Probating a Pennsylvania Estate

Probating estates is also referred to as estate administration which is the process of managing and distributing a person’s probate property after their death.  If the person had a will, the will goes through probate, which is the process by which the deceased person’s property is passed to his or her heirs and beneficiaries (people named in the will).  The entire process usually takes about 18 months. However, distributions from the estate can be made in the interim.

Here we set out the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor in the deceased family member’s will.  You should meet with an attorney to review the steps necessary to administer the decedent’s estate. Bring as much information as possible about assets, taxes and debts.  Estate administration in Pennsylvania include the following steps:

1. Filing the original will and Death Certificate at the County Register of Wills in order to be appointed executor. You will take an oath, sign the petition and pay a probate fee to get the letters testamentary issued to you appointing you as executor. In the absence of a will, heirs must petition the court to be appointed administrator of the estate and may have to post a bond. 

2.  Giving formal notice to all the beneficiaries named in the will, and then filing a report with the Register of Wills.

3.  Collecting all the assets. This means that you have to find out everything the deceased owned. You need to file a list, known as an Inventory with the Register of Wills within nine months of the date of death.  You will also need to open an estate bank account to consolidate all the estate funds. Bills and bequests should be paid from the estate bank account, so that you can keep track of all expenditures.

4. Paying the federal estate tax if applicable and Pennsylvania inheritance taxes. If the estate was over $11,580,000 then a federal estate tax return (form 706) needs to be filed for 2020.  If any assets pass to anyone other than the spouse and children 21 years old and younger, then the executor needs to file a Pennsylvania inheritance tax return.  If you prepay the Pennsylvania Inheritance Tax within three months of the date of the death you receive a 5% discount.  The Pennsylvania inheritance tax return is due nine months after the date of death, but you can apply for a six month extension to file the return. The Pennsylvania Department of Revenue assesses the inheritance tax at a rate of 4 1/2% on linear descendants (children over 21, parents, grandparents and grandchildren), 12% for siblings, and 15% for anyone else.         

 5. Filing final income tax returns. You must also file a final federal and Pennsylvania income tax return for the decedent for the year of death.  If the estate holds any assets and earns over $600 of interest or dividends, or over $600 from sales of property a fiduciary income tax return for the estate will need to also be filed.  

6.  Paying the administrative expenses and all the debts of the estate.  The estate needs to pay for the funeral, probate fees, attorney fees and other administrative expenses first.  The secured creditors are paid next, and then the unsecured creditors are paid with whatever is left. 

If creditors are not paid in the proper order, the executor may be held personally liable for the estate’s debts.        

7. Filing a Disclaimer with the Orphan’s Court within 9 months of the date of death to disclaim any bequests.

8. Distributing property to the heirs and beneficiaries. Generally, executors do not pay out all of the estate assets until after all the known creditors are paid, and the period runs out for other creditors to make claims which is one year after the estate notice is published. 

9. Notifying the Pennsylvania Attorney General for any specific bequests over $25,000 or any bequests paid as percentage of the estate or any charitable bequests that will not be made.  

10. Filing an informal final account. The executor must file an informal final account with all the beneficiaries listing any income to the estate since the date of death and all expenses and estate distributions.  Once the beneficiaries sign a receipt and release approving the informal final account, the executor can distribute whatever is left in the reserve, close the estate bank account and file a status report with the Register of Wills.

If you need help probating an estate please contact Gregory J. Spadea of Law Offices of Spadea & Associates, LLC at 610-521-0604.

How To Take The Spousal Elective Share in Pennsylvania If You Are Disinherited

It is possible for a spouse intentionally left out of the other spouse’s will to still receive a share of the estate in the event of death. Pennsylvania law provides that if a person is still married at the time of their death with no divorce pending, the surviving spouse can elect to receive 1/3 of that person’s estate. The following property is subject to election:

  1. Property transferred from the decedent by will or intestacy which is when there is no valid will executed by the deceased person;
  2. Income from property of the deceased spouse, which the decedent was entitled to receive during marriage provided that the deceased had the right to the income at the time of death;
Spouses holding hands to show on blog elective care if disinherited
  1. Property that was transferred during decedent’s life that the deceased person still had the right to revoke the transfer and assume the property or invade the principal for his or her own benefit;
  2. Property conveyed by the deceased person during marriage to the decedent and another with a right of survivorship such as jointly owned property;
  3. Annuity payments to the extent that it was purchased during the marriage by the deceased spouse and the decedent was receiving annuity payments at the time of death;
  4. Property or gifts given by the decedent during the marriage within one year of death to the extent that the amount exceeds $3,000 per recipient.

The following property is not subject to election:

  1. Any conveyance or transfer of property made with the express consent of the surviving spouse;
  2. The proceeds of life insurance policies of the decedent;
  3. Interests from any employer established pension, deferred compensation, retirement plans,  profit sharing, etc. for the deceased;
  4. Property passing by the decedent’s exercise or non-exercise of any power of appointment given by a person other than the deceased.

To simplify, a surviving spouse cannot receive any portion of something that they already agreed to give away by way of previously consenting to it. An example would be a pre-nuptial or post-nuptial agreement. As far as it relates to life insurance proceeds and retirement plans or any other accounts that have a beneficiary designation will pass to the named beneficiary.

Additionally, the surviving spouse waives the right to seek other items they may have been entitled to if they choose to exercise the elective share. The surviving spouse must reduce to writing their intent to exercise the elective share and timely file with the Register of Wills within 6 months after the decedent’s death or within 6 months of the date of that the will was probated – whichever date comes later.

If you have any questions or need additional information about the spousal elective share please call Gregory J. Spadea at 610-521-0604.  

The 2020 Coronavirus Aid Relief and Economic Security (CARES) Act

Here’s a highlight of what we perceived as important based on the calls we’ve been getting. 

We have posted the link to the SBA Economic Injury Disaster Loan and attached the application for Payday Protection Program on our resource page.

Coronavirus Covid-19 graphic
  • Recovery Rebates for Individuals – CARES provides direct rebates of up to $1,200 for each qualified adult ($2,400 for married couples) and $500 per child. The full rebate amount is available if you have income at or below $75,000 ($150,000 for married couples), phases out as income increases and is capped with income above $99,000 ($198,000 for married couples). The money should be directly deposited into your account by late April.
  • Pandemic Unemployment Insurance – CARES expands existing state-level unemployment insurance benefits for individuals by the Corona economic downturn. It adds $600 per week to existing state-level benefits through the end of July. For those in need, CARES provides an extra 13 weeks of benefits beyond what states usually permit. Pandemic Unemployment Assistance will even cover many who were typically excluded from a state’s program like independent contractors, free lancers, self-employed individuals, “gig” workers (i.e. Lyft or Uber drivers) and even those laid off from religious institutions. It will not be available to those who are compensated for working remotely or are receiving paid leave.
  • Retirement Plans – CARES waives the normally imposed 10% penalty for premature withdrawals from retirement accounts up to $100,000 and permits 3 years for repayment. If not repaid, income is spread over 3 years. The limit of $50,000 for loans from qualified loans is increased to $100,000. Required Minimum Distributions are suspended for 2020.
  • Student Loans – CARES defers payments on federal student loans through September 30, 2020. Employer payments on employee student loans is a tax-free fringe benefit for 2020 (not to exceed $5,250 decreased by other educational assistance programs).
  • Net Operating Loss Changes – The tax act passed at the end of 2017 eliminated a taxpayer’s ability to carry back an NOL, only to be carried forward (indefinitely) and, even then, limited to 80% of income. For tax years beginning before 1/1/2021, the CARES Act will now allow net operating losses to be carried BACK to offset 100% of income for the prior 5 years (i.e. 2013 thru 2017). YOU SHOULD CONSIDER HAVING US FILE AN AMENDED RETURN FOR BACK TO 2013 TO CLAIM AND RECEIVE A POSSIBLE TAX REFUND. The Act also allows NOLs stemming from tax years beginning after 12/31/2020 to offset 100% of income going forward rather than 80% limitation.
  • Employee Retention Credit – CARES provides employers subject to disruption due to COVID-19 by helping to continue paying employees. Any size employer may be eligible for a 50% refundable tax credit of up to $10,000 of wages plus health insurance paid per eligible employee. Qualified employers will access the funds via a payroll tax credit. The enterprise must have been disrupted by COVID-19 enough to effectively cause a loss of 50% of revenue from the same quarter of the prior year. The retention credit ends when revenue increases to at least 80% of what the business earned in a comparable quarter of the prior year. We found an answer to one question posed – employers are NOT eligible for the credit if they receive a small business loan pursuant to the CARES Act.
  • Payroll Tax Payments – CARES permits employers of any size, even sole proprietors, to delay payment of their 2020 payroll taxes until 2021 and 2022. 50% of the 2020 payments will be due in 2021, and the balance will be due in 2022. Keep in mind, FICA taxes are imposed on both employers and employees’ wages at a rate of 6.2% for the Social Security tax and 1.45% for the Medicare Tax. Self-employed individuals pay a corresponding self-employment tax effectively twice that amount. The CARES Act allows an employer to defer the employer portion of the social security tax.
  • Increased Incentives for Charitable Contributions – The CARES Act attempts to get funds to charitable organizations quickly by allowing both individuals and businesses to claim increased deductions for all cash contributions. Since we’ve so many people now taking the standard deduction, the Act permits an “above the line” deduction of up to $300 during 2020. Limitations for 2020 are relaxed so that individuals can take an itemized deduction for cash contributions of up to 100% of their gross income while corporations can deduct up to 25% of its taxable income. We understand donor advised funds or private foundations do not qualify for these laxed limitations for 2020. Perhaps limited applicability but a pretty neat item for our restaurant/food related clients is that the Act increases the allowable deduction for contribution of food inventory by business made during 2020.
  • Paycheck Protection Program – CARES enable employers (including self-employed individuals) with less than 500 employees to participate in an 8-week loan program for up to 250% of the monthly payroll brought about by the economic uncertainty as long as they maintain their payroll during this COVID-19 emergency. These loans will be made available through Commercial Banks that are authorized SBA lenders on April 3, 2020. No personal guaranties or collateral are required on these non-recourse loans. As long as the employer maintains payroll, there is forgiveness available for the portion of the loans used for covered payroll costs, interest (not principal) on mortgage loans, utilities and interest on any other debt obligations incurred before the covered period. The maximum payroll is $10,000,000 while the loan amount is limited to $100,000 annualized per employee, including wages, vacation, parental, medical, family or sick leave, retirement benefits, tips, health care benefits, etc. Seasonal businesses should calculate the 2.5 months’ payroll using the 12-week period beginning Feb. 15, 2019. Alternatively, the business may choose the period beginning March 1, 2019, and ending June 30, 2019. Seasonal businesses will multiply this average by 2.5. Employers cannot cut employees’ pay by more than 25%. In order to bring back on payroll employees that may have already been furloughed, this loan program is retroactive back to February 15, 2020. The program removes the “Credit Elsewhere Test,” which usually required an extensive analysis to determine whether the borrower had the ability to obtain some or all of the requested loan funds from alternative sources, without causing undue hardship.  That test could also have required them to utilize those alternative sources first before trying to obtain the SBA loan.
  • While the CARES Act includes loan forgiveness, please take note of how much of any such loan will be eligible for forgiveness.  The law refers to the “covered period” meaning the 8-week period starting at the date of the origination of the loan. Loan recipients are eligible for a certain amount of forgiveness but the forgiveness is reduced if the employer reduces its workforce during the 8-week covered period when compared to other periods in 2019 and 2020, or reduces employee salaries by more than 25% during the covered period. These reductions can be avoided when an employer rehires employees and increases pay during the given time period.
  • The loans have a maximum maturity of 10 years with interest rates for any portion of the loan that is not forgiven not to exceed 4%. Lenders are required to give borrowers a complete payment deferral on all principal, interest and fees of not less than 6 months and not more than 1 year on all loans under CARES.
  • Economic Injury Disaster Loan –  Small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available following a successful application. This loan advance will not have to be repaid.  A link to apply for the loan online is on our website resource page.
  • Please note that any business that receives an Economic Injury Disaster Loan under Section 7(b) of the Small Business Act must reduce the amount received from CARES’ Payroll Protection Program loan.

If you have any questions please call Gregory J. Spadea at 610-521-0604.

Understanding What a Real Estate Professional Is under The Passive Activity Loss Rules

Because of the potential increased focus on the audit of returns showing rental real estate losses, it is important to understand when Landlords are entitled to deduct losses from rental real estate as ordinary losses rather than having to treat such losses as passive.

To escape passive-loss classification, the Landlord must qualify as a “real estate professional” and must materially participate in the rental activity. Keep in mind this is not the only way to avoid passive loss. There is also the exception for up to $25,000 of losses of an active participant in a rental real estate activity under 469(i). Section 469(c)(7)(B) requires that a Landlord meet two tests in order to be considered a real-estate professional for a taxable year. Those tests are:

  1. The Landlord must show that more than one-half of the personal services performed by him in trades or businesses were performed in real property trades or businesses in which he materially participated; and
  2. The Landlord must show that he worked more than 750 hours in real property trades or businesses in which he materially participated.
For Rent sign in front of new house

The first test becomes an issue only if the Landlord is involved in another occupation in addition to real estate.  The courts in deciding the issue of “real estate professional” have not expressly dealt with this test; rather, they use the fact that the Landlord spent time in an occupation outside of real estate to buttress their conclusions that Landlord has not met the 750-hour test.

I always recommend that Landlords keep contemporaneous time logs, time reports or calendars that they can input manually into a day timer or type into a google calendar.   The log or calendar should provide a detailed account of what the Landlord did with respect to an activity, when he did it, and how much time it took. 

Rental services that qualify for meeting the 750 hour annual requirement includes, but is not limited to:

  1. Advertising to rent or lease the real estate;
  2. Negotiating and executing leases;
  3. Verifying information contained in prospective tenant applications;
  4. Collection of rent;
  5. Daily operation and management;
  6. Maintenance and repair of the property, including the purchase of materials and supplies;
  7. Supervision of employees and independent contractors.

It is a common misconception, however, that qualifying as a real estate professional makes the Landlord’s rental activities nonpassive. This is not the case; rather, a Landlord who qualifies as a real estate professional has merely overcome the presumption that all rental activities are passive regardless of level of participation. For the real estate professional’s rental activities to become nonpassive activities, the Landlord must establish that he or she has met the material-participation standard with regard to the rental activities.  Only those rental activities in which the real estate professional materially participates are nonpassive activities.

Importantly, the statute provides that a qualifying real estate professional must establish material participation in each separate rental activity. An exception is provided, however, by which the Landlord may elect to aggregate all interests in rental real estate for purposes of measuring material participation.  The landlord can elect to treat all rental properties as a single rental activity by filing a statement with his original income tax return for the taxable year.  Merely aggregating rental income and expenses on Schedule E does not suffice.  Without an election, the Landlord must examine each rental property to determine whether he materially participated in the rental of that property.

Material Participation

Material participation is determined under the seven tests set forth in Treasury Regulation § 1.469-5T. To prove “material participation,” the Regulation allows grouping real-property trades or businesses based upon facts and circumstances. The regulation lists 11 types of real property trades or businesses: real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage. However, rental activities cannot be grouped with other real-property trades or businesses.  The seven tests are: 

  1. The individual participates in the activity for more than 500 hours during the tax year.
  2. The individual’s participation in the activity for the tax year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for the year;
  3. The individual participates in the activity for more than 100 hours during the tax year, and the individual’s participation in the activity for the tax year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for the year;
  4. The activity is a significant participation activity for the tax year, and the individual’s aggregate participation in all significant participation activities during the year exceeds 500 hours;
  5. The individual materially participated in the activity for any five tax years whether or not consecutive, during the 10 tax years that immediately precede the tax year;
  6. The activity is a personal service activity, and the individual materially participated in the activity for any three tax years whether or not consecutive preceding the tax year;
  7. Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the year.

There are several important considerations when measuring material participation in a Landlord’s real property trade or business.  First, hours spent as an employee are not counted unless the employee is a 5% owner in the employer. Second hours spent as an investor in a real property trade or business such as studying and reviewing financial statements, preparing summaries of the finances or operations, or managing the finances of an activity in a nonmanagerial capacity are not counted toward material participation unless the Landlord is directly involved in the day-to-day management of the business.

In addition, if the individual holds an interest in a real property trade or business through a limited partnership interest, the individual may establish material participation only by satisfying the first, fifth, or sixth tests of the seven tests from the regulations described above.

When measuring material participation, an individual taxpayer is required to count any hours performed by his or her spouse, even if the spouse does not own an interest in the business or if no joint return is filed.  While this rule is advantageous because it makes it more likely the taxpayer materially participates in the real property trade or business, it is a trap for the unwary in the real estate professional context.

The relevant case history has established that it is very difficult for a Landlord who has a full-time job that is not in a real property trade or business to satisfy this first 50% test. The IRS and the courts find it dubious when a Landlord who works 2,000 hours a year at a non-real estate job purports to have spent more time on his or her real estate activities.

If you have any questions about material participation or being a real estate professional call Gregory J. Spadea at 610-521-0604.    

The Setting Every Community Up for Retirement Act of 2019 (SECURE Act)

On December 20, 2019 the President signed into law the Setting Every Community Up for Retirement Act (the SECURE Act) as part of the Further Consolidated Appropriations Act of 2020.   The SECURE Act made various changes to the rules governing retirement benefits.  The key changes are as follows:

Distributions After Death

The most significant changes in the law are that the rules governing required distributions after the death of an employee or IRA owner generally now require that any remaining assets be distributed to the designated beneficiary by the end of the tenth calendar year following the employee or IRA owner’s death. This substantially reduces the benefit of the stretch.

Gold nest egg concept for retirement savings and financial planning

Until now, designated beneficiaries could take distributions over their life expectancy or faster if they wanted. The ability to stretch the distributions over a long period of time provided a substantial income tax benefit.

There are exceptions for spouses, minor children, disabled or chronically ill persons, or persons not more than 10 years younger than the employee or IRA owner.  In addition, withdrawals of up to $5,000 that are used for adoption or childbirth expenses will be exempt for the 10% premature distribution tax for distributions made after 12/31/2019.

These changes are generally effective for persons dying after December 31, 2019.

Traditional IRA Contributions After Age 70 ½

Until now, an individual could not contribute to a traditional IRA if he or she reached age 70 ½ or would reach age 70 ½ by the end of the year for which the contribution is made. Beginning in 2020, this limitation is repealed.

Unlike a traditional IRA, an individual over age 70 ½ is already permitted to contribute to a Roth IRA. However, there are income limits for eligibility to contribute to a Roth IRA. These limits remain in effect.

When Distributions Must Begin

Until now, employees and IRA owners generally had to begin taking distributions at age 70 ½, though they could defer the distribution for the year in which they reach age 70 ½ until April 1 of the following year. However, an employee who is not a 5% owner (with attribution) may defer benefits until retirement; and no distributions are required from a Roth IRA.

The new law increases the age threshold from 70 ½ to 72. This change is effective beginning in 2020 for individuals attaining age 70 ½ after December 31, 2019.

This change benefits some IRA owners who want to do Roth conversions to the extent it will not put them into too high a tax bracket. They will have an additional year or two before they have to take distributions that would be added to their income.

This change also benefits IRA owners who do not need to take distributions from their retirement plans and IRAs. They will be able to accumulate money in their retirement plans and IRAs for a longer period of time.

Planning Considerations

Roth contributions and conversions

It generally makes sense to contribute to a Roth IRA or convert to a Roth IRA to the extent the tax rate on the conversion is less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions.

The limitation on the stretch will bunch the distributions after death into a shorter period of time. This generally will result in the distributions being taxable at higher rates.

As a result, Roth contributions and conversions will be much more advantageous than in the past.

Spouses of IRA owners who died within the last nine months

Most married people name their spouse as the primary beneficiary of their retirement benefits. However, under the new law, the surviving spouse’s beneficiaries generally will not be able to stretch the distributions for more than 10 years.

As a result, if an employee or IRA owner died in 2019 within the last nine months, the surviving spouse should consider disclaiming the benefits. In this way, the benefits will pass to the contingent beneficiaries, who may be able to stretch them over their life expectancy under the old law.

Reviewing existing trusts

Many people left their retirement benefits in trust rather than outright for the same reasons they left their other assets in trust rather than outright. By leaving assets in trust, their beneficiaries’ inheritances will not be included in their estates for estate tax purposes and will be better protected against their creditors and Medicaid.

Some people designed their IRA trusts so that any distributions from the IRA to the trust would be paid out to the beneficiary on a current basis. They may have been willing to have the beneficiary receive modest distributions in the early years but may not want the beneficiary to receive the entire amount at the end of 10 years. These trusts should be reviewed, and if appropriate, changed to discretionary trusts.

Charitable remainder trusts

A charitable remainder trust is a possible workaround to replicate the stretch.  A charitable remainder trust distributes a percentage of the trust assets to one or more individuals for life or for a term of up to 20 years, whereupon the trust ends and the balance of the trust assets goes to charity. The distribution percentage must be at least 5%. The client may select the charities.

The payments can be fixed based on the initial value of the trust or may vary based on the value of the trust each year. The actuarial value of the charity’s remainder interest must be at least 10% of the value of the trust as of inception.

Since a charitable remainder trust is tax-exempt except for New Jersey income tax purposes, it can take the benefits in a lump sum without any adverse tax consequences.

Since the individual beneficiaries receive distributions for life or for a fixed term of up to 20 years, the result is similar to that of a stretch.

There are some tradeoffs to a charitable remainder trust. It is less flexible than a traditional trust since the payments may not vary from year to year except based on changes in the value of the trust assets.

The payments to the individual beneficiaries have to be outright. There is an economic cost since the actuarial value of the charity’s interest has to be at least 10% of the value of the trust as of inception. However, for some people, this may be a small price to pay to be able to replicate the stretch.

Increased Penalties for Failure to File Retirement Plan Returns which Applies to Returns, Notices and Statements required to be filed or provided after 12/31/2019

  1. The fee for failure to file form 5500 increased from $25 per day to $250 per day, with the maximum amount per Form increased from $15,000 to $150,000;
  2.  The failure to file form 8955-SSA penalties increased from $1 per day per participant with a maximum penalty of $5,000, and to $10 per day per participant with a maximum penalty up to $50,000;
  3. Notification of withholding of income tax penalties increased from $10 to $100 dollars for each failure, with the maximum being increased from $5,000 to $50,000;
  4. Fees related to failure to report plan name change, name or address change of plan administrator, plan termination or plan merger increased from $1 per day per failure to $10 per day per failure, with the maximum amount being increased from $1,000 to $10,000.

If you have any questions about tax, trust or estate planning call Gregory J. Spadea at 610- 521- 0604.

Ten Things a Valid Search Warrant Must Have in Pennsylvania

While valid search warrants are permissible under the Pennsylvania Constitution and under the 4th Amendment of the United States Constitution, law enforcement must satisfy very specific requirements to obtain one and even then, the warrant itself must contain certain information. The 10 things every search warrant must have to be valid are as follows:

PA search warrants
  1. A warrant must have an affidavit of probable cause attached to it which tells the person issuing the warrant that there is probable cause for the search and seizure of the item in question. Probable cause is the reasonable expectation that a crime was or is being committed;
  2. A warrant must be based on reliable information by some witness or an informant;
  3. A warrant must have the information used to obtain it corroborated by another source other than that same witness or the informant;
  4. A warrant must be signed and sealed by the issuing judge;
  5. A warrant must have a specific date and time of issuance;
  6. A warrant must identify specifically the property to be seized;
  7. A warrant must name and describe with particularity the person or place to be searched;
  8. A warrant must be executed within a specified period of time not to exceed two days from the date of issuance;
  9. A warrant must be served during the day light hours (typically 8 am -5 pm), unless otherwise authorized on the warrant;
  10. A warrant must state the title of the judicial officer who issued the warrant. This person must also certify that he has found probable cause based upon the facts sworn to or affirmed by police based on the witness or the informant.

If you have any questions about search warrants or are charged with a crime call Gregory J. Spadea at 610-521-0604.

What Records You need to Deduct Business Meals, Travel and Lodging on Your Federal Tax Return

Many of my clients ask me what documentary evidence is adequate to deduct travel and lodging.  I tell them to get a receipt or credit card statement that shows the amount, date, place, and essential character (business purpose) of the expense. I recommend they use the same credit card or business debit card to pay all the business expenses to keep things simple and organized.  I also recommend clients record their travel in their day timer or google or outlook calendar that can be cross referenced with the travel or lodging receipts.

Adequate evidence for Lodging requires a hotel receipt if it has all the following information:

  • The name and location of the hotel.
  • The dates you stayed there.
  • Separate amounts for charges such as lodging, meals, and telephone calls.

Adequate evidence for Travel will include the airline, train or bus ticket that has all the following information:

  • The name of the passenger.
  • The name of your destination.
  • The date and cost of the ticket.

Adequate evidence for Meals requires a restaurant receipt if it has all of the following information:

  • The name and location of the restaurant.
  • The number of people served.
  • The date and amount of the expense.

There is an exception when you do not needdocumentary evidence if any of the following conditions apply.

  • You have meals or lodging expenses while traveling away from home for which you report to your employer under an accountable plan, and you use a per diem allowance method that includes meals and lodging. 
  • Your expense, other than lodging, is less than $75 such as for cab fare or breakfast.

Keep in mind if your spouse is an employee of your company, you can deduct travel and meals for both you and your spouse as long as you discuss business.  

 If you need help setting up an accountable plan or have any tax questions call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC is located in Ridley Park, PA and prepares tax returns year-round.  

Understanding What Car & Truck Expenses are Deductible For Business

I have a lot of business owners and self-employed clients who ask what records to keep in order to deduct their car or truck expenses incurred in their business. I first remind them to keep track of the total miles they drive during the year as well as the total miles driven for business. The reason is if the business owner uses their car for both business and personal purposes, the expenses must be split. Therefore, they will need to know the total miles and total business miles to calculate deduction based on the portion of mileage used for business.
There are two methods for figuring car expenses:

Using actual expenses which include:
o Depreciation or Lease payments
o Gas and oil
o Tires
o Repairs and tune-ups
o Insurance
o Registration fees

Federal Tax Law Gregory Spadea Lawyer

Using the standard mileage rate. Under this method business owners will keep track of the business miles driven during the year and multiply that total by the current standard mileage rate in effect. However, the business owner must choose to use this method in the first year the car is available for use in their business. In addition, business owners who want to use the standard mileage rate for a car they lease must use it for the entire lease period. The standard mileage rate for 2019, is 58 cents.

No matter which option you select you must keep adequate records. You should keep a diary, travel log or trip sheets documenting where you went, who you met and the mileage and date. You should also keep documentary evidence such as gas receipts, credit card statements and cancelled checks or repair bills to support your expenses. I always recommend paying all the car and truck expenses with the same credit or debit card.

If you have any questions about deducting car expenses call Gregory J. Spadea at 610-521-0604. The Law Office of Spadea & Associates provides estate and tax planning services to business and individual clients including tax return preparation services year-round.

The Landlord Tenant Eviction Process in Pennsylvania

When a landlord has a tenant who fails to pay rent, a landlord must file an eviction complaint at the local magisterial district court where the property is located.  Once a complaint is filed along with a copy of the lease, a hearing is scheduled in two to three weeks.  It is very important for the landlord to sue for both back rent and possession.  The reason is if the tenant appeals he has to post the lesser of the rent in arrears or three months rent.  

The hearing is very straight forward. The landlord testifies that the tenant has failed to pay rent and a judgment is entered in the landlord’s favor for the amount of rent owed plus court costs and the court will grant the landlord possession.  The landlord can also be awarded attorney fees if they are in the lease.  However, the landlord must have a valid rental license covering the period that he or she is requesting back rent.   

After the magistrate judge enters a judgment and awards a landlord possession, the tenant has the right to file an appeal to the possession portion of the judgment within ten days. After the tenth day, the tenant can still appeal the money portion of the judgment within thirty days of the judgment, but the tenant can no longer appeal the award of possession.  A tenant would file an appeal with the Court of Common Pleas in the county, where the rental property is physically located.  When a tenant files an appeal, they ask the court to enter a Rule to Show Cause, which would require a landlord to file a civil complaint in the court within twenty days. An appeal is conducted de novo, which means a new hearing is required at the Court of Common Pleas and usually takes 9 months for the hearing to be scheduled in Delaware County.

If the tenant does not file an appeal within ten days of the judgment date and the tenant remains in possession of the property, the landlord must then file an Order of Possession with the district court on the eleventh day after the judgement date. The Constable will then call the Landlord in one to weeks after he files for the Order for Possession to arrange to meet him at the property, so  the Constable can remove the tenant from the property and the landlord can change the locks. 

When an appeal is filed by a tenant, the tenant is required to post with the court the judgment in the amount of rent in arrears or three months rent, whichever is less.  If the tenant posts the rent with the court, the tenant will be granted a supersedeas, which means that the Constable cannot move forward with the actual eviction process while the appeal is pending. Furthermore, the tenant must deliver the notice of appeal to the magisterial district court to be granted the supersedeas and serve a copy upon the landlord.

In order to obtain the posted rent after a tenant files an appeal, a landlord must file an application with the Court of Common Pleas so the rent posted by the tenant can be released from escrow.

If a tenant is claiming they are indigent, the tenant can submit an affidavit stating they do not have the financial ability to post with the court the lesser of three months rent or the actual rent in arrears and the court would permit the appeal to proceed.  If the tenant files this affidavit and has not paid rent in the month the appeal is filed, the tenant is merely required to pay one-third  of their monthly rent payment at the time of appeal. The remaining two-thirds must then be posted within twenty days of the appeal.  The tenant must then continue to pay rent every thirty days after filing the appeal with the court.  When a tenant fails to post rent with the court, the landlord can terminate the superseadas by filing to terminate the tenant’s appeal with the Court of Common Pleas.  If you are a landlord and need help evicting a tenant or getting possession, feel free to call Gregory J. Spadea at 610-521-0604.

When To Issue or Not Issue IRS Form 1099

I strongly encourage our business clients, nonprofit organizations and landlords to issue 1099 forms which are required by law. The reason is IRS Form 1099 provides the means of reporting very specific types of income from non-employment related sources that might not be reported elsewhere. If you paid someone for services (other than employees) you must issue them a 1099 by January 31 of the following year. Business income tax returns including IRS Forms 1120S and 1040, Schedule C include a question asking if Forms 1099 were filed as required and by signing your return, you are certifying that your response is true.

I recommend to all my clients to review all disbursements made from January 1, through December 31, summarizing all payments for services to unincorporated individuals and businesses where the accumulated total is $600 or more.  If you pay a Limited Liability Company (LLC) that is taxed like a corporation you still have to issue a 1099 to that LLC.  Make sure you have the correct name, employer identification or social security number and address of everyone you pay before you pay them.

Beyond having to possibly face an IRS or State audit, if you fail to file the correct information by the deadline, fail to include all the required information on a return, or if you include incorrect information, you can be subjected to an array of steep penalties if you cannot show reasonable cause.  If the payee fails to furnish his or her taxpayer identification number (TIN), they are subject to backup withholding at a 28% rate. If you do not collect and pay backup withholding from affected payees as required, you may become liable for any uncollected amount.

Closeup of overlapping Form 1099G Certain Government Payouts and W-2 forms.

Here are a few additional tips of when you do not have to issue 1099’s:

1. Do not send a 1099-MISC to an employee since that is what a W-2 is for.  Remember that someone that performs services for you is either an employee or an independent contractor, but not both.  

2. Do not send a 1099 to someone you’ve paid by credit card, debit card or by services like PayPal. Such payments will be reported on a 1099K that they will receive from their merchant services provider

3. Do not use Form 1099-MISC to report employee business expense reimbursements. Report payments made to employees under a non-accountable plan as wages on Form W-2. 

4. If you pay a non-U.S. citizen who works remotely via the Internet from another country, you do not need to file a 1099 for that person. However, if the foreign worker performs any work inside the United States, you would need to file the 1099. For that purpose, you should have that foreign worker fill out, sign and return to you Form W-8BEN.

5. Do not issue 1099’s to corporations.

If you need help issuing 1099’s or have any questions, please contact Gregory J. Spadea at 610- 521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns year round.   

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