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Archive for February 2010

The Ides of March are almost upon us! Get those S corp returns done!

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For those of you who have S corporations, remember that if your 2009 tax year ended December 31 (which is probably true for most of you) your 2009 Form 1120S is due on March 15, 2010. If this is your first year filing as a S corporation, make sure that you take note of this for future reference – the return is due on the 15th day (or first business day after the 15th when the 15th falls on a weekend or a holiday) of the third month after the end of the tax year, and not the fourth month as is the case for your personal return.

If you intend to operate as an S corporation, you should have filed IRS Form 2553, Election by a Small Business Corporation, either within 2 months and 15 days of the beginning of your first tax year, or at any time during the year preceding the tax year in which it was to take effect. If you failed to make an election in a timely manner, you may be able to request relief and make a late election by filing Form 2553 with your initial 1120S. You can request relief if all of the following are true:

  • You fail to qualify to elect to be an S corporation solely because of the failure to timely file Form 2553.
  • You have reasonable cause for your failure to timely file Form 2553.
  • You have not filed a tax return for the tax year for which you want to make the election.
  • You file Form 2553 as an attachment to Form 1120S.
  • No taxpayer affected by the S corporation election (generally, the shareholders in the S corporation) has reported inconsistently with the S corporation election on any tax return for that tax year.
  • As always, if you have questions about your specific tax situation, you should consult a reputable tax professional in your area.

    Written by nctaxpro

    February 28, 2010 at 3:10 pm

    Posted in Federal, State, Taxes

    “What’s the basis, Kenneth?” Calculating gain on sales of stock

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    The New York Times has an AP release up entitled “Using Tax-Prep Software? Trust Results but Verify”. Interpreting the typical 1099-Combined that taxpayers get from their brokerage house can be tricky, and downloading the info from your broker into your tax prep software can be even trickier. By far the largest number of post-April 15 problems that we see have to do with misreported stock transactions.

    The basic problem, as the referenced article notes, is this:

    brokerages aren’t currently required to provide cost data (e.g. your basis in the stock), and software simply reflects the information it’s given, it’s up to filers to make sure the results of the import are accurate.

    At its core, calculating your cost basis is simple. You take the amount that you paid when you purchased the stock, plus any commissions that you paid to the brokerage firm, and you have your basis. Once you have the basis, the amount of your capital gain is the amount for which you sold the shares (less any commissions received by the brokerage firm), minus your basis.

    Where it becomes tricky is when you purchase shares of stock at different times and for different amounts. Unless you (or your agent) designates specific shares of stock to be sold, the IRS requires you to use the FIFO method (first in, first out) to determine which shares were sold – which means that you sell your oldest shares first. You also have to take into consideration such things as stock splits (which reduce your basis per share but not your total basis) and reinvested dividends (which add to the number of shares that you own).

    Let’s walk through a case study:

    1/1/2008: purchase 100 shares of company XYZ at $10 per share, $25 brokerage fee
    12/1/2008: company declares a dividend of 50 cents per share, reinvested in stock at $20 per share (no fee). You now own 102.5 shares ($50 dividend on your 100 shares reinvested at $20 per share)
    5/1/2009: broker purchases an additional 100 shares at $15 per share, $25 brokerage fee
    11/1/2009: you sell 150 shares at $17 per share. $25 transaction fee.

    Using FIFO, you sold:
    100 shares from the first purchase, basis $1025 (100 * 10 + 25)
    2.5 shares from the reinvested dividend, basis $50
    47.5 shares from the final purchase, basis $724.38 (47.5 shares at a basis of $15.25 per share, calculated from the $1525 you paid for 100 shares)

    So your total basis in the shares that you sold is $1799.38. However, because you sold 100 shares that you held for more than a year, and 50 shares that you held for less than a year, you have to allocate the basis and the sale proceeds between long-term and short-term for purposes of calculating gain.

    Your net proceeds from the sale were $2525 ($2550 for 150 shares at $17 per share, less the $25 brokerage fee). Of that $1683.33 is allocated to the 100 shares held long-term, and $841.67 is allocated to the 50 shares held short-term. Your gains, then, are:

    long term $658.33 ($1683.33 – $1025 basis)
    short term $67.29 ($841.67 – $50 basis on the reinvested dividend – $724.38 basis on the remaining 47.5 shares)

    Fun, yes? Chances are that if you imported your information from the brokerage house into your favorite tax prep software -as the referenced article notes – the basis information would either be missing or incorrect.

    The good news is that many brokers, including most of the major ones, report basis as well as proceeds on the Combined 1099, so you should be able to figure it out. The better news is that by 2012 stock brokers and mutual fund companies will be required to report cost basis to their investors, and to the IRS – so that you’ll ALWAYS have the basis handy on the 1099.

    As always: if you are not sure you have it right, contact a reputable tax advisor in your area. IRS looks closely at Schedule D transactions; if you have it wrong, you are almost guaranteed to get a letter from them, and it’s better to be sure before you have to pay penalites and interest rather than after.

    Written by nctaxpro

    February 27, 2010 at 10:45 am

    Posted in Federal, Taxes

    More about Austin Joe

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    Professor James Edward Maule, writing in his MauledAgain blog, wonders if Joseph Stack knew about the options available to him:

    One ironic aspect of this tragedy is that Stack could have avoided the independent contractor versus employee tax hurdle that he cites as one of many things in life that angered him. In his posting (here), Henchman points out that this issue “seems to have vanished over the last 20 years, since the consultant can incorporate himself or herself.”

    It is true that Stack could have incorporated himself, but that likely would not have solved his problem. I have experience working in high-tech companies, including several years as a consultant, and in practice, the issue hasn’t really gone away. High-tech companies are loath to hire consulting firms consisting of a single individual, in part because there’s still a perception that single individuals who incorporate are doing so to dodge taxes, in part because there’s no fallback position if something happens to the individual. To the extent that the issue has gone away, it’s in large part due to consultants banding together under one roof (much as a group of physicians does in a group medical practice, in fact) rather than individuals incorporating on their own.

    Written by nctaxpro

    February 22, 2010 at 2:37 pm

    Austin Joe, tax protests, and independent contractor vs employee status

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    I was going to write something about Joe Stack, but other people have said what I’d say, and much better. Two in particular caught my eye.

    Kay Bell, who writes the Don’t Mess With Taxes blog, and who lives in the Austin area, wrote this excellent piece on the efforts by tax protesters to turn Stack into a hero/martyr for the cause. Ms. Bell writes:

    In addition to the relatively moderate bloggers and Internet chat room participants who prefaced their comments with “I don’t agree,” even more have come out of the extremist woodwork to make Stack a martyr for their anti-government, anti-tax causes. In Internet chat rooms, his deluded destruction was praised as a patriotic act against an oppressive system. Fan pages sprung up on Facebook.

    That, folks, is almost as disturbing as what Stack did. And it’s just flat out wrong.

    Amen!

    The Tax Lawyer, Peter Pappas, has this explanation of the independent contractor vs employee ruling that was at the heart of Stack’s decision to fly his plane into the IRS building. He notes, quite rightly, that

    Stack was upset that §1706 did precisely what it was designed to do: Deprive him of the chance to exploit independent contractor status to avoid paying taxes through non-filing or through the understatement of income, overstatement of deductions, and avoidance of income tax withholding.

    Mr. Pappas includes a link to this description of the law governing the determination of independent contractor status vs employee status. If you are not sure that you are classified correctly, read that article.

    Written by nctaxpro

    February 21, 2010 at 1:30 pm

    “What do I do with a 1099-C?”

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    If you have had a debt forgiven – not an uncommon occurrence in this economy – you might receive Form 1099-C, Cancellation of Debt, in the mail. What that means is simple – the lender has reported the cancellation of your debt to the IRS, and the IRS will be expecting you to report that as income on your tax return, and pay the appropriate amount of tax on it. I’m sure that you don’t appreciate having “income” that you never saw in your pocket subject to tax, but that’s what the tax code allows.

    Robert Wood’s excellent article in Forbes discusses ways that you might be able to handle the Cancellation of Debt (COD) income on your tax return (hat tip to Kathleen A. Scanlon for the tweet). Generally, you have to report the income on line 21 of your Form 1040 as other income subject to tax, but there are exceptions, which Mr. Wood covers in detail. I’ll mention a couple of the more common ones here.

    If the COD is the result of a foreclosure or restructuring of the mortgage on your primary residence, or a “short sale” where the lender accepts less than the amount remaining on your mortgage and writes off the balance, that income is tax-free up to $2 million, for transactions from 2007 through 2012. Note that this applies only to your primary residence, and only for loans used to buy, build, or improve your home; if you took out a second mortgage to pay your kids’ tuition, you’re out of luck here.

    If your liabilities exceed your assets by more than the amount of the debt forgiven, then you are considered to be insolvent, and the amount received from the COD can also be excluded from your income. Debts discharged in bankruptcy are also not considered to be taxable income.

    If you are unfortunate enough to receive a 1099-C, you should not, must not, CAN NOT ignore it! I also recommend that you consult a reputable tax professional for advice – do NOT try to handle this on your own, because it’s all too easy to make a mistake that will cost you even more than getting out of the debt did in the first place. There are a lot of things that you can handle on your own when it comes to your taxes (yes, I know that’s sacrilege coming from a tax pro!), but COD isn’t one of them.

    Written by nctaxpro

    February 20, 2010 at 8:18 pm

    Posted in Federal, Taxes

    Deducting moving expenses, part 4 – how to report them (federal and state)

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    Part 1 – can expenses be deducted
    Part 2 – what expenses can be deducted
    Part 3 – handling employer reimbursement

    Now we come to the last step – how do you report moving expenses on your return?

    For your Federal return, that’s the easy part. You record your moving expenses and employer reimbursements on IRS Form 3903. You report the total amount you paid to move your personal effects and household goods on line 1, and your deductable travel expenses on line 2. Line 3 is the sum of lines 1 and 2. On line 4, put the amount of your employer reimbursement (reported in box 12 with Code “P”). Subtract line 4 from line 3, put the result on line 5 and (if positive) transfer the total to line 26 of Form 1040. That’s it! Note that if the result is negative, you must report the excess reimbursement as part of your wages on line 7 of your form 1040.

    What about state returns? Rules vary from state to state. Some states, like New Jersey, don’t allow them to be deducted at all (although in NJ you can exclude taxable reimbursements for moving expenses from your income). Some states, like Pennsylvania, allow them to be deducted only for moves into or within the state, but not for moves outside the state. Some states, like North Carolina which bases its tax structure off the Federal taxable income, allow them to be deducted regardless of the nature of the move. The general rule, if you are not sure, is that moving expenses go on the return of the state that you are moving to – but check with a tax professional first!

    Written by nctaxpro

    February 20, 2010 at 11:12 am

    Deducting moving expenses, part 3: handling employer reimbursement

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    In the prior entries, I told you

    how to determine if you qualify to deduct moving expenses, and

    what you can and cannot deduct.

    It’s far less frequent now, but in the past employers would often offer prospective employees an incentive package that included reimbursement of some or all of their moving expenses. For example, when I moved from Pennsylvania to Maryland in 1982, the company that hired me paid the cost of moving and shipping my household goods and personal effects, and provided a 30-day housing allowance. So how do you handle employer reimbursements when figuring your expenses?

    You might think that you don’t report any expenses that were reimbursed by your employer. That’s not necessarily the case; it depends on the method your employer uses to reimburse you. Let’s consider several ways that your expenses can be reimbursed:

    1. The employer pays a third party (such as a moving company) directly. In this case, you have no cost or direct reimbursement, and those expenses are not reported.

    2. Your employer reimburses you directly, but you are required to file an expense report within 60 days of incurring your expenses, and the employer remiburses you only for the expenses that you are allowed to deduct. The employer may pay you an advance, but if the advance is more than your actual expenses you are required to return any excess to the employer. In this case, you are very likely reporting your expenses under an accountable plan. You can confirm this by looking at your W-2; there should be an entry in Box 12 with Code “P” for the amount of your reimbursement. If the employer’s reimbursement was for 100% of your deductable moving expenses, you do not report either the expenses or the reimbursement. If the employer’s reimbursement was for less than 100% of your deductable moving expenses, you report both the total of the expenses and the reimbursement you received, and you can deduct the difference.

    3. Any other reimbursements – including reimbursements for non-deductable expenses, such as my 30-day housing allowance – are reimbursements under a non-accountable plan. The employer is required to include those in your income (box 1 of your W-2) and deduct Social Security and Medicare taxes. In this case, since you have been taxed on the reimbursement, you report all of your deductable expenses but only those reimbursements (if any) that show in box 12 of the W-2 with code “P”.

    If you are not sure where your reimbursements fall – especially if your W-2 does not have a Box 12/Code “P” entry – ask your employer. If your employer did not include your reimbursements in either Box 1 or Box 12, then you must include those reimbursements on Line 7 of your Form 1040 – they are considered to be part of your compensation.

    If you were reimbursed in 2009 for moving expenses that you incurred and deducted in 2008, on the other hand, and those reimbursements show up on your 2009 W-2 in Box 12/Code “P”, you report that reimbursement as other income on Line 21 of your Form 1040.

    In the next – and final! – installment, I’ll discuss how moving expenses are deducted on your Federal return, and how they are treated on state returns.

    Written by nctaxpro

    February 17, 2010 at 10:46 am