Tax Tip: Home Office Deduction Safe Harbor

In a newly issued Revenue Procedure 2013-13, effective for tax years starting on or after 1/1/2013, the IRS has created a safe harbor for the home office deduction calculation. The safe harbor is $5 times the home office square footage, for a maximum of $1,500. The safe harbor is in lieu of the substantiation of actual expenses otherwise required under IRC 280A.

If the safe harbor is used:

• The safe harbor is the total deduction. No depreciation or any other costs can be taken in addition to the safe harbor amount.
• The taxpayer can take 100% of the mortgage interest and property taxes as an itemized deduction on schedule A. No reduction of these expenses are required.
• Disallowed home office expenses that were carried over from prior years cannot be used in the year the safe harbor is taken. These amounts continue to be carried over and are usable in a year in which actual (substantiated) expenses are claimed.
• The taxpayer can elect safe harbor or substantiated expenses year-by-year.

Tax Tip: Proof of Gross Income

During the course of a tax audit, the agent will add up all bank deposits, back out identifiable non-tax items (such as account transfers) and compare that total to the gross income reported on the tax return. The excess of deposits over reported income is deemed to be unreported taxable income unless proven otherwise. Frequently, taxpayers find themselves trying to explain undocumented deposits. A loan from a friend, a gift from a relative, and other clearly nontaxable deposits will be included in the taxpayer’s income unless proof of Continue reading »

The Importance of Sourcing Software License Royalty Income

If a U.S. company pays a royalty to a foreign company for the use of a software license, there is an issue regarding whether the royalty payment is considered to be U.S. source income to the foreign licensor. If the royalty is considered to be U.S. source income to the foreign licensor then I.R.C. Section 1442 U.S. nonresident tax withholding generally will apply at a rate of Continue reading »

Fiscal Cliff Legislation Lets D.C. Empowerment Zone Incentives Expire

The “Fiscal Cliff” legislation (H.R. 8: American Taxpayer Relief Act of 2012) enacted by Congress earlier this month did not extend the tax benefits provided pursuant to Internal Revenue Code sections 1400 through 1400C with respect to District of Columbia Enterprise Zones (“DC Zones”).  Although the legislation retroactively extended the Federal Empowerment Zone incentives for calendar years 2012 and 2013, the December 31, 2011 expiration date for the designation of certain DC Zones being eligible for empowerment zone designation was left unaddressed by the Fiscal Cliff legislation.

As a result, the following DC Zone incentives will no longer be available for tax years beginning on or after December 31, 2011: Continue reading »

Cloudy with a Chance of Sales Tax in the DC Metro Area

The taxation of cloud computing services is an evolving area of sales and use tax.  Cloud computing, which includes a wide variety of service offerings, generally allows businesses the potential to reduce IT costs by outsourcing hardware and software maintenance and support.  Still, remote access to software, or “software as a service” (SaaS), is only a small part of what is referred to as “cloud computing.”  The term also includes offerings such as Continue reading »

Mileage Rate Increase

Effective January 1, 2013, the IRS increased the mileage rate to $0.565 per mile for business miles driven. Read more about it here.

New Roth Conversion Provisions in 401(k) Retirement Plans

The legislation to avoid the “Fiscal Cliff” did not spawn widespread retirement plan changes as many had feared. However, there is a minor change related to Roth conversions in eligible retirement plans. 401(k) plans that allowed for Roth 401(k) contributions also allowed for the conversion of participant accounts to Roth accounts, but only if the participant had a distributable event. Such events are typically termination of employment, reaching normal retirement age, reaching early retirement age, permanent disability, death, or attainment of age 59 ½. Under the new legislation, participants can Continue reading »

EFT Payment Requirement Threshold Reduced to $5,000

The District of Columbia requires business taxpayers to make tax payments over a certain threshold by electronic funds transfer (“EFT”).  The most recent guidance issued by the D.C. Office of Tax and Revenue regarding EFT payments says that business taxpayers must pay EFT for all tax payments exceeding $10,000.  However, over the last couple of months the Office of Tax and Revenue have been issuing notices to business taxpayers informing them that the EFT requirement has been decreased to payments exceeding $5,000.  Although the Office of Tax and Revenue is authorized by statute to require EFT payments at this threshold, it has yet to issue a general notification to taxpayers or practitioners informing them of this new requirement. 

According to conversations we have had with the Office of Tax and Revenue, their system will generate the 10% non-compliance penalty when a payment is submitted by check over $5,000.  Although there is a reasonable cause waiver to the penalty that we think would obviously apply in these circumstances (i.e., no notice to taxpayers), the waiver requires a written request that could take some time in getting approved. 

Taxpayers that suspect that they will have upcoming payments over $5,000 should register for making EFT payments on the Office of Tax and Revenue’s Electronic Taxpayer Service Center (eTSC) well advance of the payment due date.  It can take 7-10 business days to receive the ID and password for the website, which are sent separately to taxpayers via regular mail.  Taxpayers can call the Office of Tax and Revenue to receive their ID earlier, but the ID still may not be available for up to 7 business days after the registration is submitted. 

Therefore, we would recommend completing the eTSC registration early if there is any chance that it will have an upcoming payment over $5,000.  Please contact Aronson’s tax department if you have any questions.

Caution: Nonresident Foreign Individuals Must Comply with New IRS Documentation Requirements when Filing a Form W-7 U.S. TIN Application

Depending on a foreign individual’s inbound activities in the United States, the person could be required to obtain a U.S. Taxpayer Identification Number (TIN) if the person is not eligible to obtain a U.S. Social Security Number (SSN). Foreign individuals who are required to obtain a U.S. Taxpayer Identification Number must file a Form W-7 with the Internal Revenue Service (IRS).

A U.S. TIN generally is required if a nonresident foreign individual is required to file a U.S. federal tax return on the Form 1040-NR. A nonresident foreign individual generally must file a Form 1040-NR if the person has income that is effectively connected with a U.S. trade or business. A nonresident foreign individual who has ordinary trade or business income from a U.S. partnership generally is considered to have effectively connected income that must be reported on a Form 1040-NR.

A U.S. TIN also could be required if Continue reading »

Same-Sex Couples: Protect Your Rights to Refund!

The Defense of Marriage Act (DOMA) has been repeatedly challenged in federal court, specifically pertaining to Section 3, which codifies that same-sex marriages are not recognized for any federal purpose. So far, eight courts, including the First and Second Circuit Courts of Appeal (these two cover New York and all states comprising New England) have ruled that Section 3 of DOMA is unconstitutional.

The Department of Justice (DoJ) under the Obama administration agreed that Section 3 is unconstitutional and would no longer defend it in court, although the DoJ would continue to enforce the provision so long as it remains the law.

The case specific to taxes was heard in the Second Circuit Court of Appeals (Windsor vs. United States). Under New York state law, Edith Windsor was legally married to Thea Spyer, her same-sex partner. In 2009 Spyer died and, because there is no martial exemption for same-sex couples, Spyer’s estate paid $363,000 in estate taxes. Windsor sued the federal government for refund, claiming an inherent unfairness in that the estate was subject to federal tax in the same manner as for an unmarried individual, even though they were legally married in the eyes of the state. The lower court ruled in Windsor’s favor, and the appeals court upheld the ruling. On December 7, 2012 the Supreme Court has agreed to hear her challenge to DOMA, and a ruling is expected by June 2013.

How does all of this affect you?

If DOMA is ruled unconstitutional, it could open up claims for federal (and possibly state) income, estate, and gift tax refunds. To claim a refund, an amended return must be filed on or before the three-year anniversary of the due date (including extensions, if one was filed) of the original return. Once this window closes, any refund claim is barred.

For most individuals, 2010 is the oldest year for which an amended return can be filed and will expire on April 15, 2013. Since odds are high that there Supreme Court will not rule by then, the procedure is to file protective claims of refund for 2010, and submit those before the refund statute expires. The IRS and state governments will hold the returns in abeyance until the Court makes its ruling. Should the Court rule that Section 3 of DOMA is unconstitutional, the returns will be processed and refunds issued, even though by then the statute of limitations will have expired.

If you were legally married in 2010, now is the time to explore whether or not filing an amended return would potentially be beneficial. We are here to assist you with the evaluation of potential tax savings and to prepare the protective claims of refund. Our tax controversy lead partner, Larry Rubin, has extensive experience with the tax issues facing same-sex couples. For further information, please contact him at 301.222.8212.