Reference: IRS Code Secs 61(a) and 102(a)

At this point, there isn’t a lot of specific regulation written on the topic of crowdfunding. IRS guidance is based on intent and use of the funds as well as common reporting from the funding sites.

Business: Funds raised for business purposes, such as to provide “seed capital” for emerging businesses are often reported by the funding sites on the IRS Form 1099-K as receipt of funds by party for business purposes (regardless of whether personal property changed hands or not). In such situations, the amounts raised should be reported as taxable business income under IRC Sec 61(a).

Individual/medical/personal funding: Sites are often set up to raise money for individual life-events such as medical needs, burial needs, or other specialized individual (non-business) events. Typically such are treated as gifts from one party to another and aren’t taxable to the recipient under IRC Sec 102(a). Note that if a gift is over $15,000 (2019 limit) from a single individual , then the grantor (not the recipient) will be required to file a gift tax return.

Ref: IRS Publication 463

It’s “cruise season.” A good time to reflect on the IRS rules for deducting attendance at training / seminar on a cruise ship. If the primary reason for the cruise is the seminar/training, the a deduction is allowed up to $2,000 per year for the attendee (not their family/companion) only IF all of the following are true and well documented:

1. The convention, seminar or meeting is directly related to your trade or business.
2. The ship is registered in the United States
3. All of the cruise ship’s ports of call are in the United States or a possession of the United States
4. You attach to the return a signed /written statement with detail including a log of the number of hours each day attending the meetings and a program of the business activities.
5. You attach to your return a signed written statement signed by an officer of the organization sponsoring the conference that includes the daily schedules and the number of hours you actually attended (from their attendance rolls).

This is a VERY DIFFICULT deduction to qualify for and one which will receive scrutiny or the taxing authorities.

Reference: Rev. Proc. 2019-08 and IRC Sec 168(e)(6)

Limits on Section 179 election to immediately expense property placed in service after 2017 have been greatly expanded under the Tax Cuts and Jobs Act. Rev. Proc 2019-08 further clarifies that the following asset types qualify as Qualified Improvement Property (QIP) and can use Sec 179 within its limits:

1. Any improvement to an interior portion of a nonresidential real property;
2. Roofs
3. Heating, ventilation and air-conditioning property
4. Fire protection and alarm systems
5. Security systems.

The following are NOT allowed:

1. The enlargement of the building;
2. Any elevator or escalator
3. The internal structural framework of the building.

Ref: Elliotts Inc v. Comm’r 716 F.2d1241 (9th Cir. 1983)

The Internal Revenue Code does not define the term “reasonable compensation” as it relates to S corporation shareholders working in the corporation. This has led to dozens of high-level cases both in Tax Court and federal District Court as the judiciary seeks to define the term from the bench. [Some shareholder-owners attempt to low-ball their compensation to limit FICA/Medicare taxes].

The above case is cited as it reflects the 9th Circuit’s current approach to the definition. The Court has adopted a five factor test:

1. the employee’s role in the company;
2. a comparison of compensation paid by similar companies (industry comparison;
3. the character and condition of the company;
4. potential conflicts of interest; and
5. the internal consistency of compensation (i.e. comparison of the shareholder/officer compensation with other employees within the corporation)

No one factor is weighted above the other.

Small S corporations have a very real struggle with year-to-year compensation. It usual for a real estate broker, for example, to have a year with a gross of $300k followed by a year with a gross of $120k depending on when large sales closes. Certainly, the officer would do less administrative work in the smaller year by comparison. 

Care should be taken to assess the relative sufficiency of the compensation on an annual basis.

A corporation was not allowed to petition against the IRS in Tax Court because it had been suspended by the California Secretary of State. The most common reasons for suspension are failure to file/pay income tax OR failure to timely file the annual Statement of Information. You can check your corporation’s status with the Sec of State online at www.sos.ca.gov.

Ref: Timbron International Corp V. Commissioner, TC Memo 2019-31

It’s important to keep your corporation current.

For those unable to meet with us prior to April 15, please call Laura to set up an extension and see us in May. Nearly twenty percent of our individual and business clients go on extension.

SEE YOU SOON!