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

Tax Deductions for Education Expenses

Here is a great tax tip I read about recently in an article by Julie Welch CPA. Her article Have Employer Pay for Your Tuition and Exclude Cost From Income addresses a tax savings technique that I have personally been using for several years. I decided for personal and professional reasons to learn to speak Spanish. I have devoted hundreds of hours and almost as many dollars to Spanish classes, tapes, and private lessons. I have taken eight semesters of college Spanish at a local universities and have studied Spanish abroad in Mexico and Guatemala. I have Spanish-speaking clients and have been involved in court cases as a referee where the parties have presented their claims and defenses in Spanish.

I have also taken many classes on business, technology, and tax and accounting topics over the years.
As a small business owner, the costs of these classes are deductible business expenses.

Ms Welsh writes in her article that education expenses can reduce taxes in one of three ways:

First, job related education expenses can be deducted, along with other miscellaneous itemized deductions, to the extent they exceed 2% of the adjusted gross income. Education expenses are deductible if they are: job related, do not qualify a person for a new business, and are not taken to meet the minimum educational standards for qualification in a person’s business. The costs of obtaining an undergraduate degree do not qualify because they are usually meeting the minimum educational standards. The costs of obtaining a graduate degree, especially in business, generally qualify if a job is in the same subject area as the classes unless the degree qualifies that person
for a new business, such as law or medicine. Examples of some of the costs that can be deducted include tuition, books, supplies, car expenses, and travel costs.

Second, job-related education expenses [paid by your employer] can be excluded as a working condition fringe benefit. Many employers used this approach when the educational assistance provisions temporarily expired in prior years.

Third, education expenses under an employer’s educational assistance program can be excluded. This is generally the best approach. Check to see if the employer offers an educational assistance plan. If the employer does, up to $5,250 from income can be excluded. Although meals, lodging, and transportation costs cannot be reimbursed, the costs that can be reimbursed tax-free include: tuition, books, supplies and equipment. An employer can either pay the expenses directly to the school or reimburse the taxpayer after they are paid. Proof of the expenses will need to be provided, such as receipts for tuition and books. Unlike the deduction for education expenses, the subjects being studied do not have to be business or job related. Thus, a college degree can be completed or non-business courses can be taken. However, subjects considered a sport, game, or hobby are ineligible unless required as part of a degree program or related to an employer’s business. Graduate courses are also included in this exclusion.

Savings include both income tax and Social Security tax. Additionally, many states do not tax educational assistance reimbursements, thus saving even more.

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

Sloppy Recordkeeping Can Be Expensive

I ran across a recent tax court case that reminded me of some of my clients. Garza v Commissioner is a story about a taxpayer who couldn't convince the IRS that his records substantiated his deduction for auto mileage.

It's not that he don't keep any records, he just wasn't disciplined enough to do it every day. At the end of each month, he made a note of the odometer readings at the end of each month, with occasional additional mid-month readings. But there was no other information relating to vehicle expenses. There was nothing recorded about any personal travel. His entire deduction for auto mileage of $20,085.50 was disallowed by the IRS and Garza took the IRS to the Tax Court.

He lost because he did not record the amount, time, or business purpose for each business use of his truck.
To paraphrase the court, "a taxpayer generally  must maintain adequate records or produce sufficient evidence corroborating his own statement, establishing the amount, date, and business purpose of each expenditure or business use of [an automobile]".

So, my readers, don't let this happen to you.

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

Money Laundering 101

How's that for a catchy title for a blog post?

My friend Richard says that I remind him of Barry the Money Launderer, one of the characters in his favorite TV series, Burn Notice.
I am not an expert in money laundering.  I know next to nothing about it.
This afternoon I ran into an overview of money laundering on the Cornell University Law School Legal Information Institute website.
I thought I would share this information with my readers, some of whom are apparently admirers of Barry the Money Launderer.

"Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. 
The money laundering process can be broken down into three stages. First, the illegal activity that garners the money places it in the launderer’s hands. 
Second, the launderer passes the money through a complex scheme of transactions to obscure who initially received the money from the criminal enterprise.
Third, the scheme returns the money to the launderer in an obscure and indirect way."

This article then goes on to discuss the relationship of money laundering to tax evasion. The two go hand-in-hand. 

"Tax evasion and false accounting practices constitute common types of money laundering. 
Often, criminals achieve these objectives through the use of shell companies, holding companies, and offshore accounts.
A shell company is an incorporated company that possesses no significant assets and does not perform any significant operations. 
To launder money, the shell company purports to perform some service that would reasonably require its customers to often pay with cash.
Cash transactions increase the anonymity of customers and therefore decrease the government’s ability to trace the initial recipient of the dirty money. 
Money launderers commonly select beauty salons and plumbing services as shell companies. The launderer then deposits the money with the shell company, which deposits it into its accounts. 
The company then creates fake invoices and receipts to account for the cash. Such transactions create the appearance of propriety and clean money. 
The shell company can then make withdrawals and either return the money to the initial criminal or pass the money on to further shell companies before returning it to further cloud who first deposited the money."

None of my former or current clients are hairdressers or plumbers and I have never had a client whom I suspected of engaging in this type of activity.

In 1970 Congress enacted the Bank Secrecy Act which requires banks to report cash and currency transactions of over $10,000.00.
Money laundering is a federal crime under the Money Laundering Control Act of 1986. 

If you are a money launderer, I do not want you for a client.

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

Perhaps The Greatest Tax Cheat in History

Paul Daugerdas, a lawyer and certified public accountant from Wilmette Illinois, seems to have won the world record for the biggest tax cheat in all history. He was sentenced yesterday to 15 years in prison.

He was found guilty of tax evasion, mail fraud, wire fraud, conspiracy to defraud the IRS and of "corruptly endeavoring to obstruct and impede the internal revenue laws."

According to a press release issued yesterday by the Department of Justice, Mr. Daugerdas marketed and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes owed to the Internal Revenue Service (IRS), yeilding
approximately $95 million in fees to Daugerdas personally. 

He was ordered to pay $371,006,397 in restitution to the IRS. 

Several other co-conspirators had already been convicted and sentenced for their parts in this massive 20 year scheme.

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