Article Highlights:

Taxpayer First Act
Taxpayer Notification when a SSN is Fraudulently Used
Purpose of an IP PIN
Obtaining an IP PIN
Is an IP PIN Right for You?

With the passage of the Taxpayer First Act in mid-2019, the Treasury Department (i.e., the IRS) is required to establish a program to issue an identity protection pin (IP PIN) to any U.S. resident who requests one. For each calendar year beginning after the date of enactment, the IRS must also expand the issuance of IP PINs to individuals residing in such states as the IRS deems appropriate, provided that the total number of states served by the program continues to increase. Often, identity theft and refund fraud victims may be unaware that their identity has been used fraudulently, or when they are aware, they may not be fully informed of the outcome of their case. The Taxpayer First Act addresses this situation by requiring that the IRS notify a taxpayer if it determines any of the following: there has been any suspected unauthorized use of a taxpayer’s identity or of that of the taxpayer’s dependents; if an investigation has been initiated and its status; whether the investigation substantiated any unauthorized use of the taxpayer’s identity; and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving the victim the ability to pursue civil action against the perpetrators. An IP PIN is a six-digit number assigned by the IRS to eligible taxpayers. This pin helps prevent the misuse of taxpayers’ SSNs on fraudulent federal income tax returns. The IP PIN was originally established several years ago to aid taxpayers whose SSNs had been used to file a fraudulent return or if a taxpayer’s SSN had been compromised and there was concern it could be used to file a fraudulent return. Recently, as a result of the Taxpayer First Act, the IRS has opened the IP PIN system to a variety of taxpayers. In addition to taxpayers whose SSNs the IRS has determined are compromised for tax-filing purposes, IP PINs now are available to those who

filed their federal tax return last year as a resident of Florida, Georgia, the District of Columbia, Michigan, California, Maryland, Nevada, Delaware, Illinois, or Rhode Island or
received an IRS letter inviting them to “opt-in” to get an IP PIN.

Requesting an IP PIN is strictly voluntary. If you choose not to participate in the program, you can file your return as you normally would. If you are assigned or if you request an IP PIN, you must use it – along with your SSN – to confirm your identity on any tax returns filed electronically during the calendar year. A new IP PIN is generated for each filing season and can be retrieved starting in mid-January of each year by logging into the account you create with the IRS. At this time, if you choose to receive an IP PIN, you must use your IP PIN on all 1040 (current year and delinquent) returns filed during the calendar year. To obtain an IP PIN, you must pass the IRS’s identity verification secure access process. To do that, you must register with the IRS and set up an online account that is only accessible with a username and password established during the registration process. This can require lots of verification information so the IRS can make sure you are not a scammer trying to obtain an IP PIN for someone whose identity has already been stolen. Next, you have to log into the IRS IP PIN Section, which requires double authentication: a password plus a 6-digit code that is sent to your cell phone. Once you have jumped through all those hoops, you can retrieve your IP PIN. So, is an IP PIN right for you? That depends; the process is quite complicated, and you get a new number every year. So, you have to weigh the trouble and inconvenience it creates when your SSN has not been compromised with knowing you can always obtain an IP PIN if your SSN is compromised in the future or if you feel it may have been compromised. The decision is up to you. Of course, if the IRS has already sent you a CP01A Notice – the annual communication from the IRS containing your unique 6-digit IP PIN and instructions on how to use it—you are already in the system. Please give this office a call if you have questions about IP PINs.

Article Highlights

Improvements for Medical Care or Treatment
Improvements That Increase the Home’s Value
Improvements That Do Not Increase the Home’s Value
Medical AGI Limitations

While Americans may argue about any number of hot-button political topics, there’s no disagreement on one issue: the country’s population is aging…fast. According to the Social Security Administration, 10,000 baby boomers a day are reaching the age of 65. Many individuals, for either themselves or an older family member, are senior-proofing their homes – adding grab bars in showers, modifying stairways, widening hallways to accommodate a wheelchair, and other projects to make the home safer and more accessible for older occupants. If you are planning to make such home improvements, you may be wondering whether any of the costs will be tax-deductible. Generally, the costs of home improvements are not deductible except to offset home gain when the home is sold. But a medical expense deduction may be claimed when the primary purpose of the home modification is for a medical reason. The tax law says that deductible medical expenses are those paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.” So, if you are making the modification because you, your spouse, or a dependent has a medical need for doing so, then the modification expense may be deductible as a medical expense, but only to the extent that it exceeds any resulting increase in the property’s value. For example, a doctor recommends that a taxpayer with severe arthritis have daily hydrotherapy. The taxpayer has a hot tub installed at a cost of $21,000. A certified home appraiser determined the hot tub addition increased the home’s value by $20,000. The taxpayer’s medical deduction for installing the hot tub will only be $1,000. The other $20,000 of expenses will increase the home’s basis, meaning that it will add to the home’s cost and will offset the sales price when the home is sold. While the tax rules don’t require a prescription from a doctor for most medically related home modifications, the taxpayer, if questioned by the IRS, needs to be able to demonstrate how the expenditure is related to his or her medical care or that of a spouse or dependent. And having a letter from the individual’s doctor that explains the type of modifications that would be medically beneficial would help to prove a medical need. Not all improvements result in an increased home value. In fact some, such as lowering cabinets for an occupant confined to a wheelchair, could actually decrease the home’s resale value. The IRS has identified certain improvements as not usually increasing a home’s value and for which the cost can be included in full as a medical expense. These improvements include, but are not limited to, the following items:

Constructing entrance or exit ramps for the home;
Widening doorways at entrances or exits to the home;
Widening or otherwise modifying hallways and interior doorways;
Installing railings, support bars, or other modifications;
Lowering or modifying kitchen cabinets and equipment;
Moving or modifying electrical outlets and fixtures;
Installing porch lifts and other forms of lifts (but generally not elevators);
Modifying fire alarms, smoke detectors, and other warning systems;
Modifying stairways;
Adding handrails or grab bars anywhere (whether or not in bathrooms);
Modifying hardware on doors;
Modifying areas in front of entrance and exit doorways; and
Grading the ground to provide access to the residence.

Only reasonable costs to accommodate a home to a disabled condition or to an elderly individual are considered medical care costs. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses (but could be additions to the home’s tax basis). Unfortunately, the total of all medical expenses can be deducted only to the extent that they exceed 10% of the taxpayer’s adjusted gross income (AGI) and only if the taxpayer itemizes deductions. With tax reform’s higher standard deduction, only between 5% and 12% of taxpayers are expected to itemize their deductions in the years through 2025, down from 30% prior to 2018. So even if a medically needed home improvement is made and qualifies to be deducted, only a small percentage of taxpayers will end up with a tax benefit as a result of the expenditure. All is not lost, though. To the extent that the taxpayer doesn’t claim the expense as an itemized deduction, the improvement costs, including those that might not meet the medically necessary standard, can be added to the home’s purchase cost to determine the home’s tax basis. Thus, when the home is sold, the capital gain from the sale will be lower.Either to substantiate the currently deductible improvements or with a future home sale in mind, taxpayers should be sure to keep records of the home improvements they make, including the receipts for the costs. Please call this office if you have questions related to this deduction and whether you will benefit, tax-wise, from any medically related home modifications.

Tax problems aren’t just a worry that hang over people’s heads from January through April every year. Many of them go far beyond the numbers that you report, and they can require additional evidence that your bank statements and paychecks can’t provide. Additionally, the IRS isn’t the only source of those problems: state tax authorities are hungry for revenue, and if you divide your time among different states, you may find it difficult to establish nexus and may even have to file taxes in multiple states. Below are some of the most common personal income tax issues people are likely to face. 1. You didn’t make (or underpaid) estimated tax payments. Self-employment is the most common cause of this. When you’re used to having taxes withheld from your paychecks at work, it can be a shock to have to pay taxes yourself. You can end up owing not just a large amount of self-employment and income taxes, but also penalties for not making tax payments on time. Estimates must be deposited quarterly, or you will face an underpayment penalty. If your total tax due when you go to file is under $1,000, you won’t have to worry about getting smacked with an underpayment penalty. However, it’s a good idea to set aside at least 25%-30% of your income for estimated tax payments and commit to paying this amount every month if quarterly taxes are too complicated to figure out. Other situations like freelancing on the side or rental income while you’re still employed can also cause you to fall short at tax time, so make sure to have extra taxes withheld from your paycheck if you don’t want to make estimated payments. State tax payments also shouldn’t be neglected. 2. You didn’t correctly file state tax returns after moving. Moving to a state with little or no income taxes like Nevada or Florida can be appealing if your bank account feels squeezed in high-tax states like New York or California. Many people divide their time between multiple states for work or personal reasons, and if it’s not just a two- or three-week creative retreat or corporate assignment, it can make nexus difficult to determine in some cases. With the prospect of a lower tax burden becoming even more appealing, it seems logical to just move to the tax-haven state you’ve been eyeing. But even after you file for a change of address with the postal service, change your voter registration, and get recognized as a resident by your new state, the high-tax state that you left is likely to also still treat you as one. Typically, you must spend at least 183 days of the year in the other state and maintain a primary residence there. Simply having property in another state won’t do if the rest of your family doesn’t also live and wait there for you after your work or travel. Where you spend time outside of work also matters because where you sleep every night is ultimately what counts. If your move is indeed permanent and your residency is valid, you may have to file a part-year resident tax return for the final months you stayed in the old state. You won’t need to worry about it for following years, but keep track of how many days were spent in each state before and after moving day. 3. You neglected to file state income tax returns as a nonresident. If you have business or rental income in another state, you may be required to file state tax returns as a nonresident. If this income is significant, it can end up producing a large tax bill if you’re unprepared. If you have an out-of-state job, chances are that your payroll provider may also be incorrectly withholding taxes for the appropriate state and/or city. In concentrated regions like the tri-state area, especially for New York City and Philadelphia residents, ensure that city taxes are being correctly withheld if you are a resident, and that withholding curtails if that is no the longer the case. There are usually reciprocity agreements among states and municipalities in areas where state lines cross, but you should carefully check to make sure you don’t owe nonresident taxes in addition to what you owe your home state. Failure to make tax payments on time, and to the right agency, are income tax problems that are often overlooked and can quickly spiral out of control. To avoid these issues and many more, contact our office so we can consult you on your state and local taxation, as well as rules for establishing nexus.

Article Highlights:

Wildfires
Planned Power Outages
Solar Batteries
Solar Tax Credit

Over the past few years, several wildfires have been blamed on power lines downed during periods of low humidity and gusty winds, which typically occur in the fall. The 2018 Camp fire, sparked by downed power lines, was the deadliest in California history, claiming 85 lives and causing more than an estimated $16 billion in damages. Wind events can last for days, and the loss of power for extended periods can result in spoiled food and other inconveniences for homeowners who lack other power sources. Planned power outages are already being implemented by some utility companies and may become commonplace in the future, since gusty weather comes every year, and power companies must consider their financial liabilities if a downed line sparks a wildfire. As a result, homeowners and businesses in fire-prone areas will need to be proactive in planning for these emergency power outages and decide whether they need to provide themselves alternate power sources during outages or just ride out the powerless periods. Of course, alternate power sources come with a price tag, which will play into that decision. Even if you do not live in a wildfire-prone area, you may be in an area that is susceptible to power outages and may want to consider alternate power sources for during outages. Businesses can, of course, write off the cost of providing themselves alternate power sources, but the tax law doesn’t allow homeowners to deduct the costs of a generator or other outage-mitigation measures. However, one tax credit applies to homeowners who install solar power property, and that credit extends to batteries that are charged solely by solar power. (1) Even if you only have a standard solar power system without a battery back-up, you will still lose power during an outage because of how most panels are connected to the electric grid. However, if you have a battery incorporated into your solar system, your home can run off the solar energy stored in your battery when there is a power outage. Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery.(1) Those who do not already have a solar system may want to consider the cost of installing a solar system with a battery.Installing a solar system with a battery or adding a battery to an existing system may be a convenience item for some and worth the cost. The costs can be substantial, however, and a household’s energy needs or the cost of power in your area may not justify the cost of a solar system, much less the cost of a battery. Carefully consider your needs before deciding whether to invest in a solar system. Although it will not qualify for a solar credit, a battery system attached to the electric grid may be another option. If you want to take full advantage of the solar tax credit, you need to act soon, as it is being phased out. Note that 2019 is the last year that the credit is equal to 30% of the cost of a solar system. The credit amount drops to 26% in 2020 and 22% in 2021, the final year of the credit. The credit is nonrefundable, which means it can only reduce your tax to zero, and any excess is carried over to the subsequent year. During periods of possible outages, keep your car’s gas tank filled, as service stations can’t pump gas without power. Keep some cash handy, since without power, your credit/debit cards are useless, and ATM machines won’t be able to pump out cash. External batteries to charge cell phones will come in handy as well. If you have questions related to how the solar credit might apply to your particular circumstances, please give this office a call. (1) A battery attached to solar panels is qualified solar electric property if it’s charged only by solar energy. A software-management tool is qualified solar electric property where the software is necessary to monitor the charging and discharging of solar energy from a battery attached to solar panels. Earlier installations of qualifying property don’t affect the availability of the solar for qualifying property in later years. Thus, where a qualifying solar panel system was installed in Year 1, an additional solar credit could be claimed in Year 2 for the installation of a battery that was connected to the system and was qualified solar electric property. (IRS Letter Ruling 201809003)

At their core, tax credits are a very particular type of benefit designed to offset the actual tax liability associated with SMBs around the country. This isn’t the same thing as a tax deduction, which lowers that business’s actual income. Tax credits are typically offered to incentivize everything from hiring more workers in order to stimulate the economy to making meaningful contributions to specific industries. While certain tax credits are obvious, others are decidedly less so. This is why proper tax planning is essential as a small business owner — you need to be proactive about getting every last penny that is owed to you. There are a number of essential small business tax credits in particular that you’ll definitely want to take advantage of when tax season rolls around. The General Business Tax Credit As the name suggests, this is something of a “kitchen sink” tax credit made up of a number of smaller, individual credits. Collectively, they are designed to act as a way to motivate savvy business owners such as yourself to participate in certain activities. If you purchased a qualified electric vehicle for your business, branched out into a new market, or retained a certain number of employees, you may very well be qualified. To find out more information, see the General Business Tax Credit Form 3800. Paid Family and Medical Leave This particular tax credit is relatively new, having only just been authorized in 2017. Again, it’s intended to act as motivation — this time, so that small business owners will provide paid leave to all employees who themselves are covered by the Family and Medical Leave Act. Employees that qualify are entitled to up to 12 weeks of totally unpaid, job-projected leave — all while still retaining access to their group health benefits as well. Note that this is something that happens every year. The credit itself is equal to a percentage of the wages that an employer pays to those qualified employees while they’re on leave for things like unexpected medical emergencies or even giving birth. To find out more information, view IRS Form 8994. The Alternative Motor Vehicle Credit This credit is a sizable one of up to $8,000, so it is absolutely in your own best interest to claim it if you qualify. As the name suggests, it’s a way to incentivize small business owners to purchase an “alternative fuel source” vehicle. Note that the cars that fall into this category would be those that use hydrogen fuel-cell technology, not hybrids or electric vehicles since those are still considered to be “traditional” types of fuel. Yes, the list of qualified vehicles is currently small — but that doesn’t mean it won’t expand in the future, and the credit itself is still worth keeping an eye on. To find out more information, be sure to view Form 8910. Credits for Qualified Research Expenses Depending on the specific type of small business you’re running, you may have to engage in a significant amount of research and development in order to better serve your own customers. The United States government would like to encourage you to do as much of that as possible, which is how the qualified research expenses credit (otherwise known as the “Increasing Research Activities Credit”) came into being. In order to qualify for this credit, you need to engage in domestic research and development for the purposes of things like certification testing, environmental testing, developing or applying for patents, prototype and model development, and more. Research associated with the development of new or even improved products, processes, and formulas would also qualify. This credit can cover up to 20% of all of your related expenses that fall under this umbrella, so be sure to view Form 6765 for more information. The New MarketsCredit Last but not least, we have the New Markets Credit — one designed to encourage investment in Community Development Enterprises and Community Development Financial Institutions, otherwise known as CDEs and CDFIs, respectively. These are the types of organizations that assist lower income communities around the country and, obviously, they need all the help they can get. The vast majority of all qualified projects involve either purchasing, renovating or constructing real estate in areas that have a 20% poverty rate or with median family incomes that don’t exceed 80% of that of the larger area. This means building or renovating hospitals, for example, or industrial buildings that go on to create jobs. To find out more information, consult Form 8874. Note that while all of these small business tax credits are critical, they represent just a small fraction of those that may be available to you. For the complete list, be sure to review the IRS’ official website devoted to that very topic. As always, you should also enlist the help of a qualified tax professional to prepare your business taxes as well. Not only can we help ensure you’re taking full advantage of these and other critical credits, but we can also help you avoid the types of costly mistakes that small business owners and the self-employed often make when they attempt to do everything themselves. Contact our office for more information today.

Article Highlights:

Crowdfunding Sites
Gifts
Charitable Gifts
Business Ventures
SEC Registration

Raising money through Internet crowdfunding sites prompts questions about the taxability of the money raised. A number of sites host money-raising projects for fees ranging from 5 to 9%, including GoFundMe, Kickstarter, and Indiegogo. Each site specifies its own charges, limitations, and withdrawal processes. Whether the money raised is taxable depends upon the purpose of the fundraising campaign. Gifts – When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient. On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual; the contributor is then liable to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible. A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (whom we’ll call the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; if the amount is over $15,000, the fundraiser is required to file a gift tax return and to reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems. Gifts to specific individuals, regardless of the need are not considered a charitable contribution under tax law. An example is raising funds to help pay for someone’s funeral expenses. Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A. Charitable Gifts – Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:

Contribution Less Than $250 – To claim a deduction for a contribution of less than $250, the taxpayer must have a cancelled check, a bank or credit card statement, or a letter from the qualified organization; this proof must show the name of the organization, the date of the contribution, and the amount of the contribution.
Cash contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization; this acknowledgment must include the following details:
o The amount of cash contributed; o Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, along with a description and good-faith estimate of the value of those goods or services (other than intangible religious benefits); and o A statement that the only benefit received was an intangible religious benefit, if that was the case.

Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided. Business Ventures – When raising money for business projects, two issues must be contended with: the taxability of the money raised and the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.

No Business Ownership Interest Given – This applies when the fundraiser only provides the contributor nominal gifts, such as products from the business, coffee cups, or T-shirts; the money raised is taxable to the fundraiser.
Business Ownership Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest; the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment. When the fundraiser is selling business ownership, the resulting sales must comply with SEC regulations, which generally require any such offering to be registered with the SEC. However, the SEC regulations carve out a special exemption for crowdfunding:
o Fundraising Maximum – The maximum amount a business can raise without registering its offering with the SEC is $1.07 million in a 12-month period. Non-U.S. companies, businesses without a business plan, firms that report under the Exchange Act, certain investment companies, and companies that have failed to meet their reporting responsibilities may not participate. o Contributor Maximum – The amount an individual can invest through crowdfunding in any 12-month period is limited:

If the individual’s annual income or net worth is less than $107,000, his or her equity investment through crowdfunding is limited to the greater of $2,200 or 5% of the investor’s annual net worth.
If the individual’s annual income or net worth is at least $107,000, his or her investment via crowdfunding is limited to 10% of the investor’s net worth or annual income, whichever is less, up to an aggregate limit of $107,000.

On the bright side, even if the money raised is income to the business, it will probably net out to zero taxable if it is spent on tax deductible business expenses. Does the IRS Track Crowdfunding? – Maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (credit card, PayPal, etc.). These third-party processers are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. Question is, will the third party follow the de minimis rule? If you have questions about crowdfunding-related tax issues, please give this office a call.