New Markets Tax Credit Benefits Nonprofits

The New Markets Tax Credit (“NMTC”), under IRC §45D, was created as part of the Community Renewal Tax Relief Act of 2000. This act encouraged qualified equity investments (“QEIs”) in community development entities (“CDEs”) directed towards low-income communities. President Obama recently extended the NMTC in January of 2013 as a part of the American Taxpayer Relief Act of 2012. The NMTC rewards investors with a 39% tax credit of the total QEI, which is split over a seven year period. There is also additional return to investors who make a low-return project viable.

The CDEs also benefit with a 25% reduced cost of borrowing and lower interest rates than could otherwise be attained. Programs must apply to become CDEs; awards totaling up to 3.5 billion are announced annually. The stimulated investments lead to job and material improvement in the residents of struggling communities. Many CDEs serve as intermediaries for providing loans and investments in low income areas, which lead to increased economic activity.

To qualify as a CDE, the program must be located in a distressed community which displays at least one of the following characteristics:

• The poverty level is above 20%.
• The median family income less than 80% of the average family.
• The community is composed of a specified targeted population.
• The population is less than 2000 people.
• It is a rural county with high migration.

Tax Tip: Tax Debt and the ‘Alter Ego’

In a recent Court of Appeals case (Berkshire Bank vs. Town of Ludlow MA and IRS, 1/11/2013) the Court ruled that an LLC owned by individual behind on his taxes was that individual’s alter ego. That is, the LLC and the individual were deemed to be one and the same, resulting in the assets of the LLC being available to satisfy the IRS tax debt.

Closely held businesses are in particular in danger of being seen as the alter ego of its owners. Common elements the IRS can use to find an alter ego relationship exists include Continue reading »

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.

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 »