Category Archives: Federal Tax Developments

ALERT: IRS PHONE SCAM

We have received notification from some of our clients that they are receiving telephone calls from someone claiming to be from the IRS.  They have even managed to rig the caller ID on your phone to show the IRS phone number.  The callers threaten that you must immediately pay taxes that are overdue on your account or you will be arrested, deported, or liens placed on your property.

If you receive a call like this and have no knowledge of owing any tax to the IRS, HANG UP.  They will ask for your Social Security number or other personal information for identity theft.

The IRS will ALWAYS mail several notices to taxpayers requesting payment for any past due taxes owed.

You may report these types of calls to the Treasury Inspector General for Tax Administration at 800-366-4484, or call our office, 928-778-0079, with any questions.

The thieves have invaded the Prescott area so please be aware.

Posted:  July 22, 2014; Lois Hilgendorf, CPA

 


A Simplified Home Office Deduction

Do you work at home or have a home-based business?  If so, you should be aware that beginning this year, the IRS has created a simpler option for calculating the deduction for the business use of your home.  The new option makes recordkeeping easier because instead of maintaining records of specific home office expenses, you can use a standard rate per square foot.  The rate is $5 per square foot (up to a maximum of 300 square feet or $1,500) for qualifying business use space in place of taking a pro rata percentage of items such as mortgage interest, taxes and repairs.

Keep in mind there are good and bad aspects to this “simpler” method.  The new method gives you back your full interest and tax deduction on Schedule A, but you will lose your depreciation and loss carryover deductions.  Of course, you must still use your home office regularly and exclusively for business.  This may be a welcome relief for some taxpayers, but it might not be the best choice for others.

Is it the right choice for you?  Contact us today and let’s decide together.

 

 

 

 


Latest News from IRS Regarding Homeowner Associations

The IRS recently posted this information regarding the tax-exempt status of Homeowners’ Associations.  There is often confusion between Non-Profit Status in the eyes of the Arizona Corporation Commission and in the eyes of the IRS.  Most homeowners associations will not be granted tax-exemption by the IRS, and are expected to file an 1120 or 1120H.  Click on the link below for more information:

TAX EXEMPT STATUS OF HOMEOWNERS’ ASSOCIATIONS

 

Schutte & Hilgendorf CPAs has over 20 years experience invested in the complex accounting and tax treatment of Homeowners’ Associations. We provide audit, review and compilations to homeowners association to help them meet the annual Arizona statutory requirement.  In addition, we provide tax planning and preparation services to Associations all year around.  Call us today to schedule your free initial consultation 928-778-0079.


Health Care Act: Tools and Answers for Employers and Individuals

EMPLOYERS (FOR-PROFIT AND NON-PROFIT)!!:

We are receiving information daily regarding the new Patient Protection and Affordable Care Act (ACA) (Also called “ObamaCare”), which is scheduled to phase in starting in 2014. Here’s some important information that will effect both individuals and employers before then:

For Individuals: The Individual Insurance Exchanges will be open for enrollment in October 2013.

For Employers: The scheduled Employer side of it has been delayed until 2015. However, there is a requirement for ALL Employers to post a notice for all new and existing employees (both full and part time) by October 1, 2013

The attached templates can be used by Employers for posting and handouts (click on the link that applies):

Template A_withoutplans: For employers who DO NOT offer a health plan
Template B_withplans: For employers who offer a health plan to all or some of their employees

In addition, we’re excited to announce a new, streamlined health care tool , housed at Business USA, to help you find out exactly what you and your employees need to know about the Affordable Care Act. In a few quick steps, you’ll understand the essentials of new insurance options and other health care changes. We tried it and think it will help you work through all of the options. Click on the link below to access the tool (if the link doesn’t work, copy and paste the URL to your browser):

http://business.usa.gov/healthcare

Rest assured, we will pass on all final, relevant information, links and tools for both individuals and employers, as it becomes available. We at Schutte & Hilgendorf CPAs are trying to keep in front of the information to answer your questions as you begin to contemplate what this means for you individually and as a business owner or manager. Look for announcements and new developments either through direct mailings or email. All content will also be posted on our website, www.prescottaccountants.com.

To find more information directly, go to https://www.healthcare.gov/ , the official website for the ACA.

If you have questions, call us today!

Schutte & Hilgendorf CPAs is a full service public accounting firm, providing tax preparation, planning, audit, accounting, and QuickBooks set and consulting to Prescott and the great Yavapai and Northern Arizona region.  Call us for more information at 928-778-0079


Questions and Answers for the Additional Medicare Tax – Effective January 1, 2013

The following link will take you to questions and answers that will  provide employers and payroll service providers information that will help them as they prepare to implement the Additional Medicare Tax which goes into effect in 2013. The Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.

Click on the link below to be taken to the IRS Q&A:

Questions and Answers for the Additional Medicare Tax – From the IRS

For further tax planning considerations and questions, contact Schutte & Hilgendorf, pllc – CPAs.  We offer free initial consultations.  Schutte & Hilgendorf, pllc – CPA’s, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals, small businesses, non-profits, and homeowners associations in the Prescott and greater Yavapai County area.  Call us at 928-778-0079 or visit www.prescottaccountants.com


IRS Net Investment Income Tax – Effective January 1, 2013 – FAQs

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code (IRC). The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. The Net Investment Income Tax goes into effect on Jan. 1, 2013.

For more information directly from the IRS, click on the link below for a FAQ page.

3.8% NET INVESTMENT INCOME TAX – EFFECTIVE 2013 – FAQS

For further tax planning considerations and questions, contact Schutte & Hilgendorf, pllc – CPAs.  We offer free initial consultations.  Schutte & Hilgendorf, pllc – CPA’s, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals, small businesses, non-profits, and homeowners associations in the Prescott and greater Yavapai County area.  Call us at 928-778-0079 or visit www.prescottaccountants.com


IRS/DOL Crackdown on Independent Contractor vs. Employee

IRS/DOL Crackdown

If you classify any workers as “independent contractors”—or have plans to do so—2013 is the year to make sure you get that classification correct.

Below is Topic 762 – Independent Contractor vs. Employee provided by irs.gov to help in identifying which classification a worker falls:

To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Type of Relationship.

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done, through instructions, training, or other means.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses
  • The extent of the worker’s investment in the facilities used in performing services
  • The extent to which the worker makes his or her services available to the relevant market
  • How the business pays the worker, and
  • The extent to which the worker can realize a profit or incur a loss

Type of Relationship covers facts that show how the parties perceive their relationship. This includes:

  • Written contracts describing the relationship the parties intended to create
  • The extent to which the worker is available to perform services for other, similar businesses
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
  • The permanency of the relationship, and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company

For more information, refer to Publication 15-A (PDF), Employer’s Supplemental Tax Guide, or Publication 1779 (PDF), Independent Contractor or Employee. If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Contact Schutte & Hilgendorf with your questions related to independent contractor vs. employee.  Schutte & Hilgendorf, CPAs, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals and small business in the Prescott and greater Yavapai County area.  Call us at 928-778-0079 or visit www.prescottaccountants.com


Things to Remember about Charitable Giving

All giving is valuable to those in need, but from a tax perspective, not all giving is rewarded with a tax write-off.   Here is what you need to keep in mind:

1. YOU MUST ITEMIZE FOR FEDERAL FILING TO DEDUCT CHARITABLE GIVING. You can be as generous as you want, but a tax deduction is limited to those who itemize personal deductions and forego the standard deduction amount.

2. DEDUCTIONS ARE ALLOWED ONLY FOR IRS-APPROVED CHARITIES. You cannot claim a deduction for money you give directly to individuals. Check to see that a charity is IRS-approved at www.irs.gov/Charities-&-Non-Profits/Search-for-Charities.

3. ANNUAL DEDUCTIONS ARE LIMITED WITH RESPECT TO ADJUSTED GROSS INCOME. You cannot deduct cash donations in excesss of 50% of your adjusted gross income.  Unused deductions can be carried forward for up to 5 years.

4. DEDUCTIONS REQUIRE SUBSTANTIATION. Your word or even a canceled check isn’t good enough.  If you donate $250 or more, you must obtain a written acknowledgment from the organization, specifying your gift and stating that no goods or services were received in exchange. Special rules apply for donations of vehicles.

5. SOME GIFTS REQUIRE APPRAISALS.  If you donate property valued at more than $5,000, you need a qualified appraisal.  This must be done by someone who has the credentials to be a qualified appraiser.

6. DEDUCTIONS OF APPRECIATED PROPERTY PROVIDE A DOUBLE TAX BENEFIT.  If you donate appreciated property that you have owned for more than a year, such as stock, you can deduct the value of the property on the date of the gift.  What’s more, you don’t have to report any capital gain on the appreciation; it effectively becomes tax free to you.

7. CASH DONATIONS MADE BY YEAR-END ARE DEDUCTIBLE NOW EVEN IF RECEIVED IN THE NEW YEAR. If you mail a check to the charity on December 31, it is deductible on your 2012 return, even though the charity does not receive the gift until 2013. Also, you can charge a donation to a credit card; you can take the  deduction in 2012 even if you pay the credit card bill in 2013.

8. OUT OF POCKET EXPENSES ARE DEDUCTIBLE. If you spend any money helping a charity, you can deduct those if you have substantiation. The value of your time volunteered to a charity, however, is NOT deductible. The mileage on your vehicle for driving to volunteer IS deductible at the rate of $0.14 a mile.  Be sure to keep a record of the mileage, including the date and purpose of each charitable trip.

These tips are brought to you by Schutte & Hilgendorf, PLLC, CPA’s, a Prescott firm serving the greater Yavapai County, providing audit, accounting, bookkeeping, tax preparaton and planning, Quickbooks accounting and setup, to individuals and small businesses. Contact us for a free consultation at (928) 778-0079.


Exempt Organizations Annual Reporting Requirements – Annual Electronic Notice (Form 990-N) for Small Organizations: Information Reported

From www.irs.gov

Exempt Organizations Annual Reporting Requirements – Annual Electronic Notice (Form 990-N) for Small Organizations: Information Reported

 
What information do I need to provide on the e-Postcard?

The e-Postcard is easy to complete. All you need is the following information:

  • Organization’s legal name –
    • An organization’s legal name is the organization’s name as it appears in the certificate of incorporation or the organization’s application for Federal tax-exempt status, unless a request was previously submitted to the IRS to have the name officially changed.
  • Any other names your organization uses – If the organization is known by or uses other names to refer to the organization as a whole (and not to its programs and activities), commonly referred to as Doing-Business-As (DBA) names, they should be listed.
  • Organization’s mailing address – The mailing address is the current mailing address used by the organization.
  • Organization’s website address (if you have one).
  • Organization’s employer identification number (EIN) –
    • Every tax-exempt organization must have an EIN, sometimes referred to as a Taxpayer Identification Number (TIN), even if it does not have employees. The EIN is a unique number that identifies the organization to the Internal Revenue Service. Your organization would have acquired an EIN by filing a Form SS-4 prior to requesting tax-exemption.  The EIN is a 9-digit number and the format of the number is NN-NNNNNNN (for example:  00-1234567). 
    • If you do not know your EIN, you may be able to find it on the organization’s bank statement, application for Federal tax-exempt status, or prior year return.
    • Please note that the EIN is not your tax-exempt number.  That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes.
    • If you do not have an EIN, see the Instructions for Form SS-4 for different ways to apply for an EIN.  DO NOT use the EIN of a parent or other organization.
  • Name and address of a principal officer of your organization –
    • Usually president, vice president, secretary, or treasurer – often specified in the organization’s by-laws.
  • Organization’s annual tax year –
    • Like any taxpayer, exempt organizations must keep books and reports and file returns based on an annual accounting period called a tax year.  A tax year is usually 12 consecutive months that can be either calendar year or fiscal year and is often specified in the organization’s by-laws.
  • Answers to the following questions:

Page Last Reviewed or Updated: September 21, 2011

 

Schutte & Hilgendorf, CPAs, a Prescott accounting firm, specializes in auditing, accounting and tax preparation and planning for non-profit Organizations throughout Yavapai County and Northern Ariziona.  Should you need assistance with filing a non-profit information return (990) or notecard, please call us at 928-778-0079.  We can e-file 990-e postcards (990-N) for you from our office for a nominal fee.  Call us today!


IRS may recharacterize dividend payments to S shareholder-employee as wages

IRS may recharacterize dividend payments to S shareholder-employee as wages
Watson, P.C. v. U.S., (DC IA 12/23/10) 107 AFTR 2d ¶2011-305
A district court has concluded that an S corporation shareholder-employee’s $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments.
RIA observation: This is a long standing compliance issue with IRS, which feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder’s discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren’t subject to employment taxes.
RIA observation: In 2010, the House but not the Senate passed legislation that included a crackdown on service professionals who try to minimize Medicare and Social Security taxes by routing their self-employment income through an S corporation and then paying themselves a nominal salary (see Federal Taxes Weekly Alert 06/03/2010).
Facts. David E. Watson had a bachelor’s degree in business administration and a specialization in accounting. He owned a professional corporation (PC) called DEWPC that, since its inception, had elected to be taxed as an S corporation. Watson was its sole shareholder, employee, director, and officer, and was the only person to whom DEWPC distributed money during the years at issue. His $24,000 annual salary was documented in the corporate minutes. In selecting his salary, he did not look at what comparable businesses paid for similar services. For both years at issue, Watson received dividend distributions from DEWPC that totaled over $175,000 annually.
On Feb. 5, 2007, IRS assessed $48,519 in taxes, penalties, and interest against DEWPC for the eight calendar quarters of 2002 and 2003. It made these assessments after it determined that portions of the dividend distributions from DEWPC to Watson should have been characterized as wages paid to Watson that were subject to employment taxes. DEWPC later paid $4,063.93 toward these assessments and then filed a claim for refund of the payments. IRS denied the claim and DEWPC sued in district court.
Background. Employers are liable for FICA (Social Security) taxes on wages paid to their employees. (Code Sec. 3111) Fact Sheet 2008-25, August 2008 warns S corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. Fact Sheet 2008-25, August 2008 lists these factors that courts have considered in determining reasonable compensation:
•       training and experience;
•       duties and responsibilities;
•       time and effort devoted to the business;
•       dividend history;
•       payments to non-shareholder employees;
•       timing and manner of paying bonuses to key people;
•       what comparable businesses pay for similar services;
•       compensation agreements; and
•       use of a formula to determine compensation.
DEWPC argued that IRS did not have the authority to recharacterize any of the dividend payments as compensation. DEWPC cited three federal court cases to support its argument.
Court’s ruling. The district court found that DEWPC’s position was undermined by IRS revenue rulings and case law. For example, in Rev Rul 74-44, 1974-1 CB 287, IRS concluded that dividends received by an S corporation’s two sole shareholders were wages for which the corporation was liable for FICA, FUTA and income tax withholding. In Joseph Radtke v. U.S., (DC WI 4/11/89) 63 AFTR 2d 89-1469, aff’d, (CA 7 2/23/90) 65 AFTR 2d 90-1155, a district court determined that certain funds designated as dividends were actually compensation for which an S corporation owed employment taxes. The district court was not persuaded by the rulings that DEWPC cited because in those rulings, the taxpayer was attempting to recharacterize funds, whereas in DEPW’s case, it was the government that was attempting to recharacterize the funds.
The district court said that the proper tax treatment of funds disbursed by an S corporation to its employees or shareholders turns on an analysis of whether the payments were remuneration for services performed. After reviewing the facts, the court concluded that DEWPC structured Watson’s salary and dividend payments in an effort to avoid federal employment taxes, with full knowledge that the dividends paid to Watson were actually “remuneration for services performed.” The court believed that a reasonable person in Watson’s role as DEWPC’s sole shareholder, officer, and employee would be expected to earn far more than a $24,000 salary for his services. The court pointed out that Watson was an exceedingly qualified accountant, with both bachelor’s and advanced degrees, working as one of the primary earners in a reputable firm that had over $2 million in gross revenues in 2002 and nearly $3 million in 2003.
As a result of the ruling, DEWPC will owe employment taxes, penalties, and interest on the 2002 and 2003 dividend distributions to Watson that were reclassified as salary.
RIA Research References: For S corporation dividends as wages subject to withholding, see FTC 2d/FIN ¶ H-4329; TaxDesk ¶ 532,002.
Source:  Federal Tax Updates on Checkpoint Newsstand tab 1/13/2011

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.