News & Articles

5 Last-Minute Ideas to Lower Your 2018 Taxes

Posted on Mon, Mar 18, 2019

It's almost Tax Day! But don't despair; there still may be time to make some moves that will save taxes for your 2018 tax year. Here are five tax-saving ideas to consider. 

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Tags: Deductions, Tax Return, Tax Deduction

IRS: We Disagree with Court Decision Involving Customer Loyalty Discounts

Posted on Mon, Oct 24, 2016

The IRS recently announced its "nonacquiesence" with a federal appeals court decision that held a retailer that issued loyalty discounts to its customers was entitled to deduct its liabilities attributable to discounts, which were accrued but hadn't yet been redeemed. (IRS Action on Decision 2016-03)

What Is an IRS "Action on Decision?"

The IRS has a policy of announcing at an early date whether it will follow the holdings in certain court cases. An Action on Decision is the document making such an announcement.

"Nonacquiescence" signifies that, although no further review was sought, the IRS doesn't agree with the holding of the court and generally won't follow the decision in disposing of cases involving other taxpayers.

Background Information

Under the tax code, a deduction or credit must be taken for the tax year that is the proper year under the accounting method used by the taxpayer to compute its taxable income. A liability is generally incurred and taken into account under an accrual accounting method in the tax year in which:

  • All the events have occurred that establish the liability;

  • The amount of the liability can be determined with reasonable accuracy; and

  • Economic performance has occurred with respect to the liability under the tax code.

If the taxpayer's liability is to pay a rebate, refund, or similar payment to another person (whether paid in property, money, or as a reduction in the price of goods or services to be provided in the future by the taxpayer), economic performance generally occurs as payment is made to the person to which the liability is owed.

However, under the recurring item exception, certain recurring items can be deducted for a tax year, even if economic performance hasn't been met, if:

  • At the end of the tax year, all events have occurred that establish the liability and the amount can be determined with reasonable accuracy;
  • Economic performance occurs on or before the earlier of the date that the taxpayer files a return (including extensions) for the tax year, or the 15th day of the ninth calendar month after the close of the tax year;
  • The liability is recurring in nature; and
  • Either the amount of the liability isn't material, or accrual of the liability in the tax year results in better matching of the liability against the income to which it relates than would result from accrual of the liability in the tax year in which economic performance occurs.

Facts of the Case

The taxpayer operates supermarkets, pharmacies and gas stations. During the years at issue, the retailer had a customer loyalty program. Under the program, customers would present a loyalty card when purchasing qualifying groceries and, for every $50 spent, earn a 10 cents per-gallon price reduction for gasoline purchased in one transaction. The discounts were aggregated so they could potentially reduce the per-gallon gas price to zero. Although the discounts were described in a program brochure as expiring three months after the last day of the month in which they were earned, the retailer didn't revoke any accumulated discounts during 2006 or 2007 (the years at issue).

On its corporate income tax returns for the years at issue, the retailer claimed a deduction for the discounts its customers had accumulated but, at year's end, hadn't yet applied to fuel purchases, amounting to $3.4 million for 2006 and $313,490 for 2007. Here's how the retailer computed the deductions:

1. By ascertaining the total dollar amount spent at its supermarkets on discount-qualifying items.

2.By dividing that figure by 50 to determine the number of outstanding accumulated discounts.

3.By multiplying the quotient by 10 cents to determine the face value of the discounts.

4. Next, the retailer multiplied the discounts' face value by the historical redemption rate of discounts in their expiring month, and multiplied that product by the average number of gallons purchased in a discounted fuel sale.

The IRS disallowed the deductions, and the retailer challenged the disallowance in U.S. Tax Court. The court agreed with the IRS. The retailer argued that the discounts accumulated but not applied by year's end satisfied the "all events" test under the recurring items exception because the retailer's liability became fixed upon issuance of the discounts and the amount of that liability was reasonably ascertainable.

However, the Tax Court found that the claimed deductions didn't satisfy the "all events" test. Since the program was structured as a discount against the purchase price of gas, the purchase of gas was necessarily a condition precedent before the retailer could claim a deduction. (Giant Eagle, Inc., TC Memo 2014-146)

The retailer appealed, and based on IRS concessions, the only unresolved issue on appeal was whether the "fact of the liability" was fixed at year's end. In other words, before the end of the tax year, had the retailer become liable to pay the discount to its customers who had purchased qualifying groceries under the program?

Appeals Court Decision

On May 6, 2016, the Third Circuit Court of Appeals found that the retailer's liability in this case attached when a customer made qualifying purchases under the program. (Giant Eagle, Inc., 117 AFTR 2d 2016-1476) It applied a Pennsylvania Superior Court's decision to show that the retailer entered into a unilateral contract with each shopper at checkout, thereby incurring liability to provide discounted gas at that time.

The appeals court found it irrelevant that neither the total amount of the retailer's anticipated liability nor the identity of all the customers who eventually applied discounts toward gasoline purchases could conclusively be identified at year's end. The court acknowledged there was some possibility that the claimed deductions would overstate the value of the rewards its customers ultimately redeemed, but that the retailer significantly mitigated that risk by tracking its customers' monthly redemption rates and offsetting the deductions accordingly to account for prospective non-redeemers.

Overall, the appeals court was convinced that the retailer demonstrated the existence, as of year's end, of both an absolute liability and a near-certainty that the liability would soon be discharged by payment. The court found the retailer's method for calculating the deduction reasonably took into account the chance of non-redemption with "reasonable accuracy." It noted that this is all that's required to satisfy the tax code's "all events" test. Therefore, the retailer was entitled to deduct its program-related liabilities incurred during the years at issue.

The IRS Disagrees

Now the IRS has announced its nonacquiescence with the Third Circuit's holding that all events fixing a liability for federal income tax purposes occurred when the discount fuel purchase coupons were issued to a customer for retail grocery purchases.

The tax agency stated this case is controlled by the Supreme Court's 1987 opinion in General Dynamics Corp., which held that a taxpayer may not "deduct an estimate of an anticipated expense, no matter how statistically certain, if it is based on events that have not occurred by the close of the taxable year." Thus, the IRS said, although a customer's purchase of $50 worth of groceries obligated Giant Eagle to provide a 10 cents-per-gallon discount on a future purchase of gasoline, the discount itself wasn't absolute until the customer actually purchased gasoline.

The IRS also said that the Third Circuit misconstrued three cases that it cited as support for its holding. In all three cases, according to the IRS, the taxpayer was permitted to deduct a liability where the amount of the liability was unconditionally fixed. The only contingency in these cases was the identity of the individual or individuals who would receive payment from the taxpayer or the point in time when the payment would be made. In contrast, the Pennsylvania precedent relied upon by the Third Circuit didn't fix the amount to be paid by the retailer. It only created the contractual obligation to pay in the event the discount coupons were redeemed with the purchase of fuel.

Accordingly, IRS said, it disagrees with the decision. However, it recognizes the precedential effect of the decision to cases appealable to the Third Circuit and therefore will follow it with respect to cases within that circuit if the opinion cannot be meaningfully distinguished. It will continue to litigate its position in cases in other circuits.

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Tags: Customer Relationships, Deductions, IRS, Customers, Tax Deduction

Maintain a Healthy Cash Flow

Posted on Mon, Mar 28, 2016

In today's economic environment, one major concern for businesses is maintaining a healthy cash flow.

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Tags: Expenses, Non-cash Incentives, Tax Deduction, Accounts Receivable, Accounts Payable

10 Elections That Could Save Money on Your 2015 Federal Taxes

Posted on Tue, Jan 26, 2016

This year's presidential election has drawn significant attention, but the elections you make on your 2015 personal tax return can be just as important to your financial welfare. Here's a list of 10 potential elections for individuals (including self-employed taxpayers) to consider making before tax day on April 18, 2016 (or April 19 for taxpayers in Maine and Massachusetts due to their Patriot's Day observances).

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Tags: Tax Extension, Sales Tax, Section 179 Deductions, Education Credits, Investment, Tax Deduction, Home Office Deductions, Mileage Rate

Don't Overlook Miscellaneous Itemized Deductions

Posted on Mon, Nov 09, 2015

Many people itemize deductions on Schedule A of their tax returns, rather than taking the standard deduction. Your tax preparer will generally advise you to do so if your allowable itemized deductions exceed the standard deduction.

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Tags: Tax, IRS, Tax Deductible, Tax Deduction, Taxes

How a Deductible Home Office Affects a Sale

Posted on Sun, Jun 29, 2014

If you use part of your home as an office and take deductions for related expenses on your annual tax return, can you claim a valuable federal tax break when you sell? Specifically, can you claim the home sale gain exclusion of up to $250,000 for single taxpayers ($500,000 for married couples filing jointly)? In many cases, you can still take advantage of this tax benefit.

Gain Exclusion Qualification Rules

    If you're single, you can potentially sell your principal residence for a gain of up to $250,000 without owing federal tax. If you're a married joint filer, you can potentially pocket up to $500,000 without paying federal tax. To qualify, you generally must pass these tests:
    1.
You must have owned the property for at least two years during the five-year period ending on the sale date (referred to as the ownership test).
    2. You must have used the property as a principal residence for at least two years during the same five-year period (referred to as the use test).
    To be eligible for the $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test.
    If you excluded a gain from an earlier principal residence sale, you generally must wait at least two years before taking advantage again. For joint filers, the $500,000 exclusion is only available when both spouses haven't claimed an exclusion for an earlier sale within two years of the sale date.
    Gain beyond what you can exclude under these rules is generally treated as a long-term capital gain taxed at a maximum federal rate of no more than 20 percent. However, gain caused by depreciation deductions on the part of your home used as a deductible office may be taxed at up to 25 percent.

What Can You Deduct?

If you qualify to take home office deductions, you can deduct part of expenses including mortgage interest, depreciation, utilities, insurance, and repairs. The office must be used regularly and exclusively as your business place, which means personal activities cannot be done there. Other tips:

  • Take photos to prove the room was used for business purposes in case of an IRS audit.
  • To figure the percentage of your home used for business, you can use two methods -- square footage or the number of rooms.
  • Home office deductions can't exceed your income from the related business activity. But if they're greater, you can carry the excess deductions forward to a future year.
  • If a home office is required by an employer, it's a good idea to get a written statement from the company explaining the requirement.

As long as your deductible home office space is in the same dwelling unit as your residence, you can use the gain exclusion to shelter profit from the entire property.

In other words, you are not required to split the sale into two separate deals for tax purposes (one transaction for the sale of the residential part of your property and another for the sale of the office part).

However, you will be taxed on gain up to the amount of depreciation deductions on the office part of your property that were claimed for business use after May 6, 1997. You will owe a maximum federal rate of 25 percent on this profit (called unrecaptured Section 1250 gain).

However, paying tax on this portion of your profit is not really so bad, considering that you collected earlier tax savings from the office part of your property.

A Separate Dwelling

The tax outcome is less favorable when the office is not in the same dwelling unit as the residence.

For example, say you claimed home office deductions for what was formerly a carriage house, garage, or finished basement with cooking and bathroom facilities and a separate entrance. In these cases, even though the office is on the same property or in the same building, it is considered to be a separate dwelling unit that is not part of the residential portion of your property.

In these scenarios, you must pass the ownership and use tests (see right-hand box) for both the office portion of your property and the residential part in order to treat the sale as a single transaction that is eligible for the gain exclusion.

If you fail the tests for the office part (for example, because it was used as a deductible office for the entire five-year period ending on the sale date), you must calculate separate gains for the office and residential portions of your property. Then, you can use the gain exclusion only to shelter profit from the residential part. Any gain on the office part is usually fully taxable.

You will generally owe a federal income tax rate of no more than 25 percent on gain up to the amount of post-May 6, 1997 depreciation. Any remaining profit from selling the office part of your property will be taxed at the regular capital gains rates.

Contact your tax adviser if you are contemplating the sale of property with a home office. Advance planning may be necessary to maximize your tax savings.

 

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Tags: EHTC Article, Tax Laws, Documentation, Home Office, IRS, Articles, Tax Deduction

Tax Rules When Your Business Trip Involves a Passport

Posted on Tue, Jun 18, 2013

If you travel a lot on business, you may make some international trips, as well as trips within the United States. When traveling abroad, you may want to add a few extra days to a trip for relaxing and sightseeing.

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Tags: business consulting, CPA Firm, Echelbarger, Tax Deduction, EHTC, International Business Travel, Tax Rules for Foreign Business Travel