MCB Accounting Blog

The Internal Revenue Service (IRS) has announced that it has finished updating its processing systems and is now accepting all 2012 tax returns. This includes returns that contain the 29 forms that were delayed by the late passage of the American Taxpayer Relief Act of 2012.

The IRS could not accept these forms when tax season opened because the forms needed extensive form and processing systems changes to reflect changes made by the American Taxpayer Relief Act.

Click here to view the complete JournalofAccountancy.com article.

Contact an MCB Tax Adviser at 703.218.3600 and start building a relationship with a CPA firm that strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

The Virginia Telework Expenses Tax Credit is a new credit available to any business subject to income tax in Virginia.  The legislation provides for a tax credit of up to $1,200 per employee, up to $50,000 per organization, for eligible telework expenses incurred during the taxable year. Of the $50,000 available per organization, up to $20,000 can be claimed for costs of conducting a telework assessment.  This amount is not subject to the $1,200 per employee cap.

To be counted as a participating employee for purposes of claiming the telework expenses tax credit, an employee must telework at least one day per week.  The employee must enter into a signed telework agreement and begin to telework on or after July 1, 2012 but before January 1, 2017. Eligible teleworking expenses include computer equipment, networking equipment and software, security and antivirus systems, Internet access, and communications equipment and services. Click here to read more detail in Virginia Code Section 58.1-439.12:07, Telework expenses tax credit, or go to teleworkva.redmon.com for further information.

Taxpayers are required to apply to the Virginia Department of Taxation to reserve a portion of the credit.  The reservation application, Form TEL-1, must be filed between September 1 and October 31 of the year preceding the calendar year in which the eligible telework expenses will be incurred.  

Taxpayers may claim this credit for taxable years beginning on or after January 1, 2012, but before January 1, 2017.  The aggregate amount of tax credits that will be issued is capped at $1 million annually.  If credit applications exceed the $1 million cap, credits will be allocated on a pro rata basis.

The actual credit per taxpayer is determined by how many applications are received.  Another form, TEL-2, must be filed by April 1 of the year following the calendar year in which the eligible expenses were incurred.  Once the Form TEL-2 is approved, the Virginia Department of Taxation will send a certification letter by June 30 providing the amount of the credit that can be claimed on the taxpayer's Virginia return.

MCB has served the accounting and tax needs of businesses for over 65 years. We understand the pressures you face today. We work together with our clients as accounting, business, and tax advisers. Contact an MCB adviser for your tax and accounting needs at information@mcb-cpa.com or 703.218.3600 to start building a relationship with a CPA firm that strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

The Internal Revenue Service (IRS) has issued proposed regulations relating to the tax treatment of noncompensatory options and convertible instruments issued by a partnership that would expand the list of "measurement events" upon which a holder of a noncompensatory option may be characterized as a partner. The proposed regulations also provide additional guidance in determining the character of the option grantor's gain or loss as a result of certain closing transactions. The proposed regulations would apply to options issued on or after February 5, 2013, the date final regulations on noncompensatory partnership options took effect.

Definitions. Internal Revenue Code Section 761 provides definitions of several terms, including "partnership" and "partner." A partner is broadly defined as a member of a partnership. In general, a member can be a natural person, a trust, another partnership, a corporation, or a joint venturer. Code Section 1234(b)(2)(B) defines the term "property" to mean stock and securities (including stocks and securities dealt with on a when-issued basis), commodities, and commodity futures.

Corresponding final regulations. The final regulations contain a characterization rule providing that the holder of a noncompensatory option is treated as a partner under certain circumstances. Under this rule, a noncompensatory option is treated as a partnership interest if, on the date of a "measurement event," (1) the noncompensatory option provides the option holder with rights that are substantially similar to the rights afforded a partner, and (2) there is a strong likelihood that the failure to treat the holder of the noncompensatory option as a partner would result in a substantial reduction in the present value of the partners' and noncompensatory option holder's aggregate federal tax liabilities.

The final regulations define a "measurement event" as the (1) issuance of the noncompensatory option; (2) an adjustment of the terms (modification) of the noncompensatory option or of the underlying partnership interest; or (3) transfer of the noncompensatory option if either (A) the option may be exercised (or settled) more than 12 months after its issuance, or (B) the transfer is pursuant to a plan in existence at the time of the issuance or modification of the noncompensatory option that has as a principal purpose the substantial reduction of the present value of the aggregate federal tax liabilities of the partners and the noncompensatory option holder.

Additional measurement events under proposed regulations. The proposed regulations would add the following three measurement events to those listed in the final regulations:

• issuance, transfer, or modification of an interest in, or liquidation of, the issuing partnership
• issuance, transfer, or modification of an interest in any look-through entity that directly, or indirectly through one or more look-through entities, owns the noncompensatory option
• issuance, transfer, or modification of an interest in any look-through entity that directly, or indirectly through one or more look-through entities, owns an interest in the issuing partnership

Other changes in proposed regulations. The proposed regulations also provide that the term "securities," as used in Code Section 1234(b)(2)(B), includes partnership interests. Under the proposed regulations, in the case of the grantor of an option on a partnership interest, gain or loss from any closing transaction with respect to, and gain on lapse of, the option would generally be treated as gain or loss from the sale or exchange of a capital asset held not more than one year (i.e., short-term capital gain).

Under Code Section 1234(a), gain or loss on the sale or exchange of, or loss on failure to exercise, an option is considered gain or loss from the sale or exchange of property that has the same character as the property to which the option relates would have in the hands of the taxpayer. Although a partnership interest is generally considered a capital asset, Code Section 751(a) may apply to recharacterize a portion of a partner's gain on the sale or exchange of a partnership interest as ordinary. The IRS is seeking comments on whether Code Section 751(a) applies to the lapse, repurchase, sale, or exchange of a noncompensatory option, and on the computation of the resulting income or loss to the option holder and partner.

Click here to view related cbiz.com article.

The MCB Difference is our long-term relationships with clients.  Our priority is to enhance the growth and success of each of our clients in every industry we serve.  We RESPECT our clients and work hard to earn your CONFIDENCE as a TRUSTED business advisor.

The Internal Revenue Service (IRS) has issued final regulations on the tax treatment on noncompensatory options and convertible instruments issued by a partnership.  The regulations generally provide that the exercise of a noncompensatory option does not cause recognition of gain or loss to either the issuing partnership or the option holder. The regulations also modify Internal Revenue Code Section 704(b) regulations on the maintenance of partners' capital accounts and the determination of partners' distributive shares of partnership items. In addition, the final regulations provide a characterization rule under which the holder of a call option, warrant, convertible debt, or convertible equity issued by a partnership is treated as a partner under certain circumstances.

A noncompensatory option is defined by the final regulations as an option issued by a partnership, other than an option issued in connection with the performance of services. An option is defined for this purpose as a call option or warrant to acquire an interest in the issuing partnership, the conversion feature of convertible debt, or the conversion feature of convertible equity.

Background. Under Code Section 721, a partner's contribution to a partnership, whether being formed or operating, in exchange for a partnership interest usually does not result in recognized gain or loss to any partner or to the firm. However, this section applies only to contributions, and not to sales, loans, or other transactions between a partner individually and the firm.

Partnerships often issue options or convertible instruments that allow the holder to acquire by purchase or conversion an equity interest in the partnership. However, there was no clear guidance of the tax consequences of these options until the IRS issued proposed regulations in January 2003. The proposed regulations, which addressed the tax treatment of noncompensatory options and convertible instruments used by partnerships, have now been finalized, with some modifications.

Overview of final regulations. The final regulations generally provide that the exercise of a noncompensatory option does not cause recognition of gain or loss to either the issuing partnership or the option holder. The final regulations apply only if the call option, warrant, or conversion right grants the holder the right to acquire an interest in the issuer (or cash measured by the value of the interest).

Capital accounts and determination of partners' distributive shares. The final regulations modify the regulations under Code Section 704(b) on the maintenance of the partners' capital accounts and the determination of the partners' distributive shares of partnership items. The regulations provide that the issuance by a partnership of a noncompensatory option (other than an option for a de minimis partnership interest) is a permissible revaluation event.

Characterization rule. The final regulations contain a characterization rule that provides that the holder of a call option, warrant, convertible debt, or convertible equity issued by a partnership is treated as a partner under certain circumstances. A  noncompensatory option is treated as a partnership interest for all federal tax purposes if, on the date of a measurement event, with respect to the option: (1) the noncompensatory option (and any agreements associated with it) provides the option holder with rights that are "substantially similar" to the rights afforded a partner; and (2) there is a strong likelihood that the failure to treat the holder of the noncompensatory option as a partner would result in a substantial reduction in the present value of the partners' and noncompensatory option holder's aggregate federal tax liabilities.

Safe harbors. Two safe harbors are provided in the regulations. The first safe harbor provides that a noncompensatory option is not considered reasonably certain to be exercised if it may be exercised no more than 24 months after the date of the applicable measurement event and it has a strike price equal to or greater than 110 percent of the (FMV) of the underlying partnership interest on the date of the measurement event. The second safe harbor provides that a noncompensatory option is not considered reasonably certain to be exercised if the terms of the option provide that the strike price of the option is equal to or greater than the FMV of the underlying partnership interest on the exercise date.

Applicability date. The final regulations apply to noncompensatory options issued on or after February 5, 2013.

Click to view related articles from the JournalofAccountancy.com and the AICPA.

The MCB Difference is our long-term relationships with clients.  Our priority is to enhance the growth and success of each of our clients in every industry we serve.  We RESPECT our clients and work hard to earn your CONFIDENCE as a TRUSTED business advisor.

The Internal Revenue Service (IRS) began accepting some 2012 individual tax returns on January 30, 2013. It began accepting some corporate, partnership, and tax-exempt organization returns on Monday, February 4, 2013. Returns of filers claiming depreciation deductions and various energy and business tax credits cannot be filed until a number of revised forms are ready.

The IRS anticipates accepting returns containing the delayed forms in late February or early March 2013.

Click here to view the complete AccountingToday.com article, which includes a complete list of delayed forms.

Contact an MCB Tax Adviser at 703.218.3600 and start building a relationship with a CPA firm that strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

In recent years, the Internal Revenue Service (IRS) has increased its scrutiny of S corporations regarding reasonable compensation.

When you do business as a sole proprietor or as a partnership, the profit that flows out to your individual tax return is subject not just to income tax, but to self-employment tax as well. The self-employment tax rate is 15.3 percent. This funds your Social Security and Medicare accounts and substantially increases your tax liability. If you incorporate your business, making it an S corporation, any profit that passes through to your individual tax return is subject only to income tax. You do not pay self-employment tax on those proceeds.

There is a significant financial benefit to incorporating your business. However, it is not as simple as it appears. Many S corporation shareholders wrongly believe they can take a small salary or no salary at all and let the entire profit of the business pass through to their individual tax returns, at a considerable tax savings.

However, the IRS dictates that compensation must be reasonable. How it determines whether compensation is reasonable depends on the facts and circumstances. For example, if your business is experiencing tough times and you are using savings and other earnings to live on, you will likely have little or no W2 earnings from the business. If this is the case, the IRS is not likely to be concerned. However, if you have a successful business with significant profits but little or no W2 income, the disparity between the two items of income is likely to raise questions and lead to IRS scrutiny.

If your compensation is found to be less than reasonable, the IRS will recategorize the income and you will be subject to additional tax. Penalties and interest will also be levied, and it is possible that an audit could be triggered.

Click here for the complete FoxBusiness.com article.

MCB has served the accounting and tax needs of businesses for over 65 years. We understand the pressures you face today. We work together with our clients as accounting, business, and tax advisers. Contact an MCB adviser for your tax and accounting needs at information@mcb-cpa.com or 703.218.3600 to start building a relationship with a CPA firm that strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

The Virginia Department of Taxation has been alerted to a phone scam related to the new Virginia Tax Refund Debit Card. Although the new cards have not yet been issued, the Department has received reports of phone calls being made to individuals, telling them that their "Way2Go prepaid MasterCard is locked for security reasons." The automated caller then tries to get the listener to divulge personal information.
 
This is a phone scam. The Department of Taxation never makes automated calls and never solicits personal information in this manner. If you receive such a call, hang up immediately. If the call is recorded as a voice mail, delete it.
 
The Department is working with other government agencies, law enforcement, the debit card vendor, and the telephone companies involved to try and end the phone scam. 
 
If you have questions, please contact the Department of Taxation's Customer Services Department at (804) 367-8031.

Contact an MCB Tax Adviser at 703.218.3600 and start building a relationship with a CPA firm that strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

The Internal Revenue Service (IRS) has introduced a simplified way for small business owners and home-based employees to claim the home office tax deduction beginning with their 2013 tax returns. Under Revenue Procedure 2013-13, small business owners who maintain a home office and employees who work from home will be able to deduct up to $1,500 per year using a new, simplified version of the required form.

Taxpayers may deduct $5 per square foot of home office space, up to 300 feet, for as much as $1,500 in deductions. Current restrictions on claiming the home office deduction, such as the requirement that a home office be used regularly and exclusively for business purposes and the limit on the amount of the deduction to income derived from the particular business, still apply. The new option is an alternative to the calculation, allocation, and substantiation of actual expenses previously required. Instead of the 43-line Form 8829, which requires complex calculations of allocated expenses, depreciation, and carryovers of unused deductions, taxpayers can claim the deduction through a simplified form.

Homeowners using the new options cannot depreciate the portion of their home used in a trade or business, but they can claim allowable mortgage interest, real estate taxes, and casualty losses as itemized deductions on Schedule A. These deductions do not need to be allocated between personal and business use. Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible.

Click here to view the complete AccountingToday.com article.

Contact an MCB Tax Adviser at 703.218.3600 and start building a relationship with a CPA firm that strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

The Internal Revenue Service (IRS) has reported that audits of individuals topped 1 million in fiscal year 2012 for the sixth year in a row. This represents 1.03 percent of all tax returns filed. Audits of individuals in the upper income ranges were substantially higher than in other categories.

The IRS noted that it increased its examinations across all categories of business returns by more than 12 percent in 2012. The largest increases were seen in audits of pass-through entities such as partnerships and S corporations. More than 20 percent of returns for the largest corporations were audited in 2012.

For the third year in a row, the IRS collected more than $50 billion in enforcement revenue.

Electronic filing by individuals continued to increase. The e-filing rate for individuals exceeded 80 percent for the first time in 2012.

Click here to view the complete AccountingToday.com article.

MCB has over 60 years of experience serving clients as a full-service accounting firm. Contact us today with your audit, accounting, and tax needs at 703.218.3600 or email information@mcb-cpa.com.