Four Things to Know About Bartering

In today’s economy, sacramento and auburn california small business owners sometimes save money through bartering to get products or services they need. The IRS wants to remind small business owners that the fair market value of property or services received through barter is taxable income.

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. However, the fair market value of the goods and services exchanged must be reported as income by both parties.

Here are four facts on bartering :

1. Organized barter exchanges A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet-based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

2. Barter income Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.

3. Tax implications of bartering Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

4. How to report The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations or Form 1120-S for Small Business Corporations.

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President's FY 2013 budget proposals carry numerous tax changes 

On February 13, the President released his federal budget proposals for fiscal year 2013, and, on the same day, the Treasury released its “General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals” (the so-called “Green Book”). The revenue proposals include over 130 large and small proposed tax changes for businesses and individuals, including new incentives to “insource” jobs, higher taxes for upper-income taxpayers, and the extension of key tax breaks.

Business Tax Proposals 

The budget's proposals for business include the following.  

The payroll tax cut currently in place for January and February of this year would be extended for the rest of 2012.

Qualified employers would be provided a tax credit for increases in wage expense, whether driven by new hires, increased wages, or both. The credit would be equal to 10% of the increase in the employer's 2012 eligible wages (OASDI wages) over the prior year (2011). The maximum amount of the increase in eligible wages would be $5 million per employer, for a maximum credit of $500,000, to focus the benefit on small businesses. For employers with no OASDI wages in 2011, eligible wages for 2011 would be 80% of their OASDI wage base for 2012. The credit would generally be considered a general business credit. A similar credit would be provided for qualified tax-exempt employers. The credit would be effective for wages paid during the one-year period beginning on Jan. 1, 2012.

Employers currently pay FUTA tax at a rate of 6.0% (beginning July 1, 2011) on the first $7,000 of covered wages paid annually to each employee. The rate for the first half of 2011 was 6.2%, including the 6% permanent tax rate and the 0.2% temporary surtax that expired on June 30, 2011. The net federal unemployment insurance tax on employers would permanently revert to 6.2%, effective for wages paid with respect to employment on or after Jan. 1, 2013. Also, under current law, employers in States that meet certain Federal requirements are allowed a credit against FUTA taxes of up to 5.4%, making the minimum net Federal rate 0.6%. States that become non-compliant are subject to a reduction in FUTA credit, causing employers to face a higher Federal UI tax. Effective on the enactment date, short-term relief would be provided, for example, the FUTA credit reduction for employers in borrowing States would be suspended in 2012 and 2013. Other changes would be made. For example, the FUTA wage base would be raised in 2015 to $15,000 per worker.

The 100% bonus first-year depreciation deduction that generally applies only for assets placed in service before 2012, would be extended through 2012.

Use of the last-in, first-out (LIFO) accounting method would be repealed, for tax years beginning after Dec. 31, 2013. Taxpayers required to change from the LIFO method also would be required to report their beginning-of-year inventory at its first-in, first-out (FIFO) value in the year of change, causing a one-time increase in taxable income that would be recognized ratably over 10 years.

For tax years beginning after Dec. 31, 2013, bar the use of the lower-of-cost-or market and subnormal goods methods of inventory accounting, which currently allow certain taxpayers to take cost-of-goods-sold deductions on certain merchandise before the merchandise is sold. Any resulting income inclusion would be recognized over a four-year period beginning with the change year.

An additional $5 billion of credits for investments in eligible property used in a qualifying advanced energy manufacturing project. Taxpayers would be able to apply for a credit with respect to part or all of their qualified investment. Applications for the additional credits would be made during the two-year period beginning on the date on which the additional authorization is enacted.

Replace the existing deduction for energy efficient commercial building property with a tax credit equal to the cost of property that is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting, heating, cooling, ventilation, and hot water systems of the building by 20% or more in comparison to a reference building which meets certain minimum requirements. The tax credit would be available for property placed in service during calendar year 2013.

Effective for bonds issued after the enactment date, make the Build America Bonds program permanent at a Federal subsidy level equal to 30% through 2013 and 28% of the coupon interest on the bonds thereafter. The 28% Federal subsidy level would be intended to be approximately revenue neutral relative to the estimated future Federal tax expenditure for tax-exempt bonds. The eligible uses for Build America Bonds also would be expanded.

Effective after 2013, require employers in business for at least two years that have more than ten employees to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll-deduction basis. If the employer sponsored a qualified retirement plan, SEP, or SIMPLE for its employees, it would not be required to provide an automatic IRA option for its employees. Additionally, the non-refundable “start-up costs” tax credit for a small employer that adopts a new qualified retirement, SEP, or SIMPLE would be doubled from the current maximum of $500 per year for three years to a maximum of $1,000 per year for three years and extended to four years (rather than three) for any employer that adopts a new qualified retirement plan, SEP, or SIMPLE during the three years beginning when it first offers (or first is required to offer) an automatic IRA arrangement. This expanded “start-up costs” credit for small employers, like the current “start-up costs” credit, would not apply to automatic or other payroll deduction IRAs.

For qualified small business stock (QSBS) acquired after Dec. 31, 2011, make the 100% exclusion for qualified small business stock permanent. The AMT preference item for gain excluded under Code Sec. 1202 would be repealed for all excluded small business stock gain. Also, the time for a taxpayer to reinvest the proceeds of sales of small business stock under Code Sec. 1045 would be increased to 6 months for qualified small business stock the taxpayer has held longer than three years.

For tax years ending on or after the date of enactment, the maximum amount of start-up expenditures that a taxpayer may deduct (in addition to amortized amounts) in the tax year in which a trade or business begins, would be permanently doubled from $5,000 to $10,000. This maximum amount of expensed start-up expenditures would be reduced (but not below zero) by the amount by which start-up expenditures with respect to the active trade or business exceed $60,000.

For tax years beginning after Dec. 31, 2011, liberalize the tax credit available to small employers providing health insurance to employees. For example, the group of employers who are eligible for the credit would be expanded to include employers with up to 50 full-time equivalent employees and the phase-out would begin at 20 full-time equivalent employees.

Require corporate business jets that carry passengers to be depreciated over seven years instead of five, effective for property placed in service after Dec. 31, 2012.

Eliminate these tax preferences for oil and gas companies, generally effective after Dec. 31, 2012: investment tax credit for enhanced oil recovery projects, production credit for oil and gas from marginal wells, intangible drilling cost deduction, the deduction for tertiary injectants used as part of a tertiary recovery method, the exception to passive loss limits for working interests in oil and natural gas properties, percentage depletion, and two-year amortization of independent producers' geological and geophysical expenditures (amortization period would be increased to seven years).

Eliminate tax preferences for coal activities beginning in 2013 (expensing of exploration and development costs, percentage depletion for hard mineral fossil fuels, capital gains treatment for royalties, and the Code Sec. 199 deduction).

Tax certain “carried interest” as ordinary income, instead of at the 15% capital gains rate.

Permit IRS to issue generally applicable guidance about the proper classification of workers and to require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under section 530 of the '78 Revenue Act. Penalties would be waived for service recipients with only a small number of workers, if they had consistently filed all required information returns reporting all payments to all misclassified workers and agreed to prospective reclassification of misclassified workers. This proposal would apply on enactment, but the prospective reclassification for those covered currently by section 530 of the '78 Revenue Act would not be effective for at least one year after the enactment date.

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Proposals to Boost U.S. Manufacturing and Insourcing of Jobs 

To encourage businesses to locate jobs and business activity in the U.S., the President's budget proposes to make these changes, among others:  

Effective for expenses paid or incurred after the date of enactment, create a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business. Insourcing a U.S. trade or business would mean reducing or eliminating a trade or business (or line of business) currently conducted outside the U.S. and starting up, expanding, or otherwise moving the same trade or business within the U.S., to the extent that this action results in an increase in U.S. jobs.

Effective for expenses paid or incurred after the date of enactment, deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business would be disallowed. Outsourcing a U.S. trade or business would mean reducing or eliminating a trade or business or line of business currently conducted inside the U.S. and starting up, expanding, or otherwise moving the same trade or business outside the U.S., to the extent that this action results in a loss of U.S. jobs.

Creation of a new allocated tax credit to support investments in communities that have suffered a major job loss event (i.e., when a military base closes or a major employer closes or substantially reduces a facility or operating unit, resulting in a long-term mass layoff). About $2 billion in credits would be provided for qualified investments approved in each of the three years, 2012 through 2014.

For tax years beginning after Dec. 31, 2012, limit the extent to which the Code Sec. 199 domestic production deduction is allowed with respect to nonmanufacturing activities by excluding from the definition of domestic production gross receipts (DPGR) any gross receipts derived from sources such as the production of oil and gas, the production of coal and other hard mineral fossil fuels, and certain other nonmanufacturing activities. Additional revenue obtained from this retargeting would be used to increase the general deduction percentage and to fund an increase of the deduction rate for activities involving the manufacture of certain advanced technology property to approximately 18%.

Retroactively effective after Dec. 31, 2011, make the research credit permanent and increase the rate of the alternative simplified research credit from 14% to 17%.

International Tax System 

Following are highlights of the President's proposals for reforming the U.S. international tax system:  

Defer the deduction of interest expense properly allocated and apportioned to a taxpayer's foreign-source income that is not currently subject to U.S. tax until such income is subject to U.S. tax.

Require a taxpayer to determine foreign tax credits from the receipt of a dividend from a foreign subsidiary on a consolidated basis for all its foreign subsidiaries. Foreign tax credits from the receipt of a dividend from a foreign subsidiary would be based on the consolidated earnings and profits and foreign taxes of all the taxpayer's foreign subsidiaries.

Provide that if a U.S parent transfers an intangible to a controlled foreign corporation (CFC) in circumstances that demonstrate excessive income shifting from the U.S., then an amount equal to the excessive return would be treated as subpart F income.

Clarify the definition of intangible property for purposes of the special rules relating to transfers of intangibles by a U.S. person to a foreign corporation (Code Sec. 367(d)) and the allocation of income and deductions among taxpayers (Code Sec. 482) to prevent inappropriate shifting of income outside the U.S.

Amend the rules that limit the deductibility of interest paid to related persons subject to low or no U.S. tax on that interest to prevent inverted companies from using foreign-related party and certain guaranteed debt to inappropriately reduce the U.S. tax on income earned from their U.S. operations.

Disallow the deduction for non-taxed reinsurance premiums paid to affiliates.

Modify tax rules for dual capacity taxpayers.

Tax gain from the sale of a partnership interest on look-through basis.

Prevent use of leveraged distributions from related foreign corporations to avoid dividend treatment.

Extend Code Sec. 338(h)(16), which provides that (subject to certain exceptions) the deemed asset sale resulting from a section 338 election is not treated as occurring for purposes of determining the source or character of any item for purpose of applying the foreign tax credit rules to the seller, to certain asset acquisitions.

Remove foreign taxes from a Code Sec. 902 corporation's foreign tax pool when earnings are eliminated.

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Tax Changes for Individuals 

The President's plan calls for numerous changes to be made for individuals, including the following:  

For tax years beginning after Dec. 31, 2012, reinstatement of upper-income taxpayers' reduction of itemized deductions and phaseout of personal exemptions.

The expiration of the 2001 and 2003 (EGTRRA and JGTRRA) tax cuts for those with household income over $250,000 a year for joint filers ($200,000 for single taxpayers), effective after 2012.

For dividends received after Dec. 31, 2012, the current reduced tax rates on qualified dividends would expire for income that would be taxable in the 36% or 39.6% brackets. In other words, qualified dividends for upper income taxpayers would be taxed as ordinary income.

For long-term capital gains realized after Dec. 31, 2012, the current reduced tax rates on long-term capital gains would expire for capital gain income that, in the absence of any preferential treatment of long-term capital gains, would be taxable in the 36% or 39.6% brackets. Thus, the maximum long-term capital gains tax rate for upper-income taxpayers would be 20%.

For tax years beginning after Dec. 31, 2012, the tax value of specified deductions or exclusions from AGI and all itemized deductions would be limited to 28% of the specified exclusions and deductions that would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limit also would apply under the alternative minimum tax. The limit would apply to tax-exempt state and local bond interest, employer-sponsored health insurance paid for by employers or with before-tax employee dollars, health insurance costs of self-employed individuals, employee contributions to defined contribution retirement plans and individual retirement arrangements, the deduction for income attributable to domestic production activities, certain trade and business deductions of employees, moving expenses, contributions to health savings accounts and Archer MSAs, interest on education loans, and certain higher education expenses. The change would apply to itemized deductions after they have been reduced by the proposed statutory limit on certain itemized deductions for higher income taxpayers.

The budget proposal would make permanent the American Opportunity Tax Credit (AOTC), a partially refundable tax credit worth up to $10,000 per student over four years of college.

For tax years beginning after Dec. 31, 2012, the expansion of the EITC for workers with three or more qualifying children would be made permanent. Specifically, the phase-in rate of the EITC for workers with three or more qualifying children would be maintained at 45%, resulting in a higher maximum credit amount and a longer phase-out range.

For tax years beginning after Dec. 31, 2012, the AGI level at which the child and dependent care credit begins to phase down would permanently increase from $15,000 to $75,000. The percentage of expenses for which a credit may be taken would decrease at a rate of 1 percentage point for every $2,000 (or part thereof) of AGI over $75,000 until the percentage reached 20% (at incomes above $103,000).

The exclusion for income from the discharge of qualified principal residence indebtedness (QRPI) would be extended to amounts that are discharged before Jan. 1, 2015, and to amounts that are discharged pursuant to an agreement entered before that date.

Estate and Gift Tax Proposals 

Restoration of transfer tax to 2009 levels. The estate, generation-skipping transfer (GST), and gift tax parameters as they applied during 2009 would be made permanent. The top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes. These changes would apply for estates of decedents dying, and for transfers made, after Dec. 31, 2012.  

Portable estate tax exclusion made permanent. The provision allowing a surviving spouse to use the deceased spouse's unused estate tax exclusion, which expires for decedents dying after Dec. 31, 2012, would be made permanent.  

Basis consistency and reporting requirement for donated and inherited property. The basis of property in the hands of the recipient could be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). A reporting requirement would be imposed on executors and donors to provide the necessary valuation and basis information to both the recipient and IRS. These rules would apply for transfers on or after the enactment date.  

Toughened rules for valuation discounts. Certain additional restrictions (“disregarded restrictions”) would be ignored under Code Sec. 2704 in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transferor's family. The transferred interest would be valued by substituting for the disregarded restrictions certain assumptions to be specified in regs. These rules would apply to transfers after the enactment date of property subject to restrictions created after Oct. 8, 1990 (the effective date of Code Sec. 2704)  

Minimum and maximum term for grantor retained annuity trusts (GRATs). A GRAT would be required to have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years. Also, the remainder interest would have to have a value greater than zero at the time the interest is created and any decrease in the annuity during the GRAT term would be prohibited. These rules would apply to trusts created after the enactment date.

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Duration of GST tax exemption limited. On the 90th anniversary of the creation of a trust, the GST exclusion allocated to the trust would terminate. This rule would apply to trusts created after the enactment date, and to the portion of a preexisting trust attributable to additions to such a trust made after that date.  

Coordination of income and transfer tax rules applicable to grantor trusts. The current lack of coordination between the income and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences. New rules for grantor trusts would prevent this by: (1) including the assets of the trust in the grantors' gross estate of that grantor for estate tax purposes, (2) subjecting to gift tax any distribution from the trust to one or more beneficiaries during the grantor's life, and (3) subjecting to gift tax the remaining trust assets at any time during the grantor's life if the grantor ceases to be treated as an owner of the trust for income tax purposes. These rules would apply for trusts created on or after the enactment date and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the enactment date.

Extension of estate tax lien on Code Sec. 6166 deferrals. The estate tax lien under Code Sec. 6324(a)(1) would be extended to apply throughout the Code Sec. 6166 deferral period, effective for estates of decedents dying on or after the effective date and for estates of decedents dying before the enactment date as to which the current law Code Sec. 6324(a)(1) lien period had not expired on the effective date.

Other Proposals 

Many expiring provisions would be extended. The Administration proposes to extend a number of provisions that have expired or are scheduled to expire on or before Dec. 31, 2012. For example, the optional deduction for State and local general sales taxes, the deduction for qualified out-of-pocket classroom expenses, the deduction for qualified tuition and related expenses, the Subpart F “active financing” and “look-through” exceptions, and the modified recovery period for qualified leasehold, restaurant, and retail improvements, would be extended through Dec. 31, 2013.

Reducing the tax gap. The President's budget calls for increases in IRS's tax enforcement and compliance budget to enable IRS to more effectively crack down on “tax cheats and delinquents,” and thereby bring in more revenue, and implement many recent tax law changes. The plan also includes a host of measures to expand information reporting, improve compliance by businesses (e.g., require more forms to be filed electronically), and specific changes to step up collection of taxes.  

The following web links can go to the White House or Treasury websites to access the official release material:

White House FY2013 budget webpage can be viewed at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf .

Treasury press release can be viewed at http://www.treasury.gov/press-center/press-releases/Pages/tg1414.aspx.

Full text of the FY2013 Green Book can be viewed at http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf

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Taxation of Foreclosures

It has been some time since the real estate industry, on a large-scale basis, has had to deal with foreclosures, deeds in lieu of foreclosure, short sales and other distress sales of real property. Unfortunately, distress sales of real property, resulting from a convergence of tightening credit, falling property values, and the consequences of prior lending practices, are all too common currently and do not appear likely to end any time soon.

Seemingly adding insult to injury, owners of real property facing a distress sale, and generally already under financial strain, may be unpleasantly surprised to learn that two types of taxable income can result from a foreclosure, deed in lieu of foreclosure, or short sale: capital gains

and forgiveness of debt (cancellation of debt) income. Both types of income can trigger unexpected taxes for the owner.

This article discusses the income tax consequences to the borrower in the event of foreclosure, the event the borrower simply transfers title to the lender (deed in lieu of foreclosure), and if the borrower sells the property to another in a short sale in which a lender accepts less than the balance due on the loan as payment in full.

Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation?

A         Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is "recourse" (the borrower is personally liable for the debt) or "nonrecourse" (the borrower is not personally liable for the debt).

TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE

What is the difference between a foreclosure and a deed in lieu of foreclosure?

A         A foreclosure refers either to a trustee's sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in lieu of foreclosure is not a special instrument. It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property. In this way the lender can avoid the foreclosure process to regain title to the property

However, a borrower cannot simply transfer title to the lender without the lender's permission. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender's permission.

In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender. The lender must record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code § 1058.5.)

A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens. A foreclosure by a senior lienholder essentially wipes out all junior liens.

How does the owner receive "income" from a foreclosure or a deed in lieu of foreclosure?

A         A foreclosure proceeding, whether through a trustee sale or judicial foreclosure, and a deed in lieu of foreclosure given to the lender are treated the same as a sale for income tax purposes. The foreclosure or deed in lieu of foreclosure is reported on the taxpayer's tax return as a sale or exchange in the year the foreclosure is finalized or the deed in lieu of foreclosure is given to the lender.

In a foreclosure or deed in lieu of foreclosure, the owner can receive "capital gain or loss" as in any other sale of real property (i.e., be subject to capital gains taxation or receive a credit for a capital loss). Additionally, the owner can receive "forgiveness of debt" income. This is also referred to as "cancellation of debt" income. Whether the owner is subject to taxation on this income may depend on whether the debt is "recourse" or "nonrecourse." If the debt is a recourse debt, the owner may be deemed to have received taxable income in the amount of debt that is forgiven by the lender (except in certain situations discussed below where the owner will not be taxed). If the debt is nonrecourse debt, there is no taxable income from forgiveness (or cancellation) of debt, but the owner may be still be subject to capital gains taxation.

What is "nonrecourse" debt?

A         Under California law, a debt is considered "nonrecourse" when a loan is made under either one of the following two circumstances:

(1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or

(2) When the seller carries back financing for all or a portion of the purchase price of any real property.

In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency should the property be worth less than the loan amount.

What is "recourse" debt?

A         Under California law, a "recourse" debt is one in which neither of the two exemptions in Question 4 occurs.

Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee's sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt. In order to go after a deficiency judgment, the lender must go through a judicial foreclosure process.

How is the amount realized (taxable income) calculated for a "recourse" debt in a foreclosure?

A         If the debt is recourse debt, meaning the owner may be personally liable for the debt, the amount realized is calculated in a two-step approach.

First, you take the difference between the Fair Market Value (FMV) of the property (usually the sales proceeds at the judicial foreclosure or trustee's sale) and the Adjusted Basis in the property. Generally, the Adjusted Basis consists of the purchase price of the property plus any capital improvements (less depreciation, if the property is investment property). This difference is the capital gain or loss. If the FMV exceeds the amount of the Adjusted Basis, then the borrower has realized a capital gain at the time of the transfer (foreclosure). If the Adjusted Basis exceeds the FMV, then the borrower has a capital loss.

Second, you take the difference between the amount of the cancelled debt (e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV). This is the forgiveness of debt (cancellation of debt) income and it is treated by the IRS as ordinary income despite the fact that the borrower has received no cash at the time of the foreclosure.

However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, there will be no taxation on this forgiveness of debt (cancellation of debt) income. See Question 9 for a definition of "qualified principal residence indebtedness."

Example One:

The unpaid balance of the loan is                                       $300,000;

The FMV of the property is                                                 $250,000;

The taxpayer's adjusted basis in the property is                 $200,000.

Assume the lender forecloses and will forgive the underlying debt.

Step one:

FMV ($250,000) less taxpayer’s adjusted basis ($200,000)

results in capital gains for the taxpayer.

FMV                                        $250,000

Less Adjusted Basis               $200,000

Capital Gains                           $ 50,000

Step two:

Amount of cancelled debt (amount owed on $300,000 loan) less FMV ($250,000)

is ordinary income to the taxpayer.

Amount Owed                        $300,000

Less FMV                               $250,000

Ordinary Income                     $ 50,000

Note: If a lender chooses to foreclose through a trustee's sale and is barred from obtaining a deficiency judgment by the one action rule under California Code of Civil Procedure Section 580d, it is likely the IRS will still consider that the underlying debt as a recourse debt and it will be subject to debt forgiveness income. (See Rev. Rul. 90-16.)

However, there may be no taxation of this income under The Mortgage Forgiveness Debt Relief Act of 2007.

RECOURSE DEBT

Example Two:

If the FMV at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer.

The unpaid balance of the recourse debt is        $300,000

The FMV of the property is                                  $400,000

The taxpayer's adjusted basis in the property is $200,000

Step one:

FMV ($400,000) less taxpayer's adjusted basis ($200,000)

results in capital gains for the taxpayer.

FMV                                                                     $400,000

Less Adjusted Basis                                            $200,000

Capital Gains                                                       $200,000

Step two:

The debt is fully paid (since the FMV of $400,000 exceeds the unpaid loan amount of $300,000) resulting in no forgiveness of debt.

How is the amount realized (taxable income) calculated for a "nonrecourse" debt in a foreclosure?

A         If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between the greater of:

(i) the FMV or (ii) the entire outstanding debt; and the adjusted basis of the property.

This amount is treated as capital gains and there is no taxation for forgiveness of debt income.

Even though the adjusted basis might exceed the FMV and the outstanding debt, generally no capital loss would be allowed because nearly all nonrecourse debt is associated with a principal residence. (Capital losses are applicable only to investment property.)

NONRECOURSE DEBT

Example:

The unpaid balance of the loan is                                                $300,000;

The FMV of the property is                                                          $250,000;

The taxpayer's adjusted basis in the property is                          $200,000.

Greater of FMV ($250,000) or entire unpaid debt ($300,000)

minus taxpayer’s adjusted basis ($200,000) results in capital gains to the taxpayer.

Greater of  FMV                    ($250,000)

OR

Unpaid Debt                         ($300,000)

Greater of the above             $300,000

Less Adjusted Basis              $200,000

Capital Gains                        $100,000

A         A deed in lieu of foreclosure is treated as a sale and taxed just like a foreclosure. See Questions 6 and 7 above.

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"It's not just about the numbers... it's what's behind the numbers that counts".

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Short Sales

In the over aggressive housing market of the past lenders are made loans in amounts that have become too difficult for borrowers to repay. Some of these borrowers arenot be able to fulfill their mortgage obligations.

When a borrower is no longer in a position to make the mortgage payments, is facing foreclosure and the current market value of the property--including escrow costs--is less than the loan on the property, the borrower may consider a short sale.

This saves the lender the expenses of foreclosure proceedings and from having another REO property on its books.

From the borrower's perspective, the short sale prevents having the foreclosure on the borrower's credit history, and releases the borrower from an obligation that he or she can no longer afford.

In essence, a short sale is a sale transaction subject to a lender's approval in which the lender consents to a sale of the security interest for less than what is owed on the note and accepts the proceeds in full satisfaction of the loan amount.

A short sale requires much paperwork and preparation on behalf of the borrower.

Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender. The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.

I. Lender's Options Upon Borrower's Loan Default

Q1. What options does a lender have on a debt secured by California real property if the borrower does not make the payments on the loan?

There are two types of "foreclosures" available to a lender: a trustee's sale and a judicial foreclosure. Technically, a trustee's sale is not a "foreclosure" but the term has been used for both a trustee's sale as well as a judicial foreclosure.

For certain loans, a lender has no choice and must conduct a trustee's sale. With a trustee's sale, a lender cannot go after a deficiency judgment. A deficiency occurs when the current market value of the property is less than the loan on the property. See Questions 3 and 4 for more details.

The lender may also be able to pursue "guarantors" of the debt who have signed written guarantee agreements (not including the borrowers).

Q 2. What other options may the lender consider instead of foreclosure when the borrower is delinquent?

A Depending on the situation, a lender may consider one of the following:

Loan Workout: Basically, a loan workout is any resolution of a problem loan between the lender and borrower that modifies the original loan agreement. Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement an acceleration clause in the loan.

Deed in Lieu of Foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt. Using this method, the lender saves the costs of foreclosure and the borrower avoids having a notice of default on his/her records.

Short Sale: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. A lender may accept a short sale when the borrower is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender's damages. Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report.

Short Payoff: With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold.

*Note: Some lenders do not differentiate between a short sale and a short payoff.

Q 3. What is a deficiency judgment?

A A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment. See Question 4 for more details.

Q4. Can a real estate lender obtain a deficiency judgment against a defaulting borrower following foreclosure?

A It depends. California has "anti-deficiency statutes" that protect certain borrowers from deficiency judgments. Under those circumstances, a lender would opt for a trustee's sale foreclosure which is quicker and less expensive than a judicial foreclosure. A trustee's sale foreclosure does not involve the courts. Generally, there are five situations in which a deficiency judgment is prohibited:

1        Purchase Money. If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection. (Cal. Code Civ. Proc. § 580b.) Note, however, that should the buyer refinance the home, the new loan is no longer "purchase money." Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.

2        Seller Carryback. If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer. (Cal. Code Civ. Proc. § 580b.)

3        Trustee's Sale. A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure (a non-judicial action). (Cal. Code Civ. Proc. § 580d.)

4        3 Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale. (Cal. Code Civ. Proc. § 580a.)

5        Fair Value Limitations. A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value. (Cal. Code Civ. Proc. §§ 580a, 726 (b).)

When a deficiency judgment is permitted, the lender may obtain one only following a judicial foreclosure, or when the security has become valueless (such as when security for a second trust deed loan is wiped out when the first trust deed lender completes its foreclosure). Holders of a junior deed of trust (second, third, etc.) should note that if the "wiped-out" junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable. (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).)

Q5. Can a lender avoid the foreclosure process and just sue the borrower on the note (La, treat it as an unsecured note)?

A No. A lender cannot sue on a debt secured by a mortgage or trust deed except for a judicial foreclosure. This is called the "one action rule" or "one form of action rule." (Cal. Code Civ. Proc. § 726.) One exception to this rule is if the security for the loan has become "valueless" after the lender's security interest was recorded (e.g., a "wiped out" junior lien holder). In this case, the lender can sue directly on the debt (note) unless the borrower's loan falls into category 1) or 2) in Question 4.

Q6. Why would a lender agree to accept a short sale?

A Lenders may have ample incentive to negotiate a short sale with a distressed borrower. For example, should the lender take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.

A lender will typically evaluate the financial situation of the borrower as well as current market conditions to determine whether or not to agree to a short sale. It is really a business decision for the lender to determine whether it would receive more money by accepting the short sale, or completing a foreclosure, reselling the property, and pursuing personal liability (i.e., deficiency judgment against the borrower and/or claims against guarantors, for loans on which those remedies are available.)

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

II. Effect On Borrowers of Short Sales

Q7.    Does a short sale adversely affect a defaulting borrower's credit rating?

A Yes. Lenders will report the short sale as being settled for less than the full balance. This would show up on the borrower's credit report as a negative mark for seven years. (Cal. Civ. Code

§ 1785.13.)

Q8. Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower's credit report?

A Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower's credit report as a "foreclosure in process," "foreclosure proceedings," "current was 30," or in some other way. Any such terms, or other similar reporting comments, harm that individual's overall credit rating.

Q9. Is the method by which lenders report a short sale a negotiable item?

A Typically, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. However, a borrower may try to negotiate this at the time the short sale is being arranged.

Q10. Are there any special risks to borrowers when negotiating a short sale with their lender?

A Yes. In particular, Realtors who assist borrowers should be aware and warn their clients of one particular risk. If the borrower was less than completely honest when using the stated income method in applying for the loan, this information may become apparent to the lender when the documentation listed in Question 17 (such as tax returns and paycheck stubs) are submitted to the lender in the application for short sale approval. This may put the borrower at great risk of potential liability for their dishonesty.

Are there any tax effects of a short sale?

A Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower's best interest. Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

Generally speaking, any relief of indebtedness from a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale. For more information on the tax implications of short sales, see the CAR legal article, Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales.

III. Short Sale Application Process and Other Issues

Q11 What is the process for applying for a short sale?

A It is always in the best interest of the borrower to keep the lender informed. If the borrower is in default of the loan and is contemplating a short sale, it would be best for the borrower to let the lender know before the foreclosure proceedings are well under way. The lender may or may not grant more time to the borrower to find a buyer. In general, the process goes as follows:

Q12 What documentation will a lender typically require?

A Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:

Starting in April, most U.S. workers will no longer receive their annual Social Security benefit estimates in the mail.

Blame it on the federal budget woes and a shift to the web.

 The annual Social Security benefit statement, which contains a summary of your earnings history and estimated retirement benefits, updated annually with previous years totals, arrives about three months before the worker's birth day.

You now must get your estimate of projected retirement benefits at www.ssa.gov/estimato​r.

Essential to retirement planning

The agency began mailing annual Social Security statements to 125 million workers age 25 and older in 1999, at an annual cost of about $70 million. Last year, it mailed statements to more than 158 million Americans. Over the past decade, the annual statement has become an essential part of personal financial planning, supplying critical information about future retirement income and serving as a stark reminder of the need for personal savings to supplement those benefits.

The agency estimates it will save $30 million by suspending mailings for the remainder of the fiscal year, which ends in September, and will save an additional $60 million next year by restricting mailings to workers 60 and older.

The Fedreal Government saving money... Now that's a good thing!

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

• Pay the balance due on your current-year tax return.
• Make an extension payment (form FTB 3519).
• Make an estimated tax payment(Form 540-ES).
• Pay any amount owed for prior years.
• Pay any bill you receive from us that includes an insert about credit card payments.

Complete your payment information and have it on hand when you are ready to make your payment. You can pay online or by phone:

• Online: www.officialpayments.com

THIS COMPANY IS A FOR PROFIT THIRD PARTY - NOT THE FTB

THEY ARE THE ONLY OPTION LISTED ON THE FTB WEB SITE.  WHY?

• Toll-free: 800.272.9829

Frequently Asked Questions

• Is there a fee?

  Yes. "Official Payments Corporation" charges a convenience fee for this service. The fee is based on the amount of your tax payment as follows:

  • 2.5% of the tax amount charged (rounded to the nearest cent)
  • Minimum fee: $1
  • Example of fee:

    Tax Payment = $753.56
    Convenience Fee = $18.84

  Official Payments Corporation will tell you your fee before you complete your credit card transaction. You can decide whether or not to complete the transaction at that time.

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

• When will my payment be effective?

  Your payment is effective on the date you charge it.

• What if I change my mind after I made the charge?

  If you pay your taxes by credit card and later reverse the credit card transaction, you may be subject to penalties, interest, and other fees imposed by the Franchise Tax Board for nonpayment or late payment of taxes. If you overpay, we will issue you a refund.

PLEASE NOTE: IT IS NOT FREE.

YOU MUST GO THROUGH A THIRD PARTY.

THE IRS DOES NOT ADMINISTRATE THIS PROGRAM, MEANING YOU'RE ON YOUR OWN

HOWEVER THERE ARE BENEFITS IF YOU CAN HANDLE THE FEE$.

Features and Benefits of Paying via Credit or Debit Card:

• It's convenient - taxpayers can e-file or paper- file early and make a payment by credit or debit card later, to delay out-of-pocket expenses. Payments can be made by phone, Internet or when e-filing.
• It's safe and secure - standard, commercial card networks are used. The IRS does not receive or store card numbers.
• These electronic tax payment options are available through service providers.
• There is a fee charged by service providers. Fees are based on the amount of the payment and may vary by service provider (see table below).
• Payment information will not be disclosed for any reason other than processing the transaction authorized by the taxpayer.
• A confirmation number is provided at the end of the phone or Internet transaction.
• The "United States Treasury Tax Payment" is included on the card statement as further proof of payment. The convenience fee will be included on the statement as a "Tax Payment Convenience Fee" (or similar transaction).
• If enrolled in such a program, taxpayers may earn miles, points, rewards or money back from the credit card issuer.

¹ The ATM/Debit card must be a Visa Debit Card, or a NYCE, Pulse or Star Debit Card.
² Flat fee per transaction. 
³ Contact the service provider to receive up-to-date information regarding fees.  The minimum convenience fee is $3.89 for L2G and RBS, and $3.95 for OPC.

¹ Contact the contracted service provider for up-to-date information regarding fees.  The minimum convenience fee is $3.95 for OPC, and $3.89 for RBS.
² Contact the registered service provider for up-to-date information regarding fees.  The minimum convenience fee is $1.25.

• Generally, taxpayers can make a payment through the above-named service providers using an American Express® Card, Discover® Card, MasterCard® or Visa® card.  Taxpayers can visit the service provider's web site for payment method options.
• To make a payment of $100,000 or greater through the Link2Gov Corporation, taxpayers should call Link2Gov at 1-888-729-1040.
• To make a payment of  $100,000 or greater through the Official Payments Corporation (OPC), taxpayers should call OPC's Special Services Unit at 1-888-889-7228.
• To make a payment of $500,000 or greater through RBS WorldPay, Inc., taxpayers should call RBS WorldPay at 1-888-877-0450.
• For more information, or to make a payment, taxpayers should contact the service providers.

• Individual e-file Partners for Electronic Payment provides a description of the service providers' products and special offers.

For more information, refer to the related links at the end of this article.

Credit or Debit Card Convenience Fees

• Taxpayers will be informed of the convenience fee amount before the payment is authorized. This fee is in addition to any charges, such as interest, that may be assessed by the credit card issuer. Taxpayers must agree to the terms and conditions of the payment including acceptance of the convenience fee before the transaction is completed.
• The Taxpayer Relief Act of 1997 authorizes the Treasury to accept these payments for federal taxes but prohibits the IRS from paying a fee or consideration to service providers for processing these transactions.
• In order to provide taxpayers this option, IRS has entered into non-monetary contracts and agreements with service providers.
• The service providers act in the capacity of  merchants and are necessary intermediaries in transaction processing. The service providers validate card numbers and expiration dates, obtain authorization from the card issuers and issue confirmation numbers to taxpayers at the end of the payment transaction. The service providers forward tax payment information to the IRS for posting to taxpayer accounts.
• The IRS does not receive or charge any fees for card payments. Additionally, the IRS cannot pay or reimburse any convenience fee to taxpayers. Convenience fees are charged by the service providers.  The fee is a deductible business and individual expense.  For an individual expense, taxpayers may deduct the fee as a miscellaneous itemized deduction subject to the 2% limit on Form 1040, Schedule A (see Publication 529).

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

How to Make a Payment

• The integrated e-file and e-pay credit card option is available through a number of tax preparation software products and tax professionals. For additional information about e-filing and paying all at once (including convenience fees and accepted credit cards), taxpayers can refer to tax preparation software or a tax professional.
• When paying through tax preparation software, users will be prompted to enter the necessary credit card information.
• Pay by phone and Internet options are available through service providers.
• When paying by phone, a recorded script will prompt taxpayers through the call.
• When paying by Internet, taxpayers will be prompted to complete the necessary entry fields.

The following information is needed in order to complete a card payment:

Facts You Need to Know:

• Payments must be made electronically through tax preparation software, a tax professional or a card payment service provider via phone or Internet.
• Cards should not be forwarded to the IRS with the return or form.
• Account numbers should not be written on the return or form.
• The payment date will be the date the charge is authorized.
• Taxpayers can make partial payments by phone or Internet if the tax preparation software being used allows this.
• Multiple payments cannot be made through tax preparation software.
• Taxpayers who e-file and e-pay should re-file rejected returns promptly in order to ensure timely payment.  Otherwise, the payment may have to be re-authorized through the card issuer.
• Federal tax deposits cannot be made through these options. Amounts not properly deposited may be subject to a 10% penalty for failure to deposit through an authorized financial institution or EFTPS.  It is the responsibility of the employer to ensure that all taxes are paid or deposited correctly and on time.  Please refer to Publication 15 (Circular E), Employer's Tax Guide for additional information explaining the requirements for paying employment taxes.
• The IRS does not issue an immediate release of a Federal Tax Lien when a credit or debit card payment is made to full pay the tax liability.  Please refer to Publication 1468 for the recommended payment option when an immediate release is necessary.

Cancellations, Errors and Questions:

• Generally, payments cannot be cancelled.
• Taxpayers can call the card issuer or service provider's customer service number to report problems such as unauthorized charges or concerns regarding payment errors.
• Taxpayers can contact the IRS at 1-800-829-1040 to report problems concerning the amount of tax owed or any other matter concerning the tax return.
• Taxpayers can also write to the IRS office where the return would be mailed regarding income tax payment concerns. The impacted taxpayer's SSN or EIN, payment tax year, and payment method should be included.
• In the event the service provider fails to forward the tax payment to the Treasury, the taxpayer will be responsible for the tax payment and for any penalties and interest.
• Voluntary or estimated payments such as Form 4868 and Form 1040-ES payments that result in an overpayment will be resolved through normal administrative procedures.
• In most instances, the Treasury will refund an overpayment to taxpayers once the return is received and processed. An overpayment may be used to settle or offset an existing debt on the taxpayer's account.

Sacramento - The Franchise Tax Board (FTB) today announced special tax relief for California taxpayers affected by the recent winter storms in California.

The December 17, 2010, through January 4, 2011, storms were declared a Federal disaster in 10 counties on January 26, 2011. Affected taxpayers are able to claim disaster losses in the current or the prior tax year. Claiming the loss on a previously filed tax return allows FTB to issue refunds quickly.

Counties declared a major disaster area are: Inyo, Kern, Kings, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara, and Tulare counties.

Taxpayers claiming the disaster loss should write “California Winter Storms 2010” in red ink at the top of their tax return to alert FTB to expedite the refund. If taxpayers are e-filing, they should follow the software instructions to enter the disaster information. Taxpayers can get FTB’s amended 2009 tax return or original 2010 tax return at FTB’s website, ftb.ca.gov.

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing. 

It's not about the numbers...it's what's behind the numbers that counts.

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Taxpayers needing copies of lost or damaged state returns should complete Form FTB 3516, “Request for Copy of Tax Return,” available online. Disaster victims can receive copies of tax returns for free. Print “California Winter Storms 2010” in red ink at the top of the request.

If Charlie Sheen tries to deduct his hookers from his taxable income, he won't be stretching the preposterous. 

A retired Brooklyn lawyer deducted prostitutes, massages, pornography and other sex-related activities were claimed as "medical expenses. The lawyers disallowed deductions included $40,588 for "therapeutic sex," $70,776 for "massage therapy to relieve osteoarthritis and enhance erectile function through frequent orgasms" not to mention $2,173 for "pornography to enhance sexual performance in lieu of taking Viagra."

Patronizing a prostitute, the tax court somberly noted, is illegal in New York. Neither the lawyer nor any other taxpayer can claim a deduction for an illegal treatment (no matter how "therapeutic"). The court, however, did affirm the lawyer's right to deduct $6,308 in doctor visits, prescription drugs and other medically-justified services.

Every tax season has its "over the top" deductions. Lately:

Thong underwear. An Ohio TV news anchor claimed as her work-related deductions teeth whitening, manicures, pedicures, gym fees, clothing, dry cleaning, self defenses classes, subscriptions to Glamour and Cosmopolitan, and lingerie--including thongs--some of it purchased from Victoria's Secret. Her claimed deductions came to $167,356 in all. The U.S. Tax Court ruled against her, judging them to be personal expenses.

No mater how funny they sound,  sometimes these deductions are legit.

The IRS, for example, has permitted a farmers to deduct the depreciation of ostriches. The cost of Navajo healing ceremonies likewise are deductable, provided they have been prescribed for a medical purpose or to alleviate a medical condition. A professional bodybuilder may deduct the cost of his gym membership.

Ordinary and necessary business expenses are deductilbe against income.  Who is to say what is "ordinary". Do you want the IRS to define "ordinary"?  It may be a very narrow definition of ordinary.  Do you want Charlie Sheen to define "ordinary"?  It may be xxx.

Islip + Company CPAs offer personalized service to help you with these issues.  Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.  With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing. "It's not just about the numbers... it's what's behind the numbers that counts". Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Stripper Chesty Love was permitted to deduct the cost of her breast implants, which were determined by the IRS to meet the test of being "ordinary and necessary" for her work.

Tax Payers claim "over the top" deductions because it's a form of protest, or because they believe, mistakenly, that their own notions of equity match the IRS's. In the last category he puts the female TV anchor, whose own personal test of something's being business-deductable was to ask herself (according to her own account): Would I be buying this if I didn't have to wear it to work?

The IRS determined that the clothing, while appropriate to the workplace, was not inappropriate for the anchor's personal use, and, as such, ought to be treated as a personal expense.

So Charlie can deduct his Hookers' as independent contractors as long as their professional service provided is not illegal and necessary for Charlie Sheen's business purpose.