WASHINGTON TAX UPDATE DECEMBER 28, 2012 Welcome to Washington Tax Update, where you will find useful information about taxes, including current events in our nation s capital, as well as informed opinions and predictions about what is expected to happen. Tax Look Inside Tax Planning Tip of the Week IRS Courts What s New from the IRS What s New from the Courts It Bears Repeating Tax Laughs Congress
tax planning tip of the week Know the rules for deducting charitable donations Do you expect to itemize your deductions on your 2012 return? Because of the fiscal cliff conundrum, your decision about year-end charitable contributions may be more complicated than usual. If you have decided to delay your charitable donation until 2013, your deduction may be able to offset income otherwise taxed in a higher rate bracket than would a gift made in 2012. On the other hand, ongoing tax negotiations may lead to a decrease in the value of itemized deductions to higher-income taxpayers. If you have made 2012 year-end charitable contributions, here are some points to keep in mind as you complete your tax return: Monetary donations To deduct any charitable donation of money, regardless of amount, you must have a bank record, like a canceled check, a credit card statement or a written communication from the charity showing the name of the charity and the date and amount of the contribution.
Donations of money include those made in cash or by check, through an electronic funds transfer, with a credit card and through payroll deduction. For payroll deductions, you should retain a pay stub or other document furnished by your employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. Additionally, for each contribution of $250 or more, you must obtain an acknowledgment from the charity. Donations of clothing and household items To be deductible, clothing and household items donated to charity generally must be in good used condition or better. Items worth more than $500 must be reported on Form 8283, Noncash Charitable Contributions. In some cases, they require an appraisal (see a more detailed explanation below). Donations of appreciated property No gain is recognized when you donate appreciated property to a charity, but the fair market value of the property is deductible. As a result, you generally achieve a greater tax savings than a sale of the property followed by a gift of the tax planning tip of the week
tax planning tip of the week proceeds. However, you do not recognize a loss when property with a basis in excess of its fair market value is donated to charity. In that case, you should consider a sale of the loss property to recognize a deductible loss before donating the cash proceeds to the charity. These rules apply to gifts of property only if a gain from the sale would have resulted in long-term capital gain income. A charitable deduction for short-term capital gain or ordinary income property is limited to your basis. General guidelines Contributions are deductible in the year made. Donations charged to a credit card before the end of 2012 count for 2012, even if the credit card bill is paid in 2013. Checks count for 2012 as long as they are mailed in 2012. Only donations to qualified U.S. organizations are tax-deductible. Exempt Organizations Select Check, a searchable online database available on the IRS website, lists most organizations that are qualified to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
For all donations of property, get a receipt from the charity, if possible that includes the name of the charity, the date of contribution and a reasonably detailed description of the donated property. If you leave the donation at a charity s unattended drop site, keep a written record of the donation that includes this information. Also note the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more. The deduction for a motor vehicle, boat or airplane worth more than $500 is usually limited to the gross proceeds when the charity sells the item. The charity should provide you with Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to attach to your tax return. If the amount of your deduction for all noncash contributions is over $500, a properly completed Form 8283 must be submitted with your tax return. You are required to attach an appraisal to your tax return for any noncash charitable contributions in excess of $5,000. A qualified appraisal must be performed and signed by a qualified appraiser. In addition, the appraisal must be made not more than 60 days before the date the appraised property is contributed to a charitable organization, and not later than the time your tax return is due. tax planning tip of the week
what s new from the IRS Modify doesn t mean satisfy an installment sales obligation The IRS has privately ruled that the modification of an installment sales obligation by deferring the maturity date, substituting a new obligor and altering the interest rate did not result in a disposition or satisfaction of the installment obligation that would trigger gain or loss. The tax law provides that income from an installment sale is taken into account under the installment method. That is, a portion of the total gross profit from an installment sale is included in income in each year in which the seller receives payment. If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss is recognized at that time. In previous published rulings, the IRS has held that: The modification of the terms of a purchaser s note by deferring the dates of payment of principal by five years and increasing the annual interest rate from 6 percent to 7 percent was not a disposition or satisfaction of an installment obligation. (Rev. Rul. 68-419) The substitution of obligors, deeds of trust and promissory notes, without
any other changes, was not a satisfaction or disposition of an installment obligation. (Rev. Rul. 75-457) The substitution of a new obligor and a change in the rate of interest would not be a satisfaction or disposition of an installment obligation. (Rev. Rul. 82-122) In the recent private letter ruling (PLR 201248006), the IRS addressed an individual who sold stock in his employer corporation to the company s employee stock ownership plan (ESOP) in a transaction that qualified for installment sale reporting. As part of the arrangement, the corporation borrowed money from a bank (the bank loan) and lent funds to the ESOP to make the down payment to the former shareholders (the company loan). In addition, the ESOP borrowed funds from the former shareholders in the form of the installment notes to pay the balance of the purchase price (the ESOP loan). In a later year, the payment schedules on the bank loan, the company loan and the ESOP loan were revised to address the company s deteriorating financial condition. As a result, the maturity date of the note was extended, the obligor was changed, and the interest rate altered. The IRS ruled that the modifications would not be a disposition or satisfaction of the installment obligation. The IRS observed that, under the various revenue rulings, modification of an installment obligation by deferring the maturity date, substituting a new obligor and altering the interest rate is not a disposition or satisfaction of an installment obligation. The IRS also said that, when the original installment note is replaced, the substitution of a new promissory note without any other changes is not a disposition of the original installment note. what s new from the IRS
what s new from the courts Taxes due for services rendered Owners of limited liability companies should distinguish between payments for services and distributive shares to partners. Clearly establishing the difference may mean lower self-employment taxes. Michael and Lauren Howell were owners of a limited liability company (LLC) that operated as a general partnership for tax purposes. In 2000 and 2001, the LLC reported guaranteed payments of $165,000 and $259,000, respectively, and substantial partnership distributions to Michael and Lauren. The IRS determined that the guaranteed payments were self-employment income and that Lauren owed self-employment taxes. The Tax Court rejected Lauren s argument that she did not owe self-employment taxes because she was a limited partner and did not provide any services to the partnership. The court found that the guaranteed payments were made for services actually rendered to the partnership by Lauren and must be treated
as net earnings from self-employment. The LLC s operating agreement indicated that Lauren contributed intellectual property, a business plan and organization design at the LLC s formation. She also provided marketing advice and the use of her credit card, and she executed documents on the LLC s behalf. The court concluded that Lauren provided services and was not merely a passive investor or limited partner, as the couple argued in court. It ruled that Lauren owed self-employment taxes on the guaranteed payments she received from the partnership. Although Lauren s services were relatively minimal, the couple failed to establish how much of the payments were for services. Therefore, the court accepted the IRS s position that all the payments were for services. Self-employment taxes are assessed on net earnings from self-employment. That term includes a partner s distributive share of trade or business income from a partnership of which he or she is a member. The distributive share of a limited partner is not self-employment income, but guaranteed payments that are compensation for services actually rendered to the partnership are self-employment earnings. The court concluded that the payments to the wife were for services and were self-employment income. Because the payments were made for services actually rendered, the court avoided deciding whether Lauren was a limited partner. (Lauren A. and Michael H. Howell v. Commissioner, TC Memo 2012-303, Nov. 1, 2012)
it bears repeating Employers given extension for proper tip reporting In 2012, the IRS updated its rules concerning businesses, like restaurants, whose employees receive tips from customers as part of their compensation. As a general rule, employees who receive tips must pay income tax on the amounts they receive. In addition, employees are supposed to report tips to their employer so the employer can withhold the appropriate amount for income taxes, Social Security taxes and Medicare taxes. Withholding is required at the point in time when a written statement including the tip is provided by the employee to the employer. Last June, the IRS issued Revenue Ruling 2012-18, which provided guidance for handling service charges and tips. In this ruling, the IRS reiterated its position that a customer payment is a tip only if four conditions are met: 1. The payment is made free of compulsion. 2. The customer has an unrestricted right to determine the amount. 3. The payment is not the subject of negotiation or dictated by employer policy.
4. The customer has the right to determine who receives the payment. Revenue Ruling 2012-18 was effective immediately and applicable retroactively. Under limited circumstances with regard to amounts paid before Jan. 1, 2013 that were improperly characterized as tips when they should have been characterized as service charges, the IRS instructed its examiners to apply this rule only to amounts paid on or after Jan. 1, 2013. Now the IRS has announced, in Announcement 2012-50, that it has extended until on or after Jan. 1, 2014, the time to comply with the proper treatment of service charges under Revenue Ruling 2012-18. The extension allows employers an additional year to make their systems compliant with the new rules.
tax laughs It s just a friendly visit In the United Kingdom, anyone under the age of 75 who watches or records live broadcast television transmissions is required to purchase an annual television license. The license fee is classified as a tax, and evasion is a criminal offense. The current annual fee is 145.50 ($236.60) for color and 49.00 ($79.68) for black and white. Income from the license is primarily used to fund the television, radio and online services of the BBC. Blind owners of television sets get a 50 percent discount. The law states a valid license is required to watch or record a television program on any device as it is being broadcast. Devices include televisions, computers, mobile phones, game consoles, digital boxes and Blu-ray/DVD/VHS. services, no license is required. You do not need a license if you do not use any of these devices to watch or record television programs as they are being shown. For example, if you use your television only to watch DVDs or play video games, or you watch only catch up If you get fed up with television and decide you are not going to watch it any more, you can cancel your license. If you change your mind and decide you want to
watch your favorite shows again, you must buy a new license or risk a 1,000 fine. The licensing website advises, As it is our duty to ensure that everyone in the UK who needs a licence has one, we may visit your address to check that no licence is required. It s unfortunately necessary to do this, as when we make contact on these visits, almost one in five people are found to need a TV Licence. Please be assured that this is a routine visit, and will take no more than a few minutes. If we find during the visit that you do in fact need a licence, you ll need to pay the full licence fee, and you could risk prosecution and a fine of up to 1,000. On my income tax 1040 it says Check this box if you are blind. I wanted to put a check mark about three inches away. Tom Lehrer
Courts Tax IRS Congress The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. 2012 CPAmerica International