Three Surprising Non-Cash Items IRS Says You Must Report On Your Taxes

To the person on the street, the phrase “for tax purposes” sounds artificial, if not ridiculous. A variety of events can give you taxable income even though you’ve seen no cash. Here are the most common ones you may encounter:

1. Cancellation of Debt Income. One category where you can have income despite an absence of cash involves a discharge of debt (also called cancellation of debt or “COD” income). If you are solvent and are relieved of the obligation to repay a debt (your debt is forgiven), the tax law says you’ve just received the forgiven debt as income. In most cases, lenders are required to issue a Form 1099-C reporting this COD income to ensure you don’t omit it from your tax return. there are a few key exceptions to be aware of: Debts forgiven while you’re in bankruptcy–or if not in bankruptcy when you are technically insolvent with more debt than assets–don’t count as income.

2. Partnerships, LLCs and S Corporations. Phantom income from entities can be a big problem. Partnerships, limited liability companies (LLCs) and S corporations are pass-through entitles. That means they are generally not taxed themselves, their owners are taxed. Each owner receives a Form K-1 that reports his or her appropriate share of the income (or loss) even if that income is retained by the business and not distributed to the owners. You are obligated to report it, regardless of whether you received any payout. The IRS matches K-1s against individual tax returns.

3. Constructive Receipt. If you have a legal right to a payment but elect not to receive it, the IRS can tax you nonetheless. Constructive receipt requires you to pay tax when you merely have a right to payment even though you do not actually receive it. The classic example of constructive receipt is a bonus check. Suppose your employer tries to hand it to you at year end, but you insist you’d rather receive it in January, thinking you can postpone the taxes. Wrong. Because you had the right to receive it in December, it is taxable then, even though you might not actually pick it up until January.

On the other hand, if your company actually agrees to delay the payment (and actually pays it to you and reports it on its own taxes as paid in January) you would probably be successful in putting off recognition of the income until the next year. Yet even in this circumstance, the IRS might contend you had theright to receive it in the earlier year. The IRS does its best to ferret out constructive-receipt issues, and disputes about such items do occur.

The situation would be quite different if you negotiated for deferred payments before you provided the services. For example, suppose you are a consultant and contract to provide personal services in 2009 with the understanding that you will complete all of the services in 2009, but will not be paid until Feb. 1, 2010. Is there constructive receipt? No. In general, you can do this kind of tax deferral planning as long as you negotiate for it up front and have not yet performed the work.

Some of the biggest misconceptions about constructive receipt involve conditions. Suppose you are selling your watch collection. A buyer offers you $100,000 and even holds out a check. Is this constructive receipt? No, unless you part with the watch collection.

If you simply refuse the offer–even if your refusal is purely tax-motivated because you don’t want to sell the watch collection until January–that will be effective for tax purposes. Because you condition the transaction on a transfer of legal rights (your title to the watch collection and presumably your delivery of it), there is no constructive receipt.

If you are settling a lawsuit, you might refuse to sign the settlement agreement unless it states that the defendant will pay you in installments. Even though it may sound as if you could have gotten the money sooner, there is no constructive receipt because you conditioned your signature on receiving payment in the fashion you wanted. That is different from having already performed services, being offered a paycheck and delaying taking it.

Tax issues in litigation are huge, and you should consider the bottom line after taxes, not before taxes. In fact, when settling litigation, you should always address taxes, preferably before you sign. Otherwise you may end up with a Form 1099 you would rather not have. From Forbes: Robert W Woods

Eight Tax Tips about Deducting Charitable Contributions

When you give a gift to charity that helps the lives of others in need, it may also help you at tax time. You may be able to claim the gift as a deduction that may lower your tax. Here are eight tax tips you should know about deducting your gifts to charity:

1. Qualified Charities. You must donate to a qualified charity to be able to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates. To check the status of a charity, visit www.IRS.gov

2. Itemized Deduction. To deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return. If you use the standard deduction, you cannot deduct charitable contributions.

3. Benefit in Return. If you get something in return for your donation, your deduction is limited. You can only deduct the amount of your gift that is more than the value of what you got in return. Examples of benefits include merchandise, meals, tickets to an event or other goods and services. :

4. Donated Property. If you gave property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market. :

5. Clothing and Household Items. Used clothing and household items must be in good condition or better to be deductible in most cases. Special rules apply to cars, boats and other types of property donations. See Publication 526, Charitable Contributions, for more on these rules. :

6. Form 8283. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year. :

7. Records to Keep. You must keep records to prove the amount of the contributions you made during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. For more about what records to keep refer toPublication 526. :

8. Donations of $250 or More. To claim a deduction for donated cash or goods of $250 or more, you must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift. :

Additional IRS Resources available at www.irs.gov

• Interactive Tax Assistant tool

• Publication 561, Determining the Value of Donated Property

• IRS Tax Map

IRS YouTube Videos:

• Fair Market Value of Charitable Donations – available in English | Spanish | ASL

From IRS

Bartering Income: Yes, It's Taxable

Bartering is the trading of one product or service for another. Often there is no exchange of cash. Some businesses barter to get products or services they need. For example, a gardener might trade landscape work with a plumber for plumbing work. If you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business.

Here are a few facts about bartering:

• Bartering income. Both parties must report the fair market value of the product or service they get as income on their tax return.

• Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Exchanges must give a copy of the form to its members who barter each year. They must also file a copy with the IRS.

• Trade Dollars. Exchanges trade barter or trade dollars as their unit of exchange in most cases. Barter and trade dollars are the same as U.S. currency for tax purposes. If you earn trade and barter dollars, you must report the amount you earn on your tax return.

• Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.

• Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040,Schedule C, Profit or Loss from Business.

For more information, see the following resources at IRS.gov

• Tax Topic 420 - Bartering Income

• Publication 525, Taxable and Nontaxable Income

• Filing Your Taxes

• IRS Tax Map

• The Bartering Tax Center

IRS YouTube Videos: Miscellaneous Income – English | Spanish | ASL