Author: Leon Clinton

Are you considering a bold tax position that may significantly reduce your taxes? If approved by the IRS, it’s a win. But if disapproved, be prepared to face a considerable tax penalty.

The IRS imposes a 20 percent penalty for substantial tax underpayment. For instance, if the IRS finds you underpaid your taxes by $50,000, you’ll face a $10,000 penalty in addition to the tax due and interest.

The tax code considers a tax underpayment “substantial” if you understate your tax by over 10 percent or $5,000, whichever is greater. If you claimed the qualified business income (Section 199A) deduction on your return, the 10 percent becomes 5 percent.

To avoid this penalty, you can adequately disclose on IRS Form 8275 the item causing the understatement on your return (or amended return). You’ll need to demonstrate a “reasonable basis” for your tax position, meaning a 20 percent likelihood of success is sufficient.

Filing Form 8275 has an additional advantage. If you underpay your taxes by 25 percent or more, the IRS examination period extends from three to six years. But items disclosed on Form 8275 don’t count as underpayments for the 25 percent threshold. This helps avoid crossing the 25 percent omitted income threshold, maintaining the statute of limitations period at three years.

Some hesitate to file Form 8275, fearing it may trigger an audit. The IRS states this isn’t true, and no evidence suggests that filing the form alone increases audit risk. But it’s worth noting that Form 8275 can provide the IRS with information on what to question on a return, which may concern some practitioners.

Please note that you shouldn’t file Form 8275 for items fully disclosed on your regular tax return forms, such as itemized personal deductions listed on IRS Schedule A or specific business or rental property expenses.

If you have questions about Form 8275, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 8, 2023

Here’s some information on how you can help a family member buy a home by making a loan to them while ensuring that you and the family member benefit from a tax-smart loan structure.

With the current national average interest rates for 30-year and 15-year fixed-rate mortgages at 6.81 percent and 6.13 percent, respectively, family loans can offer a much more attractive alternative. By charging the Applicable Federal Rate (AFR) as interest, you can give the borrower a good deal without giving yourself a tax headache.

The IRS issues new AFRs for term loans every month. The rates for April 2023 are as follows:

• Short-term loan (three years or less): 4.86 percent
• Mid-term loan (over three years but not more than nine years): 4.15 percent
• Long-term loan (over nine years): 4.02 percent

Charging at least the AFR for a term loan to a family member allows you to avoid federal income tax and federal gift tax complications.

But if you charge less than the AFR, you may need to navigate some tax complications. Two tax-law exceptions, the $10,000 and $100,000 loopholes, can help you avoid these complications, although they may not be suitable for all home loans.

It is crucial to document the loan with a written promissory note and secure it with the borrower’s home for them to claim deductions for qualified residence interest expenses. Make sure the borrower signs the note and that the note includes details such as the interest rate, a schedule of interest and principal payments, and any security or collateral for the loan.

In conclusion, family loans can provide homebuyers with better interest rates than commercial lenders offer, especially if family members charge the AFR. Remember to consider the loan terms and tax consequences when structuring the loan.

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

• By Leon Clinton
• June 1, 2023

The IRS recently issued new guidance on electric vehicles. There are four ways you can potentially benefit from a federal tax credit for an EV you place in service in 2023 or later:

• Purchase an EV, and claim the clean vehicle credit.
• Lease an EV, and benefit from the lessor’s EV discount.
• Purchase a used EV that qualifies for the used EV tax credit.
• Purchase an EV for business use, and claim the new commercial clean vehicle tax credit.

The new clean vehicle credit is available through 2032, with a maximum credit of $7,500.

To qualify for the clean vehicle credit, you must meet specific criteria, including income limits, vehicle price caps, and domestic assembly requirements. The credit amount for vehicles delivered on or after April 18, 2023, depends on the vehicle meeting critical minerals sourcing and/or battery components sourcing requirements.

If you can’t find an EV that qualifies for the credit or your income is too high, you can lease an EV from a leasing company that can claim up to a $7,500 commercial clean vehicle tax credit. The leasing company may then pass on all or part of the credit to you through reduced leasing costs.

For used EV purchases, you can earn a credit of up to $4,000, but you must buy the vehicle from a dealer and meet the law’s lower income caps and other restrictions.

Finally, if you purchase an EV for business use, you can qualify for the commercial clean vehicle tax credit, which is not subject to critical minerals or battery components rules, making it easier to qualify for this credit starting April 18, 2023.

To claim an EV credit, the seller must complete a seller’s report and provide a copy to you and the IRS. For the clean vehicle credit, you will file IRS Form 8936; for the commercial clean vehicle credit, you will file IRS Form 8936-A.

If you have any questions or need my assistance navigating these new tax credit opportunities, please call me on my direct line at408-778-9651.

• By Leon Clinton
• May 25, 2023