Month: June 2021

The PayPal loophole is going away in a little over six months from now.

You may remember the strategy where you can avoid giving 1099s to contractors and vendors when you use PayPal or a similar service as your payment platform.

With this strategy, you push the reporting requirements to PayPal. Current federal law requires that PayPal file Form 1099-K with the IRS and send it to you when

• your gross earnings are more than $20,000, and 
• you have more than 200 transactions.

Example. You work as a consultant. Your clients pay you $30,000 via PayPal. PayPal does not give you a 1099-K because this fails the more than 200 transactions in a calendar year test.

According to lawmakers, this created a situation where those people who use PayPal have an easy ability to cheat (i.e., not report the income on their tax returns).

Starting January 1, 2022, the American Rescue Plan Act kills the two-step “more than $20,000 and more than 200 transactions” threshold for third-party settlement organization (TPSO) filing of 1099-K and replaces it with the single “$600 or more” reporting threshold.

The Joint Committee on Taxation estimates that this change in the 1099 rules will gain more than $8 billion in new taxes over the next 10 years with this change.

Several states have already closed this reporting loophole on the state level: 

• Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year. 
• Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions). 
• Arkansas has a $2,500 threshold. 
• Missouri has a $1,200 threshold.

If you would like to discuss the new rules, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 30, 2021

When you buy business or investment real property, such as an apartment building, you usually pay one lump sum for land, buildings, and other improvements. There’s no cost breakdown.

You can’t depreciate land because it doesn’t wear out. So, as far as depreciation goes, land is useless. 

What you need is a way to take that lump sum and allocate it to land, buildings, improvements, and equipment.

Allocating costs to land and buildings for tax purposes is a factual determination initially performed by you, the property owner. 

The IRS provides little guidance on how land and building values should be allocated. It simply says that “you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it.” 

There are many ways to perform this allocation, including the contract terms and cost segregation. You are not required to use any particular method—just a reasonable method. The two most popular methods are assessed value and appraised value. 

If you have questions on allocating costs, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 24, 2021

Here’s a vehicle story that you will find of interest.

Taxpayer DJ is in an IRS audit of his 2018 tax return. It is now at the IRS appeals level.

The vehicle in question is an SUV with a curb weight of 5,700 pounds and a gross vehicle weight of 6,100 pounds.

• If the tax code makes the SUV a passenger vehicle, the curb weight of 5,700 pounds limits DJ’s tax deduction to $18,000.
• If the tax code makes the SUV a truck using the gross weight of 6,100 pounds, DJ’s deduction is $55,000.

The IRS lawyer who is handling the appeal tells DJ that he has to use curb weight because his SUV is built on a car chassis.

Wrong. DJ wins his $55,000 deduction. Here’s why.

To qualify for bonus depreciation (or Section 179 expensing), the SUV must escape the luxury vehicle depreciation limits on deductions.

The escape works like this:

1. The SUV must have a gross vehicle weight rating (GVWR) of 6,001 pounds or more.
2. Also, the SUV must be a truck under the Department of Transportation (DOT) regulations. (Using guidelines set out in DOT regulations, manufacturers label SUVs as “trucks” or “cars.”)

Under the DOT rules, an SUV can qualify as a truck regardless of chassis.

If you have bonus depreciation or Section 179 questions, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 19, 2021