Articles Posted in US Taxes

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please contact us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

IRS has issued detailed guidance on the 2010 Tax Relief Act’s 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for components where work on a larger self-constructed property began before Sept. 9, 2010, allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation for property placed in service in a tax year that includes Sept. 9, 2010, permit 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property, and provide an escape hatch for some business car owners who would otherwise be subject to a draconian depreciation result.

Under the 2010 Tax Relief Act, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write off its entire cost in the placed-in-service year. A heavy SUV is one with a GVW rating of more than 6,000 pounds.

The new health reform legislation generally requires employers to report the cost of health insurance they provide to employees on their W-2 forms. Last fall, the IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2. More recently, the IRS announced that the reporting requirement will continue to be voluntary for small employers at least through 2012.

The IRS has announced a second voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. It will be available through Aug. 31, 2011. The IRS released details of the new voluntary offer, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), in the form of 53 frequently asked questions (FAQs). As with the first offer, participants have to pay back taxes and penalties but will avoid criminal prosecution. The offshore penalty is different under the new offer. The general rule is that the penalty is 25% based on amounts in foreign bank accounts, but can be as low as 12.5% or 5% for some taxpayers.

The IRS has announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. Its goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers.

Specifically, the IRS is:
• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses; and
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

Reversing its prior position, the IRS has announced that expenses paid for breast pumps and supplies that assist lactation qualify as deductible medical expenses.
Amounts reimbursed for these expenses under FSAs (flexible spending accounts), Archer MSAs (medical savings accounts), HRAs (health reimbursement arrangements), or HSAs (health savings accounts) are accordingly not income to the taxpayer.

The IRS has explained the income tax and information return consequences of payments made to or on behalf of homeowners under various government programs designed to prevent avoidable foreclosures of homeowners’ homes and stabilize housing markets. In general, homeowners may exclude the payments from income, and may deduct all payments they actually make during 2010-2012 to the mortgage servicer, HUD (the Department of Housing and Urban Development), or the State HFA (housing finance agency) on the home mortgage. The aid payments aren’t subject to information reporting, and there are transition rules for payments that are incorrectly reported.

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. Now, some Courts have addressed the regulations. The Court of Appeals for the Fourth Circuit and the Tax Court have rejected the regulations. On the other hand, the Federal Circuit has upheld them and the Seventh Circuit has viewed them favorably. As a result, it looks like the Supreme Court will ultimately have to resolve the issue.

Estates of decedents dying in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents’ basis plus certain increases. The IRS has announced that Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is not due Apr. 18, 2011 and should not be filed with the final Form 1040 of persons who died in 2010. The IRS says the due date will be set in forthcoming guidance but does not indicate when that guidance may be issued. The forthcoming guidance will also explain the manner in which an executor of an estate may elect to have the estate tax not apply for a decedent dying in 2010.

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 Third Circuit has reversed the Tax Court and upheld the regulation (so has the Court of Appeals for the Seventh Circuit).

Gambling losses may be deducted only to the extent of gambling winnings, even in the case of an individual engaged in the trade or business of gambling. Previously, the Tax Court had held that losses for purposes of the limitation included both the cost of wagers and business expenses. Earlier this year, the Court overruled its prior position and now says that a professional gambler’s business expenses are not subject to the loss limitation.

In general, a taxpayer must file a claim for credit or refund of tax within three years after filing the return or two years after paying the tax, whichever period expires later. (Code Sec. 6511(a)) However, the statute of limitations is suspended for certain taxpayers who are unable to manage their financial affairs because of a medically determinable mental or physical impairment. A physician’s statement must be submitted to claim this relief, but a Court has made clear that the statement alone doesn’t establish that the taxpayer was financially disabled. Thus, it allowed the IRS to seek additional proof of the taxpayer’s condition.

Call us for tax relief and tax resolution services to resolve any tax problem and get back taxes help by calling 1-877-78-TAXES [1-877-788-2937].

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Tax relief USA is for the American citizens who are dwelling in the foreign countries. The taxation phenomenon becomes multifaceted and complex as you become taxable under the laws of two different countries. Most of the US expats do not know their rights and obligations as there is not much awareness among the commoners regarding the Tax Relief USA. This article describes the key points related to this relief program.

Let us suppose, if an American citizen is residing and working in Canada, he is obliged to pay the IRS taxes just like other citizens inside the United States. The taxpayer needs to learn the filing requirements the way they are based on American laws. However, this does not mean that he is not bound to pay the taxes under Canadian laws. Fortunately, IRS offers tax relief USA to such individuals which can lessen considerable financial burden.

So what is tax relief USA actually? Though the taxpayer must pay the taxes in both the countries but if the IRS believes that he is eligible for tax relief USA, he will either be given credit for the taxes paid in the foreign country or he will be entitled to exclude a part or the whole income earned outside the US.

There a few benefits including Canada Pension Plan, Old Age Security scheme etc. which are not taxable in the United States. Actually, this tax relief program is based on a tax treaty between the governments of the United States and Canada, which offers that such benefits would be taxed utterly on the base of current residence. In the same way, the above mentioned benefits come to be taxable if the taxpayer obtains them while residing in the USA.

Therefore, these Canadian social security benefits are preceded just like their American counterparts because of the United States tax. However, in case any of such benefits is not subject to taxation in the hands of a Canadian resident, the same benefit is not taxable in the United States.

Obviously this is not a straightforward procedure and having different taxation laws for different countries, legal tax expertise are required to understand it thoroughly. It is sensible to contact a tax relief expert to understand your rights and responsibilities.

Relief for homeowners with corrosive drywall. The IRS is allowing individuals with corrosive drywall to apply a safe harbor formula to treat the costs of repairing the defective drywall as a casualty loss. The safe harbor applies for original and amended federal income tax returns filed after Sept. 29, 2010. Reported problems have occurred with certain imported drywall installed in homes between 2001 and 2008. Homeowners have reported blackening or corrosion of copper electrical wiring and copper components of household appliances, as well as the presence of sulfur gas odors. In the case of any individual who pays to repair damage to his personal residence or household appliances that results from corrosive drywall, the IRS won’t challenge his treatment of damage resulting from corrosive drywall as a casualty loss (which might otherwise be difficult to achieve under the regular rules) if the loss is determined and reported under the safe harbor rule. A taxpayer who does not have a pending claim for reimbursement may claim as a loss all unreimbursed amounts paid during the tax year to repair damage to his personal residence and household appliances resulting from corrosive drywall. A taxpayer who has a pending claim (or intends to pursue reimbursement) may claim a loss for 75% of the unreimbursed amount paid during the tax year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall.

Over-the-counter drug costs will no longer be reimbursable. Effective Jan. 1, 2011, unless prescribed or insulin, the cost of over-the-counter medicines cannot be reimbursed from flexible spending arrangements (FSA), health reimbursement arrangements (HRA), Health Savings Accounts (HSA) and Archer Medical Savings Accounts (Archer MSA). The IRS has issued guidance explaining that an individual may be reimbursed for over-the counter medicines or drugs, so long as the individual obtains a prescription for the medicines or drugs. It also makes clear that expenses incurred for over-the-counter medicines or drugs purchased without a prescription before Jan. 1, 2011 may be reimbursed tax-free at any time by an employer-provided plan, including an FSA or HRA, under the terms of the employer’s plan.

Simplified per diem rates lowered effective Oct. 1, 2010. Reimbursements of an employee’s business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn’t exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas. The IRS has issued the “high-low” simplified per diem rates for post-Sept. 30, 2010, travel. An employer may reimburse up to $233 for high-cost localities ($168 for lodging and $65 for M&IE) and $160 for other localities ($108 for lodging and $52 for M&IE). The list of high-cost areas is also updated.

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please contact us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New law gives tax breaks to small business. The Small Business Jobs Act of 2010, which was signed into law on September 27, 2010, includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized tax shelter penalty rules.

Schedule UTP for reporting uncertain tax positions finalized and liberalized. The IRS has released a final Schedule UTP (Form 1120), Uncertain Tax Position Statement, and an announcement detailing many liberalizations to the reporting requirements, which initially apply only to large corporations. In addition, the agency has taken steps to protect taxpayer communications with practitioners and to ensure that the program is properly applied by its own personnel. The key changes include: a five-year phase-in of the reporting requirement based on a corporation’s asset size; no reporting of a maximum tax adjustment; no reporting of the rationale and nature of uncertainty in the concise description of the position; and no reporting of administrative practice tax positions.

Guidance addresses tax breaks for hiring new employees. Employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to newly hired qualified individuals. These are workers who: (1) begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011, (2) certify by signed affidavit, under penalties of perjury, that they haven’t been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer; (3) do not replace other employees of the employer (unless those employees left voluntarily or for cause), and (4) aren’t related to the employer under special definitions. The payroll tax relief applies only for wages paid from Mar. 19, 2010 through Dec. 31, 2010.

Employers also may qualify for an up-to-$1,000 tax credit for retaining qualified individuals. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

The IRS had issued guidance on these tax breaks in the form of frequently asked questions (FAQs). Updated FAQs explain: when an employee is considered to begin work; how the exemption can be claimed for a new hire who replaces a prior employee; that the exemption can be taken for someone who was self-employed for the entire 60-day lookback period; that minors may sign the HIRE Act employee affidavit (Form W-11); and what counts as wages for the retention credit.

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for businesses. Here’s a brief overview of the tax changes in the Small Business Jobs Act.

Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property–generally, machinery, equipment and software–placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.

Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).

Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

100% exclusion of gain from the sale of small business stock. Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.

General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.

Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.
S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
Limitation on penalty for failure to disclose certain reportable transactions. The Small Business Jobs Act generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.

Revenue raisers. These tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.

Please keep in mind that I’ve described only the highlights of the most important changes in the Small Business Jobs Act. If you would like more details about any aspect of the new legislation, please do not hesitate to contact us.

Employee vs. Independent Contractor – Ten Tips for Business Owners

IRS Tax Tip

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. 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.

3. 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.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Federal & State tax debt relief and IRS tax problem resolution is our specialty. Call us today for reliable tax debt relief, or a state tax debt relief at 1-877-78-TAXES

Construction Industry Tax Issues

Accumulated Earnings Tax

Closely held C corporations are more likely to accumulate earnings and profits beyond the reasonable needs of the business in order to avoid income taxes on its shareholders than are large C corporations. Each accumulated earnings case is unique. No pro forma guide for calculating a taxpayer’s reasonable needs can be prepared. Reasonable needs that would usually be considered in any accumulated earnings case are the need for sufficient net liquid assets to pay reasonably anticipated, normal operating costs through one business cycle and sufficient net liquid assets to pay reasonably anticipated, extraordinary expenses and capital improvement financing.

In addition, the following represents a non-exclusive list of specific items that should be considered for construction contractors:

1. Working Capital necessary for Bonding Purposes: The general rule of thumb is that working capital needs to be at least 10% of “backlog” for bonding purposes. A specific taxpayer’s situation may result in a different percentage based on the bonding company’s requirements. Thus, this percentage should be determined on a case-by-case basis. “Backlog” work program is the sum of contracts in process less the billings from those contracts plus contracts not started.

2. Equipment Needs: Contractors who have high equipment needs will generally have a need to replace the equipment on a periodic basis.

The following information is included to assist an examiner during an examination of a construction company in determining whether an accumulated earnings tax issue exists. When considering whether an IRC Section 531 issues exist, examiners are advised to apply the Bardahl, Mead, or similar method used in determining the reasonable business needs. However an examiner must consider that, unlike most entities, a construction company normally needs to retain earnings and profits to have adequate bonding capacity. Relevant court cases involving the accumulated earning tax and construction contractors are:

1. Ready Paving and Construction Co. v. Commissioner, 61 T.C. 826 (1974): A paving contractor had permitted its earnings to accumulate beyond the reasonable needs of its business. A “modified” Bardahl formula was used with the case hinging on what items were and were not to be included in determining working capital.

2. Thompson Engineering Co. v. Commissioner, 80 T.C. 672 (1983) 751 F.2d 191 (6th Cir. 1985): A construction subcontractor was liable for the accumulated earnings tax. The IRS determined the taxpayer’s reasonable business needs by applying the “Bardahl” formula. The court agreed with the taxpayer that the Bardahl formula has “little or no value when applied to a mechanical contracting business that lacks a routine operating cycle.” The bonding capacity, and not the Bardahl formula, is the major consideration in determining the taxpayer’s business needs. This case was appealed and reversed.

3. Peterson Bros. Steel Erection Co. v. Commissioner, T.C. Memo. 1988-381, 55 T.C.M. (CCH) 1605 (1988): The taxpayer, involved in the steel erection of high-rise buildings, was not liable for the accumulated earnings tax. The petitioner’s ability to obtain a bond on a job when required is of primary importance and is clearly a reasonable need of the business. The fact that the petitioner was rarely required to provide a performance bond on its jobs is immaterial since it had to be prepared to provide a bond if required.

Alternative Minimum Tax

Taxpayers who are not required to use PCM under IRC Section 460) may owe alternative minimum tax. IRC Section 56(a)(3) states that the PCM must be used for long-term contracts for alternative minimum tax purposes. Therefore, taxpayers on the cash, accrual or completed contract methods must compute alternative minimum taxable income on the percentage of completion method. Exceptions to the required use of PCM for AMT:

1. Homebuilders: IRC Section 56(a) applies to long-term contracts except for home construction contracts

2. Small Corporations: Exempt from AMT for tax years beginning after 1998. Small corporations are C corporations with average annual gross receipts of $5,000,000 remain exempt in subsequent years until their average annual gross receipts exceed $7,500,000.

Many construction companies are required to prepare certified financial statements for bonding and lending purposes. Financial statements must be prepared on percentage of completion method. (Statement of Position 81-1) Thus, the difference between the percentage of completion method and the tax return method can easily be determined for alternative minimum tax purposes.

Employment Tax

The use of subcontractors is common within the construction industry. Many taxpayers treat employees as subcontractors to avoid paying employment taxes. The agent may need to seek guidance from an employment tax specialist when confronted with potential employment tax issues. Back-up withholding can apply to subcontractors. The bargain sale of a house to an employee involving a discounted sales price could produce employment tax liability.

Conclusion

Many issues are common to all industries. However, some issues are specific to the construction industry, due to the nature of the business and the special accounting methods available. Additional facts and tax research will be necessary to develop the issues in this chapter.

Keywords: construction tax problem, construction tax help, construction IRS audit, construction IRS examination.

IRS El Monte, CA-IRS Los Angeles, CA-IRS El Segundo, CA-IRS Laguna Niguel, CA-IRS Camarillo, CA-IRS Glendale, CA-IRS Woodland Hills, CA

Getting to Grips with Wage Garnishment

Have you ever heard of a wage garnishment? If you haven’t, and you are responsible for paying the IRS what you owe them, then you should read on! If you’re in a position where you owe the IRS money already, then you shouldn’t just read on, but take note because wage garnishment is something that could very easily be in your future!

Every taxpayer knows that Uncle Sam needs his pound of flesh (or at least roll of dollars), regardless how many mouths you have to feed, and how high your mortgage payments are now that the financial world is in crisis, or how your income has changed. Uncle Sam doesn’t care if you’ve lost your job, or had to take unpaid leave because of health reasons. If you owe Uncle Sam money, he wants it; and in the form of wage garnishments, he’s going to make sure that he gets it.

There are strict procedural guidelines that the IRS must adhere to before they can attach a wage garnishment to your salary, and the first of these is to warn you that it’s about to happen. If you haven’t defaulted on your tax payments, then you need to immediately contact them because they need you in default in order to proceed! If you’re not in default, then they can’t put a wage garnishment onto your salary. You should get about 30 days warning of the wage garnishment going into effect so check the date that it is due to begin and use your time wisely.

If you’re already finding it difficult financially, imagine how much worse it’s going to be if the IRS takes money from your monthly income before you get a chance to see it? It’s difficult enough to decide which bills get paid when your income no longer covers your monthly outgoings. If the IRS has a wage garnishment on your salary, then they take what they want and you have to make do with what’s left. As soon as you get that warning letter, notice of levy, you need to act fast.

Find the services of a reliable tax relief specialist. You need someone who is experienced in wage garnishment issues so that they know their way around the system. You don’t have time for them to learn the process on your case, you need someone who already knows the process and can stop the wage garnishment being put into place. These specialists will be able to guide you through the process, and mediate with the IRS on your behalf so that an amicable agreement is reached regarding your tax debt to the IRS.

As the recession tightens its grip, an increasing number of people are finding themselves in a wage garnishment situation. A recent news story from Lima, OH suggested that there was a 24% increase in these cases compared with the same 5-month period in 2008. Uncle Sam wants his money, if you didn’t have it to pay when it was due, chances are you don’t need him taking it from your wages so if you owe the IRS money, or you get a letter telling you that you are about to have a wage garnishment or wage levy attached to your salary – don’t wait until it’s too late to stop it.

Pick up the phone and call Mike Habib at 1-877-78-TAXES [1-877-788-2937] or send us an inquiry. Make an appointment with Mike Habib who knows what he’s doing, and ensure that the wage levy is stopped before it gets started!

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IRS to seek more regulation of tax preparers

The IRS reported that it is working on new rules that will require paid tax preparers to be licensed. This will improve tax compliance and reduce tax preparer fraud; IRS Commissioner Doug Shulman announced that on June 4, 2009.

A whopping eighty percent of taxpayers get help with their returns, either from paid tax preparers or tax software programs, Shulman told a congressional subcommittee. Surprisingly, tax preparers currently don’t have to be licensed, unless they represent clients in proceedings before the Internal Revenue Service.

Commissioner Shulman said he wants “better leverage” to make sure tax preparers act ethically.

“Paying taxes is one of the largest financial transactions individual Americans have each year, and we need to make sure that professionals who serve them are ethical and ensure the right amount of tax is paid,” Shulman said.

Commissioner Shulman said he would seek input from the industry before making his proposals to President Barack Obama by the end of the year. The proposals could include new regulations or new laws.

Our firm, Mike Habib EA Tax Relief Services, we are licensed to represent taxpayers before the IRS in all 50 states. If you have a tax problem, such as a wage garnishment levy, or a bank levy, contact us today regarding your tax relief options. Online at www.myirstaxrelief.com, or toll free at 1-877-78-TAXES

How small businesses can take maximum advantage of the new longer 2008 NOL carryback

Mike Habib, EA Tax Relief & Tax Problem Resolution

The American Recovery and Reinvestment Act of 2009, signed into law on Feb. 17, 2009 ( P.L. 111-5 , the “Recovery Act”) allows qualifying small business to choose a three- four- or five-year net operating loss (NOL) carryback period for certain losses instead of the usual two-year period. This article explains the details of this new provision and the planning that should be undertaken to ensure that a qualifying business chooses the carryback period that will yield maximum tax benefits for the business, taking into account the carryback itself and its tax picture for this year and previous years.

Background. A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions.

In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it’s allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward.

Different rules apply for certain types of losses. For example, a three-year carryback is allowed for an eligible loss, including an individual’s loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. A five-year carryback is allowed for a farming loss, a qualified disaster loss, and certain amounts related to specified disasters.

New law. For NOLs arising in tax years ending after Dec. 31, 2007, the Recovery Act permits small businesses to elect to increase the NOL carryback period for an applicable 2008 NOL (the “applicable NOL”) from 2 years to any whole number of years which is more than 2 and less than 6. (Code Sec. 172(b)(1)(H), as amended by Act Sec. 1211(a))

Observation: In other words, an eligible business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period.

A small business for this purpose is a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (under Code Sec. 448(c), as modified) for the three-tax-year period (or shorter period of existence) ending with the tax year before the year in which the loss arose are $15 million or less.

Observation: The increased carryback period can generate a refund for a small business because it allows the taxpayer to offset income that has already been taxed. Under pre-Recovery Act law, a taxpayer couldn’t use the NOL to offset the taxable income for the fifth, fourth, and third tax years preceding the NOL year, and so couldn’t have received a refund of the tax paid on those amounts.

Illustration 1: ABC, Inc., an eligible small business, has an “applicable NOL” for 2008. It had taxable income for 2005 (and paid the applicable federal income tax), but not for 2006 or 2007. ABC elects a 3-year carryback for the NOL, and carries it back to 2005. The NOL wipes outs ABC’s 2005 taxable income, entitling it to a refund of the tax it paid on that income. Under pre-Act law, the NOL could have been carried back only 2 years, to 2006 and 2007. Because ABC had no taxable income for either year, the carryback wouldn’t have resulted in a refund. ABC would have had to wait until later years when it had taxable income to get any tax benefit from the NOL.

Recommendation: The small business should use the tentative (or “quick”) carryback procedures (under which taxpayers can recover a refund attributable to an NOL carryback before IRS processes the return filed for the year the NOL arises to expedite the recovery of the refund. That way, the taxpayer won’t have to wait until IRS processes the return for the NOL year to get the refund. Presumably, the taxpayer will have to indicate the increased carryback election on the claim form (Form 1045 for individuals, Form 1139 for corporations).

Observation: The key factor in deciding whether to elect to carry an NOL back three, four, or five tax years should be which election will result in the largest tax savings. Thus, if the NOL is more than or at least equal to the taxpayer’s combined income for the third, fourth, and fifth years before the year in which it arose, then the loss should be carried back to the fifth year so that it can be used in all three years (see Illustration (2), below). On the other hand, if the NOL is less than the combined income for those three years, the taxpayer should try to carry it back to the year(s) in which his income was taxed at the highest rate so as to get the highest refund (see Illustration (3), below). In some cases, it may be better to not make the election because the largest tax savings will come from carrying the NOL back to the second year before the year in which the NOL arose (see Illustration (4), below).

Illustration 2: Taxpayer, a calendar-year C corporation, has an NOL of $200,000 for its 2008 tax year. It had taxable income of $50,000 in 2003, $50,000 in 2004, and $100,000 in 2005. It had taxable income of $25,000 in both 2006 and 2007. Taxpayer paid federal income taxes of $7,500 on its 2003 income, $7,500 on its 2004 income, $22,250 on its 2005 income, and $3,750 on its income for both 2006 and 2007. If Taxpayer elects to carry its 2008 NOL back five years, the NOL will completely offset its income for 2003, 2004, and 2005 ($50,000 + $50,000 + $100,000 = $200,000), and it will be entitled to a refund of $37,250 (the sum of the taxes it paid for those three years).

If Taxpayer carries the NOL back only four years, it will completely offset its income for 2004, 2005, 2006, and 2007 ($50,000 + $100,000 + $25,000 + $25,000 = $200,000), and will also result in a refund of $37,250 (the sum of the taxes paid for those four years), but it will mean that the income for 2007 will not be available to offset any NOL taxpayer may possibly have in 2009.

If Taxpayer carries the NOL back only three years, it will completely offset its income for 2005, 2006, and 2007 ($100,000 + $25,000 + $25,000 = $150,000), and $50,000 ($200,000 $150,000) of the loss can be carried forward to 2009. However, it will result in a refund of only $29,750 (the sum of the taxes paid in those three years).

Illustration 3: Assume the same facts as in Illustration (2), except that in 2005, Taxpayer had taxable income of $300,000 on which it paid federal income taxes of $100,250. If Taxpayer elects to carry the NOL of $200,000 back five years, it will completely offset the income of $50,000 for 2003 and 2004, and $100,000 of the income for 2005. Because the income for 2005 above $100,000 is taxed at a rate of 39%, this will result in a refund of $39,000 (39% of $200,000 [$300,000 $100,000]) for that year and a total refund of $54,000 ($7,500 for 2003, $7,500 for 2004, and $39,000 for 2005).

However, if Taxpayer carries the NOL back only three years to 2005, it will be entitled to a refund of $78,000 (39% of $200,000, the taxable income for 2005 over $100,000).

Observation: Because in Illustration (3), the income for 2003, 2004, and 2005 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2005 if carrying it back to that year will result in the largest tax refund.

Illustration 4: Assume the same facts as in Illustration (2), except that Taxpayer had taxable income of $300,000 in 2006. Taxpayer will get the largest refund if it does not elect to carry the NOL back beyond two years. By carrying it back to 2006, it will get a refund of $78,000 (39% of the taxable income for 2005 over $100,000). If Taxpayer elected to carry the NOL back five years, it would get a refund of only $37,250 as shown in Illustration (2). If it carries the NOL back four years, it would get a refund of $49,250 ($7,500 for 2004, $22,250 for 2005, and $19,500 [39% of $50,000] for 2006). If it elected to carry the NOL back three years, it would get a refund of $61,250 ($22,250 for 2005 and $39,000 [39% of $100,000] for 2006).

Observation: Because in Illustration (4), the income for 2006 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2006 if carrying it back to that year will result in the largest tax refund.

What is an “applicable 2008 NOL”? An applicable 2008 NOL is the taxpayer’s NOL for:

  • any tax year ending in 2008, or,
  • at the taxpayer’s election, any tax year beginning in 2008. (Code Sec. 172(b)(1)(H)(ii)(II))

An election under Code Sec. 172(b)(1)(H), made in the manner prescribed by IRS, must be made by the due date (including extensions) for filing the taxpayer’s return for the tax year of the NOL. (Code Sec. 172(b)(1)(H)(iii)) Any such election is irrevocable. Additionally, any carryback election under Code Sec. 172(b)(1)(H) may be made only with respect to one tax year. (Code Sec. 172(b)(1)(H)(iii))

Excess interest losses. If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an “excess interest loss” (i.e., interest allocable to the CERT) for a “loss limitation year,” the loss is an NOL. It’s subject to the regular NOL carryback and carryover rules, except that it can’t be carried back to a tax year before the year in which the CERT occurred. The “loss limitation year” is generally the tax year in which the CERT occurred (the “CERT year”) and each of the next two tax years.

Under the Recovery Act, if an eligible small business makes a Code Sec. 172(b)(1)(H) election to increase the carryback for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.” (Code Sec. 172(b)(1)(H)(i)(II))

“Eligible losses.” Code Sec. 172(b)(1)(F) prescribes a 3-year NOL carryback for “eligible losses,” including an individual’s loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. The Recovery Act provides that Code Sec. 172(b)(1)(F) doesn’t apply to an applicable 2008 NOL for which a small business taxpayer has made a Code Sec. 172(b)(1)(H) election. (Code Sec. 172(b)(1)(H)(i)())

Alternative tax net operating loss. An alternative tax net operating loss deduction (ATNOLD or ATNOL deduction) is allowed for alternative minimum tax () purposes instead of the regular NOL deduction.

Observation: The regular tax NOL deduction and the ATNOLD are governed by a single carryback period. Thus, the increased carryback elected for the 2008 NOL also applies for the ATNOLD in computing AMTI.

Transition rules. Act Sec. 1211(d)(2) provides that for a NOL from a tax year ending before Feb. 17, 2009:

  • any election made under Code Sec. 172(b)(3) to waive the carryback period with respect to such loss may be revoked before Apr. 18, 2009 (the date which is 60 days after the Feb. 17, 2009 enactment date);
  • any election to increase the carryback period under Code Sec. 172(b)(1)(H) is treated as timely made if made before Apr. 18, 2009; and
  • any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed before Apr. 18, 2009.

Anti-abuse rules. Act Sec. 1211(c) gives IRS authority to issue rules necessary to prevent the abuse of the purposes of Act Sec. 1211, including anti-stuffing rules, anti-churning rules (including rules relating to sale–leasebacks), and rules similar to the rules under Code Sec. 1091 relating to losses from wash sales.

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