John Dundon | TaxConnections

26 Sep 2013

Accumulated Adjustment Accounts

Now that the corporate tax extension deadline is past and we all prepared, signed and filed our 2012 1120-S IRS forms (yeah right!), I write to report some of my codified thoughts on Analysis of Accumulated Adjustments Account, Schedule M-3, Other Adjustments Account, and Shareholders’ Undistributed Taxable Income Previously Taxed. Or in tax speak the “AAA”.

Generally your corporation’s Accumulated Adjustments Account (AAA) is an account of the corporation. It belongs to the corporation, not to you the shareholder. If you have elected S-Corporation Status the AAA tracks the amount of undistributed income that has been subject to income tax at each respective shareholder’s marginal tax rate. Its treatment is similar in nature to the manner in which earnings and profits generally track a C corporation’s undistributed income.

The AAA became relevant in 1983, so if you formed your S-Corp any time then or later the first day of the first year your corporation is an S corporation the balance of the AAA is zero. Each year after that the AAA is adjusted under mandate. I’ll address how to adjust the AAA a bit later in the post.

The significance of the AAA is that it allows previously taxed but undistributed income to be distributed income tax-free to shareholders up to the value of the shareholder’s investment in the corporation. This can be a difficult concept to grasp and without adequate bookkeeping even more difficult to track.

Here’s why… Read More

Written by John Dundon | Posted in Corporate • Federal • United States

16 Sep 2013

Colorado Individual and Business Taxpayers Impacted by Storms Receive IRS Relief

According to the IRS:

“certain taxpayers in the counties of Adams, Boulder, Larimer and Weld will receive tax relief, and other locations may be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA).“

The tax relief postpones some tax filing and payment deadlines to Dec. 2, 2013.

Additionally the IRS states:

“Corporations and Businesses that previously filed an automatic an extension until Sept. 16, 2013, to file their 2012 returns and individuals and businesses that received a similar extension until Oct. 15 will now have until December 2nd 2013 to both file and pay.”

This deadline also applies to estimated tax payments for the third quarter of 2013 due September 16th. Read More

Written by John Dundon | Posted in IRS • United States

15 Sep 2013

Prepare For Indefinite IRS Closure Starting October 1, 2013

According to the National Association of Enrolled Agents (NAEA) most recent newsletter, ”October 1st, which marks the beginning of FY14, is 18 days from now. The House was supposed to vote earlier this week on a continuing resolution that would allow non-essential portions of the federal government to continue operations. Spending bills originate in the House … and House Speaker John Boehner (R-OH) is having difficulty … corralling his caucus.”

You need to be concerned because the IRS is not considered essential and and as such without a continuing resolution will for all intents and purposes be closed for business until it has been properly funded.

When this happened under Clinton, I believe they had a skeleton crew on staff to receive mail but that was about it. So if you have any business whatsoever with the IRS, particularly time sensitive business, you are best served getting to it ASAP as my guess is that this time around our federally elected officials will be unable to avoid a shutdown. This includes anything from audits, appeals, collections, liens, ITIN, OIC, PPIA, + DDIA, applications, wage garnish releases, etc.

In accordance with Circular 230 Disclosure

Written by John Dundon | Posted in IRS • United States

13 Sep 2013

Individuals Exempt From The Affordable Care Act (Obama Care) Mandate

United States citizens are required to carry minimum essential health insurance coverage beginning January 1st 2014. This is also commonly referred to as the ‘individual mandate’ and some people are exempt from this individual mandate including:

• Members of recognized religious sects that are exempt from self-employment tax.

• Members of health care sharing ministries.

• Individuals who are not U.S. citizens or nationals who are nonresident aliens or are present in the U.S. illegally.

• Incarcerated individuals, other than those who are incarcerated after dispositions of charges. If the charges are pending, this exemption doesn’t apply. Read More

Written by John Dundon | Posted in TaxConnections

29 Aug 2013

Trader or Investor

I have another new client who is a day trader and wow is he good at it! Even though he has another job he makes so much more money as a trader that this ultimately is his primary vocation. The following are a few things I’ve learned in helping this new client with his tax obligations.

1. If you are a day trader who has not elected to mark your portfolio to market accounting method under Internal Revenue Code 475 your expenses are deductible on IRS Form 1040 Schedule C.

2. The most commonly referenced Business Code provided on the Schedule C is 523900. Other financial investment activities (including investment advice) and in my opinion is the most appropriate for a person that meets the definition of “day trader” regardless of the accounting method chosen.

3. Regarding expenses, lodging and meals while away from home at investment seminars are allowable deductions assuming you actually qualify as a day trader under IRC Sec. 274(h)(7) which denies a Sec. 212(l) deduction for (non-business related) “expenses allocable to a convention, seminar, or similar meeting.” However, the Tax Court held that a day trader can deduct the cost of a seminar in securities day trading and related travel expenses under IRC Sec. 162. Read More

Written by John Dundon | Posted in United States

23 Aug 2013

Small Businesses Receive IRS Letter 5036 – Under Reporting of Income

The Internal Revenue Service has over the last week or so started sending Letter 5036 to small businesses questioning the possible under reporting of income. The letter looks intimidating as it’s header states “Notification of Possible Income Under Reporting” and starts with “Your gross receipts may be under reported.”

Rest assured this letter is systematically generated. Basically the IRS matched the information reported on Form 1099-Ks that were sent to the business with income reported on the tax return. Don’t be threatened or upset by this letter but do recognize that you will be required to provide a written explanation, or a completed Form 14420, Verification of Reported Income, explaining why the portion of the gross receipts from credit card payments and other 1099-K transactions was higher than expected. Failure to respond might result in a proposed assessment or further compliance action, so please respond.

My advise is that this might be a job for the accountant, controller or tax practitioner signing the income tax return as accuracy is paramount.

Written by John Dundon | Posted in United States

21 Aug 2013

Reviewing Mortgage Interest Deduction Limitations – Sophy v. Commissioner

Taxpayers living in Vail Colorado contacted me most recently to represent them in an Internal Revenue Service audit covering tax years 2009, 2010 and 2011 relevant to several small items but specifically to the mortgage interest deduction claimed on Schedule A of Form 1040.

The taxpayers are domestic same sex partners each filing their own federal and Colorado income tax forms. Upon further inquiry it became clear to me that this file had many of the same characteristics of the United States Tax Court Case Sophy v. Commissioner.

In Sophy v. the Commissioner a domestic couple owned their principal residence in California as joint tenants. Together they held a mortgage of $2,000,000 on the residence and took out an additional $300,000 line of credit secured by the residence. They were not married and as such on their respective tax returns deducted mortgage interest on their respective portion of the mortgage.

In examination the IRS’ position was that the $1,000,000 and $100,000 limitations apply per property and not per taxpayer limiting the interest deductions to the interest on the combined total of $1,100,000. The United States Tax Court agreed with the IRS.

According to Internal Revenue Code 163 and Internal Revenue Bulletin 2010-44 there are two limits on mortgage interest which are applied per property: Read More

Written by John Dundon | Posted in United States

09 Aug 2013

Transfers of Property to a Corporation – IRC Sec. 351

According to IRC 1001 you generally recognize a gain or a loss when you sell or dispose of property. However, there are a number of exceptions, specifically transfers of property to a corporation.

For example under IRC 351a no gain or loss is recognized if property is transferred to a corporation in exchange for stock in the corporation if immediately after the exchange the person transferring the property in question is in control of the corporation that received ownership of the property.

The intent of IRC 351 I believe is to apply when there is simply a change in the form of ownership of the property in question and you have not really profited or cashed out a loosing investment, which it turns out is a reasonable rule of thumb to use in making a determination as to whether a gain or loss is recognizable upon transfer.

The majority of the nonrecognition transfers of property I have been involved with to date have generally taken place in conjunction with forming a new corporation but these tax code sections also apply to transfers of property made to existing corporations.

Written by John Dundon | Posted in United States

25 Jul 2013

Trader In Securities

If you are an individual who buys and sells securities you may qualify as a “trader in securities,” for tax purposes. This post attempts to explain how traders must report the income and expenses from being in the trading business.

First it is important to understand the meaning of the terms: “security,” “investor,” “dealer,” and “trader,” and the different manner in which income and expenses are reported.

Internal Revenue Code Section 1236 defines “security” basically for all intents and purposes as any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the above.

“Investors” typically buy and sell securities and expect income from dividends, interest, or capital appreciation. If you are an investor you tend to buy securities and hold them for personal investment; generally speaking you are not conducting a trade or business. Most investors are individuals. Sales of these securities result in capital gains and losses that must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses and on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, as appropriate. Investors are subject to the capital loss limitations described in IRC 1211(b), in addition to the IRC 1091 wash sales rules. Read More

Written by John Dundon | Posted in United States

19 Jul 2013

Income Tax Filing Status For Same Sex Married Couples

The following states recognize same sex marriages: Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and District of Columbia. In the most recent Supreme Court decisions that I blogged about earlier a great deal of disconnect surrounding the following sentence was brought forth and follow up I felt is both important and required.

“Legally married same sex couples are taxed in the same manner as legally married opposite sex couples.”

On one hand this sentence brought relative clarity to the treatment of estate tax matters as the decision was relevant to the treatment of a taxpayer’s ESTATE TAX. In that there is a huge difference between estate tax and income tax I for one am not completely comfortable assuming that this sentence applies automatically to income tax statutes and regulations, particularly the definition of filing status without first understanding how specifically the IRS responds.

Because of the decision handed down by the Supreme Court in the Windsor Case there are many questions yet to be answered regarding the treatment of INCOME TAX by the IRS. Also confusing matters is the fact that marriage of a same sex couple is separate and distinct from civil unions or other similar state provisions regarding unions. Read More

Written by John Dundon | Posted in United States

26 Jun 2013

United States Supreme Court DOMA Throw Down – Progress or Kabuki Theater?

The fact of the matter is that the Internal Revenue Service will continue to define marriage for United States Taxpayers everywhere in that only one man and one woman married to each other can file an income tax return with the filing status of married/joint. This filing status, looked upon by the Service as one taxpaying unit is entitled to substantial tax benefits over and above all other filing statuses be it Single, Head of Household, Married/separate, or Widow. So from an income tax perspective today’s supreme court decision is really in my opinion little more than kabuki theater.

If you check out the IRS’ Interactive Tax Assistant to determine your filing status you will find it to be incredibly disingenuous if not unilaterally misleading as the Instructions for the 2012 IRS Form 1040 Income Tax Return clearly state under under filing status the following.

“For federal tax purposes a marriage means only a legal union between a man and a woman as husband and wife, and the word “spouse” means a person of the opposite sex who is a husband or a wife.”

In my own humble opinion until you can check the box Married/Joint on an income tax return (box #2 under filing status) you are unfortunately NOT married for federal income tax purposes regardless of the Supreme Court’s decision today and I find it impossible at this time or any time in the near future that the IRS will be compelled to change their definition of the Married Filing Joint (MFJ) filing status. Read More

Written by John Dundon | Posted in Federal • Individual • North America

07 Jun 2013

Tax Treatment – IRC 351 Nonrecognition Transactions aka “Corporate Reorganizations”

Check out the following five lessons I learned this week regarding IRC 351 nonrecognition transactions:

1. The basis assigned to stock received generally is the same as the basis in the property transferred to the corporation. If however you also receives boot from the corporation your basis must be decreased by the amount of any money received plus the fair market value of any other property received (aka BOOT).

2. Your basis under IRC 358(a) must also be increased by the amount of any gain recognized due to any boot received. Specifically if you transfers property with a fair market value of $700,000 and a basis of $300,000 to a corporation in exchange for common stock with a fair market value of $500,000 and cash of $200,000 your basis in the stock is equal to $300,000 which is calculated as follows:

$300,000 basis in property transferred – $200,000 boot received (as cash) + $200,000 gain recognized due to receipt of boot.

3. When transferred property is subject to a liability that the corporation assumes, the amount of the liability generally is not treated as boot for purposes of determining any taxable gain on the transaction. However, the amount of the liability generally is treated as boot for purposes of determining your basis in Read More

Written by John Dundon | Posted in TaxConnections