More on Travel - Are expenses deductible for that Convention you plan to attend?

You can deduct your travel expenses including travel, lodging, and meals for yourself when you attend a convention within the United States if you can show that attending the convention benefits your business. These rules apply to workshops, conferences and seminars, as well as actual conventions.

You can satisfy the business relationship test by showing that your business duties and responsibilities tie in to the program or agenda of the convention. The agenda doesn't necessarily have to deal specifically with your duties or responsibilities - a tie-in is enough. You must, however, show some kind of income-producing purpose for attending the convention. In any case, you won't be able to deduct any non-business expenses (sightseeing, for example) you incur while attending the convention.

The rules become far stricter when the convention is held outside North America or on a cruise ship. Basically, you can not deduct expenses that are essentially allowing you to disguise a vacation as attending a convention. This is especially true of investment conventions and seminars or where the purpose of the convention attendance is simply to receive materials to be viewed at the taxpayer's leisure  However, the IRS recognize that at least some of these trips are for bona fide business purposes.

Here's more you need to know:

Conventions held outside North America. In order to be able to deduct expenses for attending a convention outside the North American area, the convention must be directly related to your business and it must be as reasonable to hold the convention outside North America as in it. For example, it would be reasonable to hold the convention outside North America if many of the convention's attendees lived overseas.

You must also satisfy the requirements for deducting business travel expenses outside the U.S..

However, there is a way to enjoy an exotic locale without triggering the foreign convention rules: be aware of what countries are considered within the "North American area." For purposes of convention travel, a North American area" includes the obvious: the United States, its possessions, the Trust Territory of the Pacific Islands, Canada and Mexico. However, it also includes countries that have an information agreement in place with the United States and that meet certain tax law requirements.

The IRS maintains a list of these countries, many of which are tourist meccas that you might not think of as North American, mainly the Caribbean Islands.

Conventions held on cruise ships. The following requirements must be met before you can deduct expenses incurred for a convention or seminar held on a cruise ship:

·         The convention must be directly related to the active conduct of your business.

·         The cruise ship must be a vessel registered in the U.S.

·         All of the cruise ship's ports of call must be located in the U.S.(or its possessions).

·         You must attach to your income tax return a written statement signed by you that includes the total days of the trip (excluding the days you spent traveling to and from the ship's port), the number of hours each day that you devoted to scheduled business activities, and a program of the scheduled business activities of the meeting.

·         You must attach to your income tax return a written statement signed by an officer of the organization or group sponsoring the convention that includes a schedule of the business activities of each day of the convention, and the number of hours you attended the scheduled business activities.

If you meet the requirements, you can deduct up to $2,000 annually of the expense of attending a seminar or convention on a cruise ship. In the case of a joint return, a maximum of $4,000 would be deductible if each spouse attended qualifying cruise ship conventions.

So now you know!

What you need to know about deductions when taking business vacation trips outside the United States

We all understand that trips outside of the United States are deductible for employees if the primary purpose of the trip was for business. 

However, what we often don't know is that such a trip is only deductible if the employee had no control over the assignment of the trip, is not a managing executive of the company, holds  10% or less of the company stock an is not related to the employer. A managing executive is one who can make the decision on whether the trip should be taken.

What about the Managing Executives, self-employed persons, employees who are related to the employer or who own more than 10% of the company stock?

Well, the good news is they can still deduct the costs of a business trip if the total time outside of the United States was 1 week or less, not counting the day of departure but counting the day of the return.

If the trip lasted longer than 1 week, then the trip can still be deductible if:

 less than 25% of the taxpayer's time was spent on vacation or other personal activities;  

      or   the planning of the trip was organized to conduct business rather than to take a vacation.

If the 25% rule is not satisfied, then the taxpayer must allocate travel expenses between the business part and the personal part by dividing the number of days spent in the business activity by the number of days spent outside the United States, then multiplying the travel expenses by that fraction. 

OK, more good news for Managing Executives, self-employed persons, employees who are related to the employer or who own more than 10% of the company stock.

 If scheduled business activities are several days apart, then those days are counted as business days even if the taxpayer uses them for vacationing. The following are considered business days:

Business days: Days mainly devoted to business.

Required presence: if you are required to be there, even for a short time, then it counts as a business day.

Business travel: Days traveling to another business location, but only the number of days that would be required to travel to the destination directly.

Weekends and holidays that are between business days, not including the return-to-home day. So if you spend Friday and Monday on business, but spend Saturday and Sunday sightseeing, then that counts as 4 business days. But if you spend Monday sightseeing, then work on Tuesday, then, if Monday was not a holiday, that would only count as 2 business days.

If a business trip consists of both domestic trips and foreign trips, then the number of days counted either for business or personal reasons is only for those days outside of the United States.

If travel is by cruise ship, then the maximum deduction that can be claimed is limited:

Maximum Deduction for a Cruise Ship = Number of Days on the Cruise Ship × Highest Federal per Diem Rate for Travel in the United States × 2.

So what is next for tax inversions and when?

As an international tax advisor we are always interested when the topic of “tax inversion” hits the headlines as was recently the case with the announcement of the Medtronic for Covidien,  Pfizer for AstraZenca, Questcor for Mallinckrot, and Horizon Pharma for Vidara Therapeutics deals.

A tax inversion is generally a transaction where a foreign corporation acquires all the stock or assets of a US corporation, typically for the purpose of moving the US company out of the domicile of the US for tax purposes.

These transactions are subject to a great deal of scrutiny and in order to protect the US corporate tax base, Congress and the IRS have implemented rules designed to make tax inversion processes costly and in some cases effectively impossible.

Generally, a US corporation will not be able to escape US tax domicile without triggering a tax payment to the IRS on the way out if:

a) the US shareholders of the US target company ends up with at least 80% of the foreign acquiring company and,

b) the foreign corporation lacks “substantial business activities” in the foreign acquiring company’s country of incorporation.

Companies find tax inversion beneficial if there is a lack of predictable growth in earnings per share from manufacturing and sales efforts and they have achieved near to maximum efficiencies. These companies will most likely benefit from harvesting offshore profits by domiciling in a country where taxes are lower than the US.

Currently, US corporations are able to defer paying US tax on income from foreign operations by keeping these earnings outside of the US, though in many cases these US companies have received US research and development tax credits.

If a US corporation wants to pay higher dividends they have to bring earnings from foreign operations back to the US (“repatriation of foreign earnings”) at which point they have to pay the 35% US corporate tax rate minus the any foreign taxes already paid.

The simple aim of tax inversion is to avoid paying the US tax on repatriation of foreign earnings and reduce the total tax rate of the US corporation.

There has been a significant increase in M&A transactions in pharma, bio-tech and most recently medical device companies. It is unsure if the increase in tax inversion activity will lead to legislators to change the advantages of offshore companies given the amount of lost tax revenue involved and respond to any public outrage if these transactions are seen as capitalists running off and not paying their rightful dues.

No one knows if the government will take action but there will certainly be a lot of companies looking at similar transactions and contemplating going ahead before a new tax code is introduced and these benefits have gone forever.

Did you pay the new 0.9% Medicare Surtax and 3.8% Net Investment – How did that go?

Well as you know now, 2013 was the first year the new 0.9% Medicare surtax and the new 3.8% tax on net investment income.

OK, let’s get in to detail.

The  income that is subject to tax under these new provisions is different, but  there is an overlap in the definition of taxpayers subject to these new taxes. The 3.8% tax on net investment income applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have modified adjusted gross income (“MAGI”) in excess of certain threshold amounts: $250,000 in the case of married taxpayers filing a joint return or a surviving spouse; $125,000 in the case of a married taxpayer filing separately; and $200,000 for everyone else except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins (projected to be $12,150 in 2014). The 0.9% Additional Medicare Tax applies to individuals at the same threshold amounts, but does not apply to estates or trusts. Neither of these new taxes applies to individuals who are treated as non-resident aliens for U.S. income tax purposes. Let’s review each of these new taxes separately.

3.8% Tax on Net Investment Income

Tax planning is the key to understanding your liability to this tax on net investment income. This tax applies  to net investment income of taxpayers to the extent their net investment income and their MAGI, including their net investment income, is in excess of the threshold amounts mentioned earlier.  “Net investment income;” basically includes most dividends, interest, annuities, royalties, rents and the taxable portion of gains from the sale of property. Gains or losses from the disposition of partnership or S Corp interests are generally not subject to this tax, except to the extent the pass-thru entity would have generated gain or loss if it had sold all of its assets immediately before the sale of the pass-thru interest (the deemed sale rule). To the extent that rents and other income are treated as non-passive investment income, they are not treated as net investment income subject to the 3.8% surtax. Qualified plan distributions and any income items subject to self-employment tax are not treated as net investment income subject to this surtax.

Effective tax planning relating to this tax focuses on: 1) changing investment portfolios so that income generated will not be subject to tax (e.g., tax exempt bond interest, growth stocks instead of dividend paying stocks, annuities which will defer income until later years when the taxpayer will in a lower tax bracket), 2) maximizing deductions (e.g., depreciation, investment expenses, and other properly allocable deductions) that will reduce income otherwise subject to the tax, and/or 3) reorganizing or regrouping rental activities.

Additional 0.9% Medicare Tax

The additional 0.9% Medicare tax on wages and self-employment income is applicable only to income in excess of the threshold amounts discussed above. The threshold and the amount of income subject to tax is based on the combined income of a husband and wife on a joint return. So, even if each is under the threshold amount individually, the couple will be subject to the tax to the extent their combined incomes exceed the threshold. In addition, in the case of wages paid to an employee, the surtax applies only to the employee’s share of the employment tax. Therefore, a single taxpayer with a salary of $300,000 would pay Medicare tax at a rate of 1.45% on the first $200,000 of salary received, but 2.35% on the $100,000 of salary received in excess of the $200,000.

Employers are required to withhold additional Medicare tax on wages in excess of $200,000 in a calendar year, without regard to the employee’s filing status or income from other sources. If an employer withholds the Additional Medicare Tax and no Additional Medicare Tax is due – for example, in the case of a married taxpayer who is under the $250,000 married filing jointly threshold but has wages in excess of $200,000 – the employer must withhold the tax and the employee will claim a credit for the withheld taxes on his or her income tax return for the year. If no tax is withheld – for example, if a husband and wife are each paid under $200,000 for the year, but their combined income exceeds the threshold amount – they should either request additional withholding or cover their additional liability for this tax by paying estimated tax.

A self-employed person will pay self-employment tax at a rate of 2.9% on self-employment income up to the threshold amount and 3.8% on income in excess of the threshold. These amounts are reduced, but not below zero, by the amount of FICA wages taken into account in determining the Additional Medicare Tax.

Self-employed individuals, as well as salaried employees, need to take both of these new taxes into account when determining estimated taxes.

Hope this helped.  Contact us if you need more information.

So your wondering if you should make that gift!

The gift tax only kicks in after lifetime gifts exceed $5.34 million in 2014

The first thing to know about the federal gift tax is that gift givers—not gift recipients—have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than $1 million in cash or other assets during your lifetime. The lifetime exclusion will be raised to $5.34 million starting in 2014. If you’re married, your spouse is entitled to a separate $5.34 million in 2014. So actually owing the gift tax is not a concern for most folks. But you may still have to file gift tax returns even though you don’t owe any tax. So please keep reading.

The annual gift tax exclusion provides additional shelter

The annual federal gift tax exclusion allows you to give away up to $14,000 in 2014 to as many people as you wish without those gifts counting against your $5 million lifetime exemption. 

Say you give two favored relatives $20,000 each in 2014 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $14,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount. Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $12,000 [($20,000 - $14,000) x 2 = $12,000]. The $10,000 gift is ignored, because it’s below the $14,000 annual exclusion.

If you give three individuals $14,000 each in 2014, these gifts are ignored because they don’t exceed the annual exclusion.

Gift taxes and estate taxes are connected

You have a $5.34 million federal estate tax exemption for 2014, thanks to the 2010 Tax Relief Act signed into law recently by President Obama. You can leave up to that amount to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $5.25 million exemption. Beginning in 2011, the gift tax and the estate tax was reunified with an exclusion amount of $5.34 million for 2014.

Gifts made during your lifetime will reduce your taxable estate. However, gifts in excess of the annual exclusion also reduce your estate tax exemption. In the earlier example, the two $20,000 taxable gifts made in 2014 would reduce your estate tax exemption by $12,000 to $5,328,000 ($5,340,000- $12,000), based on the recently enacted changes in estate law. The $10,000 gift in 2014 and the three $14,000 gifts in 2014 would not reduce your estate tax exemption.

Some gifts are tax-exempt

Among others, the following types of gifts are exempt from the federal gift tax so you can make unlimited gifts in these categories without any gift tax or estate tax consequences and without having to file gift tax returns:

·         Gifts to IRS-approved charities

·         Gifts to your spouse (assuming he or she is a U.S. citizen)

·         Gifts covering another person’s medical expenses, as long as you make the payments directly to medical service providers

·         Gifts covering another person’s tuition expenses, as long as you make payments directly to the educational institution. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)

You many need to file a gift tax return

If you make a taxable gift (one in excess of the annual exclusion), you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. The return is required even if you don’t actually owe any gift tax because of the $5.34 million lifetime exemption. The return is due by April 15 of the year after you make the gift—the same deadline as Form 1040. If you extend your 1040 to October 15, the extended due date applies to your gift tax return too.

If you’re married, you can’t file a joint gift tax return. Each spouse must file a separate return if he or she makes any taxable gifts. You can, however, choose to “split” gifts with your spouse. Making a split gift allows you to take advantage of your annual gift tax exclusion plus your spouse’s exclusion for a gift that is made entirely by you.

For example, say you gave $28,000 to your child in 2014. By treating it as a split gift, you can completely shelter the gift with your $14,000 exclusion plus your spouse’s $14,000 exclusion. That way no gift tax is due, and the gift doesn't reduce the $5.34 million lifetime gift tax exemption in effect for 2014 or the estate tax exemption for you or your spouse. If you choose to make a split gift, you must file Form 709, and your spouse must consent to the arrangement.

A bigger story

This article only covers the basics of federal gift taxes. For more information, see IRS Publication 950: Introduction to Estate and Gift Taxes. See also the instructions for Form 709. You can find these documents on the IRS website at www.irs.gov.

What taxes will I pay if I sell my rental property that I also used as my principal residence?

If you have a rental unit that has a substantial amount of equity you may be able to take advantage of the Home Sale Exclusion if you lived in the house at any time before it is sold.

However, before you move ahead there are a number of tax consequences that you need to be aware of.

Limits on Home Sale Exclusion

You have heard of the tax law that allows owners a $250,000/$500,000 home sale exclusion on any gain that is made. This rule permits single homeowners to exclude from their taxable income up to $250,000 in profit realized from the sale of a personal residence. The exclusion is $500,000 for married couples filing jointly. There is no limitation on how many times the exclusion may be used during your lifetime. Generally, you can use the exclusion every two years.

To qualify for the home sale exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Your two years of ownership and use can occur anytime during the five years before you sell—and you don’t have to be living in the home when you sell it.

However, a special rule enacted in 2009 limits the $250,000/$500,000 exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years (the IRS worksheet calculation actually uses the number of days) after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.”

Example: John buys a home on January 1, 2009 for $400,000, and uses it as rental property for two years. On January 1, 2011, he evicts his tenants and moves into the house, thereby converting it to her principal residence. On January 1, 2013, he moves out and rents it again. He then sells the property for $700,000 on January 1, 2014. He has a $300,000 gain (profit) on the sale. John owned the house for a total of five years and used it as a rental property for two years before he converted it to her residence. Thus, two of the five years (40%) before the sale were a nonqualifying use, so 40% of his $300,000 gain ($120,000) does not qualify for the exclusion. This means that he must add $120,000 to her gross income for the year. His remaining gain of $180,000 is less than the $250,000 exclusion, so it is excluded from his gross income.

A nonqualified use can occur only before the home was used as the taxpayer’s principal residence. Time periods after the home was used as the principal residence do not constitute a nonqualified use. This is why John’s nonqualifying use during 2013 does not reduce her exclusion.

Recapture of Depreciation Deductions

Converting a rental into your residence will not eliminate all taxes when you sell it. While the home was a rental, you should have claimed a depreciation deduction for it each year. The total amount of depreciation you claimed during the rental period is not eligible for the exclusion. Instead, you must "recapture" all your depreciation deductions--that is report them on Form 1040 Schedule D and pay a flat 25% tax on these deductions. This can have a significant tax impact. In the example above, if John had taken $10,000 in depreciation deductions during the time he rented out the home, he would have to pay a deprecation recapture tax of $2,500 (25% x $10,000 = $2,500).

Ownership Taxes and Deductions

Once you occupy the home as your personal residence, you will no longer be able to take any of the deductions you took when the property was a rental. This means you will get no depreciation deduction and you can't deduct the cost of repairs. However, you will be entitled to the deductions provided to homeowners--that is, you may deduct a personal itemized deduction on Form 1040 Schedule A  the amount of your mortgage interest, mortgage insurance premiums, and even property taxes. The expenses must be prorated for the time the home was not considered a rental property.

Are you using QuickBooks Go-Payment mobile app with check deposit?

A QuickBooks mobile app makes sense when you save your own and your staff’s time as well as reduce the working capital needed to finance your small business.  Any of these advances can give you an advantage over your bigger competitors.  

The sales, billing and collection process is one area that may offer opportunities. The good news is that QuickBooks and some banks have had mobile ‘plug-in” technology for billing and collecting cash for a number of years.  You have seen these services advertised, you have seen these services in action……..but you may not have signed-up!

It is essential you start with a cost benefit analysis to make sure that your business will have a clear advantage if it adopts the technology and optimizes the sales, billing and collection process.

The ‘plug-in” nature of the technology and support available to small business to adopt proven selling, billing and collection best practices will allow you to move forward at less cost and taking-up less of your time than you might think.

Here are the advantages that you stand to achieve.

1.  Never miss an opportunity to make a sale at anytime and anywhere.
2. Bill customers and receive payment without having to go back to your office or having office staff involved in a wasteful time delay. 
3. Deposit funds at your bank without having to go to the bank branch, taking up your time or your staff’s time.

A process needs to be formalized that optimizes activities between the office and the client location and you will need to do a couple of friendly practice runs.

If in this process you can collect payment and have it deposited at your bank and synced to your QuickBooks Desktop or OnLine accounting system automatically, you can see that a tremendous amount of time has been saved.  You can reduce the time you or someone else spends in the office and you or your staff don’t have to go the bank to deposit funds.

Here are the two ‘plug-in” services you need.

QuickBooks GoPayment service allows payment in the file by credit card with or without a card swiper on your mobile phone. You can also add a ‘Pay Now” button to your emailed invoice for your client to transfer finds directly to your bank account. You can also record cash payments. This will be synchronized to your QuickBooks Desktop or QuickBooks Online systems.

Chase Bank’s QuickDeposit will allow you to accept a check from your customer on your mobile phone or tablet by taking a photograph of both sides of your endorsed check and deposit directly into your bank without visiting the branch. You follow this with an electronic download from the your bank’s online banking platform into QuickBooks.

Your business cash is collected and in the bank and all your records are electronically entered into your  QuickBooks accounting system.

Visit our website www.mottramcpas.com and start that cost benefit analysis.

Can a sole proprietor deduct losses?

One of the benefits enjoyed by a sole proprietor is their ability to use the category of loss known as a "net operating loss" to reduce  taxable income.

When a sole proprietor suffers a business loss, you first offset any current income with that loss. Amy loss in excess of current income becomes a net operating loss (NOL) and is carried back to prior years. Currently the losses can be carried back to the prior two years. Should there be any excess beyond the carryback period, you can carry the loss forward until it is used up or for 20 years, whichever comes first. The calculations of the NOL and carryover amounts are complex because the amounts are subject to many adjustments.  You can also elect to forego the carryback period and only carry the loss forward, but you have to make an election on a timely filed tax return or on an amended return with six months of the due date of the return including extensions. If you decide you do not want to carry back the loss, you can attach a statement to your tax return during the net operating loss year. Your statement must say you elect to forgo the carry-back period under section 172 of the Internal Revenue Service tax code.

The offset earnings may come from the proprietorship that suffered the loss, another proprietorship the same individual owns or from employee wages.

You start with the earliest year first, then apply the remainder of the loss to the years after that.

The easiest way for a sole proprietor to determine if she has one is to complete a tax return. If the adjusted gross income amount entered on Line 41 of IRS Form 1040 is a negative number, there may be a NOL.

File Form 1045, "Application for Tentative Refund." to claim your losses against previous tax years. You have one year from the end of the net operating loss year to file this form.

If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on the “Other income” line of Form 1040 or Form 1040NR (line 21 for 2013). Estates and trusts include an NOL deduction on Form 1041 with other deductions not subject to the 2% limit (line 15a for 2013).

You must attach a statement that shows all the important facts about the NOL. Your statement should include a computation showing how you figured the NOL deduction. If you deduct more than one NOL in the same year, your statement must cover each of them.

Have you reported Foreign Assets to the IRS and Treasury properly?

Taxpayers with foreign financial accounts or foreign financial assets have filing responsibilities that should not be overlooked. There are two primary IRS international reporting forms required for individuals to disclose their interests in foreign accounts or foreign assets: 1) Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”) for foreign accounts, and 2) Form 8938, Statement of Foreign Financial Assets, for foreign assets.  

If you have a financial interest in a foreign bank or financial account with a combined balance of more than $10,000 (at any time during the year), or you have signature authority over such an account, you are required to report the account annually to the Treasury Department by filing the FBAR.  This form is due on June 30^th of each year. No extensions are available and the form must be received by the due date, not just mailed by the due date, to avoid the $10,000 late filing penalty. This penalty can increase significantly if the failure to file or supply correct information is willful.  

Form 8938 is much the same an is used to report “specified foreign financial assets” if the total value of all specified foreign financial assets in which you have an interest is more than the reporting threshold (which varies depending on your filing status and whether you live in the U.S. or abroad).  You are required to include a reportable asset even if you receive no income or distributions with respect to that asset.  Form 8938 must be filed with your income tax return. The penalty for failure to file this form or late filing is $10,000. If you receive a notice from the IRS for failure to file this form and do not file it within 90 days of the IRS notice, additional penalties may be imposed.

What are specified foreign financial assets?

Specified foreign financial assets include:

·         Savings, deposit, checking and brokerage accounts held with a foreign financial institution;

·         Stock or securities issued by a foreign corporation;

·         A note, bond or debenture issued by a foreign person;

·         A swap or similar agreement with a foreign counterparty;

·         An option or other derivative instrument that is entered into with a foreign counterparty or issuer;

·         A partnership interest in a foreign partnership;

·         An interest in a foreign retirement plan, pension, or deferred compensation plan;

·         An interest in a foreign estate;

·         Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value;

·         Any financial account maintained by a foreign financial institution;

·         Reportable assets held by a disregarded entity.

The above list is not all inclusive. Other assets may also be considered specified financial assets and must be reported.

What are NOT specified foreign financial assets?

The IRS has indicated that certain assets are not considered specified foreign financial assets and therefore do not have to be reported. These include:

·         Foreign real estate (e.g., personal residence or rental property), unless the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate.  In such cases, the interest in the entity is reported on Form 8938;

·         Foreign currency;

·         Directly held shares of a U.S. mutual fund that owns foreign stocks and securities;

·         Financial account maintained by a U.S. financial institution that holds foreign stock and securities (e.g., U.S. mutual fund accounts; IRAs (traditional or Roth); 401(k) retirement plans; qualified U.S. retirement plans; and brokerage accounts maintained by U.S. financial institutions.  This is an exception to the general rule that a financial account maintained by a foreign financial institution is a specified foreign financial asset.  A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution does not have to be reported on Form 8938;

·         Financial account, such as a depository, custodial or retirement account, is held through a foreign branch or foreign affiliate of a U.S.-based financial institution;

·         Safe deposit box;

·         Payments or the rights to receive the foreign equivalent of Social Security; and

·         Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles;

·         Directly held precious metals, such as gold. Note, however, that gold certificates issued by a foreign person may be reportable on Form 8938.  Similarly, a contract with the foreign person to sell assets held for investment is reportable on form 8938.

Again, this list is not all inclusive. 

Valuation

Once it has been determined that an asset is required to be reported, it is important that the correct amount be reported. The following guidelines should be used in determining the amount of specified foreign financial assets to report on Form 8938:

·         The value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year. If you do not know, or have reason to know, based on readily accessible information the fair market value of your beneficial interest in the pension plan or deferred compensation plan on the last day of the year and you did not receive any distributions from the plan, the value of your interest in the plan is zero; 

·         Fair market value of a foreign financial account is its maximum value based on periodic account statements; and

·         For a specified foreign financial asset not held in a financial account, you may determine the fair market value of the asset based on information publicly available from reliable financial information sources. Even if there is no information from a reliable financial information source or other verifiable source, you do not need to obtain an appraisal by a third party in order to reasonably estimate the asset’s maximum value during the tax year.

FBAR & Form 8938

Filing Form 8938 does not relieve you of the separate requirement to file the FBAR, if you are otherwise required to do so, and vice-versa; however, if you are not required to file an income tax return, you are not required to file Form 8938. If you omitted Form 8938 when you filed your income tax return and you were required to file this form, you should file Form 1040X, Amended U.S. Individual Income Tax Return, with Form 8938 attached, as soon as possible.

Do you have a business that uses foreign vendors to provide personal services?

Many US businesses use foreign companies or individuals to provide website development, SEO, customer service, accounting, IT support and many other services.

US businesses need to know that foreign individuals or entities are subject to U. S. tax at 30% on income they receive from U. S. sources when personal services are provided.  Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, and the performing arts.  This would seem to indicate that US businesses need to withhold 30% on all payments sent to foreign companies and individuals for these types of services.

But wait….

In many situations the US Company will not have to withhold tax as long as:

• The foreign vendor completes a Form W8 “Certificate of Foreign Status” before the form is completed and signed,
• The personal services were wholly performed outside of the US, or
• A Tax Treaty exists between the US and the country in which the foreign entity or individual resides.

As you can imagine the foreign company or individual is going to be surprised and upset when you tell them that you are holding back 30% of their  payments until they have completed , signed an returned the W8 Form.  This will usually be the Form W-8BEN. The completed Form W-8 is not sent to the IRS.

It is also important that all foreign individuals and vendors be required to complete the Form W-8 irrespective of what the payment is for or where the services were performed, not just those foreign vendors for services performed in the US.

The US Company must also carefully review where the services are performed.  The IRS considers many services as performed in the US if the recipient of the services is located in the US.  As examples, the IRS has decided that the following are subject to this policy for example:

a.       Website hosting performed in France where the website’s visitors are located in the US.

b.      Telephone and a web-based conferencing service provided by a Canadian vendor where the users are located in the US.

If the personal services are performed in the United States, the income paid is from U.S. and withholding tax will have to be assessed.

The place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer. If the services are wholly performed outside of the US then the income is not sourced from the US and no withholding tax will be taken.

If the income is for personal services performed partly in the United States and partly outside the United States, you must make an accurate allocation of income for services performed in the United States based on the facts and circumstances. In most cases, you make this allocation on a time basis.

The US company paying for the service needs to take great care in determining where the services are performed.

There are significant penalties if the US Company does not have the complete form on file.  The US Company must fulfill the IRS instruction to verify that their payments are properly documented when made to a foreign company or individual.

The US Company may be liable to pay the withholding tax if the completed and signed Form W-8 is not on file or the proper withholding tax has not been withheld.

Top 10 Tax Deductions You May Not Be Taking

• Charitable Donations – Did you know you can deduct your cost of transportation to a charitable event or fundraiser?

• Home Office Deductions – if your self employed you can deduct expenses that employees cannot such as rent and utilities for your home office. This can also include magazines and member  organization fees in your selected business field.

• Refinance your home – You can deduct interest and any loan points on the refinance.Health insurance – you can deduct the cost of health insurance premiums that surpass 10% of your adjusted gross income even if you are covered by an employers plan. For the self-employed the 10% threshold for insurance premiums is removed.

• Tax planning and investment expenses - Tax planning and investment expenses can be deducted if you itemize and the costs exceed 2% of your adjusted gross income. Investment expenses could include phone calls to your broker or even subscriptions to financial publications like Forbes and Fortune.

• Working Parents - Parents who work and leave their children with a caregiver are eligible for a tax credit to offset the cost of a baby sitter, day care, nursery school or preschool. Limitations on the credit include the age of the child and the percentage of the credit.

• Making a move - Lucky enough to find a new job, but find that it’s in the next state? You can deduct what you spend packing and moving your belongings as well some costs for storage, insurance, transportation and lodging associated with the move. There’s no limit to the deduction, but your new job must be at least 50 miles farther from your home than your old job.

• Working 9 to 6 - For most people, the costs they incur heading to and from work every day are not deductible. For part-time workers, however, if you work two jobs, you can deduct a portion of the costs of getting from one job to the other.

• Teacher expenses - Educators, including K-12 teachers, teacher aides, instructors or principals, can get an above-the-line tax deduction for materials they buy for use in classrooms. Because it’s an above-the-line deduction, itemizing isn’t required for this deduction.

• Disaster Recovery - If your home was struck by a natural disaster for which federal aid was issued, you could be eligible to deduct uninsured costs you paid in getting your life back together.