Ronald J. Cappuccio, J.D., LL.M.(Tax)

Ronald J. Cappuccio, J.D., LL.M.(Tax)
Tax Attorney and Business Lawyer

Monday, February 06, 2017

IRS can Steal Your Passport - Let's stop it!

Prohibiting citizens from traveling abroad was the hallmark of many communist countries such as East Germany, the Soviet Union, Cuba, North Korea and China. Now, the US joins this dishonorable crowd by prohibiting travel by American citizens.

Specifically, Congress and the previous Obama administration passed a law authorizing the State Department to revoke a passport of an American citizen if $50,000 or more of taxes are due. The IRS has a public pronouncement on this:

https://www.irs.gov/businesses/small-businesses-self-employed/revocation-or-denial-of-passport-in-case-of-certain-unpaid-taxes

The IRS claims that sometime in 2017 they are going to implement this draconian policy. We now have a new Secretary of State, Rex Tillerson. He can simply tell the IRS that he is not going to revoke anyone's passport. President Trump can make an Executive Order prohibiting any regulations enforcing this misguided law. Finally, and more importantly, Congress should immediately repeal IRC § 7345 and prohibit any regulations.

Let's be the Land of the Free!

Monday, January 30, 2017

Domestic Production Activities Deduction

The “manufacturers’ deduction” isn’t just for manufacturers

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101
The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated
To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:
  • Tangible personal property (for example, machinery and office equipment),
  • Computer software, and
  • Master copies of sound recordings.
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Also, be aware this is a hot item in IRS Audits, particularly Large Business and International Audit Group audits. Please make sure you have the appropriate documentation and if you contract to manufacture for a third-party, you will need a written agreement.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.

Monday, January 23, 2017

2016 Tax Return - Take Bonus Depreciation

Why 2016 may be an especially good year to take bonus depreciation

Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The PATH Act, signed into law a little over a year ago, extended 50% bonus depreciation through 2017.

Claiming this break is generally beneficial, though in some cases a business might save more tax in the long run if they forgo it. However, 2016 may be an especially good year to take bonus depreciation. Keep this in mind when you’re filing your 2016 tax return.

Eligible assets
New tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified improvement property. And beginning in 2016, the qualified improvement property doesn’t have to be leased

It isn’t enough, however, to have acquired the property in 2016. You must also have placed the property in service in 2016.

Now vs. later
If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.
But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2016, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

Making a decision for 2016
The greater tax-saving power of deductions when rates are higher is why 2016 may be a particularly good year to take bonus depreciation. With both President Trump and the Republican-controlled Congress wishing to reduce tax rates, there’s a good chance that such legislation could be signed into law. This means your tax rate could be lower for 2017 (if changes go into effect for 2017) and future years. If that happens, there’s a greater likelihood that taking bonus depreciation for 2016 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years.

Also keep in mind that, under the PATH Act, bonus depreciation is scheduled to drop to 40% for 2018, drop to 30% for 2019, and expire Dec. 31, 2019. Of course, Congress could pass legislation extending 50% bonus depreciation or making it permanent — or it could eliminate it or reduce the bonus depreciation percentage sooner.

If you’re unsure whether you should take bonus depreciation on your 2016 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact me.

Thursday, January 19, 2017

Can you defer taxes on advance payments?

Can you defer taxes on advance payments?

Many businesses receive payment in advance for goods and services. Examples include magazine subscriptions, long-term supply contracts, organization memberships, computer software licenses and gift cards.

Generally, advance payments are included in taxable income in the year they’re received, even if you defer a portion of the income for financial reporting purposes. But there are exceptions that might provide you some savings when you file your 2016 income tax return.

Deferral opportunities

The IRS allows limited deferral of income related to advance payments for:
  • Goods or services,
  • Intellectual property licenses or leases,
  • Computer software sales, leases or licenses,
  • Warranty contracts,
  • Subscriptions,
  • Certain organization memberships,
  • Eligible gift card sales, and
  • Any combination of the above.
In the year you receive an advance payment (Year 1), you may defer the same amount of income you defer in an “applicable financial statement.” The remaining income must be recognized in the following year (Year 2), regardless of the amount of income you recognize in Year 2 for financial reporting purposes. Let’s look at an example.

Fred and Ginger are in the business of giving dance lessons. On November 1, 2016, they receive an advance payment from Gene for a two-year contract that provides up to 96 one-hour lessons. Gene takes eight lessons in 2016, 48 lessons in 2017 and 40 lessons in 2018.
In their applicable financial statements, Fred and Ginger recognize 1/12 of the advance payment in their 2016 revenues, 6/12 in their 2017 revenues and 5/12 in their 2018 revenues. For federal income tax purposes, they need to include only 1/12 of the advance payment in their 2016 gross income. But they must include the remaining 11/12 in their 2017 gross income.

The applicable financial statement
An applicable financial statement is one that’s audited by an independent CPA or filed with the SEC or certain other government agencies. If you don’t have this statement, it’s still possible to defer income; you simply need a reasonable method for determining the extent to which advance payments are earned in Year 1.
Suppose, for example, that a company issues gift certificates but doesn’t track their use and doesn’t have an applicable financial statement. The company may be able to defer income based on a statistical study that indicates the percentage of gift certificates expected to be redeemed in Year 1.
If your business receives advance payments, consult your tax advisor to determine whether you can reduce your 2016 tax bill by deferring some of this income to 2017. And make sure you abide by the IRS’s rules on these payments.

Wednesday, January 11, 2017

IRS Taxpayer Advocate calls for Congress to reform Internal Revenue Code

Tax season for individuals starts January 23, 2017 for the 2016 return. Unfortunately, most individuals are facing increasingly complex and confusing tax laws. It is not just businesses that are suffering. The National Taxpayer Advocate has called for Congress to simplify the Internal Revenue Code which takes individuals and businesses more than 6 billion hours a year to comply with filing.

The idea espoused by the Taxpayer Advocate the Congress was to have a neutral Tax Code and cut individual tax rates as well as business tax rates. This means that many of the exclusions, exemptions, deductions and credits would be eliminated as the trade-off for simplification and rate reduction.The recommendation is that Congress start with the tax code without any reductions and then only add back deductions, such as exclusion of capital gains on home sales, if the benefits outweigh the complexity of the provision. The idea is to have a simpler compliance mechanism and use tax is for collecting revenue for the government rather than influencing behavior.

The taxpayer advocate also criticized the Internal Revenue Service for poor service and a focus on enforcement of the tax laws rather than service and helping taxpayers. This makes sense!

Wednesday, January 04, 2017

115th Congress - Will we get Tax Reform and Simplification?

Yesterday, the 115th Congress convened.The Republicans are in charge of both the House and Senate and there is been a lot of talk about tax reduction and "tax reform". Does this mean we will get tax simplification? Since President Reagan signed the Internal Revenue Code of 1986, there have been more than 30,000 changes, excluding Obama care. The fact is the Internal Revenue Code is ridiculously complex and far too much time and money spent in our society both by individuals and businesses in complying and planning for our burdensome tax laws.

There definitely will be a push to lower corporate tax rates. This is good but let's also simplify our business tax structure.

Even more unnecessary and confusing is the personal side of the Internal Revenue Code. For example the alternative minimum tax, designed to force a few wealthy millionaires of the late 1960s to pay tax, has now resulted in more than 1/4 of the middle class paying this burdensome tax. The AMT must go!

There are also complicated and unnecessary rules dealing with real estate. For example there is something known as the "passive activity loss limitation." This is designed to prevent people from getting deductions for losses in real estate investment against their other income. The amount of time and effort to comply with this, plus the amount of litigation involving real estate deductions is an unnecessary drag upon the economy. This must go.

There is also a lot of talk about fraud and abuse. It is not the big so-called "loopholes" where most of the fraud occurs. Most fraud occurs with the earned income tax credit. This was originally designed as the "negative income tax" in the Nixon administration in order to be an efficient way for distributing welfare type payments from the government. Unfortunately it has become an area of massive abuse. If you don't believe me, wait until the first days of tax filing this season. You will see people lined up outside the big box tax preparation offices so they can get their "refund" which is actually more money than they paid in for taxes. This must go!

The next time any of our politicians talk about tax reform listen for "simplification." Simply adjusting tax rates is not enough to have the kind of impact we need to make our economy and lives simpler.

Monday, December 19, 2016

Take stock of your inventory accounting method’s impact on your tax bill

Take stock of your inventory accounting method’s impact on your tax bill

If your business involves the production, purchase or sale of merchandise, your inventory accounting method can significantly affect your tax liability. In some cases, using the last-in, first-out (LIFO) inventory accounting method, rather than first-in, first-out (FIFO), can reduce taxable income, giving cash flow a boost. Tax savings, however, aren’t the only factor to consider.

FIFO vs. LIFO
FIFO assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices. The LIFO method operates under the opposite assumption: It allocates the most recent costs to the cost of sales.
If your inventory costs generally rise over time, LIFO offers a definite tax advantage. By allocating the most recent — and, therefore, higher — costs first, it maximizes your cost of goods sold, which minimizes your taxable income. But LIFO involves more sophisticated record keeping and more complex calculations, so it’s more time-consuming and expensive than FIFO.

Other considerations

LIFO can create a problem if your inventory levels begin to decline. As higher inventory costs are used up, you’ll need to start dipping into lower-cost “layers” of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed you to defer. If you use LIFO and this phantom income becomes significant, consider switching to FIFO. It will allow you to spread out the tax on phantom income.

If you currently use FIFO and are contemplating a switch to LIFO, beware of the IRS’s LIFO conformity rule. It generally requires you to use the same inventory accounting method for tax and financial statement purposes. Switching to LIFO may reduce your tax bill, but it will also depress your earnings and reduce the value of inventories on your balance sheet, which may place you at a disadvantage in comparison to competitors that don’t use LIFO. There are various issues to address and forms to complete, so be fully informed and consult your tax advisor before making a switch.

The method you use to account for inventory can have a big impact on your tax bill and financial statements. These are only a few of the factors to consider when choosing an inventory accounting method. Contact us for help assessing which method will provide the best fit with your current financial situation.

Monday, December 12, 2016

Help prevent the year-end vacation-time scramble with a PTO contribution arrangement

Many businesses find themselves short-staffed from Thanksgiving through December 31 as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace a ghost town as workers scramble to use, rather than lose, their time off. A paid time off (PTO) contribution arrangement may be the solution.
How it works
A PTO contribution program allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.
A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.
Getting started
To offer a PTO contribution arrangement, simply amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.
To learn more about PTO contribution arrangements, including their tax implications, please contact us.

Tuesday, November 22, 2016

Is cash for keys cancellation of debt income?

When a house is foreclosed, or there is a deed in lieu of foreclosure, some mortgage companies make a deal with the owner or tenant. Usually the deal works like this: the owner agrees to leave the property on a certain date and broom swept condition without taking any of the appliances, copper pipes, etc. If the  home was left in the promise condition, the homeowner or tenant will receive a certain stipend from the mortgage company. Sounds good, right?

Nevertheless, the mortgage company than typically issues a 1099 for the cancellation of indebtedness income for the amount of the foreclosure and an additional 1099-MISC for the alleged miscellaneous income and cash for keys. The IRS has taken the position that the cash for keys income as ordinary income and should be taxed. In the case of Bobo vs. Commissioner, the US Tax Court determined that the foreclosure and the additional cash for keys payment were really one transaction. Since in that case, the taxpayer had an actual loss on the sale of their home, even with cash for keys payment there was no additional income.

Any time taxpayer receives a 1099s for a home foreclosure, settlement with a credit card company, or other loan, the matter should always be reviewed with a good tax lawyer to see if they amount of the 1099s is actually taxable or not.


Monday, November 21, 2016

NJ Ends Urban Enterprise Zones

The New Jersey Division of Taxation announced the end of urban enterprise zones for sales tax:

  • Bridgeton
  • Camden
  • Newark
  • Plainfield
  • Trenton

The former 3% rate for these urban enterprise zones for sales tax will be changed to the full rate of 6.875% starting January 1, 2017. It is possible that the New Jersey legislature a change this position, but it was part of the negotiated deal by the legislature when it radically increased the New Jersey gasoline tax.

Tuesday, November 01, 2016

New Jersey Phasing Out NJ Estate Tax

New Jersey has long had the highest state estate tax in the country. Any estate over $675,000 would owe tax to the state of New Jersey. This could be very substantial and was a significant reason for many taxpayers, especially retirees, to move from New Jersey to more tax-advantaged states such as Florida. Tax lawyers, and estate planners, have been arguing for many years that this is really costing New Jersey a lot in revenue and negatively affects the state.

Finally, after years of arguing, the New Jersey legislature passed a bill, signed by Governor Christie, that would reduce the New Jersey estate tax. Beginning January 1, 2017, only estates in excess of $2 million would be subject to the New Jersey estate tax. Starting January 1, 2018, if it is not repealed, the New Jersey estate tax would be eliminated.

There was a lot of political wrangling in order to get this passed. There is a slight reduction in New Jersey sales tax rate, but not the fact that many items are tax New Jersey that are not taxed elsewhere, and the legislature increased the gasoline tax by $0.30 a gallon. Instead of tightening their belts, the legislature chose to increase taxes in order to eliminate the estate tax. My choice would have been to simply cut the state budget!

Everyone within the state above $675,000 should have their Wills and Trusts, and entire Estate Plan reviewed immediately. Many of the actions we have taken to avoid New Jersey estate tax are no longer necessary. This is particularly true for estates with values between $675,00 and $5.5 million.

Monday, October 31, 2016

Sugar Tax Helps Beverage Companies!

The Internet is filled with reports from a recent article in the Journal of American Public Health showing that a sugar tax cuts consumption of sugar sweetened soda. This plays right into the hands of Bradford manufacturers! You are probably thinking I am crazy, but once again government does the wrong thing.

Sweetened sodas and diet sodas are sold for the same price. Nevertheless, diet sodas are much cheaper to manufacture than sodas with high fructose corn syrup and sodas with cane sugar. Therefore the tax on sweetened soft drinks increases the number of people drinking a diet soda, which is more profitable to the beverage industry, then naturally sugar sweetened soda and drinks.

So, governments by misusing taxes to force people to change behavior, have in fact increase the profit of beverage manufacturers and increase diet drinks rather than healthier all-natural sugar sweetened drinks. Obviously, the intake of the sugar sweetened drinks should be limited, but every study that is ever been done shows that diet sodas do not help people lose weight.

Let's get government out of taxing things to force people to change behavior. Let's just have taxes simply to collect the minimum money needed to run our government!

If you want to see the article in the Journal of American public health:
bit.ly/2ekY7Nu