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Larry Villano, Publisher of LoopholeLewy.com

April 21, 2014

What Are the At-Risk Rules?

Based on the questions I get regarding the at-risk rules, there seems to be some confusion as to what or who it is that is at risk. Here's a question I recently received: "I have a small business and had a loss. I don't feel that my business is at risk, so should I check the box on Schedule C that says: Some investment is not at risk?

My answer:

The at risk rules have to do with how much of your investment in the business you are PERSOANLLY at risk of losing if your business fails. In other words, these rules have nothing to do with whether the business itself is at risk but the risk to you personally.

Most sole proprietors who file Schedule C check the box that says: "All investment is at risk". This is because a sole proprietor and her business are considered one and the same, and therefore, the proprietor is PERSONALLY at risk of losing her investment in the business if the business fails.

For example, if you buy inventory on credit and your business fails, you are personally liable for that debt. As a sole proprietor, if your business did not have sufficient cash or other assets that you could convert into cash to pay the debt, then your personal (non-business) assets could be placed at risk to satisfy the debt if you were sued.

On the other hand, any borrowed funds used in your business that you are not PERSONALLY responsible for paying back would NOT be at risk and you would check the other box that says: "Some investment is not at risk".

If you have a corporation, you would NOT be personally liable (not at risk) to creditors of the corporation unless you signed a personal guarantee.

Here are the IRS rules:

You are at risk in any activity for:

1. The money and adjusted basis of property you contribute to the activity, and

2. Amounts you borrow for use in the activity if:

(a) You are personally liable for repayment, or

b) You pledge property (other than property used in the activity) as security for the loan.

If the above statements are true, and you're filing Schedule C, check the box that says: "All investment is at risk".

If you have a business loss and if any part of your investment in the business is not at risk, you must complete Form 6198, At-Risk Limitations.

Tips and Tid Bits...

Recently Reported Tax Scam Warning!

On March 23, 2014 it was reported by various news media that people are receiving phone calls from individuals purporting to be from the IRS claiming that taxes are due and must be paid immediately over the phone. About 20,000 people have been affected so far. The victims are asked to use their credit or debit cards to pay the bogus tax.

If you get such a call (or email), IGNORE it. The IRS does not call or email taxpayers regarding tax problems, it always initiates contact by snail-mailing written correspondence. Follow-up contacts are also sent through the U.S. postal service.

The only time the IRS may call you is when YOU contacted them FIRST and they are simply responding to your contact.

Report suspicious calls or emails to the Treasury Inspector General at 1-800-366-4484. You can also report fraud by going to the Treasury Inspector General for Tax Administration web site.

IRS Collects $2.9 Trillion During Fiscal Year 2013

During fiscal year 2013, the IRS collected almost $2.9 trillion in federal revenue and processed 240 million returns of which 151 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 83 percent were e-filed. More than 118 million individual income tax return filers received a tax refund, which totaled almost $312.8 billion. On average, the IRS spent 41 cents to collect $100 in tax revenue during fiscal year 2013.

Over 99% of All Returns Unaudited

The IRS examined just under one percent of all tax returns filed and about one percent of all individual income tax returns during fiscal year 2013. Of the 1.4 million individual tax returns examined, over 39,000 resulted in additional refunds.

Seven States With No Personal Income tax

Seven states do not have a personal income tax. They are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee do not tax wages. They tax investment income from stocks and bonds.

How the IRS Flags Excessive Travel Expenses

The IRS uses occupational codes to measure typical amounts of travel by profession. A tax return showing 20 percent or more above the norm might get a second look? Here are a few other red flags that can trigger an IRS audit.

Did You Rob a Bank Last Year?

Silly as it may seem, if you robbed a bank dung 2013, you had taxable income. Intentionally not reporting ill-gotten gains is considered tax evasion. The IRS doesn't care how we "earn" our loot as long as they get their cut, from a tax compliance standpoint of course. So, if you're selling drugs or scamming investors and not reporting the income, some day you could find yourself in the same predicament that Al Capone found himself in! Here are some of the top tax myths.

Updates...

W-2 Reporting of Employer-Sponsored Health Coverage

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on Form W-2, Box 12, with Code DD. This is for information purposes only. The amount reported in Box 12 for health care coverage is not taxable.

More >

Tax Changes for 2013

Several important tax changes went into affect in 2013. Depending on your income, age, marital status, or whether you operate a business, you could be affected.

For example, higher income taxpayers will be impacted by the new top tax bracket of 39.6% and the two additional Medicare taxes, 0.9% and 3.8%.

Taxpayers under age 65 will have a tougher time deducting medical expenses because the floor for deducting medical expenses was increased to 10% from 7.5%.

The 2013 social security wage base is $113,700. It will be increased to $117,000 in 2014. For 2013 and 2014, the self-employment tax rate is 15.3% (social security rate 12.4% plus Medicare tax rate of 2.9%).

For 2013, the social security rate for employees and employers is 6.2% each and the Medicare tax rate is 1.45% each. No change in 2014.

More tax changes >

IRS Meal Allowance

If keeping records of meal expenses while traveling away from home on business is difficult for you, you can claim the IRS meal allowance.

The IRS meal allowance shown in the General Services Administration (GSA) tables is referred to as the M&IE rate (meals and incidental expenses). The table lists six tiers for the lower 48 continental United States ranging from $46 to $71.

The rates are broken down by category: breakfast, lunch, dinner, and incidentals (i.e. fees and tips for various services).

If you need to deduct a meal amount, first determine the location where you will be working while on official travel. Next, look up location-specific information at www.gsa.gov/perdiem. The M&IE rate for your location will be one of the six tiers listed on this table.

Self-employed individuals may claim the M&IE allowance. Employees who have expenses that are not reimbursed under an "accountable" plan may also claim the M&IE allowance.

More on the meal allowance >

Guidelines for Year-End Charitable Contributions

To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better.

A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgment from the charity for each gift worth $250 or more that includes a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.

To deduct cash donations, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.

Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction.

For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

The taxpayer must obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more.

Tax-Free Charitable Distributions for IRA Owners 70 1/2 or older

An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 to an eligible charity and can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This option, which is scheduled to expire at the end of 2013, was first available in 2006.

The funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income, which lowers taxable income and avoids taxes on the distribution

If the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.

Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

First-year Expensing Limit to be Cut 95% in 2014!

Unless Congress acts, the first-year expensing limit for qualified business property is scheduled to fall to $25,000 in 2014. The expensing limit for 2013 is $500,000. That's a 95% reduction!

In addition, the phaseout threshold for 2014 is scheduled to fall to $200,000. The threshold for 2013 is $2,000,000. That's a 90% reduction.

Bonus depreciation is scheduled to expire at the end of 2013.

Learn about first-year expensing and bonus depreciation >

Saver's Credit Can Slash Your Tax Bill

If you made contributions to a retirement plan, including a traditional IRA or Roth IRA, you may be able to claim the retirement savings contribution credit, (referred to as the saver's credit) on your 2013 return.

The maximum tax credit is $1,000 ($2,000 if married filing jointly). The deadline for setting up a new IRA or adding money to an existing one is April 15, 2014. Elective deferrals (contributions) must be made by the end of the year.

Learn more >

Important Dates for Retirement Plans

The IRS has posted important dates for December 2013 and January 2014 related to retirement plans administered by employers, trustees, and custodians.

More >

Interest Rates on Overpayments and Underpayments

The Internal Revenue Service recently announced that interest rates for overpayments and underpayments will remain the same for the calendar quarter beginning Jan. 1, 2014. The rates will be:

  • 3% for overpayments (2% for a corporation)
  • 3% for underpayments
  • 5% for large corporate underpayments
  • One-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000

More >

Fees for Offers In Compromise and Installment Agreements to Increase January 1, 2014

The IRS plans to increase fees charged for Installment Payment Agreements and Offers in Compromise effective January 1, 2014.

  • The fee for entering into installment agreements will be $120, a $15 increase. Taxpayers who make their payments by direct debit will still qualify for a lower fee of $52. Taxpayers who meet low income guidelines established by the Department of Health and Human Services will still pay a fee of $43.
  • The fee to reinstate a defaulted installment agreement will be $50, a $5 increase.
  • The fee for processing an Offer in Compromise will increase $36 to $186. Taxpayers who meet the low income guidelines still qualify for a fee waiver.

For more information on IRS Installment Payment Agreements and Offers in Compromise visit IRS.gov.

To apply for an IRS installment agreement online, use the Online Payment Agreement application.

To find out if you are eligible for an Offer in Compromise and what a reasonably acceptable offer amount might be, use the IRS Offer in Compromise Pre-Qualifier Tool.

New IRS Commissioner Confirmed

IRS Commissioner John Koskinen

John Koskinen, President Obama's nominee to head the IRS, was confirmed by a Senate vote of 59 to 36 December 20, 2013. Koskinen succeeds acting commissioner Daniel Werfel.

Koskinen's resume:

  • Served as non-executive chairman of Freddie Mac from 2008 to 2011 and acting CEO in 2009.
  • Deputy mayor and city administrator of Washington, D.C., from 2000 to 2003
  • Assistant to the president and chair of the President’s Council on Year 2000 Conversion from 1998 to 2000
  • Deputy director for management at the Office of Management and Budget from 1994 to 1997.
  • He also has experience in the private sector and received a B.A. from Duke University and an L.L.B. and J.D. from Yale University School of Law.

2014 Business Mileage Rate Reduced

Beginning January 1, 2014, the standard mileage rate for a car, van, pickup or panel truck, will be reduced to 56 cents per mile for business miles driven during 2014. The rate for 2013 is 56.5 cents per mile.

Medical and moving related miles will also be decreased 1/2 cent to 23.5 cents per mile. The 2013 rate is 24 cents per mile for medical and moving miles.

The 2014 rate for charitable-related miles is 14 cents per mile. This rate is based on statute and hasn't changed for several years.

Learn about the mileage allowance method >

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