MERCHANTS ALLOWED TO CHARGE EXTRA FOR CUSTOMER USE OF CREDIT CARDS – WHAT DOES THIS MEAN FROM A TAX PERSPECTIVE The media reported due to a recent settlement in federal court that retailers in 40 U.S. states can now charge up to 4 percent extra on a sale when consumers pay for goods and services with a credit card. The fees are illegal in California, New York, Texas and seven other states.
In plain terms, what this means is that the underground economy will thrive. When customers use credit cards, merchants have a tough time making this income reflected on credit cards disappear. Thus, there was better tax reporting by merchants of income. Now, customers will be disinclined to use credit cards because of the extra fees. Accordingly, merchants will take in more cash and since there is no “audit trail” as there would be with credit cards, merchants will probably under-report their income and pocket the cash claiming that there was breakage, theft, etc. of the items for sale. While no one knows what the chances of audit will be for these “cash” merchants, it most likely will be low because of the vast number of merchants in this country. But cash is a very interesting commodity – without depositing it, cash does not earn any interest. A merchant cannot deposit the cash since this would expose him, it or her to audit as to the source of the funds; so the merchant must spend it. Thus, the underground economy will increase. So, when you see those people with big wads of cash at restaurants, resorts, etc.; there is a good chance that these individuals operate a “cash” business.
If you have any doubt that merchants are charging extra for credit card transactions, go fill up at your car with gas at your local gas station and use a credit card – you will see you are paying extra for this privilege.
SIMPLIFIED SAFE HARBOR FOR CLAIMING A HOME OFFICE DEDUCTION On January 15, 2013 IRS issued Revenue Procedure 2013-13, I.R.B. 2013-6 to detail a new optional method for claiming a home office deduction starting January 1, 2014. For individuals starting a new business, this simplified procedure could prove to be a gift from the heaverns. Instead of keeping detailed records under Form 8829’s actual expense method where actual costs such as insurance premiums, repairs, painting , etc. expended on a home office during a taxable year are computed and listed, all a taxpayer has to do is calculate the square footage of the home office and then multiply that figure by $5.00 a square foot under the optional method. However, under the optional method, the deduction is limited to only 300 square feet or $1500 for each tax year and there is no carryover of any unused home office deduction from one year to the next in the event there is not enough income generated from the business in a taxable year to cover this computation of home office expense.
To claim a home office deduction either under the optional or actual cost method, two tests must be satisfied: a regular and exclusive use of the space and principal place of business.
Regular and exclusive use of space The space claimed for the home office must be used regularly and exclusively for business. The space cannot serve a dual purpose like the kitchen table for meals and then the office at other times. The space need not be a full room or partitioned and one can have a home office in a trailer, boat, basement, etc. A separate structure such as a free standing garage can qualify. There must be business use of the space – one just cannot make phone calls and send e-mail. If an employee uses the space for an employer’s business, it must be for the convenience of the employer, ie, the employer requires the employee of work out of the employer’s office. The fact that the employee takes work home or is on a flex schedule will not count.
Actual cost method There are two types of costs, direct and indirect. Direct costs would be actual work on the space such as painting it, installing light fixtures, etc. Indirect costs would be allocating costs applicable to the whole home such as mortgage interest, real estate taxes, utilities, etc. This allocation is made on the basis of square footage used by the business. So, if the residence is 2,000 square feet and the home office occupies, 200 square feet; then 10% of these indirect costs would be allocated.
Optional method The optional method saves the taxpayer from computing the direct and indirect costs of operating the home. Accordingly, Taxpayers using the optional method cannot claim any deduction for depreciation for the portion of the home which is used for home office. If the optional method is used, there are certain requirements to be met. For instance, an employee who receives reimbursement from his or her employer for home office expenses cannot utilize this optional method. Taxpayers can elect each year which method they wish to use, optional or actual. Thus, whatever results in the highest tax deduction in a particular year will be used, however, once a taxpayer makes an election for a taxable year, it cannot be changed until the next year.
Type of businesses utilizing home offices While it is impossible to categorize the types of businesses having a home office, there are certain general ones. For instance, a salesman might store samples at home; a tradesperson who works in the field but does billing and other administrative work at home would qualify. Likewise, a professional who has a regular office for conducting business but meets clients at home for private conferences, would qualify.
Where the home office deduction becomes tricky is for those individuals who operate real estate and invest in securities. If one manages rental real estate there is a home office deduction; if one just manages an investment in real estate these is no deduction. With securities, the issue is clearer in that if one is a trader in securities (ie, the taxpayer engages mainly in short term trades with income derived from the sale of securities), this activity sustains a home office deduction,. The investor, who is not entitled to a home office deduction, is one who deals with long term investments and earning primarily interest and dividends. However, with both securities and real estate, the intent of the taxpayer is an important consideration.
When one considers that in 2010, nearly 3.4 million taxpayers claimed a home office deduction,
this change by IRS will make life simpler for taxpayers with the result being that there will probably be more taxpayers claiming a home office deduction for their business. IRS in the past, when taxpayers claimed a home office deduction, would in many cases audit them making them support the deduction by producing actual receipts for the expenses for insurance, repairs, etc. In 2014, under the optional method, the chance of audit will be considerably reduced since the taxpayer does not have to set forth the expenses, only a calculation of square footage.
WORKER CAN SIMULTANEOUSLY BE BOTH AN EMPLOYEE AND INDEPENDENT CONTRACTOR OF A FIRM The IRS issued Information Letter 2012-0069 which states that a professional consultant working for a company on two separate consulting jobs can be both an employee of the company where social security and witholding taxes will be deducted and an independent contractor where the taxpayer will just receive a Form 1099 for the work done. Unfortunately, there is no magic formula to detail how this event could occur. What has to be examined are three basic relationships – behavioral control over the worker; financial controls, and the relationship of the parties. For behavioral control, a determination must be made as to how much the business has to direct and control the worker performing his or her assigned tasks. In the case of the financial control, the examination focuses on the ability of the business to control the financial aspects of the worker’s activities – the method of payment, if the worker incurred unreimbursed expenses, did the worker make a significant financial investment to do the work and the worker’s ability to make a profit or loss. For “relationship of the parties,” the factors which are evaluated are how the parties represent the relationship to others (employer-employee or independent contractor); agreements between the worker and the business regarding how the worker is paid and how the parties perceive themselves – employer-employee or independent contractor.
Rather than leave the situation up to guess work, a business can file a Form SS-8 with the IRS to request determination of the status of the worker.
PRE-NUPTIAL AGREEMENTS AND LONG TERM CARE When second marriages occur, lawyers often suggest that the spouses enter into a pre-nuptial agreement to preserve the assets of each spouse. Or, as the phrase goes: “The first marriage is about love, the second is about money.” When two people marry, each has a right for a spousal share of the other’s estate on death and if the deceased spouse does not provide properly for the surviving spouse, the survivor has a right to elect against the deceased spouse for the survivor’s share (for instance, in New York State, the statutory elective share for a widow without children of the marriage is $50,000 plus one-third of the net estate and testamentary substitutes). So that each spouse can leave their estate to people they choose such as their children, usually the pre-nuptial agreement provides for each spouse to waive the right of election against the other.
However, there is a trap for the unwary when Medicaid is involved. Michael Long, a noted elder care lawyer with offices in New York, New York, advises, that Medicaid is not required to honor pre-nuptial or post-nuptial agreements and will consider assets belonging to either spouse as available in determining the eligibility of one or both spouses, regardless of these agreements or agreements entered into to address separation and financial responsibility of legally responsible relatives. There is even a law in New York, rarely invoked, that allows Medicaid to pursue a former spouse when divorced from the other spouse who is attempting to apply for government assistance that is means tested like Medicaid.
The right of election, when it can be exercised after the death of the first spouse, or more specifically the failure of the surviving spouse to exercise his or her right of election is considered an uncompensated transfer of an asset available to that surviving spouse, and subject to a period of ineligibility for the surviving spouse for institutional Medicaid services. This is the case even if the surviving spouse entered into an agreement not to pursue this right. The uncompensated transfer subject to a Medicaid penalty is applied not at the time of agreement but when the surviving spouse has the statutory right to pursue the statutory election after the death of the first spouse.
So suppose John and Jane executed a pre-nuptial just before being married in 2007 wherein each waived their rights of election against each other. After the marriage they lived in New York City. John died on January, 2013 and Jane fell on February 15, 2013 necessitating her to be admitted to a skilled nursing home. At the time of John’s death, the Medicaid average regional nursing home care rate is $10,957. Jane’s elective share is calculated at $109,570. Jane will be ineligible for nursing home Medicaid for 10 months ($109,570 divided by 10,957 = 10 months). Thus, she must provide her own funds or have a long term care policy to cover the 10 months of care. This denial of Medicaid coverage is true even if Jane is otherwise financially able for Medicaid.