Corporation Was Not Entitled To Deduct Amount of Shareholder’s Bonus Check

The Tax Court in Vanney Associates Inc., TC Memo 2014-184, held that the corporation could not deduct its sole shareholder/CEO’s yearend bonus as officer compensation because the corporation did not have the funds to cover the check he received. Therefore, the check could not have been paid.

The corporation is a personal service architectural C corporation that uses the cash method of accounting. The corporation’s sole shareholder, an experienced, licensed architect, is also the corporation’s CEO, CFO, vice president of marketing, vice president of operations, and director of human resources. Although the corporation has other employees, the shareholder is primarily responsible for marketing, bringing in new business, and signing construction documents.

The shareholder’s wife is responsible for the corporation’s books and records. She is a CPA with an inactive license, and is also employed as vice president of finance for an unrelated company. She prepares the payroll checks and the shareholder signs and distributes them.

At the end of each tax year, the shareholder and his wife determine the corporation’s remaining profits after paying outstanding bills and employee bonuses. The shareholder’s wife then prepares a check on behalf of the corporation and pays the remaining profit to the shareholder as his yearend bonus. The shareholder and his wife both testified that they did this only to pay out the remaining profit, and they did not intend to zero out the corporation’s tax liability, even if that was the result.

In 2008, the corporation paid the shareholder a yearend bonus of $815,000. After making appropriate withholdings, the shareholder received a check for approximately $464,000. He signed the check on behalf of the corporation, and then endorsed it in his own name and made it payable to the corporation. He never attempted to cash the check, his wife recorded the payment on the books as a loan from the shareholder to the corporation, and the corporation repaid the shareholder in March 2009.

The total balance of the corporation’s bank accounts on 12/31/08 was approximately $389,000. After adjusting for outstanding deposits and checks, the balance was approximately $283,000. The shareholder testified that he believed the corporation did not have the funds to honor the check. However, he claimed the corporation could have received a loan to cover it. His wife testified that the corporation was strong and had considerable receivables. Further, she testified that although they considered taking out a loan for the corporation, they decided not to because they personally did not need the money and wanted to avoid the expenses of taking out a loan.

The corporation timely filed its income tax return for 2008, reporting no taxable income and claiming a deduction for officer compensation. The IRS disallowed the $815,000 of the deduction that represented the shareholder’s yearend bonus check.

The court noted that payment by check is a conditional payment because it is subject to the condition subsequent that the check be paid on presentation to the drawee. When the condition subsequent is fulfilled, it is generally reasonable to conclude that the payment relates back to the time the check was given. Therefore, the allowance of a deduction is dependent on proper payment of the check. The court has previously disallowed a deduction when a check was not paid due to insufficient funds. Further, it has held that the relation-back doctrine is inapplicable when the payee knows the payor has insufficient funds and so refrains from cashing the check.

Also, transactions between related entities are subject to special scrutiny. The economic reality of a transaction will prevail over its form, and a finding of economic reality depends on whether the transaction would have followed the same form if the parties were unrelated. The court has disallowed deductions when there was no actual economic outlay and the payments were “wholly circular.”

The corporation argued that the bonus check to the shareholder was unconditional and the payment occurred when the shareholder took possession of the check. It relied on O’Connor, TC Memo 1954-90, PH TCM ¶54195, 13 CCH TCM 623 , in which the court held that the essential element was that the control of property distributed by way of a dividend must have passed absolutely and irrevocably. The court in O’Connor also relied on the fact that the payee had unrestricted use of the money and the amount was unqualifiedly his to do with as he wished.

The court pointed out that this was distinguishable from the situation here. The shareholder’s wife knew or should have known that the corporation did not have the funds to cover the bonus check, and the shareholder testified that he had at least some idea of the same. Further, the shareholder had only a restricted use of the check. He could not cash it at the bank, use it to pay a debt, or use it to make a loan to someone other than the corporation. The shareholder’s only option to make use of the money was to lend it back to the corporation because the check could not be honored.

Additionally, the court stated that it had previously held that although a taxpayer maintains possession of a check, the amount of the check may not be treated as a distribution or may not be included in gross income when the account has insufficient funds to honor the check. Therefore, the IRS’s disallowance of the portion of the deduction for officer compensation relating to the shareholder’s bonus check was upheld.

Also, as always, we’re ready to assist you with other tax and business matters.
AB Tax Accounting

info@abataxaccounting.com
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

Advertisements

AB Tax Accounting Empowers Affordable Affiliate Startups

FOR IMMEDIATE RELEASE

AB Tax Accounting Empowers Affordable Affiliate Startups

ST. PAUL, Minn. (October 18, 2014)

AB Tax Accounting, a professional tax accounting and business consulting firm, is offering an affiliate program designed to help interested persons get started in the field of tax preparation. With just a minimal cash outlay, all can take advantage of this unique and painless means of going into business for themselves.

According to representatives of AB Tax Accounting, any new affiliate will find the opening of a tax accounting firm to be surprisingly affordable. “A minimum investment will get you started,” they state, “with no revenue splits involved.”

All affiliates of AB Tax Accounting will receive personal training and year-round support as well as the necessary tax preparation software, banking products and proven marketing plan to ensure an auspicious start. During the startup phase, the company will also serve as a back office, checking each affiliate-produced tax return for correctness and IRS compliance.

Representatives of AB Tax Accounting stress that tax preparation is not a seasonal proposition. Since all small businesses must file on a quarterly basis, a properly marketed tax accounting concern is sure to keep busy all year long.

About AB Tax Accounting

Since 1989, AB Tax Accounting has operated as one of the leading firms of its kind in and around the St. Paul area. In addition to providing accounting, bookkeeping, tax, payroll and CFO services, it also specializes in tax problem resolution and U.S.-based outsourced solutions.

Contact Information:

AB Tax Accounting
10670 Hawthorn Trail
St. Paul, MN. 55129
Phone: (651) 621-5777
Fax: (651) 621-5755
Email: info@abataxaccounting.com

Published in: on October 21, 2014 at 4:53 am  Leave a Comment  
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The Child Tax Credit May Cut Your Tax

Income Tax Service For Individuals – If you have a child under age 17, the Child Tax Credit may save you money at tax time. Here are some key facts the IRS wants you to know about the credit.
• Amount. The non-refundable Child Tax Credit may help cut your federal income tax by up to $1,000 for each qualifying child you claim on your tax return.
• Qualifications. A child must pass seven tests to qualify for this credit:
1. Age test. The child was under age 17 at the end of 2013.
2. Relationship test. The child is your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child can also be a descendant of any of these persons. For example, your grandchild, niece or nephew will meet this test. Adopted children also qualify. An adopted child includes a child lawfully placed with you for legal adoption.
3. Support test. The child did not provide more than half of his or her own support for 2013.
4. Dependent test. You claim the child as a dependent on your 2013 federal income tax return.
5. Joint return test. A married child can’t file a joint return with their spouse they are filing jointly only to claim a tax refund.
6. Citizenship test. The child must be a U.S. citizen, U.S. national or U.S. resident alien.
7. Residence test. In most cases, the child must have lived with you for more than half of 2013.
• Limitations. Your filing status and income may reduce or eliminate the credit.
• Additional Child Tax Credit. If you get less than the full Child Tax Credit, you may qualify for the refundable Additional Child Tax Credit. This means you could get a refund even if you owe no tax.

We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Identity Theft and Tax Returns: Tips for Taxpayers

Federal, State, Local and International Taxes – Refund fraud caused by identity theft is one of the fastest growing crimes nationwide.

Stopping refund fraud related to identity theft is a top priority for the IRS. With more than 3,000 employees working on identity theft cases, the IRS is focused on preventing, detecting and resolving identity theft cases as soon as possible and has trained more than 35,000 employees to work with taxpayers to recognize and provide assistance when identity theft occurs.

Taxpayers might encounter identity theft involving their tax returns in several ways. One possible scenario is where identity thieves try filing fraudulent refund claims using another person’s identifying information, which has been stolen.

We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Tax Planning For Small Business Owners

Amare Berhie, Enrolled Agent – Tax planning is the process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your EA/CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud:
• Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
• Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
• Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
• Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(651) 621-5777, (612) 224-2476
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Choosing the Right Filing Status

Federal, State, Local and International Taxes – Using the correct filing status is very important when you file your tax return. You need to use the right status because it affects how much you pay in taxes. It may even affect whether you must file a tax return.

When choosing a filing status, keep in mind that your marital status on Dec. 31 is your status for the whole year. If more than one filing status applies to you, choose the one that will result in the lowest tax.

Note for same-sex married couples. New rules apply to you if you were legally married in a state or foreign country that recognizes same-sex marriage. You and your spouse generally must use a married filing status on your 2013 federal tax return. This is true even if you and your spouse now live in a state or foreign country that does not recognize same-sex marriage.

Here is a list of the five filing statuses to help you choose:
1. Single. This status normally applies if you aren’t married or are divorced or legally separated under state law.
2. Married Filing Jointly. A married couple can file one tax return together. If your spouse died in 2013, you usually can still file a joint return for that year.
3. Married Filing Separately. A married couple can choose to file two separate tax returns instead of one joint return. This status may be to your benefit if it results in less tax. You can also use it if you want to be responsible only for your own tax. Head of Household. This status normally applies if you are not married. You also must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Some people choose this status by mistake. Be sure to check all the rules before you file.
4. Qualifying Widow(er) with Dependent Child. If your spouse died during 2011 or 2012 and you have a dependent child, this status may apply. Certain other conditions also apply.
We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Tips about Taxable and Nontaxable Income

Income Tax Service For Individuals – Are you looking for a hard and fast rule about what income is taxable and what income is not taxable? The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Some types of income are not taxable except under certain conditions, including:
• Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
• If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.
Here are some types of income that are usually not taxable:
• Gifts and inheritances
• Child support payments
• Welfare benefits
• Damage awards for physical injury or sickness
• Cash rebates from a dealer or manufacturer for an item you buy
• Reimbursements for qualified adoption expenses

We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Which Tax Form Should You File?

Individual Tax Preparation – Which form should you use to file your federal income taxes? These days, most people use a computer to prepare and e-file their tax forms. It’s easy, because tax software selects the right form for you. If you file on paper, you’ll need to pick the right form to use.

Before you decide, check out IRS Free File on IRS.gov. It has free tax software or a Fillable Forms option that allows you to fill in your tax forms using a computer. You can e-file the completed forms for free!

If you still prefer paper and pen, here are some tips on how to choose the best form for your situation.

You can generally use the 1040EZ if:
• Your taxable income is below $100,000;
• Your filing status is single or married filing jointly;
• You are not claiming any dependents; and
• Your interest income is $1,500 or less.

The 1040A may be best for you if:
• Your taxable income is below $100,000;
• You have capital gain distributions;
• You claim certain tax credits; and
• You claim adjustments to income for IRA contributions and student loan interest.

However, reasons you must use the 1040 include:
• Your taxable income is $100,000 or more;
• You claim itemized deductions;
• You are reporting self-employment income; or
• You are reporting income from sale of a property.

We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(952) 583-9108, (651) 621-5777, (612) 224-2476, (763) 269-5396, (818) 627-7315, (773) 599-7182, (404) 884-6903
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Who Should File a 2013 Tax Return?

Income Tax Service For Individuals – Do you need to file a federal tax return this year? Perhaps. The amount of your income, filing status, age and other factors determine if you must file.

Even if you don’t have to file a tax return, there are times when you should. Here are five good reasons why you should file a return, even if you’re not required to do so:

1. Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.

2. Earned Income Tax Credit. Did you work and earn less than $51,567 last year? You could receive EITC as a tax refund if you qualify. Families with qualifying children may be eligible for up to $6,044. Use the EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return and claim it.

3. Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit. To claim it, you need to file Schedule 8812, Child Tax Credit, with your tax return.

4. American Opportunity Credit. Are you a student or do you support a student? If so, you may be eligible for this credit. Students in their first four years of higher education may qualify for as much as $2,500. Even those who owe no tax may get up to $1,000 of the credit refunded per eligible student. You must file Form 8863, Education Credits, with your tax return to claim this credit.

5. Health Coverage Tax Credit. Did you receive Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation? If so, you may qualify for the Health Coverage Tax Credit. The HCTC helps make health insurance more affordable for you and your family. This credit pays 72.5 percent of qualified health insurance premiums.

To sum it all up, check to see if you would benefit from filing a federal tax return. You may qualify for a tax refund even if you don’t have to file. And remember, if you do qualify for a refund, you must file a return to claim it.

We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(952) 583-9108, (651) 621-5777, (612) 224-2476, (763) 269-5396, (818) 627-7315, (773) 599-7182, (404) 884-6903
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Individuals – Tax Credits For 2014

Adoption Credit
In 2014, a non-refundable (only those individuals with tax liability will benefit) credit of up to $13,190 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit
For tax year 2014, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,143, up from $6,044 in 2013. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit
For tax year 2014, the child tax credit is $1,000 per child.

Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2014. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Individuals – Education
American Opportunity Tax Credit and Lifetime Learning Credits
The American Opportunity Tax Credit (formerly Hope Scholarship Credit) was extended to the end of 2017 by ATRA. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return.

Interest on Educational Loans
In 2014 (as in 2013), the $2,500 maximum deduction for interest paid on student loans is no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers with modified AGI of more than $65,000 ($130,000 joint filers).

Individuals – Retirement
Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500. Contribution limits for SIMPLE plans remains unchanged at $12,000. The maximum compensation used to determine contributions increases to $260,000 (up $5,000 from 2013).

Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $60,000 and $70,000, up from $59,000 and $69,000 in 2013.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $181,000 and $191,000, up from $178,000 and $188,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.

Saver’s Credit
In 2014, the AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

Businesses – Standard Mileage Rates
The rate for business miles driven is 56 cents per mile for 2014, down from 56.5 cents per mile in 2013.

Section 179 Expensing
For 2014 the maximum Section 179 expense deduction for equipment purchases decreases to $25,000 of the first $200,000 of business property placed in service during 2014. The bonus depreciation of 50 percent is gone, as is the accelerated deduction, where businesses can expense the entire cost of qualified real property in the year of purchase.

Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, in 2014 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $130 down from $245 in 2013. The monthly limitation for qualified parking is $250.

While this checklist outlines important tax changes for 2014, additional changes in tax law are more than likely to arise during the year ahead.

Don’t hesitate to call us if you want to get an early start on tax planning for 2014. We’re here to help! For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(952) 583-9108, (651) 621-5777, (612) 224-2476, (763) 269-5396, (818) 627-7315, (773) 599-7182, (404) 884-6903
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

%d bloggers like this: