The West is Best

When it comes to business and tax climate readings – a new report from the Tax Foundation concludes, for the third year in a row, that Wyoming offers the most hospitable tax climate, and six of the ten best states are found in the west.

Alaska, Florida, Nevada, South Dakota, Washington and Wyoming – all states found in the Tax Foundation’s top ten, have no personal income tax.  And better yet, Alaska doesn’t even levy a sales tax!

Northeastern states have the dubious distinction of anchoring the “bottom” ten – notably, New York which finishes dead last, with Rhode Island, Vermont, Connecticut, New Jersey and Maryland not far behind.

And let us not forget California, which also languishes in the “bottom” ten.

Side Deal Renders Contributions Non-Deductible

So you think you can donate to a charity, and at the same time enter into a “side agreement” with that charity to return the asset to you if IRS disallows your deduction?

It won’t fly.

See the recent decision in Graev, where the Tax Court ruled that a taxpayer wasn’t entitled to charitable deductions for contributions of a façade easement on an historic property, or his related cash donation to a charity, because of the existence of a “side letter” which stated that the charity would return the cash and remove the easement if the IRS disallowed the deductions.

The gifts were “conditional,” and thus not deductible, ruled the Court.

IRS ‘Shutdown’ Rules

IRS reminds you that due to the current lapse in appropriations, IRS continues to operate, though on somewhat of a limited basis.  Nonetheless, they admonish taxpayers to continue to meet their tax obligations in the mean time.  That means that you should keep filing returns and making all relevant deposits.  In particular, folks who requested an extension of time to file their 2012 returns should still consider October 15, 2013 their operative deadline.

But don’t expect any live telephone “customer service” during the shutdown.  And if you’re under audit, consider the auditor-imposed deadlines and scheduled meetings to be essentially postponed until the resumption of normal operations.

Maintain adherence to filing deadlines for both electronically filed and paper filed returns. But don’t expect any refunds to hit your mail box until all of the folks return to work.

City of Los Angeles Offers Amnesty

If you live in L.A. and are a bit behind on your taxes, check out the recently-announced City of Los Angeles tax amnesty program.

According to a press release recently issued by Mayor Garcetti, “This business friendly program will assist those businesses that may have fallen behind in their payments or have not previously registered with the City,” and can allow folks to avoid up to 40% in penalties.

The amnesty program runs from September 1 through December 31, 2013, and applies to:

  • Business tax
  • Telephone, electricity & gas users tax
  • Commercial tenants’ occupancy tax
  • Transient occupancy tax
  • Parking occupancy tax

The city estimates this largesse will generate approximately $5.5 million for its coffers.

Recent Developments in California

Principal residence foreclosures: Recent legislative action has resulted in no extension of the “cancellation of debt” exclusion associated with a principal residence.  Although Federal law allows for relief of this nature through 2013, no similar 2013 benefit applies in California.

Electronic filing expanded: The Franchise Tax Board will begin allowing for the electronic filing of Forms 541 beginning January 1, 2014, for the 2013 tax year.  Previously, only paper filings of these forms were permitted.

Check That Withholding Before Year-End

As the clock winds down on 2013, taxpayers should carefully examine their tax withholding/estimated tax payment situations.  This year may be an especially critical year in this regard, because for the first time a new tax kicks into many taxpayers’ pictures:  the 3.8% Medicare surtax applicable to net investment income.

If you’re having an especially good year, say, in the market, and/or if the new surtaxes may apply to you – check the level of your Federal income tax withholding, in comparison to the amount of payments required to keep you out of underpayment penalty trouble.  Recall that the use of estimated tax payments doesn’t provide the same flexibility as withholding.  An individual who has underpaid an estimated tax installment generally cannot avoid the penalty by increasing one or more estimates for later periods.  But income tax withheld by an employer is treated under the law as paid in equal amounts on each of the four installment dates – even in situations in which a large amount of “extra” tax is withheld late in the year.

IRS Releases Stats

Those of you who are curious about how individuals and businesses are doing financially, according to the IRS, might find it interesting to view the recently-released summer 2013 issue of the Statistics of Income Bulletin.  IRS produces this bulletin on a quarterly basis – articles included within provide recent data available from various tax and information returns filed by U.S. taxpayers.  This most recent bulletin describes, among other things:

  • Average individual W-2 earnings rose slightly from $40,532 in 2008 to $40,892 in 2010.  And something like 65 million taxpayers with W-2 income participated in an employer-sponsored retirement savings plan in 2010, making $209.2 billion in direct contributions for the year.
  • Approximately 23.4 million individual income tax returns reported nonfarm sole proprietorship activity for tax year 2011.  Profits rose to $282.6 billion for the year, a 5.6% increase from 2010.

Payment of Tax, or a Mere Deposit?

When it comes time to send the IRS some dough, folks need to carefully consider their situation and circumstances, relative to whether what they send is actually a payment of tax, or a mere “deposit.”

When IRS receives the money, it has to decide to classify the receipt as one or the other.  If a remittance is determined to be a “deposit,” it is treated as a cash bond, which IRS merely holds, and a taxpayer may seek a refund of the deposit at any time..  But if a remittance is deemed a payment, the taxpayer may only recover the money by timely filing a claim for refund.

In determining whether a remittance is a deposit or a tax payment, courts apply a facts and circumstances test, which particularly includes the taxpayer’s intent in remitting the money.

Check out the recent decision in Leone Syring v. U.S. for how this works, and what happens when the taxpayer doesn’t dot the I’s and cross the T’s.

IRS ‘Obamacare’ Website

Almost everything you wanted to know about the “Affordable Care Act” can be found at a new IRS website on the matter:

Here can be found tax benefits and responsibilities of individuals, employers, and others.  And not only current tax implications are discussed, but also those which will not hit until 2014 and later.

IRS has also issued Publication 5093: Health Care Law Online Resources, for your edification.

Another S-Corp Shareholder Loses on the ‘Salary Versus Distribution’ Question

Pigs get fat, and hogs get slaughtered – an age old maxim proven, once again, in the recent Tax Court Decision in the Glass Blocks Unlimited case.

Seems the corporation made a bunch of payments to its President and sole shareholder, treating none of those payments as salaries or wages, filing no Forms 941 and no Forms W-2 for the years 2007 or 2008, notwithstanding the facts that the shareholder was the corporation’s only officer, its sole full time worker, who performed substantially all of the work necessary to operate the business, including processing orders, collecting payments, arranging shipment of goods, managing inventory, and handling customer relations.  According to the Court, “His services generated all of petitioner’s income.”

In concluding that payments to the shareholder were more correctly “wages,” the Court also didn’t buy the arguments advanced that certain of the corporate distributions represented repayment of loans from the shareholder because, among other things, no promissory notes had been prepared and interest on the “loans” was not required to be paid.