Track your hours now, not when you get audited. Doing time reports is no fun. If I had a nickel for every CPA who left public accounting and told me how fun it is to not do time reports, I’d have multiple nickels.
Unfortunately, the tax law might make time sheets necessary for people who don’t charge by the hour. The passive loss rules disallow losses if you don’t spend enough time on a loss activity to “materially participate.” Obamacare uses the same rules to impose a 3.8% “Net Investment Income Tax” on “passive” income.
It’s up to the taxpayer to prove they spent enough time to “materially participate,” as a Mr. Graham from Arkansas learned yesterday in Tax Court.
The taxpayer wanted to convince Judge Nega that he met the tax law’s stiff tests to be a “real estate professional,” enabling him to deduct real estate rental losses. If you are not a “professional,” these losses are automatically passive, and therefore deferred until there is passive income. To be a real estate professional, the taxpayer has to both:
- Work at least 750 hours in real estate trades or businesses, and
- performs more than one-half of all personal services during the year in real property trades or businesses in which the taxpayer materially participates.
That’s a high bar to clear for a taxpayer with a day job. Mr. Graham gave it a good try, providing a judge with spreadsheets to show that he did that work. The judge remained unconvinced:
Mr. Graham did not keep a contemporaneous log or appointment calendar tracking his real estate services. His spreadsheets were created later, apparently in connection with the IRS audit.
There were other problems:
Furthermore, the entries on the spreadsheets were improbable in that they were excessive, unusually duplicative, and counterfactual in some instances. As all petitioners’ rental properties were single-family homes, reporting 7 hours to install locks or 30 hours to place mulch on a single property (amongst other suspect entries) are overstatements at best. Performing maintenance for a tenant that did not pay rent for an entire year with no record of “past due rent” or any attempt to collect rent (as Mr. Graham would note on entries for other rental properties) seems dubious.
The judge ruled that the taxpayer failed to meet the tests. Worse, the court upheld a 20% penalty: “We conclude that the exaggerated entries in petitioners’ spreadsheets negate their good faith in claiming deductions for rental real estate losses against their earned income.”
The Moral? Maintain your time records now. When the IRS comes calling, it’s too late. And play it straight; the Tax Court didn’t just fall off the turnip truck.
Russ Fox, FBAR Filing Follies:
Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.
Mild is right.
Peter Reilly, Robert Redford’s New York Tax Trouble Provides Lessons For Planners. “You dodge non-resident state taxes, either on purpose or by accident, at the peril of missing out on a credit against the tax of your home state.”
Jason Dinesen, S-Corporation Compensation Revisited. “But what should the salary be? And what if the year has ended and the W-2 deadlines have passed, but the corporate tax return still needs filed?”
Keith Fogg, Postponing Assessment and Collection of the IRC 6672 Liability (Procedurally Taxing). Issues on the “trust fund” penalty imposed for not remitting withholding.
Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state.
And just like in the old days, states want to extend their reach no matter how flimsy the nexus.
Lyman Stone, New Upshot Tool Provides Historical Look at Migration (Tax Policy Blog):
Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.
I will be seeing Mr. Stone speak at the Iowa Association of Business and Industry Tax Committee this morning. I’m geeking out already.
Jim Maule, “Give Us a Tax Break and We’ll Do Nice Things.” Not. It seems the subsidized Yankees parking garages don’t stop with picking taxpayer pockets.
Kay Bell, Is it time for territorial taxation of businesses and individuals? “Territorial taxation advocates hope that long local journey has at least now started.”
Howard Gleckman, Is Treasury About to Curb Tax Inversions on Its Own? (TaxVox). If the law is whatever the current administration says it is, I look forward to the $20 million estate tax exclusion next time the GOP takes power.
Daniel Shaviro, The Obama Administration’s move towards greater unilateral executive action. “And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to ‘secur[ing] our republic.’”
The best and the brightest in action. TIGTA: ObamaCare Medical Device Tax Is Raising 25% Less Revenue Than Expected, IRS Administration of Tax Is Rife With Errors (TaxProf)
TaxProf, The IRS Scandal, Day 468
News from the Profession. AICPA Celebrates 400,000th Member Just Because (Caleb Newquist, Going Concern)
I can verify that a Kindle absorbs less coffee than paper. Do readers absorb less from a Kindle than from paper? (Tyler Cowen)