Monthly Archives: January 2016

Business Versus Hobby

Business versus hobby? Why does that matter? Because there is a tax impact, that’s why.

Are you tired of the rat race?  Are you ready to make the American dream a reality?  Congratulations, you live in Massachusetts, one of the easiest places in the world to start a business . . . except when that business is not really a business but a hobby.

Business versus Hobby

The First Five Years of a Business

Many businesses tend to lose money the first couple of years of operation. It usually takes five years to make a profit. Because they are a business they get to write off all of their losses. Here is where a business versus hobby will pan out. If you have a hobby, you can only use the losses to offset any incidental hobby income. The tax benefits of having a business has led many a taxpayer to run afoul of the IRS. While there is no single hard and fast rule that one can use to determine if you have a hobby or a business, the IRS has a list of criteria that one can use to make that determination.

  1. The manner in which the taxpayer carries on the activity. Do they complete accurate books? Were records used to improve performance?
  2. The expertise of the taxpayer or his advisers. Did the taxpayer study the activities business practices? Did they consult with experts?
  3. The time and effort expended by the taxpayer in carrying on the activity. Do they devote much of their personal time and effort?
  4. The expectation that the assets used in the activity may appreciate in value. Is the plan to generate profits through asset appreciation?
  5. The success of the taxpayer in carrying on similar or dissimilar activities. Have they converting them from unprofitable to profitable?
  6. The taxpayers history of income or losses with respect to the activity. Has the taxpayer become profitable in a reasonable amount of time?
  7. The amount of occasional profits. Even a single year of profits can be a strong indication that an activity is not a hobby.
  8. The financial status of the taxpayer. Does the taxpayer have other income sources that are being offset by the losses of the activity?
  9. Does the activity lack elements of personal pleasure or recreation? If the activity has large personal elements it is indicative of a hobby.

A Likely Hobby

Let’s say that you are an electrician and you put together remote controlled robots on the side.  You periodically make sales of your creations online and at a robotics club. You do not really keep financial records.  You don’t have a written business plan.  I would probably say that this is a hobby, even if it makes an occasional profit as it does not meet any of the business criteria presented by the IRS.

A Likely Business

Now let’s say you decide you want to turn this same activity into a business. You consult with your tax advisor and a lawyer. You put together a business plan; you set up an LLC, a website, a separate bank account. You feature a lineup of products that you intend to make a profit on.  You keep excellent books and you pour a ton of sweat equity into the venture. Despite your best efforts, your robots are a complete disaster and you lose your shirt. You then make the decision to close up your business. In this instance, despite having lost money, I would probably classify this as a business as it meets virtually every IRS business criteria. In the end, you end up with the two consolation prizes. The first is that you get a nice tax break when you write off all your business losses; the second is that this is a great country for closing out a business as well.

Business versus Hobby, Sort it Out

Alex Franch, BS EA  can help you work through all the criteria of a business versus hobby. Call him at 781.849.7200 to determine if you will get any tax benefit from your business investment. We invite you to leave your comments below or on our Facebook or Google + pages. If you found this information helpful , and you think someone else might benefit from it, feel free to share it on your social media pages.

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Wrong Tax Forms Issued – Massachusetts Retirees

Wrong Tax Forms were issued on January 21, 2016 to over 50,000 Commonwealth of Massachusetts Retirees.

What happens if I file with the wrong tax forms?

About 50,000 Commonwealth of Masachusetts retirees received the wrong tax forms. An uncorrected 1099-R form would mean possible over payment of federal income taxes for retirees. Fortunately some State retirees called the office after they noticed the wrong tax forms, as tax bills were much higher than 2014. Normally, retirees who would receive refunds might have had to owe money.

The misprinted forms, because of a programming error, had bad codes assigned. The correct code should have been 7, for normal distribution of benefits. Instead, Code 1 was printed. Code 1 means a premature distribution of benefits. What would this cost the retiree? A 10 % penalty. In addition, State Retirees who should have been assigned Code 2, for early distribution of benefits with exceptions, received forms erroneously marked as Code 7. You can read more about it here on the Massachusetts government website.

Fortunately, this was caught fairly early. The issue can be resolved with the IRS should retirees file the wrong tax forms. However, it can take two years.

When Can I file my paper tax returns?

The State Treasurer’s office recommends that you wait for the revised 1099-R form to come in the mail if you file with a paper tax return. First, make sure the box at the top of the 1099-R marked “Corrected” is checked off.

2015_1099-R, corrected tax form, wrong tax forms

A corrected 1099-R form will be mailed out in early February. The board is sending postcards to make sure the 50,000 Commonwealth retirees are notified of this error. You should receive a revised 1099-R statement by Tuesday, February 16th, 2016. If not, please call the Massachusetts State Retirement Board (the number is at the end of this blog).

How Do I File Electronically?

State retirees who file electronically, can go ahead and file, just use the correct codes. If you are a retired employee of the Commonwealth of Massachusetts, up to the age of 59-1/2 in 2015, you can enter Distribution Code 2 on the electronic form. Use Distribution Code 7 if you turned older than 59-1/2 in 2015. If you have any questions, you can contact the State Treasurer’s office by email at srb@tre.state.ma.us or by telephone at (800) 392-6014 or (617) 367-7770. By the way, be easy on them. Make sure that you notify the Massachusetts State Retirement Board of any change of address. The change of address form can be found here.

You can access information on how to read your 1099-R form here. Make sure the new one you receive has “Corrected” checked off on the top.

Alex Franch, BS EA  at  781.849.7200. He can answer any questions you may have regarding tax preparation and the filing of your returns. We have ultra-convenient service at any three of our locations where you can conveniently drop off your tax documentation to be prepared, Dedham, Quincy and South Weymouth. Worthtax uses a triple check accuracy system.

If you found this information to be helpful, please share it with someone else. You are welcome to leave a comment below, or on our social media outlets below.

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Selling Your House Tax Reporting

selling your house, selling your home,Selling your house may be bittersweet with all your memories being handed off to a stranger. Maybe selling your house comes with the jubilation of not having to spend your weekends fixing something. Whatever the case, houses around the Boston area are expensive and you may have some tax reporting to do.

If you are selling your house, your personal residence, you might qualify to exclude $250k of profits ($500k if you are married). If your house was your personal residence for two out of the last five years, congratulations! You qualify for the exclusion.

Beware When Selling Your House

Here are some things you should be aware of:

Years ago you had a small business that you were running out of your house. You claimed a home office deduction for a couple of years. You now need to recapture that and pay tax on what you depreciated. If the cumulative depreciation totaled $5,000, you have to pay tax on the $5,000 recapture.

This is also the case, if you moved out of your house two years prior to the sale and rented it out. You still qualify for the $250,000 (filing single) or $500,000 (filling married) exclusion, except on the depreciation on the house. For example, You bought your house ten years ago for $300,000, you moved out two years ago. You also rented it out until you sold it this year for $400,000. The accumulated depreciation during that time was $20,000. You pay tax on $20,000. I know your realtor told you that you qualify for the exclusion. You get to exclude the $100,000 gain, not the $20,000 accumulated depreciation.

But, you say you did not make $100,000; you only got $50, after you paid off your mortgage. Your gain is not a function of your mortgage balance. Surprise.

Other Tax Home Selling Tax Examples

Let’s say none of this stuff applies to you selling your house. You have a straightforward sale of a personal residence. You get to exclude the entire gain and 2 years after you file your tax return, you get a nice letter from the IRS claiming you owe them $100k in taxes. That is because when you sold the house, somewhere in that giant package of papers that you received at closing was a Form 1099-S that reported to the IRS that you received $400k for the sale of a house and you did not report it on your Schedule D. Well, how is the IRS supposed to know that you are excluding the gain. They also assume the gain was the entire $400k so they took the liberty of adjusting your tax return as such. (If this happened to you call me, Alex Franch, BS EA  at our WorthTax office, 781.849.7200.)  Not the hardest fix, but it could have been avoided had the sale been properly reported on the Schedule D when you filed your tax return in the first place.

Finally, you got the house from your great uncle’s other brother twice removed. He originally bought the house in 1954 for $3 and a bushel of corn. The house has been in a trust for the past 30 years. All the people who were alive when this was done have passed away.  To that I say, good luck!

If you have a home sale scenario you want help sorting out. Give Alex Franch, BS EA  at  781.849.7200.

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Deadline Changes: Congress Did Something Right

deadline change, deadline changes, pigs flyDeadline changes for various filings have been made by congress. But wait, has anyone seen any pigs flying lately? Well, they are about to because the deadline changes make perfect sense.

Your regular 1040 tax return does not change; we all still need to file by 4/15. However, in the past, if you were waiting for a K-1 from a Partnership you could find yourself waiting for that final tax document until 4/15. Partnership returns were not due until 4/15. Many a business partner have found themselves waiting for that elusive K-1 right up to the deadline. Beginning in 2017, there are more deadline changes. Forms 1065 and 1120S will be due on 3/15. This is welcomed news for many small business partners and it makes sense that the pass through returns would be due before the taxpayer returns.

Corporate Returns Deadline Changes Help Small Business

The Corporate 1120 returns are pushed back to 4/15. This can help small business owners from a cash flow perspective. This is because any tax payments would also get pushed back from 3/15 to 4/15. Finally, this also makes sense intuitively that a taxpayer (C-corp) would be due after a pass through return (1120S and 1065).

Foreign Bank and Financial Accounts Deadline Changes

One more change is the filing date for the FBAR. This is where you get to report your Swiss bank account to the Financial Crimes Enforcement Network. This deadline was 6/30. It has been moved to 4/15. HOWEVER, with a six month extension allowed so it lines up with your regular tax return filing. Once again, this is a deadline change that makes complete sense as it syncs with, and streamlines, two filing requirements.

The Deadline Changes Bad News?

The only bad news is that we will have to wait until the 2017 filing season for all these deadline changes to take place. Hey, I will take it. To be fair, there are a number of other filing requirement deadlines and extension deadlines that are changing. If you are responsible for filing anything, it would be wise to double check your filing deadlines.

Any thoughts, questions, concerns? Call Alex Franch, BS EA  at our WorthTax office. He has all the answers for you. He can help you with a smooth filing and can help you meet every one of these changed deadlines. You can also learn more about us here.

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The Future of Obamacare

The future of Obamacare is always in question. So I am going out on a limb on this one. Usually I play it safe as a Monday morning quarterback when it comes to our tax updates but I am going deep on this one.  What might we expect this upcoming year with the implementation of Obamacare.

Future of Obamacare, ACA, Affordable Care Act, HPDP,

More Reporting is Predicted in the Future of Obamacare!

The implementation of the future of Obamacare will include additional reporting requirements.  Here is my big prediction; we might see an increase in the number of High Deductible Health Plans (HDHP); a bold prediction, I know. According to the previous link, for calendar year 2016, the IRS has raised the annual limitation on deductions for an individual with family coverage to $6,750.

If your employer (and therefore you) move to High Deductible Health Plans (HDHP) you get to fill out one more tax form with your tax return. This is regardless whether you take money out of it or not. How do you like those apples? Let me introduce you to Form 8889.  You get to compute how much you are eligible to contribute. You also get to report how much was withdrawn for medical expenses.  If you switched coverage part way through the year, all the HDHP limits are prorated. Okay, now don’t get too excited.

What Else Does the Future of Obamacare Hold?

In addition to my bold prediction on the future of Obamacare, we can expect to receive Form 1095-A/B/C as proof of health insurance coverage, or for purposes of computing any Premium Tax Credit on Form 8962, or a shared responsibility payment on Form 8965. Form 1095 was not fully available last year but most people can expect to receive one each year going forward.  On the plus side, we in Massachusetts have had our 1099-HC in place for a long time now so we have become accustomed to the Mass version. This link will answer any questions you may have.

So there you have it, a short list of my predictions. Not that they will prove me to be anyone great, but I do want you to know that if you have any questions, you can call me, Alex Franch, BS EA , 781-849-7200, at Worthtax located in Quincy, Dedham and South Weymouth.

Learn more in our Frequently Asked Questions section.

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60-Day Rollover

60-Day Rollover rule was part of the IRA rollover rules that have been clarified. Unfortunately, they are now more heavily restricted. The IRS limits one rollover from an IRA to another IRA in any 12-month period. The difference is that the limit will now apply by aggregating all IRAs, effectively treating them as one for purposes of the one rollover per 12-month period limit.

60-day rollover, rollover change, rollover rule

60-Day rollover change affects you how?

Basically, in the past, one could theoretically have multiple IRAs and take a distribution from one IRA to contribute to another IRA.  In this way, one could theoretically string out a 60-day rollover indefinitely as long as one had enough IRAs out there.  The change now restricts one 60-day rollover per 12 month period, per taxpayer. That being said, a married couple might be able to string out a 60-day rollover over 120 days if they timed it properly between each of their IRAs.

However, if you want a happy marriage, I would never ever drag my wife into such shenanigans. Maybe you should give Alex Franch, BS EA  at Worthtax a call the next time you have a question about an IRA rollover. He just might be able to save you a whole lot of grief.

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Are Legal Expenses Tax Deductible? Part 2

Legal Fees, Legal ExpensesLegal expenses were discussed in our last blog which were more related to the person opposed to the business. In this blog, we will discuss legal expenses associated with business and the production of taxable income, the tax benefits, and present examples of legal expenses and how they may be deducted.

  • Examples of Legal Expenses and Their Deductibility
  • The Tax Benefit of Legal Fee Deductions

A frequent question that arises is whether legal expenses are deductible. We explained that the answer to that question can be both yes and no. It can also be complicated depending upon the nature of the legal expense.

Bankruptcy – Legal fees connected with a business bankruptcy are deductible. If personal bankruptcy is primarily caused by the failure of a business activity, the legal expenses related to the bankruptcy proceedings are partially deductible as a business expense. The courts have used a proration of the fees based on the ratio of business creditor claims to total creditor claims.

Conduct of a Business – Legal expenses incurred by a taxpayer in the course of a trade or business are generally deductible. This is provided if the fees are ordinary and necessary expenses of the business.

Managing, Conserving, or Maintaining Income-Producing Property – Legal fees related to managing, conserving, or maintaining income-producing property are generally deductible. However, just because a taxpayer may have to sell income-producing property to satisfy a possible adverse judgment does not mean he/she can deduct the cost of defending the suit under this provision.

Related to Title of Property – Although legal fees to acquire, perfect, defend, or clear title to property currently cannot be deducted as business or investment expenses. They are capital expenditures whose cost may be recovered through depreciation, depletion, or cost recovery. Incurred legal expenses related to title of personal property, such as a principal residence, are not deductible but can be added to the basis of the property.

Damage Suits – Legal expenses for defending and filing damage suits in a taxpayer’s business are deductible. This is true for or in employment. Examples include expenses paid for defending a suit for wrongfully taking property, Settling a damage suit against a business could help to avoid adverse publicity and controversy. Also, getting a judgment for damages to rental real estate.. And finally, a teacher’s action of sex discrimination against a university.

Criminal Cases – Legal fees to defend against criminal charges related to a taxpayer’s trade or business are deductible. This is true even if the taxpayer is convicted of the crime. However, legal defense expenses incurred by an individual charged with a crime are personal and generally not deductible.

Tax Issues – Legal expenses associated with getting tax advice, having tax returns prepared, and defending a taxpayer who is audited are all specifically included as deductible legal expenses.

If legal expenses are deductible, will a person receive any tax benefit from the deduction?

Just because legal fees are deductible does not necessarily mean you will receive any tax benefit from the deduction. Some legal fees can be deducted on business schedules and provide the maximum benefit. Others have to be deducted as a miscellaneous itemized deductions, the total of which is subject to a 2% of AGI deduction floor. In addition, miscellaneous itemized deductions are not deductible for alternative minimum tax (AMT) purposes.

As you can see, determining which legal expenses are deductible is complicated. Even if allowed, a deduction may not provide any tax benefit. As every circumstance is unique, you are encouraged to  Alex Franch, BS EA  at 781-849-7200 to determine if you will derive any tax benefit from your legal expenses.

 

 

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Are Legal Fees Tax Deductible? Part 1

unpaid debt, debt, delinquent debt, past due debt, legal fees, Often the question comes up are legal fees deductible? The answer to that question can be both yes and no. It’s complicated and depends on the nature of the legal expense. This two part blog will discuss:

  • Legal Fees Associated With Personal, Living, or Family Issues
  • Legal Fees Associated With Business and the Production of Taxable Income
  • Examples of Legal Fees and Their Deductibility
  • The Tax Benefit of Legal Fee Deductions
  • What does the Internal Revenue Code say About Legal Fees?

The Internal Revenue Code (IRC) is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created. The IRC tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses. The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year:

  • For the production or collection of taxable income;
  • For the management, conservation, or maintenance of property held for the production of income; or
  • In connection with the determination, collection, or refund of any tax.

IRC Provisions for Legal Fees

Applying those IRC provisions will allow you to determine whether a legal expense you have incurred is deductible or not. The application can sometimes be complicated. It must take into account the Internal Revenue Service’s (IRS’s) interpretation of the law through rulings and regulations as well as the courts’ opinions on all of the above. Here are some situations that may involve legal expenses to be paid and how they should be handled:

Divorce – Legal costs, such as attorney fees and court costs, connected with divorce, separation, or support are non-deductible personal expenses. Non-deductible extends to legal fees incurred in disputes over money claims. However, legal and accounting fees paid for tax advice in connection with the divorce are deductible. This is provided the amounts for those services are clearly marked on the legal firm’s billings.

Taxable Alimony – The part of legal fees that qualify as producing taxable alimony is deductible by the person who receives the alimony. The attorney’s statement or invoice should stipulate what part of the fee relates to alimony. This ensures a deduction for the alimony recipient. Legal fees paid by the payer of the alimony are not deductible. Because child support payments are not taxable, fees paid to get those payments are not deductible.

Damages for Personal Injury or Sickness – In some cases, damages for personal injury or sickness can be excluded from income. Thus, the legal fees paid to secure such income are not deductible if the damage award is not taxable. However, to the extent that the damage award is taxable or accrued interest is paid on the settlement funds, the legal fees are deductible. Where the funds are partially taxable and partially excludable, the legal expenses have to be prorated in the same ratio as the income is.

Relating to Insurance Proceeds – Legal fees to collect on a claim related to a taxpayer’s business are currently deductible. Legal fees related to a personal loss are not deductible. However, where a loss is associated with a capital asset, such as a taxpayer’s personal home, the related expenses can be added to the home’s tax basis. This means that they can be used to offset any taxable gain in the future.

Producing or Collecting Taxable Income – Attorney fees, court costs, and similar expenses are deductible if incurred during the production or collection of taxable income. A reasonably close connection must exist between the legal expense and the production or collection of the taxable income.

Will and Trust Document Preparation – The cost of legal fees for preparing a will is considered a personal expense that is not deductible. In most cases, the legal cost of creating a living trust is similarly treated as a personal, nondeductible expense. However, if the attorney who prepares the trust on the billing statement the amount of the fee that is for tax planning or tax advice, the tax-related portion of the fee is deductible.

In our next blog, Part 2, we will talk about more business-related issues with debt. In the meanwhile, if you have any questions, you can call Alex Franch, BS EA  at 781-849-7200.

 

 

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Unpaid Debt Can Take Your Tax Refund

Do you have unpaid debt?

Unpaid DebtAs the tax season approaches, you may be get excited about your potential tax refund. But you never thought your unpaid debt would take a chunk out your tax refund. That excitement may be premature if you have outstanding federal or state debts. The Treasury Department’s Bureau of the Fiscal Service (BFS) issues federal tax refunds, and Congress authorizes BFS to reduce your refund through its Treasury Offset Program (TOP) to pay:

  • Past-due child and parent support;
  • Federal agency non-tax debts;
  • Unpaid debt for a student loan
  • State income tax obligations; or
  • Certain unemployment compensation debts owed to a state.

So, if you owe a debt that is past-due, it can reduce your federal tax refund. All or part of your refund may go to pay your outstanding federal or state debt. That is if it has been submitted for tax refund offset by an agency of the federal or state government.

If you have an outstanding debt and want to be proactive, contact the agency with which you have a debt. They can help you figure out if your debt was submitted for a tax refund offset. You may call BFS’s TOP call center at 800-304-3107 or TDD 866-297-0517, Monday through Friday, 8:30 a.m. to 6 p.m. ET.

If your debt was submitted for offset, BFS will reduce your refund as needed to pay off the debt and send it to the agency you owe. Any portion of your remaining refund after offset is issued in a check or direct deposited as originally requested on the return.

What if I wait to see what happens with my unpaid debt?

If you choose to wait and see what happens when you file your return, BFS will send you a notice if an offset occurs. If you wish to dispute the amount taken from your refund, you will have to contact the agency that submitted the offset claim. It will show on the notice you receive from the BFS.

What if I have unpaid debt and filed a joint return?

If you filed a joint tax return, and only one spouse is responsible for the debt, the other spouse may be entitled to part of or all the refund. To request the refund of the spouse that is not responsible for the offset, you can file Form 8379, Injured Spouse Allocation. The benefits provided under the injured spouse allocation will generally not apply if you reside in a community property state.

Please contact this office if have you have questions about refund offsets.

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