Monthly Archive: June 2014

Travel IRS Style

Submitted by Chris Moss CPA

All taxpayers who own their own business deduct travel and transportation on income tax returns as either a business expense for themselves or as a reimbursement to their employees or subcontractors. However, many honest hardworking business owners are reluctant to deduct the full extent of their travel, transportation, and related expenses because they know their unique circumstances or “history” are not adequately documented to separate out the personal part of the business trip from the business part of the business trip. I call this the “Law is on your Side Conundrum.” (LSC) You know the law is on your side but you still feel danger. But there is a safer way to travel the “IRS World”. So get ready to “Travel IRS Style” to a happy and safe destination you will cherish: When we arrive you will the proud owner of a bullet proof tax return that can keep you safe and protected during even the fiercest attack from IRS natives. Hang on to your seats because this trip will fly you and your family far away from the LSC that is keeping you all home.

As we take off on this journey you will notice the law is very clear: Travel must be business related, reasonable and customary for similarly situated businesses. No personal travel allowed. It sure seems like LSC is present here keeping us at home this summer. But we all know there is both personal and business on every trip. The government of course knows this too. Courts have held that whether the primary purpose of the trip is business or personal depends on all the facts and circumstances, in particular, the amount of time during the trip that the taxpayer devoted to business and personal activities. Sec. 1.162-2(b)(2), Income Tax Regs. Also cited in NOZ AND MAGUIRE v IRS, Docket No. 4993-10

Clearly the Maguire’s had no clue how much danger they were in on as they traveled the “world according to IRS” because they never saw the LSC prior to filing their tax return. Facts in Maguire case are simple: Mr. and Mrs. Maguire traveled for academic research and deducted $18,543 in travel on their tax return with no extemporaneous recordings of history. The Court disallowed all their travel expenses in part because the taxpayer did not offer any evidence, testimonial or otherwise, as to how they allocated their time between activities related to their research collaboration and other work activities. Id at 27. The Court also noted that neither petitioner offered any details concerning the nature of their research collaboration, the collaborative activities undertaken, their research objectives, or how the travel expenses contributed to the accomplishment of these research objectives. Both petitioners testified that their travel allowed them to collaborate with each other and researchers at other institutions, but they did not identify a single one of the other researchers by name, nor did they identify a single meeting with another researcher that took place during any of their trips. Because we cannot ascertain from the record the dates of all of Maguire’s flights, we cannot calculate exactly what portion of the year the petitioners spent in the same country. Id at 27.

Let’s look at another taxpayer in the textile business who is the poster boy for how not to “Travel IRS Style”. OLAGUNJU v COMMISSIONER, T.C. Memo. 2012-119 Docket No. 6073-10. 4_23_2012. Olagunju deducted travel expense for his textile and consulting business which the IRS disallowed. Mr. Olagunju did not keep a travel log. Mr. Olagunju’s broad testimony that he traveled to Nigeria to tend to the textile business matters is insufficient to establish the business purpose of each trip. Id at 18.

Finally, a fun case and easy read, ANN JORGENSEN v COMMISSIONER T.C. Memo. 2000-138 Docket No. 19001-98. 4_13_2000. Fun because Ms. Jorgensen, a high school teacher in the San Francisco public school system won against the IRS ProSe, and easy because Special Trial Judge Dean, drives home the difference between personal and business travel: Judge Dean reads the IRS map as follows: “The amount of time during the trip which is spent on activities directly relating to the taxpayer’s trade or business relative to the amount of time devoted to personal activity is an important factor in determining the trip’s primary purpose. See McCulloch v. Commissioner, supra; sec. 1.162-5(e), Income Tax Regs. Petitioner’s travel to Greece and Southeast Asia undoubtedly involved significant elements of personal pleasure; however, we are satisfied that petitioner’s primary purpose in undertaking the travel was to maintain and improve her skills as an English teacher//at Abraham Lincoln High School //” Id at 21.

How about you all? Are you planning to travel for business this summer? Make sure your CPA and tax advisor bullet proofs next years tax return by helping you create a record, a history of your travel in the making, recording that history for insertion in a tax return prior to filing that tax return. History created with “extemporaneous” recordings whether through pictures, video, audio or dictation can make the difference between winning and losing in US Tax Court when you have LSC. Did you create a truthful historical record of what actually happened prior to filing your income tax return? Will your tax return open and honestly disclose this history when you file your tax return next April? Have you consulted with your professional tax advisor? If you answered yes, your tax return is wearing a bullet proof shield. You will be safe. You have successfully navigated around the LSC as you “Travel IRS Style”. See you when you get back and safe travels.

Thanks for visiting us at TaxView with Chris Moss CPA. See you next time on TaxView.

Kindest regards
Chris Moss CPA

Debt Forgiveness and Short Sales

Submitted by Chris Moss CPA

Only the IRS could tax you after you have lost your home in foreclosure. But that is exactly what used to happen if your lender sold your home at a sheriff’s sale for less than your mortgage and did not come after you for the difference. What a surprise when you would receive form 1099 from your lender the following year and your CPA would have no choice but to report that amount as “other income” on line 21 of your form 1040 annual income tax return.

That all changed when Congress enacted the Mortgage Forgiveness Debt Relief Act in 2007 just as the Great Recession was starting. Millions of Americans benefited. Primary, business and rental property were all included in one way or another. Eventually all but primary home mortgages expired and finally primary mortgage provisions expired December 31, 2013. So unless Congress renews the expired provision debt forgiven in 2014 will be taxable.

What is Congress doing? The Senate Finance Committee approved the extender provision but Senate Majority leader Harry Reid (D-Nev) stopped the action on the Senate Floor. House Ways and Means Dave Camp (R-Mich) is not holding hearings at all on extending. My prediction is that Congress is waiting until after the November 2014 elections and will then extend the law in some fashion. But what if they do not?

If you have a pending short sale here are a few sets of facts which might apply to you:

For those taxpayers who have abandoned their home and are living somewhere else: If the opportunity for short sale comes up before foreclosure take advantage of the short sale making sure the lender forgives you the debt. But without jeopardizing the short sale delay the deal so that the short sale closing is perhaps January 2015. Worst case if Congress does not act is that you pay the tax in 2016. Remember, it is always better to delay than to pay.

However, there are many taxpayers who need to sell their home in order to relocate for a better job or to be closer to family somewhere else in the country. If these facts apply to you and you are still living in the upside down house then perhaps a different tax strategy would work for you. Do you have a rental property with equity that you can sell at a loss? If you must short sale your primary in order to move you have options. First you can coordinate the sale of both properties so that the gain on the short sale offsets the loss on the rental. Make sure you consult your CPA on this one.

Second, if you were to convert your primary to a rental (see my last month’s blog) and your rent was able to carry the home, you could move and rent in your new location until you eventually could sell your primary. After you sell the former primary you could then purchase in your new location. You may be able to have enough losses on the short sale rental to offset the debt forgiveness. As mentioned in my previous blog, there is no requirement that the house actually has to be rented as long as there was a genuine attempt to do so with plenty of advertising and signs outside the house. Just so you know your losses are limited to the time the house was rented so make sure to consult your CPA on this strategy as well.

Third for those folks who actually have a gain with a short sale this is a very interesting set of facts and carries with it a custom tax strategy just for you. Let’s say you were gifted your primary house years ago with a very low basis and no mortgage. However you put an equity line on the house of 70% of the value (remember those days?). You used that money to invest in a franchise business and the business is doing very well but all your money is tied up on the business and you don’t want to sell. Just like everyone else you lost that 30% equity over the last ten years. You moved out of the now underwater house at some point and rented it out as millions of other taxpayers have done. You are now upside down on the house and do not have the money to cover a short sale difference. Let’s say 200k. But you have a great new business opportunity and want the hone equity line paid off. If you shortsale, not only will your $200K be taxable but you will have a large capital gain on the sale. It is imperative for these taxpayers to prove that they have lived in the house for 2 of the last 5 years to take advantage of the $250,000 exemption ($500,000 if married). If you only lived in the house less than 2 years out of 5 there is still hope if the facts show that your driver’s license voter registration and tags were all still registered at that address and that you did not immediately rent the house out. See US Tax Court Case Richardson V Commissioner This set of facts is very complex and it is essential to consult with you CPA sooner than later.

In conclusion there are many Americans who will still be short selling in 2014/2015. Whatever your circumstances go over with your CPA the facts in your case. Document those facts on the tax returns you file and make sure the IRS knows what you are doing. If Congress extends the Debt Relief Act then all is good. But what if Congress does not extend the Debt Relief Act? Wish there was an easier way? Let you elected Representatives know you want the Debt Relief Act extended…at least long enough to allow you to short sale your house.

Thanks for visiting us at TaxView with Chris Moss CPA. See you next time on TaxView.

Kindest regards
Chris Moss CPA

Residence to Rental Conversion

Submitted by Chris Moss CPA

Most of us know that $250K of gain is exempt from tax on the sale of your primary residence ($500K if married) if you lived in that house for 2 of the last 5 years. But what if you sell your house at a loss? Tough luck the IRS says. Losses are not deductible on the sale of your personal residence. Or are they? In fact, if you are planning to sell your home and you feel that market values are beginning to rapidly deteriorate, you should consider renting out your house prior to selling with a Residence to Rental Conversion Tax Strategy. This Residence to Rental Conversion (RRC) allows a deductible loss on the sale of your personal residence. And it is absolutely legal. So hold on to your seat as we take the RRC tax savings tax strategy journey to the work around needed for you you to protect and bullet proof your tax return in the event of an IRS audit.

First we head back to year to 2013: You are married earning $215,000 on a W2 annually. You have a 10 year old son. Your spouse manages the household but earns no income. You also have $13,000 of dividends/interest and a $3000 capital loss carryover. Your AGI is $225,000. You decided with your spouse in early 2013 that you plan to move to Texas for a better job and you are putting the house up for sale on July 1 2013. You listed your house for $200,000 which was the Zillow appraisal on July 1, 2013. Six months later the house sold for $150,000. You really feel bad because you paid $250,000 for that house a few years earlier. So you lost $100,000 off the original price and you lost $50,000 from the date the house was listed. When you meet your CPA to file your 2013 tax return you feel confident that you can deduct some of this loss when your house sold. Your CPA who used to work for the IRS says “tough luck” you cannot deduct a loss on the sale of your personal residence. As a result you had a $40,000 tax bill in 2013 which you paid but with much upset because you feel you should have been able to deduct some loss on the sale of your home.

But here is what could have happened if you traveled a wiser path perhaps to a wiser tax advisor who know all about the RRC tax strategy: Same facts as above except you also listed the house for rent as well as for sale. The house is sold six months later for $150,000 just like before but now you have a legal and deductible loss. Your deductible loss is $50,000. ($200k-150k). You cannot take the full $100,000 loss because the government does not want you to include in your loss the portion of the loss incurred while living in the house, only to include in your loss the portion of the loss incurred while the house was listed for rent. Just so you know, I ran some numbers on your 2013 tax return. When we subtract a $50,000 loss your tax drops to $20,000 a savings of $20,000! This $20,000 tax savings is real money in your pocket.

But there is more good news for anyone who successfully implements an RRC. In this example, even if your house never rents out before it is sold you still get the $20,000 tax savings. You just have to jump through some easy promotional hoops as follows: Include a proper and valid listing for rent agreement, advertisements for rent and most important place outside the house a sign for rent. All this advertising can be documented photographed and assembled as part of your tax filing and even attached to your tax return in PDF. Don’t make the mistake that Bill and Nancy Turner made in US Tax Court Summary Opinion 2002-60. As Judge Vasquez noted: “Petitioners never placed a sign in front of the Belair property nor ran any newspaper advertisements listing it for rent. Furthermore, the renovation of the Belair property prevented it from being rented. By the time petitioners could have rented the Belair property, petitioners had decided “to get rid of” the Belair property. Petitioners never rented the Belair property, and it remained unoccupied until the new owners moved in….” Id at 4

So in conclusion, if you are planning to list your home for sale at a loss, don’t just ride the elevator down for a few months without any tax savings. Implement a Residence to Rental Conversion Tax strategy for some real cash flow tax savings that takes the sting out of selling your home at a loss and puts some cash back in your pocket. Thanks for joining me and see you next time on Tax View.

Kindest regards
Chris Moss CPA

10% Tithe Replaces Income Tax

Submitted by Chris Moss CPA

Did you all know that the United States never had an income tax until the Civil War? But what you probably don’t know is that England had also been working with income tax hundreds of years earlier. This was no coincidence. Western nations in the 19th century started keeping track of money by recording transactions in books and records. Having access to subjects accounting records gave Governments the ability to visualize a new type of revenue flowing into their coffers; the income tax. So why is Income Tax not working in the 21st century?

Now heads up because here is answer: In order for Income Tax to be an effective revenue raiser for a 21st century nation state, the Revenue Agency of a nation must be able to easily document and verify the income earned from its citizens. Let’s unpack this in a hard core image of government forms, the ultimate of verification: the 20th century American created W2 tax form. See my blog on the W2. But most high net worth individuals have figured out how to circumvent the W2. Income tax collections have dramatically declined to the point where the US Government cannot pay its bills. Furthermore, the National Debt keeps rising each year to astronomical levels unseen in our 200 year history as a nation.

So let’s dig out a solution to the income tax problem from some ancient times and civilizations, just like alternative medicine physicians have done with natural supplements form Brazilian rain forests. Sit back and enjoy the ride as we rewind a few thousand years to harvest some simple ancient solutions to cure 21st century tax complications. Back in ancient times, subjects to the King did not have financial records to measure their income. So how did the ancient Kings tax their Subjects? Back in those ancient days wealth was measured in produce like wheat, olives or grain, or animals like sheep, cows, goats, or in real estate like lands, or castles or perhaps in minerals like gold or silver and sadly in human servants and slaves. Can you imagine taking a slice off the top of all these things say 10% worth? The ancient collection of Tithing taking or taxing 1/10 of your wealth was a perfect way for Emperors, Kingdoms and Churches to tax their Subjects wealth. For example if you wake up one morning and had 100 sheep, you owed 10 sheep to the King. Then you do it all over again a year later. Sounds pretty easy to me but hard for us moderns to visualize.

Fast forward 2000 years. Folks around the world are not “subjects to the King” anymore, at least not here in the United States. As US taxpayers we all measure our income on an annual profit and loss statement sent to the government, aka, Form 1040 US annual income tax return. Tithing is out, Income Tax is in. Flat rates are out Graduated rates are in. Oh just so you know in my view Governments are not really collecting income tax. The Tax Code is so riddled with deductions, credits and exemptions that the IRS is not collecting an income tax anymore, the IRS is collecting a behavior tax. Behave like the Government says to behave and you pay no tax. Play a different game and pay more tax. Don’t play the game at all and pay the most tax. Who decides how we are to behave are the special interest lobby groups who have methodically changed the income tax code into the most complex behavior code since Moses wrote Leviticus for the Jews of the Old Testament.

Where did these lobbyist come from? It is not clear how lobbyists became such a big business in the United States. I am just guessing that lobbyists are the same type of folks that used to hang out at the King’s Court in England. Their ancestors probably turned into the first lobbyists in America. Lobbyists started to advise politicians in the 20th century to carve out exemptions for special industries groups and wealthy individuals. Hundreds if not thousands of tax laws were enacted based on a multitude of graduated tax rates with a series of exemptions, deductions and credits to benefit special interest groups. These “loopholes’ were so mind boggling that in the last 20th century even CPAs could not prepare tax returns without computers.

Now in the 21st century the US cannot collect enough income tax to even pay the basic bills like the armed forces, education, and maintenance of roads and bridges. That’s because most of us have figured out how to behave to pay as little tax as legally possible. “Cut Expenses” the Republicans say. “Raise Taxes” the Democrats say. But Congress should not cut essential services and certainly should not encourage more income tax legislation. The answer is to raise tax receipts by scrapping the non-workable income tax and replace that dying tax with a 10% flat tax. Indeed a flat tax is nothing more than a disguised 10% tithe! Can you see it? Thousands of pages of incomprehensible regulations rules and laws all gone! Replaced with a simple ancient but very effective 10% tithe.

Here’s how it would work as I see it. All Americans each January would donate 10% of their wealth to the IRS in 12 monthly installment payments which would be auto debited out of everyone’s federal checking account. This would be exclusive to the US Government and the account could not be used for anything else except tax payments. All Americans would need to have a Personal Financial Statement (PFS) updated each year and signed under penalty of perjury. Just so you know, this Tithe is not be confused with the simple income tax floating around that could filed on post card based on gross receipts. A Tithe would simply be a slice off the top 10% of what you are worth. So all folks would have to have at least 10% of the worth liquid to pay the tax. I see that as a small price to pay for having no income tax. Can you see it? Taxpayers become Tithers as they pay monthly Tithes to the US Government. No more withholding from paychecks and no more W2s; your gross paycheck is yours to keep and save, yes the entire amount.

There is no question in my mind, in fact I am absolutely certain that if the United States was to change from an income tax to an asset based tax, the budget would have a surplus every year—at least until Congress figured out how to spend it—and within a few years the entire National Debt would be wiped clean. Not only that, but all that offshore money would come flowing quickly back to US soil creating jobs for Americans currently unemployed. The underground economy would disappear and so would all those secret Swiss bank accounts. You all think about this but think “out of the box” like I’m doing. A net worth ancient 10% Tithe: An ancient remedy for the 21st century that works.

Kindest regards
Chris Moss CPA

The Family Limited Liability Company

The Family Limited Liability Company
Submitted by Chris Moss CPA

Credit Suisse pleads guilty to helping “clients deceive U.S. tax authorities by concealing assets in illegal, undeclared bank accounts, in a conspiracy that spanned decades..” —and no one going to jail? According to news reports the only penalty to Credit Suisse was a $2.5 billion fine. In fact, US Attorney General Eric Holder, made certain that Credit Suisse and their CEO Brandy Dougan would still be allowed to do business as usual in the aftermath of the criminal plea.

Are you surprised? The outdated and ultra-complex US Tax Code, 100 years in the making, is a dinosaur in the 21st century. As a result, a few hundred or perhaps thousands of wealthy Americans along with their corrupt tax advisors go through the most amazing hoop of all—they put themselves and their family at risk of criminal prosecution just to save income some tax dollars each year by illegally keeping assets and earnings off shore. Come on America’s top wealthy taxpayers who have their money offshore—there is always a legal work around that will save you taxes and help America, the country that made it possible for you to make all that money. Why not put your money to work here in the United States and start a Family LLC. Start to purchase commercial real estate and put your kids to work in the family business. Start a Family Limited Liability Company. The Family LLC will save you taxes but more importantly will keep the family, your family, together and committed to stay together for many years to come.

According to the Wall Street Journal, “Wealthy families are increasingly turning to family limited liability companies to minimize taxes and transfer assets between generations.” The WSJ goes on to say that the “strategy helps provide hands-on investment education for the younger generation without forcing older family members to cede control.”

Here is how the Family LLC works: The easy workaround for The Parents or Grandparents with net assets less than $10 Million is to gift the bulk of their assets to younger generations You do this by gifting membership interests in the Family LLC to your kids or grandchildren. However, the Grandparents retain management control as managing members. I then customize the operating agreements to match each client’s unique family, business and long range financial goals. For one family the purpose of the Family LLC might be to promote unity within the family, organize and protect the assets of the family from harm including creditors, and as a very distant third purpose to reduce income and future estate taxes.

But I might give another client a totally different operating agreement which requires ownership to be between grandparents and their children and their children’s children. No wives or husbands that should enter into the family through marriage and certainly no outsiders including cousins, uncles and aunts. This structure would be best suited for grandparents who have an absolute fear that divorce will lead to a breakup of a profitable successful and well known family business operation. This operating agreement may void ownership of any family member who triggers a life event like divorce, bankruptcy or a felony convention.

For clients of mine with net assets over the $10 Million exemption we would have operating agreements focusing on the reason for discounting memberships to the children. Best practice allows for discounts in the 20% range–and sometimes even up to 30%–primarily because the children cannot sell their interests as per the custom operating agreement. But another reason worth arguing before the IRS is that typically in these cases the children would have minority interests of less than 20% with no management control making their interests worth less even if they could sell.

So for example if a family has a family business with a net worth of $20 Million, a 20% discount would allow for a $16 Million dollar valuation. From that I would recommend a $10 Million dollar gift to the children and grandchildren with the remaining $6 Million still in the membership of the Grandparents. A good tax strategy at that point would be to perhaps leverage the $6 Million to purchase a few more commercial rental properties or perhaps a hotel or a fast food franchise. Creating divisions within the family business allows for children and grandchildren to actually work in these businesses as well as own them.

When all is said and done, if the Family LLC is good for your family, the Family LLC is good for America. My view is that American family business is the backbone of our great nation. If the Family LLC keeps your family business strong, the Family LLC will keep America strong. Ask your tax professional to consider whether you should setup and operate a Family LLC not only to help your family, but to help America.

See you next month and God bless America.
Kindest regards Chris Moss CPA