IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017

The Internal Revenue Service advised tax professionals and taxpayers today that pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances.

The IRS has received a number of questions from the tax community concerning the deductibility of prepaid real property taxes. In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.  A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.  State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.

The following examples illustrate these points.

Example 1:  Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018.  On July 31, 2017, County A sends notices to residents notifying them of the
assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018.   Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return. 

Example 2:  County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018.  County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019.  However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year.  Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.

The IRS reminds taxpayers that a number of provisions remain available this week that could affect 2017 tax bills. Time remains to make charitable donations. See IR-17-191 for more information. The deadline to make contributions for individual retirement accounts – which can be used by some taxpayers on 2017 tax returns – is the April 2018 tax deadline.

IRS.gov has more information on these and other provisions to help taxpayers prepare for the upcoming filing season.

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Happy Holidays From NFS!



Your friends at Northeast Financial Strategies want you to know how much your loyalty and friendship are appreciated this year and in all years past. At the holiday season, our thoughts turn gratefully to those who have made our success possible. It is in this spirit we say … thank you and best wishes for the holidays and a happy new year.

From all of us here at NFS, THANKS!!

How to Know if the Knock on Your Door is Actually Someone From the IRS

How to Know if the Knock on Your Door is Actually Someone From the IRS

People can avoid taking the bait and falling victim to a scam by knowing how and when the IRS does contact a taxpayer in person. This can help someone determine whether an individual is truly an IRS employee.

Here are eight things to know about in-person contacts from the IRS.

  • The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
  • There are special circumstances when the IRS will come to a home or business. This includes:
    • When a taxpayer has an overdue tax bill
    • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
    • To tour a business as part of an audit
    • As part of a criminal investigation
  • Revenue officers are IRS employees who work cases that involve an amount owed by a taxpayer or a delinquent tax return. Generally, home or business visits are unannounced. 
  • IRS revenue officers carry two forms of official identification.  Both forms of ID have serial numbers. Taxpayers can ask to see both IDs.
  • The IRS can assign certain cases to private debt collectors. The IRS does this only after giving written notice to the taxpayer and any appointed representative. Private collection agencies will never visit a taxpayer at their home or business.
  • The IRS will not ask that a taxpayer makes a payment to anyone other than the U.S. Department of the Treasury.
  • IRS employees conducting audits may call taxpayers to set up appointments, but not without having first notified them by mail. Therefore, by the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.
  • IRS criminal investigators may visit a taxpayer’s home or business unannounced while conducting an investigation. However, these are federal law enforcement agents and they will not demand any sort of payment.

Taxpayers who believe they were visited by someone impersonating the IRS can visit IRS.gov for information about how to report it.

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Happy Thanksgiving from NFS!

Happy Thanksgiving from NFS!



From All of us here at

Northeast Financial Strategies, Inc.

WE GIVE THANKS…

… For Our Families
… For Our Friends
… Four Our Clients
… For Our Communitiy
… For You

HAPPY THANKSGIVING!

Marijuana and the IRS

Currently, 29 states and the District of Columbia allow legal use of marijuana in some form. Several more will join in 2018, while advocates in other states are pushing to add marijuana initiatives to upcoming ballots. Marijuana sales are big business and generate needed tax revenue for the states. Although state law legalizes activities related to its production and sale, marijuana is considered a Schedule I drug under the Controlled Substances Act of 1970. As such, this activity continues to be illegal under federal law. This dichotomy of state and federal laws on the use and sale of marijuana presents unique challenges to the industry. 

Federal Taxation

As far as the IRS is concerned, all income is taxable, even illegal income. IRS publications state that “illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.” When no other crimes could be pinned to Al Capone, the Internal Revenue Service obtained a conviction for tax evasion. As the astonished Capone left the courthouse he said, “This is preposterous. You can’t tax illegal income!” But the fact is income from whatever source derived (legal or illegal) is taxable income.

State legalization often comes with heavy regulation and oversight. In addition, growers, distributors and dispensaries incur costs like any other business. They hire employees and pay overhead costs. For federal tax purposes a legitimate business is allowed to deduct all “ordinary and necessary” costs from revenue in order to compute their taxable income. This is not the case for the trafficking of controlled substances such as marijuana. Although all illegal income is taxable, not all expenses are deductible.


Code Sec. 280E specifically denies tax credits or deductions to businesses trafficking in controlled substances. However, the legislative history does not indicate that Congress intended to deny all of a taxpayer’s business expense deductions simply because the taxpayer was involved in trafficking in a controlled substance. Code Sec. 280E applies to deductions or credits that are taken against gross income. Therefore, the adjustment for cost of goods sold, which is subtracted from gross receipts to arrive at gross income, is allowed by Code Sec. 280E.

Subsequent to Code Sec. 280E, Congress amended Code Sec. 263A and added the UNICAP rules. The IRS has taken the position that costs that are not deductible under Code Sec. 280E are not capitalized under the UNICAP rules. On the other hand, excise tax is neither a deduction from gross income nor a tax credit and the IRS notes that Code Sec. 280E does not apply and is therefore included in the adjustment for cost of goods sold. Obviously the exclusion of credits and deductions results in a material distortion of taxable income and a higher effective rate of taxation.

There is little chance that Congress will act to exempt state-licensed marijuana suppliers from the rules under Code Sec. 280E anytime in the near future. One partial solution to this problem is to allocate appropriate expenses between two separate businesses. For example, a dispensary may also sell paraphernalia or provide counseling services. By segregating business activities, and isolating the sale of marijuana, businesses can use the benefit of the necessary and ordinary business expenses to their other operations. This approach has had mixed reaction from the IRS. Taxpayers should be cautious with this strategy and be diligent in recordkeeping and operations procedures, making certain that the expenses allocated to the legitimate operations cannot be expenses of the marijuana business. Any allocation must be supported in an IRS audit.

Cash

Because dealing in marijuana is illegal at the federal level, banks are prohibited from working with any marijuana business. Banks must adhere to FDIC regulations and refuse to accept money directly related to the sale of a controlled substance. There are some exceptions to this rule in Colorado, where some banks have found ways to work with the marijuana industry. But in general, these business have no access to bank accounts, and therefore, no check writing privileges.

While some businesses in the marijuana industry have begun accepting credit cards, it is still largely a cash-based industry.  Where retailers must deal exclusively in cash, their customers cannot use credit or debit cards for payment. All payments to suppliers, landlords, and employees are in cash. This not only presents a security issue, with large amounts of cash on site, but there is the practical issue of how to make payroll tax deposits and pay the tax on income.

The IRS recognized this problem and now offers a way to pay taxes at participating retail stores using PayNearMe. There is a small fee for the cash payment option. It usually takes two business days to post to the account so a taxpayer should plan ahead to avoid interest and penalties. Payment limits are up to $1,000 per day. This cash option is only available at participating 7-Eleven locations in 34 states. In Colorado, payments can be made in cash at local IRS offices by appointment. In addition, the IRS has also offered cash counting rooms during the recent tax filing season in Denver and Seattle.

Medical Deduction

Finally, there are tax implications for the medical user. Although patients, many with serious or life threatening illness, may derive benefit from the use of marijuana and have the full endorsement of their doctor, they cannot take a deduction for the cost of the cannabis treatment. Payments for illegal treatments are not deductible as a medical expense.

If you have any questions or concerns related to the marijuana industry, please call our office. We are here to assist you.

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