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Tax Tip of the Week | 5 Ways to Fail a Sales Tax Audit March 20, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

IRS audits are horrible! Sales tax audits are worse. In some areas, a sales tax auditor has more legal authority than an IRS agent. Yes, that is scary! Some businesses think that it is not a big deal failing to collect sales tax from a “favorite” customer since the customer would be liable anyway in an audit. It is not that easy – the sales tax agent collects this shortfall from whoever they are auditing. You might be paying the sales tax for your “favorite” customer. Good luck trying to get those dollars back from them.

The article below is advertising from an Avalara blog. I do not know anything about Avalara other than this tongue in cheek article which makes a lot of sense at least from my experience over the years.
                                                      By Mark Bradstreet

 FROM THE AVALARA BLOG JANUARY 23, 2019

 “All businesses relish a good sales tax audit. After all, what’s not to like? And did you know it’s possible to spend more time, money, and resources than absolutely necessary during an audit? It’s true. Simply follow the five tips below and you’ll dramatically increase your chances of having to pay those coveted audit penalties. 

[From the Avalara blog.]

1. Give the auditor a hard time

Spare no inconvenience. Send the auditor on coffee runs. Set the auditor up in your most cramped and unappealing space then make the auditor sort through the messiest records. First impressions matter when it comes to audits, so make yours a terrible one. The harder the experience for the auditor, the more likely that auditor will help you spend more money, resources, and time.

2. Assume you don’t need to collect tax

This is a high-risk move. If you have nexus in a state, you’re required to collect and remit sales tax; and while nexus used to refer primarily to some sort of physical presence, that’s no longer the case.

On June 21, 2018, the Supreme Court of the United States ruled physical presence is not a requisite for sales tax collection. Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, or economic nexus. That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.

If you want to ensure you run afoul of auditors, just keep on not collecting in states where you make significant sales: Tax authorities are looking for you; they’ll likely find you.

3. Put your exemption certificates in a box in the warehouse

This gives you two advantages. First, it forces the auditor to dig through a potentially rat-infested box for the records needed, thus wasting more time. Second, it increases your chances of losing certificates to flood, fire, or vermin.

If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge — plus bonus penalties and interest.

4. Keep incorrect records

You want to fail a sales tax audit? Make sure your records don’t match your bank accounts. If you have more or less money in your account than shows up on your sales tax records, you’re begging for an audit penalty.

If incorrect records are too blatant for your taste, strive for incomplete records. Don’t stress about recording every cent of sales tax charged to your customers. Scribble sales tax records down on a sheet of paper so you’ll never know where to find them when you need them. The auditor will linger as long as there’s a clear discrepancy between how much you collect and how much you record.

5. Pay less than you owe

This one’s about your overall method. You can drastically increase your risk of penalties during an audit by manually managing sales tax. Paying less sales tax than what your business owes will substantiate incorrect record-keeping, shoddy certificate storage, and (purposeful) ignorance about nexus. Plus, think of all of the other opportunities for error that await when you manually manage the following:

•    State and local jurisdiction rate changes
•    Filing methods and schedules for each taxing jurisdiction
•    Changing product taxability rules

But seriously

We know you don’t actually want to waste time, money, and resources. So, hopefully these tips give you some ideas of what not to do.

The right technology can turn sales tax management from painful and risky to easy and more accurate. Avalara’s suite of solutions can reduce your risk by automating calculations, certificate management, timely filing, and easy-to-access reports.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Five Things to Know About Proposed Tweaks to the Retirement Systems March 13, 2019

Posted by bradstreetblogger in : Deductions, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

The following article, by Anne Tergesen (WSJ), discusses possible revisions to the USA retirement system. These “proposed tweaks” may never happen or if they do, the changes will most likely be different than what follows. When I first began in taxes, an elderly tax practitioner told me to stop worrying about the future tax law changes and to make my decisions based upon the current law. For more often than not, I thought that was good advice. But that is not to say, we should bury our heads in the sand and not consider the provisions that Congress is working on.

-Mark Bradstreet

“In addition to giving annuities a greater role in 401(k) plans as part of its proposals to tweak the U.S. retirement system, Congress is considering provisions that could serve to expand workers’ access to retirement-savings plans and make it easier for savers to tap their accounts in case of emergencies. Here are five changes Americans could see in their 401(k) plans and individual retirement accounts.

(1)     A New Item on 401(k) Disclosures
Currently, 401(k) plans are required to send participants quarterly and annual account statements with their balance. Under the proposed legislation, plan sponsors would have to show an estimate of the monthly income a participant’s balance could generate with an annuity, a detail akin to the payoff disclosures required on credit-card statements. The goal is to help workers better understand how prepared they are to maintain their income in retirement.

(2) A Repeal of the Age Limit on IRA Contributions
If you are 70 ½ or older, you can’t currently make deductible contributions to a traditional IRA. Congress is considering removing the age cap and allowing people above 70 ½ or older to deposit up to $6,500 a year in either a traditional IRA or a Roth IRA. With a traditional IRA, account holder’s generally get to subtract their contributions from their income but they must pay ordinary income taxes on the money when they withdraw it – something they are required to do starting at age 70 ½ (the bill would do nothing to change that). With a Roth IRA, there is no upfront tax deduction but the money increases tax-free.

(3) More Types of Savings Accounts
Among the proposals under consideration is a new type of universal savings account that would offer more-flexible withdrawal rules than existing retirement accounts, according to Rep. Kenny Marchant (R, Texas) Employers could also be allowed to automatically enroll workers into emergency savings accounts. (Employees would be free to opt out.)

(4)  More Ways for Graduate Students to Fund IRAs
The bill would allow students to contribute taxable stipend or fellowship payments to an IRA, something that’s not currently possible.

(5)  Pooled 401(k) Plans
For years policy makers have tried to make retirement-savings plans more attractive and affordable to small businesses, many of which have no plan at all. About one-half of private-sector employees, many of whom work for small companies, lack access to a workplace retirement plan. Under one measure before Congress, small employers would be able to more easily band together to spread out the administrative costs of 401(k) plans. The proposal would eliminate a requirement that employers have a connection, such as being members of the same industry trade group, in order to join a so-called multiple-employer plan. Congress is also considering expanding a tax credit available to small companies to offset the costs of starting a new retirement plan. The annual credit amount would increase from $500 to as much as $5,000 for three years.”

Credit given to Anne Tergesen, WSJ
Saturday/Sunday July 21-22, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA
–until next week.

Tax Tip of the Week |Offshore Tax Cheats – The IRS is Still Coming for You March 6, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Having an offshore account is not illegal, provided the accounts are in compliance with U.S. tax laws which include appropriate disclosure. And, yes, you can get into serious trouble for failing to attach the appropriate forms to your income tax return. So, please be certain to advise your tax preparer of any foreign assets you may have. But, where things get really dicey, is the situation of using these “secret” accounts to hide your money and not paying any income tax (offshore tax evasions is a criminal act). More details from Laura Saunders follow.

  • Mark Bradstreet

“Hiding money from the U.S. government is a lot harder than it used to be.  

On Sept. 28, the Internal Revenue Service will end (now ended) its program allowing American tax cheats with secret offshore accounts to confess them and avoid prison. In a statement, the IRS said it’s closing the program because of declining demand.

But the agency vowed to keep pursuing the people hiding money offshore and said it will offer them another route to compliance.

What a difference a decade makes.

Before 2008, an American citizen could often walk into a Swiss bank, deposit millions of dollars, and walk out confident that the funds were safe and hidden from Uncle Sam, says Mark Matthews, a lawyer with Caplin & Drysdale who formerly helped the IRS’ criminal division.

Now he says, “Americans hiding money abroad have to go to small islands with sketchy advisers and less reliable financial systems.”

The reason:  a historic crackdown on the longstanding problem of U.S. taxpayers hiding money offshore, U.S. officials ramped it up after a whistleblower revealed that some Swiss banks saw U.S. tax evasions as a profit center and were sending bankers onto U.S. soil to hunt for clients.

The defining moment came in 2008, when Justice Department prosecutors took Swiss banking giant UBS AG to court and managed to pierce the veil of Swiss bank secrecy. In 2009, UBS agreed to pay $780 million and turn over information on hundreds of U.S. customers to avoid criminal prosecution.

The Justice Department repeated the UBS strategy, with variations, for scores of other banks and financial firms in Switzerland, Israel, Liechtenstein and the Caribbean. So far, institutions have paid about $6 billion and turned over once-sacrosanct customer information. More major settlements are still to come.

Prosecutors also successfully pursued more than 150 individuals hiding money abroad. Some defendants earned jail time, and many paid dearly – a total of more than $500 million so far. Dan Horsky, a retired business professor and a startup investor, appears to have handed over the largest amount: $125 million for hiding more than $220 million offshore.  

In many cases, a taxpayer can owe a penalty of half a foreign account’s value, if it’s greater than $10,000 and it’s not reported to the Treasury Department. Ty Warner, the billionaire creator of Beanie Babies plush toys, paid $53.6 million for hiding an account with more than $100 million.

The IRS capitalized on tax cheats’ fears of detection with its Offshore Voluntary Disclosure Program, the limited amnesty that’s ending. It hit confessors with large penalties in exchange for no prosecution. Since 2009, more than 56,000 U.S. taxpayers in the program have paid $11.1 billion to resolve their issues.

To be sure, the U.S. crackdown hasn’t reached everywhere – notably Asia.

Edward Robbins, a criminal tax lawyer in Los Angeles formerly with the IRS and Justice Department, attributes the enforcement gap to the widespread use of human beings, rather than structures like trusts, to shield account ownership in Asia.

“In the Far East, individuals often use other individuals who use other individuals to hold assets. Finding the true owner is a tough nut to crack, unlike in the West,” he says.

The crackdown also had drawbacks, making financial life difficult for many of the roughly 4 million U.S. citizens living abroad. Unlike most countries, the U.S. taxes citizens on income earned both at home and abroad. Often expatriates were stunned to find they could be considered tax cheats under the expansive U.S. Law and that compliance would be onerous.

In reaction, more than 25,000 expats have given up U.S. citizenship since 2008, with some paying a stiff exit tax. Others are working to get Congress to change the taxation of nonresidents.

For expats and others, the IRS now offers a compliance program with lesser penalties, or none, for offshore-account holders who didn’t willfully cheat. About 65,000 taxpayers have entered the program and the IRS says it will remain open for now.

Current and would-be tax cheats should take seriously the IRS’s vow to keep pursuing secret offshore accounts, says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink who has handled more than 1,500 offshore disclosures to the IRS.

Although the IRS’s staffing is way down, he says, the agency and the Justice Department have far better tools for detecting and combating evasion than 10 years ago.

Among these agencies’ tools are the Fatca law, which requires foreign firms to report information on American account holders.This law is providing the IRS with streams of useful information it’s using in prosecutions.This week brought the first guilty plea for a violation of Fatca rules by a former executive of a bank in Hungary and the Caribbean.

The IRS is also mining data from foreign bank settlements and whistleblower information. The payment of $104 million to UBS whistleblower Bradley Birkenfield, apparently the largest ever, has inspired other informers.

To detect clusters of cheats, U.S. officials now can use a “John Doe summons” to force firms to release information on a class of customers suspected of evading taxes – even if their identities aren’t known, and even if the information isn’t in the U.S.

This strategy has been so successful that the IRS has broadened its use to identify possible tax cheats using cryptocurrencies.

“More than ever, there’s no place to hide,” say Mr. Skarlatos.”

Credit given to Tax Report, Laura Saunders, WSJ, September 15-16, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases) February 27, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases)

As a refresher, the QBI deduction is available for the first time on your 2018 Form 1040. So, this is all new stuff for you and us (and the IRS). The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Yes, if you qualify – that may be a huge deduction for you. So, when it comes to the interpretation of 199A, there is a lot at stake for a lot of businesses.

Landlords have anxiously awaited further guidance in regards to Section 199A. There has been much speculation if, when and how the Section 199A would apply for them.  Finally, on Friday, January 18, 2019, the Treasury Department and the Internal Revenue Service issued final regulations on the implementation of the new qualified business income (QBI) deduction for rentals. Now we have to interpret their interpretation. And, only time will tell, whether this final interpretation is their last interpretation (probably not).

What follows is specifically about landlords and the applicability of 199A. For starters, let’s define “triple net lease.” This term often comes up in business conversations. Interestingly, not everyone has the same definition in mind. So, excerpts from the first article below define some different types of leases before moving into the second and last article which tends to revolve around “triple net leases.” Please keep in mind that his interpretation of the final 199A interpretation as well as some of his opinions may differ from ours. Many parts of the new tax law are still fuzzy, moving targets and this one is no exception.

By Mark Bradstreet

By Rob Blundred  – Commercial Sales Associate, Henkle Schueler and Associates
Aug 6, 2018

Net lease
The benefit of a net lease is that the landlord can charge a lower base rent price. However, along with the base rent the tenant is responsible for an “additional rent fee” which covers the operations and maintenance of the property. These costs can cover real estate taxes, property insurance and common area maintenance (CAM) items. The CAM fees cover the landlord costs for janitorial services, property management fees, sewer, water, trash, landscaping, parking lot, fire sprinklers, and any shared area or service.

There are several types of net leases:

•    Single net lease (N lease). In this lease, the tenant pays base rent plus their pro rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant). The landlord covers all other building expenses. The tenant also pays utilities and janitorial services.

•    Double net lease (NN lease). The tenant is responsible for base rent plus their pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.

•    Triple net lease (NNN lease). This is the most popular type of net lease for commercial freestanding buildings and retail space. The tenant pays all or part of the three “nets” – property taxes, insurance, and CAMS – on top of a base monthly rent.

Absolute triple net lease

The absolute triple net lease is an extreme form of an NNN lease where the tenant absorbs all of the real estate risk and responsibility. The tenant is ultimately responsible for all building-related expenses and repairs, including roof and structure.

Modified gross lease

The appeal of a modified gross lease is the tenant has one set amount to pay each month. In a modified gross lease, the base rent and “nets” (property taxes, insurance and CAMS) are all included in one lump sum payment; excluding utilities and janitorial services, which are typically covered by the tenant.
The benefit of a modified gross lease is their flexibility. They are generally an easier agreement to make between the landlord and tenant. The risk is if insurance, taxes or CAM increase or decrease the cost or savings is passed on to the landlord.

Why Is the IRS Punishing Triple Net Landlords?

Alan Gassman Contributor to Forbes Jan 26, 2019
Retirement  (writes about tax, estate and legal strategies and opportunities.)

“There are horrible people who, instead of solving a problem, tangle it up and make it harder to solve for anyone who wants to deal with it.

Whoever does not know how to hit the nail on the head should be asked not to hit it at all.”

– Friedrich Nietzche

While the IRS as a whole is by no means “horrible,” the new Final Regulations regarding Section 199A of the Internal Revenue Code must seem that way to landlords who lease property under triple net leases. The vast majority of these will not be considered to be “active trades or businesses” for purposes of qualifying for the 20% deduction that will be available to most active landlords.

Code Section 199A was introduced to the Internal Revenue Code as part of the 2017 Tax Cuts and Jobs Act with the intent of giving taxpayers some degree of parity with the 21% income tax bracket bestowed upon large and small companies that are taxed as separate entities (known to tax professionals as “C corporations.” C corporations are different than “S corporations,” as S corporations report their income under the “K-1” system that causes the shareholders to pay the income tax on their personal returns).

Since the term “trade or business” was not defined under Section 199A, the real estate community has been waiting for the Final Regulations which were released on Friday, January 18, and basically follow what the Proposed Regulations (released last August) said, which is that passive investors are not considered to be an active trade or business, even though they take significant economic risks and may work hard to verify that the tenants pay the taxes, insurances and maintenance of the leased property, comply with applicable law and otherwise do what tenants are supposed to do.

The practical result will be that landlords will need to become active and possibly renegotiate lease terms to have at least a chance of being eligible to have the deductions that other landlords will have, or to perhaps qualify under the new safe harbor rules that allow the deduction to non-triple net leases if they satisfy the 250 hour per year requirement, which requires tabulation of the work hours of landlords and agents of landlords, and certain time log and verification procedures.’

This seems very unfair since REIT (Real Estate Investment Trusts) income will often include triple net lease profits that will qualify for the Section 199A deduction, and C corporations only have to pay the 21% rate on net income from triple net leases.

Tax professionals, and masochists may enjoy or derive a better understanding by reading on.

The new Final Regulations refer to several Supreme Court cases to aide in defining what types of enterprises will qualify as a trade or business, and these cases do not bode well for landlords of triple net leases. For example, the Final Regulations cite to the Supreme Court’s 1987 landmark “trade or business” case, Commissioner v. Groetzinger, which held that to be engaged in a trade or business the following two requirements must be met:

1. The taxpayer’s involvement must be continuous and regular; and

2. The primary purpose of the activity must be for income or profit.

The very definition of a triple net lease seemingly disqualifies the majority of triple net landlords from qualifying under this definition under the assumption that they do not have continuous and regular involvement.

With triple net leases, the tenant is usually responsible for the three “nets”: real estate taxes, building insurance, and maintenance. By having the tenant be responsible for most of the on-site responsibilities, the landlord is able to spend more time and effort buying and selling other properties and therefore investing more into the economy.

In turn, triple net lease agreements usually benefit the tenant because the pricing of the agreement will reflect the fact that the tenant will be responsible for a lot of the on-site responsibilities. Now tenants have the upper hand when landlords ask to be allowed to provide at least 250 hours of services per year (cumulatively, as to all leases that the landlord will aggregate under the complicated aggregation rules, which are discussed in our blog post entitled Real Estate: Investing with Section 199A: Don’t Let Your Deductions Fly Out the Window).

The new Final Regulations do, however, contain one saving grace for taxpayers with triple net leases by quoting the 1941 Supreme Court case of Higgins v. Commissioner.

In Higgins the Supreme Court stated that the determination of “whether the activities of a taxpayer are ‘carrying on a business’ requires an examination of the facts in each case.” Since it is a factual determination, a taxpayer with the right facts can successfully argue that his or her triple net or almost triple net rental enterprise should constitute a qualified trade or business.

However, doing so will be a tough and expensive hurdle for many landlords to jump over.

Perhaps Congress will act in a compromise to assist the continued growth in the economy in recognizing that taxpayers with triple net leases put themselves at significant financial risk, in that tenants like Toys R Us and Sears may go bankrupt and leave a landlord high and dry after many months of eviction and then bankruptcy litigation. Many landlords are not aware that the bankruptcy law allows tenants to have the court terminate long term leases and limit damages to one year of rent.

Non-triple net lease landlords who spend considerable time in their leasing activities can take considerable comfort from Notice 2019-7, which was published alongside the new Final Regulations. The Notice provides the above-mentioned safe harbor for non-triple net leases to be “treated as a trade or business solely for the purposes of Section 199A.”

Under the new safe harbor, non-triple net rental real estate may be treated as a trade or business, if the following three requirements are met:

1. separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

2. 250 or more hours of rental services are performed per year with respect to the rental enterprise; and

3. the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding the following: a) hours of all services performed, b) description of all services performed, c) dates on which such services are performed, and d) who performed the service.

Interestingly, while triple net lease arrangements outside of REITs will likely not qualify under Section 199A, banks that are taxed as S corporations, or partnerships, are eligible for the deduction, although in many respects a loan is like a triple net lease where the landlord has put money out for a long term series of payments, where in many cases the vast majority of the value is in the years of payments to be received, just like a long term promissory note.

It is even more disturbing that other types of businesses involving much less risk on the part of the owner qualify for the deduction. These include brothels, franchisors and vending machine owners. How is it possible that a brothel owner sitting back and receiving rent from independent contractor “professional entertainers” may qualify for the benefits of Section 199A, but taxpayers with triple net leases do not?

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | Sales Tax (Where You Have No Physical Presence) February 13, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Sales Tax ( Where You Have No Physical Presence)

I would rather have an IRS audit than a sales tax audit for a multitude of reasons that I won’t bore you with. Just take my word for it! Too many taxpayers are more diligent with meeting their IRS tax compliance than with their sales tax requirements.  You better be diligent with both of these taxes or you have a lot to lose!

Excerpts from an article follows on South Dakota v. Wayfair, Inc., U.S. (2018).  As businesses increasingly use internet to sell, their sales tax compliance has become even more cumbersome and complex.

I have spared you a lot of history in this article and just shown the author’s FAST FACTS.  You may also go directly to the online article if you are interested in more details.

-Mark Bradstreet

Credit to Rich Molina, CPA, CPA Voice, The Ohio Society of Certified Public Accountant, Sep/Oct 2018

FAST FACTS:

1.    “Reversing precedent, the U.S. Supreme Court finally upheld a requirement that retailers withhold and remit sales taxes for purchases made by customers in states in which the retailers have no physical presence.
2.    South Dakota, like other states, experienced a substantial decline in tax revenues as more and more of its residents purchased goods and services online from out-of-state retailers.
3.    On a national level, states were losing $8-33 billion of tax revenue per year in uncollected sales taxes by out-of-state sellers. In addition, at the time the Supreme Court rendered the Quill decision in 1992, less than 2% of Americans had internet access while that number is 89% today.
4.    The court’s holding has evolved along with modern day commerce just as the court is finding itself having to adapt to new areas in other parts of the law, including privacy in the digital age.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Students Get Help From Judges January 2, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Students Get Help From Judges

To give you an idea of the pervasiveness of this issue, student loan debt “has eclipsed credit cards as the largest source of consumer debt after mortgages.”  Please read the write-up below for potential relief for some former students.

Mark Bradstreet, CPA

“More bankruptcy judges are throwing lifelines to people struggling to repay their student loans after decades of refusing to consider any sort of relief.

In interviews with the Wall Street Journal, more than 50 current and former bankruptcy judges, frustrated at seeing borrowers leave federal courtrooms with six-figure debts, say they or their colleagues are more open to chipping away at the decades-old guidelines that determine how such debt is treated.

“If the law’s not going to be improved by Congress, we have to help these young people who are drowning in student loan debt, said U.S. Bankruptcy Court Judge John Waites in South Carolina.

Outright cancellations remain rare, but judges said they have other tools at their disposal, including asking lawyers to represent borrowers for nothing. The lawsuits can cost $3,000 to $10,000 and take years.

Other judges are embracing debt-relief techniques that don’t fully erase student loans but make repayment more affordable by, for instance, canceling future related tax bills. The popularity of these relief strategies could get a boost from a panel of professors, judges and advocates who are studying failures in consumer bankruptcy law and plan to release a report next year.

Hundreds of thousands carry student debt in the U.S. – the total has more than doubled over the past decade to $1.4 trillion – nearly all backed by the federal government. It has eclipsed credit cards as the largest source of consumer debt after mortgages. Almost every other type can be extinguished in bankruptcy, but standards made college debt untouchable. Borrowers typically must repay student loans over their lifetime, even those facing extreme financial hardship.

In March, Federal Reserve chairman Jerome Powell said he would be “at a loss to explain” why student loans can’t be cancelled like other debt. The Trump administration is considering whether to fight cancellation requests less aggressively.

Consumer bankruptcy lawyers are starting to notice that judges are being more flexible. One Las Vegas law firm recently filed the first cancellation request in its 14-year history after hearing a judge at a conference voice concern over student loans. Other lawyers said growing sympathy amounts to judges making lenders more willing to reach resolutions in court.

“I’m getting really good results with settlements these days,” said Chicago lawyer David Leibowitz. “I’m not the only one.”

Rules governing how student debt is handled in bankruptcy are made by Congress and by judges who issue influential rulings. Several bills in Congress that would erase student-loan debt in bankruptcy have stalled in recent years.

Last year in Philadelphia, U.S. Bankruptcy Court Judge Eric Frank cancelled a single mother’s $30,000 in student loans. Opposing lawyers from the U.S. Department of Education said the borrower needed to prove her hardship would persist 25 years. Judge Frank ruled that the relevant window was five years.

An appeals court over-turned his ruling, but his decision inspired a Tacoma, Wash., judge in December to cancel a portion of another borrower’s loans.

Such rulings are rare because few troubled borrowers attempt to cancel their student loans, because of the historically slim chances of victory.

Some bankruptcy judges criticize colleagues for re-interpreting well-settled law on student loans. “My view is, if the law is clear, follow it,” said retired California judge Peter Bowie.

The push to rethink the legal standard on student-loan debt is bipartisan. Judges interviewed by the Wall Street Journal were appointed during both Republican and Democratic administrations, though bankruptcy judges are appointed by appeals court judges, not the president.

Before 1976, laws allowed borrowers to do away with student-loan debt in bankruptcy. Congress, out of concern that the new graduates would take too much advantage of that option, made a new rule: Borrowers could cancel student loan debt after only five years of payments. Judges could grant exceptions if borrowers showed that repaying would cause “undue hardship.”

Congress didn’t define “undue hardship” so the task of doing so fell to federal judges. When Marie Brunner, a 1982 graduate of a master’s program in social work tried to cancel her loans in bankruptcy, a New York judge in 1985 said she had to show three things: she struggled financially, her struggles would continue and that she had made a good faith effort to repay. She lost.

That list still serves as a baseline for hardship in circuit courts that control the rules in most states.  Some appeals courts set even higher bench-marks, with one, for instance, saying borrowers must face a “certainty of hopelessness.”

In 1998 Congress said any borrower trying to cancel any federal student loans must prove “undue hardship,” like Ms. Brunner. Congress gave private student loans the same protection in 2005.

Some of the country’s bankruptcy judges are starting to argue that the prevailing legal standard is unintentionally harsh and wasn’t meant for adults still on the hook for student-loan debt years after college.

Judge Frank Bailey in Boston made that argument in an April ruling wiping out $50,000 in student loans for a 39-year-old man whose health ailments prevent him from working.

Some judges, including U.S. Bankruptcy Court Judge Michael Keplan in Trenton, N.J., said they are looking for ways to be more forgiving after seeing their own adult children borrow heavily for their education. Other judges grew concerned after talking to their law clerks. The typical law-school student takes out $119,000 in loans.

Two judges said they regret their rulings against borrowers more than a decade ago.

Kansas judge Dale Somers said he worked particularly hard to justify the reasoning in a December 2016 ruling that cancelled more than $230,000 in interest that built up on a couple’s student loans from the 1980s. They left bankruptcy owing $78,000.

Alabama judge William Sawyer declared that student loans had become “a life sentence” in a 2015 decision cancelling a $112,000 student loan debt for high school science teacher Alexandra Conniff, a single mother of two teen boys whose yearly income is $59,400.”

Credit given to Katherine Stech (Wall Street Journal)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | New Expensing and Bonus Depreciation Rules for Small Businesses December 19, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , 1 comment so far

New Expensing and Bonus Depreciation Rules for Small Businesses

As we approach the end of 2018, many businesses are reviewing their capital asset needs for this year and next and considering the tax benefits of buying these assets this year or next.

Some of the new rules are shown below as a refresher.

Remember Section 179 may be elected for part or all of the qualifying asset cost. However, use of Section 179 may not be fully deducted if it creates a loss and can not exceed certain thresholds as described below.

Section 168 is now available for new or used qualifying assets. It may create a loss but it must be taken on all purchased assets in a particular “asset class.”

-Mark Bradstreet, CPA

Isaac M. O’Bannon, Managing Editor on Nov 15, 2018 (CPA Practice Advisor)

“Some of the changes in the tax reform law mean small businesses can immediately expense more of the cost of certain business property. Many are now able to write off most depreciable assets in the year they are placed into service.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead. Among those for business owners are tax rate changes for pass-through entities, changes to the cash accounting method for some, limits on certain deductions and more.

Section 179 expensing changes

A taxpayer may elect to expense all or part of the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017. For most businesses, this means the 2018 return they file next year.

Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. The TCJA also modifies the definition of qualified real property to allow the taxpayer to elect to include certain improvements made to nonresidential real property. See New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act for more information.

New 100 percent, first-year ‘bonus’ depreciation

The 100 percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The law also allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

The deduction applies to business property acquired after Sept. 27, 2017, and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.  In general, the bonus depreciation percentage is reduced for property placed in service after 2022. See the proposed regulations for more details.

Taxpayers may elect out of the additional first-year depreciation for the taxable year the property is placed in service. If the election is made, it applies to all qualified property that is in the same class of property and placed in service by the taxpayer in the same taxable year. The instructions for Form 4562, Depreciation and Amortization, provide details.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Pay Your Taxes Like a Billionaire: Carefully December 12, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Pay Your Taxes Like a Billionaire:  Carefully


One of the more common comments I hear is that the “rich” don’t pay income taxes. That is simply not true. However, many of the “rich” own and operate a business, sometimes more than one. These businesses do offer some great planning opportunities not available to many non-entrepreneurs. Often, some of the major components of these tax saving strategies revolve around the use of accelerated depreciation methods for qualifying assets and some sophisticated retirement plans.
The following excerpts from Laura Sanders (WSJ, December 1-2, 2018) further explain some of the intricacies of extended planning for individuals and businesses under the new tax laws.

-Mark C. Bradstreet

“The richest Americans have long saved billions from multi-year tax planning. Now it makes sense for many others to do the same. Advisors to high earners have always done multiyear analyses of items like operating-loss carryforwards or stock options for their clients. But because of last year’s tax overhaul, filers earning less have an incentive to use this approach.

Individuals may decide to speed up or slow down their charitable donations, while business owners may want to spread out certain deductions instead of taking them all at once. The result could be a significantly lower tax bill over time.

One key driver of the change is the near doubling of the standard deduction, the amount taxpayers get if they don’t itemize write-offs like mortgage interest, state and local taxes, and charitable donations on a Schedule A. This write-off is now $12,000 for single filers and $24,000 for married couples.

This is where multiyear planning helps.

Say that John and Jane have paid off their mortgage, owe $15,000 in state and local taxes, and give $10,000 a year to charities.

For 2017, they deducted the $25,000 total on Schedule A because it was greater than their standard deduction of $12,700. But their 2018 state-tax write-off is capped at $10,000. Thus, their deductions total $20,000, less than their $24,000 standard deduction this year.

Now see what happens if they accelerate their $10,000 of 2019 donations into 2018. They can deduct $30,000 on Schedule A for 2018 and take the standard deduction for 2019, which is $24,400 after an inflation adjustment. By doing this, their write-offs over two years total $54,400 rather than $48,400.

“People should maximize charitable deductions, as it’s often the only Schedule A strategy left,” says David Lifson, a CPA with Crowe LLP in New York.

Multiyear planning is also newly important to owners of pass-through businesses like a proprietorship, partnerships and S corporations. They now get a 20% deduction, as long as their own taxable income doesn’t exceed $157,500 for single filers or $315,000 for married couples. Above that, the deduction can shrink or disappear.

Owners with income above the limits can use various strategies to get below it. Among them: investing in depreciable equipment; making charitable donations; and saving more in retirement plans with deductible contributions.

Say a married business owner has a taxable income of $330,000 and buys $100,000 of equipment. The law allows him to deduct 100% of the cost right away, which gets him far below the $315,000 income threshold – for one year.

Instead, says Mr. Porter [a CPA in Huntington, W. VA], the owner should consider spreading out these deductions, as is often allowed.  If he takes the $100,000 write-off over five years, perhaps he can lower his income so it’s below the threshold for that period, qualifying him for a full 20% write-off each year.

With year-end nearing, here are other tax moves.

•    Take capital gains and losses as needed.  Don’t let the tax tail wag the dog, but remember that capital losses can offset taxable capital gains from investments and reduce a filer’s bill. Up to $3,000 of excess capital losses can also be deducted against “ordinary” income like wages.

Investors who sell losing securities can’t repurchase them for 30 days before or after without running afoul of Internal Revenue Service rules. Winners can be rebought right away.

•    Beware of the 3.8% surtax. The 3.8% tax on investment income applies to most married couples with more than $250,000 of adjusted gross income and most singles with more than $200,000.

It’s levied on net investment income, such as interest, dividends, capital gains and royalties, above the thresholds.  Thus, if a single filer has $150,000 of income and a $75,000 capital gain, $25,000 would be subject to the 3.8% tax.

Some people can avoid this tax by planning, such as by selling part of an investment before year-end and the rest early in January.

•    Take required IRA payouts.  These are typically from traditional individual retirement accounts held by taxpayers 70½ and older.  The required payout is a percentage of total assets on the prior Dec. 31. Except for those taking their first such withdrawal, the payout must be taken by year-end.

IRA owners taking their first required payout have a later deadline:  April 1 of the year after they turn 70½.  But waiting means the IRA owner will owe tax on two IRA payouts in the second year, pushing some into a higher bracket, so it may make sense to take it before year-end.”

-Laura Saunders, WSJ

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | An IRA/Charitable Contribution (QCD) for Year-End Planning December 5, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

An IRA/Charitable Contribution (QCD) for Year-End Planning

Over the last few years we continue to see an uptick in charitable contributions made from an IRA. I continue to believe this tax strategy is very often overlooked or just simply ignored. So as this year winds down and many people are making charitable donations, please remember the new tax law has made the way to make charitable contributions even more worthwhile to consider.

-Mark C. Bradstreet, CPA

Bob Carlson Contributor (excerpts from an article titled “7 IRA Strategies For The End of 2018”)

“It’s time for IRA owners to be proactive by planning and implementing their strategies for the rest of the year. Consider these steps now and take those that are appropriate for you.

Caution: Don’t wait until the last few weeks of the year to consider your actions. IRA custodians are very busy then. Many won’t process requests for some types of transactions during the last couple of weeks of the year or won’t guarantee they’ll be completed by December 31.

Use QCDs to make charitable contributions. It’s one of the best ways to make charitable contributions, though it’s available only to owners of traditional IRAs who are age 70 ½ and older.

The Tax Cuts and Jobs Act made the qualified charitable distribution (QCD) even more valuable. The law increased the standard deduction and reduced the itemized expenses that can be deducted.  The result is fewer taxpayers will be itemizing expenses and deducting charitable contributions.

In a QCD, you direct the IRA custodian to send a contribution directly to the charity of your choice. Or you can have the custodian send you a check made payable to the charity, which you deliver to the charity.

The distribution isn’t included in your gross income, yet it counts towards your required minimum distribution (RMD) for the year.”

Bob Carlson is the editor of Retirement Watch, a monthly newsletter and web site he founded in 1990. He researches and writes about all the financial issues of retirement and retirement planning, for both those planning retirement and already retired.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | The New Kiddie Tax: How It Might Change Gift Giving November 21, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

The New Kiddie Tax: How It Might Change Gift Giving


The following article is about a tax that we seldom deal with, but one which can be significant when it comes into play – the so-called Kiddie Tax. The article was written by Bob Carlson and was taken directly from the Accountants’ Daily News (10-16-2018), and discusses changes to the tax and how it is computed.
-Norman S. Hicks, CPA

By Bob Carlson

Opinions expressed by Forbes Contributors are their own.

“Beginning in 2018, youngsters who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate.

Take a good look at the new Kiddie Tax before making gifts to children and grandchildren.

The Tax Cuts and Jobs Act greatly simplified the Kiddie Tax. The tax was imposed in the Tax Reform Act of 1986 on unearned (investment) income of children. The idea was to end income splitting. That was the practice of high-income earners shifting some of their income to relatives in lower tax brackets, usually by giving investment assets to children directly or through trusts. Initially, only children under age 14 were subject to the tax. The scope was increased over the years.  Now, it applies to most children under 18 and full-time college students under 24 who don’t pay for more than half of their support.

The original Kiddie Tax had the children paying taxes on their investment income at their parents’ highest tax rate. It required a separate form and some complicated computations. It also required parents to share their tax information with their children.

Beginning in 2018, youngsters who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate. That greatly simplifies computation of the tax and means parents don’t have to share their data. But the new rules mean many who are subject to the Kiddie Tax will pay higher taxes than they would have under the old rules.

For example, the maximum 20% capital gains tax is imposed on trusts when taxable income reaches $12,700. Last year, that rate wasn’t imposed on an individual until taxable income exceeded $400,000. Throughout the tax tables, higher tax rates are imposed on trusts at much lower income levels than for individuals.

But some children will pay lower income taxes under the new rules.  When a child’s parents are in the top tax bracket and the child receives only a few thousand dollars of investment income, the income will be taxed at a lower rate under the new rules. The child won’t be in the top tax bracket.

The Kiddie Tax applies to all unearned income. That, of course, includes all types of investment income, but also includes distributions from traditional IRAs and 401(k)s and some Social Security survivor benefits.

A child subject to the Kiddie Tax receives a $1,050 standard deduction that makes that amount of unearned income tax free. The next $1,050 of unearned income is taxed at a lower rate, but tax advisors disagree on whether it is taxed at the child’s tax rate or using the trust tax tables. The rule is unclear until the IRS issues guidance.

This means the first $2,100 of unearned income earned by a child or grandchild is either untaxed or taxed at a low rate. Additional income will be taxed using the trust tax tables. So, parents and grandparents have to monitor a youngster’s unearned income sources carefully before giving additional income-producing investments or selling long-term capital assets held in the youngster’s name.

If you plan to leave assets to a youngster as part of your estate plan, you should consider leaving a child who might be subject to the Kiddie Tax a Roth IRA instead of a traditional IRA. There might be a family member in a lower tax bracket who should inherit the traditional IRA.

Another strategy for grandparents might be to give appreciated property to the parents instead of to the grandchildren. Suppose the grandparents are in the top tax bracket but the parents are in a lower bracket. The grandparents have an investment asset with a significant long-term capital gain. They want to sell the asset to help pay for the grandchild’s education or other needs.

The grandparents would owe the 20% capital gains rate if they sold the asset, and the grandchild also would owe the 20% rate if the amount of the gain plus other investment income put him or her in the top trust tax bracket. But the parents might owe only a 15% (or lower) rate if they were given the property and sold it.

The irony is that under the new rules, top-bracket parents or grandparents probably can transfer more money to youngsters before triggering a higher tax than lower-bracket adults can. The top tax rate of 37% begins at $600,000 of taxable income for married taxpayers filing jointly and at $12,500 for trusts. That means a top-bracket family can transfer up to $12,500 of gains or other unearned income to a child or grandchild before the 37% rate is triggered on the child. But an adult in a lower tax bracket has to transfer less than $12,500 before the child begins paying a higher rate than the adult would pay

The new Kiddie Tax makes computing the tax easier, but it can make planning more complicated for many families.”

Bob Carlson is a contributing editor of Forbes Media and is the editor of Retirement Watch, a monthly newsletter and web site he founded in 1990.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Norman S. Hicks, CPA

–until next week