No More “Victory Tax” for U.S. Olympians

Previously, America’s Olympic medalists were liable for federal and state taxes on both the prize money that they received from the Olympics (Gold: $25k, Silver: $15k, Bronze: $10k) and the value of the medals themselves. The medals for each Olympics can range in weight, but the worth of a gold medal is typically about $560, silver is $300, and the value of a bronze medal is negligible.

Luckily for the 2016 Rio Olympians, on October 7th, 2016 President Obama signed the Appreciation for Olympians and Paralympians Act of 2016, which excludes “the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games”.  The new exclusion applies to prizes and awards received after December 31, 2015.  However, the exclusion is not available if the Olympian has an adjusted gross income exceeding $1 million for the tax year.  This is great news for the many Olympic athletes who aren’t offered endorsement deals but still have to deal with the burden of income taxes on their winnings.

 

Social Security wage base increases to $127,200 for 2017

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2017 will increase to $127,200.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

For 2017, the FICA tax rate for employers is 7.65%—6.2% for OASDI and 1.45% for HI.

For 2017, an employee will pay:
(a) 6.2% Social Security tax on the first $127,200 of wages (maximum tax is $7,886.40 [6.2% of $127,200]), plus
(b) 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
(c) 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). (Code Sec. 3101(b)(2))

For 2017, the self-employment tax imposed on self-employed people is:
•12.4% OASDI on the first $127,200 of self-employment income, for a maximum tax of $15,772.80 (12.40% of $127,200); plus
•2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), (Code Sec. 1401(a), Code Sec. 1401(b)), plus
•3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). (Code Sec. 1401(b)(2))

There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

ARM ANNOUNCES PROMOTION

ARM is pleased to announce the promotion of Carrie Hoover to audit senior.  Carrie is a graduate of Ohio Dominican University and has been with the firm for two and a half years.

Tax Consequences of Crowdfunding

Background

Crowdfunding has quickly become a popular alternative to venture capital. In fact, a recent report published by Goldman Sachs described the practice as “potentially the most disruptive of all of the new models in finance.” Yet little is known about how such models are taxed. In a recent Information Letter, the IRS looked to general principles of income inclusion to explain the tax treatment of crowdfunding. However, given the fact-specific nature of crowdfunding arrangements, uncertainties still remain.

What Is Crowdfunding?

Crowdfunding is a way for businesses and entrepreneurs to solicit online contributions from multiple parties. This is typically accomplished through a crowdfunding platform such as Kickstarter (www.kickstarter.com) or AngelList (www.angel.co). Depending on the program, participants may receive “rewards” for their contributions. These are usually items of nominal value such as t-shirts or concert tickets. In some circumstances, contributors may receive an equity interest in the business or a right to have their contribution repaid with interest.Initially, crowdfunding was used primarily by musicians and filmmakers to fund projects that were unlikely to yield a profit. However, following the enactment of Title III of the Jumpstart Our Business Startups (JOBS) Act in 2012, the practice has expanded to a variety of industries. Title III created a federal exemption under the securities laws to permit companies to offer and sell securities through crowdfunding. Since that time, crowdfunding platforms have grown considerably, generating billions in capital for startups and small businesses.

Tax Characterization of Crowdfunding Contributions

As a general proposition, crowdfunding contributions are includible in income under IRC Sec. 61. This includes contributions constructively received by a company. However, depending on how the arrangement is structured, contributions may fall into one of the income exclusions provided by the Code. Accordingly, contributions characterized as loans, gifts, or capital contributions may be excluded.Loans. Crowdfunding contributions structured as loans are generally excludable from income. However, the arrangement should have sufficient debt-like features, such as an unconditional promise to pay, a fixed interest rate, and a specified maturity date. Arrangements where repayment depends on the financial success of the company or a particular project may be questioned by the IRS. Funds transferred without a bona fide repayment obligation will be includible in the recipient’s income, even if the parties characterize the deal as a loan.

Gifts. Crowdfunding contributions constituting gifts for federal tax purposes are excluded from the recipient’s income under IRC Sec. 102 . Gifts generally proceed from a “detached and disinterested generosity.”  Therefore, quid pro quo contributions in which the donor receives an economic benefit will not qualify as gifts.

Observation: Some crowdfunding platforms offer “rewards” in exchange for contributions. It is uncertain whether receipt of a reward negates an individual’s donative intent, especially when the item’s value is inconsequential. Although not directly on point, the IRS’s guidelines on quid pro quo charitable donations (which aren’t deductible) may be helpful. According to Rev. Proc. 2015-53, a benefit is de minimis and charitable contributions are fully deductible if the value of all benefits received by the donor is not more than 2% of the contribution, or $106 for 2016, whichever is less. In addition, if the contribution is at least $53 for 2016, and the donor receives token benefits costing no more than $10.60, the benefit is de minimis and the contribution will be fully deductible. Presumably, similarly de minimis rewards would not negate the donative intent for crowdfunding purposes.

If the contribution is a gift, the donor may be subject to gift tax depending on the amount of the contribution. Currently, there is an annual gift tax exclusion of $14,000 per person. Given that crowdfunding platforms generally attract multiple investors with often limited resources, it is likely that most participants will not pay gift tax.

Capital Contributions. The taxability of funds characterized as capital contributions generally depends on the tax classification of the business and whether the donor receives an equity interest. In the case of a corporation, gross income does not include any contribution to its capital.  If the donor receives stock as part of the deal, the corporation recognizes no gain or loss on the receipt of cash or other property. However, the donor may have to recognize gain if he contributes appreciated property to the corporation and does not own at least 80% of the entity following the transaction. This scenario is unlikely, however, because crowdfunding platforms generally support cash transactions only.

If the business is classified as a partnership for tax purposes, and the donor receives an equity interest as part of the deal, crowdfunding contributions are generally tax-free to both the entity and the donor.  Capital contributions to a partnership by nonowners, however, are generally includible in income.

Deductibility of Crowdfunding Expenses

Crowdfunding expenses commonly include service fees charged by the platform tasked with raising the funds. For example, Kickstarter charges a 5% fee if the project is successfully funded. There are also legal fees and other expenses, such as the rewards offered to contributors.As crowdfunding is typically associated with startup companies, some question whether such initiatives rise to the level of a trade or business under IRC Sec. 162(a). This stems from the fact that many projects are pursued with no reasonable expectation of profit. For businesses lacking a sufficient profit motive, crowdfunding expenses will be subject to the Section 183 hobby loss limitations.

Companies meeting the definition of an active trade or business will be allowed to deduct all ordinary and necessary expenses, including crowdfunding expenses. However, startup expenses are not immediately deductible. The taxpayer may elect to deduct up to $5,000 of these costs, but this is reduced by the amount by which total startup expenditures exceed $50,000 [IRC Sec. 195(b)(1) ]. Any startup costs remaining may be amortized ratably over 15 years.

Reporting Concerns

Crowdfunding participants may wonder if contributions are reported to the IRS. In general, payment settlement entities are required by IRC Sec. 6050W to annually report the gross amount of payments made in settlement of credit card, debit card, and other payment card transactions on Form 1099-K. Transactions handled by third-party payers, such as crowdfunding platforms, may be exempt from filing Form 1099-K if the payments to the payee are under $20,000 or there are fewer than 200 transactions with the payee within the calendar year.Observation: As a practical matter, many crowdfunding platforms will be exempt from reporting requirements. However, some crowdfunding websites publicize contribution amounts for a particular project and may disclose the names of contributors as well.

Information Letter 2016-0036

In Information Letter 2016-0036, the IRS examined the tax consequences of crowdfunding. As is common with Information Letters, the facts have been redacted. However, it appears the taxpayer received crowdfunding contributions to purchase a company. Aside from the taxability of the contributions, the taxpayer questioned the applicability of the constructive receipt doctrine because funds may have to be returned to participants.As you would expect, the IRS concluded that the tax consequences of a crowdfunding effort depend on all the facts and circumstances surrounding that effort. In general, revenues from crowdfunding are includible in income unless they constitute loans, capital contributions in exchange for equity interests, or gifts. (The IRS clarified that a voluntary transfer without a quid pro quo is not necessarily a gift for federal income tax purposes.) In addition, crowdfunding revenues are taxable if they are received for services rendered or represent gains from property sales. In the end, the IRS looked to general principles of income inclusion to arrive at a somewhat vague conclusion.

Conclusion

To date, there are no court cases or IRS rulings that directly address the taxability of crowdfunding contributions. However, Information Letter 2016-0036 provides some insight into how the IRS views the subject. For now, it is safe to say that crowdfunding contributions will be taxable unless they are loans, gifts, or capital contributions. Practitioners will need to pay particular attention to the facts to determine proper treatment.

Airbnb Hosts: Tips for Tracking and Reporting Your Rental Income

Founded in 2008, Airbnb is a marketplace for people to list and rent unique accommodations around the world. It has grown in popularity over the last few years and presents many tax reporting questions for hosts who are earning money from renting out their homes.  Here are some tips for reporting income from Airbnb.

First and foremost, hosts should keep detailed records of all income and expenses. This will be helpful not only for you and your tax preparer, but vital in the case of an IRS audit.  Some typical expenses that a host may incur would include advertising, cleaning and maintenance, utilities, home owner’s insurance, property taxes and interest on loans and mortgages. You should not rely on Airbnb to issue you a tax form for your income earned.  Airbnb only issues 1099s if someone meets one of the following criteria:

  1. US persons who have earned over $20,000 and had 200+ reservations
  2. Non-US persons who have submitted a Form W-8
  3. Hosts that had funds withheld from their payouts for taxes

It is also important to note that owners might not have to report any Airbnb income on their tax forms at all if their residences are rented out for fewer than 15 days per year. This has become popular for events where hotel rooms might not be available, like in Dublin, Ohio during the Memorial Tournament or Cleveland, Ohio during the Republican National Convention.

As always, consult your tax advisor with any questions you have about reporting Airbnb or any other rental income.

The 529 Plan Scholarship Exception

If you were fortunate enough to be able to save money to pay for your child’s college education AND they ended up receiving scholarships to put toward that education, you may be wondering what to do with that excess cash in your 529 account. Luckily for you, there are some special rules pertaining to scholarships that may apply and save you from paying additional tax.

Typically, you would owe income taxes and a 10% penalty on distributions that are not used for qualified education expenses, however, you may withdraw money up to the amount of the scholarship that your child received and only pay tax on the earnings that your original investment made.

Here are some additional alternatives for handling your excess funds:

  • Pay for qualified expenses other than tuition (room and board, books, and other mandatory fees).
  • If your child ends up pursuing further education, like graduate school for example, you can put the funds toward that tuition.
  • Switch the beneficiary of the account to another family member who can use the funds toward their college education in the future.

Be sure to consult your tax preparer or 529 plan administrator for additional tax planning tips related to your 529 plan.

ARM Mid-Year Tax Planning Series (4 of 4): Don’t Pass up Tax-free Income

Take Advantage of Retirement Plan Options. The earnings on most retirement accounts are tax-deferred. (With Roth IRAs, they’re normally tax-free.) Thus, the sooner you fund such an account, the quicker the tax advantage begins. If you can come up with the cash now, there’s no need to wait until year-end or the April 15 tax filing deadline to make your 2016 contributions. However, if your employer offers a 401(k) or SIMPLE-IRA plan at work, you’ll probably want to contribute enough to that plan to receive a full employer match before making an IRA contribution.

Invest in Tax-free Securities. The most obvious source of tax-free income is tax-exempt securities, either owned outright or through a mutual fund. Whether these provide a better return than the after-tax return on taxable investments depends on your tax bracket and the market interest rates for tax-exempt investments. These factors change frequently, so it’s a good idea to periodically compare taxable and tax-exempt investments. In some cases, it may be as simple as transferring assets from a taxable to a tax-exempt fund. ARM recommends discussing your investment options with your financial advisor.

Make Charitable Donations from IRAs. If you’ve reached age 70½, you can arrange to have up to $100,000 of otherwise taxable IRA money paid directly to specified tax-exempt charities. These so-called Qualified Charitable Distributions (QCDs) are federal-income-tax-free to you, but you don’t get to claim any itemized deductions on your Form 1040. However, the tax-free treatment equates to a 100% writeoff, and you don’t have to itemize your deductions to get it. Furthermore, you can count the distribution as part of your required minimum distribution that you’d otherwise be forced to receive and pay taxes on this year. Be careful though—to qualify for this special tax break, the funds must go directly between your IRA and the charity.

Ohio Tax Fraud Alert

The Ohio Department of Taxation released the following statement today to alert taxpayers of a new tax scam sweeping southwestern Ohio:

“Tax Commissioner Joe Testa today issued a public warning to individual and business taxpayers in Ohio about an apparent tax scam that has surfaced in southwestern Ohio.

 

Residents and businesses in Butler and Hamilton counties have been receiving a postcard through the mail sent by what is called the “State Tax Commission” offering to settle delinquent tax debts for a small fraction of the amount owed.

 

The postcard appears to imply that a “one time offer” is available to recipients from an official-sounding tax entity that claims it has the authority to offer tax settlements.

 

Tax Commissioner Testa warns that the Ohio Department of Taxation is not involved with the entity sending these postcards and has not made any of the tax settlement offers mentioned.

 

Tax Commissioner Testa urges anyone receiving these mailings to visit the following Federal Trade Commission link for more information on tax relief companies.

 

https://www.consumer.ftc.gov/articles/0137-tax-relief-companies

 

For additional information: Contact Gary Gudmundson, Communications Director, 614 466-0099.”

 

ARM Mid-Year Tax Planning Series (3 of 4): Maximize Your Business Deductions

Take Advantage of the Generous Section 179 Deduction and First-year Bonus Depreciation. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions and eligible real property costs. For tax years beginning in 2016, the maximum 179 deduction is $500,000. However, this maximum deduction is reduced to the extent you purchase more than $2.01 million of qualifying property during the tax year. Also, a much lower limit applies for amounts that can be deducted for most vehicles.

Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of eligible new (not used) equipment and software placed in service by the end of this year.

Note: You cannot claim a Section 179 write-off that would create or increase an overall tax loss from your business. This limit does not apply to first-year bonus depreciation deductions, which can create or increase a Net Operating Loss (NOL) for your business’s 2016 tax year. You can then carry back the NOL to 2014 and/or 2015 and collect a refund of taxes paid in one or both those years. Please contact us for details on the interaction between asset additions and NOLs.

Consider Selling Rather Than Trading-in Vehicles Used in Business. Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace the vehicle, it’s not unusual for its tax basis to be higher than its value. If you trade the vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

Consider Reimbursing Employees’ Out-of-pocket Business Expenses. Employees normally receive little or no tax benefit from paying business expenses because they’re deductible only to the extent they exceed (1) 2% of the employee’s adjusted gross income and, (2) when combined with the employee’s other itemized deductions, the employee’s standard deduction. Thus, for example, an employee whose compensation is $2,000 higher than it would otherwise be because he’s expected to incur about $2,000 in unreimbursed business expenses isn’t being fairly compensated for the out-of-pocket expense. After paying income and payroll taxes on the $2,000, he has less than this amount to spend on the business expenses. A better approach would be for the company to reimburse at least part of the employee’s business expenses (and renegotiate the employee’s compensation accordingly). Because properly documented expense reimbursements aren’t considered compensation, both the company and the employee save payroll taxes on this arrangement. Plus, the employee comes out better on income taxes as well.

Set up a Retirement Plan. If your business doesn’t offer a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you generally can contribute up to 20% of your self-employment earnings, with a maximum contribution of $53,000. A SIMPLE-IRA, on the other hand, allows you to set aside up to $12,500 plus an employer match that could potentially be the same amount. In addition, if you’re age 50 or older by year-end, you can contribute an additional $3,000 to a SIMPLE-IRA.

ARM Mid-Year Tax Planning Series (2 of 4): Make the Standard Deduction Work for You

Make the Standard Deduction Work for You

The tax rules allow you a deduction equal to the greater of your itemized deductions or a flat amount known as the standard deduction. Thus, itemized deductions only lower your taxable income to the extent they exceed the standard deduction. For 2016, the standard deduction is $12,600 for married taxpayers filing joint returns. If you are single, the amount is $6,300 (unless you qualify as head of household, in which case it’s $9,300). If you’re at least 65, you receive an additional standard deduction of $1,250 if you’re married (plus another $1,250 if your spouse is also 65 or older) or an additional $1,550 if you’re single. In 2017, these amounts will all likely be slightly higher after adjustment for inflation.

If your total itemized deductions are normally close to whichever standard deduction applies to you, you may be able to leverage the benefit of your deductions by bunching them in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years. (Deductions you may be able to shift between years include charitable contributions and your state and local income and property taxes. However, watch out for AMT, as these taxes aren’t deductible for AMT purposes.)