The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.

The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.

This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.

The IRS has informed taxpayers that they do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until October 15 by filing Form 4868 through their tax professional or tax software, or by using the Free File link on the IRS website. Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return, but does not grant an extension of time to pay taxes due.

Not for Estimated Taxes, Other Items

This relief does not apply to estimated tax payments that are due on April 15, 2021. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. Also, the federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. The IRS urges taxpayers to check with their state tax agencies for details on state filing and payment deadlines.

Winter Storm Relief

The IRS had previously announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June deadline.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:

• 2021 Recovery Rebate Credits of $1,400 for eligible individuals ($2,800 for joint filers) plus $1,400 for each eligible dependent. Credit begins to phase out at adjusted gross income of $150,000 for joint filers, $112,500 for a head of household, $75,000 for other individuals. The IRS has already begun making advance refund payments of the credit to taxpayers.
• Exclusion of up to $10,200 of unemployment compensation from income for tax year 2020 for households with adjusted gross income under $150,000.
• Enhancements of many personal tax credits meant to benefit individuals with lower incomes and children.
• Exclusion of student loan debt from income, for loans discharged between December 31, 2020, and January 1, 2026.
• For tax years after December 31, 2026, the $1,000,000 deduction limit on compensation of a publicly-held corporation’s covered employees will expand to include the five highest paid employees after the CEO and CFO. The rule in current law applies to the CEO, the CFO, and the next three highest paid officers.
• For the payroll credits for paid sick and family leave: The credit amounts are increased by an employer’s collectively bargained pension plan and apprenticeship program contributions that are allocable to paid leave wages. Also, paid leave wages do not include wages taken into account as payroll costs under certain Small Business Administration programs.

The president is conducting a nationwide tour to explain and promote the over 600-page, $1.9 trillion legislation.

Stimulus Payments

Many of the 158.5 million American households eligible for the payments from the stimulus package can expect to receive them soon, White House Press Secretary Jen Psaki said the same afternoon Biden signed the legislation into law. Payments are coming by direct deposit, checks, or a debit card to those eligible.

FTC: Beware of Scams

Scammers are right now crawling out from under their rocks to fleece businesses and consumers receiving the aid, the Federal Trade Commission warned on March 12.

It is important for business owners and consumers to know that the federal government will never ask them to pay anything up front to get this money, said the FTC: "That’s a scam. Every time." The regulatory agency also cautioned that the government will not call, text, email or direct mail aid recipients to ask for a Social Security, bank account, or credit card number.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.

"I hope Treasury will say something very soon: FAQs, press release, something. IRS undoubtedly will have to write new regs," commented Urban-Brookings Tax Policy Center Senior Fellow Howard Gleckman. He stressed IRS certainly will have to figure out how to make the retroactive tax exemption for some 2020 unemployment benefits work. Gleckman also said he suspects the Child Tax Credit will require new guidance.

Gleckman claimed a new form this late in the tax season is unlikely. "Amended returns seems easiest," said the veteran IRS observer.

To help implement the tax-related changes in the American Rescue Plan, a colleague at the Tax Policy Center, Janet Holtzblatt, said that she, as well, is looking for guidance from the IRS on what taxpayers would do if they received unemployment benefits in 2020. Holtzblatt noted the law would exclude $10,200 of those benefits from adjusted gross income if the taxpayers’ adjusted gross income is less than $150,000.

What people will want to know, Holtzblatt stated, is:

• What to do if they already filed their tax return and paid income taxes on those benefits? Do they have to file an amended tax return just to get the tax refund for that reason, or will the IRS establish a simpler method to do so?
• And going forward, what about people who have not yet filed their tax return? If a new form is not released, what should they report on the existing return—the full amount or the partial amount? And how will the IRS know when the tax return is processed whether the taxpayer reported the full amount or the partial amount? (Eventually, the IRS could—when, after the filing season is over and tax returns are matched to 1099s from UI offices—but that could be months before taxpayers would be made whole.)

For the CARES Act, Holtzblatt said the IRS generally provided guidance through FAQs on their website which was insufficient for some tax professionals and later voided. "Some of their interpretations raised questions—and in the case of the treatment of prisoners, was challenged in the courts and led to a reversal of the interpretation in the FAQ," she explained.

National Association of Tax Professionals Director of Marketing, Communications & Business Development Nancy Kasten said new rules are musts and the agency will have to issue new FAQs, potentially on all of the key provisions in the legislation. The NATP executive asserted that old forms are going to need to be revised for Tax Year 2021. "Regarding 2020 retroactive items, we are waiting on IRS guidance," said Kasten.

National Conference of CPA Practitioners National Tax Policy Committee Co-Chair Steve Mankowski said the primary rules that will need to be written ASAP relate to the changes in the 2020 unemployment, especially since it appears to be income based as well as the increased child tax credit with advanced payments being sent monthly unless a taxpayer opts out. He added there will most likely need to be a worksheet added to the 2020 tax returns to show the unemployment received and adjusting UE income down to the taxable amount.

Mankowski, immediate past president of NCCCPAP said the primary items for new FAQs include the unemployment and the income limit on the non-taxability, changes in the child tax credit; and changes in the Employee Retention Credit.

In response to an email seeking what the agency plans to do to help implement the pandemic relief measure, an IRS spokesman forwarded the following statement released on March 10:

"The IRS is reviewing implementation plans for the American Rescue Plan Act of 2021 that was recently passed by Congress. Additional information about a new round of Economic Impact Payments and other details will be made available on IRS.gov, once the legislation has been signed by the President."

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.

Creating new incentives and making temporary ones permanent are particularly critical for helping American competitiveness in semiconductors, batteries and other high-tech products, Senate Banking Chair Ron Wyden (D-Ore) and Ranking Minority Party Member Mike Crapo (R-Idaho) stressed at the session.

Wyden said it is urgent business for elected officials to create conditions for the American semiconductor industry to thrive for years as part of a Congressional job creation toolkit. "I have seen too many short-term tax policies and mistakes," the Senate Finance Chair said. His sentiment was echoed by Crapo, the committee’s top Republican: "This is an area of bipartisan interest, and I welcome the opportunity to work with Chairman Wyden on this."

Crapo: Don’t Raise Corporate Rate

At the same time, Crapo cautioned Congress should not offset losses in federal revenue from increasing the stability of investment importance of protecting tax credit credits by raising the overall corporate tax rate. He said he is "very concerned" by reports he has heard that the White House is preparing to propose just that. Currently at 21 percent, the corporate tax rate was 35 percent before the 2017 Tax Cut and Jobs Act took effect.

Massachusetts Institute of Technology Sloan School Of Management Accounting Professor Michelle Hanlon told the hearing raising corporate tax rates would put American industry at a competitive disadvantage globally. She said the 2017 tax cuts should be built upon to expand manufacturing.

While saying expanding tax breaks for tech including clean energy is critical, Senator Tom Carper (D-Del) warned the federal government is looking at an avalanche of debt. To lessen that surge, he said it is important to go after the tax gap: money that taxpayers owe but they are not paying.

Senator Todd Young (R-Ind) warned that left unchanged, starting in 2022 companies will no longer be able to expense research and development expenses in the year incurred. "This would come at the expense of manufacturing jobs," he said. Young has introduced legislation to let businesses write up R&D as they are currently allowed.

If businesses are not allowed to continue to amortize their research and development expenses in the year they are incurred, it would significantly increase the cost to perform R&D in the U.S., Intel Chief Financial Officer George Davis warned the panel.

Ford Embraces Biden Proposal

Ford Motor Company Vice President, Global Commodity Purchasing And Supplier Technical Assistance Jonathan Jennings told the Senate that the auto maker embraces President Joe Biden’s proposal to provide a 10 percent advanceable tax credit for companies creating U.S. manufacturing jobs.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.

"There were trailers in June filled (with unopened paper returns). There are none today," Rettig said in an appearance before the House Appropriations Committee Financial Services Subcommittee.

When there was a delay in getting to a return, Rettig said that a taxpayer was credited on the date the mail was received, not the day the payment was processed.

The IRS leader stated that virtual currency, which is designed to be anonymous, has probably significantly increased the amount of money taxpayers owed but have not paid since the last formal figure of $381 billion was estimated in 2013.

To close the gap between money owed and money paid, Rettig said there has to be an increase in guidance as well as enforcement. "The two go together," said Rettig, who pointed out that the IRS must support the people who are working to get their tax payments right as well as working against those who are trying to thwart the agency’s efforts.

Rettig cited high-income/high-wealth taxpayers, including high-income non-filers, as high enforcement priorities. "We have not pulled back enforcement efforts for higher income individuals during the pandemic. We can be impactful," said Rettig. He added that the IRS is using artificial intelligence and other information technology (IT) advances to catch wealthy tax law and tax rule breakers. "Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago," said the IRS leader.

Rettig contended that the agency’s IT improvement efforts are being hampered by a shortage of funding. According to Rettig, three years into a six-year business modernization plan, the IRS has received half of the money it requested from Congress for the initiative.

One of the impacts of the pandemic on the IRS and the taxpayers and tax professionals it serves, said Rettig, is the average length of phone calls has risen to 17 minutes from 12 minutes because the issues have been more complex.

On another issue related to COVID-19, Rettig said the IRS has been diligently working to alert taxpayers and tax professionals to scams related to COVID-19, especially calls and email phishing attempts tied to the Economic Impact Payments (EIPs). He said people can reduce the chances of missing their EIP payments through lost, stolen or thrown-away debit cards by filing their tax returns electronically.

The Commissioner told the panel that the delay in starting the tax filing season this year will not add to any additional delays to refunds on returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC).

Rettig also noted that taxpayers who interact with an IRS representative now have access to over-the-phone interpreter services in more than 350 languages.

The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.

The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.

Background

During the tax years at issue, each taxpayer had an American Express credit card that was part of a rewards program that paid reward dollars for eligible purchases made on their cards. Card users could redeem reward dollars as credits on their card balances (statement credits). To generate as many reward dollars as possible, the taxpayers used their American Express credit cards to buy as many Visa gift cards as they could from local grocery stores and pharmacies. They used the gift cards to purchase money orders, and deposited the money orders into their bank accounts. The husband occasionally purchased money orders with one of the American Express cards.

The taxpayers also occasionally paid their American Express bills through a money transfer company. Using this method, they paid the American Express bill with a reloadable debit card, and the money transfer company would transmit the payment to American Express electronically. The taxpayers used their American Express cards to purchase reloadable debit cards that they used to pay their American Express bills, and the purchase of debit cards and reloads also generated reward dollars.

All of the taxpayers' charges of more than $400 in single transactions with the American Express cards were for gift cards, reloadable debit cards, or money orders. On their joint tax returns, the taxpayers did not report any income from the rewards program.

The IRS determined that the reward dollars generated ordinary income to the taxpayers. When a payment is made by a seller to a customer as an inducement to purchase property, the payment generally does not constitute income but instead is treated as a purchase price adjustment to the basis of the property ( Pittsburgh Milk Co., 26 TC 707, Dec. 21,816; Rev. Rul. 76-96, 1976-1 CB 23). The IRS argued that the taxpayers did not purchase goods or property, but instead purchased cash equivalents—gift cards, reloads for debit cards, and money orders—to which no basis adjustment could apply. As a result, the reward dollars paid as statement credits for the charges relating to cash equivalents were an accession to wealth.

Rebate Policy; Cash Equivalency Doctrine

The Tax Court observed that the taxpayers' aggressive efforts to generate reward dollars created a dilemma for the IRS which was largely the result of the vagueness of IRS credit card reward policy. Under the rebate rule, a purchase incentive such as credit card rewards or points is not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points ( Rev. Rul. 76-96; IRS Pub. 17). The court observed that the gift cards were quickly converted to assets that could be deposited into the taxpayers’ bank accounts to pay their American Express bills. According to the court, to avoid offending its long-standing policy that card rewards are not taxable, the IRS sought to apply the cash equivalence concept, but that concept was not a good fit in this case.

The court stated that a debt obligation is a cash equivalent where it is a promise to pay of a solvent obligor and the obligation is unconditional and assignable, not subject to set-offs, and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for the use of money ( F. Cowden, CA-5, 61-1 ustc ¶9382, 289 F2d 202). The court found that the three types of transactions in this case failed to fit this definition.

The court ruled that the reward dollars associated with the gift card purchases were not properly included in income. The reward dollars taxpayers received were not notes, but instead were commitments by American Express to allow taxpayers credits against their card balances. The court found that American Express offered the rewards program as an inducement for card holders to use their American Express cards.

However, the court upheld the inclusion in income of the related reward dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards. The court observed that the money orders purchased with the American Express cards, and the infusion of cash into the reloadable debit cards, were difficult to reconcile with the IRS credit card reward policy. Unlike the gift cards, which had product characteristics, the court stated that no product or service was obtained in these uses of the American Express cards other than cash transfers.

As the court noted, the money orders were not properly treated as a product subject to a price adjustment because they were eligible for deposit into taxpayers' bank account from acquisition. The court similarly found that the cash infusions to the reloadable debit cards also were not product purchases. The reloadable debit cards were used for transfers by the money transfer company, which the court stated were arguably a service, but the reward dollars were issued for the cash infusions, not the transfer fees.

Finally, the court stated that its holdings were not based on the application of the cash equivalence doctrine, but instead on the incompatibility of the direct money order purchases and the debit card reloads with the IRS policy excluding credit card rewards for product and service purchases from income.

The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.

The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.

Settlement Day

Settlement Day events are coordinated efforts to resolve cases in the U.S. Tax Court by providing taxpayers who are not represented by counsel with the opportunity to receive free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys, and other pro bono organizations. Taxpayers can also discuss their Tax Court cases and related tax issues with members of the Office of Chief Counsel, the IRS Independent Office of Appeals and IRS Collection representatives. These communications can aid in reaching a settlement by providing taxpayers with a better understanding of what is needed to support their case.

The Taxpayer Advocate Service (TAS) employees also participate in VSDs to assist taxpayers with tax issues attributable to non-docketed years. Local Taxpayer Advocates and their staff can work with and inform taxpayers about how TAS may be able to assist with other unresolved tax matters, or to provide further assistance after the Tax Court matter is concluded. IRS Collection personnel will be available to discuss potential payment alternatives if a settlement is reached. For those who choose to take their cases to court, the VSD process can also give a better understanding of what information taxpayers need to present to the court to be successful.

Following its first announcement of virtual settlement days in May last year, the Chief Counsel and LITCs have successfully used VSD events to help more than 259 taxpayer resolve Tax Court cases without having to go to trial.

Registration and Information

The IRS proactively identifies and reaches out to taxpayers with Tax Court cases which appear most suitable for this settlement day approach, and invites them attend VSD events. The IRS also generally encourages taxpayers with active Tax Court cases to contact the assigned Chief Counsel attorney or paralegal about participating in the March VSD events.

This year, the IRS has included the following locations where these events have never been offered: Albuquerque, Billings, Buffalo, Cheyenne, Cleveland, Denver, Des Moines, Indianapolis, Little Rock, Milwaukee, Nashville, Peoria, Omaha, Reno, Sacramento, San Diego and San Jose.

LITCs can contact their local Chief Counsel offices about the event in their area. If additional information is needed, individuals can reach out to Chief Counsel’s Settlement Day Cadre, or contact Sarah Sexton Martinez at (312) 368-8604. Pro bono volunteers are encouraged to contact Meg Newman (Megan.Newman@americanbar.org) with the American Bar Association Tax Section.

An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.

An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.

However, the taxpayer, a high school graduate, testified that she had “a little bit of banking education,” indicating that she had some familiarity with bookkeeping. Her ex-spouse added during trial that the taxpayer had worked at a bank for a few years. Regarding her role in the LLC, the taxpayer maintained the business' books and records, prepared and signed sales tax returns and unemployment tax contribution forms on its behalf, and worked with an accountant to prepare its tax returns. Nothing in the record indicated that her ex-spouse tried to deceive or hide anything from her.

Further, the taxpayer’s joint ownership of the LLC, her involvement in maintaining its books and records, her role in preparing and signing tax-related documents on behalf of the business, and her cooperation with an accountant to prepare the LLC’s tax returns, showed that she had actual knowledge of the factual circumstances that made the deductions unallowable. Thus, she also was not entitled to relief under Code Sec. 6015(c).

The taxpayer was not eligible for streamlined determination under Rev. Proc. 2013-34, 2013-43 I.R.B. 397, because no evidence corroborated her testimony that her former spouse had abused her in any sense to which the tax law or common experience would accord any recognition. The history of acrimony between the taxpayer and her ex-spouse called into question the weight to be given to her claims of spousal abuse. Finally, the taxpayer was unable to persuade the court that she was entitled to equitable relief under Code Sec. 6015(f). She was intimately involved with the LLC, knew or had reason to know of the items giving rise to the understatement, and failed to make a good-faith effort to comply with her income tax return filing obligations.

A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.

A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.

Thereafter, the RA obtained written approval from her immediate supervisor for the civil fraud penalty, and sent the taxpayers a notice of deficiency determining the same. The taxpayers contended that the civil fraud penalty was not timely approved by the RA’s supervisor because the revenue agent report (RAR) presented at the conference meeting embodied the first formal communication of the RA’s initial determination to assert the fraud penalty.

Due to the use of a summons letter requiring the taxpayers' attendance, the closing conference at the end of the taxpayers’ examination process carried a degree of formality not present in most IRS meetings. The closing conference was, like an IRS letter, a formal means of communicating the IRS’s initial determination that taxpayers should be subject to the fraud penalty. Therefore, the RA communicated her initial determination to assert the fraud penalty when she provided the taxpayers with a completed and signed RAR at the closing conference. The RA had also informed the taxpayers during the closing conference that they did not have appeal rights at that time, which was incomplete and potentially misleading.

The completed RAR given to the taxpayers during the closing conference, coupled with the context surrounding its presentation, represented a "consequential moment" in which the RA formally communicated her initial determination that the taxpayers should be subject to the fraud penalty.

A taxpayer's expenses incurred due to travel outside of the United States for business activities are deductible, but under a stricter set of rules than domestic travel. Foreign travel expenses may be subject to special allocation rules if a taxpayer engages in personal activities while traveling on business. Expenses subject to allocation include travel fares, meals, lodging, and other expenses incident to travel.  

Allocation expenses

Frequently, international business trips have a personal aspect. A taxpayer who travels outside of the United States for both business and pleasure may deduct no part of his or her travel expenses (airfare, cabs, hotel, meals, etc.) if the trip is not primarily related to business. However, business expenses incurred while at the destination are deductible even though the travel expenses are not.

If the trip is primarily related to business, then that portion of travel properly allocated to the business portion may be deducted. Proper allocation is based on the amount of time spent on each activity. "Primary purpose" is a purpose of more than 50 percent. Foreign travel for purposes of allocation is travel outside the 50 states and the District of Columbia.

The general "primary purpose" rule on foreign business travel, fortunately, has two huge exceptions, one for anyone who travels a week or less and the other for most employees on business trips under an expenses allowance arrangement.

The allocation rules do not apply to taxpayers:

• who do not have substantial control over the business trip;
• whose travel outside the United States is a week or less in duration; 
• who establish that a personal vacation was not a major factor in deciding to take the trip; and
• whose personal activities conducted during the trip are less than 25 percent of the total travel time.

Taxpayers who travel under reimbursement or other expense allowance arrangements are not considered to have substantial control over the business trip unless they are the managing executive of the employer or a party related to, or more than 10 percent owner of the employer.

Conventions

Business conventions come under a separate rule. A taxpayer cannot deduct travel expenses for attending a convention, seminar or similar business meeting held outside the "North American area" unless specific criteria are satisfied. The "North American area" includes not only the US, Canada, and Mexico but also Costa Rica, Honduras and many islands in the Atlantic, Caribbean, and the Pacific.

If you are unsure of how to allocate your business travel expenses and need additional information, please give our office a call. We would be glad to help.

With the subprime mortgage mess wreaking havoc across the country, many homeowners who over-extended themselves with creative financing arrangements and exotic loan terms are now faced with some grim tax realities. Not only are they confronted with the overwhelming possibility of losing their homes either voluntarily through selling at a loss or involuntarily through foreclosure, but they must accept certain tax consequences for which they are totally unprepared.

Many homeowners - whether in connection with their principal residence or a vacation property - may not anticipate that foreclosure and a home sale that produces a loss can trigger significant and unexpected income tax liabilities, especially when the sale does not produce enough gain to pay off outstanding mortgage debt.

Selling at a loss

Homeowners may be unpleasantly surprised to learn that they can not write-off losses incurred from the sale of their home. When a homeowner is forced to sell their personal residence for less than the price they paid, the loss incurred on the sale is considered to be a non-deductible personal expense for federal income tax purposes. What's more, if the homeowner eventually buys another home that is sold down the road at a taxable profit, previous losses cannot be used to offset that gain.

Faced with such a situation, the technique of renting out the home, rather than selling it, might help some homeowner buy time until better times. If renting eventually stops making financial sense, the homeowner who sells at a loss might then succeed in establishing a deductible business loss from the business of renting property. However, only losses incurred after the property is converted may be deducted.

Debt forgiveness

Homeowners who sell their property when their mortgage debt exceeds the net sale price of the home (a so-called "short sale") may find that they owe taxes to the IRS. For example, assume you paid $500,000 for a home that you sell for a net sale price of $400,000, but you have a mortgage of $550,000 on the property. For tax purposes, you have incurred a $100,000 loss on the sale because the sale price is lower than your tax basis in the property ($400,000 sale price - $500,000 basis = $100,000 loss). Moreover, you still owe $150,000 to your mortgage lender since a mortgage note is a personal liability in addition to being an encumbrance on the house itself. If the lender refuses to discharge the remaining debt, you'll have to pay off the loan and there is no tax break or write-off for doing so.

On the other hand, if the mortgage lender forgives part or all of the remaining $150,000 debt, the amount discharged is considered taxable income. With few exceptions, discharged debt of all types is treated as income, taxable at ordinary rates just like a salary. It is irrelevant to the IRS that no tangible income was actually received on the sale of the home or forgiveness of debt by the lender. You will owe taxes on the amount of mortgage debt that the lender discharges. What's more, there is no offset from your $100,000 loss on the sale of the property; nor is this income covered by the $250,000 exclusion on taxable gain on the sale of a principal residence ($500,000 for joint filers).

A lender who discharges any part or all of a homeowner's debt must report the forgiven debt on Form 1099-C (Cancellation of Debt) to you and to the IRS. You must report the amount of discharged debt as income on your tax return in the year the mortgage debt is forgiven.

Foreclosure

Foreclosure also produces tax consequences that may be wholly unanticipated by the homeowner. Taxable gains and income from mortgage debt forgiveness also occur in foreclosure. Tax liability upon foreclosure depends on whether you have a nonrecourse or recourse loan. A recourse loan permits the lender to sue the borrower for any outstanding debt. When a foreclosure occurs on the property of a homeowner with a nonrecourse loan, however, the lender is only entitled to collect the amount that the home is sold for, and the borrower has no further liability.

Example. Your tax basis in your home is $400,000. You have a recourse loan and your mortgage debt totals $350,000. But at the time of foreclosure the fair market value of your home has decreased to $325,000. However, the lender forgives the remaining unpaid mortgage debt of $25,000 (usually because the lender sees that the former homeowner has little assets left, the remaining debt would be hard to collect, and an immediate write off gives the lender an immediate tax deduction). Tax law treats you as having received ordinary income from the cancellation of the debt in the amount of $25,000.

Alternatively, if you had a nonrecourse loan in the amount of $350,000 and your home sold at auction for $325,000, you would have no further liability to the lender since it cannot pursue you for the lost $25,000. Therefore, since your mortgage lender cannot legally pursue you for the remaining $25,000, there will be no debt for them to discharge. Such nonrecourse loans, however, are very rare in personal, non-business settings.

Moreover, if property is foreclosed and sold at auction for more than the home's tax basis, the sale produces taxable gain. In this case, however, the gain from a foreclosure sale of an individual's principal residence may be excluded to the extent of up to $250,000 ($500,000 for married homeowners filing jointly), depending on the length of homeownership. No exclusion, however, is given on vacation property that is not a principal residence.

Future relief for homeowners?

In mid-April, Reps. Robert E. Andrews (D-New Jersey) and Ron Lewis (R-Kentucky), introduced the Mortgage Cancellation Relief Act of 2007 (H.R. 1876), a bill that would assist many homeowners affected by the loss of their home through foreclosure or short sale. The legislation would exempt discharged debt on primary home mortgages from treatment as income subject to income taxation. Currently, the bill is before the House Ways and Means Committee.

If you would like more information on the tax consequences of foreclosure or the potential implications of taking a loss on the sale of your home or vacation property, please call our office and we can discuss your options for minimizing your tax liabilities.

These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online.  While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

• Individual income tax returns (Form 1040)
• Trust and estate income tax returns (Form 1041)
• Partnership income tax returns (Forms 1065 and 1065-B)
• Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
• Estimated tax for individuals (Form 1040)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax return (Form 944)
• Private foundation returns (Form 990-PF)
• Heavy highway vehicle use returns (Form 2290)
• Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

• Individual income tax returns (Form 1040)
• Estimated income taxes for individuals (Form 1040-ES)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax returns (Form 944)
• Corporate income tax returns (Form 1120)
• S-corporation returns (Form 1120S)
• Extension for corporate returns (Form 7004)
• Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

Fringe benefits have not only become an important component of employee compensation, they also have a large financial impact on an employer's business. Fringe benefits are non-compensation benefits provided by an employer to employees. Unless they fall within one of the specific categories of tax-exempt fringe benefits, however, are taxable to employees.

Qualified employee discounts are among several categories of fringe benefits that are non-taxable to the employee under Code Sec. 132 and also deductible by the employer as an ordinary and necessary business expense. If you want to give employee discounts, this is the type you should consider first.

Qualified employee discounts

For an employee discount to be excludable from an employee's income and deductible by the employer, it must constitute a qualified employee discount. A qualified employee discount is an employee discount provided on qualified property or services. If the benefits are not qualified, they are taxable to the employee.

Qualified employee discounts are those that are provided on products or services sold in the ordinary course of the employer's line of business. For instance, employee discounts on items sold only at an employee store are not excludable from gross income because they are not offered for sale to non-employee customers in the ordinary course of the employer's line of business.

An employer may exclude the value of an employee discount provided to an employee from his or her wages, up to the following limits:

• For a discount on services, 20% of the price the employer charges non-employee customers for the service.

• For a discount on merchandise or other property, the employer's gross profit percentage times the price the employer charges non-employee customers for the property.

For example, if an employer's business sells a product for $100 and its cost is $75, the gross profit margin is $25. Therefore, to be tax-free to the employee, the discount cannot exceed $25. If an employer charges customers $100 for a certain service, the employee's tax-free discount for the same service cannot exceed $20 (i.e. 20 percent of the value of the service). Any excess discount will be treated as taxable income to the employee.

Qualified employee discounts can be provided through a direct reduction in the price of property or services as well through a cash rebate system. However, the discounts cannot be provided on real estate or investment property, such as stocks and bonds.

Non-discrimination

Qualified employee discounts must be available to employees on a nondiscriminatory basis, which requires that the benefits be available on substantially the same terms to all employees or to each member of a reasonable classification of employees that does not discriminate in favor of highly compensation employees. An employer engaged in more than one line of business must treat each line of business separately in applying the discrimination test. If an employer's plan fails the test, only your employees who are not highly compensated may exclude the value of the benefit from income.

Business expense deduction

An employer can deduct the actual cost of providing fringe benefits to employees as an ordinary and necessary business expense, whether or not the benefits are taxable to the employees. Employers can deduct the cost of providing qualified employee discounts as either compensation for services rendered or as a tax deductible business expense under Code Sec. 162.

As with other business expenses incurred by an employer for which tax deductions are sought, expenses paid or incurred in carrying on a trade or business are deductible only if they are ordinary and necessary. Ordinary and necessary expenses must be reasonable in amount to be deductible.

Because a qualified employee discount is a type of fringe benefit (albeit tax exempt), and fringe benefits are a form of employee compensation under Code Sec. 61, a qualified employee discount will meet the business expense requirements of Code Sec. 162, providing for deduction by an employer. Thus, employers can deduct the cost of qualified employee discounts and not pay any employment taxes on them.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

1. The salary history of the individual employee
2. Compensation paid by comparable employers to comparable employees
3. The salary history of other employees of the company
4. Special employee expertise or efforts
5. Year-end payments
6. Independent inactive investor analysis
7. Deferred compensation plan contributions
8. Independence of the board of directors
9. Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.

There are tax benefits for which you may be eligible if you are paying education expenses for yourself or an immediate member of your family. In the rush to claim one of two education tax credits or the higher-education expense deduction, IRS statistics indicate that a more modest yet still significant tax break is often being overlooked: the higher education student-loan interest deduction.

The student loan interest deduction for 2006 was the smaller of $2,500 or the amount of interest paid. The deduction amount may be gradually reduced or eliminated based on your filing status and modified adjusted gross income (MAGI).

Form 1098-E

Form 1098-E will help you calculate your student loan interest deduction. An institution that received interest payments of $600 or more during a calendar year on one or more qualified student loans must send Form 1098-E to each borrower.

Modified adjusted gross income

For 2007, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out ratably for taxpayers with modified adjusted gross income in excess of $55,000 ($110,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $70,000 or more ($140,000 or more for joint returns).

Reduced deduction

If your credit must be reduced because of your MAGI, you must calculate your reduced deduction. To calculate your reduced amount, multiply your interest deduction (before the reduction) by a fraction. The numerator is your MAGI minus $55,000 ($110,000 for joint return filers). The denominator is $15,000 ($30,000 for joint return filers). Subtract the result from your deduction (before the reduction). This result is the amount you can deduct.

Example A. During 2007 Ed pays $800 interest on a qualified student loan. Ed's 2007 MAGI is $130,000 and he files a joint return. $800 X ($130,000-$110,000 / $30,000) =$533. Ed must reduce his deduction by $533. His reduced student loan interest deduction is $267 ($800 - $533).

Example B. During 2007 Bea, who is single, pays $2,750 interest on a qualified student loan. Bea's maximum deduction for 2007 is $2,500. However, Bea must further limit her maximum deduction since her MAGI is $60,000. Her required reduction is $2,500 x ($60,000 - $55,000 / $15,000) or $833.33 Her reduced student loan interest deduction is $2,500 - $833.33 or $1,666.67.

If you are unsure of your eligibility for the student loan interest deduction, please give our office a call and we will be happy to assist you.