President Trump is facing scrutiny for tax cuts that millions of Americans use, or would like to do.
This week the New York Times published a comprehensive analysis of Mr. Trump’s taxes after receiving several years of his tax returns. The Times has not published the returns because it says it wants to protect its sources, making it difficult to analyze the report with certainty.
Tax professionals say many of Mr. Trump’s deductions — particularly paying family members and personal use of business property, and sometimes incurring expenses — raise issues that he wants to address for the president. Let’s look at preparing returns with less money than that. The consequences of getting them wrongly range from a slap on the wrist and an interest payment to a heavy penalty or jail.
In this process there is often a tussle between taxpayers and customers. The higher the fee, the more pressure the customer has on what the customer wants. Yet tax professionals who sign false returns are at risk of losing their licenses, so they often get pushed back.
Andy Matteson, a CPA with Moss Adams in Campbell, California, who has wealthy clients who have founded tech companies, feels that such restraint is missing from Mr. Trump’s tax returns based on Times reporting .
“I am surprised that an accounting firm would allow a client to take such egoistic positions, especially when they know that he will be audited every year,” he says.
If you’re tempted to follow Mr. Trump’s tax leadership, here’s more information about his cuts that are getting the most attention. There is no need to allow tax exemption, but smart taxpayers want to know the limits.
Paying family members. The Times said that a consulting firm co-owned by Ivanka Trump received a six-figure payment from the Trump Organization while earning six or more incomes as her employee.
Business owners often want to pay family members. Such an arrangement can bring net benefits to the family when deducted at a higher tax rate (eg, 37%) than a tax payable by the recipient (eg, 10% or 12%).
The income tax benefit of such moves is reduced if the owner and relatives are in the same tax bracket. Nevertheless, the recipient can put more than $ 50,000 into retirement accounts this year or more, if that person has a special pension plan.
For the very wealthy, paying a relative can also result in property-tax savings, as the salary transfers the increase from property and owner’s property to them if it is subject to the property tax of some Americans. The per capita property-tax exemption for 2020 is $ 11.58 million, and the top rate is 40%.
Jeffrey Porter, a CPA in Huntington, WVA, says there may be nontax business reasons for paying relatives – such as withdrawing cash from a business or providing a property to provide a loan to the recipient.
Mr. Porter says his clients often want to pay their children the standard deduction amount ($ 12,400 for a single filer for 2020), as well as the amount they would pay for a traditional IRA ($ 6,000 for 2020). Can be put in He warns them that the recipients must actually work, and that the salary for the work done may not be excessive. Payroll taxes are also payable.
“The IRS has won several cases over unfair compensation,” he says.
What about paying consulting fees to a relative in addition to wages? The Internal Revenue Service is likely to raise a red flag, which may ask why the fees were not treated as additional wages.
Use of commercial property for personal use. This is another much awaited area. The Times said that the Trump family claimed that it was a large property investment property in Westchester County, NY, but used it as a private retreat.
Under tax law, an owner must keep records of personal versus commercial use and allocate expenses between them. Thus, if 40% of the use of the property was personal, 40% of the property taxes and maintenance costs would often belong to the owner. The other 60% may be deducted as business or investment expense, although other limitations may come into play.
The allocation of state and local taxes has become more important since the 2017 tax over, which has limited personal deductions to $ 10,000 per return for them. These levies are not subject to a $ 10,000 cap if they are business expenses.
Issues with a business owner, who use the car for both personal and commercial use, often arise, says Ed Zollers, a CPA with Kaplan Financial Education that teaches tax professionals. The answer to resolving IRS issues starts with keeping a good record on the business’s benefits.
But real estate can also be a battleground. Mr. Zollers advises that if a business wants to claim a beach house as an expense, it should not look like a holiday home.
He says the deduction should pass a “smack test”.
“If you point out that the IRS is something a business asset, the agent shouldn’t smoke,” Mr. Zollers says.
Cut down on hair and makeup costs. The Times reported that Mr. Trump cut haircut costs, including more than $ 70,000 to style his hair during “The Apprentice,” and nine Trump entities paid to Ivanka Trump’s favorite hair and makeup artist Went at least $ 95,464.
Kirk Stark, a tax professor at UCLA’s law school, says others should not follow suit. “If these facts are stated, then these expenses are not deductible. It is total-minded, ”he says.
A television or movie studio can cut the cost of hiring someone to do hair and makeup. But the tax rules usually say they are personal expenses that cannot be a business deduction if they are paid by the individual, Mr. Stark says.
In a tax court case he cites Drake v. Commissioner (1969), saying that the judge said that the cost of a haircut to an enlisted person in the U.S. Army to be paid every two weeks to comply with military regulations Cannot be deducted.
In another recent case, Humper v. Commissioner (2011), a television news anchor cut costs of manicure, grooming, teeth whitening and skin care because she needed her contract for a clean appearance . The judge ruled that these expenses were not deductible – and imposed an accuracy penalty.
Write Laura Saunders at [email protected]
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