Archive for 'Taxes'

Aug 06



If you own a business, then a home office provides tremendous tax savings.
Whether you operate your business as a proprietorship, LLC, or corporation, the home office deduction can save you thousands in taxes.
And one of the best aspects of this deduction is that it doesn’t cost you a penny more than what you already pay. That’s because it turns personal nondeductible expenses into business deductions that reduce your taxable income.
What qualifies:
To deduct an office in the home, you must pass the regular-use test.
What is regular use for the home-office deduction?
In its audit manual, the IRS states:
Regular use means that you use the exclusive business area on a continuing basis. The occasional or
incidental business use of an area in your home does not meet the regular use test even if that part of your home is used for no other purpose.
How do you prove regular and continuing use?
A log of time spent, and
Documents that corroborate the time spent.
To ensure compliance with the home-office rule that requires regular use, make sure that you use your home office an average of 10 hours a week or more.
Make an average of 10 hours a week your target until either the IRS or the courts give you a better
number. Next, make sure that you build proof that you worked those 10 hours or more.

Part 2 Next . . .

Dec 07

Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56 cents per mile for business miles driven
  • 23.5 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The business, medical, and moving expense rates decrease one-half cent from the 2013 rates.  The charitable rate is based on statute.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2013-80 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

May 30

As either a commercial property owner or a commercial property tenant you may take advantage of qualified leasehold improvements before midnight December 31, 2013.

 What will the qualified leasehold improvements mean for you in 2013 and 2014?

 In 2013, you’ll be able to take a 15-year depreciation, a Section 179 deduction of up to $250,000 and a 50% bonus depreciation.

 In 2014, you’ll be able to take a 39-year depreciation.

 $1,000,000 in leasehold improvements applied to 2013 tax year’s 15-year schedule rather than 2014’s 39-year schedule allowing a $24,610 deduction confers these huge savings:

  1.     $250,000 deduction straight from the top

  2.     $375,000 bonus depreciation

  3.     $12,488 additional via IRS’s first year midyear convention on the 15-year depreciation

 Adding it all up, you’ll be writing-off $637,488 versus $24,610!

 What sort of leasehold improvements qualifies under the 2013 rules?

 1.     The improvement is made under or pursuant to a lease by the lessee (or sublessee) of the building’s interior portion, or by the lessor of that interior portion.

 2.     The interior portion of the building is to be occupied exclusively by the lessee (or sublessee) of that interior portion.

 3.     The improvement is placed in service more than three years after the building was first placed in service by anyone.

 Under Section 168(k)(3)(B), the qualified leasehold improvement property does not include any expenditures:

 .                 To enlarge the building

 .                 To any elevator or escalator

 .                 To any structural component benefiting a common area

 .                 To the internal structural framework of the building

  Improvements qualifying under the 2013 rules include among others these:

 .                 Utilities

 .                 Framing

 .                 Walls

 .                 Doors

 .                 Windows

 .                 Pipes and Fittings

 .                 Plumbing Fixtures

 .                 Fire Protection

 .                 HVAV

 .                 Permanent Interior Finishes

 .                 Permanent Floor Coverings

 .                 Millwork and Trim

Other qualifying improvements include movable partitions or carpeting that is not part of the property’s structure.  Such improvements will not qualify as leasehold improvements under 2014’s 39-year rules and are generally depreciable over five to seven years.

Cost-segregation is a good way to look at faster depreciation deductions for qualified leasehold improvement property.  These depreciations are tax law-approved.

Using cost-segregation, you’ll first pay the cost-segregation fees necessary to obtain the cost-segregation study.  The study will show whether or not your cost-segregation passes IRS muster.  Qualified leasehold property improvements require no such study and it’s relatively easy to identify property qualifying for the tax breaks.

 Putting qualified leasehold improvements in practical terms, imagine the case of a lessee who’s made improvements to the HVAC serving a stand-alone commercial building used for retail sales.  The improvements serve only the space occupied by the lessee and the HVAC improvements:

 1.     Do not benefit a common area.

 2.     Are not part of the building’s internal framework and structure?

 3.     Do not enlarge the building.

 4.     Placed in service more than three years after the building first entered service.

Per the IRS, the HVAC improvements qualify as either 39-year property or as tax-favored 15-year qualified leasehold improvements.  Neither the IRS nor the lessor put forward an accelerated five-year personal property depreciation claim on the HVAC improvements.

Per the IRS, the HVAC improvements do not qualify as leasehold improvements made by the lessor as they’re located on the building’s rooftop and are not located within the building’s interior.

 The taxpayer in the example above unfortunately undertook the costly HVAC improvements without good tax advice.  Had the taxpayer received knowledgeable advice first, he’d have perhaps considered installing the HVAC upgrades within the leased space.

 Landlords and tenants:  Remember to take a good look at qualified leasehold improvements.  Keep in mind the property in question must have been in service for at least three years and the improvements must be in service before midnight December 31, 2013

Call Kruse and Crawford to assure you get this done correctly.


Feb 14

The IRS has a new tool to see if you may be eligible for an offer in compromise.

 An offer in compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay.

Go to web site and enter our financial and tax filing status to calculate a preliminary offer amount. They make their final decision based on your completed OIC application and their  associated investigation. This tool should only be used as a guide. Although it may show you can full pay your liability, you may still file an offer in compromise and discuss your individual financial situation with the IRS.

Submitting an offer application does not ensure that the IRS will accept your offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect your ability to pay. Generally, the IRS will not accept an offer if you can pay your tax debt in full via an installment agreement or a lump sum.
A booklet is also available and will lead you through a series of steps to help you calculate an appropriate offer based on your assets, income, expenses, and future earning potential. The application requires you to describe your financial situation in detail, so before you begin, make sure you have the necessary information and documentation.


Feb 13

Straight from the horses mouth . . . IRS Tax Tip 2013-11

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction - If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See for information on the Affordable Care Act.

Oct 12

The General Accounting Office has released a report titled “Federal Tax Debts: Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus.”

Seems self-explanatory.

The report was provided to Sen. Max Baucus (D-Montana), chairman of the Senate Finance Committee, and Sen. Charles Grassley (R-Iowa), ranking Republican on the Senate Judiciary Committee. At the end of 2011 the IRS was carrying an inventory of $373 billion in receivables: $258 from individuals and $115 from businesses. Under current policy the IRS cannot directly report these debts to credit bureaus, although it does provide indirect clues by filing tax liens to secure its debts. The liens become part of the private record, which can in turn be picked up by credit bureaus and included in their data bases. There are firms that troll these records to solicit IRS representation, as a number of our clients can attest. There is one outfit in California that seems quite aggressive, as I have seen their form letters with regularity.

Credit reporting is not yet IRS policy, but the GAO report does indicate that the Senate tax committee is looking seriously at this matter. As Congress considers ways to address runaway deficits, it seems a viable proposal to raise revenue.

Are there issues here? Of course.  Many employers are using credit reports as part of their hiring process, and they are also being increasingly used in housing (think renting) decisions. These credit reports have real-life consequences.

On the flip side, reporting may encourage recalcitrant taxpayers to resolve their IRS issues sooner rather than later.

I am not sure I am comfortable with this proposal. I have worked IRS representation for many years, and while my experience with the IRS has been generally positive, I also have my share of war stories. I have arrived at agreement at examination, only to have exam reverse its decision and force me into Appeals. I have had the IRS battle me on a research credit, where the business owner is a professor at the University of Cincinnati and is commercializing his research. I have a client in Florida with two daughters. He is divorced, and his wife pays child support. We are battling the IRS because they do not want to believe that the two girls live with him. This affects his filing status (head of household), as well as his child credit ($1,000 for each girl). It would seem an easy case, as the girls’ mother lives in northern Kentucky. The girls are in Florida, for goodness sake.

Remember: these are people who can afford to hire me.

Of the $373 billion, $60 billion was in dispute or already in installment plans. $110 billion has been classified as uncollectible (I have several clients included in that total). That leaves about $200 billion that could be brought into the system, I suppose. The distribution curve of the debt is pretty much what one would expect. Well over half the taxpayers owe small dollars – less than $5,000.  The big dollars are concentrated in a much smaller group of taxpayers: debts over $5,000 add-up to $310 billion of the $373 billion total.

Still, how much of this is contestable IRS debt but the taxpayer cannot afford a tax pro?

Oct 08

You may have read or heard about the “fiscal cliff” and “taxmaggedon.”

There are a couple of things going on here. Taxmaggedon refers to tax increases and the fiscal cliff refers to the federal budget and sequestration. The combination of the two is slated to happen in less than 3 months unless Congress and the White House act.

Let’s talk about the taxes.

There were revisions made to the tax code back in 2001 and 2003. These revisions have become known as the “Bush tax cuts,” which seems a reasonable description, and the “temporary tax cuts,” which doesn’t seem so reasonable. My daughter was in elementary school back when these tax changes were made. Today she is in college. To refer to these tax cuts as “temporary” is an abuse of the language.

Congress’ new thing is to put an expiration on tax legislation. It is somewhat like getting married but giving your spouse a term of only 5 or 7 years. At that date the marriage would be reviewed and – if found advantageous – would be extended for another period. I suppose one could stretch such a marriage out for many decades, but it seems bad form. Congress however seems to think that this is a fine way to pass tax law.

 A lot of tax law is expiring very soon. When it does, chances are that your taxes are going up. Why? There are a few items in there that we have come to take for granted, and by “we” I mean ordinary people who set an alarm clock and leave for work every day. Here are some examples:

(1)    Do you like your 10% individual tax rate? Well, that rate is going away. Sorry.

(2)    Have you managed to stash a couple of dollars in a mutual fund for your kids’ education? Tax on the dividends from that mutual fund will no longer be capped at 15%. Only rich people have mutual funds anyway.

(3)    Remember the tax marriage penalty? That used to mean that two people – if married – pay more taxes than if they had remained single. The penalty is back.

(4)    Are you selling that mutual fund when your kid starts college? If you have a gain, your tax is going up. See (2) above about owning mutual funds.

(5)    Certain credits, such as the education credits, will be reduced. The child credit, for example, will drop from $1,000 to $500 per eligible child.

(6)    Your social security withholding will increase from 5.65% to 7.65%.

Is it going to happen? I have no clue. But if it does, it will not be confined only to the “rich.” It will be all of us – at least, those of us who still pay taxes. That is one of the things that the “Bush tax cuts” did, by the way: remove millions of people from the tax rolls. There was debate at the time whether it was beneficial for society to divorce so many people from contributing to everybody’s government. It will be gallows humor to see the politicians tap dance when those millions return to the tax rolls.

Fiscal Cliff: How Much Would Taxes Rise in 2013?

Oct 05

Something caught my attention this week. You know how this blog works: if it catches my attention, we likely will talk about it.

So let’s talk.

Do you remember when a senior White House official blabbed-out the following in August, 2010?

“In this country we have partnerships, we have S corps, we have LLCs, we have a series of entities that do not pay corporate income tax,” said the senior administration official. “Some of which are really giant firms, you know Koch Industries is a multibillion dollar businesses.”

The problem is that this comment implies direct knowledge of Koch’s tax status, which – if offered up by a White House official – is a violation of federal law. You know, the kind of law you or I would go to jail for breaking.

In November, 2011 the New York Times opened its front-page guns on Ronald Lauder, a Reagan administration official and the chairman of the Jewish National Fund and of the World Jewish Congress.  The Times picked on Mr. Lauder for using aggressive techniques to minimize his taxes - the kind you and I might review if you hired me.  There may be a point where it is too aggressive for us, but that is a different issue. None of us has a obligation to pay more tax than necessary. I would know your taxes because you would have hired me. However, how would the Times know about Mr. Lauder’s taxes? Point is… they shouldn’t. If I talked about his taxes I would lose my license, have a malpractice claim, likely be sued and who knows what else.

The irony that the Sulzbergers – the owners of the New York Times – probably used the same or similar techniques did not seem to occur to the Times.

Frank VanderSloot is a wealthy businessman who wrote a sizeable check to a PAC which supports Mitt Romney. For this he - and seven other donors – were named on an Obama campaign website as “wealthy individuals with less-than-reputable records.” Are you kidding me? This summer he was pulled for audit by the IRS. So was his wife. For two years. Mr. VanderSloot and his accountants do not recall ever being audited. Not bad, considering that (1) he is uber-wealthy and (2) he is 63 years old.

Where are we going with this? In April a watchdog group named Cause of Action filed a Freedom of Information Act request for a listing of tax returns the White House has requested. How does the White House get them? Take a look at Section 6103(g) of the Internal Revenue Code:

6103(g) Disclosure to President and Certain Other Persons.—

6103(g)(1) In general.—

Upon written request by the President, signed by him personally, the Secretary shall furnish to the President, or to such employee or employees of the White House Office as the President may designate by name in such request, a return or return information with respect to any taxpayer named in such request. Any such request shall state—

6103(g)(1)(A)  the name and address of the taxpayer whose return or return information is to be disclosed,

6103(g)(1)(B)  the kind of return or return information which is to be disclosed,

6103(g)(1)(C)  the taxable period or periods covered by such return or return information, and

6103(g)(1)(D)  the specific reason why the inspection or disclosure is requested.

The IRS rejected the request, stating that it could not disclose information “specifically exempted from disclosure by another law.” The IRS appears to be referencing the fact that tax returns are confidential and cannot be released pursuant to the FOIA. The IRS has not explained however how a listing of returns requested by the White House is the same as releasing the tax returns themselves.

So this Tuesday Cause of Action filed a lawsuit against the Internal Revenue Service.

I am uncomfortable that a lawsuit was even necessary.

Sep 28

Let’s talk about an esoteric tax topic: selling tax credits.

You didn’t know it could be done, did you? To be fair, we have to divide this discussion between federal tax credits and state tax credits. Some states by statute allow the sale of their tax credits. Massachusetts will allow the sale its “motion picture” tax credit and Colorado will allow its “conservation easement” tax credit.

The federal rules are a bit different. These transactions usually involve the use of partnerships and LLCs, and the purchaser takes on the role of a “partner” in the deal. The business problem commonly present is that the purchaser (the “investor”) has little interest in the project other than the credit and a great deal of interest in getting out of the project as soon as possible. It is somewhat like a Kardashian marriage. There are technical problems lurking here, not the least of which is the IRS determining that a genuine partnership never existed. Tax planners and attorneys have stretched this specialized area to unbelievable lengths, and – in most cases – the IRS has gone along. Congress has said that it wants to incentivize the construction of low-income housing, for example, and to do so it has provided a tax credit. Say that someone decides to develop low-income housing, and to make the deal work that someone decides to “sell” the credit. If the IRS come in and nixes the deal, there are negative consequences – to the participants, to the industry and to the advisors to the industry. The IRS may also be called in before a Congressional tax committee for a lecture on overreach.  

Which makes the recent decision in Historic Boardwalk Hall LLC v Commissioner unnerving to tax pros. The property in question was the Atlantic Center convention center (known as the Historic Boardwalk Hall or the East Hall). We know it as the home of the Miss America pageant. The Boardwalk was owned by the New Jersey Sports and Exposition Authority (NJSEA). The NJSEA solicited bids for the historic rehabilitation tax credit. The winner was Pitney Bowes.


They put a deal together. NJSEA would be the general partner with a 0.1% partnership interest.  Pitney Bowes would be the limited partner with a 99.9% partnership interest, including a 99.9% right to profits, losses and tax credits. Goodness knows that NJSEA – a government agency – did not need tax credits. Government agencies do not pay tax.

Pitney Bowes agreed to make capital contributions of approximately $16 million.  Each installment depended on attaining certain benchmarks. Pitney Bowes was to receive 3% preferred return on its cash investment and approximately $18 million in historic tax credits

In case Pitney Bowes and the NJSEA had a falling-out, the NJSEA could buy-out Pitney Bowes for an amount equal to the projected tax benefits and cash distributions due them. 

NJSEA also had a call option to buy-out Pitney Bowes at any time during the 12-month period beginning 60 months after East Hall was placed in service.  Pitney Bowes decided to make certain on this point, and they included a put option to force NJSEA to buy them out during the 12-month period beginning 84 months after East Hall was placed in service. 

To make sure they had beaten this horse to death, Pitney Bowes also obtained a “tax benefits guaranty” agreement.  This agreement assured Pitney Bowes that, at minimum, it would receive the projected tax benefits from the project.  The guarantee also indemnified Pitney Bowes for any taxes, penalties, interest and legal fees in case of an IRS challenge. 

The IRS challenged. Its principal charge was simple: the partnership had no economic substance. That arrangement was as likely as Charlie Sheen and Chuck Lorre spending a golf weekend together. The Tax Court did not see it the IRS’ way and decided in favor of Pitney Bowes. Not deterred, the IRS appealed to the Third Circuit.

The Third Circuit reversed the Tax Court and decided in favor of the IRS.

More specifically, the Circuit Court decided that Pitney Bowes had virtually no downside risk. Pitney Bowes was not required to make capital contributions until a certain amount of rehabilitation work had been done. This meant they knew they would be receiving an equivalent amount of tax credits before writing any checks.   Then you have the tax benefits guaranty, which gave them a “get out of jail free” card.

The Court did not like that the funds contributed by Pitney Bowes were unnecessary to the project. NJSEA had been appropriated the funds before it began the renovation. NJSEA had been approached by a tax consultant with a “plan” to generate additional funds by utilizing federal historic tax credits.

Still, Pitney Bowes could argue that it had upside potential. That is a powerful argument in favor of the validity of a partnership arrangement. Wait, Pitney Bowes could not argue that it had any meaningful upside potential. While It was entitled to 99.9% of the cash flow, Pitney Bowes had to wait until all loan payments, including interest, as well as any operating deficits had been repaid.  The put and call options also did not help. NJSEA could call away any upside potential from Pitney Bowes. The Court decided Pitney Bowes had no skin in the game. 

This tax pro’s opinion: The deal was over-lawyered. The problem is that many of these deals are constructed in a very similar manner, which fact has thrown the industry (rehabilitation credit, low-income housing credit, certain energy credits, etc.) and their tax advisors into tumult. The advisors have to back this truck up a little, at least enough to giving the illusion that a valid partnership is driving the transaction.

Do not feel bad for Pitney Bowes. Remember that they have a tax indemnity agreement with NJSEA. I wonder how much this tax case just cost the state of New Jersey.

Sep 28

I do not recall ever talking about French taxes on this blog, but this morning I saw something that stunned me.

France has announced a 75% income tax rate.

Now, think about that for a moment. You would be giving-up 75 cents on the dollar, just for the privilege of setting an alarm clock, cutting sleep short, incurring dry cleaning, sitting in traffic and – finally – stressing at work. This move is driven by economic pressures in the European Union. We are familiar with the debt crisis of Greece, but Spain is also facing difficult times. Italy is hot on their heels. Germany is pulling this sled, and France likes to think that it is closer to the lead dog than the rear. Germany allows France to think that.

The EU has restrictions on allowable member deficits, and France is looking to narrow its deficit from 4.5% to 3% next year. It is doing this by raising 30 billion euros. Unfortunately, it seems to have escaped French President Hollande that one way to save money is to spend less of it. Hollande has announced that the money will be used for – among other things – thousands of new civil servant jobs. Brilliant!

The French government has softened the blow by announcing that the tax will be in effect for only two years.

On the other hand, for two years France will have the world’s highest tax rate.

French income tax applies on worldwide income for individuals who reside in France. The key word here is “reside.” Nonresidents are generally taxed only on French-source income. This is not the U.S. system, where a U.S. citizen is taxed on worldwide income, irrespective of where he/she lives. A U.S. expat living in Thailand for the last twenty years is still required to file an annual U.S. income tax return. On the other hand, a French citizen can avoid French tax by not residing in France, although I anticipate that the French tax authorities would aggressively dispute the issue of residence, where possible.

Seems to me that – if I made enough money to be subject to this new tax – I would have enough money to leave France for a couple of years. Why would I work for twenty five cents on the dollar? Short answer: I wouldn’t.