Archive | Deductions

Forbes columnist Tony Nitti makes even taxes entertaining

The IRS, bless ‘em, gave us new rules in the summer of 2014 covering how a shareholder in an S Corporation can establish the right to take losses on his tax returns.

This involves looking at ways the shareholder can show that he has debt basis in the corporation…and at the phrase, “debt basis,” most normal citizens’ eyes will rightly glaze over.

But Tony Nitti, a terrific contributor to Forbes, does a great job of explaining what’s going on in this long piece, including a Q & A that begins, “Please remind me why I should continue to read this?”

I leave it to Mr. Nitti to explain why shareholder basis in an S Corp matters.

Oh, and just for fun, here’s a link to another Nitti column in which he surveys the “tax lessons” to be learned from watching part or all of Fox’s marathon 522-episode airing of “The Simpsons” (already showing and continuing through September 1). Undoubtedly he wrote this so he could take a business deduction for the beer and pizza he consumed during his own viewings.

Make more than $200K? Your taxes are (probably) going up

Remember all the talk after the 2012 election about tax hikes? Well, they’re here–but you’re probably going to be affected only slightly, or not at all, if you are earning less than six figures. However, once you get above $200,000 of total income, you’re almost sure to see a hike in your tax bill this year.

The most significant increases affecting higher-income earners this year include:

–The new 3.8% Net Investment Income Tax on singles with modified adjusted gross income of more than $200,000 ($250,000 for joint filers.) As Brent Hunsberger of The Oregonian points out, this tax on investment income includes real estate income. Remember that real estate income is ordinary income, so this is a 3.8% tax on top of whatever your ordinary marginal tax rate already is. (Department of Shameless Self-Promotion–Hunsberger quotes Yours Truly in his article.)

–A Medicare Tax increase of 0.9% . You are subject to this if you have wages and/or self-employment earnings of more than $200,000; $250,000 for joint filers. Note: Because employers don’t know all of your sources of income, they cannot withhold this additional tax. You’ll be reporting it yourself on the all-new Form 8959.

–An increase in the top rate on long-term capital gains and qualifying dividends to 20%, instead of 15%. This hits people with taxable income above $400,000; $450,000 for joint filers.

–An increase in the top marginal tax rate, from 35% to 39.6%. Again, only the highest earners–people with more than $400,000 of taxable income, $450,000 for joint filers–are affected.

The biggest problem for folks who are affected by all of these increases? Maybe it’s figuring out where the few people are with whom you can commiserate. As this handy-dandy calculator from Kiplinger’s shows , people with adjusted gross income for $400,000 or more are in the top 1% of income earners nationwide.

Get a receipt when you make a donation! Really!

It warmed my heart to see the article in The Oregonian during the holiday season about someone who had dropped a South African krugerrand worth almost two thousand bucks into a Salvation Army kettle

Turns out this is a little bit of a nationwide phenomenon, as The Huffington Post noted.
But here’s where the warped mind of the tax pro goes with this: The gift is wonderful. But these people making anonymous contributions are missing out on the chance to take a charitable deduction for their generosity!

Where the IRS is concerned, it’s not enough to have a heart (or coin) of gold. You have to have a bank record, receipt, or other proof for any cash contributions you make to charity, and a receipt from the charity (on which you write what you gave and what it was worth) for any non-cash contributions.

Nothing wrong with being anonymous. But c’mon, let’s get those deductions too!

Oops: No paperwork, no $18.5 million deduction

Does the IRS turn a laser-like eye on tax returns that claim large deductions for non-cash contributions to charity? You bet.

Will the Service disallow deductions for contributions when people don’t have all their paperwork in order? You double-bet.

The IRS and the U.S. Tax Court hammered this home in May 2012, when it disallowed an $18 million real estate contribution by a California philanthropist.

The taxpayer is a real estate developer, broker and appraiser. He donated a half-dozen properties to charity.

Now, get this:

Everyone agreed that the donations had been made.

Everyone agreed that the properties were worth millions of dollars.

However, Form 8283–which has to be used by anyone making more than $500 in non-cash contributions for the year–was filed without an independent appraisal, which is necessary for gifts of more than $5,000. (The taxpayer, being a real estate expert, figured he could value the property himself.)

Since there was no independent appraisal, there was nobody to sign the Declaration of Appraiser.

The return also didn’t have adequate information attached about how much had been paid for the properties, how they’d been acquired, and other details.

Form 8283 can be a time-consuming pill, and I’ll admit that every year I’ll have clients complain about all the information I need them to provide for taking deductions for non-cash contributions. (No, I don’t have any clients giving anything like $18 million to charity.) But this case brings home the fact that in the eyes of the IRS, you need more than just good intentions to take deductions.

If you want to read it and weep, you can go to a summary of the case here, or get The Wall Street Journal’s take on it. Or, you can read the entire 26-page decision of the U.S. Tax Court.

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Arranging a tax-deductible fire

Ever want to help support your local fire department? Several taxpayers over the years have done just that, by allowing the fire department to use their house for training purposes, including–yes–burning down the house.

Why would someone do that? Well, for the tax benefit! No kidding. The idea is that you get to deduct the fair market value of the house as a charitable contribution. And, hey, if you’ve been planning on demolishing that structure so you can build something else, well, all the better–right?

Wrong, says the IRS. Several taxpayers have been unsuccessful in trying to claim this deduction, including the case earlier this summer of Upen and Avanti Patel, who claimed a $339,504 charitable contribution for letting the Fairfax, Virgina, fire department raze their house. The Patels bought the house planning to demolish it. The IRS’s successful stance was that the Patels did not give away the property; they only allowed the fire department to have use of the structure for training purposes, which was at best a license or a partial (nondeductible) gift.

You can read law professor Paul Caron’s tax blog summary, or read the whole case yourself if you’re getting your inner tax geek on.

One interesting note: The Tax Court’s decision was 9-8, indicating that someone trying this may not necessarily see their deduction goes up in flames (sorry!) In fact, former Oregon Republican gubernatorial nominee Chris Dudley got a lot of heat (double-sorry!!) when The Oregonian reported during his campaign that he’d reported a $350,000 charitable contribution after the local fire department burned down his house back in 2004. He replaced the house with an 8,500-square-foot mansion.

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