by Fresh Start Tax | Jun 21, 2014 | Tax Help
Exemption Requirements – 501(c)(3) Organizations
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.
In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
- Organizations described in section 501(c)(3) are commonly referred to as charitable organizations.
- Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.
The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual.
If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.
Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct.
by Fresh Start Tax | Jun 20, 2014 | Tax Help
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Deducting Business Expenses
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
What Can I Deduct?
- To be deductible, a business expense must be both ordinary and necessary.
- An ordinary expense is one that is common and accepted in your trade or business.
- A necessary expense is one that is helpful and appropriate for your trade or business.
An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
1. The expenses used to figure the cost of goods sold,
2. Capital Expenses, and
3. Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold.
Some of your expenses may be included in figuring the cost of goods sold.
Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year.
If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold.
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities.
Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
Capital Expenses
You must capitalize, rather than deduct, some costs.
These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.
There are, in general, three types of costs you capitalize.
1. Business start-up cost (See the note below)
2. Business assets
3. Improvements
You can elect to deduct or amortize certain business start-up costs.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses.
However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts.
You can deduct the business part.
Example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense.
The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home.
These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses.
If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
For a list of current and prior year mileage rates see the Standard Mileage Rates.
Other Types of Business Expenses
- Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
- Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
- Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
- Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
- Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
- Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
by Fresh Start Tax | Jun 20, 2014 | Tax Help
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Ponzi Scenarios for Clawback Treatment -Most Common Questions Answered
Question: How does a taxpayer treat the repayment of a clawback?
Answer: Claw back repayments of amounts previously reported as income from a Ponzi scheme are not additional theft loss deductions.
Instead, they are repayments of claim-of-right income that result in either a deduction as a non-theft investment loss, or a credit calculated under IRC § 1341, whichever results in lower tax.
A theft loss deduction from a Ponzi scheme is not a deemed repayment of Ponzi income that is eligible for IRC § 1341 treatment, see Rev. Rul. 2009-09, and a taxpayer that attempts to claim § 1341 treatment for all or part of a theft loss deduction cannot use the safe harbor in Rev. Proc. 2009-20.
However, an actual clawback repayment is not a theft loss deduction and § 1341 treatment is not barred by Rev. Proc. 2009-20.
If, as will generally be the case, a clawback exceeds $3,000, § 1341 applies and the taxpayer would compute the tax for the year of the clawback payment (the clawback year) under two methods.
Method 1:
Figure the tax for the clawback year claiming a non-theft investment loss deduction for the clawback payment.
It is not a capital loss and it is not subject to the 2% floor on miscellaneous itemized deductions.
Method 2:
Figure the tax for the clawback year with a credit computed as follows:
Figure the tax for the clawback year without deducting the repaid amount.
Refigure the tax for the year the clawed-back income was originally reported (the income year) without including in income the amount of the clawback payment.
Subtract the hypothetical tax for the income year in (2) from the actual tax shown on the return for the income year. This is the § 1341 credit.
Subtract the answer in (3) from the tax for the clawback year figured without the deduction (step 1).
The taxpayer is entitled to the benefit of either the deduction under Method 1 or the credit under Method 2, whichever results in less tax (or a greater refund) for the clawback year. Note that the § 1341 credit is a refundable credit.
Therefore, the credit may result in a refund payment for the clawback year even if, in that year, the taxpayer had no taxable income and made no tax payments.
However, although the § 1341 credit is based on the amount of tax the taxpayer would have saved in the income year if the taxpayer had not reported the clawed-back income, it is not an actual credit or refund for the income year, and does not bear overpayment interest from the income year.
For information on where an individual reports the IRC § 1341 credit on the Form 1040, please see Pub. 525 and the instructions to Form 1040.
Question: What does the taxpayer need to establish as to whether the repayment of a clawback is allowable as a deduction (or a § 1341 credit)?
Answer: The taxpayer would have to establish that the clawback amount was required to be repaid to the trustee. The taxpayer would also have to substantiate that payment was made. The substantiation could include a letter from the trustee.
by Fresh Start Tax | Jun 20, 2014 | Tax Help
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by Fresh Start Tax | Jun 20, 2014 | Tax Help
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