Tax-free employee reimbursements under an accountable plan.

Ref: IRS Revenue Rulings 2012-25 and 2012-37.

Reimbursements to employees under an accountable plan are not included in employee wages and are fully deductible by the employer. Common examples are reimbursements for mileage using the IRS standard mileage rates and reimbursement for employee cell phone use.

3 tests: In order to qualify, a plan must meet three tests: Business connection, substantiation and returning excess. These are discussed in Regulation 1.62-2.

IRS discusses the Business Connection Test in the above Revenue Rulings. In summary, the business connection test is met if the plan is not “wage rechacterization,” the expenses are incurred by the employee, and the expenses are in connection with the performance of his/her services.

Used correctly, this rule can greatly benefit both the employer and employee. An example would be reimbursement of employee business mileage at the 2014 rate of 56 cents per mile (when the employee is driving a hybrid car). The employer receives the deduction of 56 cpm and the employee receives the reimbursement tax-free.

Call us for additional discussion.

US Senate postpones action until after November election.

US Senate Majority Leader Harry Reid confirmed in June that there will be no actions on the extender package in the Senate until after the midterm election in November.

Depreciation for small businesses: This means that the IRC Section 179 election for accelerated depreciation on business property acquired in 2014 will remain at a maximum of $25,000 for the time being. We won’t know about restoration to the old limits (or somewhere in between) until November at the earliest.

Ref: Regulation 1.67-4; TD 9664, 5/8/2014

Some trust/estate expenses are not fully deductible. On May 8, the IRS issued final regulations listing those administrative-type expenses which will be allowed as fully deductible on a trust or estate return.  Among those are:

1. Ownership costs: Such as property tax on non-rental real estate.

2. Tax preparation fees tied to the trust/estate: Examples given are fees to prepare estate returns, trust returns and the decedent’s final individual income tax returns (year of death).

3. Appraisal fees: Incurred to value trust/estate assets as of the decedent’s date of death (or the alternate valuation date) or subsequent valuations for any other valid trust/estate purpose.

4. Fiduciary expenses: For example, probate court fees/costs, fiduciary bond premiums and cost of certified copies of the decedent’s death certificate.

5. Investment advisory fees: If greater than those charged to an individual investor. Examples would include professional advisory fees tied to advice regarding the beneficiaries of retirement accounts or fees charged to create a listing of security values as of the date of death (or alternative valuation date).

For further information, please contact our office directly.

Source: Appeal of Mendoza; Cal St. Bd. of Equalization, Case No. 575960

In Mendoza, a taxpayer was notified by the IRS that Ohio wages had been reported under his Social Security Number. Mr. Mendoza had never worked in Ohio and was a full time California resident. He took NO STEPS to report his identity theft. Eventually, the CA Franchise Tax Board assessed taxes on those wages. He appealed and lost because he could not provide any evidence to show that he had reported and fought the identity theft.

If you suspect identity theft, you should immediately:

1. File a police report with your local jurisdiction.

2. File Form 3552, Identity Theft Affidavit, with the California FTB.

3. File Form 14039, Identity Theft Affidavit, with the IRS.

4. Seek assistance from a credit protection agency to “lock down” your credit and regularly monitor your credit reports.

Summary: It’s important to act quickly to limit future damage including tax assessments for income incorrectly reported under your Social Security number.

April 1, 2014: Potential great news for individuals in foreclosure or facing a short sale.

A bipartisan bill, the EXPIRE Act, was introduced by the Senate Finance Committee. One major feature of the bill is the restoration of the exclusion of up to $2 million of discharged principal residence indebtedness from gross income under Internal Revenue Code Section 108.

THIS IS NOT YET LAW, but it’s significant that a bipartisan bill includes this.

There has also been recent positive movement in this area by the California Franchise Tax Board in the case of short sale discharges. Clients can call the office at 800-924-1040 ext 12 if they have questions in this area.

Reference: Revenue Procedure 2013-30

The IRS just released updated and simplified procedures for late S corporation elections.  Over the last several years, we’ve seen an increase in corporations formed through paralegal services. Often times, the corporation feels that the paralegal has filed the S corporation election, Form 2553, with the IRS, but finds out a year later that nothing was mailed in.

Under this new Rev. Proc., in most circumstances, the IRS will allow a late filing election up to 3 years and 75 days from the original due date. The late filing does involve some detailed paperwork, but the process is straight-forward.  Please call us if you think that you need to make a late election. (Note: This new procedure supersedes all prior late filing procedures in this area).