At last count, there were close to two million charitable organizations in the United States. Each organization is required to register with the IRS, and each is subject to strict regulations The IRS keeps a very close watch on charities and the people who contribute to them. Exactly what is the IRS watching for? Simply put, tax evasion.

In offering tax and accounting advice, the CPAs at Sapurstein & Associates believe in telling true stories to get important points across.

Here’s one cautionary tale: Several years ago a married couple — both medical doctors — transferred appreciated stock and cash to a charitable foundation. This foundation was created “to benefit not only charitable causes, but also doctors and their families.”

The foundation kept the donated assets in a separate account for each donor. The foundation’s program summary stated “donors and their family members may work for and be compensated . . . for good works they perform on behalf of their family public charities.” This segregated foundation account also allowed donors to direct the use of these funds, specifically including college loans.

The two-doctor couple had the foundation make college tuition payments on behalf of one of their sons. The son signed a “loan agreement” promising to repay the funds five years after graduation, or to provide designated amounts of charitable services. The couple’s taxes listed this as a charitable contribution.

The IRS denied the charitable contribution deduction, and the Tax Court upheld that denial.

Why? The taxpayers had retained control over the stock and cash donated to the foundation. The court also found the couple liable for capital gains tax on the foundation’s subsequent sale of the appreciated stock.  The couple was charged an “accuracy-related penalty” (under Sec. 6662).

This doctor couple was taught a lesson – the hard way. At Sapurstein CPAs we don’t want our clients to take the chance of incurring accuracy related penalties. What lesson can you gain from the doctors’ story? When donating to a charitable organization and especially when handling foundation funds, consult a CPA or attorney (or both) to be sure you “stay within the lines” – IRS guidelines, that is.

By all means, be charitable.  But, be careful! The penalties for non-compliance can be stiff.

If you own rental properties as your primary business, this story of classifying rental profits against the sale of your property may be of interest.

Recently, Mr. M, the owner of six rental properties bought three more properties, intending to broaden his business by increasing his rental income.

Mr. M’s intent was to rent the new properties, but that changed when the real estate market shifted around him. He decided instead of renting the properties, he would “flip” the three for a quicker profit, seeing that a sale would be better for his business.

The IRS audited out the businessman’s tax return, saying that Mr. M couldn’t net his short-term gains against the passive rental losses from the other six houses. Interestingly, the Tax Court disagreed with the IRS.

The Tax Court (Vandegrift, TC Memo. 2012-14) ruled that since Mr. M’s real estate activities were a single business, he was entitled to use his rental losses to soak up the sales gains. So, even though Mr. M’s income was over the $150,000 cutoff for deducting passive losses, he still was able to get a tax benefit from his “paper” losses.

Unsure of whether or not your gains vs. losses qualify your business for a write off? Consult the CPAs at Sapurstein & Associates, who can help sort through IRS regulations and recent rulings to provide you with the most up to date, best tax guidance available.

Multi-generation households are common these days. Our protracted economic slump has forced thousands of newly minted college graduates and young adults to move in with their parents until jobs become more available.

Learning to live together again is tricky in itself, but the tax rules dealing with situations where adult children live with parents are even trickier. Can you – and should you – claim an adult child as a dependent on your tax return?

Housing your adult child does not automatically mean you can claim that person as a dependent. The IRS has a series of “qualifying criteria” you must meet to determine your dependent qualification:

• Age: Your child must have been under 19 at year’s end, or under 24 if that child was a full time student for at least five months of that tax year.
• Relationship: The child must be your child, stepchild, foster child, sibling or stepsibling.
• Residence: Your child must have lived with you for more than half the year (with some exceptions for parents who are divorced or separated).
• Support: More than half of the child’s support must be paid by you during the year, including college, food, clothing, medical expenses, and even health insurance.

So long as your child’s income doesn’t exceed the amount you spent on support and meets the other qualifying criteria, you can claim that adult child as a dependent.

Got a tax question for the CPAs at Sapurstein & Associates? Feel free to give us a call or email your question. We’re happy to blog about it – and help you get you the information you need.

If you own a small business in Indiana and you are audited by the IRS, you may be sure you will be required to substantiate the business expenses you’ve claimed. In fact, at Sapurstein & Associates, one of the most important services we offer our clients is helping establish and maintain precise and manageable record keeping systems.

Needless to say, accurate record keeping is a good idea whether or not your business is ever audited. The well-known saying “What gets measured, gets done” has been attributed to Peter Drucker, Tom Peters, Edward Deming and others, but no matter who coined the phrase, at our small business tax and accounting firm in Indianapolis, it’s become our mantra.

Two court cases described in the December 2011 TaxAdvisor bulletin emphasize just how costly it can be if you can’t substantiate business expenses.

S. of Los Angeles failed to show up for meetings with the IRS auditor, and when asked for substantiation of expenses for the net losses she’d claimed, said she’d paid dozens of workers direct cash compensation (with no records to prove it). The tax court found Sharon’s testimony “vague and evasive” and denied her deductions.

B., on the other hand, flat refused to provide substantiation of his expenses, claiming the IRS was violating his Fifth Amendment rights!  He argued that signing his tax return under penalty of perjury should have been sufficient proof his honesty.  No surprise, the Tax Court denied all of B’s losses and levied a penalty of $36,000.

After so many years of providing small business accounting and tax solutions in Indiana, we at Sapurstein CPAs know one thing:  Even if all your business expenses are perfectly legitimate and necessary, one thing is for sure:  You must be able to substantiate all of them.

The IRS is not going to take your word for it!

It may be, according to a recent IRS memo sent to tax practitioners. Provided that the funds are allocable to a business or used for investment purposes, Sapurstein & Associates CPAs have learned, even the interest on seven-figure home loans might qualify for the mortgage interest deduction.

Although IRS regulations have traditionally treated interest on home mortgages over $1 million as nondeductible, there is now a possible way around this limit. For instance, if the taxpayer elects to group together all his/her debts when figuring the interest write-off, the IRS field memo says the regulation may be disregarded.

What’s the “open secret”?

A tax reporting method outlined in Pub. 936 allows a deduction for interest on “excess proceeds used for business or investment.”  Interest on the first $1 million of debt incurred to buy the home — and the first $100,000 of home equity loans — is fully deductible, with any excess deduction deriving from the documented business or investment use.

At  Sapurstein & Associates, we take pride serving high-income individuals with intricate or special circumstance tax needs. Caution is in order, though - claiming deductibility for top-tier mortgage interest is no do-it-yourself strategy!  You need top-tier, federally authorized tax practitioner experience on your side.

They may be in the process of a divorce but still legally married. They may be married, but only one has a failed business or other hardship.  Sometimes, the “innocent” husband or wife can be held liable for unpaid taxes, even though the debt really “belongs” to the other spouse.

The CPAs at Sapurstein & Associates are happy to report that the IRS recently revised the factors it uses to evaluate claims by innocent husband or wife filers. Under the new guidelines, more of those spouses will now qualify for “equitable relief” from back taxes.

What’s more, this “kinder” and very welcome approach on the part of the IRS is effective immediately.  The idea is to avoid punishing the “innocent” marital partner, and objectively consider whether that spouse would suffer undue economic hardship if held responsible for those back tax debts caused by the other spouse.

There’s even more good news for both our Indiana personal tax and accounting clients – and our small business tax and accounting clients – who have cases already in progress:  The new ruling (extending the kinder, gentler treatment) can be applied to all cases now before the Service or Tax Courts.

At Sapurstein & Associates, CPAs who are also authorized tax practitioners, we know: It’s not enough to be “innocent” – your adviser must keep you informed.

There are times when nothing conveys information quite as well as a story, particularly if it’s a true tale. Here’s how one couple claimed – and proved – their charitable deductions to the IRS.

The Bradleys, a husband and wife team, served as a volunteer football and cheerleading coaches for a community football league. The couple claimed charitable deductions for out-of-pocket expenses that included:

• $660 for bus rental
• $162 for pizzas, stickers, ribbons, office, and party supplies for a team party
• 1,857 total miles for league practices 4 x per week

An IRS Tax Court determined that the Bradley’s volunteer activities were to benefit the Yellowjackets community football team, a qualified charitable organization. The court then looked at whether the Bradleys had properly substantiated their deductions.

The Bradleys had receipts from every one of the vendors who had supplied the pizza, stickers, ribbons and supplies for the team parties. Although the receipts did not show the name of the charitable organization, the IRS deemed them “legitimate substitutes” because they contained the type of pertinent information that would have appeared on a cancelled check.

In addition, the Bradleys had provided a computerized map showing directions and mileage to the football practice fields. According to Bradley v. Comm’r., T.C. Summ Op 2011-120, this qualified as “other reliable written records” for purposes of Reg. 1.170A-13(a)(2). As such, the Court said the Bradleys were entitled to a deduction of 14 cents per mile for travel to and from practices and games.

As the CPAs at Sapurstein & Associates will tell you, the bottom line for any charitable deductions you are planning to claim on your taxes, is to be fastidious in detailing your claim with proof, information and receipts. The more information you have to verify your charitable deduction, the better your chance of having it approved. Better safe than sorry.

Long gone are the days when it was possible to use simple cancelled checks and lists of donations to charities in order to claim a deduction. Today’s IRS wants to see proof.

Proof includes a complete written acknowledgment of the nature of the donation. Was it out of pocket expenses that you incurred while doing work for a charitable organization? Did you donate cash, or was it a car, clothing, food, or something else?

The IRS also wants to know if the donor got anything of value in exchange for the contribution. For example, did your monetary donation go towards buying a raffle ticket? Or perhaps “purchasing a table” at a fundraising dinner?

Each situation has a specific rule. The IRS does not want to hear the answer from the donor, even if the donor has a cancelled check to prove the donation. The final say has to come in writing from the charity, preferably on letterhead, explaining the nature of the donation and how much of it is deductible.

In fact, an incomplete gift letter from a charity can nix a charitable contribution (Cohan, TC Memo. 2012-8). The Tax Court specifies that when the charity’s written donor acknowledgment leaves out significant amounts of consideration provided to the donors, then the donor loses the entire tax deduction.

At Sapurstein & Associates, we know that “giving” doesn’t necessarily mean getting — unless you get it in writing!

Not everyone shares their gambling habits with their CPA. But that’s something that professional gamblers had better do.

What qualifies one as a “professional” gambler? The IRA loosely defines this as one who:

• Depends on gambling winnings as a meaningful source of income
• Devotes substantial time to gambling on a regular basis

If you do qualify as a “professional gambler,” chances are good you are on the IRS radar screen. New IRS rules, which do not apply to amateur gamblers, do apply to you.

Interestingly, IRS rules as of December 2011 favor professional gamblers, allowing them to write off gambling-related expenses such as meals, lodging and transportation. These can be listed as Schedule C business expenses, or the “cost of doing business.” These costs can reduce self-employment income and may even create a net operating loss.

Sapurstein CPAs issues a word of caution to our professional gambler friends:  Conduct gambling activities in a business-like manner. Keep detailed records of wins and losses and save all receipts related to your business expenses.

Educational Assistance Programs (EPS) under Sec. 127 were due to end after 2010 but have been extended through 2012.

Under Sec. 127, if an education institution provides tuition assistance to its employees that exceed the $5,250 per year cap, the assistance could be a working additional fringe benefit.  Of course the institution would have to meet the requirements of Sec. 127.

Yes, how to apply these conditions does require a working knowledge of IRS codes. If you are unsure whether or how this EAP might benefit you or your company, contact Sapurstein & Associates for requirement details. Your first hour of consultation is always free.