Petty Pennsylvania tax penalty

Tax professionals seem to love sharing bizarre stories of the trade especially when the taxpayer or the government acts in some silly manner. I am no exception.

Recently I settled a multi-year complex tax problem for a small business client in Pennsylvania. I figured that, as happened in this case, if I can negotiate a discount less than the amount of my fee then my involvement is a win/win/win for both of us plus the state.

I was pleased to work with a helpful revenue agent. At the end of the negotiation I asked for advice on how to handle the payments since it was a complex case and payments had to be applied to multiple years and different types of taxes. Normally I would make the payment online but felt this might trigger confusion. The agent said send the check to her and she would apply it appropriately. Again I was grateful, and that’s what I did.

Then, a month or so later the taxpayer received a 5% penalty notice because the payment was not made online and the check sent for the settlement was not certified! Good grief. In any event, we are just happy to move on.

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No double taxation for dual state residents

Can a state or local government tax your income that was earned and already taxed in another state? That was the question before the U.S. Supreme Court over the past few years and an opinion was finally issued this week.

NO” says SCOTUS in a 5-4 decision. The surprise to me was that it was such a close decision with sharply divided opinions among the Justices. But in Comptroller vs. Wynne, the Supreme Court decided that Maryland’s tax was in violation of federal law because its county tax effectively “double-taxes”some income that was already taxed in another state.

This decision is important to people like me who maintain legal residency in more than one state. Dual residency could have been suddenly a lot more expensive if the decision had gone the other direction. I suspect that this decision will also impact local earned income taxes but the Court decision does not address the question of what options are left open to the states. Other media reports speculate that we will see a wave of new tax laws designed to replace the tax revenue that will potentially be lost be this Court decision.

For more information see: Bradley Joondeph, Opinion analysis: Maryland’s personal income tax violates the Commerce Clause, SCOTUSblog (May. 19, 2015, 10:20 AM), http://www.scotusblog.com/2015/05/opinion-analysis-marylands-personal-income-tax-violates-the-commerce-clause/

Tax accounting for hobby income and expenses

If you have an active hobby then you might find that you make some money at it. But it is important to recognize that the IRS makes a distinction between businesses run for profit and those that are hobbies without a profit motive. This post summarizes the four key differences in tax accounting between the two.

  1. Hobby businesses cannot be used the generate losses that reduce other taxable income. For example, you have a $60,000 salary and your hobby business loses a net of $10,000 per year. You don’t get to net the two and report your taxable income as $50,000.
  2. You are always allowed to deduct expenses up to the amount you earn in the hobby business. For example, the hobby business generated $15,000 gross income but you spent $25,000. You get to deduct $15,000 of the $25,000 expenses so that your net hobby business income is $0.
  3. If total expenses exceed income then depreciation is the first expense to be disallowed.
  4. Expenses are deducted on IRS 1040 Schedule A, not the Schedule C as used for for-profit businesses.

This post does not cover the factors that IRS uses to determine whether an activity is a business or a nonprofit activity. See “Is Your Hobby a For-Profit Endeavor?

Proposed Sandy tax relief for individuals and businesses

These measures are proposed June 2013 and appear to have a strong chance of passage. (My source is NJSCPA.org).

 

Individuals:

  • Waiver of Adjusted Gross Income limitation for theft/loss deduction, so individuals can deduct the cost of uninsured losses. 
     
  • Increased Charitable Contribution Limits: The legislation increases charitable deduction limits of taxpayers with respect to cash contributions to certain tax exempt organizations made for the purpose of relief efforts related to Hurricane Sandy. 
     
  • Look-back Provision for Child Tax Credit and Earned Income Tax Credit, to allow a family in the affected region to opt to use their previous year’s earnings to calculate their Child Tax Credit and Earned Income Tax Credit.
     
  • Allow taxpayers whose principal place of residence is in the Hurricane Sandy Disaster Area and who suffered a loss from Hurricane Sandy, to take distributions from retirement savings accounts with no tax penalty, provided such amount is repaid within three years.

Businesses:

  • Allowing businesses to expense the cost of disaster recovery.
     
  • Allowing businesses to use Net Operating Loss to recover past tax payments or reduce future tax payments, if they are operating with no tax liability during the prescribed period.
     
  • Increase in new markets tax credit for investments in community development entities serving Hurricane Sandy disaster areas.
     
  • Allowing public utilities to reduce their tax liability when rebuilding or replacing assets damaged in the storm.
     
  • Work Opportunity Tax Credits for displaced workers.