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Withdrawal of Notice of Federal Tax Lien under IRS Fresh Start Program

House in ChainsIf you are an individual, business with income tax debt or an entity that has gone out of business, you may be entitled to have the IRS withdraw the Notice of Federal Tax Lien under the Fresh Start Program.

To qualify, you must enter into a direct debit agreement with the IRS and

  • The tax debt must be less than $25,000;
  • Must be able to be paid off within 60 months;
  • You must be in full compliance with other filing and payment requirements;
  • You must have made three consecutive direct debit payments;
  • You cannot have previously received a lien withdrawal for the same taxes unless the withdrawal was for an improper filing of the lien; and
  • You cannot have defaulted on your current, or any previous, direct debit installment agreement.

If you are currently on a regular installment agreement, you may convert to a Direct Debit Installment Agreement.

Filed Under: Tax Article, Tax Lien, Tax Relief Tagged With: IRS Tax Lien

IRS Announces That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes

Filing Status Married - Same Sex MarriagesThe IRS ruled today that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including

  • filing status,
  • claiming personal and dependency exemptions,
  • taking the standard deduction,
  • employee benefits,
  • contributing to an IRA, and
  • claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement.

For help with filing an amended return, contact us now!

Filed Under: Tax Article, Tax Planning Tagged With: Refund, Same-Sex

Tax Tip: Deductibility of a Charitable Contribution of Intellectual Property

charitable contribution of intellectual propertyQuestion: Is custom software that is donated to a 501(c)(3) charity deductible? What about the data that goes with the software?

Answer:

An important principle when considering the donation of intellectual property is that for the gift to be deductible, the donor must transfer all substantial rights in the intellectual property such that the donation would be considered to be a complete assignment of all rights. That is, one cannot merely let the charitable organization use the intellectual property. The organization must, for all intents an purposes own the intellectual property.

Rights in software are generally based on copyright. In general, for the donation of a copyright to be deductible, both the tangible item and all rights in the copyright must be transferred. This is referred to as an assignment, rather than a license. Software that is purchased at the store wouldn’t qualify for this treatment. Prepackaged software is generally licensed to the purchaser. Therefore the purchaser could not transfer the copyright, since the purchaser of prepackaged software most likely does not own the copyright. Additionally, there may be some limitations on the purchaser’s ability to transfer the license in the software.

Similarly, a compilation of data may be intellectual property classified as a trade secret. Similar principles would apply. That is, the donor would have to transfer the data and all rights in the trade secret and its use.

The correct deductible amount for the donation of the intellectual property is the fair market value less any gain that would have been realized if the property had been sold at its fair market value on the date of the donation.

Filed Under: Tax Tips

Tax Tip: Deductibility of Off-Shore Contract Labor

Question: Is the expense for off-shore labor deductible even though no 1099 is issued? During an audit, the IRS told me that the expense wasn’t deductible because the contractor was not an employee and neither was a 1099 issued.

Answer:

In general, a 1099 is not required for a valid business expense to be deductible. Keeping accurate records of the payment and the purpose for the payment is required. However there is a penalty for the failure to issue a 1099 when one is required.

Assuming that the off-shore contractor is only a contractor and not a partner or business owner or has some other relationship to the hiring business, the payment to the off-shore contractor would likely be a deductible expense for contract labor. The expense would be listed on Schedule C.

If the labor is performed entirely outside of the US and the person is a foreign individual, a 1099 would not be necessary as the income is “foreign sourced income” and the contractor is not subject to US tax.

However, there are other issues to consider in dealing with foreign persons. For example there may be liability for withholding such as if the off-shore contractor has a presence in the US. In such a case the payment to the developer would be what is known as “effectively connected income” and there may be a requirement to withhold 30% of payments to the developer.

International tax is a complex area and numerous rules and exceptions may apply. In the case of international taxation and audits, representation that is familiar with international taxation is strongly recommended. Note that not all IRS examiners are intimately familiar with the international tax provisions. This is where competent representation could be very helpful.

Filed Under: Tax Tips

Tax Tip: Characterization of Income from Angel Investments

Question: Are self-employment taxes due from the managing members of an LLC when the only income to the LLC is earnings from angel investing activities.

Answer:

By default an LLC is a disregarded entity unless an election is made to be treated as a corporation. When an entity is disregarded, income and losses flow through to the members and maintain their characteristics.

The characterization of gains and the issue of self-employment taxes owed by the managing members is complex question and is very fact dependent. However, in general, there are three broad characterizations of activity, each with its own implications for gains and self-employment tax.

The first categorization is that of “securities dealer”. A securities dealer is one who is engaged in the trade or business of selling securities. A securities dealer will hold an inventory of securities for sale to customers in the regular course of business. Securities held by such a dealer are not considered capital assets and therefore the gain or loss realized is ordinary gain or loss and would be subject to self-employment tax.

A second categorization is “securities trader”. A securities trader is one whose activities rise to the level of a trade or business, but they do not hold an inventory of securities for sale to customers. A securities trader derives income based on the changes in price of the held securities. Since the securities are not held for sale to customers in the ordinary course of business, the securities trader can realize capital gains and losses from the sale of the securities. IRC 1402(a)(3)(A) specifically excludes capital gains from income subject to self-employment tax.

Third is an “investor”. An investor is not engaged in a trade or business. Hence gains or losses on securities transactions are typically capital and not subject to self-employment tax.

It is likely that an LLC engaging in angel investing will be considered as a securities trader, the gains realized from the investment activities will be considered capital gains and will be exempt from self-employment taxes.

Filed Under: Tax Tips

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