Monthly Tax and Accounting Newsletter Gregg Harvey, CPA
About This Newsletter
This monthly Newsletter is a free service provided by Gregg Harvey, CPA. It is emailed every month to clients and to select members of the Rochester Regional Chamber of Commerce. billion sole proprietor tax gap. GAO recommends improving recordkeeping, simplifying rules, increasing information reporting, and improving IRS data usage. This is probably more evidence of where IRS scrutiny is going to be falling.
This Month’s Contents:
This months contents include: recently released information regarding areas of IRS audit attention; Michigan MBT highlights; education expenses; a refresher on the tax consequences of selling your home; and the tax effect of catching Barry Bond’s record breaking home run ball.
Treasury and IRS Release Details of Tax Gap Plan
The Treasury Department and IRS have produced a lengthy document that expands on their coauthored ―A Comprehensive Strategy to Reduce the Tax Gap‖, which they released in September 2006. Not satisfied with the strategy provided last fall, Senate Finance Committee Chairman Max Baucus (D-MT) demanded a more detailed report from Treasury and the Service (and challenged IRS to increase the compliance rate from the current 86 percent to 90 percent by 2017). The new report, ―Reducing the Federal Tax Gap‖, focuses on the seven components that were identified in the 2006 strategy, and explains current IRS activities and future initiatives under those components. The document is some 100 pages long, so here are some highlights: Due to a greater likelihood of misreporting and underreporting by small businesses, the IRS plans to increase the level of Form 1040 Schedule C examinations The Automated Substitute for Return Refund Hold Program this will minimize loss by holding the current-year refunds
Current IRS Audit Focus
Recently while working on an audit for 2004 and 2005 I spoke to the Taxpayer's Advocate's office. During that call I was told that the IRS is zeroing in on rental properties and Schedule C filers. Special attention is being given to zero income or low income Schedule C returns.
New GAO Report Focuses on Sole Proprietors
The Government Accountability Office (GAO) this week reported that most sole proprietors underreported net business income in 2001—the most recent year for which IRS has detailed information about tax compliance. According to the report, 10 percent of the tax understatements by sole proprietors (or only those returns understating income by at least $6,200) made up the vast majority of the $68
September, 2007 Phone 248-650-2960; website greggharveycpa.com, email gregg@greggharveycpa.com
Monthly Tax and Accounting Newsletter Gregg Harvey, CPA
of taxpayers who are delinquent in filing individual tax returns and are expected to owe additional taxes. The Office of Professional Responsibility recently obtained a wholesale review of practitioner tax filing patterns. This review identified practitioners whose personal filing patterns were problematic. Who will pay less under the MBT Manufacturing firms - 72% will pay less Small businesses between $10 and $20 million of gross receipts. Small businesses under $10 million with income to owners over $115,000. Michigan multi-state firms
Who will pay more under the MBT
Taxpayer Advocate Releases Mid-Year Report
IRS National Taxpayer Advocate Nina Olson has issued her annual mid-year report to Congress, identifying priority issues and challenges for the upcoming fiscal year. The report emphasizes three areas for her office's attention: Improving taxpayer services by implementing the taxpayer assistance blueprint, Protecting taxpayers' rights under the private debt collection program, and Making the offer in compromise program more accessible.
Profitable firms. Firms without much personal property. Firms that operate in Michigan but have little payroll or property here.
Filing Requirements With the MBT taking effect in January, taxpayers should note the following filing information and dates: Taxpayers expecting to have a 2008 tax liability exceeding $800 must file quarterly estimates. Quarterly Estimate Return forms and instructions will be mailed to businesses currently registered for the SBT in early January 2008. Forms will also be posted on the MBT site. For Calendar Year filers, MBT returns and payments will be due April 15, July 15, and October 15 of 2008 and January 15, 2009. Returns and payments for Fiscal Year Filers are due the 15th day of the first month after each quarter. Annual MBT Returns are due the last day of the 4th
Olson also expresses her concerns that an overemphasis on closing the tax gap might lead to overzealous enforcement activity that is potentially harmful to taxpayers. In past reports, Olson has described the tax gap as unfair to lawabiding taxpayers and has asked Congress to pass measures to close the tax gap.
Michigan MBT Notes
September, 2007 Phone 248-650-2960; website greggharveycpa.com, email gregg@greggharveycpa.com
Monthly Tax and Accounting Newsletter Gregg Harvey, CPA
month after the tax year end, with payment of final liability Small Business Breaks Firms with less than $350,000 in gross receipts exempt Alternate rate phased-in for $350,000 to $700,000 in gross receipts Allow qualifying firms to pay 1.8% on adjusted business income Raise officer compensation disqualifiers to $160,000 to $180,000 Double gross receipts threshold phase-out to $18-20 million Entrepreneurial credit to encourage hiring and investment in Michigan Business Income Tax – 4.95% rate o Base includes noncorporate entities o Subject to PL 86-272 Modified Gross Receipts- 0.8% rate o Base is gross receipts less purchases from other firms o Purchases from other firms includes inventory, depreciable property, materials and supplies, and construction payments to a subcontractor Tax Base is 1/3 business income and 2/3 modified gross receipts
New credits to aid MI economy Compensation Credit – 0.37% compensation paid in Michigan Investment Credit – 2.9% of cost of net new capital located in Michigan R&D Credit – 1.9% of amount business spends on R&D in Michigan Compensation plus investment credit limited to 65% of liability; Together with R&D credit cannot exceed 75% of liability Entrepreneurial Credit – businesses with less than $25M in gross receipts can claim if they add at least 20 jobs and invest at least $1.25M
Intended Effect of the MBT New Tax base of income and gross receipts less purchases shifts part of burden to ability to pay while maintaining a stable base Substantial personal property tax relief will attract capital to Michigan Tax credits provide incentives to invest in Michigan, to employ Michigan residents, and to perform research and development in the state Special provisions lower tax burden for small businesses helping them to grow
New tax base
September, 2007 Phone 248-650-2960; website greggharveycpa.com, email gregg@greggharveycpa.com
Monthly Tax and Accounting Newsletter Gregg Harvey, CPA
Educator and Educations Expenses
It is Back-to-School time and maybe time for a tax break, too. Whether you are paying for a college education or a teacher buying items for your classroom, education credits and deductions can help lower your tax bill. The Hope Credit, Lifetime Learning Credit or the Tuition and Fees Deduction may help offset the cost of higher education for you, your spouse and your dependents. The amount of these credits and deductions are based on the qualified education expenses, such as college or vocational school tuition and enrollment fees, that you paid during the year and may be limited by your modified adjusted gross income. Room and board, insurance or personal living expenses are not considered qualified education expenses. The Hope Credit, which is up to a $1,650 tax credit per student per year, is available for only the first two years of college or vocational school. The Lifetime Learning Credit, which is up to a $2,000 tax credit per tax return, applies to undergraduate, graduate and professional degree courses and there is no limit to the number of years you can take this credit. The Tuition and Fees Deduction, which is up to a $4,000 deduction from your income, applies to undergraduate, graduate and professional degree courses. This deduction may be beneficial as the modified adjusted gross income limits are higher than the thresholds for the Hope and Lifetime Learning Credits. Are you paying Student Loan interest? You may be able to deduct up to $2,500 from your income per tax return. Student Loan interest may be deducted even while your student is in school if you are paying the interest immediately rather than deferring the payments. You cannot claim the Hope Credit, Lifetime Learning Credit and the Tuition and Fees Deduction for the same student in the same year. You will want to choose the credit or deduction that provides the greatest benefit. However, you can claim the Student Interest Loan deduction and one of these other benefits simultaneously. Students and parents of students are not the only ones who can claim a Back-toSchool tax benefit. As summer comes to an end, many teachers and other eligible educators are preparing for the start of the new school year. That preparation could include purchasing items for the classroom from personal funds. Be sure to keep your receipts. These out-of-pocket classroom expenses can be deductible. As an educator, you may be able to deduct up to $250 for expenses paid for the purchase of books, computer equipment and classroom supplies. If you and your spouse are filing a joint return and both are eligible educators, the maximum deduction is $500. Michigan Education Savings Plan
September, 2007 Phone 248-650-2960; website greggharveycpa.com, email gregg@greggharveycpa.com
Monthly Tax and Accounting Newsletter Gregg Harvey, CPA
The MESP can be used for any public or private institution in the country and is the only 529 Plan that can be deducted on a MI return. The deduction is up to $10,000 for a married couple. Michigan Education Trust (MET) is a pre-paid tuition plan that also can be deducted If you and your spouse file a joint return and both meet the use test, you normally will be able to claim the exclusion for married couples even if the ownership test is met by only one of you. If you do not meet these tests, you may still be allowed to exclude a reduced amount of the gain realized on the sale of your home. But you must have sold the home for other specific reasons such as serious health issues, a change in your place of employment, or certain unforeseen circumstances such as a divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If you are entitled to exclude the entire gain from the sale of your home, you do not need to report the gain on your federal tax return. However, if you are not entitled to exclude the entire amount of the gain, use Schedule D, Capital Gains and Losses, and Form 1040 to report the total gain, the portion that can be excluded, and the portion that is subject to capital gains tax.
Selling Your Home
Although this is not a great time to be a home seller in Michigan, here is an update on the taxability of such sales. Generally, you have a profit if the selling price of your home is greater than the price you paid to purchase the home. That profit, considered a capital gain, is subject to income tax. However, under certain circumstances the law allows you to exclude all or part of that gain from your income. This exclusion—up to $250,000 for individuals and $500,000 for married taxpayers filing joint returns—is not a once in a lifetime event. The exclusion may be claimed each time that you sell your main home, but generally no more often than once every two years. To qualify, you must meet both the ownership and use tests. Ownership Test: You must have owned the home for at least 2 years in the 5year period ending on the date of the sale. Use Test: You must have lived in the home as your main home at least 2 years during the 5-year period ending on the date of the sale.
Last Year’s Telephone Tax Credit
Maybe you filed your year 2006 federal tax return before realizing that you missed out on a one time opportunity to request the Telephone Excise Tax Refund. You can still request the telephone tax refund even if you filed a 2006 return but missed this unique refund. Simply
September, 2007 Phone 248-650-2960; website greggharveycpa.com, email gregg@greggharveycpa.com
Monthly Tax and Accounting Newsletter Gregg Harvey, CPA
file an amended return using Form 1040X. The one-time refund of previously collected federal telephone excise taxes is owed to just about anyone who paid a phone bill in the last several years. You are eligible if you paid long-distance excise taxes on landline, cell phone, Voice over Internet Protocol (VoIP), or bundled service that was billed for the period after Feb 28, 2003 and before Aug 1, 2006. (Bundled service is local and long-distance under a plan that does not separately list the charges.) Eligible taxpayers have two options: requesting the actual amount of federal excise tax paid based upon your telephone bills for this period; or requesting the standard refund that ranges from $30-$60 based upon the number of exemptions you are entitled to claim on an individual income tax return. To amend your return, use the most recent version of IRS Form 1040X and enter the credit on line 15. If you have received an initial refund check you may cash it while waiting for any additional refund. Form 1040X must be filed on paper and can be printed from the IRS Web site IRS.gov or ordered by calling 800-TAXFORM (800-829-3676). The refund is also available for many individuals who did not have a regular 2006 income tax filing requirement through the Form 1040EZ-T.
The Barry Bonds Home Run Ball
The baseball world has been abuzz about the value of the 756th home run baseball Barry Bonds hit recently, and the tax world has been thinking about, well, the tax implications for the ball's owner. Some tax practitioners believe that the ball is covered by the price of the game ticket, and therefore is not taxable immediately. However, others believe the ball is instantly taxable income because it is "accession to wealth." There appears to be uniform agreement that tax will be owed when the ball is sold, but more questions arise regarding the classification of income, rate, and cost basis. So which is correct? Since the lucky owner decided on a quick auction, the issue is largely moot – tax will definitely be due upon sale. And the IRS Chief Counsel declined to weigh in with an official or even unofficial IRS position. We may need to wait until Alex Rodriguez breaks Bond’s record to get a complete answer.
For More Information
For more information on anything covered in this Newsletter, please contact me. I provide tax, accounting, consulting, and other business services such as payroll and medical billing. You can reach me at gregg@greggharveycpa.com, phone 248-650-2960, or cell 586-707-1077. You can also visit my website, greggharveycpa.com.
September, 2007 Phone 248-650-2960; website greggharveycpa.com, email gregg@greggharveycpa.com