“C” Corp Reasonable Compensation

A recent case (TC Memo 2013-10) upheld the taxpayer’s deduction of compensation to its officer as reasonable.  The taxpayer (a privately-held nursing care business) was able to prevail because the owners did their homework and documented how they arrived at the officer compensation and corroborated its conclusion with third party experts in the compensation area.

IRC 162(a)(1) specifies two tests that must be met for compensation to be deductible – the compensation must be reasonable, and it must be paid purely for personal services actually rendered.  It is the first prong of this test that the IRS and courts focus most on.  Looking back to various cases, the Court identified six factors in determining the reasonableness of compensation: Continue reading »

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.

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 »

Deadline Looming for Stock Option Reporting

Under Section 6039 of the Internal Revenue Code, corporations are required to furnish statements to current and former employees who exercised an incentive stock option in 2012 or first transferred legal title to shares acquired as part of the corporation’s 423 employee stock purchase plan in 2012. Your company may be subject to significant penalties if Forms 3921 and 3922 are not 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 »

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.

Key Tax Provisions of “Fiscal Cliff” Legislation

You are probably aware that Congress passed legislation (the “American Taxpayer Relief Act”) early Wednesday morning, which the President is expected to sign into law to avert (or delay, depending on you viewpoint) the so-called “Fiscal Cliff.” While the legislation only delayed by two months widespread automatic spending cuts, it prevents many of the tax increases that were scheduled to take effect in 2013. With the exception of a targeted tax increase to the wealthiest Americans, the Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently addresses Congress’ reoccurring task of “patching” the alternative minimum tax (AMT). Further, it temporarily extends many other tax provisions that had lapsed at the end of 2012 and others that had expired a year earlier. Among the tax items not addressed by the Act was the so-called “payroll tax holiday.” Thus, the temporary 4.2% rate for the employees’ portion of the Social Security payroll tax will revert back to 6.2%, effective January 1, 2013.

Below is a summary of the key tax provisions: Continue reading »