Category: Tax

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Helpful Articles Tax

When do valuable gifts to charity require an appraisal?

If you donate valuable items to charity and you want to deduct them on your tax return, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions.

How can you protect your deduction?

First, be aware that in order to deduct charitable donations, you must itemize deductions. Due to today’s relatively high standard deduction amounts, fewer taxpayers are itemizing deductions on their federal returns than before the Tax Cuts and Jobs Act became effective in 2018.

If you clear the itemizing hurdle and donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must:

  • Get a “qualified appraisal,”
  • Receive the qualified appraisal before your tax return is due,
  • Attach an “appraisal summary” to the first tax return on which the deduction is claimed,
  • Include other information with the return, and
  • Maintain certain records.

Keep these definitions in mind. A “qualified appraisal” is a complex and detailed document. It must be prepared and signed by a qualified appraiser. An “appraisal summary” is a summary of a qualified appraisal made on Form 8283 and attached to the donor’s return.

While courts have allowed taxpayers some latitude in following these rules, you should aim for exact compliance.

The qualified appraisal isn’t submitted to the IRS in most cases. Instead, the appraisal summary, which is a separate statement prepared on an IRS form, is attached to the donor’s tax return. However, a copy of the appraisal must be attached for gifts of art valued at $20,000 or more and for all gifts of property valued at more than $500,000, other than inventory, publicly traded stock and intellectual property. If an item of art has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.

What if you don’t comply with the requirements?

The penalty for failing to get a qualified appraisal and attach an appraisal summary to the return is denial of the charitable deduction. The deduction may be lost even if the property was valued correctly. There may be relief if the failure was due to reasonable cause.

Are there exceptions to the requirements?

A qualified appraisal isn’t required for contributions of:

  • A car, boat or airplane for which the deduction is limited to the charity’s gross sales proceeds,
  • Stock in trade, inventory or property held primarily for sale to customers in the ordinary course of business,
  • Publicly traded securities for which market quotations are “readily available,” and
  • Qualified intellectual property, such as a patent.

Also, only a partially completed appraisal summary must be attached to the tax return for contributions of:

  • Nonpublicly traded stock for which the claimed deduction is greater than $5,000 and doesn’t exceed $10,000, and
  • Publicly traded securities for which market quotations aren’t “readily available.”

What if you have more than one gift?

If you make gifts of two or more items during a tax year, even to multiple charitable organizations, the claimed values of all property of the same category or type (such as stamps, paintings, books, stock that isn’t publicly traded, land, jewelry, furniture or toys) are added together in determining whether the $5,000 or $10,000 limits are exceeded.

The bottom line is you must be careful to comply with the appraisal requirements or risk disallowance of your charitable deduction. Contact us if you have any further questions or want to discuss your charitable giving plans. © 2024

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General Helpful Articles Tax

Timelines: 3 Ways Business Owners Should Look at Succession Planning

Business owners are rightly urged to develop succession plans so their companies will pass on to the next generation, or another iteration of ownership, in a manner that best ensures continued success.

Ideally, the succession plan you develop for your company will play out over a long period that allows everyone plenty of time to adjust to the changes involved. But, as many business owners learned during the pandemic, life comes at you fast. That’s why succession planning should best be viewed from three separate but parallel timelines:

1. Long Term

If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family.

As soon as you’ve identified a successor, and that person is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully determine how to best fund your retirement and structure your estate plan.

2. Short Term

Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes, even a planned liquidation is the optimal move financially.

In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, drafting a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of professional advisors.

3. In Case of Emergency

As mentioned, the pandemic brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling businesses to maintain operations immediately after unforeseen events such as an owner’s death or disability.

If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis. Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed.

As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes and vision for your company. Contact us. © 2024

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Helpful Articles Tax

The Tax Advantages of Including Debt in a C Corporation Capital Structure

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So, for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

  • Some third-party debt (owed to outside lenders), and/or
  • Some owner debt.

Tax rate considerations

Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.

On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.

Third-party debt

The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.

Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends.

When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part.

Owner debt

If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company.

An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit.

An example to illustrate

Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation.

This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply.

This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings. © 2024

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Tax

Estimated Tax Payments

If you make estimated tax payments, be aware that April 15 isn’t just the 2023 tax filing deadline. It’s also the deadline for the first estimated tax payment for 2024. Estimated tax payments are generally made by self-employed people, retirees, investors, businesses and others that don’t have taxes withheld from their income. The payments are also made by employees who don’t withhold enough tax to pay what’s due.

Taxpayers who don’t make estimated payments (or don’t make sufficient payments) may be subject to failure-to-pay penalties. Exceptions apply to certain taxpayers. The second estimated payment for 2024 will be due June 15. For more information: https://bit.ly/4aFuJuc

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Tax

The tax deadline is almost here: File for an extension if you’re not ready

The April 15 tax filing deadline is right around the corner. However, you might not be ready to file. Sometimes, it’s not possible to gather your tax information by the due date. If you need more time, you should file for an extension on Form 4868. An extension will give you until October 15 to file and allows you to avoid “failure-to-file” penalties. However, it only provides extra time to file, not to pay. Whatever tax you estimate is owed must still be sent by April 15, or you’ll incur penalties — and as you’ll see below, they can be steep. Two different penalties Separate penalties apply for failing to pay and failing to file.

The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 25, the penalty is 1% (0.5% times 2 months or partial months). The maximum penalty is 25%. The failure-to-pay penalty is based on the amount shown as due on the return (less amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher.

On the other hand, if the actual tax bill turns out to be less, the penalty is based on the lower amount. The failure-to-file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum 25%. If you file for an extension on Form 4868, you’re not filing late unless you miss the extended due date. However, as mentioned earlier, a filing extension doesn’t apply to your responsibility for payment. If the 0.5% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the combined penalty is 5%. The maximum combined penalty for the first five months is 25%. Thereafter, the failure-to-pay penalty can continue at 0.5% per month for 45 more months (an additional 22.5%).

Thus, the combined penalties can reach a total of 47.5% over time. The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid through withholding or estimated payments. If no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual liability is later determined to be an additional $1,000, the failure-to-file penalty (4.5% × 3 = 13.5%) would also apply to this amount for an additional $135 in penalties. A minimum failure-to-file penalty also applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $485 (for returns due after December 31, 2023) or the amount of tax required to be shown on the return.

Exemption in certain cases Both penalties may be excused by the IRS if lateness is due to “reasonable cause” such as death or serious illness in the immediate family. Interest is assessed at a fluctuating rate announced by the government apart from and in addition to the above penalties. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can jump to 15% per month, with a 75% maximum.

If you have questions about filing Form 4868 or IRS penalties, contact us. © 2024

Categories
Tax

Get ready for the 2023 gift tax return deadline

Did you make large gifts to your children, grandchildren or others last year? If so, it’s important to determine if you’re required to file a 2023 gift tax return. In some cases, it might be beneficial to file one — even if it’s not required.

Who must file?

The annual gift tax exclusion has increased in 2024 to $18,000 but was $17,000 for 2023. Generally, you must file a gift tax return for 2023 if, during the tax year, you made gifts:

  • That exceeded the $17,000-per-recipient gift tax annual exclusion for 2023 (other than to your U.S. citizen spouse), that you wish to split with your spouse to take advantage of your combined $34,000 annual exclusion for 2023,
  • That exceeded the $175,000 annual exclusion in 2023 for gifts to a noncitizen spouse,
  • To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($85,000) into 2023,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($12.92 million for 2023). As you can see, some transfers require a return even if you don’t owe tax.

Who might want to file?

No gift tax return is required if your gifts for 2023 consisted solely of gifts that are tax-free because they qualify as:

  • Annual exclusion gifts,
  • Present interest gifts to a U.S. citizen spouse,
  • Educational or medical expenses paid directly to a school or health care provider,
  • Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The deadline is April 15 The gift tax return deadline is the same as the income tax filing deadline. For 2023 returns, it’s Monday, April 15, 2024 — or Tuesday, October 15, 2024, if you file for an extension.

But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2023 gift tax return on IRS Form 709, contact us. © 2024

 

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Tax

How to Establish Reasonable Cause for Missing or Incorrect TINs

Businesses are required to prepare and file a number of information returns with the IRS. Recently the IRS has published an updated Publication 1586, which addresses how payors can prove and claim reasonable cause when they file any information returns (1099, W-2, 1098 etc. forms) with incorrect names or identification numbers on the forms. Reasonable cause is necessary for payors to avoid penalties for reporting inaccurate information.

To establish reasonable cause (and not willful neglect), the filler must establish both that they acted in a responsible manner both before and after the failure occurred and that:

  1. There were significant mitigating factors with respect to the failure (for example, an established history of filing information returns with correct TINs, OR
  2. The failure was due to events beyond the filer’s control (for example, actions of the payee or any other person).

Acting in a responsible manner for missing and incorrect TINs generally includes making an initial solicitation (request) for the payee’s name and TIN and, if required, annual solicitations. The publication addresses various ways payors can solicit TIN information including requesting completed forms W-9.

Mitigating factors or events beyond the filer’s control alone are not sufficient to establish reasonable cause.   Upon receipt of a newly provided TIN, it must be used on any future information returns filed.  Refer to Treas. Reg. 301.6724-1 for reasonable cause guidelines.

Payors are required to solicit the TINs of payees to meet reasonable cause criteria as acting in a responsible manner to avoid information reporting penalties.  Generally, a solicitation is a request made by the payor to a payee to furnish a correct TIN. An initial solicitation for a payee’s correct TIN must be made at the time an account is opened (or a relationship initiated) unless the payor already has the payee’s TiN and uses that TIN for all transactions with the payee.   The solicitations maybe made oral or written request or by electronic communications, depending on how the account is opened or relationship established.   Where a payee’s TIN is missing or incorrect after the initial solicitation, the payor generally will need to conduct annual solicitations for correct TIN to obtain a waiver for reasonable cause.

You should keep copies and notes to document the request for each W-9, keep a copy of each W-9 on file for each tax year.   When possible, we recommend you verify the information provided by employees and payees through the Social Security Administration verification or the verification allowed by “authorized payors of payments subject to backup withholding”.   See the two notes below.

Note: Employers may use the Social Security Administration’s (SSA) Social Security Number (SSN) verification systems to verify the employee’s name and SSN, but there is no Internal Revenue Service (IRS) requirement to do so. The option is useful for employers to identify potential discrepancies and correct SSNs before receiving a penalty notice. For more information, go to www.socialsecurity.gov/employer.

Note: TIN Matching is also available as part of the Internet based pre-filing e-services that allows “authorized payors of payments subject to backup withholding” the opportunity to match Form 1099 payee information against IRS records prior to filing information returns. For more information, go to https://www.irs.gov/tax-professionals/taxpayer-identification-number-tin-matching .

For more information and additional details, see publication 1586.

www.irs.gov/pub/irs-pdf/p1586.pdf .

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Tax

IRS Adds Employee Retention Credit Scam to Annual Dirty Dozen List

The IRS recently kicked off its annual Dirty Dozen campaign, which highlights the top 12 scams and schemes that target taxpayers. The “widely circulating promoter claims” regarding Employee Retention Credits (ERCs) is a new entry in the Dirty Dozen list.

The fact that the IRS saw fit to start its campaign with ERC claims reflects its serious concern. “The aggressive marketing of these credits is a major concern for the IRS,” said IRS Commissioner Danny Werfel. “Businesses need to think twice before filing a claim for these credits [and remember that] there are very specific guidelines around these pandemic-era credits.”

For more information: https://bit.ly/3newWcd

Reach out to an ATA expert with any questions.

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Tax

What Makes a Medical Expense Deductible?

The IRS recently posted a list of FAQs concerning the treatment of certain costs related to nutrition, wellness, and overall health. Generally, to be deductible, medical care expenses must meet certain criteria, including that they must be incurred primarily to alleviate or prevent a physical or mental disability or illness. Included are the costs of diagnosis, cure, mitigation, treatment, or disease prevention, rendered by doctors, surgeons, dentists, and other medical practitioners. Also included are the costs of equipment, supplies, diagnostic devices, drugs, and medications prescribed by a doctor. Click here for the FAQs: https://bit.ly/3FC8A2y

Have more tax questions? Contact one of our experts for help.

 

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Tax

April 18th Tax Deadline

April 18th is the deadline to file your individual 2022 tax return and pay any tax due. If you can’t file on time, you can request a six-month extension to file. However, any tax owed is generally still due by April 18th to avoid interest and penalties. If you owe taxes and don’t seek an extension to file, the IRS encourages you to file and pay as soon as possible to limit interest and penalties.

 

Some taxpayers may automatically qualify for extra time to file and pay tax due without penalties. This includes military members serving in combat zones, certain disaster victims, and taxpayers living abroad. If you’re due a refund, there’s no penalty for filing late. Here’s more: https://bit.ly/3YASLjn

 

Do you have tax questions or need to file an extension? Contact one of our experts for help.