September 11, 2012

Time To Call Your Tax Advisor

by Kenneth Hoffman in Tax Counsel, Tax Planning

Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse:

Waited until the last possible minute to start preparing your return
Receive a large employee bonus or award
Become unemployed
Change employment
Take an unplanned withdrawal from an IRA or other pension plan
Retire or are contemplating retirement
Exercise an employee stock option
Have significant stock gains or losses
Get married
Separate from or divorce your spouse
Sell or exchange a property or business
Experience the death of a spouse during the year
Turn 70½ during the year
Increase your family size through birth or adoption of a child
Start a business or acquire a rental property
Receive a substantial lawsuit settlement or award
Get lucky at a casino, lotto, or game show and receive a W-2G
Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity
Plan to gift more than $13,000 to any one individual during the year

In addition, you should call whenever you receive a notice from the government related to your tax return. You should never respond to a notice without first checking with us.

Don't wait until December 31st to call. By then, it is too late.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace of Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a comment and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

September 7, 2012

Can You Prove Basis When Selling Property

by Kenneth Hoffman in Tax Planning, Tax Preparation

In Jovita Diaz (T.C. Memo. 2012-241) the taxpayer sold two pieces of real property. The purchase prices were not in dispute. But in the first property she argued she made $60,000 in improvements after purchase. The costs included $40,000 for renovating the garage to be used as a daycare center and $20,000 for improving the driveway and walkway.

She testified that she hired a contractor to perform the improvements, but she did not introduce any records which supported the costs. She did not introduce an invoice from the contractor, a canceled check, a construction permit for the improvements, or before and after pictures.

Also, she did not introduce any records that showed the property was used as a daycare center. The taxpayer contended that she did not have documentation because she kept moving from one place to another. The Court found her testimony was unpersuasive in support of her claim of $60,000 of improvements. The taxpayer claimed $10,000 in improvements (installation of a lawn) with respect to the second property, but again, could show no support. The Court disallowed any increase in basis for the improvements. In addition, the Court allowed the imposition of the accuracy-related penalty for failure to keep records.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

September 5, 2012

Players Behaving Badly

by Kenneth Hoffman in Business Counsel, Tax Planning

Football season is back! College teams have started already, and the pros kick off this weekend. So welcome back to the energy and excitement of game day. Enjoy the pageantry and the tailgating as the days get shorter and the air gets crisp. And don't forget the tax liens!

What?!? Don't forget the tax liens . . . ? That's right, sometimes the surest hands in the game drop the ball on their taxes.

We'll start our tour of NFL tax offenders with Plaxico Burress. The free-agent wide receiver, who once signed a $25 million contract with the New York Giants, owes New York state a cool $59,241 in tax. Of course, Burress is no stranger to the law -- he spent nearly two years scrimmaging behind bars after accidentally shooting himself in the leg at Manhattan's glitzy Latin Quarter nightclub.

Running back Jamal Anderson played eight seasons for the Atlanta Falcons, where he earned the nickname "Dirty Bird" for his touchdown celebration dance. But the IRS will be dancing in the end zone when they collect $478,247.57 in unpaid taxes for 2007 (when he appeared on MTV's "Celebrity Rap Superstar") and $627,015.94 for 2008 (when he appeared as an analyst for ESPN). Like Burress, Anderson has also had brushes with the law -- in 2012, he was arrested for drunk driving, and in 2009, he was arrested after Atlanta police reported him snorting cocaine off a toilet bowl in the Peachtree Tavern's restroom.

Quarterback Ken Stabler led the Oakland Raiders to a 32-14 win over the Minneapolis Vikings in Super Bowl XI. (That was so long ago, people paid more attention to the game than the commercials!) Now it looks like he'll be playing for the IRS. Earlier this summer, a federal judge sacked Stabler for $259,851 in unpaid business and personal taxes. (Oh, and the IRS piled on for another $5,509 in penalties.) Stabler's attorney says the former passer has sold his house to help pay the debt, and will also make monthly payments out of income he earns appearing at NFL events.

At least Burress, Anderson, and Stabler actually filed their returns, even though they didn't pay. Cornerback William James played for the New York Giants, Philadelphia Eagles, Buffalo Bills, Jacksonville Jaguars, Detroit Lions, and San Francisco 49ers. Apparently he lost his W2 in one of those moves. Federal prosecutors say he earned over $9 million during his career -- but failed to file returns for 2005-2009. Now he faces up to a year in prison and $100,000 in fines when he's sentenced later this month. Oops!

And what about everyone's favorite former All-Pro felon, O.J. Simpson? Would you be shocked to learn that "the Juice" is fumbling his taxes, too? That's right, the IRS announced just last week that they had tackled him with liens for $15,927.89 for 2007, $105,119.71 for 2008, $49,490.27 for 2009, and $8,897.20 for 2010. Of course, taxes are probably the least of O.J.'s worries right now, considering he's got 29 years left to serve on armed robbery and kidnapping charges. And he still owes murder victim Ron Goldman's family $33 million in civil damages!

There's not really a specific tax-planning lesson here -- we just hope you're paying more attention to the game than these guys are! Either way, you can trust us to keep an eye downfield for you, and help you stay out of those IRS tackles!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

August 29, 2012

Trillion Dollar Taxpayer

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

When America's biggest corporations make news for their taxes, it's usually for how little they pay. One recent study, for example, argues that 26 big corporations, including AT&T, Boeing, and Citigroup, paid their CEOs more than they paid Uncle Sam in federal income tax. (Comparisons like that might bring to mind an old Babe Ruth quote. In 1930, a reporter pointed out that Ruth's $80,000 salary was more than the President's -- to which the Babe replied "I know, but I had a better year . . .") Now, another corporate giant is making headlines for its taxes. And for once, the surprising news involves how much it paid, not how little.

Exxon and Mobil are iconic corporate names. Both began life as parts of John D. Rockefeller's original Standard Oil Company. Both were spun off in 1911 when the U.S. Supreme Court found Standard Oil guilty of illegally monopolizing the oil refining industry. ("Standard Oil Company of New Jersey" eventually grew into Exxon, while "Standard Oil Company of New York" morphed into Mobil.) When the two giants re-joined to create ExxonMobil in 1999, they instantly became the biggest publicly-traded corporation on earth. And since then, they've only gotten bigger, with a "market capitalization" (total value of outstanding publicly-traded shares) topped only by tech giants Apple and Microsoft, and the largest company on earth by revenue.

You would expect a corporation this size to pay a lot in taxes, right? And for once, you would be right. In fact, a recent study by economist Mark Perry reveals that ExxonMobil has paid over one trillion dollars in taxes since that merger. That's a full three times the profit the company earned for its actual shareholders.

Take 2008, for example. ExxonMobil's profit reached a staggering $46.87 billion, the highest annual profit since the Romans invented the corporation. But they also paid $36.53 billion in income taxes, $34.51 billion in excise taxes, and $41.72 billion in other taxes, including sales taxes. Do the math and you'll see that totals $112.76 billion -- $9.4 billion per month, $2.17 billion per week, $309 million per day, and $214,535 per minute.

Skeptics might reply that ExxonMobil doesn't actually "pay" all those taxes out of its own pocket. They argue that the corporation just passes the cost of excise taxes on to customers and merely collects sales taxes imposed by state and local governments on buyers. But there's no arguing that the economic activity generated by this particular actor ultimately led to that trillion dollars in worldwide tax revenue.

We're not here to champion "Big Oil" in general, or ExxonMobil in particular. We realize ExxonMobil has been criticized for inadequately responding to various oil spills, funding research disputing "global warming" claims, and even violating workers' human rights in Indonesia. We're here to champion the value of surprising information -- especially when we can use that information to your benefit.

You'd probably be surprised, for example, to learn that some business owners deduct their family's medical bills as a business expense. But that's exactly what a medical expense reimbursement plan allows. You'd probably be surprised to learn that you can deduct the cost of crashing your car if it happens while you're driving for work. But that's what the law allows.

We constantly go to the well for smart tax strategies, so you don't have to. Call us if you want to put this sort of information to work for you! And remember, we're here for your friends, family, and colleagues, too.

August 22, 2012

Linsanity!

by Kenneth Hoffman in Tax Counsel, Tax Planning

The clock is ticking down on "summer." July 4th barbecues are a distant memory, and Labor Day is looming near. Forget about baseball's pennant races starting to heat up. Forget about the upcoming NFL season. It's time to talk basketball!

Taiwanese-American point guard Jeremy Lin played college ball at Harvard, where he notched an Ivy League-record 1,483 points, 487 rebounds, 406 assists, and 225 steals. That might have been enough to get drafted if "Ivy League" earned any respect with NBA scouts. Instead, he walked on to the Dallas Mavericks and warmed various benches for the Golden State Warriors, Houston Rockets, and (Chinese Basketball Association) Dongguan Leopards before catching fire with the New York Knicks. He averaged 18.5 points and 7.6 assists over 26 games before leaving because of a torn meniscus. But those 26 games were enough to ignite "Linsanity," with New York bars and restaurants introducing "Lintinis," asian-spiced chicken "Lings," and asian-inspired "lin-burgers" for beleaguered Knicks fans who finally had a reason to cheer.

At the end of the season, Lin became a restricted free agent. This meant he could sign an offer with another team -- but the Knicks could match it and keep him. Last month, the Houston Rockets re-signed him to a three-year, $25.1 million deal, which New York declined to match, and now, Linsanity moves south to Houston. So naturally, we want to know what it means for Lin's tax bill!

Let's start with Lin's rooting section at the IRS. Regardless of where he plays, he'll pay federal income tax at the top marginal rate of 35%. He'll also pay Medicare tax of 2.9%. If the Bush tax cuts expire at the end of the year, as they're already scheduled to do, that top rate will rise to 39.6%. And the Medicare tax jumps to 3.8% on January 1 as tax hikes included in the Affordable Care Act take effect.

Now let's look at his old tax bill for the Knicks. In "New York, New York", Frank Sinatra sings "If I can make it there, I'll make it anywhere." What ol' Blue Eyes probably meant is that if he could afford the taxes there, he can afford them anywhere. So, Lin starts out owing Uncle Sam anywhere from 37.9 to 43.4%. New York State shakes him down for 8.82%. Then New York City runs up the score for another 3.876% more. If Lin counted baskets like he paid taxes, he would have scored 481 points for the Knicks -- but kept just 239 after taxes!

Now let's look at his new tax bill for the Rockets. Lin will be glad that basketball is an indoor sport when he gets a taste of Houston humidity. But he'll find the tax climate a lot cooler. He'll pay the same amount to Uncle Sam, of course. But neither Texas nor Houston impose any tax on his income at all. None! So this difference could mean as much as a million dollars more per year in Lin's oversized pockets. Smart planning for a guy who graduated with an economics degree and a 3.1 GPA!

Of course, as is usually the case with taxes, things aren't quite so simple. Professional athletes pay state and local taxes wherever they play. That means that when Lin travels back to Gotham to play the Knicks, he'll renew his friendship with New York tax collectors -- but when he plays the Orlando Magic or Miami Heat, he'll enjoy the same zero percent tax rate in Florida that he gets in Texas. And of course he can deduct state and local taxes he pays from his federal taxable income.

Are you expecting an outstanding season in 2012? Maybe wondering where it makes the most sense to play ball? We're here to prevent the IRS from "calling a technical" on your finances. And remember, we're here for your teammates, too!

August 17, 2012

Tax Tips For NewlyWeds

by Kenneth Hoffman in Tax Counsel, Tax Planning

If you’ve recently updated your status from single to married, you’re not alone – late spring and summertime is a popular period for weddings. Marriage also brings about some changes with your taxes. Here are several tips for newlyweds from the IRS.

Notify the Social Security Administration It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5, Application for a Social Security Card. The form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213, or visiting a local SSA office.
Notify the IRS if you move IRS Form 8822, Change of Address, is the official way to update the IRS of your address change. Download Form 8822 from IRS.gov or order it by calling 800-TAX-FORM (800-829-3676).
Notify the U.S. Postal Service To ensure your mail – including mail from the IRS – is forwarded to your new address, you’ll need to notify the U.S. Postal Service. Submit a forwarding request online at www.usps.com or visit your local post office.
Notify your employer Report your name and/or address change to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
Check your withholding If you both work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. You can use Publication 505, Tax Withholding and Estimated Tax, to help determine the correct amount of withholding for your marital status, and it will also help you complete a new Form W-4, Employee's Withholding Allowance Certificate. Fill out and print Form W-4 online and give it to your employer(s) so the correct amount will be withheld from your pay.
Select the right tax form Choose your individual income tax form wisely because it can help save you money. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns rather than taking the standard deduction. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
Choose the best filing status A person’s marital status on Dec. 31 determines whether the person is considered married for that year for tax purposes. Tax law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but filing jointly is usually more beneficial.

Bottom line: planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings. Contact us for more information about changing your name, address and income tax withholding.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

August 15, 2012

Living the Tax-Free Life

by Kenneth Hoffman in Tax Counsel, Tax Planning

As the 2012 election draws near, and taxes take center stage in that election, politicians and pundits are weighing in on Republican nominee Mitt Romney's personal taxes. Will he release any of his returns for years before 2010? Did he really not pay any tax at all in some of those years? Is there something in those returns that he fears might jeopardize his campaign?

But Mitt Romney isn't the only candidate enjoying tax-advantaged income. President Barack Obama, like Presidents before him, enjoys tax-free benefits that would make most corporate CEOs drool with envy. And it's not a scandal -- it's all out in the open for any voter to see.

Let's start with the basics. The President earns a $400,000 annual salary -- barely enough, by itself, to put him in the much-vaunted "1%." He also gets a $50,000 annual entertainment allowance, which helps support those State Dinners.

But salary and allowance are just the tip of the President's compensation iceberg. For starters, there's a 55,000 square-foot house on 18 prime acres of Washington real estate that Zillow.com estimates would rent for $1,752,296 per month. (The tax alone on the value of that rent is $7.36 million per year.) There's also a rustic cottage just outside DC, staffed by the U.S. Navy and Marine Corps, that he uses as a vacation retreat.

Next, there's security. Plenty of CEOs and celebrities hire bodyguards to ward off real or imagined threats. And that security may be tax-deductible. (Hard for the IRS to collect tax on your income if you're not alive to earn it.) But the President's Secret Service protection is tax-free, and his guards are the best of the best. While the exact value of the President's protection is a closely-guarded secret, the House of Representatives voted $113 million in funding for the 2012 campaign.

Those of you travel often will probably agree that the President's most valuable perk is the ability to fly without the usual TSA "perp walk." CEOs typically fly Gulfstreams, Bombardiers, and similar aircraft, with barely enough headroom to stand up straight. The President, on the other hand, enjoys not one, but two fully-loaded 747-200Bs, both equipped with executive stateroom, office, conference room, and state-of-the-art navigation and communications systems that let him conduct business in the air, even if the country is under attack. (The term "Air Force One" doesn't refer to a specific plane -- it's the official air traffic control signal for any aircraft carrying the President.)

Corporate jets typically carry a dozen passengers and cost $3,000 to $6,000 per hour to operate, while Air Force One carries 102 passengers and crew and costs a whopping $181,000 per hour.

Then there are the "little" perks that ease the stress of leading the free world. The fawning staff. The private chefs. The first-run movies, delivered straight to your own "media room." Fully tax-free, of course . . . who can even figure out how to tax them?

The perks won't stop when the President leaves office. As with all former Presidents, he'll enjoy a pension equal to a Cabinet-level salary (currently $199,700). He'll enjoy continued Secret Service protection, for himself and his family, for 10 years from the date he leaves office. He'll get reimbursed for staff, travel, and office expenses. And he'll be able to earn a small fortune writing memoirs and giving speeches -- although that fortune will be fully taxable.

Most of us would agree that any President earns every dime we pay him, whether that income takes the form of salary or benefits. But you don't have to be President of the United States to profit from tax-free perks and benefits. Helping you make the most of those opportunities for your business is a big part of our business. Call us for a plan that makes the most of your opportunities!

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

August 11, 2012

How Not To Run A Business

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

In Leon Solomon Verrett III et ux. (T.C. Memo. 2012-223) the taxpayer's activity was small construction jobs. The construction activity has not generated a profit for any of the 17 years it has operated.

The taxpayer managed his construction activity from a home office. It had a listing in the local telephone directory, but no business plan, dedicated bank account or Internet presence. The taxpayer did not use computer software to track finances although he had done so as a purchasing manager. He was not licensed as a general contractor. The construction activity consequently generated limited income without the license because he could not lawfully undertake larger construction jobs. He owned a tractor, four trailers, various power tools and other machinery that he used in his construction activity. He charged lower rates than did other local contractors. The taxpayer did not follow the industry practice of applying a 20% overhead charge to the cost of materials. Rather, he directed his clients to purchase the materials from a home improvement store. Most of the taxpayer's construction services during the years at issue involved uncompensated projects for his family and his church. The taxpayer used the same tools and equipment for these endeavors that he used when providing paid construction services.

The taxpayers claimed construction activity income of $3,400, $4,000 and $13,395 and expenses of $31,757, $36,152 and $30,174 for the years at issue. The Court looked at the none factors reviewed in determining whether an activity is engaged in with a profit motive and found the taxpayer was not engaged in the activity for profit. The Court noted the taxpayer's decisions regarding pricing, the general contractor's license and unpaid projects, however, show that he was not primarily motivated by profit. It was significant that the construction activity never generated a profit. A for-profit enterprise would not repeatedly and consistently generate losses without changing its practices. The Court also cited that the losses offset his wife's wage income.

In reading the Court's decision, I find the following passage interesting:

B. The Expertise of the Taxpayers or Advisers: The second factor is whether petitioner developed his own expertise and sought guidance from industry experts. See sec. 1.183-2(b)(2), Income Tax Regs. Petitioner acknowledged his practices made the construction activity consistently unprofitable. He testified that he came from a family of construction workers, yet nothing in the record established his relatives were experts or that he consulted with them. We find that petitioner did not demonstrate any business expertise or consult with any experts. This factor weighs against petitioner.

If you are a new entrepreneur or a seasoned veteran, it pays in the long run to consult with a tax and business advisor. I am available to discuss with you any questions you may have regarding tax implications of a business decision or general business questions. Feel free to call me at 954-591-8290 or email me with your questions. I am available to answer that one-time question or my firm can be retained as an ongoing, on-call advisor.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

August 8, 2012

Tax Code Runs Deep

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

American capitalism has produced generations of great brand names, and Chevrolet is one of the most iconic. Swiss race car driver Louis Chevrolet founded his car company in 1911, then sold it to his partner just four years later. General Motors acquired the company in 1918, and positioned Chevrolet as an everyman's car to compete with Ford's Model T. The company prospered through the 1950s and 60s, producing the legendary Corvette among other models. More recently, Chevy was caught in the economic downturn of 2007-2010, leading to General Motors bankruptcy reorganization. But GM and Chevy rebounded quickly, and now actually are in one of the strongest periods in their history.

Right now, Chevrolet is running a truly bold marketing campaign for our era of skeptical consumers. Their "Love It or Return It" campaign lets you buy any new Chevy through September 4 -- and, as the name implies, if you don't love it, you can actually return it. There's fine print, of course. You have just 60 days to decide, and you can't drive it more than 4,000 miles. Oh, and -- you knew the tax angle was coming, right -- "you may be subject to federal, state, or local tax on any benefit paid."

Huh? Tax on a benefit? What "benefit" is there in returning a car you decide you don't like?

Well, as so often happens with a question like this, the answer is, "it depends." Let's say you take delivery of a new Corvette. (Red, of course.) The manufacturer's suggested retail price on a base coupe is $49,600. You drive it off the lot, confident you're behind the wheel of your dreams. But soon you get tired of the 430-horsepower V-8, the 4.2-second 0-60 acceleration, or the standard leather 6-way power seats. So after 60 days and 3,999 miles, you take it back.

You've always heard that cars lose half their value the minute you drive them off the lot, right? Well, that's an exaggeration -- but "your" Corvette is still probably worth $8,000 less than than what you paid for it. So if you get a full refund, have you just realized $8,000 in income? And if you used the car for business, do you have to recapture anything you depreciated?

Let's take another example. You're an environmentally responsible driver, but you can't afford the sexy new Tesla Model S. So you settle for a $40,000 Chevy Volt. You gleefully claim the $7,500 plug-in motor vehicle credit. And again, after 60 days and 3,999 miles (but only a couple of tankfuls of gas), you return it and get your $40,000 back. Now what? First off, have you even kept the car long enough to claim the credit? And as with the 'Vette, if you owe tax on the "benefit"... what is that benefit? That credit reduces your "basis" in the car to $32,500, so how much tax you owe on the difference depends both on what the car is worth and whether you get to keep the credit! (Oy!)

Washington knows how important the auto industry is to our economy, so the tax code is full of incentives to drive sales. This credit is just one example. Business owners have long known of another one -- which is that buying a truck in December can make for some nice year-end planning. Then there was 2009, when we saw a limited-time above-the-line deduction for state and local sales and excise taxes on new car sales. And in that same year, the much-mocked "Cash for Clunkers" program generated $2.877 billion in rebates on 690,114 vehicles, too. So don't be surprised if the IRS really does pay attention to these sorts of questions!

We want you to enjoy the freedom of the open road -- especially if it means a sweet convertible with the wind in your hair. But -- especially if you use your vehicle for business -- we want you to make smart choices. So call us before you trade in your old ride, and let us help you get the most out of your wheels!

August 5, 2012

Cancellation of Debt Is Taxable - Maybe

by Kenneth Hoffman in Tax Counsel, Tax Planning

Generally, if you satisfy a debt for less than the face amount, you have cancellation of debt (COD) income and COD income is taxable. There are several exceptions to this rule.

One is if you're insolvent at the time you receive the income. The term insolvent means the excess of liabilities over the fair market value of assets. In Bernard R. Shepherd et ux. (T.C. Memo. 2012-212) the taxpayers settled a credit card debt for $4,412 less than the amount due and received a Form 1099-C, Cancellation of Debt for that amount. The taxpayers claimed they were insolvent at the time the debt was canceled.

The IRS only disputed the fair market value claimed for the taxpayers' principal residence and their beach house. The taxpayers entered into a settlement with the city regarding the value of the beach house for property tax purposes and cited that as a basis, along with comparable sales the taxpayers had assembled in grieving the valuation. The Court noted that the comparable sales were at least two years after the discharge of the debt, and were not backed up by details and valuation methodology. As to the settlement with the city, the Court noted that it has previously that a value placed upon property for the purpose of local taxation, unsupported by other evidence, cannot be accepted as determinative of fair market value for Federal income tax purposes in the absence of evidence of the method used in arriving at that valuation. The Court found the taxpayers also failed to show the fair market value of their principal residence.

The Tax Court found the evidence the taxpayers provided for the FMV of the two residences did not meet the required burden of proof. Sec. 108(d)(3) requires the FMV of the taxpayer’s assets to be determined “immediately before discharge.” The taxpayers provided a stipulated settlement of the value of the vacation home for local real estate tax purposes of $380,000 for 2010, two years after the discharge. Besides not being a value contemporaneous with the discharge, the Tax Court noted that values for real estate tax purposes are not persuasive without other evidence corroborating them.

An "appraisal" by a bank the taxpayers cited was as of 2011, some three years after the discharge of the debt. The Court also discounted the value of the assessment of the property for the tax bill. The Court held the taxpayers did not meet their burden of proof in showing they were insolvent at the time of the discharge of the debt.

A timely appraisal would have caused the canceled debt to be non-taxable.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.