Damage awards received on account of personal physical injuries or physical sickness are not taxable. If a taxpayer receives a non-taxable award under this rule and then is discriminated against by his employer due to the physical injuries, is a second award paid by the employer also non-taxable? The court recently addressed this in Rajcoomar… Continue reading Settlement Award for Discrimination Related to Physical Injuries is Taxable
Category: Federal Income Tax
Federal income tax advice, articles, tips, & more.
The Federal income tax is the largest expenditure for most individuals and businesses. It dwarfs the costs for insurance and basic necessities. This is only going to increase in the future. Tax planning is needed.
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Tax Law is Not Determined by Common Industry Term
Just because businesses in a particular industry commonly use a term to describe a particular transaction or event, the industry term does not necessarily have any bearing on the Federal income tax consequences of the transaction or event. The court addresses this in Greenteam Materials Recovery Facility PN v. Commissioner, T.C. Memo. 2017-122, in the… Continue reading Tax Law is Not Determined by Common Industry Term
Court Considers Economic Substance in S Corp Transactions
The IRS challenges some tax positions by asserting that the transactions lack economic substance. This can allow the government to unwind or ignore transactions that comply with our tax laws if there is no legitimate business purpose for the transactions other than tax savings. There is a growing body of court cases that helps define… Continue reading Court Considers Economic Substance in S Corp Transactions
Subchapter S Corporation Losses Limited by Tax Basis
One of the benefits of Subchapter S corporations is the ability to have losses flow through from the business’ tax return to the individual shareholder’s tax return. These flow-through losses are limited by the shareholder’s tax basis in the S corporation stock. The court recently addressed this limitation in Tinsley v. Commissioner, T.C. Summary Opinion… Continue reading Subchapter S Corporation Losses Limited by Tax Basis
Bad Credit Results in Disallowance of Bad Debt Deduction
The IRS often challenges bad debt deductions–particularly when the loan is from a family member or friend. The courts have developed several factors that they consider in these disputes. One of these factors is whether the borrower would have been able to secure a loan from a third party. The court recently addressed this in… Continue reading Bad Credit Results in Disallowance of Bad Debt Deduction
Appeals Court Upholds IC-DISC Roth IRA Tax Strategy
The Sixth Circuit Court of Appeals upheld the IC-DISC Roth IRA tax strategy in In Summa Holdings, Inc. v. Commissioner, No. 16-1712 (2017). This tax strategy allows business owners to sidestep the annual Roth IRA contribution limits, thereby allowing the taxpayers to amass sizable amounts in their Roth IRAs to grow tax-free. The case is… Continue reading Appeals Court Upholds IC-DISC Roth IRA Tax Strategy
Discount Loyalty Programs are Not Trading Stamp Companies
Accrual method taxpayers generally must recognize advance payments in taxable income in the year of receipt, because receipt satisfies the all events test. The trading stamp rules are an exception to this all-events test. These rules apply to businesses that have customer loyalty programs. The rules can result in significant tax deferral as they allow… Continue reading Discount Loyalty Programs are Not Trading Stamp Companies
Deducting Back Taxes in Current Year for Defunct Business
Can an S corporation shareholder for a defunct business pay unpaid taxes in the current year, and have the defunct business deduct the payment in the current year? The court addresses this in Brown v. Commissioner, T.C. Memo. 2017-18. Most business owners may miss this deduction given that the business is no longer operating. Facts &… Continue reading Deducting Back Taxes in Current Year for Defunct Business
Deducting Pre-Acquisition Stock Compensation
In Qinetiq US Holdings, Inc. v. Commissioner, No. 15-2192 (4th Cir. 2017), the court addresses the situation where a taxpayer acquired a target corporation and then claimed a substantial tax deduction for expenses the target corporation had paid prior to the acquisition. There are rules intended to prevent taxpayers from being able to deduct pre-acquisition… Continue reading Deducting Pre-Acquisition Stock Compensation
Bad Debt Deduction for Cease-and-Desist Order
With tax losses, one challenge is to determine what tax year the loss is allowable. The loss year is usually identified by a triggering event. Is a cease-and-desist order from the state regulator a triggering event that establishes that a start-up company is worthless in the year the order was received? The court addressed this in Sensenig… Continue reading Bad Debt Deduction for Cease-and-Desist Order