MN Dept of Revenue Advises Taxpayers on Hiring a Tax Preparer

The Minnesota Department of Revenue suggests asking the following questions to your prospective new tax preparer:

• What kind of formal tax training do you have?
• Do you hold any professional licenses or designations?
• Do you belong to any professional organizations?
• Do you take continuing professional education classes each year?
• How long have you been preparing tax returns?
• Have you ever done a tax return dealing with my situation?
• Are you available year-round if I need to contact you?
• Have you ever been disciplined by any governmental authority?
• Will you represent me if I’m audited?
• How much do you charge and how do you calculate your fees? 
• Can you provide me with names of references I can contact about your work?

Here are some additional things to consider:

• In my opinion, most taxpayers are best off preparing their own returns.
• I like Turbo Tax and other off the shelf software packages.
• Those who rely on paid preparers still need to understand how their taxable income and deductions are computed and reported.
• Your taxes are your responsibility even if you hire someone to prepare your returns for you.
• I mostly prepare returns for small business owners and others having unusually complicated tax forms.

- Mark S Gleason CPA
  www.lakes-cpa.com

SCORE Takes a Look at Accounting and Taxes

SCORE (Service Corps of Retired Executives - a resource partner of the Small Business Administration) has recently issued "A Look at Accounting & Taxes."

This document presents some interesting statistics about what small business owners' attitudes about the burden of tax preparation, bookkeeping, and payroll compliance costs.

40% say that bookkeeping and taxes are the worst part of owning a small business.
47% dislike the financial cost of bookkeeping and taxes.  It is surprising to learn that only 8% dislike the inequity of the tax code and only 8% dislike all the paperwork. Only 10% dislike changing regulations an confusion.

40% claim to spend 80+ hours per year on taxes, payroll, working with accountants and obligations and 16% claim to spend over $20,000 complying with the tax laws.

Although I have serious reservations about the methodology of this study and the sources cited in the bibliography, it's interesting to note that many business owners don't seem to mind the administrative headaches and time required to comply with tax laws.

- Mark S Gleason CPA

The United States Senate passed the Tax Increase Prevention Act of 2014 by a vote of 76 to 16 earlier this week, on Tuesday, December 16. This is the bill that the House of Representatives had passed earlier in December. I expect President to sign the bill into law soon.

The main purpose of the new tax legislation is to extend of bunch of tax provisions that expired at the end of 2013.

The biggest revenue impacts of the "Tax Increase Prevention Act"" (TIPA) were the deduction for state and local sales taxes and the credit for research and development.

Many of my business clients are favorably impacted by the extension of the 2013 deduction limit under Section 79. Had the 2013 limit of $500,000 not been extended the annual limitation for Section 179 would have been $25,000. Section 179 allows taxpayers to elect to deduct the entire cost of new property plaece in service in a trade or business, rather than the normal depreciation rule that spread the deductions out into the future.

I have several clients that were very interested in the provision that provides an exclusion from income up to $100,000 for an individual that directly makes charitable gifts with IRA (or other qualified plan) distributions. This is beneficial to donors because it allows them to circumvent some of the limitations on deductions for charitable contributions.

Additional details will be published here soon. 

- Mark S Gleason CPA
  www.lakes-cpa.com

Congress Cuts IRS Budget Again

There is $10.9 billion to fund the IRS for fiscal year 2015 in the spending bill that is working it's way through congress.  This is a 3% reduction from the funding level for 2014.

A spokesperson for the National Treasury Employees Union issued a statement saying
"This budget hurts everyone in our country by further eroding the IRS' ability to provide tax assistance to millions of Americans, curb tax fraud and collect the taxes owed that finance vital programs and services and reduce the federal deficit".

The IRS estimates that it will be able to answer about half the calls it receives with this budget. The IRS has lost 5,000 enforcement personnel and audit and collection activities have been impaired since congress began implementing a series of budget cuts that began in 2010 reducing the IRS annual budget by about 10 percent.


- Mark S Gleason CPA
  www.lakes-cpa.com

New Standard Mileage Rate is 57.5 Cents Per Mile

The standard mileage rate for 2015 has been increased to $ .575 per mile, up from the 56 cents that was allowed for 2014.  The new rate is effective on January 1, 2015.

- Mark S Gleason
  www.lakes-cpa.comwww.lakes-cpa.com

The IRS Has Over $ 1 Trillion in Frozen Credit Accounts.

Here are some figures from a report issued by the Treasury Inspector General for the United States (TIGTA),  Further Actions Are Needed to Resolve Millions of Dollars of Frozen Credits in Taxpayer Accounts, dated September 26, 2014 (Reference Number: 2014-30-089).

Number of Tax modules in credit status (payments exceeding assessments) at the end of Fiscal Year 2012 [total dollar amount]:
Business Master Files :  10.1 million modules [$883 billion]
Individual Master Files: 1.5 million modules [$305 billion]

Number of Tax modules in credit status (payments exceeding assessments) at the end of Fiscal Year 2013 [total dollar amount]:
Business Master Files :  10.2 million modules [$977 billion]
Individual Master Files: 15.6 million modules [$392 billion]

These numbers are not just "millions" but "hundreds of billions". This is a much more interesting story about FROZEN than the animated tale about Princesses Elsa and Anna. The truth is that the IRS is sitting on a big chunk of the economy.  This story almost slipped by me.  I would have noticed a TRILLION DOLLARS in credits but they only said MILLIONS in the title of their report.

The federal budget deficit for fiscal year 2015 (Oct 2014 through Sept 2015) is projected to be only $564 billion (per Kimperly Amadeo, US Economy Expert)  It looks to me like the IRS has got it covered, sort of.

The TIGTA report discusses how these funds are being handled by the IRS and made a series of recommendations regarding nonfiler and bankruptcy training, turning off backup withholding under certain conditions, monitoring nonfiler referrals, decision documentation, working civil penalty credit transcripts, aging frozen credits and evaluation of procedures.

The IRS responded to more than one recommendation by stating they were in agreement with the recommendation but that corrective action will not be taken because of limited information technology resources.

- Mark S Gleason CPA
  www.lakes-cpa.com

IRS Reminds Us About Documenting Deductible Gifts to Charity

Last week the IRS issued a new "year end tax tips" document reminding taxpayers making year-end gifts to charity that there have been some tax law changes affecting their deductions.

For charitable contributions of clothing and household items, taxpayers must get a written acknowledgement from the charity for all gifts worth $250 or more. It must include, among other things, a description of the items contributed.

For cash contributions, a taxpayer must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of amount. The record must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

In addition, a taxpayer must obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Additional reminders from the IRS:

• Only give to qualified charities. Only donations to eligible organizations are tax-deductible. You can use Select Check, a searchable online tool available on IRS.gov to make sure the organizations you give to are eligible to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are also eligible to receive deductible donations. These is true even if they are not listed in the IRS's database.
• Contributions are deductible in the year made. Donations charged to a credit card before the end of 2014 count for 2014, even if the credit card bill isn’t paid until 2015. Also, checks count for 2014 as long as they are mailed in 2014.
• You must itemize your deductions. Individual taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). Most taxpayers don't itemize deductions, so for most taxpayers, there is no tax benefit to making charitable contributions.
• Recordkeeping: for all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written  record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• Special Rules. The deduction for a car, boat or airplane donated to charity is usually limited to the gross  proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• Form 8283: If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

IRS Publication 526 covers almost everything there is to know about tax deductions for charitable contributions.

- Mark S Gleason CPA
  www.lakes-cpa.com

You Can Pay in Advance for a Tax Deduction This Year Instead of Next Year

As the year draws to a close, many of my clients are looking for ideas on end-of-year tax saving strategies. 

For taxpayers wishing to shift taxable income from 2014 into 2015, saving dollars on their 2014 tax obligations, the idea of prepaying deductible business expenses often comes up.
This strategy usually works to provide a deferral of the taxes from one year to the next. Whatever taxes are saved in 2014 will have to be paid for 2015. But this is a particularly beneficial strategy if there is a bump-up in income in 2014 that is unlikely to repeat in 2015.
If a taxpayer is in a lower tax rate bracket in 2015 than in 2014, this results in a tax savings as well as a tax deferral.

There is no overall dollar limit on a taxpayer's ability to prepay business expenses but it is important not to waste money prepaying for things that might not be needed.

I have reviewed the rules for deducting prepaid expenses with three different clients in the past week, so I thought this would make a good topic for my blog.

Most taxpayers file their returns using the cash method, where income is taxed when received in cash and deductions are permitted when paid in cash. Almost all individual taxpayers and almost all small and medium size businesses are cash basis taxpayers.

Larger businesses are accrual basis taxpayers. They report their taxable income when it is earned and deduct their expenses when they are incurred. The distinction between cash and accrual basis is important and accountants study the rules for accrual basis accounting, known as Generally Accepted Accounting Principles in their college accounting courses.
The ability to deduct a prepayment is only permitted for cash basis taxpayers.  If you are an accrual basis taxpayer this idea will not work for you.

For cash basis taxpayers, IRS regulations prohibit deductions for prepaid interest which is not deductible until incurred. Payments that create an asset (tangible or intangible) are not deductible either. 

Since prepaid expenses are all considered to be assets, an exception to the rule, known as the 12-month rule is most useful. The exception that is almost as big as the rule itself. Under the 12-month rule, prepayments for expense items that create benefits for a relatively brief period of time, such as insurance, security, rent, and warranty service contracts may be immediately deducted when paid if the contract period to which the prepayment applies is not more than a year and the contract period does not extend beyond the end of the taxable year following the tax year in which the payment is made.

Other expenses that fit into this 12-month rule would be advertising, marketing, postage (stocking up on postage stamps), business travel expenses (buy those airline tickets before the end of the year), conference registrations and business education. Professional fees for legal and accounting advice will often fit within this rule, but not always.

A cash basis taxpayer receiving prepayments must include the prepayments in taxable income in the year received, so your plan to shift taxable income from 2014 to 2015 by prepaying your expenses may be foiled by your customers who prepay you.

- Mark S Gleason CPA
  www.lakes-cpa.com

IRS Predicting Extra Difficult Tax Filing Season (Again)

John Koskinen, Commissioner of Internal Revenue, addressed the American Institute of CPAs' (AICPA) National Tax Conference earlier this month. He talked about the upcoming 2015 tax filing season. “We believe it may be one of the most complicated filing seasons we’ve ever had, for a number of reasons".

“Continuing uncertainty about the extender legislation imposes stress, not only on the IRS, but on the entire tax community,” he said, and “if the uncertainty over extenders continues into December, the IRS could be forced to postpone the opening of the 2015 filing season.” With Congress now on Thanksgiving break, this seems to be a certainty.

I have written about the "extender legislation" in previous posts on this blog.

Reductions to the IRS's budget “will pose serious challenges to our customer service, enforcement efforts and information technology projects,” he said. Telephone service could drop from the 2014 service level of 71 percent to 53 percent in 2015, because the IRS has not been given the funds to hire sufficient staff to handle incoming calls.

Poor customer service at the IRS has been getting worse and worse every year because a hostile Congress has not given the IRS the funds they need to do the job. Because of long waits, I never even attempt to call the IRS on the phone. Rather, I write them a letter and send it in the mail.  It takes months to get a response. Thanks, Congress.

- Mark S Gleason CPA
  www.lakes-cpa.com

Inflation Adjustments Increase Tax Exemptions and Lower Rates (Slightly)

The IRS has announced the annual inflation adjustments for 43 different tax provisions including the rate thresholds for the tax rate schedules. These go into effect on Jan 1, 2015.

Here are some of the adjustments:

• The top federal tax rate of 39.6 percent affects single taxpayers whose income exceeds $413,200 ($464,850 for marrieds), up from $406,750 and $457,600, respectively. 
• The standard deduction rises to $6,300 for singles and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively. The standard deduction for heads of household rises to $9,250, up from $9,100.
• The income threshhold where itemized deductions begin to be phased out begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
• The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. The exemption phase-out begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly) and phases out completely at $380,750 ($432,400 for marrieds).
• The 2015 maximum Earned Income Credit amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014.
• The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).
• This amount of the basic exclusion (exemption) from federal estate taxes for decedents who die during 2015 is $5,430,000, up from a total of $5,340,000.
• The annual exclusion for gifts remains at $14,000 for 2015.
• For 2015, the foreign earned income exclusion is $100,800, up from $99,200 for 2014.

Here's one I hadn't previously imagined. The tax on arrow shafts for 2015 (to be paid by the manufacturer or importer of certain arrows) is going up to $0.49 per shaft. To avoid this tax, it looks like you want your arrows to be less than 18 inches long and less than 5/16 of an inch in diameter, unless of course your arrows are suitable for use with a bow having a peak draw weight of 30 pounds or more, in which case all your arrow shafts are taxable.

Complete details can be found in Rev. Proc. 2014-61.

- Mark S Gleason CPA
  www.lakes-cpa.com

New Per Diem Rates for Business Travel Deductions

The IRS has revised their simplified per diem reimbursement rates for lodging, meals, and incidental expenses effective October 1, 2014. These rules provide convenience to employers and employees by eliminating the need to save detailed receipts for employee travel reimbursements. The rules have also been further clarified. Under the new IRS pronouncement, "incidental expenses" include only fees and tips given to porters, baggage carriers, hotel staff and staff of ships.


Transportation beween places of lodging or business and places where meals are taken (ie. cab fares) are no longer included in incedential expenses. Employees can be separately reimbursed for the actual costs of transportaion and mailing expenses, in addition to the flat daily amount for "incidental expenses". 

The new per diem rates are $259 for travel to any high-cost locality and $172 for any other place. These rates are an increase from those allowed earlier. High-cost localities include: Sedona AZ, Chicago IL, New Orleans LA, Bar Harbor ME, Conway NH, Kill Devil NC, Philadelphia PA, Charleston NC, Midland TX, Park City UT, Seattle WA, Jackson/Pinedale WY and several trendy places in CA, CO, FL, MD, MA, NY and most of the Washington D.C. area. Some areas are considered high-cost for only a portion of the year.

See IRS Notice 2014-27 for complete details.

- Mark S Gleason CPA
  www.lakes-cpa.com

Social Security Wage Base For 2015 Increases To $118,500

The Social Security Wage Base for 2015 will be $118,500. Wages and self-employment earnings in excess of this amount will not be subject to the 6.2% employer-paid social security tax or the 6.2% employee share. Earnings from self employment in excess of $118,500 will not be subject to the 12.4% social security portion of the self employment tax.

Single taxpayers with earnings from employment over $200,000 and married taxpayers with earnings over $250,000 will again be subject to the medicare surtax of .9%.

- Mark S Gleason CPA
  www.lakes-cpa.com

Contribution Limits to 401(k) Plans for 2015 are Increased

The IRS has announced upward revisions to the annual contribution limits for pension and other retirement plans for 2015. Taxpayers will be allowed to make contributions of $18,000 to 401(k) plans for 2015. The increase, from $17,500 to $18,000 also applies to 403(b) plans and 457 plans. In addition, the limit on "catch-up" contributions for taxpayers over the age of 50 has been increased from $5,500 to $6,000.

Many of my clients will benefit from these increases in the limits as these will result in bigger deductions for their retirement savings. Those that are saving for retirement with Roth accounts will benefit from the increased contribution limits as well.

- Mark S Gleason CPA
  www.lakes-cpa.com

Scam Alert for Minnesota Taxpayers

The Minnesota Department of Revenue has issued a warning about a new scam. Fraudsters are calling taxpayers and demanding immediate payments over the phone.

The callers claim to be from the Department of Revenue and tell people they owe the state money and must pay it immediately by credit card or money order or the police will be sent to their home.

The MN Department of Revenue says on their website that they never call taxpayers to demand immediate payment or threaten to send the police to a taxpayer's home.

- Mark S Gleason CPA
  www.lakes-cpa.com

You Can Avoid The Inconvenience Of A Late Tax Refund

Once again tax refunds for early filers in 2014 will be delayed.  Refunds were delayed in 2013 and 2014 because Congress didn't enact it's 2012 or 2013 tax laws until the following January. This is going to happen again for 2014 returns filed in 2015.

But there a way to avoid this problem.  The work-around is to reduce your withholding for November and December.  This will put the refund dollars you would have expected to collect in the form of a refund in January or February 2015 when you file your return into your hands now.  The reduction in withholding puts the cash into your paychecks now, instead of into your refund later.

- Mark S Gleason CPA
 - www.lakes-cpa.com

Put Your Dog to Work and Get a Tax Deduction

Service dogs, the canines that lead the blind and provide emotional support, have been gaining in popularity. They are helpful in many contexts and enjoy special status under the Americans with Disabilities Act. They also have special status under IRS rules because their medical expenses and the cost of their food and training can be deductible as a medical expense. No deductions are allowed for ordinary dogs.

Here is what IRS Publication 502, Medical and Dental Expenses has to say about it: "You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually impaired or hearing disabled person, or a person with other physical disabilities. In general, this includes any costs, such as food, grooming, and veterinary care, incurred in maintaining the health and vitality of the service animal so that it may perform its duties".

The medical expense deduction in my experience is mostly an illusion because only the amount of medical expenses in excess of 10% of a taxpayer's income is deductible. Furthermore, taxpayers who do not itemize deductions are unable to benefit from medical deductions. Nevertheless, I predict that service dogs are going to continue to grow in popularity and that lots of dog owners are going to want to pass Fido off as a service animal in order to get a tax deduction.

- Mark S Gleason CPA
  www.lakes-cpa.com

Get Your Orders in Today

For all of us living here in Minnesota, today, Sept 30, 2014 is going to be our last day to make purchases via Amazon.com without paying Minnesota sales tax. The on-line retailing giant has announced that effective October 1st, they will be collecting Minnesota sales taxes on purchases made by Minnesota residents. Amazon has not stated any reason for the change.

Under Minnesota law any business with a "physical presence" in Minnesota is required to collect sales tax on sales to customers in Minnesota. The rate of sales tax in Minnesota is 6.875%.

I am old enough to remember when it was zero and then became 3%.

- Mark S Gleason CPA
  www.lakes-cpa.com

US Treasury Cracks Down on Inversions

The Treasury Department announced this week a batch of new rules designed to curtail inversions, the corporate income tax loophole du jour.

The inversion loophole is expected to cost the US $20 billion in revenue losses over the next 10 years, unless Congress takes action. Since Congressional action isn't going to happen, the executive branch is stepping up with the limited authority it has to try to limit the fiscal hemmoraging these inversions are causing.

The inversion loophole is used by large US corporations to avoid US income taxes by having the income taxed in a foreign jurisdiction having a lower tax rate. In a typical inversion transaction, a US corporation merges with a foreign corporation.  The newly merged entity retains it's status as a foreign corporation, even if most of the operations are located in the US.

Under current law, the merged entity is not treated as a US corporation if the (old) US company's shareholder's end up owning less than 80% of the combined company. The obvious solution would be to lower the 80 percent to 50 percent, but congressional Republicans will not permit that to happen.
The new rules issued by the Treasury Department are intended to make the 80% rule harder for companies to get around.

The press release issued by the Treasury Department states: "Today’s action eliminates certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape U.S. taxation.  It also makes it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. company own less than 80 percent of the new combined entity".

These actions are being taken under sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874 of the Internal Revenue Code.

Here are a few of the actions being taken to close these loopholes:

• Preventing inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free (Section 7701(l) of the Internal Revenue Code).
• Closing a loophole to prevent an inverted company from transferring cash or property from a controlled foreign corporation to the new parent to completely avoid U.S. tax (Section 304(b)(5)(B) of the Internal Revenue Code).
• Restricting the "skinnying down" technique where corporations reduce their size before a merger so the new combined entity meets the requirements of current law (Section 7874 of the Internal Revenue Code).
• Preventing "spinversions" of business units into foreign corporations by treating the new spun-off company as a US domestic corporation (Section 7874 of the Internal Revenue Code).
• Eliminating "hopscotch loans", a technique whereby a foreign subsidiary of a US company loans money to a foreign corporation to help it finance an (inversion) merger with the US parent corporation are now forbidden (Section 956 of the Interal Revenue Code).

This is only a taste of today's loophole closing du jour.  For further details visit the Treasury Department's website at http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx

- Mark Gleason
  www.lakes-cpa.com

"Exclusive" Use of Home Office May be Less Than Perfect

A recent tax court case sheds a little light on how flexible the "exclusive business use" requirement for a home office deduction can be.

In a rare taxpayer victory in the United States Tax Court, taxpayer Lauren Miller, who admitted to occasionally using portions of her home office space for nonbusiness purposes, was successful in defending against disallowance of her home office deduction. After analyzing the layout of her apartment and the business use of the home office, the court ruled that she was entitled to deduct one-third of her apartment rent and cleaning service charges for the year, as claimed in her income tax return.

Although this is a tax court summary decision in a case involving less than $50,000 and is not to be treated as precedent for any other case, taxpayer's victory hints that if facts and circumstances warrant, minor, "de minimis" personal use of a home office will not cause failure of the entire deduction.

This case is available on line at http://ustaxcourt.gov/InOpHistoric/MillerSummary.Guy.SUM.WPD.pdf

Mark S Gleason CPA
www.lakes-cpa.com

New IRS Forms for Implementing the Affordable Care Act

The IRS has released draft versions of a bunch of forms for individuals and employers to make reports required under the Affordable Care Act (ACA). These forms will be used to gather the information necessary to administer the tax credits and penalties provided by the ACA.

• Form 1094-B is the Transmittal of Health Coverage Information Returns which accompanies the filings of Forms 1095-B (below).
• Form 1095-B is the Health Coverage form requesting information about each "responsible" individual policy holder.
• Form 1094-C is the Transmittal of Employer-Provided Health Insurance Offer and Coverage forms contains information about the "applicable large employer" and is to be sent in with the forms 1095-C (below) .
• Form 1095-C is the the Employer-Provided Health Insurance Offer and Coverage form having fields for the social security numbers for all the covered individuals along with information regarding the offer of coverage and the employer share of premiums. It looks like employers will provide one of these forms for each employee.
• Form 1095-A is the Health Insurance Marketplace Statement containing information about health care recipients and their families and other details such as dates of birth, coverage periods, and their premium payments. It looks like employers will provide one of these forms for each employee.
• Form 8965 is the form for Health Coverage Exemptions and is to be attached to individual taxpayers' forms 1040, 1040-A, and 1040-EZ.

This law has lots of moving parts and it is going to be interesting to see how tax preparers deal with all these new forms. I think that I will be one of the few to be prepared for this transition.

- Mark G Gleason CPA
  www.lakes-cpa.com