New Numeric Codes Required to Claim AZ Tax Credits

The AZ Department of Revenue (AZDOR) announced today that effective for 2018 tax returns, the AZDOR will require taxpayers to enter the identification number assigned to the school or charity by the AZDOR to claim the school tax credit, the qualifying charitable organization tax credit, and the qualifying foster care charitable organization tax credit. Those announcements and directions for locating the number can be found at:

https://azdor.gov/news-events-notices/news/notice-taxpayers-claiming-arizona-school-tax-credit

https://azdor.gov/news-events-notices/news/credits-contributions-qcos-and-qfcos-form-321-and-form-352

Don't forget that these donations still qualify for the AZ Tax Credit, but will no longer qualify as a federal deduction if used for the AZ Tax Credit.

Deadline for Tax Refunds for Combat-Injured Disabled Veterans

The Internal Revenue Service, in a much appreciated move, alerted combat-injured disabled veterans that they have a limited amount of time to claim a refund for lump sum disability severance payments received after 1991which were included as income on their income tax return. Congress passed the Combat-Injured Veterans Tax Fairness Act in 2016 which exempted these payments from income tax.

Eligible combat-injured disabled veterans should have received a letter from the Department of Defense with information on how to claim the refund. If a veteran did not receive such a letter and believes he or she is eligible, the veteran should visit this DFAS page  or the IRS alert page for information on how to claim the refund.

Veterans must make their claim by the later of one of these dates:

• 1 year from the date of the Department of Defense notice
• 3 years after the due date for filing the original return for the year the disability severance payment was made
• 2 years after the tax was paid for the year the disability severance payment was made

For many veterans, one year from the DOD notice is the latest date which means the veteran needs to act quickly.

To claim the refund Veterans are supposed to file an Amended Tax Return, Form 1040X. This is problematic since some payments were made as long ago as 1991, and the veteran may not have the 1991 Income Tax Return any longer. A copy of old tax returns can be requested, but takes time to receive and costs $50 for each copy. Newer tax returns (the current year and prior 3 years) can be obtained online at no cost. Therefore, the IRS has proposed a simplified method in which the veteran can choose to claim a standard refund amount instead of the actual refund amount. The standard refund amount is set as follows:

• $1,750 for tax years 1991-2005
• $2,400 for tax years 2006-2010
• $3,200 for tax years 2011-2016

To claim a refund, the veteran must file a Form 1040X for the appropriate year and write "Veteran Disability Severance" across the top of page 1 of the Form 1040X. To find the correct form, simply put Form 1040X and the year in your search engine. The veteran must attach the following documentation:

• Documentation showing the amount of and reason for the disability severance payment (DD214 

OR

• a notice mailed to the veteran by DOD or DFAS explaining the severance payment at the time of the payment) or a determination that your injury or sickness was caused by: 1) direct result of armed conflict, 2) simulated war exercises, 3) an instrumentality of war, or 4) extra -hazardous service. If the veteran has died, the surviving spouse or heir may file the claim and must attach Form 1310.

Mail the completed 1040X to:

Internal Revenue Service

333 W. Pershing Street, Stop 6503, P5

Kansas City, MO 64108

These directions are found in IRS Publication 3 on page 7.

Questions? Please call us at (928) 778-3113 or contact us at Team@PrescottTax.com. 

Prescott Tax and Paralegal discusses what business entity is right for your new Prescott business

Selecting the right business entity is an important decision. In fact, it is a decision that can impact personal asset protection and income tax obligations. Prescott Tax and Paralegal discusses what business entity is right for your new Prescott business. Let’s consider some of the different options:

Sole proprietorship. Sole proprietorships are the most common and easiest business structures to form. Sole proprietorships are only allowed for businesses with one owner, and there is no legal distinction between the owner and the business in a sole proprietorship. The main benefit is the ease of set up and that the income is reported on the owner's personal income tax return. It is important to understand that in a sole proprietorship, an owner’s personal assets are at risk and can be used to pay the business’ debts or obligations in the event the business fails, or if a lawsuit is filed.

Partnership. A partnership is owned by two or more persons. Similar to a sole proprietorship, a partnership is easy to form with minimal upfront costs. A partnership generally requires a written partnership agreement which is a contract between the partners describing how they will operate and potentially dissolve their business. Unless it is a limited partnership, the partners are personally liable for business debts. A partnership files a separate business income tax return, and each partner is given a Form K-1 to report that partner's share of the income on that partner's individual income tax return.

LLC (Limited Liability Company). LLCs have increasingly become  popular. Created and governed entirely under state law, LLC owners must elect how they want to be taxed by the IRS (e.g. as a sole proprietorship, partnership, s-corporation, or even a c-corporation). LLCs limit the liability of the members, and are often a good way to protect assets. For example, holding a rental property within an LLC can minimize risk to personal assets in the event the renter files a lawsuit against the owner (LLC) of the property.

S-Corporation. S-Corporations require the working members to take wages from the business, unlike a sole-proprietorship or partnership. This means that the S-Corporation must file and pay quarterly payroll taxes, and issue W2s to those receiving wages. However, it has the advantage of lowering self-employment taxes by only taking a portion of the income as wages and the remainder as a dividend.  Self-employment tax is 15.3%. For example, if the business net income is $300,000 and the owner pays himself wages of $180,000, the remaining $120,000 is not subject to self-employment tax resulting in a savings of $18,360. The warning here is that the wage paid to the owner must be "reasonable" given the facts and circumstances.

C-Corporation. This is by far my least favorite structure. First, if you organize as a corporation at the state level in Arizona you must file an annual report and pay an annual fee which is currently $45. The C-Corporation must file its own income tax return. Income is taxed at the corporation level and the tax rate is currently 21%. Any dividends paid to the shareholders are taxed again at the shareholder level. While it might seem attractive to some because of the 21% tax rate, the double taxation on dividends may make this less attractive.  This is the only structure that does not qualify for the new Qualified Business Income Deduction which is another drawback.

At Prescott Tax and Paralegal we can give you information and tax advice on the different types of entities. The type of business entity is a question of both tax and law. We don't give legal advice, but we can give you information so that you can make an informed decision. Then we can help prepare the paperwork to correctly form your new business. We can prepare documents statewide. We would love to discuss your new business with you. To schedule a consultation, call us at 928-778-3113. Learn more about us at http://www.PrescottTax.com.

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Prescott Tax and Paralegal, your tax resolution specialist in Prescott, explains your options when you are in tax trouble

A letter from the IRS is rarely a good thing. One of the most dreaded letters to get from the IRS is the CP90 – Final Notice Before Levy. It is a final warning shot to scare you into paying and should not be ignored. If you find yourself on the receiving end of an IRS letter, Prescott Tax and Paralegal, your tax resolution expert in Prescott, wants you to be aware of your options.

After an IRS final notice, you could:

• Pay in full – most people would have already done that if they could have afforded it
• Sign on for an installment agreement on your own - with penalties and interest so excessive it feels like it will continue until you die.
• Ignore them - and wait for terrible consequences like garnished wages and tax liens. Don’t do this, ever.
• Contact your tax resolution professional to see what your resolution options are.

The CP90 intends to intimidate you into calling the IRS so the tax man can take as much as possible from you even if it leaves you in dire financial straits, unable to pay your bills or support your family.

A better option is to work with a certified tax resolution expert that can negotiate on your behalf for better results. A tax expert can pursue resolutions that would be difficult - if not impossible - to negotiate on your own. Here are four options to deal with tax debt.

Offer in Compromise (OIC): An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. It can be far more reasonable than an IRS installment agreement, but you have to see if you qualify based on your unique financial situation and specific case.

Installment Agreement (IA) or Partial Payment Installment Agreement (PPIA): These are well-structured installment agreements that can slash penalties by 50%. The IA is an agreement to make monthly payments on what’s owed in full while a PPIA lets you make a monthly payment that does not pay the total owed. You must qualify for a PPIA based upon your financial circumstances. These agreements generally run 6 to 72 months.

Penalty Abatement (PA): This agreement strips away penalties tacked onto your tax balance. Penalties include failure-to-file, failure-to-pay, and failure-to-deposit (for business owners). If you’ve never had a penalty before, a first-time abatement (FTA) penalty waiver may apply. Otherwise, your tax relief consultant can fight for a reasonable cause abatement if any of the following apply:

• Illness, death, or incapacitation of the taxpayer or their immediate family
• Fire, casualty, natural disaster, etc. affecting the taxpayer
• Inability to obtain records and documents
• Currently Not Collectible (CNC)

In cases of extreme financial hardship, your tax rep can argue that you can’t afford to pay anything. With this option, your tax debt goes on the back burner, and you make no monthly payments although penalty and interest keep accruing. The big advantage of CNC is that the 10-year statute of limitations on collection keeps ticking so you might be able to ride it out and pay nothing on the tax debt.

If you’ve received an IRS final notice or threatening letter, don’t ignore it. Instead, contact Prescott Tax and Paralegal to speak with a tax resolution specialist in Prescott to get the IRS off your back for good. To schedule an appointment, call us at 928-778-3113. Learn more about the services we offer at http://www.PrescottTax.com.

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