Monthly Archives: March 2012

IRS Issues Guidance on Expanded Work Opportunity Tax Credit

by Michael W. Blitstein, CPA 

The IRS has released guidance and posted online Frequently Asked Questions (FAQs) for employers planning to claim the enhanced Work Opportunity Tax Credit (“WOTC”) for hiring qualified military veterans.  The guidance contains transition relief, describes electronic submission of the form used to claim the credit and describes the procedures for tax-exempt organizations to claim the credit.

The WOTC was enhanced as part of the VOW to Hire Heroes Act, passed by Congress at the end of November 2011. Employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit.

For military veterans, the VOW to Hire Heroes Act expanded the WOTC, which rewards employers with a tax credit for hiring individuals from targeted groups. The “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit” are intended to encourage employers to hire unemployed military veterans.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a maximum $5,600 credit per employee (Returning Heroes Tax Credit); employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee. Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a credit of up to $9,600 per employee (Wounded Warriors Tax Credit).

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work for the employer. The credit applies in the case of qualified veterans who begin work prior to 2013.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after November 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised form to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit. Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit.

The FAQs on the IRS website address topics such as how employers claim the enhanced WOTC for hiring qualified veterans, how a non-profit organization can claim the credit, and more.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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Court Upholds Treatment of S Corporation Dividends as Compensation

by Michael W. Blitstein, CPA 

The Eighth Circuit Court of Appeals has affirmed a Federal district court decision holding that a portion of the dividends paid to an employee-owner of professional services firm was compensation for services. As a result, the taxpayer earned additional wages and owed additional Social Security taxes.

Taxpayers and the IRS frequently spar over the amount of compensation, and, subsequently, the amount of FICA (Social Security) taxes owed, by a closely-held corporation where the same person owns the company and is its employee. Unlike a partnership, where a general partner’s share of profits is subject to self-employment taxes, distributions to an S corporation stockholder are not subject to FICA taxes.

Background

The taxpayer was working for his own professional corporation (“P.C.”). The P.C. owned 25 percent of a professional services firm that was an S corporation. His P.C. entered into an employment agreement with the S corporation, and he exclusively worked for the firm.

The P.C. paid the taxpayer $24,000 a year as compensation and paid Social Security taxes on that amount. The P.C. received substantial distributions from the firm, which had gross earnings of $2–3 million each year. After the P.C. paid the taxpayer’s salary and other expenses, it distributed the remaining cash to the taxpayer as dividends, amounting to $203,000 in year one and $175,000 in year two.

The IRS determined that the P.C. underpaid employment taxes. A Federal district court agreed, determining (based on the testimony of IRS’s expert) that the taxpayer’s compensation should have been $91,000 a year.

Substance Over Form

To determine the appropriate amount of FICA taxes, the court found that the inquiry was whether payments at issue were remuneration for services performed. Because the corporation was controlled by the employees to whom the compensation was paid, the court gave special scrutiny to the salary amount, since there was a lack of arm’s-length bargaining.

A reasonable compensation determination is usually appropriate to determine the amount of an income tax deduction, but it also applies to FICA tax cases. In an old regulation ruling, the IRS concluded that it could recharacterize S corporation dividend payments because the dividends were paid to stockholders in lieu of reasonable compensation. Courts looking at the FICA issue have also evaluated the economic substance of a transaction.

Reasonable Compensation

The Eighth Circuit agreed with the district court’s conclusion that the value of the taxpayer’s services was $91,000 and that the P.C. owed additional FICA taxes. The P.C.’s purported intent to pay $24,000 as compensation was not relevant, the court concluded. Even if intent mattered, it was not credible that the P.C. intended to pay a mere $24,000 in compensation.

The appeals court said that it was appropriate to determine whether the taxpayer’s compensation was reasonable. Based on the following factors, the appeals court concluded that the district court properly determined the fair market value of the taxpayer’s services: the taxpayer was a qualified professional; the taxpayer worked 35 to 45 hours per week as a primary earner of the firm; the $24,000 supposedly paid was unreasonably low compared to similar professionals; the firm had substantial gross earnings; and the firm made substantial distributions to the taxpayer, especially when compared to the claimed salary.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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IRS Issues 2012 Vehicle Depreciation Dollar Limits

by Michael W. Blitstein, CPA 

The IRS has issued limitations on depreciation deductions for owners of passenger automobiles, light trucks, and vans first placed in service during calendar year 2012.  Generally, depreciation deduction limits for calendar year 2012 are $100 more than the limits for calendar year 2011. For 2012, the depreciation dollar limits also reflect 50 percent bonus depreciation under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

The Internal Revenue Code (“The Code”) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service within its business and for each succeeding year. The IRS adjusts the amounts allowable as depreciation deductions for inflation.

The 2010 Tax Relief Act generally extended the 50 percent additional first year depreciation deduction to qualified property acquired and placed in service before January 1, 2013. The Code increases the first year depreciation allowed for vehicles subject to the luxury vehicle limits, unless the taxpayer elects out, by $8,000, to which the additional first year depreciation deduction applies. The $8,000 amount is not adjusted for inflation.

Passenger Automobiles

The maximum depreciation limits for passenger automobiles first placed in service by the taxpayer during the 2012 calendar year are:

  • $11,160 for the first tax year ($3,160 if bonus depreciation is not taken);
  • $5,100 for the second tax year;
  • $3,050 for the third tax year; and
  • $1,875 for each tax year thereafter.

Trucks and Vans

The maximum depreciation limits for trucks and vans first placed in service during the 2012 calendar year are:

  • $11,360 for the first tax year ($3,360 if bonus depreciation is not taken);
  • $5,300 for the second tax year;
  • $3,150 for the third tax year; and
  • $1,875 for each tax year thereafter.

Sport utility vehicles and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds are exempt from the luxury vehicle depreciation caps.

Leases

Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicle’s business use. However, lessees must include a certain amount in income during the year the vehicle is leased to partially offset the amounts by which lease payments exceed the luxury automobile limits.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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Winning The Lottery Is Just The Beginning…

by Michael W. Blitstein, CPA 

Many individuals play the lottery every week with the fantasy of having that winning ticket. Oh, all the things the prize would provide if we just had the lucky numbers.  However, most do not think of the necessary tax planning that surrounds acquiring the wealth.

A recent Tax Court case summarizes the experience of one family. The taxpayer learned she held a winning lottery ticket. The taxpayer’s father contacted an attorney who prepared incorporation papers for an S corporation. The taxpayer and several family members were the stockholders. The taxpayer subsequently transferred the ticket to the S corporation.

Before the taxpayer could claim her winnings, she had to defend her prize against a competing claim by her co-workers. A state trial court sided with the co-workers but the state highest court reversed that decision.

The IRS determined that the taxpayer had made a gift as a result of her transfer of the ticket to the S corporation. The IRS issued a deficiency notice for $771,000 for gift tax owed (income tax liability was not a part of this case). The taxpayer appealed to the Tax Court for relief.

The court first found that the Code generally imposes a tax irrespective of whether the gift is direct or indirect. Under regulations, a transfer of property to a corporation for less than adequate consideration represents gifts to the other individual stockholders of the corporation to the extent of their proportionate interests.

The court rejected the taxpayer’s argument that there was no gift because a family contract required transfer of the ticket. The court found that there was no pooling of money. There were no predetermined sharing percentages. At most, the family had an unenforceable “agreement to agree.”

The court further found that no partnership existed among the taxpayer and her family members. All of the decisions about the ticket were made by the taxpayer’s father; not jointly by all the family members as had been argued. The court concluded that the transfer was a gift, discounted only to account for the competing claims by co-workers at the time of the gift.

So… what’s the moral of this story? As you daydream about what winning the lottery can mean to you, you may want to include getting some real tax advice before you cash in the ticket as part of your fantasy.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com