at your current corporate structure and make a comparison. It is less expensive than you might think to make the change and the tax savings continue each year.
If you already have an S corporation and need help setting up the reimbursement plan, give us a call.
AFS- USE THE BEST FOR LESS
It is no surprise that criminals are taking advantage of Hurricane Harvey and those generous people that are trying to to help the victims. These scammers often impersonate charities to collect cash directly or use the fraudulent identities to collect personal information from those attempting to donate.
These schemes may involve contact by telephone, social media, e-mail or even face to face.
You might see emails attempting to steer you to bogus websites that mimic the names or websites of legitimate charities or infer that they are associated with legitimate charities. They are attempting to persuade people to send money or provide personal financial information so that identities or other personal assets can be stolen.
The IRS has a tool to check charities to make sure they are valid. That can be found at https://apps.irs.gov/app/eos/. Charities listed on this website are registered with the IRS and donations to them are tax-deductible. Note that many scammers have similar sounding names to legitimate charities.
Of course, you should never give out personal financial information to anyone soliciting a contribution. That should go without saying but there are still thousands of people every day that are fooled by these attempts.
If you suspect an attempt at fraud via email or the internet, you can report it to the IRS by visiting https://www.irs.gov/privacy-disclosure/report-phishing. They have a number of articles posted on their website regarding fraud and phishing attempts and many other scams that are common.
We here at AFS do not want to discourage you from donating whatever you can but we do want to help and make sure your donations go where intended and you are not hurt in the process. If you have a question regarding this subject matter, don’t be afraid to give us a call.
Volunteering at local charities, such as your PTA, may give you some valuable tax breaks, such as deductions for mileage, travel expenses and out-of-pocket expenses. There are rules of course, that you must adhere to.
The IRS allows you to deduct expenses associated with the use of your car, either actual expenses or a flat mileage deduction (17 cents per mile in 2017). This includes the mileage that you drove to and from the charity or the place where the charitable services were rendered.
Other travel expenses may also be deductible, including air, rail or bus, lodging, meals, as well as taxi fares between your temporary lodging and place of charitable work.
There are 3 requirements for a volunteer travel expense to be deductible; a) you must volunteer to work for a qualified 501(c)(3) organization (The IRS maintains lists of eligible charities on its website, www.irs.gov), b) there must be no significant element of personal pleasure, recreation or vacation in the travel (which doesn’t mean you can’t enjoy the trip), and c) the work performed is ‘real and substantial’ throughout the trip.
What is and isn’t deductible is often subject to an interpretation as to what the IRS guidelines mean. For instance, let’s look at what ‘real and substantial’ expenses throughout the trip might mean. Let’s say you are a Marlins fan and you travel to FL to see a game. You are there for 3 days and while there, you spend 4 hours donating time to a charity. Traveling to the charity from your hotel and back would be deductible but not the expenses of traveling to FL and back. But, if you traveled to FL to participate in a charitable event over 3 days, and while there you went to a Marlins game, travel to and from FL would be deductible.
Finally, some out-of-pocket expenses could be deductible. Some examples of that might be advertising expenses you incurred to promote a charitable event, food expenses incurred while hosting a fundraiser, postage expenses or other items purchased for the charity.
So, besides making you feel good, that charitable work could put a few bucks in your pocket. Remember though, the IRS doesn’t care how nice you are. If you don’t have receipts for those expenses, you will never win the audit.
It’s not too late to record your year end mileage to get that tax deduction for 2016 and start your mileage record for 2017. Either estimate the Dec 31 mileage or use today’s mileage as your 2016 and and 2017 beginning. What is important is you write it down!!
Even if you are not a business owner but are an employee who doesn’t get reimbursed for mileage, this needs to be done.
When you file your taxes to claim this deduction, you will need to know both business mileage and personal mileage. Make sure you keep a log of your business mileage. (Total mileage is needed because we usually have to report percentage of miles driven that are business.) We offer pocket calendars which you can keep in your car for this purpose or there are a number of phone apps to help you keep these records.
If you claim a mileage deduction, you will certify on your tax return that you have records and they are written. (You may not be aware of this if your tax preparer just checks the certification boxes without comment). If you are audited and don’t have records, or your records are insufficient, you will lose the deduction. IRS wins most of these audits because of poor documentation on the taxpayer’s part.
So, right now, go check your mileage and write it down. If you are an AFS client, email it to us, we will put it in your file.
Use more than one car for business? Make sure you get mileage on both!
AFS – USE THE BEST FOR LESS
The IRS was nice enough to compile a list of arguments that will never work. They are considered “frivolous”. The courts tend to agree and both tend to look at these strategies as willful attempts to evade or defeat taxes, often leading to increased penalties and even jail time.
Here are 10 of the most common frivolous arguments:
- The filing of a tax return or payment of federal tax is voluntary
- Taxpayers can reduce their federal tax by filing a “zero” return that reports no income and no tax liability
- Compensation received for personal services isn’t income
- Military retirement pay isn’t income
- Only foreign source income is taxable
- The IRS isn’t a US agency
- The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes
- The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes
- Various constitutional amendments permit the taxpayer to avoid taxes
- Form 1040 instructions and regulations don’t have an OMB control number as required by the Federal Paperwork Reduction Act
Normally, if you don’t file and don’t pay your taxes, the IRS eventually catches up to you and you will pay failure to file and failure to pay penalties plus interest. The penalties at worst could be up to 47.5% of your unpaid taxes and the interest charged right now is less than 4%.
However, as stated above, the IRS considers the use of a frivolous argument, and the list here is a partial one, and frivolous arguments are frequently viewed as fraudulent.
The worst case is fines up to $100,000 and jail time of 5 years.
Short of that, there are other penalties that can be assessed.
- An ‘accuracy-related’ penalty equal to 20% of your underpayment if your underpayment is due to negligence or disregard of the tax rules.
- Penalties of up to 75% of the tax due for fraudulent failure to file an income tax return
- Penalties of up to 75% for underpayment due to fraud
- A $5000 penalty for frivolous returns or other submissions (for example, requests for hearings)
- A penalty of 20% of the excessive amount in an erroneous claim for a refund or credit
- A $25000 penalty for making frivolous arguments in tax court
Tax protestor arguments usually claim that you can ignore the plain language of the law. They will say the IRS isn’t legitimate or you are somehow not subject to the rules.
Real tax strategies work within the law. Deductions or strategies are used that the tax code or the IRS itself has blessed.
If you are faced with someone promising what seems too good to be true, ask for tax law citations that back up their case.
You know how it works. If it is too good to be true, it isn’t.
AFS – USE THE BEST FOR LESS
2 of the most valuable deductions for home businesses are the mileage deduction and the home office expense deduction. Both of these can be lost by not understanding one simple rule, and that is your home office must be used exclusively for your business. That means no personal use of that space.
A recent ruling (Haag, T. C. Summary Opinion 2013-29-you can Google it) agreed with the IRS that the taxpayers were not eligible to claim the home office deduction because they admitted in court that the 60 sq ft office space claimed on their tax return had personal information in the file cabinets and that there was personal use of the computer. (The fact that two businesses claimed the same office space is not addressed in the opinion. I believe that alone could have disqualified the use of that space as a home office).
A home office of 60 sq ft is pretty small. Losing that deduction alone would not have resulted in much in the way of lost deductions but does mean that their home doesn’t qualify as a principal place of business, In turn, this results in their deductions for traveling from home to several work locations being disallowed as they were considered to be commuting expenses.
This lesson cost the taxpayers nearly $7500 in lost deductions and accuracy related penalties. I don’t know what the court costs were but I would suspect that the total cost of this mistake was far in excess of $10,000 with interest and penalties and court costs considered.
I am surprised this went to court. After reading the summary, it appears that the deductions claimed were mostly unsubstantiated and/or not actually deductible. It was a self-prepared return so I can understand that they didn’t know what was or was not deductible and did not understand what records were required but the taxpayers were represented in court and should have been told that they had a very weak case prior to filing.
Don’t let this happen to you. I believe that the taxpayers in this case probably had good reason to claim a large part of what they claimed. With good advice tax advice, recordkeeping, and proper return preparation, this return would have never been flagged for audit. They probably saved $40-$70 for tax preparation when compared to what AFS would have likely charged for a married couple with 2 Schedule C businesses (our fees are pretty low). But you can see what it cost them.
AFS – Use the Best for Less
This time of year, we often get questions on the tax consequences of cash gifts to kids.
We can illustrate how this works with a very simple example. Let’s say Bob is a single parent and wants to give his son $20,000 for Christmas this year.
Bob is the one responsible for reporting the gift in 2016. Bob’s son has no taxable consequence and no filing requirement for the gift.
Bob will have to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, no later than April 17, 2017. This form is required because the gift exceeded the annual gift exclusion of $14,000 for 2016. Bob will show the $20,000 gift amount on the return as well as the name and social security number of the recipient. The return will reflect the gift exclusion of $14,000 and show the remaining $6000 as a taxable gift, but no gift tax is due as long as Bob has not used his allowable lifetime exclusion of $5,450,000 for 2016.
The Form 709 is informational return for the IRS and is only required when gifts exceed the annual excluded gift amount or if a taxpayer has already used his allowable lifetime exclusion.
AFS – Use the Best for Less
Congress eliminated an IRS penalty on small businesses that was devastating to those that incurred it. On their own volition, the IRS decreed that any small business that reimbursed their employees for health care premiums could face a $100 per day per employee, up to $36500 a year.
There are few small businesses that could take a hit like that. Note that the penalty wasn’t part of the Affordable Care Act (ACA). This was a fine the IRS wizards took upon themselves to initiate with no regard to consequences. Their rationale was that such reimbursement plans couldn’t be integrated with individual policies to meet market reforms required by the ACA. So, a business tries to help their employees and gets a huge fine, or even forced out of business, for doing so.
As always happens with tax law, there was relief for a few through the use of medical reimbursement plans and we helped some of our clients navigate that bureaucracy so that they could continue to offer this benefit to employees.
Finally, this last Wednesday, Congress eliminated that penalty. The legislation can be seen in Section 18001 of the 21st Century Cures Act.
Let’s hope for more good news for small business and their employees. Maybe more people can get back to work.
AFS – use the best for less
If you're an individual, a family or a small business, we can help you with all your tax needs. Contact us today to see how we can help.