In IR-2018-109, the Service highlighted various resources that may benefit small business owners. These include online tax help, protection against identity theft and the home office deduction.
- Online Services - The IRS website offers multiple options for small business owners. The "Sharing Economy Tax Center" and a video on the Service's YouTube channel titled "Your Taxes in a Sharing Economy" answer various tax questions. The sharing economy includes ride sharing, home rentals, reselling and similar businesses. A common challenge for small business owners is withholding. The number of taxpayers who paid under-withholding penalties increased from 7.2 million in 2010 to 10 million in 2015. The IRS "Pay As You Go" page explains withholding and quarterly estimated tax payments. Finally, the "Small Business and Self-Employed Tax Center" has a variety of tools to help taxpayers avoid an IRS audit.
- Avoiding Identity Theft - A small business owner is an attractive target for identity thieves. They may steal Employer Identification Numbers (EIN) and create fake Forms W-2 to file and claim fraudulent refunds. A helpful guide for small business owners is "Small Business Information Security: The Fundamentals." It is published by the U.S. Commerce Department.
- Home Office Deductions - Many small business owners have an office in their home. The home office deduction is only available if the home office is the owner's only fixed business location. The regular home office method permits deductions of direct business expenses and allocation of indirect home expenses between business and personal use. The simplified method deducts $5 per square foot up to 300 square feet. Daycare providers must use a special calculation method. The typical deductible expenses for a home office include the pro rated business portion of real estate taxes, mortgage interest, utilities, depreciation, maintenance and repairs.
Consultant Doctor Denied Exempt Status
In Abovo Foundation, Inc. v. Commissioner;
No. 18673-15X; T.C. Memo. 2018-57 (30 Apr 2018), the Tax Court held that a medical doctor's corporation was not a qualified Sec. 501(c)(3) charity.
Dr. Emmanuel C. Okonkwo is a board certified physician with specialization in patient safety and risk management. On May 27, 2011, he incorporated Abovo Foundation, Inc. (Abovo). He filed IRS Form 1023, Application for Recognition of Exemption Under Sec. 501(c)(3).
Abovo planned to "deliver quality management consulting services to medical providers and advance government programs through patient safety initiatives. Its quality management services would include defining, identifying, analyzing, measuring and controlling systems and process to ensure desirable outcomes." Dr. Okonkwo is the only employee of Abovo and could receive compensation of up to $300,000 per year.
A Sec. 501(c)(3) nonprofit must be organized and operated exclusively for exempt purposes. No part of its earnings may inure to the benefit of a private individual.
The Tax Court held that Abovo was merely the platform for Dr. Okonkwo to consult on patient safety and risk management. It is primarily commercial in nature and does not serve a public interest. Therefore, a Sec. 501(c)(3) exemption was denied.
American Hospital Association Requests Guidance on UBI and Excise Tax
On May 1, 2018, Thomas Nickels, Executive Vice President of the American Hospital Association (AHA), sent a letter to the IRS and Department of Treasury requesting guidance on the new unrelated business income (UBI) rules and the excise tax on employees with over $1 million in income.
The Tax Cuts and Jobs Act created Sec. 512(a)(6) to prohibit separate unrelated businesses from using losses in one entity to offset profits in another. The AHA requests answers to multiple questions on the new UBI rules.
The AHA's questions include: How is one business defined separately from another? Many business have related or similar functions. Is an LLC or partnership separate from the underlying business? How is Sec. 512(b)(4) debt-financed income allocated? Will enforcement of the "separate unrelated business" rules be delayed until final regulations under Sec. 512(a)(6) are published?
A second major area of concern for nonprofits is the Sec. 4960 excise tax of 21% of compensation over $1 million. The tax applies to the "five highest compensated" employees for any taxable year. The AHA also requests answers to multiple questions.
Here, the AHA asks: If an organization is on a taxable year that is different from the calendar year, how is the employee income allocated between the two periods? Is the reported Form W-2 income the correct number in this situation? What happens if there is a merger with another nonprofit?
Because "medical services" are excluded under Sec. 4960(c)(3)(B), what is the definition of that term? Doctors often supervise delivery of care, train medical residents, teach medical students and do research. Are all of these "medical services?" How does a doctor who is paid by two separate nonprofits calculate the excise tax? When must the tax be paid? How will the statute of limitations be determined?
The Tax Cuts and Jobs Act created both the new UBI rules and the excise tax on remuneration over $1 million. Many large nonprofits will be required to calculate the "separate business" UBI tax and also the "high-compensated employee" excise tax. With the complex business structures of large medical centers, it is essential to have answers to these questions in order to complete the tax returns.
Applicable Federal Rate of 3.2 for May -- Rev. Rul. 2018-12 ; 2018-20 IRB 1 (24 Apr 2018)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2018. The AFR under Section 7520 for the month of May is 3.2%. The rates for April of 3.2% or March of 3.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here