Archive for the ‘Taxable Talk’ Category

The Form 3115 Conundrum

Monday, January 26th, 2015

[Accounting Today readers: Here’s a link to Fail, Caesar.]

Form 3115 is the form used to request an accounting method change. For example, if your business is changing from cash to accrual, this form is filed. Many such changes are automatic; you just notify the IRS, file the paperwork, and life moves on. Of course, even the simple is complex: Form 3115 gets filed twice: once with your tax return, and once to either Ogden, Utah or to Washington, DC.

This year there’s a conundrum faced by tax professionals: Do we need to file a Form 3115 for every taxpayer who has equipment, depreciation, rental property, inventory, etc.? And no one seems to know the answer.

The cause of the problem is the new repair/capitalization/property regulations. These new regulations are effective for the 2014 tax year, and specify how certain things are supposed to be done. Why is this a big issue? Because Form 3115 is complex: The IRS estimates it will take 24 work hours to complete one form for one client.

It’s a certainty that companies that manufacture or have inventory will need to file Form 3115 with their returns. But what about someone with a side business? A couple who rents out their old home? There is a 12-page thread on TaxProTalk on this subject and I don’t think anyone there has a good handle on this.

Let’s take a real world example: John and Mary Smith. The Smiths own one residential rental property here in Las Vegas. The property has been depreciated for the last five years. In 2013, they put in a new garage door and are depreciating it. Their tax return is otherwise quite blase: they have wage income, a home mortgage, property tax, and some minor investment income.

I still don’t have a good answer for this. I’d love to hear from other tax professionals on this issue.

Nominations Due for 2014 Tax Offender of the Year

Tuesday, December 23rd, 2014

With just about one week prior to the end of 2014, it’s time for a final reminder to submit nominations for the Tax Offender of the Year. To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

Vacation

Friday, December 5th, 2014

It’s time for my annual winter vacation. I will not be posting until I return. While I’m away, enjoy the fine bloggers listed in the blogroll on the right.

I’ll be back on Tuesday, December 23rd.

As God as my Witness, I Thought Turkeys Could Fly

Wednesday, November 26th, 2014

Have a Happy Thanksgiving everyone:

Today, Liechtenstein; Tomorrow, the World!

Sunday, August 24th, 2014

Fellow Enrolled Agent Jason Dinesen calls EAs the Liechtenstein of the tax world. Personally, I think he may be overstating our case; when I tell people I’m an Enrolled Agent the most common reaction is, “You don’t look like you’re in law enforcement.” Sigh….

But kudos to the National Association of Enrolled Agents: The NAEA is doing some positive public relations. If you fly American Airlines in the coming months you will hear NAEA President Lonnie Gary explaining what an EA really is–America’s tax experts. Here’s a link to the video that will be running.

Vacation

Saturday, July 26th, 2014

It’s time for my annual vacation. If something earth-shattering in the tax world happens while I’m relaxing, I’ll take time out to post on it. Otherwise, enjoy the fine bloggers listed in the blogroll on the right.

I’ll be back on Tuesday, August 5th.

A Little Housekeeping

Thursday, May 1st, 2014

We’re in the process of updating our website and the look of the blog. For now, we’re using the “default” WordPress format. This may change in the next few weeks as we make other (more important) changes.

Bozo Tax Tip #1: The Eternal Hobby Loss

Monday, April 14th, 2014

The goal of must businesses is to make money. There aren’t many businesses that can lose on each sale and make it up in volume. In fact, I don’t know of any. But I digress….

So let’s take Sam and Edna, two successful individuals who love horses. They decide to start raising horses. They remember their accountant telling them that if they had a business that loses money they can take the loss and offset some of their income. That’s true. They don’t remember their accountant telling them that the business does need to be structured to make money eventually.

Hobby losses are not allowed. The IRS has a webpage that notes the major factors used in determining whether or not your business is a business or a hobby:

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

– Does the time and effort put into the activity indicate an intention to make a profit?
– Do you depend on income from the activity?
– If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
– Have you changed methods of operation to improve profitability?
– Do you have the knowledge needed to carry on the activity as a successful business?
– Have you made a profit in similar activities in the past?
– Does the activity make a profit in some years?
– Do you expect to make a profit in the future from the appreciation of assets used in the activity?

If your business loses money year-after-year, and you’re not making any efforts to change it, and you get a lot of personal enjoyment out of the business, beware! Your “business” might be a hobby. Yes, circumstances can cause any business to fail (and the IRS knows this). But when your business is losing money every year and you make no effort to change your business, at least on the surface you’re looking like a hobby. The eternal hobby loss is a good way to head to an IRS audit.


That’s it for our Bozo Tax Tips for the 2014 Tax Filing Season. I hope you’ve enjoyed them. We’ll be back with actual tax posts at the end of the week.

Bozo Tax Tip #2: Hot Air

Sunday, April 13th, 2014

Congress has decided to legislate through the Tax Code. There are hundreds of tax credits that now exist. These range from the Earned Income Credit, education credits, electric vehicle credits, and adoption credits. Some of these credits, such as the Earned Income Credit, are refundable credits: You can get a refund based on the credit even if you don’t have income.

Now, the Bozo mind works differently than yours and mine. They see a tax credit and think, “How can I get some free money? I’ll find a tax credit and the government will just send me money!” So our Bozo looks and finds there’s a tax credit available for recovering methane (CH4) from landfills. Our enterprising Bozo sets up the Hot Air Gas Company, and starts claiming the credit. Our Bozo skips the somewhat important step of actually obtaining some methane from a landfill.

The IRS does investigate such tax credits, and when you claim that you are recovering natural gas when you’re not, that’s tax fraud, a criminal offense. And that leads straight to ClubFed.


The Tax Code is far too complex. Our Congresscritters have decided to legislate through the Tax Code, leading to a myriad of deductions and credits. The best solution to this issue would be for Congress to simplify the Tax Code but that’s not going to happen any time soon. Until then, if you legitimately qualify for a tax credit you should take it. But if the only hot air you possess is exhaling from your mouth, don’t claim a tax credit for it unless you want to visit ClubFed.

Bozo Tax Tip #3: Be Suspicious!

Thursday, April 10th, 2014

Another repeat, but one that is a continual issue with cash business. It may be “cash and carry,” but cash is taxable in all ways. And cash reporting (or lack thereof) can be a problem. Anyway, let’s be suspicious:

Given my practice area, I deal with individuals who occasionally make large cash deposits. I tell them that they shouldn’t mind the completion of a Currency Transaction Report. The IRS gets so many of them that as long as you’re paying your taxes it’s not a big deal.

On the other hand, if you break up your $11,000 transaction into two $5,500 deposits, you can get in trouble. Big trouble. A suspicious activity report (SAR) might be issued. The IRS doesn’t get as many of these, and almost all of them are investigated. And that’s what leads into this tale of woe.

We’re focusing today on a public figure. He was a prosecutor, and he used the Bank Secrecy Act (among other laws) to help send many individuals—primarily in organized crime—to prison. He then became Attorney General of his state, serving two terms in that office. He was then elected Governor.

But our public figure had a problem. He enjoyed the world’s oldest profession. While traveling to Washington, D.C. he used a service called the Emperor’s Club. He funded his nighttime activities by making multiple wire transfers of just under $10,000.

Come on, could a politician who used to use the Bank Secrecy Act actually get blindsided by the Act? Yes. Eliot Spitzer’s wire transactions were duly reported by North Fork Bank. That led to an IRS investigation which led to an FBI investigation which led to a governor becoming an ex-governor.

So if you want to send money, go big-time. Send more than $10,000. But whatever you do, don’t break up your cash transactions into smaller pieces to evade the reporting requirements. One day you might find two armed federal agents at your door, reminding you, “You have the right to remain silent….”