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Monthly Archives: June 2019

Cryptocurrency US Tax laws and Foreign Reporting Requirements.

Is Cryptocurrency (i.e. Bitcoin) reportable if held in a foreign jurisdiction under the Foreign Bank and Financial accounts (FBAR) regulations? The quick answer is NOT CURRENTLY.  However, be prepared for possible changes.

Ever since the creation of cryptocurrency, income tax and reporting laws have been confusing, changing and a lot of people might not want to accept the laws.  Internal Revenue Service (IRS) Notice 2014-21 stated that the following highlights:

  1. Virtual currency may be used to pay for good and services or held for investments but does not have legal tender status in any jurisdiction.
  2. Virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency is referred to as “convertible” virtual currency.
  3. The sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy has tax consequences that may result in a tax liability.
  4. The IRS treats virtual currency as property.  Thus, if property is mined, income should be reported at the FMV of the property less the mining expenses.  A mining operation may trigger income subject to self-employment tax.
  5. If virtual currency is received as payment for goods or services, the taxpayer must report the payment based on the FMV.
  6. Does a taxpayer have gain or loss upon the exchange of virtual currency for other property?  The IRS says yes.
  7. Do payments in virtual currency require information reporting using W-2’s and 1099’s?  Yes, if payment is considered wages or 1099 reportable, then those documents are required.
  8. Notice 2014-21 didn’t really take a position on the question about reporting virtual currency in a foreign account, so fortunately there is updated information.

Just recently, the AICPA contacted the Treasury Financial Crimes Enforcement Network (FinCEN) to ask if virtual currency in a foreign account would need to be reported on form FATCA and 8938, Statement of Specified Foreign Financial Assets.  FinCEN informed the AICPA that currently, virtual currency held in an offshore account is not reportable pursuant to 31 C.F.R Reg. 1010.50(c).  FinCEN did state that the discussion with IRS on this issue continues to be evaluated.

Vertical Advisors, LLP is a boutique accounting and tax firm, that has experience with virtual currency and taxation.  Please contact us if you have additional questions.

2019 Vehicles, Auto Depreciation Limits, and Amounts

The IRS has released the depreciation deduction amounts which are pursuant to Internal Revenue Code (IRC) Section 280F. This code section discusses the depreciation deduction limits for passenger automobiles (including trucks and vans) first placed in service during 2019. For passenger autos acquired before 9/28/17 and placed in service during 2019, the depreciation limits are $10,100 for the first year ($14,900 with bonus depreciation), $16,100 for the second year, $9,700 for the third year, and $5,760 for each succeeding year. Typically bonus depreciation is taken by default for tax year 2019.

If a taxpayer is leasing a car, there are also lease inclusion amounts which is really giving the lease expense a haircut. This is discussed in Rev. Proc. 2019-26. Most small business owners use their auto’s for business. However, one needs to be careful in how they deduct the expense and depreciation of the vehicles. There are also additional considerations for luxury autos, and automobiles that weigh over 6,000 lbs., which allow for larger deductions.

Clients often ask us – “is it better to lease or purchase?” The answer is, well, it depends. Here are some quick thoughts.

If you drive a lot of miles, say over 12,000 miles a year, you will typically have to pay more or get a penalty for too many miles under a lease. However, if you like to get a new car often, then a lease might work out. Purchasing a car generally allows a business owner to deduct a large amount in the first year using accelerated depreciation, but one still needs to navigate through the depreciation limitations above. However, depreciation for vehicles above 6,000 gross vehicle weight may allow for more. Now, most of this discussion is regarding passenger auto’s and SUV’s, so if you purchase commercial vans or trucks for your business the depreciation rules and deductions are generally much larger as they are viewed as not being passenger autos.

Anyway, as one can see there are specific rules and considerations for deducting your vehicle. The IRS doesn’t allow for deductions for personal use, and personal use technically can also include commuting to and from work. So, discuss this topic with your tax advisor and make sure you understand your plan, your deductions and your risk.

For passenger autos acquired after 9/27/17 and placed in service during 2019, the depreciation limits are $10,100 for the first year ($18,100 with bonus depreciation), $16,100 for the second year, $9,700 for the third year, and $5,760 for each succeeding year. Also, the IRS has released the lease inclusion amounts for lessees of passenger autos first leased in 2019. Rev. Proc. 2019-26.

Donating your vehicle to charity may not be a tax-wise decision

You’ve probably seen or heard ads urging you to donate your car to charity. “Make a difference and receive tax savings,” one organization states. But donating a vehicle may not result in a big tax deduction — or any deduction at all.

Trade in, sell or donate?

Let’s say you’re buying a new car and want to get rid of your old one. Among your options are trading in the vehicle to the dealer, selling it yourself or donating it to charity.

If you donate, the tax deduction depends on whether you itemize and what the charity does with the vehicle. For cars worth more than $500, the deduction is the amount for which the charity actually sells the car, if it sells without materially improving it. (This limit includes vans, trucks, boats and airplanes.)

Because many charities wind up selling the cars they receive, your donation will probably be limited to the sale price. Furthermore, these sales are often at auction, or even salvage, and typically result in sales below the Kelley Blue Book® value. To further complicate matters, you won’t know the amount of your deduction until the charity sells the car and reports the sale proceeds to you.

If the charity uses the car in its operations or materially improves it before selling, your deduction will be based on the car’s fair market value at the time of the donation. In that case, fair market value is usually set according to the Blue Book listings.

In these cases, the IRS will accept the Blue Book value or another established used car pricing guide for a car that’s the same make, model, and year, sold in the same area and in the same condition, as the car you donated. In some cases, this value may exceed the amount you could get on a sale.

However, if the car is in poor condition, needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide won’t set the car’s value for tax purposes. Instead, you must establish the car’s market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage.

You must itemize

In any case, you must itemize your deductions to get the tax benefit. You can’t take a deduction for a car donation if you take the standard deduction. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you donate a car to charity, you may not get any tax benefit, because you don’t have enough itemized deductions.

If you do donate a vehicle and itemize, be careful to substantiate your deduction. Make sure the charity qualifies for tax deductions. If it sells the car, you’ll need a written acknowledgment from the organization with your name, tax ID number, vehicle ID number, gross proceeds of sale and other information. The charity should provide you with this acknowledgment within 30 days of the sale.

If, instead, the charity uses (or materially improves) the car, the acknowledgment needs to certify the intended use (or improvement), along with other information. This acknowledgment should be provided within 30 days of the donation.

Consider all factors

Of course, a tax deduction isn’t the only reason for donating a vehicle to charity. You may want to support a worthwhile organization. Or you may like the convenience of having a charity pick up a car at your home on short notice. But if you’re donating in order to claim a tax deduction, make sure you understand all the ramifications. Contact us if you have questions.

© 2019

IRS updates rules for personal use of employer-provided vehicles

The IRS recently announced the inflation-adjusted maximum value of an employer-provided vehicle under the vehicle cents-per-mile rule and the fleet-average value rule. Employers can use the rules to value an employee’s personal use of such a vehicle for income and employment tax purposes.

The new values reflect vehicle-related amendments in the Tax Cuts and Jobs Act (TCJA) and the IRS’s intent to make the rules more widely available to employers. The IRS is also temporarily loosening some of the consistency requirements for 2018 and 2019.

Valuation methods for personal use
When an employer provides an employee with a vehicle that’s available for personal use, it must include the value of the personal use in the employee’s income. Employers generally have four methods available to value an employee’s personal use of a company car:

  1. General valuation rule. This involves the fair market value (FMV), which is defined as the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle.
  2. Commuting valuation rule. This is the amount of each one-way commute, from home to work or from work to home, multiplied by $1.50. (This method’s availability is subject to stringent requirements, including having a written policy limiting the employee’s use to commuting and “de minimis” personal use.)
  3. The cents-per-mile rule. Employers can use the business standard mileage rate (58 cents for 2019, less up to 5.5 cents if the employer doesn’t provide fuel) multiplied by the total miles the employee drives the vehicle (including cars, trucks and vans) for personal purposes.
  4. The automobile annual lease valuation rule. With this method, employers use the annual lease value of the automobile (including trucks and vans) — as specified by an IRS table that bases annual lease value on an automobile’s FMV — multiplied by the percentage of personal miles out of total miles driven by the employee. This amount also is subject to a fuel adjustment.

The fleet-average value rule allows employers operating a fleet of 20 or more qualifying automobiles to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule.

The fleet-average value rule or the simple cents-per-mile rule isn’t available, though, if the FMV of the vehicle exceeds a certain base value, adjusted annually for inflation, on the first date the vehicle is made available to the employee for personal use. In 2017, the maximum value for the cents-per-mile rule was $15,900 for a passenger automobile and $17,800 for a truck or van. The maximum value for the fleet-average value rule that year was $21,100 for a passenger automobile and $23,300 for a truck or van.

The role of the TCJA
The base values were raised significantly earlier this year, in IRS Notice 2019-08, to reflect amendments made by the TCJA. The law changes the price inflation measure for automobiles (including trucks and vans). It also substantially increases the maximum annual dollar limitations on the depreciation deductions for passenger automobiles, basing the latter on the depreciation of a passenger automobile with a cost of $50,000 (up from $12,800), inflation adjusted annually, over a five-year recovery period.

The IRS announced in the guidance that it intended to amend the tax regulations to incorporate a base value of $50,000 for both the cents-per-mile and the fleet-average value rules, effective for the 2018 calendar year. It also intended to amend the regulations to provide that the base value will be adjusted annually for 2019 and future years using the new price inflation measure.

The latest news
Now, in Notice 2019-34, the IRS has announced the adjusted values for 2019. For vehicles and automobiles first made available to employees for personal use in calendar year 2019, the maximum value under both rules is $50,400. Under planned amendments to the applicable regulations, these maximum values will be the same as the maximum standard automobile cost that determines eligibility to set reimbursement allowances under a fixed and variable rate (FAVR) plan — an alternative to the business standard mileage rate.

The IRS also shared its intention to amend the tax regulations to provide relief to employers that previously didn’t qualify for the cents-per-mile rule because, under the earlier rules, the vehicle’s FMV exceeded the permissible maximum value. Under amended regulations, the employer may first adopt the cents-per-mile valuation rule for 2018 or 2019 based on the maximum value of a vehicle for 2018 or 2019.

Note, though, that employers that adopt the cents-per-mile rule generally must continue to use it for all subsequent years in which the vehicle qualifies for it. An employer can, however, use the commuting valuation rule for any year the vehicle qualifies.

Similarly, employers that didn’t qualify for the fleet-average value rule before 2019 because of the pre-2018 maximum value limit can adopt the rule for 2018 or 2019 if it falls under the applicable maximum value.

The new notice confirms that employers can use the flexible guidelines in Announcement 85-113 to determine the timing for when personal use income is deemed paid. That means employers may use the rules in that guidance, the adjustment process, or the refund claim process to correct any over-payment of federal employment taxes resulting from application of the notice’s transition relief.

Additional requirements
Satisfying the maximum value limit isn’t enough for an employer to use the cents-per-mile rule or the fleet-average value rule to value an employee’s personal use of a vehicle. Both rules come with other requirements that can prove difficult to meet. For example, the cents-per-mile rule generally is available only if the employer reasonably expects the vehicle to be regularly used in its trade or business throughout the calendar year or the vehicle meets the mileage test. We can help you determine the appropriate valuation method for your circumstances.
© 2019

It’s a good time to check your withholding and make changes, if necessary

Due to the massive changes in the Tax Cuts and Jobs Act (TCJA), the 2019 filing season resulted in surprises. Some filers who have gotten a refund in past years wound up owing money. The IRS reports that the number of refunds paid this year is down from last year — and the average refund is lower. As of May 10, 2019, the IRS paid out 101,590,000 refunds averaging $2,868. This compares with 102,582,000 refunds paid out in 2018 with an average amount of $2,940.

Of course, receiving a tax refund shouldn’t necessarily be your goal. It essentially means you’re giving the government an interest-free loan.

Law changes and withholding
Last year, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the TCJA — including the increase in the standard deduction, suspension of personal exemptions and changes in tax rates.

The new tables may have provided the correct amount of tax withholding for some individuals, but they might have caused other taxpayers to not have enough money withheld to pay their ultimate tax liabilities.

Conduct a “paycheck checkup”
The IRS is cautioning taxpayers to review their tax situations for this year and adjust withholding, if appropriate.

The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions. You can access the IRS calculator at https://bit.ly/2aLxK0A.

Situations where changes are needed
There are a number of situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

  • Adjusted your withholding in 2018, especially in the middle or later part of the year,
  • Owed additional tax when you filed your 2018 return,
  • Received a refund that was smaller or larger than expected,
  • Got married or divorced, had a child or adopted one,
  • Purchased a home, or
  • Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payment is due on Monday, June 17.)

We can help
Contact us to discuss your specific situation and what you can do to remedy any shortfalls to minimize taxes due, as well as any penalties and interest. We can help you sort through whether or not you need to adjust your withholding.

© 2019