Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

The House approved the spending bill by a 256-to-167 vote on March 22. The Senate cleared the measure by a 65-to-32 vote.

Grain Glitch
The so-called "grain glitch" addressed within the omnibus package aims to fix an unintended consequence in the "pass-through" income deduction. The deduction is provided in new Code Sec. 199A, which was enacted last December as part of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Before the fix, grain and other agricultural products sold to cooperatives received a tax advantage because those sales were deductible from a farmer’s gross sales. Sales to companies other than cooperatives were deductible only from net business income. The inadvertent advantage had been given to cooperatives as part of a drafting error, according to several Republican lawmakers.

The appropriations bill repeals the provision in Code Sec. 199A that allowed farmers to deduct 20 percent of their gross sales to cooperatives. As modified, the deduction is now limited to 20 percent of farmers’ net income, excluding capital gains. "This legislation restores the competitive balance in the agricultural marketplace by leveling the tax burden on independent and cooperative farming businesses," Sen. Jerry Moran, R-Kan., said in a March 22 statement. The bill also modifies the deduction that is allowed to agricultural or horticultural cooperatives.

Low-Income Housing Tax Credit
Although Democrats have previously expressed an unwillingness to help Republicans correct issues within the new tax law, the parties agreed to the grain glitch fix in exchange for an expansion of the low-income house tax credit. The expansion is also included in the spending bill.

"This is the first increase in over a decade," Sen. Maria Cantwell, D-Wa., said on March 22. "Nearly $3 billion is a good start towards tackling the housing crisis in our cities and rural communities," she added. Cantwell spearheaded the efforts among Democrats for the credit’s expansion.

Technical Corrections
Numerous other technical corrections to previous tax bills spanning from 2004-2016 were included in the spending bill, none of which specifically address the TCJA. Included among the fixes are technical corrections to the partnership audit rules.

IRS Funding
The legislation provides the IRS with $11.43 billion in funding, close to $196 million more than currently enacted levels. $320 million is allocated specifically for implementation of the TCJA. The Trump administration had requested $397 million for implementation of the new tax law. According to Treasury Secretary Steven Mnuchin, the increased resources would provide an update to antiquated telephone systems and technology.

White House
President Trump rattled Capitol Hill on March 23 when he announced just hours before government funding was set to expire that he may not sign the government spending bill. Although Mick Mulvaney, Director of the Office of Management and Budget (OMB) said on March 22 that the President would sign the omnibus package, President Trump took to Twitter on March 23 to suggest otherwise. "I am considering a veto of the omnibus spending bill…," Trump said in a tweet.

While Trump did, in fact, wind up signing the spending bill, which tops 2,200 pages, he told reporters at the White House that he was "unhappy" to do so. Trump criticized the $1.3 trillion omnibus package for being the second largest in history. "I say to Congress, I will never sign another bill like this again. I’m not going to do it again. Nobody read it. It’s only hours old," Trump said.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

• Definition of Code Sec. 199A qualified business income.
• Aggregation method for calculation of QBI of pass-through businesses.
• Deductible amount of QBI for a pass-through entity with business in net loss.
• Qualification of wages paid by an employee leasing company.
• Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
• Availability of deduction for Electing Small Business Trusts (ESBTs).

Services
The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services,"the AICPA told the Service.

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A Ways and Means spokesperson told Wolters Kluwer on March 15 that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings."Confirmation that House GOP tax writers are mulling additional tax changes to the tax code comes just days after President Trump announced that he and House Republicans are very serious about working on a “phase-two” of tax reform. Trump quipped that Brady is the "king of tax cuts."

Individual Tax Cuts
Among expected changes, in particular, the temporary individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) could be made permanent, a Ways and Means spokesperson told Wolters Kluwer. For budgetary reasons, the cuts to individual tax rates and benefits were not made permanent under the new law. "While the tax cuts for families were long-term, they are not yet permanent, so we’re going to address issues like that," Brady said.

Criticism
Democratic lawmakers remain largely united in their criticisms of the TCJA. House Minority Leader Nancy Pelosi, D-Calif., criticized the new tax law in a March 15 news conference for "giving 83 percent of the benefits to the top 1 percent, ultimately raising taxes for 86 million middle-class families while contending that it's a middle-class tax cut."

To that end, across the U.S. Capitol, Senate Minority Leader Charles E. Schumer has said Democrats would be reluctant to work with Republicans in making any fixes to the new tax law unless Republicans would be willing to address Democrats’ concerns with the law, as well. "We don't have much of an inclination, unless they want to open up other parts of the tax bill that we think need changes, to just help them clean up the mess they made," Schumer said.

Looking Forward
"Mainstream optimism is at record levels, our economy is really gaining momentum and booming in a big way," Brady said. "We’re always looking to improve the tax code," he said, adding that lawmakers are currently considering new ideas for tax reform. "We think there are some good ones." Lawmakers will not combine additional tax reform measures with technical corrections to the existing TCJA, according to Brady, emphasizing that any significant changes to come will be new ideas.

The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

Both Republican and Democratic lawmakers have varying views on specific temporary tax provisions, but in general, seem to have largely been in agreement that year-end tax extenders are not good policy. New to the discussion, however, is whether such provisions are worthwhile now that business tax rates have been lowered along with full and immediate expensing under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

New Path Forward
The Ways and Means Committee is "charting a new path forward on temporary tax provisions,"Chairman Kevin Brady, R-Tex., said in his opening statement. "Temporary measures are rarely good tax policy."

According to Brady, numerous tax extenders only exist because of the previously outdated tax code and high tax rates. But now that tax reform has been enacted, these temporary tax breaks may serve less of a purpose. "Starting now, we’re going to apply a rigorous test to these temporary provisions,"Brady said.

To that end, Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., said that any temporary tax provision determined as no longer necessary post-tax reform should be eliminated. And, as for those that continue to serve an important role and enhance tax reform, permanence should be considered.

Tax Policy Subcommittee ranking member Lloyd Doggett, D-Tex., also weighing in on the issue, said that any temporary tax provisions that will remain need to be paid for moving forward. Additionally, Doggett criticized Republicans for not holding enough hearings on the TCJA, as well as the specific tax extenders currently under review. Doing so, he added, would enable needed discussion on relevancy as well as pay-fors.

Panels
Witnesses at the hearing were grouped into four panels, three of which consisted of several representatives from various industries including fuel, energy, and real estate. The other included witnesses from several think tanks and research organizations.

Generally, industry stakeholders argued that many of these temporary tax breaks remain important, even after tax reform. Buchanan, however, repeatedly asked witnesses why additional incentives were needed after tax cuts and full expensing were provided through tax reform under the TCJA. Several Republican lawmakers, including Buchanan, stated that tax provisions only add to the uncertainty of the tax system.

Several industry witnesses argued, in essence, that not all tax extenders are created equally and should thus be evaluated individually. Barry Grooms, testifying on behalf of the National Association of Realtors, told lawmakers that the tax exclusion for forgiven mortgage debt is unique and should be made a permanent part of our tax law. "Since it was first added to the Internal Revenue Code in 2007, this provision has provided much-needed financial relief for millions of distressed households,"Grooms testified. This exclusion makes the tax system fairer, Grooms added, stating that it provides assistance to families experiencing hardships.

Policy
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers that tax extenders are generally poor policy and that most should be allowed to sunset. According to MacGuineas, not only do tax extenders add to the federal deficit, the temporary nature of tax extenders makes it difficult for businesses and individuals to plan and invest. "To be sure, there are sometimes legitimate reasons for temporary tax policy – to respond to a natural disaster or economic downturn, to test effectiveness, or to provide transition relief – but most of the tax extenders are temporary simply to hide their budgetary cost," MacGuineas testifed.

Likewise, David Burton, senior fellow in economic policy at The Heritage Foundation, spoke to the costliness of tax extenders. Burton testified that 13 energy tax extenders are unwarranted. "At roughly $53 billion over ten years, the revenue lost from these provisions is substantial," Burton included in his written testimony. Additionally, Burton told lawmakers that tax extenders make the tax system less fair.

Seth Hanlon, senior fellow at the Center for American Progress, criticized Congress for not addressing tax extenders in the TCJA. Furthermore, Hanlon told lawmakers that tax extenders not only make the tax code more unstable and add to the federal deficit, but also complicate the IRS’s job during filing season.

"Congress should have ended the gimmicky routine on tax extenders long ago, and certainly should have done so in legislation that was billed as a once-in-a-generation tax reform," Hanlon testified. "But, better late than never."

The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

In general, Code Sec. 965 imposes a one-time tax on the untaxed post-1986 foreign earnings of foreign subsidiaries of U.S. shareholders by deeming the earnings to be repatriated. The foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and remaining earnings are taxed at an 8 percent rate. The taxpayer may elect to pay the tax in installments over eight years.

Amounts must be reported by a U.S. shareholders of deferred foreign income corporation (DFIC) or by a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a U.S. shareholder of a DFIC.

The Appendix to Q&A 2 contains a table that describes, separately for individuals and entities, how items should be reported on the 2017 tax return. For example, an individual reports the Code Sec. 965(a) amount on Form 1040, Line 21, with the notation SEC 965 on the dotted line to the left of the Line.

A person with income under Code Sec. 965 is required to include with its return an IRC 965 Transition Tax Statement, signed under penalties of perjury, and in the case of an electronically filed return, in pdf format with the filename 965 tax. A Model statement is provided. Adequate records must be kept supporting the Code Sec. 965 inclusion amount, the deduction under Code Sec. 965(c), the net tax liability under Code Sec. 965, and any other underlying calculations of these amounts.

The FAQs provide details on how to make the multiple Code Sec. 965 elections, including the election to pay the tax in installments over eight years. For each election, a statement must be attached to the return and signed under the penalties of perjury, and in the case of an electronically filed return, in pdf format.

Form 5471 must also be filed with the 2017 return of a U.S. shareholder of a specified foreign corporation, regardless of whether the specified foreign corporation is a controlled foreign corporation. A statement containing information about the Code Sec. 965(a) inclusion must be attached to the Schedule K-1s of domestic partnerships, S corporations, or other passthrough entities.

Tax must be paid in two separate payments. One payment will reflect the tax owed, without Code Sec. 965. The second payment is the Code Sec. 965 payment. Both payments must be made by the due date of the applicable return (without extensions). Additional details for paying the tax are provided in the FAQs.

Persons who have already filed a 2017 tax return should consider filing an amended return based on the information in these FAQs and Appendices.

The U.S. Supreme Court reversed an individual’s conviction for obstructing tax law administration. The government failed to show that the individual knew that a "proceeding" was pending when he engaged in the obstructive conduct.

The U.S. Supreme Court reversed an individual’s conviction for obstructing tax law administration. The government failed to show that the individual knew that a "proceeding" was pending when he engaged in the obstructive conduct.

Background
The individual owned and operated a freight service that transported items to and from the United States and Canada. The government charged the individual with violating the "omnibus clause" of Code Sec. 7212(a), which imposes criminal liability on anyone who "in any other way corruptly … obstructs or impedes, or endeavors to obstruct or impede, the due administration of" the Internal Revenue Code (Title 26).

The government alleged that the individual obstructed tax administration because he: (1) failed to maintain corporate books and records; (2) failed to provide his accountant with complete and accurate tax information; (3) destroyed business records; (4) was hiding income; and (5) was paying employees with cash. At trial, the jury was instructed that it must unanimously find that he corruptly engaged in one of the practices listed. However, the jury was not instructed that it had to find that the individual knew he was under investigation and intended to interfere with that investigation. Subsequently, the jury convicted the individual on all counts. Then, the Second Circuit Court of Appeals affirmed his conviction.

Tax Law Administration
The Supreme Court reversed and remanded. According to the Court, the verbs "obstruct" and "impede" require an object. Therefore, the taxpayer must hinder a particular person or thing. Moreover, the omnibus clause serves as a "catchall" for the obstructive conduct, not as a catchall for every violation that interferes with tax law administration.

Nothing in the statute’s history suggested that Congress intended the omnibus clause to apply to the entire Internal Revenue Code, including the routine processing of tax returns, tax payments and tax refunds. Further, if the omnibus clause applied to all tax law administration, many tax misdemeanors might turn into felonies and make specific criminal provisions in the Code redundant. Accordingly, the phrase "due administration of" the tax code referred only to some acts, not everything the IRS does.

Overly Broad Interpretation
A broad interpretation of the omnibus clause would also risk the lack of fair warning. Interpreted broadly, the provision could apply to a person who paid a babysitter in cash without withholding taxes, left a large cash tip in a restaurant, failed to keep donation receipts, or failed to provide every record to their accountant. Such individuals may know they are violating an IRS rule. However, they would not think they could be prosecuted for obstruction. Further, if Congress intended that outcome, it should have made that clear in the statute.

Government’s Argument
Further, the Court rejected the government’s argument that the need to show the obstructive conduct was corrupt cured any overbreath problem. However, a taxpayer who "willfully" violates the tax code intends someone to obtain an unlawful advantage. Moreover, relying upon prosecutorial discretion to narrow an otherwise overbroad statute puts too much power in the hands of the prosecutor, and risks undermining public confidence in the criminal justice system. Therefore, to secure a conviction under the omnibus clause, the government was required to show that there was a nexus between the individual’s conduct and an investigation, audit or other targeted administrative action.

Reversing and remanding a CA-2 decision 2016-2 ustc ¶50,453.

Q:  One of my children received a full scholarship for all expenses to attend college this year.  I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses.  Is this true and what amounts spent on my child's education will be treated as qualified expenses?

Q: One of my children received a full scholarship for all expenses to attend college this year. I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses. Is this true and what amounts spent on my child's education will be treated as qualified expenses?

A: Any amount received as a "qualified scholarship" or fellowship is not required to be reported as income if your child is a candidate for a degree at an educational institution. For the college that your child attends to be treated as an educational organization, it must (1) be an institution that has as its primary function the presentation of formal instruction, (2) normally maintain a regular faculty and curriculum, and (3) have a regularly enrolled body of students in attendance at the place where the educational activities are regularly carried on. Your child has received a qualified scholarship if he or she can establish, that in accordance with the conditions of the scholarship, the funds received were used for qualified tuition and related expenses.

Qualified tuition and related expenses include tuition and fees required for enrollment or attendance at the educational institution, as well as any fees, books, supplies, and equipment required for courses of instruction at the educational institution. To be treated as related expenses, the fees, books supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses, such as expenses for room and board, travel, research, equipment, and other expenses that are not required for either enrollment or attendance at the educational institution are not treated as related expenses. Any amounts that are used for room, board and other incidental expenses are not excluded from income.

Example: Assume this year your son received a scholarship in the amount of $20,000 to pay for expenses at a qualified educational institution. His expenses included $12,000 for tuition; $1,100 for books; $900 for lab supplies and fees; and $6,000 for food, housing, clothing, laundry, and other living expenses.

The $14,000 that your son paid for tuition, books and lab supplies and fees are considered to be qualified educational expenses and therefore would not have to be reported as income. The $6,000 that he spent on housing and the other living expenses is considered to be incidental expenses and would have to be reported in his income.

Note: This tax exclusion for qualified scholarships should not be confused with the Hope Scholarship Tax Credit, which has been temporarily renamed the American Opportunity Tax Credit and enhanced for 2009 and 2010 by the American Recovery and Reinvestment Act of 2009. The American Opportunity Tax Credit can reach as high as $2,500 for 2009 and 2010 for tuition expenses paid by you for yourself, a spouse or a dependent. Scholarship money that is excluded from income cannot be used in computing your costs for the American Opportunity Tax Credit (i.e. Hope Scholarship Tax Credit). "Financial aid" in the form of student loans, however, is not counted as a scholarship and any money applied to pay tuition can qualify for the Hope Scholarship Tax Credit.

There can be all sorts of complicating factors in assessing whether a particular scholarship will be taxed, such as the treatment of work-study scholarships, educational sabbaticals, scholarships paid by an employer, and stipends to cover the tax on the non-tuition portion of attending a university. If you need additional assistance in determining the taxability of scholarships funds, please contact the office.

Q:The holidays are approaching and I would like to consider giving gifts of appreciation to my employees. What kinds of gifts can I give my employees that they would not have to declare as income on their tax returns? I also would like to make sure my company would be able to deduct the costs of these gifts.

A:First of all, anything given in the business setting is presumed, until proven otherwise, not to be a gift (e.g., is taxable income) -- that is, you are either rewarding an employee for work done or providing an incentive in which he or she will be inclined to do more work in the future. However, the Tax Code and related IRS regulations still allow many gifts to remain tax-free to the employee while being tax deductible to the business. Here is a short list of the rules:

$25 gift rule

A business may deduct up to $25 in gifts given to each recipient during any given year. However, you can't get around this limit by giving to each family member of the intended recipient: they all share in one $25 limit. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less.

No dollar limit exists on a deduction if the gift is given to a corporation or a partnership. The cost of gifts such as baseball tickets that will be used by an unidentified group of employees also qualifies for the unlimited deduction. However, once again, if the gift is intended eventually to go to a particular individual shareholder or partner, the deduction is limited to $25.

Separate "de minimis" rules

A "de minimis" fringe benefit from employer to employee is considered to be made tax-free to the employee. "De minimis" fringe benefits are not restricted by the $25 per recipient limit otherwise applicable outside of the employer-employee context. However, de minimis fringe benefits must be small "within reason." Typical de minimis gifts include holiday gifts such as a turkey or ham, the occasional company picnic, occasional use of the photocopy machine, occasional supper money, or flowers sent to a sick employee.

The general guidelines for de minimis fringe benefits are:

• the value of the gift must be nominal,
• accounting for all such gifts would be administratively nitpicking,
• the gifts are only occasional, and
• they are given "to promote health, good will, contentment, or efficiency" of employees.

Unfortunately, "gifts of nominal value" exclude such perks as use of a company lodge, season theater tickets, or country club dues. These cannot be given tax-free to an employee. But they do include occasional theater or sports tickets or group meals.

What's more, fringe benefits such as the use of an on-premise athletic facility or subsidized cafeteria are specifically included under IRS rules as de minimis fringe benefits. The traditional gold retirement watch -- or similar gift-- to commemorate a long period of employment is also treated as de minimis. However, cash or items readily convertible into cash, such as gift certificates, are taxable, no matter what the amount.

Dual-income families are commonplace these days, however, some couples are discovering that their second income may not be worth the added aggravation and effort. After taking into consideration daycare expenses, commuting expenses, the countless take-out meals, and additional clothing costs, many are surprised at how much (or how little) of that second income is actually hitting their bank account.

Dual-income families are commonplace these days, however, some couples are discovering that their second income may not be worth the added aggravation and effort. After taking into consideration daycare expenses, commuting expenses, the countless take-out meals, and additional clothing costs, many are surprised at how much (or how little) of that second income is actually hitting their bank account.

Before you and your spouse head off for yet another hectic workweek, it may be worth your time to take a few moments to do a few simple calculations. After assessing what expenditures are necessary in order for both parents to work outside of the home, many couples quickly realize that their second income is essentially paying for the second person to be working.

Crunch the numbers. To determine whether your second income is worth the energy, you will need to calculate the estimated value of the second income. First determine how much the second income brings in after taxes. Then subtract expenses incurred due to the second person working, such as dry cleaning expenses, childcare bills, transportation costs, housecleaning services, landscaping services, and outside dining expenses. The result will be the estimated value of the second person working.

Consider the long-term. Even if your result turns out to be small, you may find that having the second person working will be beneficial to the household in the long run. However, don't forget to consider that, by losing the second income, you may also be losing future retirement benefits and social security earnings.

Take a "dry run". Before reducing down to one income, try living on the person's income you intend to keep for six months, stashing the other income into an emergency savings account. If you are able to do this, chances are you will be able to endure for the long haul.

Many different factors can affect a family's decision to have both parents work - including the fulfillment each parent may get from working regardless of whether their income is adding significantly to the household. However, if trying to make ends meet is the major reason, it may pay off to spend some time analyzing the real net benefit from that second income. If you need any assistance while determining if both spouses should work or not, please feel free to contact the office.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employment taxes such as federal income tax, social security (FICA) tax, unemployment (FUTA) tax and various state taxes (note that state issues are not addressed in this article) are all required to be withheld from an employee's wages. Wages are defined in the Code and the accompanying IRS regulations as all remuneration for services performed by an employee for an employer, including the value of remuneration, such as benefits, paid in any form other than cash. The employer is responsible for depositing withheld taxes (along with related employer taxes) with the IRS in a timely manner.

Although the employer entity is required by law to withhold and pay over employment taxes, the penalty provisions of the Code are enforceable against any responsible person who willfully fails to withhold, account for, or pay over withholding tax to the government. The trust fund recovery penalty -- equal to 100% of the tax not withheld and/or paid over -- is a collection device that is normally assessed only if the tax can't be collected from the employer entity itself. Once assessed, however, this steep penalty becomes a personal liability of the responsible person(s) that can wreak havoc on their personal financial situation -- even personal bankruptcy is not an "out" as this penalty is not dischargeable in bankruptcy.

A corporation, partnership, limited liability or other form of doing business won't insulate a "responsible person" from this obligation. But who is a responsible person for purposes of withholding and paying over employment taxes, and ultimately the possible resulting penalty for noncompliance? Also, what constitutes "willful failure to pay and/or withhold"? To give you a better understanding of your potential liability as an employer or employee, these questions are addressed below.

Typically, the types of individuals who are deemed "responsible persons" for purposes of the employment tax withholding and payment are corporate officers or employees whose job description includes managing and paying employment taxes on behalf of the employer entity.

However, the type of responsibility targeted by the Code and regulations includes familiarity with and/or control over functions that are involved in the collection and deposit of employment taxes. Unfortunately for potential targets, Internal Revenue Code Section 6672 doesn't define the term, and the courts and the IRS have not formulated a specific rule that can be applied to determine who is or is not a "responsible person." Recent cases have found the courts ruling both ways, with the IRS generally applying a broad, comprehensive standard.

A Texas district court, for example, looked at the duties performed by an executive -- and rejected her argument that responsibility should only be assigned to the person with the greatest control over the taxes. Responsibility was not limited to the person with the most authority -- it could be assigned to any number of people so long as they all had sufficient knowledge and capability.

The Fifth Circuit Court of Appeals has delineated six nonexclusive factors to determine responsibility for purposes of the penalty: whether the person: (1) is an officer or member of the board of directors; (2) owns a substantial amount of stock in the company; (3) manages the day-to-day operations of the business; (4) has the authority to hire or fire employees; (5) makes decisions as to the disbursement of funds and payment of creditors; and (6) possesses the authority to sign company checks. No one factor is dispositive, according to the court, but it is clear that the court looks to the individual's authority; what he or she could do, not what he or she actually did -- or knew.

The Ninth Circuit recently cited similar factors, holding that whether an individual had knowledge that the taxes were unpaid was irrelevant; instead, said the court, responsibility is a matter of status, duty, and authority, not knowledge. Agreeing with the Texas district court, above, the court held that the penalty provision of Code section 6672 doesn't confine liability for unpaid taxes to the single officer with the greatest control or authority over corporate affairs.

Suffice it to say that, under the various courts' interpretations -- or that of the IRS -- many corporate managers and officers who are neither assigned nor assume any actual responsibility for the regular withholding, collection or deposit of federal employment taxes would be surprised to find that they could be responsible for taxes that should have been paid over by the employer entity but weren't.

Once it has been established that an individual qualifies as a responsible person, he must also be found to have acted willfully in failing to withhold and pay the taxes. Although it may be easier to establish the ingredients for "responsibility," some courts have focused on the requirement that the individual's failure be willful, relying on various means to divine his or her intent.

An Arizona district court, for example, found that a retired company owner who had turned over the operation of his business to his children while maintaining only consultant status was indeed a responsible person -- but concluded that his past actions indicated that he did not willfully cause the nonpayment of the company's employment taxes. Since he had loaned money to the company in the past when necessary, his inaction with respect to the taxes suggested that he believed the company was meeting its obligations and the taxes were being paid.

A Texas district court found willfulness where an officer of a bankrupt company knew that the taxes were due but paid other creditors instead.

The Fifth Circuit has determined that the willfulness inquiry is the critical factor in most penalty cases, and that it requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. "A responsible person acts willfully if [s]he knows the taxes are due but uses corporate funds to pay other creditors, or if [s]he recklessly disregards the risk that the taxes may not be remitted to the government, or if, learning of the underpayment of taxes fails to use later-acquired available funds to pay the obligation.

Is there any way for those with access to the inner workings of an employer's finances or tax responsibilities -- but without actual responsibility or knowledge of employment tax matters -- to protect themselves from the "responsible person" penalty? It may depend on which jurisdiction you're in -- although a survey of the courts suggests most are more willing than not to find liability. Otherwise, the wisest course may be to enter into an employment contract that carefully delineates and separates the duties and responsibilities -- and the expected scope of knowledge -- of an individual who might find himself with the dubious distinction of being responsible for a distinctly unexpected and undesirable drain on his finances.

The laws and requirements related to employment taxes can be complex and confusing with steep penalties for non-compliance. For additional assistance with your employment related tax issues, please contact the office for additional guidance.

How quickly could you convert your assets to cash if necessary? Do you have a quantitative way to evaluate management's effectiveness? Knowing your business' key financial ratios can provide valuable insight into the effectiveness of your operations and your ability to meet your financial obligations as well as help you chart your company's future.

How quickly could you convert your assets to cash if necessary? Do you have a quantitative way to evaluate management's effectiveness? Knowing your business' key financial ratios can provide valuable insight into the effectiveness of your operations and your ability to meet your financial obligations as well as help you chart your company's future.

Acid Test: determines your company's ability to convert assets to cash to pay current obligations.

Current liabilities

Current Ratio measures your company's liquidity and ability to pay short-term debts.

Current liabilities

Debt to Assets Ratio determines the extent to which your company is financed by debt.

Total assets

Gross Profit Margin Rate: measures how much of each sales dollar can go for operating expenses and profit.

Net Sales

Return on Assets (ROA): measures how much income is generated from your company's assets.

Total assets

Once you have calculated the ratios, you will need to be able to translate the numbers into results that relate to your business. Below are some examples of how you can use these ratios in your business:

Acid Test: A result of 2:0:1 means you have a two dollars' worth of easily convertible assets for each dollar of current liabilities.

Current Ratio A ratio of 2.0:1 means that the value of your current assets are twice that of what your current obligations are, a good indicator to a potential lender that your company is in sound financial condition.

Debt to Assets Ratio This ratio shows how many cents per dollar of assets are financed. An 82% ratio would indicate that your company's assets are heavily financed and may be a troubling sign to a potential lender.

Gross Profit Margin Ratio A ratio of .45:1 indicates that for every dollar of sales, your company has 45 cents to cover operating expenses and profit. This information can be used when setting pricing for your company's products and services.

Return on Assets Ratio (ROA): A ratio of .08:1 would mean that the company is bringing in 8 cents for every dollar of assets. These results can be used to determine the effectiveness of management's efforts to utilize assets.

Take the results from the current period (e.g., this month) and deduct from the results of the previous period (e.g., last month). The result will be the net change in the ratio from one period to another. Because increases from period to period are good for one ratio (e.g., acid test) but maybe not so good for another (e.g., debt to assets ratio) it's important to analyze each ratio separately.

While changes in ratios don't always mean your company is getting off track, analyzing the cause of the changes can help uncover potential problem areas that need your attention.

There are many applications for key financial ratios to help you and your management team identify your company's strengths and weaknesses. If you would like any additional assistance with the calculation or analysis of your company's ratios, please contact the office.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Over the past few years, the rules governing stock options have become increasingly complicated. More than ever, it is important that employees who receive stock options have a good understanding about how they are taxed -- on receipt of the option, at its exercise, or pursuant to the sale of the underlying stock -- as well as the potential consequences of their decisions regarding the timing of the taxation of those options.

The most common type of stock option that employees receive is called a nonstatutory stock option (NSO). The other, less common type of stock option is generically referred to as an incentive stock option (ISO). ISOs are governed by very specific rules and are subjected to strict statutory requirements; NSOs, on the other hand, are subject to more general rules and guidelines.

Incentive stock options (ISOs) give the employee the right to purchase stock from the employer at a specified price. The employee is not taxed on the ISO at the time of its grant or at the time of the exercise of the option. Instead, he or she is taxed only at the time of the disposition of the stock acquired through exercise of the option. Note, however, the exercise of an ISO does give rise to an alternative minimum tax item in the amount of the difference between the option price and the market price of the stock.

Note. The IRS temporarily suspended the collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

NSOs also give the employee the right to purchase stock from the employer at a specified price. When and how an NSO is taxed depends on several factors including whether the underlying stock is substantially vested, and whether or not the fair market value of the stock is readily ascertainable.

Vesting. If an employee receives options from his employer, the tax consequences depend on whether the stock is vested. Stock you receive from your employer is "substantially vested" if it is either "transferable" by the employee or it is no longer subject to a "substantial risk of forfeiture". Property is "transferable" if you can sell, assign or pledge your interest in the option without the risk of losing it. A "substantial risk of forfeiture" exists if the rights in the property transferred depend on the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a certain condition related to the transfer.

Readily ascertainable fair market value. An NSO always has a readily ascertainable fair market value when the option is publicly traded. When an option is not publicly traded, it can have a readily ascertainable fair market value if its value can be measured with reasonable accuracy. IRS rules spell out when fair market value can be measured with reasonable accuracy.

Generally, an employee who receives an NSO that has a readily ascertainable fair market value is subject to special tax rules under the Internal Revenue Code that apply to property received by a taxpayer in exchange for services when the option is granted. Under these rules, the option must be included in the employee's income as ordinary income in the amount of the fair market value in the year the option becomes substantially vested. If the employee paid for the option, he recognizes the value of the option minus its cost. The employee is not taxed again when he exercises the option and buys the corporate stock; he is taxed when the stock is sold. The gain or loss recognized when the employee sells the stock is capital in nature.

No readily ascertainable fair market value. Employees who receive NSOs from privately held companies are most likely to receive an NSO without a readily ascertainable fair market value. In general, when an NSO does not have a readily ascertainable fair market value, taxation occurs at the time when the option is exercised or transferred. The employee will recognize ordinary income in the amount of the value of the stock when it becomes substantially vested minus any amounts paid for the option or stock. The gain or loss recognized when the employee sells the stock is capital in nature. However, employees who have NSOs without a readily ascertainable fair market value also have the ability to elect to have the transaction taxed differently,

Employees who exercise options that did not have a readily ascertainable fair market value when they were granted may elect to report income from the stock underlying the option at the time of the exercise rather than waiting until the stock is substantially vested. This election is referred to as a "Section 83(b) election" and is non-revocable. Once the election is made, any later subsequent appreciation when the stock becomes substantially vested would not be includible in income.

As you can see, the rules and tax laws related to stock options are indeed complicated and require some advance planning in order to avoid a big tax "gotcha". If you are contemplating entering into any transactions that involve stock options, please contact the office for additional guidance.

All of us will, at one time or another, incur financial losses - whether insubstantial or quite significant -- in our business and personal lives. When business fortunes head South -- either temporarily or in a more prolonged slide, it is important to be aware of how the tax law can limit the actual amount of your losses and your ability to deduct them. Here are some of the types of losses your business may experience and the related tax considerations to keep in mind in the event of a business downturn.

All of us will, at one time or another, incur financial losses - whether insubstantial or quite significant -- in our business and personal lives. When business fortunes head South -- either temporarily or in a more prolonged slide, it is important to be aware of how the tax law can limit the actual amount of your losses and your ability to deduct them. Here are some of the types of losses your business may experience and the related tax considerations to keep in mind in the event of a business downturn.

Bad debts

One loss that occurs frequently when business slows down is bad debt. A bad debt is simply a technical term used to describe a debt that has become totally or partially worthless. Different strategies apply depending upon whether you are the borrower or the lender.

As borrower. If you are the borrower, the "forgiveness" of all or part of the debt by the lender will generally trigger taxable income on that amount, unless the business is insolvent (debts exceed liabilities).

Note. The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) allows some business to elect to recognize cancellation of indebtedness income over five years, beginning in 2014. The temporary benefit applies to specific types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011. Under this provision, an applicable debt instrument includes a bond, note, certificate, debenture, or other instrument that constitutes indebtedness issued by a C corporation or any other "person" in connection with the conduct of trade or business by that person. This election is irrevocable. Moreover, the liquidation or sale of substantially all the taxpayer's assets can result in acceleration of deferred items.

Although recognizing income may not be an immediate problem for a business that has plenty of losses to net against current income, additional income may wash out a net operating loss carryover that can either provide an immediate refund for a past tax year or shelter from income in the future. As a result, some businesses re-define debt "forgiveness" into a non-taxable event, such as a refinancing or a business-generated settlement.

As lender. If you are the lender, your major tax concern will be proving that a real debt exists, and then determining how fast you can deduct the bad debt and whether the deduction can offset ordinary income, as opposed to just capital gains.

Loans between corporations and their shareholders are scrutinized to make sure that they are really debts rather than disguised dividends or contributions to the corporation's capital. You can protect yourself by taking the steps that an arm's-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

The IRS sometimes requires taxpayers to play a guessing game about which tax year a debt becomes sufficiently worthless to support the deduction. Because of potential statute of limitations problems, tax experts generally recommend that you claim the loss in the earliest possible year that it can reasonably be argued to be worthless.

Finally, you must determine whether a business or nonbusiness bad debt exists. A business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a corporation, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt.

As guarantor. If you take out a loan on behalf of your corporation or you personally guarantee the loan and then must make good on it, you are usually considered to have either made a contribution to capital or created a nonbusiness bad debt to protect your position as an investor. A nonbusiness debt must be completely worthless before a loss can be taken. Furthermore, nonbusiness bad debts are subject to limits on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

Net operating losses

If you show a net operating loss for the year, it normally may be carried back two years or carried forward up to 20 years until it can be netted against current taxable income. A net operating loss (NOL) for this purpose has some complexity built in to strip it of most personal tax characteristics. An individual's NOL, for example, does not include any offset for personal or dependency exemptions, for net nonbusiness capital losses, or for nonbusiness itemized deductions that exceed nonbusiness income. Another choice in dealing with an NOL is to elect to immediately carryforward the loss. This can be advantageous when high rate-bracket income is anticipated in the following year.

Note. The 2009 Recovery Act provides a five-year carryback of 2008 NOLs for qualified small businesses only. These are small businesses with average gross receipts of $15 million or less. Businesses can choose to carryback NOLs three, four or five years. This treatment applies only to NOLs for any tax year beginning or ending in 2008. The normal NOL carryback period returns in for NOLs incurred in 2009.

Pass-through losses

One of the advantages of investing in a business as a partner or a subchapter S shareholder is that losses on the business level get passed-through to your individual tax return. Regular corporations, on the other hand, file separate returns and the shareholder cannot "realize" a tax loss until he or she actually sells stock.

For both partners and S shareholders, however, the ability to deduct pass-through losses is determined by the amount of tax basis the partner has in his partnership interest or the S shareholder has in his shares. This, in turn, depends upon a variety of factors, including the original price paid, the amount of losses already passed through, cash or property distributed, and any later contributions.

If you have such a stake in a business, a tax strategy for both adding to basis and preventing its diminution is critical to your ability to be able to deduct business losses as a partner or S shareholder.

Section 1244 Stock

If you sell stock at a loss and that stock had been designated on its issuance to be "Section 1244 stock," you are more fortunate than most investors who bail out during a business downturn. Reason: you are entitled to an ordinary loss deduction rather than a capital loss. This special loss treatment is limited to $50,000 for any one year ($100,000 for joint returns). Other requirements are that the stock was issued for no more than $1 million, less than 50% of corporate receipts were from passive sources for the first five years of operation, and the shareholder claiming the treatment must be an individual.

Dealing with and making the most of losses related to a business downturn can get complicated. Because the preceding discussion is meant to be general, is limited in nature and does not cover all the tax rules involved, you are encourage to contact the office for additional guidance with this issue.