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May 26, 2011

$4 Per Gallon for Gas? Not High Enough for IRS!

Nope -- we guess it has to go a bit higher before IRS decides enough is enough, and the standard mileage rate ought to be raised.

Seems that during its May 12 payroll industry conference call, an IRS spokesperson said that the IRS has no current plans to increase the present standard rate of 51 cents per mile.

Recall that the standard rate for owned or leased cars (including vans and some trucks) was previously set at 51 cents for business travel after 2010. (Likewise, the 2011 rate for medical usage of your auto, or for its use in connection with moving is 19 cents per mile.)

The 51 cents per mile rate can also be used by employers for reimbursement of employees required to use their own auto for business, and who want to deem the reimbursement as having been made under an "accountable" expense reimbursement plan, as long as the employees appropriately document the usage to the employer. (More from Nolo on Business Tax and Deductions.)

IRS generally announces each year's standard mileage rate near the beginning of the new tax year, but it's not unheard of that they make a mid year correction - such as the action they took in 2008 when gas prices last spiked in a manner similar to recent experience.

But such is not in the cards, according to Ligeia Donis, Assistant Branch Chief, Office of the Chief Counsel, notwithstanding the recent spate of gas cost increases. And for two reasons, according to Donis: the possibility that gas prices could decline, and some recent whining by employers that mid-year changes are difficult to implement.

Time will tell -- the year isn't even half over yet.

April 27, 2011

Internet Sales Tax -- Coming Sooner Than You May Think

If something called the "Main Street Fairness Act" clears Congress, the days of sales tax-free Internet commerce may be numbered.

U.S. Senator Dick Durbin (D-Illinois) plans to introduce the bill, we hear, shortly after the Easter recess.

"Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses?" queried Durbin recently in a speech. "Out-of-state compaines that aren't paying their fair share of taxes are sticking Illinois residents and businesses with the tab."

But we hear that the Direct Marketing Association (DMA), not surprisingly, takes a dim view of Durbin's idea. "You're just giving the states a blank check to make changes without any congressional oversight," says Jerry Cerasale, DMA's senior vice president for government affairs. "We oppose that.....We think that's abrogating the authority of Congress."

So far, nobody has been able to quite figure out just what to do with the Internet from a sales and use tax standpoint. (Check out Nolo's article Sales Tax and the Internet for more info.) And that's just the way the NetChoice Colalition likes it. The Coalition says, "Internet access -- and its concomitant ability to communicate, educate, and telework -- should not be taxed. At a time when most people agree that the U.S. needs more broadband, Internet access taxes will slow broadband deployment, particularly in rural and low-density areas. Fewer consumers will buy a higher-priced taxed product. A smaller pool of potential customers means providers can't justify investment in new broadband infrastructure build-out......NetChoice endorses a permanent tax moratorium to encourage continued innovation on the 'Net'."

The big boys of retailing, however, would likely support Durbin's proposal. Why wouldn't they -- their bricks-and-mortar presence is increasingly ubiquitous.

But as NetChoice points out, "The 'Internet' is not a specific place or thing, but a network of networks that transcend geographic and political borders." A virtual entity. And who's in charge of taxing that?

March 3, 2011

'S' Corporations and Employees, Round 2

A recent Tax Court decision (Donald G. Cave a Professional Law Corp., TC Memo 2011-48) reminds us once again of employment tax considerations associated with "S" corporations and their shareholders, as well the more general topic of distinguishing between employees and independent contractors.

In this case, the law corporation reporting entity did not view associate attorneys working for the firm as employees, but instead considered them independent contractors, and issued them Forms 1099-MISC for the years in question. And the same went for a law clerk. Further, even though the sole corporate shareholder worked actively in the business, the corporation issued to him neither a Form W-2 nor a 1099-MISC, thus allowing all of the bottom line to flow to his personal return as "S" corporation dividend distributions, presumably thereby escaping employment taxation altogether.

The age old issue of who is an employee as opposed to an independent contractor is not without guidance in the literature. Specifically, the Fifth Circuit (which would govern if an appeal ensues from the Tax Court's decision) considers the following primary factors as relevant to the question:

1. The degree of control the principal has over the worker
2. The worker's investment in the tools of his trade
3. The worker's opportunity for profit or loss resulting from his efforts
4. The permanence of the relationship between worker and master
5. The skill required of the worker

The bottom line for the Tax Court, relative to the classification of the associate attorneys and the law clerk, was the conclusion that all of these folks were "common law employees," to whom Forms W-2 should have been provided, and regarding whom appropriate employment taxes should have been considered.

And as for the sole corporate shareholder, the corporation's president, who made virtually all corporate decisions, for which he was compensated, the same conclusion ensued: employee status.

Bottom line -- corporation shells out the employment taxes for the years in question, plus the usual penalties, of course!

February 8, 2011

Noose Tightens on 'S' Corp Salary-vs-Dividend Issue

So here comes another "S" corporation shareholder who tried to play the "dividend" versus "salary" game and lost.

Say hello to Mr. Watson, a certified public accountant who apparently thought the value of his "services" to his wholly-owned "S" corporation was a mere $24,000 per year in the form of salary during 2002 and 2003, while at the same time receiving dividend distributions totaling over $175,000 annually. The case is Watson, P.C. vs. U.S. (DC IA 12/23/10) 107 AFTR 2d.

Unfortunately, Watson testified at trial that the reason his compensation was set at $24,000 for the years 2002 and 2003 was because he felt this was all the business could afford on a regular and continuous basis, given seasonality factors. He also testified that when setting his salary, he did not look at what comparable businesses paid for similar services, and was surprised to discover that he was paying himself less salary than that typically made by recent college graduates in the accounting field.

This has been an issue which IRS has pressed on for years -- indeed in 2010, they almost made it over the legislative hump (in forcing the issue) with House passage of legislation which would have lowered the boom on service professionals who try to minimize Medicare and Social Security taxes by funneling what is arguably self-employment income through an "S" corporation which pays the dough out in the form of a nominal salary with the rest in dividends. Thanks to non action by the Senate, the matter still languishes amidst a bunch of case law for guidance.

For their part, IRS actually issued some specific guidance in Fact Sheet 2008-25 (August, 2008) which laid out the major factors which the courts have considered in determining "reasonable compensation":

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation.

Surely we haven't heard the last on this issue.