Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

October 2016 Tax Newsletter


Tax Calendar

October 17
Deadline for filing your 2015 individual tax return if you requested an automatic six-month extension from the April deadline.

October 17

If you converted a regular IRA to a Roth IRA in 2015 and now want to switch back to a regular IRA, this is the deadline to do so without penalty.

October 17

This is the last day to fund your Keogh or SEP or other retirement plans if you requested an extension of time to file your income tax return.

Plan Ahead for Year-End Business Tax Savings

As the end of the year approaches, turn your attention to ways you can reduce your 2016 tax liability. Here are some suggestions:

  1. Business equipment. Take advantage of end-of-year sales for business equipment. In 2016, the maximum Section 179 deduction of $500,000 and 50% bonus depreciation are generally available for qualified property placed in service anytime during the year. Be aware that special limits apply to vehicles.
  2. Business trips. When you travel to wrap up year-end business deals, you can write off your expenses – including airfare, lodging, and 50% of the cost of meals – if the primary motive of the trip is business-related. Costs attributable to personal side trips are nondeductible. If you travel by car, deduct actual business-related auto costs or a flat rate of 54 cents per mile (plus tolls and parking fees).
  3. Entertainment and meals. Generally, you can deduct 50% of the cost of entertainment and meals that precede or follow a “substantial business discussion.” For example, you might treat a client to dinner and drinks after completing a contract earlier in the day. In this case, you can include 50% of the expenses for the business purpose of entertainment.
  4. Company outings. Generally, deductions for business entertainment and meals are limited to 50% of the cost. However, if you throw a company-wide holiday party before year-end, you might be able to deduct 100% of the cost when you meet certain requirements, such as inviting your entire staff.
  5. Hire your child. If you hire your child, reasonable wages paid for actual services rendered are deductible, the same as wages paid to other employees. The wages will be taxable to your child at your child's tax rate, which may be lower than your rate or that of your business. Also, if your child is under the age of 18 years, then he or she is exempt from paying social security taxes.
  6. Job credits. When your business hires workers from certain “targeted groups,” such as veterans and food stamp recipients, you may be able to claim the Work Opportunity Tax Credit. The maximum credit is generally $2,400 per qualified worker.
  7. Give to Charity. Generally, charitable contributions typically 'flow through' a business and are claimed as deductions on the individual tax returns of the shareholders of the company. This is true whether you are running a sole proprietorship, partnership, limited liability company, or S corporation.
  8. Fully Utilize Pensions. Did you know there are tax incentives for certain retirement plans? If you own a business of any size, you may benefit greatly in multiple ways by setting up a retirement plan. Many plans require creation before the end of 2016, but many also allow funding up to the time of filing the tax return. This includes the tax filing extension, which is ¾ of the way into the year of 2017 and even cash basis taxpayers, which otherwise would have to make the payment by 12/31/16. Moskowitz LLP will do all of the calculations to show you the amounts you can put away in each plan and explain the options of each plan.
    Individual tax deductions range from small amounts up to hundreds of thousands of dollars per year. Unlike other investments where earnings are taxed every year, the earnings in a retirement account are not taxed while they remain in the retirement account.
    Many different types of investments are allowable through a retirement account. Retirement accounts also enjoy asset protection via the federal government; namely, if you file bankruptcy, you may assets, a pension is considered an “exempt” asset and you are entitled to keep a 100% of it while discharging your dischargeable debts. This advantage may give you the opportunity to settle the judgment for a tiny fraction of its award and avoid the bankruptcy altogether.
    Example: If you are in the top federal and state tax bracket, approximately half of your income is taxed. If you made a $100,000 pension contribution in 2017, you would save $50,000 in 2016 taxes. Half of your pension contribution would be paid for with 2016 tax savings and you would have ¾ of a year in 2017 to fund the other half. Why pay those taxes when you can put the money away for your retirement and have it grow with tax free earnings!
    Please see our post regarding Retirement Plans for Small Business Owners and Solo Practitioners for more information and consider implementing a plan before the end of the year.

New Procedure for 60-Day Rollover Errors

Did you inadvertently miss the 60-day time limit for making an IRA or retirement plan rollover? You may be able to avoid taxes and potential penalties by notifying your account trustee with a "self-certification."

When you take a distribution from your IRA or qualified plan with the intention of depositing it, or “rolling it over,” into another IRA or qualified plan, the 60-day rule says you're required to complete the rollover within 60 days of receiving the distribution. In the past, when you missed the deadline, you generally had to request relief from the IRS. That meant paying a fee and going through a process to obtain a written statement waiving the rule.

Now, the IRS says that in some cases you can “self-certify” by submitting a written letter to your financial institution or trustee explaining why you missed the 60-day deadline. Your error must be one of eleven allowable reasons. Contact Moskowitz LLP for more information regarding this new procedure.

Tax Relief for Louisiana Storm Victims

Victims of the August storms and floods in Louisiana have until January 17, 2017, to file individual and business federal tax returns with due dates on or after August 11, 2016. Taxpayers can also choose to claim casualty losses on current or prior-year federal income tax returns in order to obtain an earlier refund. Contact Moskowitz LLP for assistance filing your return.

Charitable Private Foundations

Giving to charity can be part of your tax planning. If you have the means, you can even create your own Private Charitable Foundation to carry out your charitable wishes. The California Attorney General's Guide for Charities advises that California common law defines "chartiable purpose" very broadly to include relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, and other purposes that are beneficial to the community. Federal and California tax laws define charitable purposes more specfically for exemption from income tax. Federal and state laws have been enacted to encourage the making of charitable gifts and to facilitate the operation of charitable organizations. As a result, certain benefits and privileges are conferred on charities that are not available to for-profit businesses.

However, for those involved with charitable private foundations because there are certain tax advantages involved, it is very important to properly maintain the organization with respect to donations, self-interests, mandatory distrubitions, tax and state filings, and otherwise complying with the requirements of the law because the charity and its founders are under much greater scrutiny from the taxing authorities. This is generally not a problem and seen as rountine within the industry.

However, for those who are not properly advised or fail to follow best practices with regards to tax and procedural guidelines for operating a charitable foundation, there are severe punishments that may be imposed. Recently, in San Jose, a CPA was charged (and has since pled) to tax evasion charges resulting from his personal use of his charitable private foundation. In addition, it turns out that this CPA had advised other California residents on Charitable Private Foundations and even established and maintained them. These individuals, his clients,have a high likelyhood to be subject to further investigation by the State Franchise Tax Board and Internal Revenue Service given their relationship to this CPA. See here for more resources and information.

September 2016 Tax Newsletter

Dear Subscriber

This month's newsletter contains tax information for individuals and corporations in general and for 2017 tax planning purposes. We hope you find it useful and we look forward to continuing to serve your legal needs.

Sincerely,

Steve Moskowitz, Esq.
Founding Partner

Tax Calendar

September 15

  • Third quarter installment of 2016 individual estimated income tax is due.
  • Filing deadline for 2015 tax returns for calendar-year corporations that received an automatic extension of the March filing deadline.
  • Filing deadline for 2015 tax returns for partnerships that received an extension of the April filing deadline.

October 1

  • Generally, the deadline for businesses to adopt a SIMPLE retirement plan for 2016.

October 17

  • Deadline for filing 2015 individual tax returns on extension.
  • Deadline for reconverting a Roth IRA to a regular IRA.

The Federal Government has made retirement saving a little easier

Normally a eligible distribution from a IRA or workplace retirement plan can only qualify for tax-free rollover treatment if it is contributed to another IRA or workplace plan by the 60th day after it was received. Unfortunately, until now, individuals would incur income tax and penalties when they failed to meet the rollover time limit, whether it was due to ignorance of the law or even in the case of bank error.

As of August 26, 2016, an individual who misses the 60-day deadline may qualify for a waiver of the 60 day rule and escape the income tax and penalty. As usual, the guidelines that the government has provided are fairly specific. However, one circumstance that may qualify an individual for waiver is if " the distribution was deposited into and remained in an account mistakenly believed to be a retirement plan or IRA."

The take away point here is that if you receive a notice of penalty from the federal or state government, do not just accept it. Talk with Moskowitz LLP and find out if it is validly assessed and if so, is there a waiver available.

IRS Sets 2017 HSA Limits

The IRS announced inflation-adjusted limits for deductible contributions to health savings accounts (HSAs) for 2017. For family coverage, the contribution limit will be $6,750, and for individual coverage, the limit will be $3,400. If you’re age 55 or older, you can contribute an additional $1,000 during 2017. HSAs combine high-deductible health insurance plans with pretax contributions to a healthcare savings account. The savings account funds can be withdrawn tax-free to pay unreimbursed medical expenses.

FSA or HSA? Choosing Between Health Accounts

Are you confused about your choices to pay medical expenses under your employer's benefit plan? Here are some differences between two types of commonly offered accounts: a health savings account (HSA) and a healthcare flexible spending account (FSA).

Overview. A FSA is generally established under an employer’s benefit plan. You can set aside a portion of your salary on a pretax basis to pay out-of-pocket medical expenses. An HSA is a combination of a high-deductible health plan and a savings account in which you save pretax dollars to pay medical expenses not covered by the insurance.

Contributions. For 2016, you can contribute up to a maximum of $2,550 to an FSA. Typically, you have to use the funds by the end of the year. Why? Unused amounts are forfeited under what’s commonly called the “use it or lose it” rule. However, your employer can adopt one of two exceptions to the rule.

If you are single, the 2016 HSA contribution limit is $3,350 ($6,750 for a family). You can add a catch-up contribution of $1,000 if you are over age 55. You do not have to spend all the money you contribute to your HSA each year. You can leave the funds in the account and let the earnings grow.

Earnings. FSAs do not earn interest. Your employer holds your money until you request reimbursement for qualified expenses. HSAs are savings accounts, and the money in the account can be invested. Earnings held in the account are not included in your income.

Withdrawals. Distributions from both accounts are tax and penalty free as long as you use the funds for qualified medical expenses.

Portability. Normally, your FSA stays with your employer when you change jobs. Your HSA belongs to you, and you can take the account funds with you from job to job. This is true even if your employer makes contributions to your HSA for you.

Because you generally can’t contribute to both accounts in the same year, understanding the differences can help you make a decision that best fits your circumstances. Contact Moskowitz LLP for help as you consider your benefit choices.

Could You Qualify for a Partial Home-Sale Exclusion?

Generally, when you’re single, you can exclude up to $250,000 of gain from the sale of a home ($500,000 if you’re married filing jointly) when the home is used as a primary residence for two years in a five-year period that ends on the date of sale. Tax law also provides for a partial exclusion when the time and ownership requirements are not met, if the primary reason for the sale is unforeseen circumstances. “Unforeseen” means events you could not have reasonably anticipated before buying the home and moving in. How flexible is the definition? Recently, the IRS allowed a partial exclusion when a family living in a two-bedroom, two-bath condominium gave birth to another child and needed a larger residence before the two-year rule was met. If you’re unsure if your circumstances qualify, contact Moskowitz LLP to help you examine the situation.

Consider These Financial Tips for Troubling Economic Times

Reacting poorly to negative economic events can turn a challenging situation into a devastating one. When troubling headline news comes your way, consider these tips before making financial moves.

  • Don’t be an average investor. Economists have noted that even in good times average investors usually fail to fully benefit from a market upswing. The reason: not staying invested for the duration of the cycle. Average investors tend to bail out when the future looks troubling, in essence “locking in” losses. Good investing techniques can be as much about mental toughness as about financial acumen.
  • Focus on costs. Periods of economic uncertainty are a good time to focus on costs, especially in a low-return environment. Make sure you’re not overpaying for fund management or sales commissions. And be mindful of tax costs, which can have a negative effect on overall returns. If you decide to sell a stock in a taxable account, consider choosing one you have held for more than one year to qualify for the long-term capital gain tax rate. A market downturn might provide an opportunity to harvest capital losses to help offset previous gains.
  • Revisit your tax planning. Unfavorable economic news might require a tweak to your tax planning. Lower anticipated income could justify reduced estimated tax payments or income tax withholding. If you’re retired, consider deferring retirement account withdrawals or changing the type of investments you were planning to liquidate but don't forget the required minimum distribution (RMD) rules, which require people over the age of 70½ to take a RMD. A review of your tax situation is always a smart move.

The bottom line: Don’t make a bad economic situation worse. Contact our office for assistance navigating the current financial environment.

Tax Deduction: Are Attorney Fees Tax Deductible?

The attorneys and tax accountants at Moskowitz LLP have successfully prepared tens of thousands of income, corporate, partnership, trust, and estate tax returns. We prepare current year returns, as well as delinquent returns. Learn more about when you can deduct your attorney fees here.

C-Corporation Tax Audits

Small businesses (less than $10 million in assets) and mid-sized businesses ($10 - $50 million in assets) are more likely to be audited than in previous years. Small businesses were around 11% more likely to be audited last year compared to two years ago and mid-size businesses were around 8% more likely to be audited. Overall, the IRS audited slightly more than 23 percent of returns for these corporations.

We have also seen an increase in corporate audits. In connection to the increased number of audits, the methods used to identify and select taxpayers for audit are developing as well. Read more about common triggers of corporate tax audits and give Moskowitz LLP a call to discuss your tax matters.