Author: Leon Clinton

Tax

Government Shutdown Affects Taxpayers

October 1, 2013 marked the first day of the shutdown of the federal government–the first since 1995-1996. Without a clear idea of how long this “lapse in appropriations” is expected to continue, here’s a look at how taxpayers are affected.

During the shutdown, approximately 86,000 IRS employees have been furloughed and IRS operations are limited. Despite this, tax law remains in effect, and in that respect it’s “business as usual.”

Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law. All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.

Where’s My Refund?

Although the IRS will accept and process all tax returns with payments, it is unable to issue refunds during the shutdown. Tax refunds will not be issued until normal government operations resume. This includes the “Where’s my refund?” service.

October 15 Tax Filing Deadline

Individuals who requested an extension of time to file should file their returns by October 15, 2013. According to the IRS, more than 12 million taxpayers requested an automatic six-month extension this year, but have yet to file.

Members of the military and others serving in Afghanistan or other combat zone localities typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due. People with extensions in parts of Colorado affected by severe storms, flooding, landslides and mudslides also have more time, until Dec. 2, 2013, to file and pay.

Taxpayers are urged to file electronically, because most of these returns will be processed automatically. You can file your tax return electronically or on paper–although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.

Taxpayer Assistance

Tax software companies, tax practitioners and Free File will remain available to assist with taxes and continue to accept and file tax returns.

For taxpayers seeking assistance, only the automated applications on the regular 800-829-1040 telephone line will remain open.

The IRS website, www.IRS.gov, will remain available, although some interactive features may not be available.

Tax Transcripts

Individual taxpayers are still able obtain to tax transcript using the automated process. Transcripts will be sent to their address of record within 5 to 10 calendar days. Please note however, that during the shutdown transcript requests by third parties, such as financial institutions, cannot be processed through the Return and Income Verification Services and Income Verification Express Service. These processes are not automated and require actions by IRS employees, are not available due to the current lapse in government appropriations.

Levies and Liens

During the shutdown, no levies or liens–either those generated systemically or those manually generated by employees–will be issued; however, taxpayers may still receive levy or lien correspondence with October mailing dates. These notices were printed before IRS shut down operations were fully complete. It is standard practice for these notices to be printed with a future date to allow for mailing time to reach taxpayers.

In addition, the IRS notes that other letters related to liens and levies, such as notifications that a taxpayer could potentially be subject to a lien or a levy at a future date, continue to be automatically generated by IRS systems during the appropriations lapse.

Note: These notices are not actual levies or liens; just a notification of potential future action. Please contact us if you need more information.

Enforcement Actions

During the shutdown, the only enforcement actions undertaken by the IRS for non-criminal cases involve isolated instances where immediate action is necessary to protect the government’s interest. As such, any enforcement action in this category, seizures for instance, would be extremely limited, for example, where the expiration of the statute of limitations on collection action is imminent.

For criminal issues, most IRS Criminal Investigation employees continue to work during this period, similar to other federal law-enforcement agencies, as well as undercover operations.

Tax Court

Tax Court closed at noon on Tuesday, October 1 and stopped accepting and serving documents such as petitions and motions, as well as electronic filings and hand deliveries. For those with deadlines that cannot be extended (i.e. set by statute), documents may be sent by US mail. The postmark serves as the filing date. If you have any questions relating to tax court, please contact us.

IRS – Miscellaneous

During the shutdown, all IRS audits and examinations will stop. All non-automated collection activity will also stop.

During the shutdown, the IRS will take also steps to protect ongoing bankruptcy, lien, and seizure cases and to prevent lapses in the statute of limitation.

Social Security

Social Security checks will continue to be issued and mailed out via US mail, which is not shut down as it is not funded by the federal government. Field offices are open, but assistance may be limited.

Questions?

Don’t hesitate to call us if you need assistance. We’re here to help!

Tax

Tax Relief for Those Affected By Natural Disasters

With floods, tornadoes, hurricanes, earthquakes, and other natural disasters affecting so many people throughout the US this year, many have been left wondering how they’re going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is some relief for tax payers–but only if you meet certain conditions.

Recovery efforts after natural disasters can be costly. For instance, when Hurricane Irene struck last year causing widespread flooding, many homeowners were not covered because most standard insurance policies do not cover flood damage.

Tax Relief for Homeowners

Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone AND these four conditions are met:

1. The loss was caused by a sudden, unexplained, or unusual event. 
Natural disasters such as flooding, hurricanes, tornadoes, and wildfires all qualify as sudden, unexplained, or unusual events.

2. The damages were not covered by insurance.
You can only claim a deduction for casualty losses that are not covered or reimbursed by your insurance company. The catch here is that if you submit a claim to your insurance company late in the year, your claim could still be pending come tax time. If that happens you can file an extension on your taxes. Call us if you need help filing an extension or have any questions about what losses you can deduct.

3. Your losses were sufficient to overcome reductions required by the IRS.
The IRS requires several “reductions” in order to claim casualty losses on your tax forms. The first is that effective December 31, 2009 you must subtract $100 from the total loss amount. This is referred to as the $100 loss limit.

Second, you must reduce the amount by 10 percent of your adjusted gross income (AGI) or adjusted gross income. For example, if your AGI is $25,000 and your insurance company paid for all of the losses you incurred as a result of flooding except $3,100 you would first subtract $100 and then reduce that amount by $2500. The amount you could deduct as a loss would be $500.

4. You must itemize.
As it now stands, you must itemize your taxes in order to claim the deduction. If you normally don’t itemize, but have a large casualty loss you can calculate your taxes both ways to figure out which one gives you the lowest tax bill. Contact us if you need assistance figuring out which method is best for your circumstances.

Tax Relief for Homeowners and Businesses

The IRS often provides tax relief for those affected by natural disasters such as the individuals and businesses impacted by the recent severe storms, flooding, landslides and mudslides in Colorado. The tax relief postpones certain tax filing and payment deadlines to Dec. 2, 2013. It includes corporations and businesses that previously obtained an extension until Sept. 16, 2013, to file their 2012 returns and individuals and businesses that received a similar extension until Oct. 15. It also includes the estimated tax payment for the third quarter of 2013, which would normally be due Sept. 16.Certain taxpayers in the counties of Adams, Boulder, Larimer and Weld will receive tax relief, and other locations may be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA). If you’ve been affected by a natural disaster, please call our office. We’ll help you figure out when your tax payments are due.

Tax Relief Tips

The IRS also states that you have two options when it comes to deducting casualty losses on your tax returns. You can deduct the losses in the year in which they occurred or claim them for the prior year’s return. So if you were affected by a natural disaster this year you can claim your losses on your 2013 tax return or amend your 2012 tax return and deduct your losses. If you choose to deduct losses on your 2012 tax return, then you have one year from the date the tax return was due to file it.

Confused about whether you qualify for tax relief after a recent natural disaster? Give us a call. We’ll help you figure out the best way to handle casualty losses related to hurricanes and other natural disasters.

Accounting Tax

Hobby or Business? Why It Matters

Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Definition of a Hobby vs. a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Is Your Hobby Actually a Business?

If you’re not sure whether you’re running a business or simply enjoying a hobby, here are some of the factors you should consider:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

  • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Still wondering whether your hobby is actually a business? Give us a call; we’ll help you figure it out.

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