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Discharging Taxes In Bankruptcy

bankruptcy

Sometimes a taxpayer finds themselves in the position where they can’t pay their tax liability.  Those taxpayers may come to us and ask us if they qualify to have their taxes discharged in bankruptcy.  Our reply is that while we do help taxpayers deal with resolving their tax debt, they are best advised to consult with an attorney to investigate the bankruptcy option.  You see, only legal counsel, or someone admitted to practice before the tax court, can represent a taxpayer in tax court.  With that being said, we typically help taxpayers with administrative tax resolution methods, which the client should pursue first. These include innocent spouse relief, a request for abatement of penalties, an installment agreement or an offer in compromise (OIC).

However, if those options are insufficient, bankruptcy may be the best way for a taxpayer to either secure a reasonable payment plan (Chapter 11 or Chapter 13) or to liquidate their assets to pay off all or a portion of their tax debt (Chapter 7). Using administrative tax resolution methods help a taxpayer avoid having a “black mark” on their credit history. However, a federal tax lien listed on the debtor’s credit report may damage their credit rating just as much as a bankruptcy notation.  Needless to say, if you think you may qualify based on the information shown below, one is advised to contact an attorney who specializes in bankruptcy law.

What tax debts may be discharged in bankruptcy?
To be dischargeable, individual income tax liabilities must meet the following “technical” rules of 11 USC §§ 523(a)(1) and 507(a)(8):

  • More than three years must have elapsed since the tax return generating the liability was due, including extensions.
  • The tax return must have been filed more than two years earlier than the bankruptcy petition (generally applicable to late-filed returns). Note, however, that IRS-prepared substitute for returns (SFRs) are not considered filed returns for this purpose, and thus a tax liability assessed from them would not be subject to discharge (IRC § 6020(b)).
  • At least 240 days must have elapsed since the date of an IRS assessment (generally applicable to audit adjustments and amended returns). This time frame is extended by an OIC.

Bankruptcy Basics
A bankruptcy court filing immediately stops the collection efforts of all creditors, including the IRS. This legal protection is called the “automatic stay.” At the end of the proceedings, some or all of the petitioner’s debts—including, in some instances, tax liabilities—may be discharged, meaning they are eliminated or no longer legally enforceable. There are two types of bankruptcy:

Liquidation.   A filing under Chapter 7 liquidates assets that are not exempted under federal or state law and distributes pro rata amounts to unsecured creditors. (Keep in mind that proceeds from the forced sale of nonexempt assets in a liquidation bankruptcy may be significantly less than in an arm’s-length transaction outside of bankruptcy.) Any unsecured debts remaining after such distribution are discharged, including certain tax debts. The court forces all creditors (including the IRS) to accept the proceeds of the liquidation in full settlement of all dischargeable liabilities included in the petition. However, a tax lien recorded before the bankruptcy was filed survives the bankruptcy to the extent it attaches to property owned by the debtor at the time of the bankruptcy. Eligibility for a Chapter 7 bankruptcy is limited to debtors whose income is below a “means tested” amount or whose “non-consumer” debts exceed their “consumer” debts.

Deferred payment plans. This type of filing (Chapter 11 for individuals or Chapter 13 for businesses) forces a payment plan on debtors through a trustee. Creditors (again, including the IRS) must accept an installment schedule that pays at least as much of the dischargeable debt as would have been paid in a Chapter 7 proceeding, and which fully pays all secured and priority creditors within five years (11 USC § 1322). Nondischargeable taxes are often priority debts, which must be paid in full over the life of the plan. To qualify for Chapter 13, the debtor must have a steady stream of income: Wages, Social Security, pension payments and receipts of an independent contractor all qualify.

The key takeaways?

  • In order to be dischargable in bankruptcy, the taxes generally have to be “old” in nature.
  • The primary “tax-related” downside to filing for bankruptcy protection is the additional collection time it allows the IRS. Once taxes are assessed, the IRS normally has a total of 10 years to collect them, along with penalties and interest. Therefore, once a bankruptcy case is over, the IRS will retain whatever time remained on the original 10 years, plus the time the bankruptcy case was pending, plus an additional six months (IRC 6503(h)(2)).
By |2016-09-05T13:31:06-06:00September 5, 2016|Categories: Tax Talk|Tags: , , , , , , , , , , , , |Comments Off on Discharging Taxes In Bankruptcy
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How To Report The Sale Of Your Home To The IRS

sold_sign

Sometimes when a homeowner sales their primary residence there can be tax reporting requirements. Generally, this occurs when you have a capital gain on the sale of the home or you sell a home that is not your primary residence (e.g. a vacation home).  However, simply having a gain may not be one of the reporting “triggers” so to speak.  So when do you have to report your sale and just how do you go about doing so?  Read on my friend, read on.

When you must report your sale.
Generally, there are three scenarios where you will be required to report the sale.  These are:

  • The sale results in a gain and you do not qualify to exclude all of it,
  • The sale results in a  gain and you choose not to exclude it, or
  • The sale results in a gain or a loss and the taxpayer received a Form 1099-S

The exclusion of the gain is discussed below so we won’t elaborate on it here. We’re not sure why you would NOT want to exclude the gain, so we won’t address that point either. But we will spend some time on the last point, if you receive a Form 1099-S: Proceeds from Real Estate Transactions.

Form 1099-S is used by the party that closes the real estate transaction to report it to yourself and the IRS.  This may include the settlement agent, the mortgage company, the attorney or the lender.  The key point to remember is that if you received the form, the IRS has received it as well. Now this doesn’t mean that the gain is taxable, but it does mean that you have to go through the hassle of reporting it to the IRS.  What happens if you don’t?  Well, the IRS through it’s matching process is probably going to send you a letter when they don’t see it on your tax return.  As such, we recommend that you avoid the hassle and just deal with it on the front end.

Understanding the gain exclusion.
Generally, to qualify for the exclusion, you must meet both the ownership test and the use test. These test are considered me IF you have owned and used your home as your main home for a period totaling at least two out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Another thing to note is that, generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

If these test are met, a taxpayer can exclude up to $250,000 of the gain if using the single or Head of Household filing status ($500,000 on a return that is Married Filing Jointly).

How to report the sale.
To report the sale, you must know the sales price, the adjusted basis and the resulting gain.  The sales price will be pretty easy to determine.  The adjusted basis is essentially what you’ve invested in the home; the original cost plus the cost of capital improvements you’ve made.  These would include things such as a new roof, a remodeled kitchen, a swimming pool, or central air conditioning. You add these expenses to your original cost to increase your adjusted basis.  Conversely, you will also need to subtract any depreciation, casualty losses or energy credits that you have claimed to reduce your tax bill while you’ve owned the house.  Once you know the adjusted basis, you subtract it from the sales price and that will be the gain you will report.

To begin the reporting process, you would need Form 8949 Sales and Other Dispositions of Capital Assets.  Since the resulting gain is one that transpired during a period longer than one year, it is considered long term.  As such, home sales are reported using Part II of the form.  Items A-E of the form are pretty self explanatory, but it is items F-H that you will want to pay attention to.  Once the proceeds from the sale and the cost are entered, you will have the resulting gain.  Column F is where you enter in the code to enter in why you are adjusting the gain.  For home sales, this is code H.  In column G you enter in the amount of gain that you are excluding as a negative number.  Any remaining gain (which is taxable) would then be reported in column H and carried to Schedule D.

Other items to be aware of.
As with anything tax related, nothing is always as simple as it seems.  With that being said, here are some more obscure things to keep in mind when it comes time to report your sale:

  • The home sale exclusion generally does NOT apply to rental properties.  However, if you convert a former rental property to your principal residence, you may be able to exclude a portion of the gain.
  • If you or your spouse serve on “qualified official extended duty” as a member of the uniformed services, you can choose to have the five-year-test period for ownership and use suspended for up to ten years.
  • In certain cases, you can treat part of your profit as tax-free even if you don’t pass the two-out-of-five-years tests.  The key to remember with this is that this doesn’t mean that you can only exclude a portion of your gain.  It means that the $200,000/$500,000 exclusion is reduced based on the amount of time you spent in the home during the qualifying period.
  • If you inherited your home from your spouse or someone else after their death, your basis will generally be the fair market value of the home at the time the previous owner died.  Note that their are special considerations if you live in a community property state or you jointly owned the home with you spouse.
  • It is possible to extend the break to a second home by converting it to your principal residence before you sell.  However, note that 1) not all the gain will be excludable and 2) calculations will have to be performed to determine how much time the property was used as a rental (if any), primary residence and how much of this occurred after 2008 (when the rules changed)
By |2016-07-04T09:43:28-06:00July 4, 2016|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , |Comments Off on How To Report The Sale Of Your Home To The IRS
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When Both Parents Claim A Child On A Tax Return

In todays day and age, it’s not uncommon for a child’s parents to live apart (i.e. in separate homes).  This fact can sometimes cause “problems” when it comes tax time and determining who will claim the child as a dependent.  A child can only be a claimed as a dependent by one parent. Furthermore, this parent must provide more than 50% of the financial support that the child receives and the child must reside with them for more than half the tax year.

Sometimes the parents try to solve the issue by “agreeing” to trade off who gets to claim the child in what year.  Sometimes, less agreeable parents will simply try to file their tax return before the other parent, thus effectively blocking them from claiming the child.  This in itself can cause problems.  Why?  Well, if the child is claimed by both parents on two separate returns, the IRS will typically “reject” the second parents return (almost instantaneously if they are e-filing) alerting them that the child had already been claimed on another’s return.  The second parent then usually has to fix their return (or amend it if paper filed) to remove the dependent and the associated exemption.

But what if the second parent disagrees that the first parent was entitled to claim the child?  Well, the IRS is then likely to require proof from the first parent that the child either lived with them or that they had the other parent’s consent.  The latter is where Form 8332 comes in.

Form 8332 – Release of Claim to Exemption for Child by Custodial Parent
The “custodial parent” (for IRS purposes) is generally the one with whom the child lived for the greater number of nights during the year.  But if you don’t have to file a tax return, or you reach an agreement with your child’s noncustodial parent, you can let the “noncustodial parent” take the exemption by filling out Form 8332.  All that’s needed is your child’s name, the tax year, your Social Security number, your signature and date. If you prefer to release your claim to your child’s exemption for more than one tax year, enter the same information in part two rather than part one. Once complete, give the form to your child’s noncustodial parent to file with their tax return. If you release your claim for multiple tax years, you only need to fill out the form once: the other parent will attach copies of the original to their return each year.

Taking your child’s exemption back
If you decide to start claiming the exemption again after you’ve released it to the noncustodial parent, you can do so by completing part three of Form 8332. You can do this for a specific tax year or all future years.  Reclaiming the exemption isn’t effective until the tax year following the calendar year in which you complete Form 8332 and give it to the other parent. In other words, if you provide the form in 2016, the earliest you can reclaim the exemption is on your 2017 tax return which you will file in 2018.

What if someone else claimed your dependent?
If you tax return is rejected because someone else claimed your child as their dependent on their tax return, this does not necessarily mean that you do not have the right to claim the dependent.  What this does mean is that the IRS systems cannot apply the tiebreaker rules on an electronically filed return.  With that said, follow these steps:

  1. Call the IRS support line at 1-800-829-1040 and inform them of the situation.
  2. Print your tax return, sign and date it, attach any required forms, and mail it to the IRS.
  3. The IRS will examine your return and that of the other taxpayer, apply the tiebreaker rules, and inform you of the results. This process may take 8-12 weeks.

What are the Tie-Breaker rules for claiming a dependent?

  1. Relationship Test: If only one of the taxpayers claiming the child is the child’s parent, then the child will be the qualifying child of the parent.
  2. Residence Test: If both parents claim the child but do not file jointly, then the child will be the qualifying child of the parent with whom the child lived for a longer time during the year.
  3. Income Test: If the child lived with both parents for an equal amount of time, then the child will be the qualifying child of the parent with the higher adjusted gross income (AGI).
  4. No Parent Can Claim: If no parent qualifies to claim the child, the child will be the qualifying child of the person claiming the child who has the highest AGI.
  5. No Parent Chooses to Claim: If either parent qualifies to claim the child, but they choose not to, the child will be the qualifying child of the claiming person with the highest AGI, but only if their AGI is higher than that of either parent (if the parents are married and filing jointly, use one half of their combined AGI).
  6. Special Rule for Unmarried Parents: If the parents are not married but lived together with their child all year and the child meets all qualifying tests for both parents, then the parents may decide which parent will claim the child as a dependent.
By |2016-01-23T23:42:25-06:00January 23, 2016|Categories: Tax Talk|Tags: , , , , , , , , , , , |Comments Off on When Both Parents Claim A Child On A Tax Return
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How I Left Corporate – Part III

Fighting foot traffic to get to the office? Not anymore!

Fighting foot traffic to get to the office? Not anymore!

If your just joining me for the final installment, let me do a quick recap of what you’ve missed.  In Part I I talked about what sparked my desire to leave, how I came across my road map and what my backup plan entailed.  In Part II I spoke on some of the intricacies of that plan and how it went from ideation to implementation.  In this post I’ll give you all the minutia of how I executed the plan and how that has played out over time.

A Day In The New Life
January 16, 2012 marked my first day heading up operations full time. In my 2012 post A Day In The Life of A Small Business CEO I speak about what that life looks like.  Four years later, daycare drop offs have been replaced with school, but the routine is still mostly the same.  Needless to say, I love what I do and I really don’t see it as work.  Our site/blog has numerous post on having passion about what you do, how to deal with fear and how manage through growth.  But the key takeaway that I would like to share about my new life is that it’s a fit for me and who I am.

Not everyone is “built for this” as I like to say, and rightly so.  Personally, I think you have to be a little bit “off” in order to strike out on your own or head up your own business.  However, if you do so, make sure that you are doing it for the right reasons.  In the 2013 post Why You Shouldn’t Become An Entrepreneur we talk about the 5 reasons you should NOT jump into this lifestyle.

Working The Bridge Plan

Can I come back as a contractor?

Can I come back as a contractor?

As I mentioned, my bridge plan was to work as a contractor via an agency.  So, when I was getting ready to leave corporate, I reached out to many of the placement agencies that I had used to get full time positions and asked them if they had a contract division.  Some of them did and some didn’t.  Needless to say, one agency found my resume in April of 2012 and got me placed on a 6 month contract.  This allowed me to pay my bills and still work on the business, which of course was in a slow period since it’s seasonal.

Now, contract work was originally only supposed to be a two year thing.  However, I found myself financially in a position where I needed to do it again in year 3 due to a lot of unexpected incidents (e.g. broken collar bone in a bike accident, car repairs, medical expenses, etc).  In year 4, I was able to reduce my schedule slightly (e.g. 2 days a week versus 5 days) and in a few weeks I will be in the business 100% (hopefully permanently but you never know).

The key point of the bridge is that it 1) is designed to tide you over until the business can support you and 2) it should also serve a purpose outside of financial motives.  What I mean by the latter is that it should enhance your skills, give you exposure to new things (e.g. industries, markets, etc), provide additional training for your new life or at a bare minimum, maintain your skills so that you can continue to be marketable.

My contract assignments kept my skills sharp as I essentially worked in the FP&A department of two different companies in two separate industries.  This essentially extended my corporate FP&A career by an additional 4 years.  It also allowed me to see how different industries worked (e.g. energy and heavy durable goods) as well as work with new teams of highly talented people.

Watching The Company Grow
Looking back at 2012 and where we’re at the end of 2015 makes my head spin.  I remember how mad I was at the end of 2012.  The short version of it was that the company performance was far off from our initial projections and I couldn’t figure out how or why.  But I quickly trained myself to focus on the mantra “the only thing I can control on a daily basis is my attempt to go out and find sales.”

Subsequent to that year I would go on to work with Intuit as an Ask A Tax Expert and in their Personal Pro product due to the acquisition of a platform I was participating in.  Our client base would grow by double digits in each of the years from 2012 thru 2015.  We got picked up by some pretty sizable companies to handle their finance function.  And somehow in the midst of all this we launched a secondary web site to help folks file all of those old tax returns!

While we’re now at the point where things are starting to stabilize, I have to reiterate that it wasn’t easy.  That “not easy” part is outlined pretty well in the post Do You Really Have What It Takes To Start A Business.  Thus I would encourage you to read it if you have some time.  But in summary, if you are looking on the “how” to leave Corporate America piece, it involves:

  • Identifying what your second or new life will look like
  • Outlining how you can bridge your current and new life
  • Developing that bridge plan
  • Implementing and working that bridge as your new life takes shape
  • Adjusting and remaining fluid until you arrive at your destination

I hope that you have gotten something out of these posts.  Going from corporate to CEO took me many years.  I had to learn and work through lots of lessons, some of which I had no direct mentoring on.  But if you have the desire to make the change and the heart/drive to learn and then try new things, I am pretty confident that you can achieve the success you desire.

Best of luck in your endeavors and here is to a prosperous 2016!

Mr. Jared R. Rogers, CPA
President & CEO
Wilson Rogers & Company, Inc.

By |2015-12-31T17:26:33-06:00December 31, 2015|Categories: Who's The Boss?|Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |Comments Off on How I Left Corporate – Part III
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How I Left Corporate – Part II

In Part I I talked about what sparked my desire to leave, how I came across my road map and what my backup plan entailed.  In this post we’ll go over some of the intricacies of that plan and how it went from ideation to implementation.

Devising The Plan

No more Brooks Brothers, Brothers Brooks?

No more Brooks Brothers, Brothers Brooks?

The first post mentioned that it was the book by Jeff Cohen that gave me the roadmap on “how” to make my transition. I will not share everything that is in his book Working Less, Earning More, but I will highlight its essence.

Essentially, the key to working less and earning more is to margin up the payout for the time/effort that you put in. For example, if you can make $40 an hour doing part time work 40 hours a week or $500 an hour for doing 4 hours of work per week, which do you choose? You choose the second because you 1) make $2,000 versus $1,600 AND 2) you still have 36 hours in the week to make more money.

So the key to the equation is that your second life has to produce more output (money) for your input (time/effort).  Thus your “new life” can take the form of being a consultant, doing freelance work, running your own business or just living off passive income.  However, once you have identified your new life, you essentially have to “bridge” from your current one to the other. So how do you accomplish this?  Per the book you can do this by:

  1. Switching to part time work
  2. Negotiating a consulting gig (with your current employer)
  3. Working freelance assignments (at night)
  4. Creating passive income (like purchasing rental property)
  5. Cut a deal with your spouse

I already knew that my second life was running my/our own business.  However, at the time I was thinking of all of this, I was well off from the bridge phase.  Thus, my shift actually involved a “pre-bridge” phase.  As I mentioned in the first post, this pretty much involved:

  • Building the business part time
  • Creating a fallback position within corporate

I wanted to do the two things above for a few reasons.  First, I wanted to scale the business up to a point that I could then transition into it with little disruption to my finances.  Second, I wanted a “plan B” should things not work out.  If I had to come back to the corporate world, I wanted it to be at a certain level (e.g. Manager).  Thus, while the business grew, I focused on attaining said fallback position (which I did).  Once that occurred, it was just a matter of waiting for the opportune time to present itself to make my exit.

Getting Prepared 

Leaving the rat race in 3...2...

Leaving the rat race in 3…2…

Preparing to leave until all of the pieces were aligned actually involved a lot. This included:

  • Curtailing finances and my lifestyle so that I could survive the startup phase.
  • Switching to my spouses health care.
  • Agreeing that she would stay on in corporate while I transitioned full time into the business.  It’s important to outline roles going into the transition as it cuts down on friction when it actually begins to happen.
  • Outlining what I would be doing to bridge the two worlds.  I decided to do something similar to consulting, but a little more “guaranteed” so to speak.  I decided to become a contractor and persue engagements via an agency during the time outside of tax season.

Now, if you are thinking of leaving and you don’t have a spouse/partner who can help you bridge, don’t assume that all hope is lost.  This just means that you have to 1) build a longer bridge or 2) build one that is strong.  How?  You can take part time/contract work that gives you flexibility to build your business gradually.  You can work for your employer in a part time consulting position (e.g. 6 months to a year) until you train a replacement or work yourself into your new life.  The possibilities are endless; you just have to think creatively.

The Departure

Catching the last train for the last time

Catching the last train for the last time

In 2011, the IRS, claiming authority under Section 330, issued a new rule making unregistered tax return preparers subject to Circular 230.  Much noise was made about this and it looked like the opportunity I had been waiting on.  Essentially, 60% of the tax preparation market looks to paid preparers to have their taxes done.  Of the paid preparer market, 40% is comprised of Attorneys, CPAs and Enrolled Agents (EAs).  The remaining 60% is made up unregistered preparers who do not hold one of these designations.  By regulating this group of preparers (and subjecting them to testing requirements) it appeared that a large population of preparers might be withdrawing from the market (thus effectively shrinking supply and artificially elevating demand).  Unfortunately, later in 2012, the case of Loving vs. IRS was brought to trial in an attempt to stop the IRS’ actions.

Needless to say, in late 2011 my wife and I made the decision that the timing was right for me to leave.  We quickly put some of the last “planning” pieces in place and I effectively “retired” from corporate america on January 13, 2012.

In the next and final post, I will talk about how I implemented my bridge and where things are now.

By |2022-08-13T17:10:20-06:00December 30, 2015|Categories: Who's The Boss?|Tags: , , , , , , , , , , , , , , , |Comments Off on How I Left Corporate – Part II
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How I Left Corporate – Part I

So…admittedly I haven’t been posting my personal exploits to our blog that much this year.  It hasn’t been for lack of wanting to, it’s just been because I’ve been trying to manage a company that seems to have a mind/life of it’s own at times.

Needless to say, this month I had some time to ponder some things.  Like the fact that my 4 year anniversary from departing Corporate America will be here in a matter of weeks!  So with that said, I figured I would end 2015 with a 3 day blitzkrieg of blog post related to the subject.  If you’ve ever thought about leaving the friendly confines of a gig to strike out on your own, but didn’t know “how” to do it, these post will share how I went about it.

What sparked the desire to leave?
Over the course of my 13 year corporate career, I believe that I had a nice run. I worked at four well respected employers, held several positions, made decent career progression and money to boot. I wasn’t a “superstar” when it came to politics, but I could hold my own and I understood most of the intricacies of the game.

Downtown! Where is Macklemore?

Downtown! Where is Macklemore?

So why was I considering leaving?  Probably for many of the same reasons that you may have contemplated it.  But when it came down to pinning a “single” reason, I’d have to say it centered around progression.  I don’t believe in “glass ceilings” as I think that you can get around that to a certain extent (e.g. switch employers).  But I do believe that those in the Ivory Tower will only let you hold the roles that they think you are fit for.

How many times have you seen a senior level manager or even a C Suite executive be mentioned in an announcement where it states they are “leaving to pursue other interest” or something to that effect?  Really?  This person makes like $500K+ and they are leaving?  Or did you really mean 1) you’re firing them, 2) they don’t want to go along with the plan or 3) their vision for themselves doesn’t line up with yours so they are out of here?

Needless to say, if I stayed around I think I had the credentials and smarts to make it to upper management.  But what if I wanted to run things?  Would they let me?  What if I wanted to make a million dollars?  Would they pay me that?  While the answers to those questions could have all been yes, there was one way that I could give myself a better probability of those things occurring…striking out on my own.

How I stumbled upon my roadmap
Once I made the decision to leave, I had to come up with a way to make it all happen.  I mean, I like to take risks in life, but I like for them to be calculated.  You know, the ones with sizable upside and minimal downside?  So walking into the bosses office, kicking my feet up on their desk and telling them I quit without having a backup plan was not in my game plan.

The book that gave me my entrepreneurial keys.

The book that gave me my entrepreneurial keys.

One day I was checking out at my neighborhood grocery store.  While standing in line I came across the book shown above.  Now, I was not necessarily interested in working less and earning more, but the title caught my attention.  Needless to say the book’s author, Jeff Cohen, outlined a plan for transitioning from the working a gig life to working for ones self.  So with that, I studied what the book had to offer and then moved towards building the plan.

Creating the backup plan
My plan to leave was actually broken down into the following three phases:

  • Building the business part time
  • Creating a fallback position within corporate
  • Preparing to leave once when all of the pieces were aligned

The plan began in late 2005 and culminated with my resignation in January of 2012.  So as you can see, it took almost 7 years for it to “fall into place” so to speak.  In the next post I will elaborate on each of those phases and exactly how I prepared to leave (e.g. financial, health care, etc).

By |2022-08-13T17:09:09-06:00December 29, 2015|Categories: Who's The Boss?|Tags: , , , , , , , , , , , , , |Comments Off on How I Left Corporate – Part I
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Uber, Lyft and Filing Your Income Taxes

We’ve all been there.  The thought of being  your own boss and leaving the 9-to-5, Monday-through-Friday grind to someone else.  Some of us take that jump and for others, the confines of a nice cubicle and a predictable  deposit into their bank account are more than enough.  But what if you are thinking of striking out on your own and joining one of those ride share companies?  Well, we strongly urge you to read this post as it has a LOT of information in it for you to consider before you take the plunge.

Worker Status
The first thing to know is that when you work for Uber or Lyft, you are not doing so as an “employee.”  Instead, you will be classified as an independent contractor.  As presented on Uber’s website:

“All Uber partners are independent contractors, so we do not withhold any taxes and partners are entirely responsible for their own tax obligations.  If you’re a partner based in the United States, you will receive a 1099-K and/or 1099-MISC form to report income you earned with Uber. You’ll receive one or both depending on the type of payment you earned in the calendar year.”

In this post we discuss the implications of being paid as an independent contractor versus an employee.  The big difference comes down to the fact that as an independent contractor 1) no taxes are taken out of the pay received and 2) the fact that the individual has to pay self-employment taxes in addition to income taxes.

Tax Considerations
In this post we talk about how those who are “self-employed” typically file their taxes and some of the issues they face.  What we’ll now discuss are those items specific to “drivers for hire” like taxi, livery and ride share operators.

Income  This one is pretty straightforward.  You report all of the money that you received while operating, including tip income.  Where we see people get into trouble is when they under report.  What do we mean?  Well, the IRS is going to get a copy of that 1099-K or 1099-MISC that you received.  If you report at least the amount that is shown on the document then you probably won’t hear anything from the IRS.  But if you report an amount that is LESS than what is shown, expect the IRS to come a knocking.  Why?  Well the IRS is going to ask you ” why did you only report $4,000 of income but Uber says you made $8,000?  We think you made at least that much but your return doesn’t reflect that.”

Now what if you say “I didn’t get a form so the IRS doesn’t know what I made!”  Can we say tax evasion?  So make sure you report every red cent that you made to stay out of trouble okay?

Operating Expenses  This one is the complicated one.  A taxpayer who uses an automobile for business purposes can figure their deduction by comparing the standard mileage rate with actual expenses and choosing the larger amount.  One would perform this analysis in every year and take the larger amount.  However, if the actual expense method is chosen in the first year, it must be used in all subsequent years until the vehicle is no longer used for business.

If the standard mileage rate method is used, the deduction is calculated by multiplying the number of business miles driven by the applicable standard mileage rate. The standard mileage rate eliminates the need to keep track of actual costs.   It is used to replace the “actual” cost of depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees.   It does not include:

  1. Interest expense for a self-employed individual
  2. Personal property taxes
  3. Parking fees and tolls

The expense above would (depending on the circumstances) be claimed in addition to the amount calculated via the standard mileage rate.  Now, sometimes people (and tax practitioners) wonder if a “driver for hire” can use the standard mileage rate. Well back in 2010, the IRS issued Rev Proc 2010-51 and within it you can find that Rev Proc 2009-54 was modified as follows:

“Section 4.05(1) is modified to allow taxpayers to use the business standard mileage rate to calculate the amount of deductions for automobiles used for hire, such as taxicabs.”

You can also find language under the standard mileage discussion of Publication 463 that reads that “you can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above.”

Now, If you decide to base your deduction on your actual expenses, note that you should keep track of the following:

  • Business Percentage: The taxpayer must calculate the business percentage of vehicle expenses. Keep track of business miles driven for the year and divide that amount by the total miles driven for the year.
  • Cost of depreciation (leave this to your tax software or gal/guy)
  • Lease payments
  • Registration fees
  • Licenses
  • Gas
  • Oil
  • Insurance
  • Repairs
  • Tires
  • Garage rent
  • Tolls
  • Parking fees
  • Sales tax paid on the purchase of a car is added to the basis of the car and deducted through depreciation.
  • Fines for traffic violations are never deductible, even if incurred while driving for business.

Business Expenses  This is for all of the items that aren’t directly related to the cost of vehicle operations, but are allowed.  Buy bottles of water for your riders?  Have to pay a monthly cell phone bill so that riders can hail you?  Both are deductible expenses.  We suggest that you consult Publication 535 to see what is allowed.  The one thing to keep in mind is that if an item is used for both business and personal use, you should keep track of your business use as that is the percentage of the expense that you may deduct.

Comprehensive Example & Sample Tax Return

*** Note: This example was originally posted in 2015.  It has been updated to reflect numbers applicable to 2022 and the associated tax returns.***

If you click this link, you will be able to download the sample tax return that is used in this example.  Having it handy will help you quickly follow along with what we’re about to discuss. Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.  Okay, the lawyers are happy now.  Shall we begin?

Need a Lyft?

Need a Lyft?

So, our good friend Memphis Raines has decided to earn some extra cash with one of the ride share companies.  He’s pretty good at what he does, get’s passengers to their place really fast and makes sure that he keeps and IRS Compliant Mileage Log (he doesn’t want the tax court disallowing his deduction).  During the year he raked in close to $63,000 in income for all that driving.  So what does Memphis’ tax return look like?  Let’s examine it.

Page 3 shows Mr. Raines’ Schedule C or Profit or Loss From Business.  He completes the top section listing all the pertinent information for his business.  If you look at the form, you will see that it contains very little information.  Looks like he spent close to $17,000 on car expense, another $143 on meals (drinks for his passengers) and another $2,000 for his business cell phone.  But let’s look a little closer at the car expense.

As indicated above, Memphis is allowed to take the larger of his actual expenses OR the amount calculated by using the standard mileage rate.  If you look at page 11, you can see all of the expense that Memphis spent to make that $63,000 in revenue.  But the thing to note is that he used his car 80.4% for business. The rest of those miles?  Well, let’s just say they were spent with his kid brother Kip and some girl named Sway!  Anyway, looks like he spent $13,500 (ignoring the fact depreciation isn’t a cash expense) to make all that money.  It also looks like he drove about 27,000 miles in a year – ouch!  So if you take the standard mileage deduction ($0.605 in 2022 when you factor that the rate changed mid year) and multiply in by the business mileage, you get a deduction of around $16,700.  Since that is larger than the actual expense deduction of $13,500, which do you think he will take?

Was it worth it?
So Memphis had fun driving around all year.  But was it worth it?  Only he knows the answer to that, but what we can analyze is the financial impact.  Page 1 shows that Memphis had a net profit from business of around $44,100 (i.e. $63,000 in revenue less $18,900 in expenses).  As Mr. Raines is single, he has very little other deductions.  He takes the standard deduction and receives the 20% qualified business income deduction granted to those who are in business for themselves.

This leaves him with taxable income of around $22,400.  On this income, he has to pay $2,486 in income taxes.  But wait, Memphis is his own boss right?  Well, that means that he has to pick up the share of Social Security and Medicare taxes that an employer usually has to pay for each employee it has.  The bill?  Another $6,200 in taxes!  So Memphis winds up with a whopping tax bill of around $9,000.  As he did not make estimated tax payments he’ll need to come up with a way to pay the IRS.

So in looking at this from another angle, Memphis took in $63,000.  He spent another $11,000 in real cash to make all that money.  He also has to pay the IRS around $9,000 in taxes.  So net, he took home around $43,000 when it’s all said and done.  Not bad for being your own boss.  But he did put about 27,000 miles on that sweet car of his, which will make selling it harder once it’s days as a ride share vehicle are done and it’s just hanging out in videos by The Cult.

Need Tax help?  Well, if all of this sounds like way too much to handle on your own and you’d rather let a professional deal with it, why not give us a call or shoot us an email?  Our information can be found at the bottom of this page and we’d be happy to help make sure that you stay on Uncle Sam’s good side!

By |2023-01-16T20:44:52-06:00October 30, 2015|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |Comments Off on Uber, Lyft and Filing Your Income Taxes
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Our 10th Year Anniversary!

 

Thanks for the past 10 years!

Thanks for the past 10 years!

So this tax season was a little more challenging than anticipated; thus the reason this post is coming out in October.  Needless to say, back on September 14, 2005 Wilson Rogers & Company came into existence.  That means that 2015 marks 10 years of us being in business!  A lot has happened in that time frame.  So with this post, we thought we would not only recap our history, but just how we were able to make it that long.

2005
So after years of Jared getting “hey, your’re an accountant, I have a tax question for you.” he and Aaronita Wilson decided to start a tax company.  “What are we going to call it?” was the question for a while.  “How about we call it Rogers Wilson” Aaronita would say.  “Nah, how about Wilson Rogers?” Jared replied.  “Kind of sounds like a person.  Some estately dude on a horse playing polo.  It also sounds like another tax company we know…”  And with that, Wilson Rogers & Company took form.

2006
This was the first year that we actually started doing returns for pay.  Some of the key highlights:

  • Mr. Asberry becomes “client number one” by sending us his information.
  • Mr. Simpson becomes the first transmitted return as he was quicker to process than Mr. Asberry!
  • Jared and Aaronita get married on September 22, 2006, thus effectively removing a person named “Wilson” from the company.  Don’t worry, people still ask to speak to Wilson Rogers when they come to the office!

2007-2010
These were the “slow years” for the most part as there really wasn’t much that changed.  Client levels stayed pretty consistent and revenues were largely flat.  This was primarily due to the fact that both Aaronita and Jared maintained full time jobs within Corporate America.  This would start to change in the following year.

2011
Sometime towards the end of 2011, the decision was made that Jared would leave Corporate America to head up our first “retail” office.  Up until this point, all the tax returns were done “in house” by making appointments to pick up documents, preparing the returns at night and then providing the completed return to the client at a later date.  2011 was filled with decisions about health insurance, resignation dates and how to outfit the new office.  Somehow, someway, it all managed to come together.

2012
Tax Season? Ready, Set, Go!

Tax Season? Ready, Set, Go!

So this was the first tax season with the new office.  If you want to read the recap on how it went, you can check that out here.  Some of the things that you won’t see in this post:

  • Mr. Campbell had the honor of becoming “retail client number one” on a cold day in January.  He had all his paperwork…we didn’t have the nice frilly folders to give him his tax return in. Oh man…the early days!
  • At the same time we were opening the office, Jared was moonlighting with the fine folks of Intuit with their Turbotax Ask A Tax Expert (ATE) team.  It was also the year that he broke the wrist on his dominant hand and had to finish out tax season using his left hand.  Talk about bad handwriting!
  • We also took many steps into the marketing world to help get the word out.  One of these included developing relationships with sites like Teaspiller (which was later acquired by Intuit)

2013
So we survived another retail office tax season.  That recap can be found here.  The one standout item for this year was that Teaspiller was purchased by Intuit and folded into the TurboTax brand.  What that did was drive additional tax preparation business to us that was above and beyond what we had projected.  It also continued Jared’s relationship with Intuit, which further broadened in late April when he became certified as a Quickbooks Proadvisor.

2014
This was the year that we hired “employee number one” so that Jared could have a little help.  You can read all about Stephanie in a little interview that we did here.  If you want to read about the season, that is located in this post.  That post will also talk about how we began using bus benches to advertise to local traffic in our area!

2015
This was our fourth tax season with the office, and man did things really pick up.  They picked up so much that we hired Patricia as “employee number two” to keep up with things.  This was also the year that we launched www.fileoldtaxreturns.com to offer those needing to file older tax returns an option to do so.

How Did We Survive 10 Years?
Everyone knows the statistic that most businesses fail to make it to the 5 year mark.  While we have been lucky enough to avoid the top 5 reasons businesses fail, we must admit that it takes a little more than that to last for 10 years.  So what are the keys to the castle?  In summary we think:

  • Provide good service.  If you don’t do that, you’ll be lucky if you last beyond a year.
  • Value your customers. We have wonderful customers and we try to let them know that as frequently as possible.  Without them, there would be no Wilson Rogers & Company.
  • Stand out from your competitors.  We’ve all heard that insanity is defined as doing the same thing over and over and expecting a different result.  If you look, sound and act just like your competitors, expect to get their results – average!  So be bold. Do things differently. Give the public what they want, not what YOU think they want.
  • Make adjustments when necessary.  Getting to 10 years has not been a straight line drive.  We’ve had to adjust and pivot along the way.  Have we made mistakes? You bet! Have we learned from them? Continuously.  The key is to make adjustments when needed, forget the past and try to do better in the future.  If you can do that (combined with the above points), then maybe one day we’ll be reading about how you survived your first ten years.

Here’s to a bright future!

By |2015-10-19T08:57:45-06:00October 19, 2015|Categories: General Ramblings|Tags: , , , , , , , , , , , , , , , , , , , , |Comments Off on Our 10th Year Anniversary!
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What Is Depreciation Recapture?

House

The term “depreciation recapture” refers to the amount of gain that is treated as ordinary income upon the sale or other disposition of property.  Gain that is treated as capital gain is not depreciation recapture.  If you do your own taxes and you never heard of “depreciation recapture” – it’s time to get an accountant. If you already have an accountant and they never discussed “depreciation recapture” with you – you need a new accountant!  Either way, this post will walk you through some of the basics.

A Simple Example
Let’s begin with an example. You bought a rental property in 2007 for $200K. True, this was right before the “great financial crisis” and your property is worth less, but that is besides the point (for the moment).  In 2014, you manage to sell it for $175K. If life was simple, you could get away with the following calculation: your loss is the $175K sales prices less the $200K purchase price, or $25K. You held the property more than a year, therefore it’s “long-term.” Done right?  Not so fast my friend.

Unfortunately, it is not so simple, and instead of having a loss, you actually have a gain. How come? Because of depreciation. Every year since 2007 you were depreciating the property, correct?  Well, that depreciation lowered your tax bill and you received a benefit because of it.  But if you think you got a free ride from the government, think again.  What you were saving on depreciation comes back to haunt you now when you sell the property. So (for simplicity) let’s assume that each year you received $7,272 in depreciation. This is approximately $51K of depreciation over the 7 years.  Thus, the building wasn’t really wrth $200K for tax purposes, but only $149K.  SInce you sold the building for $175K, you really had a $26K gain!

It gets worse. Under “normal” circumstances, the tax rate on most net capital gain is no higher than 15%. Some may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, a 20% rate on net capital gain applies in tax years 2013 and later to the extent that a taxpayer’s taxable income exceeds the thresholds.  Furthermore, there are a few other exceptions where capital gains may be taxed at rates greater than 15%:

  1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
  2. Net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate.
  3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

In case you missed it, it’s that last bullet that refers to depreciation recapture.  And yes, it’s taxed at 25% versus 15%!

The actual calculations can get quite involved depending on the amount of the gain, the amount of depreciation taken and the tax bracket you fall into.  But once again for simplicity (and illustration), since you took $51K of depreciation, the entire $26K gain would be considered depreciation recapture and you could pay $9K in taxes related to it.

If you’re tired at this point, we don’t blame you. Albert Einstein is quoted as saying that the hardest thing in the world to understand is the income tax.  As seen above, the IRS does a pretty good job proving his point!

Tax Planning Tips for Depreciation Recapture
So just how can you get out of depreciation recapture?  The short answers is you can’t, but there are things that can help or delay it’s payment.  For example, when a rental property is sold, any passive activity losses that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax.

By the way, you’ve heard of 1031 exchanges, haven’t you?  Next time, you may want to think about using one before you sell your property.  When a rental property is sold as part of a like-kind exchange, both capital gains and depreciation recapture taxes can be deferred until the “new” property is disposed of.

There’s one tax strategy, however, that will not help. Since depreciation is recaptured when the asset is sold, it is reasonable that some people would think that by avoiding claiming depreciation they can also avoid the recapture tax. This strategy does not work, because the tax law requires depreciation recapture to be calculated on depreciation that was “allowed or allowable” (Internal Revenue Code section 1250(b)(3)).

By |2015-08-16T16:33:53-06:00August 16, 2015|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , , , , |Comments Off on What Is Depreciation Recapture?
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Deducting Business Start Up Cost

Business organizational costs are amounts paid, or incurred, to create a corporation or partnership business entity.  Start-up costs are those paid or incurred for investigating or creating an “active” trade or business. Start-up and organizational cost include:

  • Analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Expenses incurred while investigating the purchase of a business.
  • Training wages for employees who will work in the business.
  • Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  • Cost of professional services, such as executives and consultants.
  • Legal fees incident to the organization
  • Accounting fees incident to the organization
  • Filing fees.

If you need a template to track your startup or organizational cost prior to deducting them, use this one from the fine folks over at Score.com.

Deductibility.
Unlike expenses incurred as part of the normal ongoing operations of a business, one must “elect” to amortize (i.e. deducted over a period of time) organizational and start up cost  in order for them to be deducted.  The current rules allow for the following:

  • You are able to deduct up to $5,000 of your qualifying start-up costs in the first year.
  • The first-year deduction starts to phase-out $1 for $1 when your expenses reach $50,000.  Once your expeneses reach or exceed $55,000, the first year deduction is fully phased out.
  • Up to $55,000 of start-up expenditures can be deducted ratably over a 180-month period beginning with the month in which the active trade or business begins.

To aid in understanding how the above works, here is how you would make your first year deduction:

If start-up costs are $52,000, $3,000 can be deducted in the first year.  You can amortize the remaining start-up costs over 180 months starting with the month business begins.

Making the Election Electing the deduction.
The election to currently deduct up to $5,000 of start-up or organizational costs (or both) is made by claiming the deduction on the tax return for the tax year in which the trade or business begins.  Note that the tax return must be timely-filed, including extensions.  Furthermore, no separate statement is required for making this election.

Electing to amortize.
The election to amortize start-up or organizational costs (or both) is made by filing Form 4562, Depreciation and Amortization, and completing Part VI. Make sure that you:

  • Attach a statement listing a description and amount of each cost, date incurred (for organizational costs), month the business began or was acquired, and the amortization period (generally 180 months).
  • Use separate statements for start-up costs and organizational costs.

Correcting an omitted election.
An election to deduct or amortize costs that was omitted on a timely-filed return (including extensions) can still be made by filing an Amended Return within six months of the original due date of the return (excluding extensions).

By |2020-09-21T12:42:38-06:00July 31, 2015|Categories: Tax Talk|Tags: , , , , , , , , , , , , , , |Comments Off on Deducting Business Start Up Cost
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