Vernoia, Enterline + Brewer, CPA LLC

Archive for August, 2015

Aid victims of the Ebola Virus

Leave-based donation programs to aid victims of the Ebola Virus Disease (EVD) outbreak in Guinea, Liberia, and Sierra Leone. Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2016, to qualified tax-exempt organizations providing relief for the victims of the EVD outbreak in Guinea, Liberia, and Sierra Leone. The donated leave will not be included in the income or wages of the employee.

The employer may deduct the cash payments as business expenses or charitable contributions. For more information, see Notice 2014-68, 2014-47 I.R.B. 842, available at www.irs.gov/irb/2014-47_IRB/ar11.html.

How do I? Compute withholding using the part-year employment method

Employers generally withhold from wages by way of the wage-bracket or percentage method (Code Sec. 3402(b) and Code Sec. 3402(c)). However, an employee may request that the amount of tax withheld by the employer from the employee’s wages be computed on the basis of the part-year employment method (Reg. ยง31.3402(h)(4)-1(c)(1)). Under this method, an individual who is employed no more than 245 days in the aggregate during a calendar year may request that the employer withhold on the basis of the part-year employment method to prevent overwithholding. Under this method, the amount of tax to be withheld is determined as if the wages paid to a part-year employee were spread evenly over the calendar year, whether or not the employee actually was employed during all of that period.

An employee’s request that withholding be based on the part-year employment method must be in writing and in the form that the employer requires. The request must be sworn and must contain the following information:

  • the last day of employment, if any, by any employer prior to the current term of continuous employment during the calendar year in which that term commenced;
  • a statement that the employee reasonably anticipates being employed for an aggregate of not more than 245 days in all terms of continuous employment during the current calendar year; and
  • a statement that the employee uses a calendar-year accounting period.

There is no specified due date for an employee’s election to withhold using the part-year method. A request by the employee furnished to the employer in proper form may be acted upon by the employer for wages paid after the furnishing of the request. It is effective only for the calendar year in which it is furnished to the employer. The request is not effective for wages paid on or after the beginning of the payroll period during which the current calendar year will end.

FAQ: Can an S corporation own an interest in another business entity?

An S corporation may own an interest in another business entity. An S corporation can be a member of an affiliated group by owning 80 percent or more of the stock of a C corporation. The group then can elect to file on a consolidated basis, if other affiliated group rules are met. But the S corporation itself cannot join the consolidated group.

Although in general only individuals can be shareholders in an S corporation, an S corporation can own an S corporation if the subsidiary corporation would otherwise qualify as an S corporation if the parent’s shareholders held the subsidiary’s shares directly, and the taxpayer elects qualified S corporation status for the subsidiary. Generally, for federal tax purposes a corporation that is a qualified S corporation subsidiary is not treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a qualified S corporation subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the S corporation.

An S corporation can also be a partner in a partnership or a member of an LLC.

For further information on how an S corporation may hold or acquire interests in another business, please contact our offices.

NJ guidelines for nexus-creating activities

NJ – General guidelines issued for nexus-creating activities

The New Jersey Division of Taxation has issued a bulletin that provides general guidelines for determining whether the activities of a person or business entity create nexus with New Jersey for the purpose of imposing sales and use tax. Specifically, activities occurring in New Jersey that create nexus for sales tax purposes include, but are not limited to:

  • selling, leasing, or renting tangible personal property or specified digital products or services;
  • maintaining an office, distribution house, showroom, warehouse, service enterprise (like a restaurant, entertainment center, business center, etc.), or other place of business;
  • having employees, independent contractors, agents, or other representatives (including salespersons, consultants, customer representatives, service or repair technicians, instructors, delivery persons, and independent representatives or solicitors acting as agents of the business) working in the state;
  • selling, storing, delivering, or transporting energy to users or customers;
  • collecting initiation fees, membership fees, or dues for access to or use of health, fitness, athletic, sporting or shopping club property or facilities; and
  • parking, storing, or garaging motor vehicles.

Click-through nexus:
New Jersey has a rebuttable presumption that an out-of-state seller who makes taxable sales of tangible personal property, specified digital products, or services is soliciting business and has nexus in New Jersey if that seller meets the following conditions: (1) the seller enters into an agreement with a New Jersey independent contractor or other representative for compensation in exchange for referring customers via a link on its website, or otherwise, to that out-of-state seller; and (2) the seller has sales from these referrals to customers in New Jersey in excess of $10,000 for the prior four quarterly periods ending on the last day of March, June, September, and December.

An out-of-state seller that meets both of these conditions is presumed to be soliciting business and has nexus with New Jersey. The out-of-state seller must register for sales tax purposes and collect and remit sales tax on all sales delivered to New Jersey. Since this is a rebuttable presumption, the out-of-state seller may provide proof that the independent contractor or representative did not engage in any solicitation on its behalf in New Jersey. The burden is on the seller to prove that it is not required to collect and remit sales tax.
Technical Bulletin TB-78, New Jersey Division of Taxation, July 30, 2015

Whistleblowers award eligibility

Whistleblowers not required to give information first to IRS Whistleblower Office to be eligible for award

Whistleblower reform legislation does not require that a whistleblower first bring his or her information to the IRS Whistleblower Office to be eligible for an award, the Tax Court has held in consolidated cases. The whistleblowers, a married couple, provided information to other federal agencies, including an IRS operating division, before contacting the Whistleblower Office. However, this did not make them ineligible for an award, the court held.

Whistleblower provision
Congress passed the Tax Relief and Health Care Act of 2006 (TRHCA) to strengthen the whistleblower program. The TRHCA created the IRS Whistleblower Office, among other reforms. It also added Code Sec. 7623(b), which provides that if the taxes, penalties, interest and other amounts in dispute exceed $2 million, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000.

Background
The informants were a married couple. The husband, in order to minimize his own punishment after he was arrested for money laundering, informed federal government agents, including some from the IRS, that a foreign company was helping U.S. taxpayers to evade federal income tax. He told the agents that the foreign company had no presence in the U.S. and that it had instructed its employees to stay out of the U.S. to avoid arrest. The husband did not have enough information to support the prosecution of the foreign business, but he knew of someone who did. The informants helped to design a scheme to induce the foreign individual to come to the U.S. where he could be arrested.

The informants participated in a complex sting operation with the assistance of federal agents. As a result of the informants’ efforts, the foreign individual came to the U.S. and was arrested. He, in turn, agreed to help the government in its pursuit of the foreign company. The company was indicted, pleaded guilty and paid $74 million to the U.S. as part of a settlement.

After federal agents thanked the informants for their help and told them about the IRS’s whistleblower award program, the informants filed Forms 211, Application for Award for Original Information. They filed their Forms 211 approximately three months after the foreign company pleaded guilty and settled.

The IRS Whistleblower Office rejected the claim without reviewing it. Before the Tax Court, the IRS argued that to be eligible for an award under Code Sec. 7623(b), an individual must submit the whistleblower information to the Whistleblower Office on Form 211 before any IRS action or examination is carried out with respect to that information.

Court’s analysis
The Tax Court rejected the IRS’s argument. It found that the TRHCA did not endow the Whistleblower Office with unlimited discretion or exclusive authority to investigate the individual or entity that was the subject of an award application. Rather, the TRHCA clearly provided that the Whistleblower Office is the central office for investigating the legitimacy of a whistleblower’s award claim, but not necessarily the underlying tax issue. Therefore, the Tax Court found that the fact that informants provided information to other federal agencies, including an IRS operating division, before submitting Form 211 did not, as a matter of law, render them ineligible for an award under Code Sec. 7623(b).

Whistleblower 21277-13W, 144 TC No. 15

IRS updates audit techniques guide on nonqualified deferred compensation

The IRS has released an updated Audit Techniques Guide (ATG), Nonqualified Deferred Compensation, for examiners. Among other things, the ATG addresses when deferred amounts are includible in an employee’s gross income, when they are deductible by the employer, and when they must be taken into account for employment tax purposes. The ATG also includes audit strategies, such as questions to ask during an audit and which company personnel to interview.

Background
Nonqualified deferrals of compensation made after December 31, 2004, are subject to Code Sec. 409A, which provides that amounts deferred under an NQDC plan (generally, other than a retirement-type plan that is not taxed until withdrawal) and that are not subject to a substantial risk of forfeiture must be included in the service provider’s gross income, unless the plan meets certain requirements with regard to deferral elections and distributions. Failure to meet these requirements could result in immediate taxation and penalties.

Audit Guide
The ATG notes that a nonqualified deferred compensation (NQDC) plan examination should focus on when the deferred amounts are includible in the employee’s gross income and when those amounts are deductible by the employer. For these purposes, the ATG outlines the doctrines of constructive receipt (for unfunded plans) and economic benefit (for funded plans).

The ATG instructs examiners that cash basis taxpayers must include gains, profits, and income in gross income for the taxable year in which they are actually or constructively received. Constructive receipt generally means the recipient had control of the receipt of the deferred amounts and that such control was not subject to substantial limitations or restrictions.

The ATG offers IRS agents tips for examining constructive receipt and economic benefit issues, including a list of documents to consult, questions to ask, and company personnel to interview.

Examiners should review, among other things: plan documents, employment agreements, deferral election forms, or other communications between the employer and the employee.

The ATG also underscores that employers are required to withhold income taxes from NQDC amounts at the time the amounts are actually or constructively received by the employee.

Small business relief from $100 per day per employee penalty

Concern builds for small business relief from $100/day/employee penalty for non-ACA compliant payment plans

Although not subject to the Affordable Care Act’s employer mandate now or in the future, some small employers (those with fewer than 50 employees) may be unaware of the $100 per employee per day excise tax ($36,500 per year) under Code Sec. 4980D for which they may now be liable. If an employer currently reimburses employees under an employer payment plan such as a premium-only health reimbursement arrangement (HRA) to buy health insurance that no longer meets Affordable Care Act (ACA) standards, the excise tax will apply. Delayed enforcement of the penalty expired after June 30, 2015.

Background
Under Rev. Rul. 61-146, if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are generally excluded from the employee’s gross income. This exclusion also applies if the employer pays the premiums directly to the insurance company. Notice 2013-54 described these health reimbursement arrangements (HRAs) as employer payment plans, which are considered to be group health plans subject to the PPACA market reforms. Excise taxes under Code Sec. 4980D apply for failure to comply with PPACA market reforms.

In February, the IRS reiterated in Notice 2015-17 the rules contained in Rev. Rul. 61-146 and Notice 2013-54, but recognized that some additional time might be needed to obtain group health coverage or adopt a suitable alternative. Notice 2015-17 therefore provided transition relief from the excise tax through June 30, 2015 for small employers.

Extension, repeal or enforcement?
The Treasury Department and IRS have been silent on whether there will be any extension of transition relief until the end of 2015. The IRS also has not indicated whether audits of small businesses will begin to focus on this issue.

According to National Federation of Independent Business (NFIB) research, 14 percent of small businesses that do not offer group insurance reimburse their workers instead. The National Association for the Self-Employed (NASE), an advocate and resource for the self-employed and micro-business community, also called on the Treasury Department to immediately delay the policy until the end of the year in order for Congress to pass bipartisan legislation to remedy the situation.

There are currently two bills (Sen 1697, HR 2911) in Congress addressing the issue: “to provide an exception from certain group health plan requirements to allow small businesses to use pre-tax dollars to assist employees in the purchase of policies in the individual health insurance market, and for other purposes,” both introduced on June 25, 2015.