Medical Caregivers Working in Your Home

If a loved one needs medical assistance within your home and you want to take the expense as a medical deduction, who you pay and what you are paying for makes a difference. The person receiving care must require that care because they are chronically ill, need long-term care, or require substantial supervision because of cognitive impairment, as determined by a physician.

If you are paying a Home Healthcare agency that employs the worker then the amount you will claim for your medical deduction is probably what you paid the agency for the year. If you had a worker, and the right to control the details of the work that was done by your worker, then your worker is your Household Employee and you must issue them a W-2 at the end of the year. If you pay each worker wages of $2,000 or more, then you are required to withhold and remit Social Security and Medicare taxes. You may also be responsible for other taxes.

The matter of Household Employees and payroll filing is complicated. The average individual probably doesn’t even know what an EIN number is (Employer Identification Number which is required), let alone which payroll forms to file. It is highly recommended that you consult with your licensed tax professional instead of trying this on your own and risking an IRS penalty and back taxes in addition to your family’s medical costs.

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What the Tax Reform Act Means for You

Congress has passed a tax reform act that will take effect in 2018, ushering in some of the most significant tax changes in three decades. There are a lot of changes in the new act, which was signed into law on Dec. 22, 2017.

You can use this memo as a high-level overview of some of the most significant items in the new act. Because major tax reform like this happens so seldom, it may be worthwhile for you to schedule a tax-planning consultation early in the year to ensure you reap the most tax savings possible during 2018.

Key changes for individuals:

Here are some of the key items in the tax reform act that affect individuals:

  • Reduces income tax brackets: The act retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent. The individual income brackets are also expanded to expose more income to lower rates (see charts below).
  • Doubles standard deductions: The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
  • Limits itemized deductions: Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
    • Caps state and local tax deductions: State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
    • Caps mortgage interest deductions: For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
    • Limit of theft and casualty losses: Deductions are now available only for federally declared disaster areas.
    • No more 2 percent miscellaneous deductions: Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.

Tip: If you’re used to itemizing your return, that may change in coming years as the doubled standard deduction and reduced deductions make itemizing less attractive. To the extent you can, make any remaining itemizable expenditures before the end of 2017.

  • Cuts some above-the-line deductions: Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
  • Weakens the alternative minimum tax (AMT): The act retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and increases the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
  • Bumps up child tax credit, adds family tax credit: The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
  • Expands use of 529 education savings plans: Qualified distributions from 529 education savings plans, which are not subject to tax, now include tuition payments for students in K-12 private schools.
  • Doubles estate tax exemption: Estate taxes will apply to even fewer people, with the exemption doubled to $11.2 million ($22.4 million for married couples).
  • Kiddie tax: Effective 2018, the “kiddie tax” on children’s unearned income will use the estates and trusts tax rate structure, meaning it will be taxed anywhere from 10 percent to 37 percent.

What stays the same for individuals:

  • Itemized charitable deductions: Remain largely the same.
  • Itemized medical expense deductions: Remain largely the same. The deduction threshold drops back to 7.5 percent of adjusted gross income for 2017 and 2018, but reverts to 10 percent in the following years.
  • Some above-the-line deductions: Remain the same, including $250 of educator expenses and $2,500 of qualified student loan interest.
  • Gift tax deduction: Remains and increases to $15,000 from $14,000 for 2018.

Farewell to the healthcare individual mandate penalty

One of the changes in the tax act is the suspension of the individual mandate penalty in the Affordable Care Act (also known as “Obamacare”). The penalty is set to zero starting in 2019, but remains in place for 2018 and prior years.

Tip: Retain your Form 1095s, which will provide evidence of your healthcare coverage. Without it, you may have to pay the individual mandate penalty, which is the higher of $695 or 2.5 percent of income. Beginning in 2019, this penalty is set to zero.

NOTICE: The IRS recently granted employers and health care providers a 30-day filing extension for Forms 1095-B and 1095-C, to March 2, 2018. The IRS clarified that taxpayers are not required to wait until receipt of these forms to file their taxes. 

New 2018 tax bracket structures for individuals

Single taxpayer

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000 37%

Head of household

Taxable income over But not over Is taxed at
$0 $13,600 10%
$13,600 $51,800 12%
$51,800 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000 37%

Married filing jointly

Taxable income over But not over Is taxed at
$0 $19,050 10%
$19,050 $77,400 12%
$77,400 $165,000 22%
$165,000 $315,000 24%
$315,000 $400,000 32%
$400,000 $600,000 35%
$600,000 37%


Married filing separately

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $300,000 35%
$300,000 37%

Estates and trusts

Taxable income over But not over Is taxed at
$0 $2,550 10%
$2,550 $9,150 24%
$9,150 $12,500 35%
$12,500 37%

Key changes for small businesses:

Here are some of these key items in the tax reform act that affect businesses:

  • Cuts the corporate tax rate: Corporate tax gets cut and simplified to a flat 21 percent rate, changed from a multi-bracket structure with a 35 percent top rate.
  • Reduces pass-through taxes: Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
  • Beefs up capital expensing: Through 2022, short-lived capital investments in such items as machinery and equipment may be fully expensed as soon as they are placed in service, using bonus depreciation. This now also applies to used items instead of only new ones; they just need to be placed in service for the first time in your business. After 2022, allowable bonus depreciation is then lowered incrementally over the next four years.
  • Strengthens Section 179 deduction: Section 179 deduction limits get raised to enable expensing of up to $1 million, and the phaseout threshold increases to $2.5 million. Section 179 may now also be used on expenses related to improvements to nonresidential real estate.
  • Nixes the corporate alternative minimum tax (AMT): The 20 percent corporate AMT applied to businesses goes away entirely.
  • Expands use of cash-method accounting: Businesses with less than $25 million in gross receipts over the last three years may adopt the cash method of accounting.
  • Reforms international taxation: Treatment of international income moves to the territorial system standard, in which foreign investments are generally only taxed in the place in which they operate. The new laws allow tax deductions for certain foreign-sourced dividends, reduced tax rates for foreign intangible income and reduced tax rates for repatriation of deferred foreign income.
  • Repeals business entertainment deduction: Businesses will no longer be able to deduct 50 percent of the cost of entertainment, amusement or recreation directly related to their trade or business. The 50 percent deduction for business-related meals remains in place, however.
  • Modifies several business credits: Several business credits are maintained but modified, including the orphan drug credit, the rehabilitation credit, the employer credit for paid family or medical leave and the research and experimentation credit.
  • Boosts luxury automobile depreciation: Luxury automobiles placed in service after 2017 will have allowable depreciation of $10,000 for the first year, $16,000 the second, $9,600 the third and $5,760 for subsequent years.

This brief summary of the tax reform act is provided for your information. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call if you have questions regarding your particular situation. Feel free to share this memo with those you think may benefit from it.

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Last-minute Year-end moves in light of Tax Cuts and Jobs Act

Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

. . . If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.

. . . Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.

. . . If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.

. . . If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.

. . . The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
  • The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies. Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren’t deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that I’ve described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.

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Taking Advantage of the Tax Law Changes

If you itemize in 2017, and you have itemized deductions that are just over the standard deduction floor, you will probably take the larger standard deduction in 2018. If this is the case, make some of next years payments that can be itemized this year. Consider accelerating charitable contributions, discretionary medical expenditures, and pay 2018 State and Local Taxes (SALT). You can also consider deferring income to take advantage of the lower rates going into effect next year.

If your tax planning is for a complex strategy you should contact your CPA before years end.

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The Medicaid Asset Protection Trust

If you need healthcare that you cannot afford, then the government expects you to use your money until it is gone, and then use up your assets until those are gone, and Medicaid will pay for the rest. If you have an asset such as a home that you want to protect for your heirs, but you are still alive and you need healthcare that you can’t pay for, you could place the home into an irrevocable trust to protect that asset.

To make their measurements, Medicaid uses a set of standards called Medicaid Asset Limits in order to determine a patient’s eligibility for care without having to pay a premium, (in most states a nursing home resident covered by Medicaid may have no more than $2,000 in countable assets). If you transfer assets into certain trusts to protect them, and you were the former owner, Medicaid has legal ways to transfer or release title to those assets.

You have to use an irrevocable trust, because a revocable trust is like no trust at all until the day that you die, at which time it automatically becomes irrevocable. With a revocable trust you can make any change you like until you die. A revocable trust can not protect the house if you’re trying to receive Medicaid because you are still alive. Has to be an irrevocable trust that now owns your old assets, and that means that you no longer own those assets and have no rights to them, and Medicaid has no rights to them either. The problems start when people put their assets into a trust and try to find ways to continue to enjoy the benefits of those assets like they did before they formed the trust.

There were a couple of court decisions that came out of Massachusetts recently that bring these problems to light. A man put his home into an irrevocable trust but continued to live there. The courts eventually ruled that MassHealth (Medicaid in Massachusetts) could not count the home as an asset for the limits test because the trust provision allowed him to live there. On the flip side, the man’s right to use and occupy the home as akin to receiving fair market value rental income from the home, and that raised his income to the threshold where he was required to pay a monthly deductible to receive healthcare.

If you have an older trust you should have it reviewed to determine that it is in compliance with current laws. Your attorney must be an expert in this field. If this subject is of interest to you then seek out professional advice, and a good place to start is always with your CPA.

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A Tax Strategy Just Right for You

In our line of work we hear a lot of things like, “This country needs a flat tax or a national sales tax. The IRS is out of control with this complicated tax code – why you’d have to be a rocket scientist to figure it out.”

First of all you have to remind yourself that your government is addicted to tax money. If we had a flat tax it would decrease overall tax revenues, hurt lower income taxpayers and reward high income earners. A national sales tax would put the government at the mercy of consumers, and be a real problem when it comes to long-term budgeting because very large ticket projects like roads or another aircraft carrier take years to complete. We don’t see either of these political footballs scoring a touchdown any time soon.

If you’re like about 40% of Americans who work for a wage and report income from a W-2, single or married, you have no children and rent, then you are already in a quasi flat tax scenario where your tax is very much the same as anybody else in your earnings stratum. A machine can do your taxes.

Our tax codes become more complicated as you accumulate wealth over your lifetime, at least that’s how it is supposed to work. If you do what your parents tell you and manage to avoid most of life’s pitfalls then you should do pretty good. Tax planning plays an important role because it is a part of protecting your assets. Combined with financial, retirement and estate planning, tax planning is the crux that helps to bind the other planning areas into a cohesive lifetime plan for accumulating wealth.

When I was in the Army, and you’re standing in the breakfast chow line and you get to the bacon server, that bacon server would always eyeball you, and poke around in that bacon for a minute and come up with two pieces that were, “Just right for you.” We used to joke about that because we thought that any two pieces are going to be about the same, but that never deterred the bacon server from doing you a favor and finding those two pieces that were, “Just right for you.”

That’s sort of what we do for our clients; we find a tax scenario that is just right for their needs considering their financial plans, retirement plans and estate planning. We don’t just crank out a tax return every year like a machine, we get to know our clients and so long as they give us the opportunity, we like looking out for them, so that we can find that perfect balancing point, that tax plan that is, “Just right for you.”

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Observations: Corporation vs. Limited Liability Company (LLC)

A regular question we hear is, “Should I have an LLC or a Corporation for my business?” That depends on your organizational goals, tax strategy and how you plan to protect yourself from potential liabilities. The following information is incomplete and general, and should not be relied upon for making any decisions. I am touching on just a few matters relating to taxation. If you wish to create a business entity you need to have a meeting with your CPA as a first step.

A corporation is a legal entity that is separate and distinct from its owners. The states that allow for their charter also consider them to be an individual person, with the same rights to enter into contracts, own assets, have bank accounts and loans, sue and be sued separately from its owners, and have a work force. Ownership percentage is determined by the number of shares authorized and issued.

A limited liability company (LLC) is a form of partnership that combines the limited liability of a corporation with the pass-through tax rates of a partnership. Partnerships are pass-through entities because the profits are not taxed on the partnership tax return, but are passed through to the partners’ individual tax returns where the profits are subject to individual tax rates, as well as Social Security and Medicare taxes.

If you form an LLC by yourself and have no partner, the partnership is considered by the IRS to be disregarded for tax purposes, hence the term “Disregarded entity.” By disregarding the partnership entity, you are not required to file a partnership tax return. You do however retain the legal entity and its protection of the owner from the company’s liabilities. You would report your business income and expenses on the Schedule C of your personal income tax return. Schedule C profits are subject to Social Security and Medicare taxes; called self-employment taxes.

Unlike a Sole Proprietor who also reports on Schedule C, the disregarded entity LLC is legally separate from its owner. If the LLC is sued, the owner is generally not liable unless personally negligent. Contrast that with a sole proprietor who has all of her assets, personal and business, at risk. Of course our sole proprietor can, and should, buy liability insurance.

Once a corporation or LLC are formed at the state level, it is up to the owners to make an election with the IRS as to how those entities will be taxed in future years. If you form a corporation and fail to make an election with the IRS, you will have a C corporation on your hands.

A C corporation is a clearly separate legal entity that requires a unique understanding to properly manage. The owners are subject to double-taxation because corporate income taxes are paid before any profit is distributed. If the owners receive a dividend, those are taxed again on the personal tax returns of the recipients. That is double taxation. Smaller C corporation owners usually take a salary to extract value from their corporations, but if they fail to take a bonus at the end of the year and leave profits in the corporation, the entity will pay corporate income tax. You need to know what you are doing, or have help from your accountant, to effectively manage a C corporation, or Professional Service Corporation.

If you elect to classify your corporation under subchapter S, your profits will flow onto your personal tax return and will only be subject to income taxes. This is very different from distributions from a partnership where distributions are subject to self-employment taxes in addition to income taxes.

An LLC with multiple owners can be taxed as a partnership. However today we see most small LLC’s electing to be taxed as a corporation, and making the subchapter S election to retain the pass-through nature of the profits that also avoids the self-employment taxes.

Wages are subject to Income tax, Social Security tax and Medicare tax. S profits, which come after payroll expenses, are extracted as a distribution, and are subject to income tax only. Social Security and Medicare taxes (called FICA) are 15.3%; with the business paying half and the employee paying the other half. When the owner is also the employee, that one person ultimately pays the entire 15.3%. Consider that on a $100,000 salary, the FICA will be $15,300. If your business lasts 20 years and you always take the same salary, the FICA adds up to a substantial $306,000.

Any owner of an S entity is automatically considered, by law, to be an employee of that business. They are further required to take a reasonable wage or salary for their position. What is reasonable? The simplest answer is whatever you would have to pay somebody else to do your job. To save money, some S owners only take a token salary and allow most of the fruits of their labors to flow onto their tax returns as distributions, escaping a portion of the SS and MED taxes. The explosive growth of the subchapter S entity over the last 20 years is no accident. The IRS is very aware of this behavior and does have the power to step in and convert distributions of profits into wages when they catch somebody, and the penalties and interest can be substantial.

If you own a business or are thinking about starting one, the requirements and pitfalls are so numerous that to rely on anyone but a CPA or Attorney to help with your organizational decisions will result in mistakes that will cost a lot more than the professional fees; which by the way are deductible to the business. The penalties for your mistakes are never deductible.

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Storm Victims E-file Deadline NOV 18

Storm victims have until Saturday, November 18, 2017 to e-file 2016 tax returns. After November 18 all tax returns will have to be mailed.

The IRS will be shutting down it’s e-file system for annual update after November 18.

Storm victims continue to have January 31, 2018 as their final deadline for filing 2016 tax returns.

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The Cohan Rule

This is a common law rule that allows a taxpayer to use a reasonable estimate of business expenses based on some factual foundation, when they are unable to produce records of said expenses. The legal citation is Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930).  

George M. Cohan was an American entertainer who is famous for his stage work, and standard songs like “Over There,”  “Give My Regards to Broadway,” and “Yankee Doodle Boy.” George was one of the first lucky souls to get an IRS audit, and because he did not keep records the auditors disallowed fifty-five thousand dollars of business expenses.

In his work George had to travel all over the country – sometimes with his attorney; take trains, cabs, pay for hotels, eat in restaurants, leave tips and any other legitimate expenses that an entertainer and his entourage would incur when on the road. Of course claims of luxurious business expenses continue to catch the attention of the IRS to this day.

The IRS took the hard position that the claims had to follow regulation and be fully documented. George took the IRS to court, and convinced the court of the necessity of his expenses based on other credible evidence. The court agreed but only to the extent of forcing the IRS to consider a reasonable estimate, and not the exact numbers he originally claimed.

“The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items of details. The question is how far this refusal is justified in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can,” Circuit Court Judge Learned Hand. The complete decision can be found here: http://pegasus.cc.ucf.edu/~bandy/cohan.htm

The Cohan rule does afford a taxpayer the ability to present a logical estimate of a reasonable expense based on fact, but the final decision is always discretionary. The taxpayer, because she used an estimate of her business expenses, does not automatically get to keep the approximated expense and resulting tax, because Judge Hand decided that the Board should at least afford “For some allowance;” not necessarily all of it.

If you plan to present an estimated expense to the IRS during an audit, be prepared to compromise because is has been our experience that the IRS will start with the position that your number is too high, and it is up to you to prove that it is not. The technology we use in the modern business environment makes producing expense records easier, and you should use third-party proof whenever possible. But if you do have to rely on an estimate make sure you can support it before you put it on your tax return. If the IRS questions your estimated expense, raise the Cohan rule and explain your logic. In George’s case, how could he have visited all of those cities and made his money without incurring some expenses? Your licensed tax professional will know what to do.

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Tax Credits for Qualified Plug-In Electric Motor Vehicles

You can get a Federal tax credit of up to $7,500 when you buy a Qualifying Vehicle. It must be an electrically powered motor vehicle for street use, no golf carts. The weight must be less than 14,000 pounds. It has to be propelled primarily by an electric motor drawing power from a battery that has a capacity of at least 4 kw hours, and can be recharged from an external electrical source.

The credit is the sum of $2,500 plus $417 for each kw hour of capacity in excess of 5 kw hours, but not in excess of $5,000; making the maximum Federal credit $7,500. The credit begins to phase-out in the second quarter that a manufacturer sells 200,000 qualifying vehicles after 2009. Electric vehicles have not sold well in the US, so many continue to be eligible for the credit.

If you are interested in the credit to offset the higher cost of the electric vehicle, be sure to contact your licensed tax professional to help with planning before you make your purchase. Your tax professional can help determine the effect on your taxes, that your choice is a qualified vehicle, and whether or not your State offers a similar credit.

Here is a general list of Qualified Vehicles; your specific vehicle and the credit you receive may be different:

Audi A3 e-tron (2016-2017), $4,502

Audi A3 e-tron ultra (2016), $4,502

BMW i3 Sedan with Ranger Extender (2014-2017), $7,500

BMW i3 Sedan (2014-2017), $7,500

BMW i8 (2014-2017), $3,793

BMW X5 xDrive40e (2016-2018), $4,668

BMW 330e (2016-2018), $4,001

BMW i3 (60Ah) Sedan (2017), $7,500

BMW 740e (2017), $4,668

BMW 530e (2018), $4,668

BMW 530e xDrive (2018), $4,668

BMW 740e xDrive (2018), $4,668

MINI Cooper S E Countryman ALL4 (2018), $4,001

FCA North American Holdings, Fiat 500e (2013-2017), $7,500

Chrysler Pacifica PHEV (2017), $7,500

Ford Focus Electric (2012-2017), $7,500

Ford C-MAX Energi (2013-2017), $4,007

Ford Fusion Energi (2013-2018), $4,007

General Motors Cadillac ELR (2014, 2016), $7,500

General Motors Cadillac CT6 PHEV (2017), $7,500

General Motors Chevrolet Volt (2011-2018), $7,500

General Motors Chevrolet Spark EV (2014-2016), $7,500

General Motors Chevrolet Bolt (2017), $7,500

Kia Soul Electric (2015-2017), $7,500

Kia Optima PHEV (2017), $4,919

Mercedes-Benz smart Coupe/Cabrio EV (2013-2016), $7,500

Mercedes-Benz B-Class EV (2014-2017), $7,500

Mercedes S550e PHEV (2015-2017), $4,043

Mercedes-Benz GLE550e 4m PHEV (2016-2017), $4,085

Mercedes-Benz C350e PHEV (2016-2017), $3,000

Mitsubishi i-MiEV [Electric Vehicle] (2012, 2014, 2016, 2017), $7,500

Nissan Leaf (2011-2017), $7,500

Porsche 918 Spyder (2015), $3,667

Porsche Panamera S E Hybrid (2014-2015), $4,752

Panamera 4 E-Hybrid (2018), $6,670

Porsche Cayenne S E-Hybrid (2015-2018), $5,336

Tesla Roadster (2008-2011), $7,500

Tesla Model S (2012-2017), $7,500

TeslaModel X (2016-2017), $7,500

Tesla Model 3 Long Range (2017), $7,500

Toyota Prius Prime Plug-in Hybrid (2017), $4,502

Toyota Prius Plug-in Electic Drive Vehicle (2012-2015), $2,500

Toyota RAV4 EV (2012-2014), $7,500

Volkswagen e-Golf (2015-2017), $7,500

Volvo XC90 or XC90 Excellence (2018), $5,002

Volvo XC60 (2018), $5,002

Volvo S90 (2018), $5,002

Volvo XC-90 T8 Twin Engine Plug in Hybrid (2016-017), $4,585

 

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