Tax Relief Blog

IRS urged to increase standard mileage rates

June 19, 2008 | Mike Habib, EA

IRS urged to increase standard mileage reimbursement rates

Several requests have been made to the IRS in recent days to increase its standard mileage rates.
The standard mileage rate for use of a car (including vans, pickups, and panel trucks) is currently 50.5 cents per mile for business-related travel, and 19 cents per mile for medical or moving expense-related travel. Employers paying a mileage allowance in excess of the standard rate must report the excess on Form W-2. The IRS generally adjusts the standard mileage rates annually, based on a yearly study of the fixed and variable costs of operating an automobile.

On May 19, 2008, Sen. Charles Schumer (D-NY) introduced a bill in the Senate called the “Reimburse Our American Drivers (ROAD) Act of 2008,” that would temporarily increase the standard mileage rate to 70 cents per mile on travel for business, medical, and moving expense-related purposes. Federal employees would also be allowed to use this rate. The rate would be in effect during all of 2008. The legislation has been referred to the Senate Finance Committee for consideration [S. 3032, 5/19/2008].

Claim of right relief under Code Sec. 1341(a)

June 19, 2008 | Mike Habib, EA

Appeals Court overturns oil company’s large claim of right refund
Texaco v. U.S. (CA 9 6/13/2008) 101 AFTR 2d ¶ 2008889

The Court of Appeals for the Ninth Circuit has reversed a district court award of an over $100 million refund claim to a large oil company, which had sought claim of right relief under Code Sec. 1341(a) because it was required to pay out pursuant to a settlement agreement sums that it had previously included in its gross income. The district court agreed with the taxpayer and ordered the government to pay the refund. The Ninth Circuit has now reversed, finding that the inventory exception in Code Sec. 1341(b)(2) barred the taxpayer from using Code Sec. 1341(a).

Background. Under the claim of right doctrine, income received without restrictionmust be reported in the year received, even if there’s a possibility it may have to be repaid in a later year. If it is repaid, the repayment is deductible in the year paid. However, various factors may prevent the taxpayer from receiving enough benefit from the deduction to offset the tax paid on the receipt of the income.

Code Sec. 1341 provides relief to taxpayers who received income in one year under the claim of right rule and were required to make refunds in another year at a time when the tax benefits of the repayment were less than the tax paid in the earlier year. It corrects the inequity by a reduction in the tax for the year in which the repayment is made. In essence, the amount of the tax reduction is equal to the amount the taxpayer would have saved if he had never received the income and never made the repayment, except for the loss of interest or other compensation for the use of his money.

For a claim of right relief to apply: (1) an “item” must have been “included in gross income for a prior taxable year (or years),” (2) “because it appeared that the taxpayer had an unrestricted right to such item,” (3) a “deduction” must be “allowable for the taxable year,” (4) “because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item,” and (5) “the amount of such deduction” must exceed $3,000. (Code Sec. 1341(a))

Company Car Benefit

June 19, 2008 | Mike Habib, EA

Why the company car is still a valued fringe benefit for company owners and key employees

A company car has long been an extremely popular “perk” or fringe benefit for company owners and key employees of medium sized or small enterprises. As this article demonstrates, this benefit yields substantial nontax as well as tax benefits for the owner or employee, as well as tax deductions for the employer.

To illustrate the benefits of the company auto, let’s assume that Mr. Smith, the owner-employee of Widget, Inc., expects to drive an auto 8,500 miles a year for business (e.g., to visit customers, check on local suppliers and distributors), and 7,000 for personal driving (e.g., commuting and weekend trips; his family owns other cars used for other personal mileage). That’s roughly 55% business and 45% personal usage. We’ll assume Widget’s having a good year and Smith wants to project a successful image to his business contacts, so Widget buys or leases a new $50,000 auto for his business/personal use.

The unique benefits that flow from the arrangement are as follows:

SFR – Substitute for return

June 19, 2008 | Mike Habib, EA

IRS may prepare substitute returns in worker classification cases
Chief Counsel Advice 200822026

A Chief Counsel Advice (CCA) has concluded that, in employment tax cases where worker classification issues are present, revenue officers have authority under Code Sec. 6020(b) to prepare employment tax returns, but the requirements of Code Sec. 7436 must be met before assessment.

Background. Where there is an actual controversy involving a determination by IRS that one or more individuals performing services for the taxpayer are employees as part of an examination, Code Sec. 7436 gives the Tax Court jurisdiction to determine certain “worker classification issues” (i.e., the proper amount of the additions to tax, additional amounts, and penalties that relate to the employment tax with respect to determinations of worker classification and whether the taxpayer is entitled to relief under § 530 of the Revenue Act of 1978). To meet Code Sec. 7436 ‘s requirements, certain procedures must be followed before assessment of employment taxes. They are spelled out in Notice 2002-5, 2002-1 CB 320. For example, Notice 2002-5 provides generally that a taxpayer will first receive a “30-day” letter listing the proposed employment tax adjustments to be made and describing the taxpayer’s right either to agree to the proposed adjustments or to protest the proposed adjustments to the IRS’s Appeals function (Appeals) within 30 days of the date of the letter.

Tax Scams for 2008 – Fuel Tax Credit Scams

June 16, 2008 | Mike Habib, EA

IRS Announces ‘Dirty Dozen’ Tax Scams for 2008

Phishing Scams, Fuel Tax Credits, Frivolous Arguments, Hiding Income Offshore Top the 2008 Tax Scams

WASHINGTON — The Internal Revenue Service today issued its 2008 list of the 12 most egregious tax schemes and scams, highlighted by Internet phishing scams and several frivolous tax arguments.

Topping this year’s list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers. New to the “Dirty Dozen” this year is a scheme, which IRS auditors discovered, that relates to unreasonable and/or excessive fuel tax credit claims.

Tax Help, Tax Problems, Tax Attorney

June 14, 2008 | Mike Habib, EA

Tax Problem Resolution Services

I specialize in resolving tax problems for individuals, small-size companies, mid-size companies, and fortune 1,000 companies. I represent individuals and businesses before the IRS and any taxing authority, therefore the taxpayer does not have to deal with the IRS directly.

Mike Habib, EA

Specialized tax breaks for the farming industry

June 4, 2008 | Mike Habib, EA

Tax provisions directly affecting farmers in the Heartland, Habitat, Harvest, and Horticulture Act of 2008

The recently enacted “Heartland, Habitat, Harvest, and Horticulture Act of 2008” (the 2008 Farm Act) contains a package of tax changes including specialized tax breaks for the farming industry (along with a crackdown on farm losses) and new and modified credits related to the production of certain fuels, among other things. Here’s a summary of the key tax provisions in the 2008 Farm Act that directly affect farmers:

Conservation reserve payments made after 2007 are not subject to self-employment tax if received by an individual who is getting Social Security retirement or disability payments.
The favorable tax treatment of capital gain property donated for qualified conservation is extended for two years (through 2009).
A new deduction is allowed for endangered species recovery expenses incurred after 2008.
A new tax credit is created for the development of cellulosic biofuels, which are biofuels produced from agricultural waste, wood chips, switch grass and other non-food feedstocks. This credit, available for fuel produced after 2008 and through 2012, is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year. The amount of the credit per gallon is $1.01, except for cellulosic biofuel that is alcohol. For cellulosic biofuel that is alcohol, the $1.01 credit amount is reduced by (1) the credit amount applicable for such alcohol under the alcohol mixture credit in effect at the time cellulosic biofuel is produced, and (2) in the case of cellulosic biofuel that is ethanol, the credit amount for small ethanol producers as in effect at the time the cellulosic biofuel fuel is produced.
The 51¢ per-gallon incentive for ethanol is reduced to 45¢ per gallon for calendar year 2009 and thereafter. This reduction is subject to an exception geared to ethanol production.
A new tax credit is created for agricultural chemicals security. The new law provides retailers of agricultural products and chemicals and manufacturers, formulators, or distributors of certain pesticides a business tax credit for 30% of costs for the protection of such chemicals or pesticides. Such protection costs include employee security training and background checks, installation of security equipment, and computer network safeguards. The credit has a $2 million annual limit and a per facility limitation of $100,000 (reduced by credits received for the five prior tax years). This credit is effective for expenses paid or incurred after May 22, 2008, and before Jan. 1, 2013.
Qualifying mutual ditch, reservoir, or irrigation company stock may be eligible for Code Sec. 1031 treatment. This provision is effective for exchanges after May 22, 2008.
Temporary assistance to victims of the 2007 Kansas tornado disaster is provided, including increased ability to deduct personal losses, increased business expense deductions, and help for affected businesses that continued to pay their employees after the disaster struck.
The amount of farming losses (other than those losses arising because of fire, storm losses, etc.) that a taxpayer may use to reduce other non-farming business income is limited for certain taxpayers. For tax years beginning after 2009, the farming loss of a non-C corporation taxpayer for any tax year in which any applicable subsidies are received will be limited to the greater of (1) $300,000 ($150,000 in the case of a married person filing a separate return), or (2) the taxpayer’s total net farm income for the prior five tax years. Applicable subsidies are (a) any direct or counter-cyclical payments under title I of the Heartland, Habitat, Harvest, and Horticulture Act of 2008 (or any payment elected in lieu of any such payment), or (b) any Commodity Credit Corporation (CCC) loan. Total net farm income is an aggregation of all income and loss from farming businesses for the prior five tax years.
For tax years beginning after 2007, the farm optional method and nonfarm optional method for computing net earnings from self-employment are modified so that electing taxpayers may pay more in optional self-employment taxes and thus become eligible for Social Security benefits.
The CCC is required to always provide IRS and the farmer with information returns showing the amount of market gain the farmer realizes when he or she repays a CCC market assistance loan.

Limitation on farming losses in the Heartland, Habitat, Harvest, and Horticulture Act of 2008

The recently enacted “Heartland, Habitat, Harvest, and Horticulture Act of 2008” (the 2008 Farm Act) contains a package of tax incentives to promote conservation investment in farm country. Those incentives are paid for, in part, by a new limitation on farming losses for certain taxpayers. In essence, the new law limits agricultural losses that can be claimed to the greater of $300,000 ($150,000 for a married person filing separately) or the net farm income for the previous five years if the taxpayer receives any 2008 Farm Act commodity payments or Commodity Credit Corporation loans. Here is a closer look at this new limitation.

Except for passive activity rules in Code Sec. 469, the amount of farming losses that a taxpayer may claim is not limited under pre-2008 Farm Act law. The new provision, which is effective for tax years beginning after December 31, 2009, alters that situation by limiting the amount of farming losses that a taxpayer, other than a C corporation, may use to offset non-farm business income. The limitation amount is the greater of $300,000 ($150,000 in the case of a married person filing a separate return) or the total net farm income the taxpayer has received over the last five years. For example, assume a taxpayer has $300,000 of net farm income and $700,000 of non-farm income in 2010, and $1 million of net farm income in each tax year 2011 to 2014. In 2015, he incurs a $7 million farming loss. Under the new provision, his farming loss in 2015 is limited to the greater of (1) $300,000 or (2) $4.3 million (total net farm income for the prior five tax years). The $4.3 million of the farming loss allowed in 2015 may be carried back to the prior five tax years.

Losses that are limited in a particular year may be carried forward to subsequent years.
For partnerships and S corporations, the limit is applied at the partner or shareholder level. Farming losses arising by reason of fire, storm, or other casualty, or by reason of disease or drought, are disregarded for purposes of calculating the new limitation.

Tax Provisions in the Heartland, Habitat, Harvest, and Horticulture Act of 2008

June 4, 2008 | Mike Habib, EA

Overview of the tax changes in the Heartland, Habitat, Harvest, and Horticulture Act of 2008

The recently enacted “Heartland, Habitat, Harvest, and Horticulture Act of 2008” (the 2008 Farm Act) contains a package of tax changes including specialized tax breaks for the farming industry (along with a crackdown on farm losses) and new and modified credits related to the production of certain fuels, among other things. Here’s a summary of the key tax provisions in the 2008 Farm Act:

Conservation reserve payments made after 2007 are not subject to self-employment tax if received by an individual who is getting Social Security retirement or disability payments.
The favorable tax treatment of capital gain property donated for qualified conservation is extended for two years (through 2009).
A new deduction is allowed for endangered species recovery expenses incurred after 2008.
There is a one-year cut in the tax rate for a corporation’s qualified timber gain. For tax years ending after May 22, 2008 and beginning on or before May 22, 2009, a 15% alternative tax applies on the portion of a corporation’s taxable income that consists of qualified timber gain (or, if less, the net capital gain) for a tax year. In addition the rules for REITs (real estate investment trusts) holding timber property are liberalized temporarily.
A new tax credit is created for the development of cellulosic biofuels, which are biofuels produced from agricultural waste, wood chips, switch grass and other non-food feedstocks. This credit, available for fuel produced after 2008 and through 2012, is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year. The amount of the credit per gallon is $1.01, except for cellulosic biofuel that is alcohol. For cellulosic biofuel that is alcohol, the $1.01 credit amount is reduced by (1) the credit amount applicable for such alcohol under the alcohol mixture credit in effect at the time cellulosic biofuel is produced, and (2) in the case of cellulosic biofuel that is ethanol, the credit amount for small ethanol producers as in effect at the time the cellulosic biofuel fuel is produced.
The 51¢ per-gallon incentive for ethanol is reduced to 45¢ per gallon for calendar year 2009 and thereafter. This reduction is subject to an exception geared to ethanol production.
A new tax credit is created for agricultural chemicals security. The new law provides retailers of agricultural products and chemicals and manufacturers, formulators, or distributors of certain pesticides a business tax credit for 30% of costs for the protection of such chemicals or pesticides. Such protection costs include employee security training and background checks, installation of security equipment, and computer network safeguards. The credit has a $2 million annual limit and a per facility limitation of $100,000 (reduced by credits received for the five prior tax years). This credit is effective for expenses paid or incurred after May 22, 2008, and before Jan. 1, 2013.
Qualifying mutual ditch, reservoir, or irrigation company stock may be eligible for Code Sec. 1031 treatment. This provision is effective for exchanges after May 22, 2008.
For property placed in service after 2008 and before 2014, all racehorses are classified as three-year property for depreciation purposes, regardless of their age.
Temporary assistance to victims of the 2007 Kansas tornado disaster is provided, including increased ability to deduct personal losses, increased business expense deductions, and help for affected businesses that continued to pay their employees after the disaster struck.
The amount of farming losses (other than those arising because of fire, storm losses, etc.) that a taxpayer may use to reduce other non-farming business income is limited for certain taxpayers. For tax years beginning after 2009, the farming loss of a non-C corporation taxpayer for any tax year in which any applicable subsidies are received will be limited to the greater of (1) $300,000 ($150,000 in the case of a married person filing a separate return), or (2) the taxpayer’s total net farm income for the prior five tax years. Applicable subsidies are (a) any direct or counter-cyclical payments under title I of the Heartland, Habitat, Harvest, and Horticulture Act of 2008 (or any payment elected in lieu of any such payment), or (b) any Commodity Credit Corporation (CCC) loan. Total net farm income is an aggregation of all income and loss from farming businesses for the prior five tax years.
For tax years beginning after 2007, the farm optional method and nonfarm optional method for computing net earnings from self-employment are modified so that electing taxpayers may pay more in optional self-employment taxes and thus become eligible for Social Security benefits.
The CCC is required to always provide IRS and the farmer with information returns showing the amount of market gain the farmer realizes when he or she repays a CCC market assistance loan.
For large corporations (those with assets of at least $1 billion), estimated tax payments due in July, August, and September of 2012 are increased by 7.75% of the payment otherwise due, and the next required payment is reduced accordingly.

Please keep in mind that this is only a summary of the tax changes in the new law. If you would like to discuss any of these provisions in greater detail, please do not hesitate to contact us.

Tax relief for Peace Corps

June 4, 2008 | Mike Habib, EA

Tax relief for Peace Corps volunteers and employees in the Heroes Earnings Assistance and Relief Tax Act of 2008

The recently enacted “Heroes Earnings Assistance and Relief Tax Act of 2008” (the 2008 Heroes Act) contains a wide-ranging package of tax cuts for military personnel and veterans. In addition, a provision in the 2008 Heroes Act will potentially enable more Peace Corps employees and volunteers to qualify for the homesale exclusion on the sale of their principal home. Here are the details of the new provision affecting Peace Corps volunteers.

An individual taxpayer may exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for the exclusion, the taxpayer must have owned and used the residence as a principal residence for at least two of the five years ending on the sale or exchange. A taxpayer who fails to meet these requirements by reason of a change of place of employment, health, or, to the extent provided under regulations, unforeseen circumstances is able to exclude an amount equal to the fraction of the $250,000/$500,000 that is equal to the fraction of the two years that the ownership and use requirements are met.

There are special rules relating to members of the uniformed services, members of the Foreign Service of the United States, and employees of the intelligence community that allow for an option to suspend the five-year test period for ownership and use during any period these individuals or their spouses serve on qualified official extended duty. This means that they may be able to meet the two-year use test even if, because of their service, they did not actually live in the home for at least the required two years during the five-year period ending on the date of sale. The five-year period can’t be extended by more than ten years.

Military Personnel Tax Benefits

June 4, 2008 | Mike Habib, EA

Pension plan benefits for military personnel in the Heroes Earnings Assistance and Relief Tax Act of 2008

The recently enacted “Heroes Earnings Assistance and Relief Tax Act of 2008” (the 2008 Heroes Act) provides several important pension plan benefits for military personnel. Specifically, the Act makes the following pension plan liberalizations for members of the military and their families:

Modifies the law which provides certain retirement plan protections for reservists who are called to active duty and who are able to return to their civilian employers after serving our country. The new law requires tax-qualified retirement plans to provide that if a participant dies while performing qualified military service, his or her survivors would be entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would have been provided had the participant resumed employment and then terminated employment on account of death. Similar rules apply to 403(b) annuities and 457(b) plans. Additionally, the new law provides that retirement plans can permit individuals who leave for qualified military service and cannot be reemployed on account of death or disability to be treated as if they had been rehired as of the day before death or disability and then had terminated employment on the date of death or disability. These changes apply to deaths or disabilities occurring after 2006.
Makes permanent the expiring Internal Revenue Code provision that permits active duty reservists to make penalty-free withdrawals from retirement plans.
Permits a military death gratuity or amount received under the Servicemembers’ Group Life Insurance (SGLI) program to be rolled over to a Roth IRA or Coverdell education savings account, notwithstanding the contribution limits that otherwise apply.

Other military tax benefits in the Heroes Earnings Assistance and Relief Tax Act of 2008

The recently enacted “Heroes Earnings Assistance and Relief Tax Act of 2008” (the 2008 Heroes Act) contains a wide-ranging package of tax cuts for military personnel and veterans. While many of the military tax benefits are pension plan-related, several important changes are not. Specifically, the 2008 Heroes Act makes the following nonpension-related liberalizations for members of the military and their families: