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You make the callBy: NATP Research
September 16, 2021

Question: Joan and Rowland filed their Form 1040 jointly for the duration of their marriage as married filing jointly. Rowland died in early 2020 and Joan remarried in late 2020. Does Joan file her 2020 federal tax return with Roland or with her new husband?

Answer: Joan will file her Form 1040 with her new husband. They will file married filing jointly or married filing separately. When your spouse dies during the tax year, the surviving spouse is considered married for the whole year for federal tax purposes, unless the surviving spouse remarries. If the taxpayer remarries before the end of the tax year, the taxpayer will file a joint return with the new spouse.

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Content creators – who are they and why do they matter?By: National Association of Tax Professionals
September 16, 2021

There’s a new occupation that’s been floating out in the news for a bit now and it has to do with social media – content creators.

Content creators (considered to be social media influencers by some) are those who create content for social media platforms or websites (think TikTok, Instagram, blogs, Patreon, etc.) with the intent to generate revenue – be it in the form of physical income or in exchange for other goods or services.

You may be asking yourself, why do I need to be concerned with content creators? Based on the number of content creators (in the millions!), there is a good chance practitioners have clients who are receiving revenue from content creation and distribution platforms. More venues to create and post content will likely be popping up as time progresses.

Many of these clients may not realize the revenue (social media money) generated from these platforms is taxable. The Form 1040 instructions explain gross income means income received in the form of money, goods, property and services that aren’t exempt from tax. Gross income would also include revenue received from sources that could be considered illegal. On the flip side, the expenses clients incur to generate the revenue may also be deductible.

Typically, salaries and other ordinary and necessary expenses incurred in carrying on an illegal business are generally deductible unless they go against public policy. No expenses incurred in connection with trafficking of controlled substances or illegal drugs may be deducted. There are a number of court cases, which we won’t go into in this blog, that discuss when deductions were allowed or disallowed for ordinary and necessary business expenses for activities that are considered illegal.

For example, the Supreme Court allowed a bookmaker to deduct rent and salaries of a bookmaking activity in a state where bookmaking was illegal, and the acts performed by the employees and the payment of rent for use of the premises in bookmaking operations were also illegal (Com. vs. Sullivan, Neil). Facts and circumstances will dictate what, if any, expenses an illegal business is allowed to deduct.

As a practitioner the first step is to make sure you are aware of any social media money generating opportunities your client may be engaged in. This information may come from client interviews or from a question being asked on the year-end tax organizer many clients are asked to complete.

Once it is determined the client is generating revenue from social media, the difficult task of determining if the activity rises to a level of a trade or business or is a hobby must be undertaken. Facts and circumstances of every situation will determine if an activity is engaged in for profit, and thus rises to the level of a trade or business.

Remember, hobby income is still taxable, however the miscellaneous itemized deduction for the related expenses is suspended through 2025. The IRS offers tips to help decide if the activity is a hobby or business.

To be engaged in a business, there must be a profit motive. There are generally nine factors to consider when determining if an activity is engaged in for profit:

  1. Manner is which activity is conducted
    • Is there a profit motive
    • Are there complete books and records? Are they maintained? Are they accurate?
    • Is there advertising, marketing, a website or other support to show activity is treated as a business?
    • Is there a budget? Business plan?
  2. Taxpayer’s or adviser’s expertise
    • Is competent advice sought?
    • Is advice followed?
    • What is taxpayer’s prior experience in the business?
  3. Time and effort
    • How much time is devoted to the activity?
    • Are others employed or consulted to assist?
  4. In lieu of operating profits, is there a reasonable expectation of asset appreciation?
  5. Has the taxpayer previously turned a similar unsuccessful business into a profitable one?
  6. Has the activity previously generated significant profits?
    • What steps are being taken to generate profits?
  7. Are profits substantial in relation to any losses and the taxpayer’s investment?
    • If there is a loss from the activity, is it outside of the taxpayer’s control?
  8. Is the activity a meaningful part of the taxpayer’s overall sources of income?
    • Is money from the activity relied on to live and pay bills?
  9. Do profit motives outweigh any elements of personal pleasure or recreation associated with the activity?

These are the same factors a practitioner would look at with a client when the client is engaged in an activity outside of social media. If it is determined the client is not engaged in a trade or business, remember, hobby income is reported on Schedule 1 (Form 1040), Line 8. It is not subject to SE tax because a hobby is not considered a trade or business. If it is determined the activity rises to a level of a trade or business, then it needs to be determined what the appropriate entity type is for the activity – Schedule C or corporation – and the correct reporting would follow.

As is the case in the tax profession, change is always happening. For some practitioners, this could be an exciting area to learn more about and develop a niche serving clients as a consultant, as there is a crossover with the expertise many have developed in helping businesses and their owners.

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NATP helps members with more than just tax updatesBy: National Association of Tax Professionals
September 8, 2021

To run a successful tax business, it’s important to not only stay up to date on changing tax law, but also continuously add more services while finding ways to cut cost and increase efficiency. If that sounds a bit overwhelming, you’re not alone. That’s why NATP makes it a priority to support you with ALL aspects of your career. NATP offers business practice education and other member benefit webinars, available to our members to advance their practice.

All webinars are on-demand education, allowing members to easily and conveniently strengthen their knowledge base with the click of a button.

Start learning now with these member-exclusive webinars:

  • Due Diligence On-Demand Webinar – From confirming the residency of a client’s child to establishing the eligibility of a credit, the tax professional must gather more information than ever before. This webinar addresses how some professionals struggle with exercising due diligence and invading a client’s right to privacy. (Note: a 2021 version of this webinar will be released in December.)
  • Ethics – This webinar summarizes key parts of Circular 230, common tax preparer penalties and key due diligence requirements. Additionally, the webinar will review actual ethical-related court cases.
  • How to Fire a Client – Client breakups are hard no matter what. You don’t want to lose revenue or risk the client spreading bad publicity about you. This course will focus on how to handle a breakup.
  • Filing Form 1040-X After IRS Calculations On-Demand Webinar – In this webinar, we’ll cover common scenarios that you’ll experience post-tax season. After, we’ll provide an overview of completing a Form 1040-X, Amended U.S. Individual Income Tax Return.
  • Casualty Loss Deduction for Federally Declared Disaster Areas – With recent wildfires, hurricanes and other natural disasters, taxpayers may deduct those losses if they have not been reimbursed by insurance or otherwise. This webinar will walk through the steps of reporting the loss on Form 4684, Casualties and Thefts.
  • Top 5 Reasons to Become an EA – In this webinar, the experts at Gleim, NATP’s trusted partner, explain the many other reasons becoming an EA would be beneficial for your practice and yourself. You’ll also learn the steps to take to begin this journey, details about the EA exam and even a suggested study schedule.
  • EA Exam Changes in 2021 – Changes include the implications of the CARES Act and other newer legislation, as well as the newly updated exam content outlines. This webinar is the first step toward securing those additional rights and expanding your business offerings.
  • NATP Fee Study Analysis & How to Increase Your Fees – Join our partners at SmartPath who will discuss the results of the NATP Fee Study then provide an easy to implement process to increase your client fees above the national average ($213/$519) in 30 days or less. (Available October 2021.)
  • Best Practices for Using the New IRS Online Services – This webinar will discuss the rapidly evolving area, explore the advantages and pitfalls in the new IRS systems, as well as previewing where the system is headed.

Earn CPE and strengthen your tax practice as a valued member of NATP. Not a member? Learn more about NATP’s member benefits.

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About NATP

Whether you’re a tax professional just starting out in your career or an experienced expert, NATP believes in you and the work you do to help your clients. We take pride in providing you with resources you won’t find anywhere else, and helping you succeed in the ever-growing and changing industry.

As tax laws change, you can rely on NATP for professional advocacy within the government, guidance on how to apply updated federal tax code to your clients’ unique situations and relationships with communities of other tax professionals to help foster your career. Explore NATP.

If you’re a taxpayer looking for an expert to help you with your tax planning and preparation, look to the industry’s top preparers. Choose an NATP member.

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