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Showing posts from May, 2012

Tax Court thwarts Collection Agency's use of 1099-C Cancellation of Debt

US Tax Court the ports collection agency tactic of filing IRS form 1099-C for cancellation of indebtedness income. One technique used by many collection agencies is to threaten a debtor that if they do not make a payment the debt will be reported as "canceled". This means the person will have to pay taxes to the IRS and their state income taxes on the alleged amount of money due.

In the case of Stewart v. Commissioner an astute taxpayer fought this 1099-C technique.The taxpayer owed a credit card debt to MBNA bank and stop paying on it in 1994. The bank charged off this debt in 1996. In 2007, the bank sold the debt to a collection agency called Portfolio Recovery Associates. When the taxpayer said the debt was charged off and refuse to pay anything, the collection agency threatened him with filing a cancellation of debt with the IRS.

The taxpayer fought this case in Tax Court and won. The Tax Court determined that the debt had been written off long before the collection agen…

Loans to Inject Capital into a C Corp

Loans to Inject Capital into a C Corp

When you borrow to inject capital into your own C corporation (or buy shares in a closely held C corp), the related interest expense falls into the investment interest category, regardless how active you are in the business. It doesn't matter if you use the borrowed funds to make a loan to the company, contribute additional capital, or receive additional stock in return for your cash injection.

Your ability to deduct the investment interest expense depends on how much investment income you generate. For this reason, you may be better off making a "back-to-back" loan to your C corporation and charging interest at least equal to what you pay the lender.

With this method, you are assured of being able to currently deduct the interest expense under the investment interest rules, thanks to the investment income generated by the corporation's interest payments to you. At the corporate level, your company gets a deduction for the interest …

Overtime Trap - Employer beware

Employment laws usually favor employees. This is especially true in dealing with overtime. Employees are presumably "non-exempt" and get overtime pay for working more than 40 hours in a single work week. The pay rate for overtime work must be at least 1.5 times the regular pay. This overtime must be in wages, not benefits such as stock options, company vehicle use, or meals.

"Exempt" employees must be salaried and have direct managerial oversight over other employees. They must be able to make significant decisions for the company. Hiring and firing employees, disciplining employees, authority to buy and sell company equipment are typical signs of an exempt employees.  Without these attributes, the employee is "non-exempt."

The definitions are not clear. For example, a salaried confidential assistant to a company president, depending on the circumstances, may be exempt. But, a similar assistant may be non-exempt and entitled to overtime.

Note: Even if an e…

Fighting the IRS -Audits, Refunds, Collections

Navigating the IRS bureaucracy can be challenging for many taxpayers. The agency processes more than 141 million individual income tax returns annually and deals with a constantly changing Internal Revenue Code. There were approximately 4,430 changes to the tax code from 2001 through 2010 -- an average of more than one a day, including an estimated 579 changes in 2010 alone.
Here are Q&As that explain some of the workings of the IRS.