Source: http://www.drtaccounting.com/
Timestamp: 2019-04-23 00:18:35+00:00

Document:
Investment income must be $3,400 or less for the year to qualify for the 2016 earned income credit.
The Earned Income Tax Credit, EITC or EIC as it is commonly know, is a tax benefit for working people with low to moderate income. It essential boosts their income by providing a refundable tax credit based on their income. Remember that you must have a job or other earned income in order to qualify for this tax credit. The government does not want encourage people not to work and to rely on government welfare by collecting this tax credit. Thus, there are certain income thresholds you must meet, but also certain income limitations which will prevent someone from claiming the earned income tax credit if they are making too much money.
To qualify for the earned income tax credit, taxpayers must meet certain requirements and file a tax return with IRS, even if you do not owe any tax or are not required to file a tax return. This is very important because many people do not file a tax return and then forgo the EITC when they would have otherwise qualified for it. For most people, the EITC reduces the amount of tax you owe and may give you a refund.
It will be very important to check with a tax preparer for more information. The IRS also has more information on claiming the earned income tax credit in 2016 on their website.
You need to file a tax return to claim EITC.
Important to remember that the 2012 American Tax Relief act extended the relief for married taxpayers claiming the EITC. This new tax expanded tax credit for taxpayers with three or more qualifying children and other provisions to December 31, 2017. Future laws could always change how the credit will apply to different taxpayer situations.
What are the Uniform Capitalization UNICAP § 263A Rules?
The UNICAP rules deny taxpayers immediate deduction for costs of producing property that taxpayer will use in its business or sell as inventory. Costs that must be capitalized (or added to the cost of inventory) include depreciation on equipment used in producing the property, employee’s wages allocable to production of the property, and an appropriate share of the rent and utilities expenses of the facility where property is produced. § 263A is for tangibles. This better matches expenses other related income and avoid un-wanted deferral of taxes by IRS.
If § 263A applies to property, they the must apply direct and indirect costs allocated to the property. A taxpayer cannot capitalize a cost if it would not be otherwise deductible. Same limitations in other deduction rules apply, for example the entertainment 50% limitation.
Direct Costs = Materials and labor directly attributable to some specific property produced are CAPITALIZED.
Indirect Costs = ALWAYS HAVE TO CAPITALIZE. Includes rent, utilities, insurance, an indirect labor costs, compensation that can’t be attributed, quality control and inspection, certain taxes on production facilities, costs of soliciting contracts to make property, hazardous waste costs, and storage costs.
Costs that are never capitalized – Selling and distribution expenses, overall management costs, research and development, deductible losses (§ 165), income taxes, product liability insurance, and strike costs. Even if they are arguable attributable to creating or buying some piece of tangible property.
Mixed- Service Costs – They are indirect business admin costs. Much in the same way that the regulations dictate that they must allocate indirect costs. They say that mixed service costs, some of them to pieces of property and deduct others. Statutory Formula.
How much do these costs directly benefit the making or buying of tangible property and how much do they not? Then split up. Split between deductibility. Personnel, Payroll departments, Security Departments.
Qualified Creative Exceptions. § 263A(h) – includes a personal efforts requirement, but does not mean that the taxpayer has to physically create the art in question. THINK ARTISTS. If they are doing something, it probably qualifiedunder 263A(h)- Not performing detailed design work, then does not qualify because he not exerting effort.
What does the IRS consider reasonable compensation?
This section often comes into play because the double taxation of corporations. If the officers and executives of a corporation are substantially identical with its major shareholders, a temptation may arise to distribute some of the earnings of the corporation under the label of additional compensation for services, rather than under the dividend label to save on taxes.
The reduction in dividend tax lessens that tax advantage of compensation over dividends, but in many situations a significant tax advantage for compensation remains. There are several exception for performance related compensation. However, what is reasonable compensation for the IRS is subject to lots of debate between the taxpayer and IRS on audit.
To find what is reasonable compensation, look at the market return. If investors are obtaining a high rate of return, executives should be compensated. Courts approach it many different ways. No indication how any of the factors should be weighed. Courts are not human resource departments. The test is unpredictable and leads to arbitrary conclusion.
No Super Personnel Department for Closely Held Corporation. The primary purpose of § 162(a)(1), which is to prevent dividends (or in some cases gifts), which are not deductible from corporate income, from being disguised as salary, which is. The IRS limits the amount of salary that a corporation can deduct from its income primarily in order to prevent the corporation from eluding the corporate income tax by paying dividends but calling them salary because salary is deductible and dividends are not.
Unreasonable compensation cases with can get very sticky. This is a lot like valuation, and courts rely heavily on expert testimony. How do you figure out if the compensation is reasonable? The IRS can really go after companies for unreasonable compensation and appeals might be necessary.
How does INDOPCO ruling affect the treatment of advertising costs as business expenses, which were generally deductible under § 162?
INDOPCO does not affect the treatment of advertising costs under § 162. These costs are generally deductible under that section even though advertising may have some future effect on business activities, as in the case of institutional or goodwill advertising. Maintain good image with public.
Taxpayers can immediately deduct promotional material that is given out to potential customers. Same thing for package design. However, trademarks are capital costs. Remember to capitalize the cost of the trademark. Deduct the package design but capitalize the facilitation of hiring the lawyer for the trademark. EVEN PAYING FOR MARKETING STRATEGY IS DEDUCTION.
Only in the unusual circumstance where advertising is directed towards obtaining future benefits significantly beyond those traditionally associated with ordinary product advertising or institutional goodwill advertising, must costs of that advertising me capitalized. What are benefits beyond advertising?
Advertising costs that create a separate and distinct asset must be capitalized. If there is ad campaign, but the only reason is to get admitted to a business organization. There is no other purpose but to create a separate and distinct asset. Make someone argument that you got something else.
What is the IRS definition of a Trade or Business?
TEST: To be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit. A sporadic activity, hobby, or amusement diversion does not qualify.
Allowance of a deduction constitutes something of a congressional blessing, an indication that Congress regards the expenditure in question as worthy and appropriate for the taxpayer to do. A finding of “necessity” cannot be made, however, if allowance of the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct, evidence by some governmental declaration thereof.
The test of non-deductibility always is the severity and immediacy of the frustration resulting from allowance of the deduction. The flexibility of such a standard is necessary if we are to accommodate both the congressional intent to tax only net income, and the presumption against congressional intent to encourage violation of declared public policy.
POLICY: § 162 business expense deduction should not encourage taxpayers to violate the law.
Qualified Residence Income- Section 163- Itemized Deduction - Taxpayers are allowed to deduct most interest on mortgages that are secured by their personal residence. Very important politically because many people do it.
FIRST, the number of personal residence is limited to two. § 163(h)(4)(A)(ii). Second home only qualifies if it used 15 days a year. Married couples may deduct one each.
SECOND, the home in question must secure the mortgage loan whose interest obligation the taxpayer seeks to deduct.
A taxpayer who has sufficient equity in the residence may borrow against that equity, use the proceeds for any purpose whatever, and still deduct the interest on the debt.
There is criticism about the vertical equity problem. The rich get more subsidy than the poor in this manner. Lots of people take this exemption. Maybe the Federal Government is losing too much REVENUE on the program. Economic distortion problem. From the political perspective, lots of people bought their homes calculating their purchases with the interest deduction. All these rules apply to mobile homes.
Finally, the loan amounts generating deductible interest (but not directly the interest itself) are limited by dollar-level maximums: Interest with respect up to $1 millions of acquisition indebtedness can be deducted, as can interest with respect for up to $100,000 of home equity debt. These numbers have not been adjusted recently.
§ 165(a) – Losses incurred in a trade or business, or in activities engaged in for profits, are generally deductible. POLICY: The usual justification is that income tax should reach only the net income from business and profit-seeking activities, not gross receipts from those activities.
§ 262(a) provides a general casualty loss rule that no deduction shall be allowed “for personal living, or family expenses” The tax rules disallowing for deductions for gradual loss in wealth in effect presume conclusively that the amount by which the value of an asset is diminished over time is itself the best measure of the consumption value enjoyed by the taxpayer over the same period.
§ 165(c)(3) will allow you to claim a casualty loss deduction.
§ 165(h)(1) - Even if the property damage is a result of an acceptable sort of casualty, a casualty loss deduction is allowed only if and to the extent that the taxpayer’s loss exceeded $100.
§ 165(h)(2) which provides that the total amount of a taxpayer’s casualty losses for the year is deductible only to the extent is exceeds 10% of the taxpayer’s AGI in the same year. Sometimes specific exceptions to waive rules.
§ 165(h)(2)(B)- If the casualty gains exceed casualty losses, the gains are treated as capital gains and the losses are treated as capital losses.
Steps for Calculating the Deductions – Lesser of Adjusted Basis or Loss!
For each piece of property damaged, begin with FMV of the property before casualty.
Subtract the value of the property after the casualty.
Compare the result with the adjusted basis of the property, taking the lesser of the two numbers as the tentative casualty loss.
Subtract the amount of any recoveries from tortfeasors or insurance coverage.
If the taxpayer suffered more than one casualty, the steps above must be repeated for each piece of property in each additional casualty suffered.
Once the gains and loses from each casualty are computed, the taxpayer adds them together, then subtracts 10 percent of AGI. 1. That is the amount allowed for the deduction. 2. Check to see if this is bigger than the standard deduction.
History and Rationale of State and Local Tax Deduction - Best justified as a concession to Federalism. The Federal Government recognizes by this deduction that state and local governments have their own revenue needs. They can get money how they please. Consents to assess federal taxes only against the income that remains after state and local governments have exacted their assessments. POLICY: Equality issues if states provide different services and assess different kinds of taxes.
For example: Interest imposed on real property, for the general public welfare. Then it is property tax and is deductible. Distinguish from fees that increase that value of the property assessed. Allows foreign taxes, this is controversial. Not a lot of wealth taxes, other countries do. What kinds of wealth taxes are deductible?
NO FEES FOR USE or STATE PRIVILEGE! For example access to parks or a state university. These are not the type of state and local taxes that are deductible on a federal return.
§ 162 says that deductions shall be allowable for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.An ordinary expense is one that is normally to be expected in view of the circumstances facing the business, and a “necessary” expense is one that is appropriate and helpful to the business.
Necessary means “appropriate and helpful” in the development of the taxpayer’s business. A requirement that a business show the absolute necessity of its expenses, in other words, would put the IRS in the position of reviewing every business decision to ensure that no money was spent unnecessarily.
Ordinary Expense- The question of whether expenditure is “ordinary” has been more controversial in the development of the business deduction. "Ordinary” means something that is “normal, usual, or customary” in the trade or business in which the taxpayer is engaged. Commonplace and used up in the course of a year. NOT CAPITAL EXPENSE.
The Principal function of the term “ordinary” is to clarify the distinction, often difficult, between those expenses that are currently deductible and those that are in the nature of capital expenditures, which, if deducible at all, must be amortized over the useful life of the asset.
There could be a public policy exception for some types of ordinary and necessary business expenses under § 162.
2. SCOPE: § 1031(a)(1): It is limited to property that is used in a business or held for investment.
a. There must be sign of continuous investment. Stuff cannot just sit there.
b. LITIGATED ISSUE: The cases often turn on this requirement.
4. Party claiming like-kind exchange must not be dealer in type of property exchanged.
1. The asset is not liquid, so the taxpayer might not have cash to pay the tax on gain.
2. Is the real justification, then, that a taxpayer who receives like-kind property should not be taxed because he has not changed the fundamental nature of his investment?
iii. Continuation of the basic nature of the taxpayer’s investment.
a. The properties must be in the same asset class.
3. In determining if two properties are of like kind, look first to the characterization of the properties in question.
a. If both are real property, the answer will almost be yes.
b. All real property is considered “like kind” for purposes of the statute, even if one is improved and the other is not, or if they are in different states.
iv. What qualifies as an “exchange”?
1. Three party exchanges are OK. Someone can buy real estate from a third party, then trade it or other real estate.
2. The IRS acknowledges that a properly structured three-party transaction such as this can qualify for Nonrecognition under § 1031.
3. If the law did not permit such three-party exchanges, the practical significance of § 1031 would be very limited.
1. Boot = Equalizing the transaction by throwing in cash. Does that mean anything thrown into the boot will spoil the transaction for § 1031 purposes?
a. § 1031(b) says that if the taxpayer has gain on the property she transfers and receives consideration both in the for of qualified (like-kind) property and nonqualified property or cash (generally referred to as “boot” in either case), then the gain realized on the transferred property will be recognized, but only up to the amount of the boot – the amount of cash or the fair market value of the nonqualified property.
i. It is necessary, in order to apply the rule of § 1031(b), to determine the taxpayer’s gain realized, which in turn requires a determination of the taxpayer’s amount realized – including the fair market value of the property.
ii. Is it really possible to defend § 1031 as a response to valuation difficulties?
c. Taxpayers with losses that they are disposing prefer not to qualify under § 1031.
a. Decreased by the amount of any money received (BOOT) by the taxpayer in the transaction; In order to reflect the allocation of basis to the cash received by the taxpayer.
b. Increased by the amount of any gain recognized by the taxpayer on the transaction;. To ensure that he is not taxed twice. The total basis to which the taxpayer is entitled is his old basis in the transferred property, plus his gain recognized on the transfer.
c. Decreased by the amount of any loss recognized by the taxpayer on the transaction.
d. INCREASE BASIS BY MONEY PAID. Not specified in statute: It is that the basis in the acquired property must be increased by any money paid by the taxpayer as part of the like-kind exchange.
i. The regulations state that when additional consideration is given in a § 1031 transaction, the basis of the acquired property is the basis of the transferred property, increased by the amount of the additional consideration.
2. POLICY: Most recognize built in gain.

References: § 263
 § 263
 § 263
 § 263
 § 162
 § 162
 § 162
 § 162
 § 163

§ 165

§ 262

§ 165

§ 165

§ 165

§ 165

§ 162
 § 162
 § 1031
 § 1031
 § 1031
 § 1031
 § 1031
 § 1031
 § 1031
 § 1031
 § 1031