CPA Archives | Rick Norris

CPA Tax Tip: What is Taxable? Almost Everything.

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” – Will Rogers

We get a number of calls throughout the year from individuals asking if certain types of income is taxable. The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages, tips, interest, dividends, and retirement. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return. (From a business standpoint, I usually don’t recommend barters because it seems one party ultimately feels that they got cheated.)

Some types of income are not taxable except under certain conditions, including:

Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable. Be careful with your life insurance strategies so you don’t get an unpleasant surprise at the end of the year.
Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable. This is a little tricky. It has changed somewhat from the days when my wife was in graduate school since the 1980’s.
If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G. One of the important facts as to its tax-ability is whether you itemized the previous year, and did the state tax deduction provide a tax benefit to you.

Here are some types of income that are usually not taxable:

Gifts and inheritances
Child support payments
Welfare benefits
Damage awards for physical injury or sickness
Cash rebates from a dealer or manufacturer for an item you buy
Reimbursements for qualified adoption expenses

IRS Sources:

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

CPA Tax Tips: Tax Benefits for Parents

Raising children can be a financial strain. There are some tax benefits that you should not forget. Here are eight CPA tax benefits parents should look out for when filing their federal tax returns.

1. Dependents. In most cases, you can claim your child as a dependent. This applies even if your child was born anytime in 2013. For more details, see Publication 501, Exemptions, Standard Deduction and Filing Information. Watch out for joint custody arrangements. As CPAs, we have had tax returns rejected because the other spouse had claimed the child as a dependent.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17 at the end of the year. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more about both credits, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for one or more qualifying persons. Your dependent child or children under age 13 are among those who are qualified. You must have paid for care so you could work or look for work. For more, see Publication 503, Child and Dependent Care Expenses. You should have the name, address, federal ID number, and amount paid ready for your CPA at tax time.

4. Earned Income Tax Credit. This is the most audited area by the IRS due to fraud. If you don’t make too much money and have dependents, you may be able to take advantage of it. Use the EITC Assistant tool at IRS.gov to find out if you qualify or see Publication 596, Earned Income Tax Credit. A CPA is at risk also, if a client misleads them in regards to this item.

5. Adoption Credit. You may be able to claim a tax credit for certain expenses you paid to adopt a child. For details, see the instructions for Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid for higher education for yourself or an immediate family member, you may qualify for either of two education tax credits. Both the American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you don’t itemize deductions on your tax return. For more information, see Publication 970.

8. Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child under the Affordable Care Act. It applies to children under age 27 at the end of the year, even if not your dependent. See Notice 2010-38 for information. Be careful if you are an owner of an S-corporation, partnership, or LLC. There are specific rules to follow in order to get the deduction. A CPA can help guide you through the process but you should contact us well before the end of each year to make sure things like W-2’s correctly reflect this if applicable.

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Entertainment Film Tax Credits: A CPA’s Holistic Approach to Individual State Taxes

L A Times article, Hollywood’s new financiers make deals with state tax credits, discusses the growing trend of film and TV production moving out of California because of the increased tax credits. The article displays aspects of the credits that Entertainment CPAs have known for years, such as the mechanics of declaring a tax credit against the state taxes.

In company taxation, the article brushes on the thought processes of producers when selecting a location to shoot, whether within California, or outside California. The bottom line in the article is that the decision sometimes comes down to “the bottom line” since a scene can be shot almost anywhere these days.

Individual investor considerations are also mentioned when making a decision of where to shoot or just invest in an entertainment project. But what this piece ignores is what an entertainment CPA analyzes when considering a decision for a client to invest in a film in another state. One of the important question is what state does the individual investor reside in? More specifically, where is this investor’s tax residency?

Now to a person not versed in taxation, it may not seem important, but to an entertainment CPA, it is vital. For example, if an individual resides in Nevada where there is no state taxation, then a film tax credit in another state would make sense on its face because it may offset taxes in that state derived from production income.

However, let’s say the investor is a California resident. In California, a tax resident is taxed on all of their income. But does that mean this resident will be double taxed?

Not necessarily. If a California investor recognizes income in another state WITHOUT a tax credit thus paying other state income taxes, then the California resident may be able to use the out of state tax (partially or totally) as a credit against their California tax liability.

On the other hand, if the California investor reports out of state income WITH a tax credit, then they may still wind up paying California taxes on that income even though the credit wiped out taxes in the other state.

The real bottom line is that a holistic approach should be taken to determine the total taxes paid everywhere in order to determine the net cash and tax effect. CPAs should do tax projections that span different states. The existence of another state’s credit may not matter to the bottom line.

I have discussed only the tax aspects. What about the financial aspects of these entertainment ventures? A proper rate of return on investment calculation should be performed on an after-tax basis. In fact, a broker that pushes these type of entertainment vehicles would include a state tax credit which would show a larger return on capital. The problem with such an analysis is that it may ignore the fact that the California investor may end up paying taxes somewhere, even with a state credit abroad. This may have a substantial impact on the return on investment, and the decision of whether to invest.

Before making any investment in another state, determine the return in investment looking at the whole tax picture, not just the tax situation of the state providing the credit.

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Tax Scams Can Hit All Year, Especially During Tax Season

Imagine getting a call or e-mail from an “IRS Agent” who claims that you owe them a lot of money and will have your bank account levied? Just reading that sentence may raise the heart rate of some of you.

Here are some warnings from the IRS and some steps you can take to protect yourself:

Be vigilant of any unexpected communication purportedly from the IRS at the start of tax season.
Don’t fall for phone and phishing email scams that use the IRS as a lure. Thieves often pose as the IRS using a bogus refund scheme or warnings to pay past-due taxes.
The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information. This includes any type of e-communication, such as text messages and social media channels.
The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.
If you get an unexpected email, don’t open any attachments or click on any links contained in the message. Instead, forward the email to phishing@irs.gov. For more about how to report phishing scams involving the IRS visit the genuine IRS website, IRS.gov.

Here are several steps you can take to help protect yourself against scams and identity theft:

Don’t carry your Social Security card or any documents that include your Social Security number or Individual Taxpayer Identification Number.
Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
Protect your financial information.
Check your credit report every 12 months.
Secure personal information in your home.
Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
Be careful when you choose a tax preparer. Most preparers provide excellent service, but there are a few who are unscrupulous. Refer to Tips to Help you Choose a Tax Preparer for more details.

For more on this topic, see the special identity theft section on IRS.gov. Also check out IRS Fact Sheet 2014-1, IRS Combats Identity Theft and Refund Fraud on Many Fronts.

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Business Ethics Start at Home, But Strategic Planning is a Music Industry Necessity

About ten years ago I went into my fifteen year old’s room and laid on the bed to talk to him while he was online. He told me was he had learned of this “new” music service where you can acquire music for free. It was called Grokster. After watching him for a few minutes I concluded that this was wrong behavior. I explained to him that this activity bothered me for two reasons: 1) It was stealing. He was not purchasing but “acquiring” music for free. and 2) I had music clients who made their living from selling the music they wrote and performed. I told him that he had to cancel his account and not use it. In its place, I made him and his following brothers and sister a deal. If they promised not to download free tunes, I would pay for all of their music purchased through a service. Fortunately, they did not go hog-wild and buy thousands of songs. Instead, they usually purchased the latest acts, classic rock , and jazz. Since I shared the music account with them, I was able to learn a lot about the latest acts and play jazz. The practice still lives today with child (daughter) number four, but I really don’t care to listen to Justin Bieber. Still, honesty prevailed and they learned that conventional wisdom is not always wisdom at all.

However, according to Paul Resnikoff’s article, Technology didn’t kill the Music Industry. The fans did… , we were in the minority. Mr. Resnikoff’s article focused on educating the public as to the value of music and the unethical and illegal practice of stealing it.

Though I don’t disagree with Mr. Resnikoff about educating the public, I believe it is the wrong strategy to help the musician. People will always rationalize the theft of music, unless they get caught and pay penalties. That is an enforcement issue that is outside the scope of this article.

Instead of bailing water out a sinking boat with a tea spoon, the budding musician should learn how to strategically plan their career. The new musician cannot make music the old tried and true ways. Those days are over.

For example: Cirque du Solei changed the circus industry. Their strategy resembled the Blue Ocean Strategy. They focused on what attributes their circus customers wanted, (e.g., clowns, acrobats, and music) and discarded attributes that customers did not want (e.g., animals, big name lion tamers, and 3-rings). The result: a new type of entertainment that stole market share from plays, sporting events, and amusement parks.

The musician must reinvent the appetite for music. For example, who would have guessed 40 years ago that The WHO and other bands would sync license their music for substantial money on television shows and commercials? I don’t recall many doing that in the 1960s.

To be a “successful” artist or business person in capitalism, strategic planning must be done on both an individual level and industry level. Right now there is no strategy in the music industry to save the musician, and likewise, there are hardly no strategies on the individual level to save the music industry. Both are needed and must be interrelated.

Have You Been a Victim of Scams?

I love our clients. Usually, before they make a financial move (small or large), they contact us. Sometimes it results in important decisions. Take for example the client who calls about an email form his bank that states that his account will be closed down unless he logs in and fixes a problem. The client would send the email to me (we control his account), and we would immediately email him to not respond because it is a phishing email trying to steal his login. We find these problems when we run our cursor over the authentic-looking logo. It points to a site other than the bank site.

The IRS system is a target of fraudsters also. Here are some examples they warn you about:

Three common year-round scams are identity theft, phishing and return
preparer fraud. These schemes are on the top of the IRS’s “Dirty Dozen” list of
scams this year. They’re illegal and can lead to significant penalties and
interest, even criminal prosecution.

Here’s more information about these scams that every taxpayer should know.

1. Identity Theft. Tax fraud by identity theft
tops this year’s Dirty Dozen list. Identity thieves use personal information,
such as your name, Social Security number or other identifying information
without your permission to commit fraud or other crimes. An identity thief may
also use another person’s identity to fraudulently file a tax return and claim
a refund.

The IRS has a special identity
protection page on IRS.gov dedicated to identity theft issues. It has
helpful links to information, such as how victims can contact the IRS Identity
Theft Protection Specialized Unit, and how you can protect yourself against
identity theft.

2. Phishing. Scam artists use phishing to trick
unsuspecting victims into revealing personal or financial information. Phishing
scammers may pose as the IRS and send bogus emails, set up phony websites or
make phone calls. These contacts usually offer a fictitious refund or threaten an
audit or investigation to lure victims into revealing personal information.
Phishers then use the information they obtain to steal the victim’s identity,
access their bank accounts and credit cards or apply for loans. The IRS does
not initiate contact with taxpayers by email to request personal or financial
information. Please forward suspicious scams to the IRS at phishing@irs.gov. You can also visit IRS.gov and select the link “Reporting
Phishing” at the bottom of the page.

3. Return Preparer Fraud. Most tax professionals
file honest and accurate returns for their clients. However, some dishonest tax
return preparers skim a portion of the client’s refund or charge inflated fees
for tax preparation. Some try to attract new clients by promising refunds that
are too good to be true.

Choose carefully when hiring an individual or firm to prepare your return.
All paid tax preparers must sign the return they prepare and enter their IRS
Preparer Tax Identification Number (PTIN). The IRS created a webpage to assist
taxpayers when choosing a tax preparer. It includes red flags to look for and
information on how and when to make a complaint. Visit www.irs.gov/chooseataxpro.

Be very careful with your personal information. If in doubt, don’t click or answer anything.

IRS Podcasts:

Protect Yourself from Identity Theft – English
| Spanish
Are You a Victim of Identity Theft? – English
| Spanish
Dirty Dozen – English
| Spanish

CPA Tip: Get a Basic Understanding of Your Taxes

The media has not shown the IRS in a favorable mood, lately. However, taxes are here and you probably pay them. Many tax questions I am asked would have been answered by the questioner if they just understood the basic premise of how our tax system work. This understanding may have also helped these people in their personal financial decisions.

The IRS actually has a site that teaches about taxes. The site can be used by high school teachers in instructing their students about our tax system.

The program is a free online tool designed in partnership with teachers for classroom use. The interactive tool is a great resource for middle, high school or community college students. However, anyone can use it to learn about the history, theory and application
of taxes in the U.S.

Here are seven reasons why you should consider exploring the Understanding Taxes program:

1. Understanding Taxes makes learning about federal taxes easy, relevant and fun. It features 38 lessons that help students understand the American tax system. Best of all, it’s free!

2. The site map helps users quickly navigate through all parts of the program and skip to
different lessons and interactive activities.

3. A series of tax tutorials guide students through the basics of tax preparation. Other features include a glossary of tax terms and a chance to test your knowledge through tax
trivia. Interactive activities encourage students to apply their knowledge
using real world simulations.

4. Understanding Taxes makes teaching taxes as easy as ABC:

Accessible
(web-based)
Brings
learning to life
Comprehensive

5. It’s easy to add to a school’s curriculum. Teachers can customize the program to fit their own personal style with lesson plans and activities for the classroom. They will
also find links to state and national educational standards.

6. The program is available 24 hours a day. All you have to do is access the
IRS website and type “Understanding Taxes” in the search box.

7. There are no registration or login requirements to access the program. That means people can take a break and return to a lesson at any time.

You can use the Understanding Taxes anytime during the year. The IRS usually updates the program each fall to reflect current tax law and new tax forms.

Additional IRS
Resources:

Understanding
Taxes

IRS YouTube Videos: English | ASL

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S.
Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.

“Breaking Bad” Habits of Ignoring Your Strengths and Copying Others

Have you ever tried to compete on the “other guy’s field?” So many businesses and people try to copy other company’s strategies because the other guy is successful. Why not strategize using your own skills and resources?

Take Andrew Huang for example. Instead of covering the “Breaking Bad” Theme like so many have done before, he used a different approach. Watch him cover the theme using items commonly found in a meth lab.

Andrew broke the bad habit of many artists. Basically these artists film sessions covering a hit song with the intent to sound exactly like the original version using the same instruments. Their goal was to pick up an audience and a following. Yet, Andrew accomplished this by combining the music with the dynamics of the program. He was able to stand apart from the millions that ache for a “following.”

This thinking not only applies to artists, but to businesses. When your competitor launches a new idea, don’t try to replicate it. Instead, try to leapfrog it using other strengths that are inherent to you and your company. The typical “SWOT Analysis” is used in strategic planning, though as only a small part of it. The SWOT analysis is measuring the internal aspects of your business (strengths and weaknesses) against the external aspects of your business (opportunities and threats).

Setting a strategic plan means taking a novel approach to your business using all available information from your internal accounting to external market conditions. This entails being brutally honest. For example, if there are products, or personnel that do not align with your strategy, you must eliminate them. The concept that Jim Collins in states in his book, Built to Last is the get the right people on the bus before it leaves. Don’t drag people along that you hope will change. If they don’t mix with the new direction, then you are better off letting them find a job that they can agree with.

Try “Breaking Bad” habits and push your company to a horizon that offers more than immediate gratification. (BTW, I don’t recall a guitar being and essential tool in a meth lab.)

Seinfeld and the Art of Consistency

A couple of decades ago, I worked on a client who was one of the first TV Producers to land a very lucrative syndication deal. He was a very talented person who wrote, composed, and created. He was very consistent in his endeavors and it showed.

I enjoyed reading about “The Seinfeld Strategy” in Kevin Eikenberry’s Leadership Tip. He states that Jerry Seinfeld consistently earned tens of millions of dollars each year for over a decade by doing just one thing…being consistent. He wrote every day.

Whether you are an artist, a business person, or both, that is truly a well-kept secret. What is a better secret is that if you chisel away, instead of having to jackhammer your daily routine, you will persevere and enjoy the journey. Too many try to push too hard, too fast, and burn out.

From a business perspective, if you build a daily routine, you will build results. The routine can be as simple as writing an article like this one, or developing teaching videos that display your expertise.

Even a CPA can learn from this in the accounting profession. There is a lot of experiences that a CPA can share that others can benefit by because we are usually the hub of a business, professional, and even an artist’s life.

So, what is your routine, and are you leading others by doing it?

IRS Tax Notices: And Who Says People Don’t Write Letters Anymore?

Though out the year, we get emails from a handful of clients who have received a tax notice from a government agency. Believe it or not, the vast majority do not result in the client paying money. But still, it is nerve-racking for our clients, especially since they are due to an IRS oversight.

The IRS also offers some tips:

Don’t panic. Many of these letters require a simple response.

2. There are many reasons why the IRS sends correspondence. If you
receive an IRS notice, it will typically cover a very specific issue about your
account or tax return. Notices may require payment, notify you of changes to
your account or ask you to provide more information.

3. Each notice offers specific instructions on what you need to do to
satisfy the inquiry.

4. If you receive a notice advising you that the IRS has corrected your
tax return, you should review the correspondence and compare it with the
information on your return.

5. If you agree with the correction to your account, then usually no
reply is necessary unless a payment is due or the notice directs otherwise.

6. If you do not agree with the correction the IRS made, it is
important that you respond as requested. You should send a written explanation
of why you disagree. Include any information and documents you want the IRS to
consider with your response. Mail your reply with the bottom tear-off portion
of the IRS letter to the address shown in the upper left-hand corner of the
notice. Allow at least 30 days for a response.

7. You should be able to resolve most notices that you receive without
calling or visiting an IRS office. If you do have questions, call the telephone
number in the upper right-hand corner of the notice. Have a copy of your tax
return and the notice with you when you call. This will help the IRS answer
your inquiry.

8. Remember to keep copies of any notices you receive with your other
income tax records.

9. The IRS sends notices and letters by mail. The agency never contacts
taxpayers about their tax account or tax return by email.

Your CPA can help you muddle through these letters. A CPA usually deals with these letters and understands how to respond. For example, just today I received a call from a client who was assessed for a late filing fee for a return a prior accountant filed. However, I probably got the penalties abated because of a little-known exception.

______________________________________________________________________________
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S.
Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.