Monthly Archives: February 2017

You May Not Get Any Amended Form 1099s for Investment Income This Tax Season

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smart-investmentsOne of the more annoying aspects of tax filing has been the amended Form 1099s that people receive from investment brokers late in the filing season that require amended returns. Well, the number of these amended Form 1099s may decline substantially this filing season.

For investment income Form 1099s filed after December 31, 2016 (i.e., for tax years 2016 and later) there is a new safe harbor for de minimis errors on informational returns. If the broker makes an error that differs from the correct amount by no more than $100 or tax withheld differs by no more than $25, the broker is not required to issue a revised Form 1099 unless the payee elects that the safe harbor not apply.

Most of the corrected Form 1099s issued late in the filing season tend to report changes that are fairly small amounts, and they are generally under $100. So this safe harbor should substantially reduce the number of amended tax returns that are required because of corrected investment income Form 1099s.

If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.


Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Is This the End of the Individual Mandate?

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crazy-sign1The IRS recently announced that it will not reject 2016 tax returns that are silent on whether the taxpayer has complied with the individual mandate of the Affordable Care Act.  These provisions require taxpayers to have qualifying health care coverage, qualify for an exemption, or pay a penalty.  The IRS previously stated that such “silent” returns would be rejected; however, the IRS has shifted its policy to comply with a recent Presidential executive order.  While the individual mandate is still law, it is possible that the IRS may not enforce the penalty.  Caution is advisable.  It is still very early in this process and guidance is still vague.

Background on the Individual Mandate

On their tax returns, taxpayers who had qualifying health coverage for every month of 2016 for themselves, their spouses, and dependents had to check the box on line 61 (Health Care: Individual Responsibility).  A taxpayer that couldn’t check the box because there were coverage lapses must generally either claim a coverage exemption or pay the penalty for the lapse months.

The Executive Order

President Trump’s first executive order stated his intent to seek prompt repeal of the ACA.  The executive orders stated:

To the extent permitted by law, the Secretary of Health and Human Services and the heads of all other executive departments and agencies with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.

While the Trump Administration cannot simply repeal the individual mandate, which is part of a law passed by Congress, they could make the regulatory exemptions from it so broad that the exemptions swallow the rule and the individual mandate is essentially unenforced.  Possibly…

One cause for concern is that even though the IRS will now process returns that are silent on compliance with the individual mandate, the IRS says that if it has questions about a tax return, taxpayers may receive follow up questions and correspondence at a future date.

Based on existing law prior to the executive order, the IRS will not issue liens or levies to collect the penalty and they will not initiate audits based on nonpayment of the penalties.  The IRS’ only recourse for nonpayment of the penalty is to reduce refunds owed to taxpayers.

If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.


Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Home Office Deductions

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When you qualify to take a home office deduction, the business
portion  of the following expenses (which are usually not deductible) become deductible:

  • utility costs
  • home insurance premiums
  • repairs
  • the lower of the cost of your home or its fair market value (this is done through depreciation deductions)

A couple of caveats:

  • the home office deduction is limited to the income from the business (or job) for which you are using the home office
  • home office deductions for employees are only allowed if the employee’s home office is used for the convenience of the employer
    • So if your employer provides you with an office at work, but you choose to work at home, you can’t take a home office deduction because you are working at home for your own convenience.
    • If your employer does not provide you with an office at work (or the availability of the employer’s office is too restrictive), your home office is more likely to be for the convenience of your employer and be deductible.

Requirements of the Home Office Deduction

A home office must be used REGULARLY and ***EXCLUSIVELY***as:

  • your principal place of business
  • a place where you meet with customers or clients
  • connected with your business if your home office is in a separate structure

If there is any personal use of your home office, it is not being used exclusively for business and the home office deduction is not allowed.  There are only two exceptions to the exclusivity rule:

  • you are running a daycare out of your home
  • the home office is being used to store inventory

If you are running a daycare or using your home office to store inventory, you can take a home office deduction even if the home office is not being used exclusively for business (but the home office deduction is reduced by the percentage that it is being used for personal reasons).

Principal Place of Business Requirement

There are two ways to meet the principal place of business requirement:

  • You meet the facts and circumstances test
    • the nature of the work performed at each location
    • the amount of time you spend at each location is considered.
  • You perform managerial or administrative work out of your home office, and you do not perform substantial administrative or managerial work at another fixed location.

Example:  Doc is a cardiologist who has a home office where he:

  • does billing work
  • reads medical journals
  • schedules appointments
  • does some bookkeeping work for his business

Under the facts and circumstances test, the IRS looks to Doc’s business and the nature of the work he performs at each location.  Doc is a cardiologist and performs surgery and consults at hospitals.  Since the work of a cardiologist is primarily surgical and consultative, Doc cannot take a home office deduction because his primary work is done at hospitals.

However, Doc can take a home office deduction because he performs managerial and administrative work out of his home office (and doesn’t do such work at other locations). 

This fact scenario is based on the Solimon v. Commissioner case.  In this case, the Supreme Court agreed with the IRS and disallowed a home office deduction under the facts and circumstances test.  Congress responded by changing the law to allow home office deductions for administrative and managerial work done in a home office.

A very important advantage of having your home as your principal place of business is that commuting expenses become deductible.  Normally, your commute to your first business stop (and from your last business stop to your home) are nondeductible.  When your home is your principal place of business, commuting expenses from your home office to your first business stop (and from your last business stop to your home office) become deductible.

A Place where You Meet with Customers/Clients

You must actually meet with customers/clients at your home (i.e., teleconferencing or videoconferencing does not count).  Not much more to say here.

Connected with Your Business if the Home Office is in a Separate Structure

The “connected with” requirement is a much less stringent requirement to meet than the principal place of business requirement.  A separate structure can include a detached garage or barn.  The reasoning for the less stringent standard is because a separate structure is less likely to be used for personal reasons (e.g., you are more likely to watch TV or have company in your den than you are to watch TV or invite company to your detached garage).

Simplified Home Office Deduction

There is a simplified method of computing the home office deduction.  The home office deduction can be calculated by multiplying $5 by the square footage of the home office.  The maximum square footage of the home office under this method is 300 square feet, and the maximum home office deduction will therefore be $1,500.  Of course, taxpayers still have the option of calculating the home office deduction under the actual expenses method if it results in a larger deduction.

Taxpayers who use the simplified method may still fully deduct mortgage interest, real estate taxes, and casualty losses as itemized deductions.  Additionally, businesses expenses such as advertising, wages, and supplies are still deductible.   Depreciation may not be claimed.

Use the Power of Positive Mental Attitude to Lower Your Taxes (2017 Top Tax Scams)

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scamThe IRS is in the process of releasing its 2017 Dirty Dozen list of tax scams. It updates this list each tax season to alert taxpayers of tax scams they may encounter during the filing season. Tax scams making the list this year include:

Falsely Padding Deductions

The majority of taxpayers file honest and accurate tax returns each year. However, each year some taxpayers “fudge” their information. This is why falsely claiming deductions, expenses or credits on tax returns remains on the “Dirty Dozen” list of tax scams.

Significant penalties may apply for taxpayers who file incorrect returns including:

  • 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
  • $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
  • In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as:

  • Tax evasion
  • Willful failure to file a return, supply information, or pay any tax due
  • Fraud and false statements
  • Preparing and filing a fraudulent return, or
  • Identity theft.

Criminal prosecution could lead to additional penalties and even prison time.

Excessive Claims for Business Credits

Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is generally limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses.

Inflated Refunds

“Exercise caution when a return preparer promises an extremely large refund or one based on credits or benefits you’ve never been able to claim before,” said IRS Commissioner John Koskinen. “If it sounds too good to be true, it probably is.”

Watch Out for Fake Charities

Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. has the tools taxpayers need to check out the status of charitable organizations.

Watch Out for Crooked Tax Preparers

Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Legitimate tax professionals are a vital part of the U.S. tax system.

Be Vigilant Against Criminals

Tax-related Identity theft – with its related scams to steal personal and financial data from taxpayers or data held by tax professionals – remains a top item on the Dirty Dozen list because it remains an ongoing concern even though progress is being made.

The IRS and its partners remind taxpayers they can do their part to help in this effort. Taxpayers and tax professionals should:

  • Always use security software with firewall and anti-virus protections.
  • Make sure the security software is always turned on and can automatically update.
  • Encrypt sensitive files such as tax records stored on the computer.
  • Use strong passwords.
  • Learn to recognize and avoid phishing emails, threatening phone calls and texts from thieves posing as legitimate organizations such as a bank, credit card company and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails.
  • Protect personal data. Don’t routinely carry a Social Security card, and make sure tax records are secure. Treat personal information like cash; don’t leave it lying around.

Phone Scams

Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation and license revocation, among other things.


Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never send taxpayers an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS. Be wary of strange emails and websites that may be nothing more than scams to steal personal information.

If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.


Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Before You Start Development on that Land Investment…

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sale to s corporationLand prices have been recovering since the Great Recession. People who hold land for investment may be interested in developing then selling the land. If held for more than 12 months, gains from sales of investment real estate are subject to favorable capital gain rates (generally 15%, but up to 23.8% for high income individuals). However, people who do any development of the land generally will not qualify for capital gain treatment; they will be subject to ordinary income rates (up to 43.4%) on their entire gain from the sale of developed land.

Example: Jane owns a parcel of land she bought as an investment 20 years ago. She originally paid $200,000 for the parcel and it is now worth $300,000. Jane has not performed any development activity on the land. If she sells the land, her gain of $100,000 will be subject to the favorable capital gain tax rate of 15%. Her tax on the sale will be $15,000.

Example 2: Same as above, except that Jane spent $20,000 improving and developing the lane. She sells the parcel for $350,000. Her cost basis in the land is the $200,000 purchase price plus the $20,000 she spent on improvements–$220,000. If she sells the land for $350,000 her gain will be $130,000. Since she began developing the land, the gain of $130,000 no longer qualifies for capital gain treatment. The gain will be taxed at ordinary income rates. If Jane is in the 28% tax bracket, the tax on her gain will be $36,400.

Tax Strategy: Sell the Undeveloped Land to Your S Corporation

Through a tax-saving strategy, it is possible to have pre-development gains subject to the capital gain tax rate, and only gains from development will be subject to ordinary income rates. This is done by selling the investment land to an S corporation that the real estate investor owns before performing any development activity.

Example: Carrying on with the same fact scenario as above. Instead of developing the land herself, Jane first sells her investment property that she purchased for $200,000 to her 100% owned S corporation. The purchase price is the $300,000 market value of the land. She recognizes a $100,000 gain that is taxed at the 15% capital gain tax rate. Her tax on the pre-development gain is $15,000.

Her S corporation will now develop the land. The S corporation spends $20,000 to develop the land and the land is now worth $350,000. The S corporation’s cost basis in the land is the $300,000 purchase price plus $20,000 development costs–$320,000. When the S corporation sells the developed land for $350,000, it recognizes a $30,000 gain that is taxed at Joan’s ordinary tax rate of 28%. The tax on the $30,000 gain is $8,400. Her and her S corporation’s total tax is $23,400.

The Tax Savings

If she developed the land herself, her total tax would be $36,400 on $130,000 of total gain. By first selling the land to her S corporation, she is able to preserve capital gain treatment on the pre-development gain ($100,000) and only pays ordinary income tax rates on the gain allocable to development ($30,000). Her total tax with the S corporation strategy is $23,400. She saved $13,000.

Strategy Does NOT Work with an LLC

This strategy will generally only work with an S corporation. It will not work with LLCs because there is a rule denying capital gain treatment when an LLC owner sells property to his LLC and the property is ordinary income property of the LLC. Since the property held by the LLC will be sold at ordinary income rates, the LLC owner’s gain on the sale to the LLC will also be ordinary income.

Make Sure It’s a Bona Fide Sale for Fair Market Value

For this strategy to work, the sale to the S corporation must be a bona fide sale for fair market value. There should be a sales agreement, and if the sale is on an installment agreement, regular payments should be made and interest to the S corporation should be charged.

If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.


Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

IRS Taxes Sweat Equity

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sweat equityWhen a taxpayer forms an LLC and contributes appreciated property to the LLC, the taxpayer generally does not recognize gain on the transfer.   The IRS does not force taxpayers to recognize gain on property contributions to LLCs because taxpayers didn’t sell or exchange the property; they continue to own an interest in the contributed property, albeit through a business entity.  Naturally, there are exceptions to this rule where gain can be recognized such as where debt encumbered property is transferred to the LLC or investments are transferred to an investment LLC.

On the other hand, when a taxpayer performs services (i.e., sweat equity) in exchange for an interest in an LLC, the taxpayer will usually recognize compensation income equal to the fair market value of the LLC interest received.  The IRS treats the transaction as if the taxpayer received cash compensation (which is taxable), and then used the cash to purchase the LLC interest at fair market value.

There are two forms of ownership interests in an LLC—a capital interest and a profits interest.  A capital interest gives the owner a claim to assets when the LLC is dissolved.  A profits interest is defined as an interest other than a capital interest.  Helpful.  Basically, a profits interest does not entitle the owner to assets upon the LLC’s liquidation, but instead entitles the owner to a share of the LLC’s profits (if any).

A taxpayer who performs services in exchange for a capital interest recognizes income in the amount of the fair market value of the capital interest.  However, a taxpayer who performs services in exchange for a profits interest will not recognize income on receipt of the profits interest.  This is because the profits interest holder is not entitled to liquidation proceeds of the LLC, but is instead entitled solely to LLC profits (if any).  Profits interests holders therefore have an speculative value in their interests and will not recognize income upon receipt of the interest, but will instead pay tax on any profits that are allocated to them.

Example 1:  Thelma and Louise form an LLC.  Thelma contributes land that is currently worth $50,000 and was originally purchased for $20,000 for a 50% capital interest.  Louise will perform real estate advisory services for a 50% capital interest.  Since both parties own a 50% capital interest, each would be entitled to 50% of the assets upon liquidation—Thelma and Louise would each own 50% of the land upon liquidation.  Thelma does not recognize income upon her contribution because it is a contribution of property.  Louise will recognize income of $25,000 because she contributed services in exchange for a capital interest.

Example 2:  Same as above except that Louise received a profits interest instead of a capital interest.  If the LLC liquidates, Louise will not share in the liquidation assets.  Instead, Thelma will receive 100% of the land.  Louise will not be taxed on her contribution of services because she received only a profits interest.  However, Louise will recognize income for any profits that are allocated to her in the future.

While a profits interest is generally not subject to tax because of their unascertainable value, there are circumstances where their value is ascertainable.  In these circumstances, the profits interests will be taxable upon receipt.  These circumstances include:

  • the profits interest relates to a substantially certain and predictable stream of income from the partnership assets (such as a net lease);
  • the partner disposes of the profits interest within two years of receipt; or
  • the profits interest is a limited partner interest in a publicly traded partnership.

While a capital interest received in exchange for services usually is taxable, it is not immediately taxable if the capital interest is subject to a substantial risk of forfeiture.  Property is subject to a substantial risk of forfeiture if the rights to its full enjoyment are conditioned (directly or indirectly) upon either of the following:

  • Future Performance of Substantial Services. A requirement of future performance (or refraining from performance) of substantial services by the recipient is a substantial risk of forfeiture. The regularity of the performance of services and the time spent in performing them tend to indicate whether the required services are substantial.
  • Occurrence of a Condition Related to a Purpose of the Transfer. For example, a requirement that the recipient complete an advanced educational degree, obtain a professional designation, or attain a certain job position within the company to receive unrestricted access to the property would likely be a substantial risk of forfeiture, which would exist until that condition was met.

When the capital interest is subject to a substantial risk of forfeiture, the service provider will not recognize gain until the substantial risk of forfeiture is eliminated.

Example:  Same as Example 1 above except that Louise’s capital interest will be forfeited if Louise does not provide 5 years of services to the LLC.  Since Louise’s capital interest is subject to a substantial risk of forfeiture, it is not taxable in the year of receipt.  Instead, it will be taxable after Louise completes 5 years of service and her capital interest is fully vested.

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 Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.


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