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Saturday, February 22, 2014

Limited Delay In ObamaCare Employer Mandate




Let’s touch again on the latest change to ObamaCare.

You may remember than last July, the IRS postponed the “Section 4980H shared-responsibility penalty” to 2015. Its original effective date was 2014.

CLARIFICATION: The 4980H shared responsibility penalty is the $2,000/$3,000 ObamaCare penalty levied on employers. The penalties apply if (1) you do not offer health insurance or (2) the government does not consider the health insurance you do provide to be adequate.

NOTE: This is a separate penalty from that levied on you personally should you not carry insurance. The way ObamaCare is constructed (at least presently), both the employer and employee can wind up paying penalties.     
OBSERVATION: And these penalties will wind up on someone’s individual or business tax return, which is why we are talking about them in a tax blog.

On February 10, 2014 the IRS further delayed the 4980H penalty for employers having 50 to 99 full-time equivalent employees in 2014. These employers now have an additional year – until 2016 – to offer health insurance to their employees.

I am going to have to put up a chart on my office wall to keep track of all the delays and changes.

Let’s recap the “new” revised rules for employer compliance with the 4980H penalty:

(1)  Employers with less than 50 full-time equivalent employees do not have to pay the penalty or file additional reports with the IRS - ever.
a.     There has been no change for this employer tier.
(2)  Employers with 50 to 99 full-time equivalent employees (FTEs) will have to file reports with the IRS in 2015 but will not have to pay any penalties until 2016.
a.     That is a change.
b.    But … see below.
(3)  Employers with over 100 FTEs have to provide health insurance. They will also have to file reports and possibly pay penalties in 2015.
a.     But the hurdle for the penalties has changed.
b.    The new hurdle is 70% employee coverage for 2015 and 95% coverage in 2016 and later years.
                                                              i.     There is a small break here.

Then there is something odd.

Let’s go back to Tier 2 employers - those with 50 to 99 FTEs.

If this is you, you will have to sign an affidavit that you did not reduce the size of your workforce below 100 to take advantage of the additional one-year delay. The IRS does allow you to explain yourself, though, if you did:

For example, reductions of workforce size or overall hours of service because of business activity such as the sale of a division, changes in the economic marketplace in which the employer operates, terminations of employment for poor performance, or other similar changes unrelated to eligibility for the transition relief provided in this section XV.D.6 are for bona fide business reasons and will not affect eligibility for that transition relief.”

Tier 2 employers will be required to maintain a “comparable” level of health benefits as existed on February 9, 2014 in order to obtain relief.
OBSERVATION: Interestingly, if the Tier 2 employer did not offer health insurance on February 9, 2014, then this requirement is automatically met.

So … you will have to sign a form saying it was not the president’s fault that people lost their jobs.

I suppose it will be the tooth fairy’s fault.



Saturday, February 15, 2014

When Can You Take That Deduction?


Sometimes the most mundane things can cause a tax issue. For example, an asset must be “placed in service” before one can claim depreciation. Consider that 2013 was the last year one could claim 50% bonus depreciation, and you can see how someone would want that big-dollar asset in service by year-end.

But what does “place in service” mean?

Let us go through a couple of examples.

Let’s say that you purchase a single-family home. You know someone who wants to rent. With that in mind you purchase the property, incur approximately $10 thousand in repairs and then verify the credit worthiness of the potential renter. You are surprised and disappointed with the result, and decide not to rent to that individual.

It is now the following year. The next applicant is eligible for Section 8 assistance. HUD sends an inspector, who unfortunately wants additional repairs before approving the application. You do the repairs. HUD approves. You have a renter.

The issue here is that expenses must be associated with a trade or business (or an income-producing activity) that is up and running in order to be deductible. Prior to then, the expenses are likely “start up” expenses, which are not immediately deductible. The classic example is a restaurant “dry run,” which occur before the restaurant opens to the public. Family and friends are invited to put the kitchen and service through its paces.

Most accountants would take the position that the house was placed in service (that is, its “activity” as a rental had started) when it was available to be rented. You had a renter lined up. Granted the renter did not pass the credit test, but there was a house, you were willing to rent the house and someone wanted to rent the house. Unfortunately, you did not otherwise try to “market” the house, perhaps by listing it on Craig’s List or advertising in the newspaper.

Oh, by the way, you did not start depreciation until the HUD renter moved in, which is year two in our example.

     Question: Can you deduct the $10 thousand in repairs?

Let’s go on to example #2.

There is a life insurance salesman who specializes in the uber-wealthy. He generally sells life policies of $10 million or more. He has developed quite the network of CPAS and other insurance agents. When prospective clients appear he will charter planes rather than rely on commercial flights. He had a bad experience when a commercial flight ran late, causing him to miss an important meeting and costing him a possible $8 million commission.

He decides to purchase his own plane. He needs to fly nonstop from cost-to-coast, as many of his clients are on the west coast. He eventually finds a $22 million Bombardier Challenger 604 that fits the bill. Unfortunately it is closing in on December 31, and he needs that bonus depreciation deduction. Problem is he also wants to customize the plane. He wants a conference table, for example. He wants to be able to work while he is flying coast-to-coast.


What to do? He tells the company that he absolutely positively needs the plane before year-end. On December 30, he gets the plane. He makes a trip to Seattle for a business lunch, then to Chicago to meet with another insurance agent. He gets in that business use.

He then returns the plane so the modifications can be made. He wants that conference table. He also wants 20-inch display screens rather than the standard 17-inch screens. Who wouldn’t?

     Question: When would you start depreciating the plane?

How would I have handled these two cases? In the first example I am inclined to start depreciation on the house in year one, the same year that the potential renter flubbed his credit check. The house was ready for rent, evidenced by have a potential renter wanting to rent.

And I would have been wrong. The Court decided that the house was not ready for rent in year one. It needed repairs, for example. The Court also observed that the potential renter was lined-up before the purchase of the house. After the credit check, the landlord did not resort to referrals and other means to rent the house. Instead she applied for Section 8 approval. Since HUD would not approve the house until repairs were made, the house could not be placed-in-service before then.

I understand the Court’s position, and I disagree with the Court. Unless the landlord bought the house specifically for Section 8, then HUD’s approval or disapproval sways me very little. Having a potential renter sways me a lot. Were the repairs substantial enough to prevent a renter from moving in? We do not know.

The Court also observed that the landlord did not try “other” means to rent the house, such as newspapers or Craig’s List. That bothers me. Just about every small landlord I know rents exclusively by word of mouth and referral. The idea of “advertising” their duplex or fourplex would be unimaginable, especially given today’s litigious environment. I have run into this position before on audit, so it does represent the IRS party line.  Can you rebut the position? You can, but it may require documentation of one’s efforts to rent the property. In my case, the IRS wanted my client’s referral sources to document her efforts to obtain a tenant.

And I suspect that the taxpayer’s decision to delay depreciation until year two may have been fatal.

What about the plane? It seems to me that the purpose of a plane is to fly, and that plane flew by December 31. Unless the flights were not really business-related and constituted only smoke and mirrors, I would say that plane was placed in service by December 31.

And I would have been wrong. The Court decided that the plane was not placed-in-service until the modifications were made, and the modifications were not made until the following year.

The Court is not without basis. IF those modifications were really THAT IMPORTANT to the insurance salesman, then one could reason that the plane was not ready for use in his trade or business as an insurance salesman. It was not enough to fly. It was necessary that he fly with a conference table. I get the nuance.

I do not think that was it, though. The Court went on to talk about how the salesman had understated his income by tens of millions of dollars and how he used nominees to conceal ownership and control of entities from the IRS. He had created false paperwork to support illegitimate deductions. Me thinks that he had hacked off the Court, and the Court – seeing an opportunity to disallow millions of dollars of depreciation – took the opportunity.

I tell you what I would have recommended to the salesman: do not give the plane back immediately. Wait three or four months. Use the plane extensively. Then install the conference table. Tax accountants refer to this as “cool down.”

Yes, sometimes tax planning is that simple.

IRS Does Not Want You To Call Next Week



So I am reading the following headline:

      IRS Asks Taxpayers to Resist Calling Next Week


I am wondering when our tax system became a Saturday Night Live skit.


The IRS does have a point. Next week includes Presidents Day and is usually one of the busiest weeks for the IRS phone lines.

The IRS wants people to instead to visit the website www.irs.gov and take advantage of the online tools there.

I try to be sympathetic – I truly do. However I cannot help reflect that we never see the following headlines:

Chick fil-A Asks Customers To Stay Away

Apple Has Nothing To Sell You

Honda Asks Potential Buyers Not To Visit Dealerships

Why the difference between the government and an actual-operating-accountable- produce-something-legitimate-or-we-go-out-of-business company?

If you even have to ask ….




Thursday, February 6, 2014

Renting To Yourself And The "Cox" Strategy



My partner brought me a new client’s personal income tax return. He wanted me to “come up with tax ideas,” as though I am an Iron Chef deciding what to do with the show’s “secret” ingredient.

Something caught my eye. Let’s talk about it.

Let me set this up for you:

(1) Taxpayer is married.
(2) The wife is self-employed. More specifically, she is a proprietor and reports her business income on a Schedule C.
(3) The business owns a house used as offices. The business depreciates the house.
(4) As is true for Schedules C, all her profits are subject to self-employment taxes.

There you go. You have all the facts you need.

Got it yet?

It has to do with the house.

There is a tax case from the 1990s addressing self-rental between a business and its owner. Taxpayer (Cox) was an attorney who reported his practice as a sole proprietorship.  His offices were in a commercial building owned jointly by Cox and his wife. He paid himself rent of $18,000, which he deducted from the law practice and reported as rental income elsewhere on his return.

NOTE: Cox addressed the “passive activities” rules. He apparently had passive losses that he could release by generating passive income.  If so, his net rental income might zero-out, and he would still get an income tax deduction for paying himself rent. It would be a win-win – if only the self-rental rule did not prohibit it.

The IRS of course disallowed the $18,000 rent entirely.

Cox went to trial on a very interesting position. He and his wife owned the rental property as tenants by the entireties. He argued that the form of ownership made a tax difference.

The Tax Court was intrigued. It looked to Missouri property law, and it noticed two things. First, each spouse is entitled to the use and enjoyment of the entire property. Second, a spouse cannot unilaterally divest his spouse of his/her interest in the property.

In a tax venue, this meant that Mrs. Cox was entitled to half the rent, and that Mr. Cox could not divest her of that right.

And the Court allowed Mr. Cox a $9,000 deduction for rent on his Schedule C. It disallowed the other $9,000 (that is, his half) under the self-rental rule.

How does this apply to the new client?

Taxpayer and her husband own the house. She owns the business. I see a strategy… for her self-employment tax.


Did I trip you up?

Remember: all her Schedule C income is subject to self-employment tax, which currently is 15.3 percent. One way to reduce it is to take a tax deduction on her Schedule C and report the corresponding “income” somewhere else on her tax return - somewhere that is NOT subject to self-employment tax. Somewhere like a real estate rental.

The tax pros refer to this a “Cox” strategy. The strategy we are talking about may also cause additional taxes under the new Obamacare “net investment income” tax. A tax advisor would have to review the situation and run numbers.

Still, it is something, and it is all your money until they take it from you. If this applies to your business situation, please bring it to your tax advisor’s attention.