Top 10 things tax accountants will be doing after tonight's tax deadline

After a three-month marathon session of tax work, many tax accountants will be breathing a sigh of relief at midnight on April 17. Once the realization sets in that the due date has passed and they are unburdened from the intense weight of that deadline, now what? Time to deflate and recharge is essential to anyone that has just gone through such a gauntlet. The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Wednesday, April 18, 2018.

Some of the fill-in responses were great, but didn't receive enough votes to make it onto the chart. Honorable mentions include:

  • "Sit in silence and wait for the next tax season."
  • "Celebrating my 47th wedding anniversary." Congratulations, by the way!
  • "Keep working on April 30th deadlines. Sincerely, the financial services group."
  • "Watch a Mets game all the way through without falling asleep."
  • "Deal with all the file rejections -- tax season doesn't end on the deadline."
  • "Celebrating my birthday April 18th, along with many checked items." Happy birthday!
  • "Have the luxury of deciding what to do when I wake up that day. Not knowing is exciting and may be something wonderfully unexpected."

What are your plans for tomorrow? Let us know in the comments section below.

Wake up with REM: Rube Goldberg edition

Income taxes are like Rube Goldberg machines: a movement by one element will impact another in surprising ways. Income goes up, some limitations go down; check this box, now we’re getting a refund. Yet somehow, by line #63 (Total Tax), we arrive at an answer the taxpayer and the IRS can both agree on (we hope). With that in mind, The REM Cycle presents tax news with a liberal sprinkling of Goldbergian facts and videos to get you through this final week of tax season. Hang in there, folks!

The IRS’s overall audit rate continues to plummet, with less than 1% of individual and partnership returns being audited. Does this situation mean more people and companies will cheat on their taxes? The answer? “It’s complicated.” [Forbes]

Debt among older Americans is rising fast. In 2017, retired workers received an average of $1,404 per month in Social Security benefits—but this amount can be reduced due to student loans. Mortgage and credit card debt only compound the problem. What to do? [CNBC]

The TCJA’s expensing and income tax changes may become permanent. Will it affect you? Will it even come up for a vote? [TaxFoundation.org]

Books to inspire financial well-being. Focusing on your well-being is an important part of life. Get a good night’s rest. Eat a healthy breakfast. Go for a jog, practice some yoga, forego that yummy cheeseburger in favor of a salad — all with the goal of being our best possible self. Extend that focus to your financial health with this list of recommended books. [New York Times]

 

Damian Kulash, lead singer of OK Go, talks about the insane amount of math involved in creating their video for “The One Moment.” (See the video he’s discussing here.)

This video is part of www.OKGoSandbox.org

 

Like a Rube Goldberg machine, federal tax swings down, state income tax pops up. Here’s why. [Politico]

13 ingenious facts about Rube Goldberg. Goldberg was likely the only Pulitzer Prize-winning cartoonist with a degree in engineering, a rap sheet for refereeing a street fight in Harlem, and a “Three Stooges” screenplay under his belt. [Mental Floss]

 

His inexhaustible reservoir of elaborate contraptions that mutated simple tasks into madcap feats of ingenuity made Rube Goldberg rich and famous. But he was also an all-around cartoon man and artist. (New York Times)

 

ICYMI: A behind the scenes look at the design and building of the Goldberg apparatus for OK Go’s music video for “This Too Shall Pass.” [Pehr Hovey]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Self-employment tax: the other tax reform

 
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iStock

 

Posted by Courtney Kopec, CPA

While the headlines parsed the effects of the Tax Cuts and Jobs Act of 2017, other important tax issues affecting the owners of pass-through entities were being scrutinized. Over the past year, the U.S. Tax Court modified self-employment (“SE”) tax guidelines to firm up the limited partner and LLC pass-through rules previously used to avoid self-employment tax on income earned by certain taxpayers.

S corporation ordinary income is not subject to SE tax

In Fleischer v Commissioner (TC Memo 2016-238), the taxpayer created an S corp entity to report non-employee compensation from a service provider contract he entered into with MassMutual as a financial services provider. The intended result was to exclude self-employment income tax because S-corp pass-through income is not subject to SE tax. The Court determined the income should have been reported on Schedule C and subject to SE tax. The Court applied two tests to determine whether the corporation was the controller of the income: first, the individual providing the services must be an employee of the corporation; and second, a contract must exist recognizing the corporation’s controlling position. The Court determined that the taxpayer, not his S corporation, had earned all the income.

A partner’s power is either general or limited, but not both

In Castigliola v Commissioner (TC Memo 2017-62), a law practice that was incorporated as a professional limited liability company by three attorneys had a compensation agreement that was reasonable based on average salaries in their area. The partners reported the guaranteed payments they received as subject to self-employment tax. However, the net profits distributed in excess of the guaranteed payments were reported as not subject to SE tax. The taxpayers argued that the guaranteed payments reflected reasonable compensation for their services and the earnings in excess were attributable to the partner’s investment and were akin to the items of income or loss of a limited partner. The Court determined that in the absence of a written operating agreement that identified a general partner, all three attorneys had equal management power that was in no way limited. None of the partners could be considered as limited and classify their additional income as limited partner income. Therefore, all three attorneys were general partners and all income was subject to SE tax.

A surgeon successfully separates out his passive activities

In Hardy v Commissioner (TC Memo 2017-16), a surgeon (Hardy) performed surgeries at a facility in which he held a 12.5% minority interest and so considered himself a limited partner. He held no management authority at the facility and his distributions were not related to his performance. Hardy reported the income as passive and, at first, also paid self-employment tax on the income. The core issue was whether Hardy properly reported the income as passive and the activities should treated as a single activity and “constitute an appropriate economic unit for the measurement of gain or loss for the purposes of Section 469.” The IRS argued that Hardy’s payment of SE tax implied that the activities were non-passive and should be grouped as a single activity. The Court rejected the IRS argument and held that Section 1.469-4(c)(2) permits a taxpayer to use any reasonable method of “applying the relevant facts and circumstances” to group activities and, therefore, the taxpayer was not liable for the SE tax. He would have been liable for SE tax and could not use the passive losses if the Court determined the activities were to be grouped as a single activity.

Tax planning considerations

The implications of the three cases presented are clear: the IRS wants to subject pass-through entity income to self-employment tax, where appropriate. The owners of S corps who do not take reasonable compensation are easy prey for IRS auditors. If you are an entrepreneurial owner of an S corporation and are not taking salary, or if you are a managing partner in a partnership entity, you should consult your CPA tax advisor to review your tax exposure under these types of situations.

Further reading

Wake up with REM: Spring fling edition

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Spring has sprung, the vernal equinox has been and gone, and everyone you know is sleep-deprived thanks to Daylight Saving Time. If you're looking for a break from tax season, we’ve got just the blog post for you. (Hint: it begins right below this paragraph.)

State sales tax is being collected by Amazon—but cities haven’t seen a dime. Amazon now collects sales tax in every state that has one. Why aren’t local governments receiving any of the revenue? [New York Times]

How will tax reform affect carried interest and private equity? This is the $64,000 question that only the newly enacted IRC Section 1061 can answer. [MiddleMarket.com]

How the new tax law creates a “perfect storm” for Roth IRA conversions. Word to the wise: while it’s true that contributing annually to your Roth IRA is generally a good idea, doing so does not guarantee that you will get to meet George Clooney. Yes, we were disappointed, too. [MarketWatch.com]

 
 

Raise a glass! Raich Ende Malter counts several distilleries as clients, so we would be remiss for not mentioning that March 27 of each year is International Whisk(e)y Day. The parenthetical “e” is a tip of the hat to the difference in spelling for Irish and American whiskeys and their Scottish, Canadian, and Japanese (Japanese whisky is apparently a thing) counterparts, which drop the “e.” Not to be confused with World Whisky Day or National Bourbon Day. Remember this at your next pub trivia night.

“Spring clean” your finances with these seven tips. Most people start their spring cleaning right around now. We de-clutter, wash the curtains, replace air filters, pack up our winter clothes and bring out the short-sleeved shirts. But what about neatening up your finances? [WKTR.com]

California considers lower taxes on pot to help new legal industry compete with black market. Good news for Seth Rogen! [Los Angeles Times]

VIDEO: Daylight Saving Time Explained. [YouTube]

EGG MYTH BUSTED! Balancing an egg on the equinox explained. Take that, Humpty Dumpty. [YouTube]

ICYMI: At last! A self-driving potato. [YouTube]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Blockchain: the future of accounting?

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Valuation of cryptocurrencies has fluctuated in recent months, drawing interest from every type of investor. While the markets remain volatile and uncertain, we here at REM believe that blockchain technology will play a significant role in the future of accounting. The concepts we first introduced in Blockchain 101 are here again in an infographic provided by the Bachelors of Science in Accounting Program at Maryville University Online, which demonstrates how blockchain can and will change some of the fundamentals of the accounting profession. We have taken part in many information sessions regarding the details of these key areas to blockchain technology and how it can impact our clients and the way we do business in the near future.

The key concepts we particularly focus on as auditors (and you should, too, with respect to blockchain) are security, trust, and verifiability. We ask:

  • How is the blockchain built?
  • How is the underlying data encrypted and how can we verify the integrity of the encryption?
  • Who are the users and who has the ability to post transactions to the blockchain network?
  • What is being transacted?
  • Who validates transactions and maintains records of the ledger?
  • What access points do we have to the ledger?
  • Do we have access to multiple points of verification?
  • Is a trusted third party involved in the validation of transactions and ledger maintenance, or is it a trustless application with distributed functionality?

In other words, a fundamental concern is whether the blockchain is centralized and vulnerable to record alteration, or whether the validation/maintenance functions are decentralized and distributed across a wide network of participants. This essentially provides an unalterable/immutable/censorship-resistant ledger with network consensus.

At REM, our Think Lab is working diligently to develop our knowledge base and identify best practices in embracing and utilizing this powerful tool. Feel free to contact us with your questions and your concerns about how blockchain might improve your business.


Click here for a quick primer on blockchain terminology.

Source (For enlarged version, click here.)

Wake up with REM: Pi Day edition

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As accountants, we get excited about numbers. It’s kind of what we do. That’s why we’re tipping the hat to our favorite mathematical constant one day early here at the REM Cycle. March 14 is traditionally Pi Day, a global celebration of π, or Pi. Pi is the ratio of the circumference of a circle to its diameter, approximately 3.14159. (March 14 = 3.14 … get it?) So while we’ve got some great tax-related content for you today, you can also delight in some smart and quirky pi facts, courtesy of Raich Ende Malter & Co. LLP. You’re welcome.

Retiring soon? Forbes has an excellent guide to 12 retirement investment options. [Forbes]

Philadelphia accountants overlooked sales tax for a food service client. Waterfront Gourmet Corporation of Philadelphia is now on the hook for over $70,000 in back sales tax, including penalties. What happened? [PennRecord] (Full disclosure: Waterfront does not sell pies. We checked.)

Not everyone can effectively use Health Savings Accounts. But it’s definitely worth learning the ins and outs of HSAs—and how they can fit into your tax deductions. [The Motley Fool]

“A host of errors and ambiguities.” Ouch. Apparently, rushing a bill through Congress can result in costly mistakes—especially when it's a set of laws that fundamentally change our tax structure. Here’s what happened, and what the government is doing to address it. [New York Times]

ICYMI: The rich are happier about their taxes than the poor. Huh? [MotherJones.com]

8 National Pi Day 2018 Freebies and Deals: [Parade]

RECIPE: Bake the perfect Pi. [Pillsbury.com]

VIDEO: Calculating pi with real pies. We are So. Hungry. Right. Now. [YouTube]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Wake-Up Call: Time travel edition

Outsourcing firms and the paradox of time-travel: Multinational facilities management and construction firm Carillion imploded spectacularly in 2017, and went into compulsory liquidation in January of this year. Carillion’s directors and auditors (KPMG) are currently the subject of multiple investigations into financial misconduct. What does this have to do with time travel? “Carillion effectively ‘pulled income from the future’ when they booked profit based on forecasts and estimates…” [Sheffield Political Economy Research Institute]

“When accountants start time traveling, it’s time for a new system.” Robin McAlpine, director of Common Weal, presents an argument for keeping the Big Four out of public policy-making. Whether or not you agree with him, he makes an entertaining case. [CommonSpace]

Bill Gates feels he and other billionaires should be paying more in taxes, not less. No word yet on what Jeff Bezos thinks about this idea. (We’d ask Elon Musk, but he’s too busy designing a time machine to comment…or is he?) [CNN]

“Back in Time:” This 367-year-old bond is still paying interest. [YouTube].

Is a tax refund good news? Maybe not. What seems like a windfall to a taxpayer looks more like an interest-free loan to the IRS. [CNBC]

ICYMI: The time travelling dietician! [YouTube]

The Wake-Up Call is The REM Cycle’s bimonthly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Taxability of software can wear you down

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Guest post by Mark L. Stone, CPA, MST

This week, the REM Cycle is pleased to welcome Mark L. Stone of Sales Tax Defense LLC as  guest blogger. Mark is an expert on Sales and Use Tax, and has served as an expert witness, testifying in tax court on behalf of his clients. Mark can be contacted here.

Software is prominent in today’s world.  Just to read this blog post, you’re using software.  It’s everywhere.  But it wasn’t prominent when most sales tax law was written and that’s an issue.  Trying to fit the definition of software into a pre-internet world tax code is like trying to fit a square peg into something even worse than a round hole.  The states are catching up though and issuing a lot of guidance about what software is, the taxability of different types of software and whether certain services are actually the sale of software.

The definition of software in many states is usually something along the lines of a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task.  That’s Georgia’s definition.  But some states, like Maryland, don’t even have a formal definition of software in their tax code.

Knowing this information, here’s a few helpful hints to understand the taxability of software:

  1. Understand that what you believe you’re selling and what you are selling as defined by the tax law are often two different things. For example, “software as a service” is not defined under the tax law in many states.  If you operate in one of those states, what are you selling then?
  2. There is usually a difference between prewritten software (aka canned software) and custom software.  Sometimes combining two pieces of prewritten software does not quality as custom software.
  3. In certain states, there are situations where you can be selling taxable prewritten software but a separately stated charge for customizations to that software are not subject to tax.
  4. If you host software that customers access through the internet, there is often specific information or documentation that must be maintained to prove that customer is located in a different state.
  5. There are often very specific rules relating to software sold via the “load-and-leave” method – both for taxability purposes AND for nexus purposes.
  6. SHOCKER SPECIAL:  If your customers access software electronically and you pay a third party to host that software, it might create nexus with a state.  That means you might owe tax in a state that you didn’t realize you had any connection with.

Someone once said that a computer programmer is a machine that turns coffee into code.  If you sell software, let us be the machine that turns your tax problem into… well... not a tax problem!

This article originally appeared here.

Wake-Up Call - Valentine's Day edition

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Posted by REM Cycle Staff

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

As accountants, we get excited about numbers. (Maybe a little too much.) We got to wondering: What percentage of Americans celebrate Valentine's Day? How much does the average adult spend on gifts? How many gallons of wine get sold that week? Grab some heart-shaped chocolates and dig into this handy infographic of Valentine's Day by the numbers. [history.com]

Currently filing joint, but about to file as single? Take note: divorce agreements entered into or amended after December 31, 2018 will no longer be picked up in income (recipient) or a reduction of income (payor) due to the Tax Cuts and Jobs Act. [Taxbot.com] (See REM's full list of changes here.)

Between 30-40% of Americans will rely primarily on Social Security for income after age 65. But how much of that Social Security is taxable? The amount you receive will determine whether the IRS will take a chunk, but the likelihood is that you won’t have to pay state tax at all: Check out this list of 37 States That Don't Tax Social Security Benefits. [The Motley Fool]

Valentine’s Day is a good time to review the new tax brackets. Whether you’re filing single, married jointly, head of household, or married filing separately, the likelihood is that the new tax law has changed the rate you’ll pay this April. (Who says romance is dead?) [Business Insider]

Think you’ve heard the worst of the Equifax data breach? Think again. Tax ID numbers, credit card expiration dates, and even the states that issued the consumers’ driver licenses were accessed by hackers. [AP News]

ICYMI: Love is in the air in Date Night with Taxes [YouTube].