ERC Compliance Efforts Top $1 Billion in Six Months, IR-2024-78 The IRS announced that compliance efforts around erroneous Employee Retention Credit (ERC) claims have topped more than $1 billion within six months. "We are encouraged by the results so fa...
IRS Releases Guidance on Form 1099-K, FS-2024-7; IR-2024-5 The IRS has released guidance to help taxpayers understand what to do with Form 1099-K. Responding to feedback from taxpayers, tax professionals and payment processors, the agency had announced b...
CA - Extensions available for disaster affected employers The Employment Development Department (EDD) issued a release that informing that employers in San Diego and Ventura directly hit by emergencies can request an extension of up to two months to file the...
President Bidensupportextending the individualtaxprovisions of the Tax Cuts and Jobs Act, many of which are set to expire next year, Department of the Treasury Secretary Janet Yellen said.
PresidentBidensupportextendingtheindividualtaxprovisionsof theTax Cuts and Jobs Act, many of which are set to expire next year, Department of the Treasury Secretary JanetYellensaid.
"The President has made it clear that he would oppose raising back thetaxesfor working people and families making under $400,000,"SecretaryYellentestified before the Senate Finance Committee during a March 21, 2024,hearingto review the White House fiscal year 2025budget proposal.
She then affirmed that"he would"supportextendingtheindividualtaxprovisionsof theTCJAwhen asked by committee Ranking Member Mike Crapo (R-Idaho), who noted that the budget did not make any mention of this.
Yellendefended the fiscal 2025 budget request against assertions thattaxeswill indeed go up for those making under $400,000, contrary to PresidentBiden’s promise, because thetaxesthat are targeted to wealthy corporations to ensure they are paying their fair share will ultimately be passed down to their consumers in the form of higher prices and lower wages.
"I think what the impact when you changetaxeson corporations, what the impact is on families involves a lot of channels that are speculative,"Yellensaid."They are included in models that sometimes the Treasury used for the purposes of analysis, in ataxthat is levied on corporations, that has no obvious direct effect on households."
The proposed budget would increase the corporate minimumtaxfrom the current 15 percent to 21 percent, as well as raise thetaxrate on U.S. multinationals’ foreign earnings from the current 10.5 percent to 21 percent. The current corporatetaxrate would climb to 28 percent and the budget would eliminatetaxbreaks for million-dollar executive compensation. It would also increase thetaxrate on corporate stock buybacks from 1 percent to 4 percent, among other business-relatedtaxprovisions.
Corporations and billionaires will be paying more in taxes if Congress follows recommendations PresidentBiden gave during his State of the Union address.
Corporationsand billionaires will be paying more in taxes if Congress follows recommendationsPresidentBidengave during hisStateof theUnionaddress.
PresidentBidenhighlighted a number of initiatives during the March 7, 2024, address. Forcorporations, he said that it is"time to raise the corporate minimum tax to at least 21 percent."
"Remember in 2020, 55 of the biggest companies in America made $40 billion and paid zero in federal income taxes,"PresidentBidensaid."Zero. Not anymore. Thanks to the law I wrote [and] we signed, big companies have to pay minimum 15 percent. But that’s still less than working people paid federal taxes."
Additionally, he alluded to further recommendations that will likely be included when the administration released its budget proposal, expected as early as the week of March 11, 2024. This includes limiting tax breaks related to corporate and private jets and capping deductions on certain employees at $1 million.
For billionaires,PresidentBidenis looking to increase their tax rate to 25 percent.
"You know what the average federal taxes for those billionaires [is]?"he asked. “"They’re making great sacrifices. 8.2 percent. That’s far less than the vast majority of Americans pay. No billionaire should pay a lower federal tax rate than a teacher or a sanitation worker or nurse."”
PresidentBidensaid this proposal would raise $500 billion over the next 10 years and suggested some of that additional tax money would help strengthen Social Security so that there would be no need to cut benefits or raise the retirement age to extend the life of the Social Security program.
The IRS has launched a new initiative to improve tax compliance among high-incometaxpayers who have not filed federal income tax returns since 2017.
TheIRShas launched a newinitiativeto improve tax compliance amonghigh-incometaxpayerswho have not filed federal incometax returnssince 2017. This effort, funded by the Inflation Reduction Act, involves sending outIRScompliance letters to over 125,000 cases wheretax returnshave not been filed since 2017. These mailings include more than 25,000 to individuals with incomes exceeding $1 million and over 100,000 to those with incomes ranging between $400,000 and $1 million for the tax years 2017 to 2021. TheIRSwill begin mailing these compliance alerts, formally known as theCP59Notice, this week.
Recipients of these letters should act promptly to prevent further notices, increased penalties, and stronger enforcement actions. Consulting a tax professional can help them swiftly file latetax returnsand settle outstanding taxes, interest, and penalties. The failure-to-file penalty is 5 percent per month, capped at 25 percent of the tax owed. Additional resources are available on theIRSwebsitefor non-filers.
The non-filerinitiativeis part of theIRS's broader campaign to ensure large corporations, partnerships, andhigh-incomeindividuals fulfill their tax obligations. Non-respondents to the non-filer letter will face further notices and enforcement actions. If someone consistently ignores these notices, theIRSmay file a substitutetax returnon their behalf. However, it's still advisable for the individual to file their ownreturnto claim eligible exemptions, credits, and deductions.
An individual’s claim for innocent spouse relief was rejected for lack of jurisdiction because the taxpayer failed to file his petition within the 90-day deadline under Code Sec. 6015(e)(1)(A).
Anindividual’sclaimforinnocent spouse reliefwas rejected for lack of jurisdiction because the taxpayerfailedtofilehispetitionwithin the 90-day deadline underCode Sec. 6015(e)(1)(A). The taxpayer argued that the deadline tofileapetitionfor a denial ofinnocent spouse reliefwas not jurisdictional and asked that the Tax Court hear his case on equitable grounds. However, the Tax Court noted that a filing deadline is jurisdictional if Congress clearly states that it is. The IRS argued that argues that the 90-day filing deadline ofCode Sec. 6015(e)(1)(A)was jurisdictional because Congress clearly stated that it was and the Supreme Court’s decision inBoechler, P.C. v. Commissioner, 142 S. Ct. 1493, in addition to numerous appellate cases, supported this argument.
The Tax Court examined the"text, context, and relevant historical treatment"of the provision at issue and concluded that the 90-day filing deadline ofCode Sec. 6015(e)(1)(A)was jurisdictional. On the basis of statutory interpretation principles, the jurisdictional parenthetical inCode Sec. 6015(e)(1)(A)was unambiguous. It did not contain any ambiguous terms and there was a clear link between the jurisdictional parenthetical and the filing deadline. Specifically,Code Sec. 6015(e)(1)(A)is a provision that solely sets forth deadlines. Further, it was unclear what weight, if any, should be given to the equitable nature ofCode Sec. 6015. The statutory context arguments were not strong enough to overcome the statutory text. Accordingly, the Tax Court ruled that the 90-day filing deadline in Code Sec. 6015(e)(1)(A) was jurisdictional.
The IRS has continued to increase the amount of information available in multiple languages. This was part of the IRS transformation work under the Strategic Operating Plan, made possible by additional resources provided by the Inflation Reduction Act (P.L. 117-169).
TheIRShas continued toincreasethe amount of information available in multiplelanguages. This was part of theIRStransformation work under the Strategic Operating Plan, made possible by additionalresourcesprovided by the Inflation Reduction Act (P.L. 117-169). OnIRS.gov,taxpayerscan select their preferredlanguagefrom the dropdown menu at the top of the page, including Spanish, Vietnamese, Russian, Korean, Haitian Creole, Traditional Chinese and Simplified Chinese. Additionally, theLanguagespagegivestaxpayersinformation in 21languageson key topics such as"Your Rights as aTaxpayer"and"Who Needs to File."
"TheIRSis committed to making further improvements fortaxpayersin a wide range of areas, including expandingoptionsavailable totaxpayersin multiplelanguages,"saidIRSCommissioner Danny Werfel."Understanding taxes can be challenging enough, so it’s important for theIRSto put a variety of information onIRS.gov and other materials into thelanguageataxpayerknows best. This is part of the larger effort by theIRSto make taxes easier for alltaxpayers,"he added.
Iftaxpayerscannot find the answers to their tax questions onIRS.gov, they can call theIRSor get in-person help at anIRSTaxpayerAssistance Center. Finally, hundreds ofIRSVolunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs have access to Over the Phone Interpreterservices. VITA and TCE offer free basic tax return preparation to qualified individuals.
The IRS has granted to withholding agents an administrative exemption from the electronic filing requirements for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
TheIRShas granted to withholding agents an administrativeexemptionfrom theelectronic filingrequirements forForm 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. Under theexemption:
withholding agents (both U.S. and foreign persons) are not required to fileForms 1042electronically during calendar year 2024; and
withholding agents that are foreign persons are not required to fileForms 1042electronically during calendar year 2025.
Theexemptionis automatic, so withholding agents do not need to file anelectronic filingwaiver request to use theexemption.
Electronic FilingofForm 1042
UnderCode Sec. 6011(e), theIRSmust prescribe regulations with standards for determining which federal tax returns must be filed electronically. In 2023, final regulations were published to implement amendments toCode Sec. 6011(e)that lowered the threshold number of returns for requiredelectronic filingof certain returns. The regulations included requirements for filingForm 1042electronically.
The final regulations provide that:
a withholding agent (but not an individual, estate,or trust) must electronically fileForm 1042if the agent is required to file 10 or more returns of any type during the same calendar year in whichForm 1042is required to be filed;
a withholding agent that is a partnership with more than 100 partners must electronically fileForm 1042regardless of the number of returns the partnership is required to file during the calendar year; and
a withholding agent that is a financial institution must electronically fileForm 1042without regard to the number of returns it is required to file during the calendar year.
The final regulations apply toForms 1042required to be filed for tax years ending on or after December 31, 2023. This means that withholding agents must apply the newelectronic filingrequirements beginning withForms 1042due on or after March 15, 2024.
Challenges to Withholding Agents
Since the final regulations were published, theIRSreceived feedback from withholding agents noting challenges in transitioning to the procedures needed for filingForms 1042electronically. Withholding agents expressed concerns about the limited number of ApprovedIRSModernizede-FileBusiness Providers forForm 1042, and difficulties accessing the schema and business rules for filingForm 1042electronically. Withholding agents that do not rely on modernizede-filebusiness providers said that they needed more time to upgrade their systems for filing on theIRS’s Modernizede-Fileplatform. Agents also noted challenges specific to foreign persons filingForms 1042regarding the authentication requirements necessary for accessing the platform.
In response to these concerns, theIRSused its power under the regulations to provide theexemptionfrom theelectronic filingrequirement forForm 1042, in the interest of effective and efficient tax administration.
Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.
Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.
The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:
Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.
Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.
Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.
For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.
Inventories.If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.
Specific Computerized Systems Requirements
If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.
If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.
Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.
After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:
Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.
Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:
Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.
You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.
Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:
Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.
Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.
Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.
Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.
With home values across the country at the highest levels seen in years, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.
With home values across the country dropping significantly from just a year ago, but still generally much higher then they had been even five years ago, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence.
Note. The Housing and Economic Recovery Act of 2008 modified the home sale exclusion applicable to home sales after December 31, 2008. Under the new rule, gain from the sale of a principal residence that is attributable to periods that the home was not used as a principal residence (i.e. "non-qualifying use") will be no longer be excluded from income. A transition rule provided in the new law applies the new income inclusion rule to nonqualified use periods that begin on or after January 1, 2009. This is a generous transition rule in light of the new requirement.
The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments.
Original cost
How your home was acquired will need to be considered when determining its original cost basis.
Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.
Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:
Attorney's fees,
Abstract fees,
Charges for installing utility service,
Transfer and stamp taxes,
Title search fees,
Surveys,
Owner's title insurance, and
Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.
Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.
Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.
Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.
Improvements
If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.
An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.
Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.
Other basis adjustments
Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:
Insurance reimbursements for casualty losses.
Deductible casualty losses that aren't covered by insurance.
Payments received for easement or right-of-way granted.
Deferred gain(s) on previous home sales.
Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.
Recordkeeping
In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)
The Internet has taken investing to a whole different level: inexpensive online trading and real-time stock market data have made many of us 'armchair investors'. As you actively manage your investments, you will no doubt incur additional expenses. Many of these expenses are deductible investment expenses.
The Internet has taken investing to a whole different level: inexpensive online trading and real-time stock market data have made many of us 'armchair investors'. As you actively manage your investments, you will no doubt incur additional expenses. Many of these expenses are deductible investment expenses.
Tax law allows taxpayers to deduct investment expenses if those expenses are ordinary and necessary for the production or collection of income, or for the management, conservation or maintenance of property held for the production of income.
What are investment expenses? Investment expenses are any expenses that you incur as you manage your investments. Some of these expenses are deductible (e.g. professional fees you paid related to investment activities; custodian fees, safe deposit rental; and subscriptions to investment-oriented publications), and some are not (e.g. costs related to tax-exempt securities; trading commissions (these increase the basis of the investment); and certain convention/seminar costs).
Who can deduct investment expenses? Investment expenses can be deducted by most individuals on their personal income tax returns. How these expenses are claimed depends on what type of investor a person is. Generally, investors fall into two categories: casual investor and professional trader.
Casual Investor
This category of investor describes most people actively managing their own investments. Investment expenses (except interest) are claimed on the taxpayer's return as miscellaneous itemized deductions. These expenses can be deductible on the return to the extent that they, when added to other "miscellaneous itemized deductions", exceed 2% of your adjusted gross income (AGI). The actual tax benefits derived from these excess miscellaneous itemized deductions may be further reduced due to AGI limitations for all itemized deductions and the alternative minimum tax (AMT).
In addition to the expenses noted above, if you use your computer extensively in the management of your investments, there are some other expenses to be aware of:
Online fees: You may deduct the portion of your monthly charges paid to your Internet Service Provider (ISP) incurred to manage your investments. If you subscribe to additional online services geared towards investors (e.g. The Wall Street Journal Interactive Edition) where you can follow your investments, these fees are also deductible investment expenses. Trading fees paid to online brokerages (e.g. E*Trade) are not currently deductible but are added to the basis of your investment, which will result in a reduced gain (or increased loss) upon disposition of the asset.
Software: If you purchase software that helps you manage and/or track your investments, the cost of the software may be depreciated over three years, and written off completely in the year of obsolescence. Programs that are useful for one year or less should be expensed in the year purchased, rather than depreciated.
Depreciation: Since the casual investor's investment-related use of a personal computer (and related equipment) is probably less than 50%, the cost of this equipment must be depreciated over five years using the straight-line method. The Section 179 expense deduction is not available for this type of investor.
A word of caution for self-employed individuals: if you use your home office for both business and investment purposes, you run the risk of losing your home office deduction for business purposes. A home office deduction is not available for the investment-related expenses for the casual investor. To claim a deduction for a home office for business purposes, your home office must be used exclusively for business; if you are performing investment activities in the same office space, you've just violated the "exclusive use" test.
Professional Trader
A professional trader is defined by the courts someone in between a dealer and an investor. A professional trader is a person that conducts trading activity focusing on short-term investments in large volumes on a regular and consistent basis, receives no compensation for his services, and does not have any customers. Participating in an investment club or partnership does not qualify a person as a professional trader.
If you meet the tough definition of a professional trader, you will be treated as a self-employed individual and all your investment expenses may be claimed on Schedule C of your return. You can also deduct all of your home office expenses, and you can claim Section 179 expenses for computers and other equipment used more than 50% in your business as a professional trader.
Below is a list of questions and answers to some of the basic topics you come across when reporting the sale of stock. Stock basis, holding periods, wash sale rules and sales of mutual funds are just a few of the items clarified.
Below is a list of questions and answers to some of the basic topics you come across when reporting the sale of stock.
Is stock a capital asset?As a general rule, any property that is owned and used by an individual for either personal or investment purposes is a capital asset. Some examples of this can be homes, furniture, cars, stocks and bonds. A sale of most capital assets will require reporting to the Internal Revenue Service (IRS) on your tax return. Losses on the sale of personal items, such as a car, furniture or personal residence, are not deductible, but may still be reportable.
What is a "holding period"?
Gains and losses on sales of stock need to be categorized as either long-term or short-term holding periods depending upon the length of time the stock is held. The date of disposition, called the trade date, is the date used for the sale. A short-term holding period would be defined as less than 1 year from date of purchase to date of sale. A long-term holding period would be one year or more.
What is meant by "stock basis"?
The cost of your stock is usually the basis. This will include commissions and recording or transfer fees. The basis of inherited stock is its fair market value (FMV) at the date of the decedent's death (unless a federal estate tax return was filed and an alternate valuation date chosen). To determine the basis of stock you receive as a gift, you must know the adjusted basis in the hands of the donor just before it was given to you, its FMV at the time it was given to you, and the amount of gift tax, if any, paid on it.
Do I need to save the purchase confirmations when I buy stock?
Yes! This helps support your documentation showing the purchase date, price and expenses. With mutual funds and stocks, it is important to keep the last statement of the year as this normally provides a summary for the year of all purchases, dividend reinvestments, etc.
What amount do I report as my sales price?
If you sold your stock through a broker, you should receive Form 1099-B, Statement for Recipients of Proceeds From Broker and Barter Exchange Transactions, by February 1 of the year following the year the transaction occurred. The amount reported to you on Form 1099-B as gross proceeds will usually consists of the total proceeds of the sale less any commissions or fees incurred on the sale. If, for some reason the amount reported as "Gross Proceeds" does not take into account any commissions or fees paid, you should add these selling expenses to the basis of the stock sold.
How important is Form 1099-B?
The amount reported on Form 1099-B is entered into the IRS computer and "matched" against the amount reported on your tax return. As a result, Form 1099-B is very important if you wish to avoid any further correspondence and/or inquiry by the IRS.
What is a wash sale?
A wash sale occurs when you sell a specific stock and, within 30 days before or after the sale, you purchase substantially identical stock. Losses from wash sales are not deductible, but are used to figure the basis of the new stock. Any gain, however, is taxable.
Is there a limit on the amount of capital loss I can deduct?
Yes. If, after combining all your capital gains and losses for the year you end up with a net capital loss, the maximum loss you may deduct would be limited to $3,000 per year ($1,500 if you are married and file a separate return). Net losses in excess of $3,000 can be carried forward to the following years until they are used up.
I frequently switch from one mutual fund to another. Do I have to report these transactions on my tax return?
Yes! If you sell or exchange shares of a mutual fund with a fluctuating share price, the IRS considers the transaction a taxable event, just like the sale of stock. You must calculate a capital gain or loss for each sale or exchange -- whether made by telephone, wire, mail or even a check. You should receive a Form 1099-B for each transaction.
Calculating gain or loss on the sale of mutual fund shares can be quite complex. Please feel free to contact the office for additional information regarding the different methods available for determining basis in your mutual funds.