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Year-End Income Tax Planning for Corporate and Non-Corporate Businesses

By 2009, Tax Tips

INTRODUCTION

As the end of 2009 approaches, it’s time to evaluate year-end tax planning for corporations and other businesses. Over the past year, Congress, the IRS, and the courts have flooded us with significant tax developments. These changes make year-end tax planning for 2009 exceedingly important! Most recently, Congress passed the American Recovery and Reinvestment Tax Act of 2009, which includes corporate and business tax benefits that: provide a longer carryback period for 2008 net operating losses; expand the Work Opportunity Tax Credit for hiring certain disadvantaged employees; extend through 2009 accelerated business asset write-offs including the higher $250,000 §179 deduction, the 50% bonus depreciation, and a 15-year (instead of 39-year) write-off of certain leasehold improvements, restaurant properties, and retail properties; often a new income deferral election for businesses that experience cancellation of debt income; and temporarily shorten the time (from 10 years to 7 years) that an “S” corporation which used to be a regular C corporation is exposed to the corporate built-in gains tax.

We are sending you this letter to bring you up-to-date on these and other new tax planning opportunities for
corporate and non-corporate businesses. Caution! Several of the most significant new tax breaks expire in 2009 (and others in 2010). Therefore, it is extremely important that you be proactive and act timely to obtain maximum benefits! This letter also contains traditional year-end tax planning strategies 1) to help ensure that your business income is taxed at the lowest possible rate, and 2) to postpone taxes by deferring taxable income and accelerating deductions.

To help you locate items of interest, we have divided the planning ideas into the following categories:

  • Highlights Of Recent Legislation Impacting Year-End Planning
  • Don’t Overlook “Other” Expiring Business Tax Breaks
  • Planning With Other Recent Tax Changes
  • Traditional Planning For C Corporations
  • Traditional Planning For S Corporations
  • Traditional General Business Planning

Planning Alert! Although this letter contains many planning ideas, you cannot properly evaluate a particular
planning strategy without calculating the overall tax liability (including the alternative minimum tax) with and without the strategy. In addition, this letter contains ideas for Federal income tax planning only. You should also consider any state income tax consequences of a particular planning strategy. We recommend that you call our firm before implementing any tax planning technique discussed in this letter, or if you need more information.

HIGHLIGHTS OF RECENT LEGISLATION IMPACTING YEAR-END PLANNING

Earlier this year, President Obama signed the American Recovery and Reinvestment Tax Act of 2009 (the
“2009 Act”) providing approximately $275 billion of temporary tax breaks and incentives impacting virtually every business taxpayer. The following are selected provisions from this tax legislation that we believe will have the greatest impact on 2009 year-end planning for corporations and businesses. Planning Alert! As you read the following highlights, please keep in mind that there are several tax breaks available only in 2009, and others expire after 2010! Due to mounting concerns about expanding budget deficits, it is unclear whether Congress will extend these temporary business tax benefits. Consequently, pay careful attention to the effective date and expiration date (if applicable) for each new provision, which we highlight prominently in each segment. Tax Tip. The recent legislation contains a host of accelerated depreciation write-offs for qualifying equipment, vehicles, buildings, software, and capital improvements “placed in service” generally no later than December 31, 2009. If your business plans to take advantage of any of these increased write-offs for 2009, make sure that you order, purchase, acquire, or construct the property early enough so that your business can actually place it in service no later than December 31, 2009!

Fiscal Year Corporations May Still Have Opportunity To Elect Temporary 5-Year Carry Back Of Net
Operating Losses.
If a taxpayer has a net operating loss (NOL) for a tax year, the NOL may generally be carried back and offset taxable income reported in the 2 tax years before the year of the loss (the “carry back period”). Any remaining unused NOL can then be carried forward to each of the following 20 years until the NOL is used up. Under the 2009 Act, for NOLs generated in a tax year ending in 2008 by an “eligible small business” (a business with average gross receipts of no more than $15 million), taxpayers may “elect” an extended NOL carry back period from 2 years to up to 5 years. Planning Alert! The latest date that an election to utilize this extended carryback period for a 2008 calendar-year taxpayer has expired. Tax Tip. Fiscal-year taxpayers may still elect the extended carryback period of up to 5 years for the tax year beginning in 2008 if the extended carryback period was not elected for the tax year ending in 2008. If you own a fiscal-year “eligible small business” that has a net operating loss for the tax year beginning in 2008 that still qualifies for this election (typically a fiscal year, regular C corporation having average gross receipts not exceeding $15 million), please call our office. We will help you determine whether or not you should consider electing an extended carryback period. Please Note! As we complete this letter, there are proposals in Congress to extend this expanded NOL carryback period to certain NOLs generated after 2008.

Increased $250,000 Section 179 Deduction Extended Through 2009. Last year, Congress increased the maximum §179 deduction for the cost of qualifying new or used depreciable business property (e.g., machinery and equipment) from $128,000 to $250,000 for property placed-in-service in tax years beginning in 2008. The 2009 Act has now extended this $250,000 cap for an additional year, to property placed-in-service in tax years beginning in 2009. However, the $250,000 deduction is reduced by the amount by which the cost of qualifying §179 property placed-in-service during the 2009 tax year exceeds $800,000. Tax Tip. If your business is a calendar-year taxpayer, the increased §179 deduction will be available for qualified property “placed-in-service” by December 31, 2009. To be safe, your qualified property should be set up and tested before 2010. Planning Alert! If your business purchases more than 40% of its machinery, equipment, etc. in the last 3 months of its tax year, it may only take 1½ months of depreciation (instead of 6 months of depreciation) for the property acquired in the last 3 months. This is commonly referred to as the “mid-quarter convention.” If you elect the §179 deduction for property purchased in the last three months of the tax year, that portion of the cost of the property will be excluded from the 40% test. This may allow you to avoid the mid-quarter depreciation convention and use the half-year convention instead. Caution! For tax years beginning after 2009, the §179 deduction is scheduled to drop back to $134,000. If you are considering a significant equipment or business vehicle purchase, please call our office. We will help you develop a purchase strategy that gives you maximum depreciation deductions.

  • Pass-Through Entities. If you have a pass-through business entity (e.g., S Corporation, LLC, Partnership), you must apply the $250,000/$800,000 limitations twice-once at the entity level and again to the owners (i.e., to the S Corporation Shareholders, LLC Members, and Partners). In certain situations with fiscal-year pass-through entities, the $250,000/$800,000 limitations may be reduced. The rules for applying the $250,000 §179 limit to fiscal-year, pass-through entities are tricky. Please call us if you need more information.
  • Don’t Forget “Taxable Income” Limitation. The §179 deduction generally is not allowed to exceed the taxpayer’s business taxable income (as determined without the §179 deduction). Thus, the §179 deduction generally cannot create a taxable loss (or NOL). For pass-through entities, this so-called taxable income limitation is applied at both the entity level, and again at the owner level. However, if wages are paid to S Corporation shareholders or “guaranteed payments” are paid to owners of a partnership, the S Corporation’s or Partnership’s §179 deduction can actually exceed the pass-through entity’s taxable income, and create a pass-through loss. If you own an interest in a pass-through entity and plan to take advantage of these temporary increases in the §179 deduction limitations, please call our firm. We will help you maximize your section 179 deduction.

The 50% Bonus Depreciation Also Extended Through 2009. Last year, Congress reinstated the 50%
bonus depreciation deduction for calendar-year 2008 property acquisitions. The 2009 Act extends the 50% bonus depreciation for one more year. Therefore, the 50% bonus depreciation deduction is available for new “qualifying property” acquired and placed-in-service during calendar years 2008 and 2009. Generally, qualifying property includes property that has a depreciable life for tax purposes of 20 years or less (e.g., machinery and equipment, furniture and fixtures, cars and light general purpose trucks, sidewalks, roads, landscaping, depreciable computer software, farm buildings, qualified leasehold improvements, and qualified motor fuels facilities). Caution! Whether your business uses a fiscal or calendar tax year, the 50% bonus depreciation is allowed only if “qualified property” is “acquired” and “placed-in-service” during calendar years 2008 or 2009. To meet the placed-in-service requirement for 2009, property must be ready and available for use by December 31, 2009. Passenger Automobiles. The maximum first-year depreciation deduction (including the maximum §179 deduction) for most business automobiles is generally capped at $2,960 for 2009 ($3,060 for trucks and vans not weighing over 6,000 Ibs). However, the 2009 Act increased the first-year depreciation cap by $8,000 for autos qualifying for the 50% bonus depreciation in 2009. Planning Alert! The dollar limits must be reduced proportionately if your business use of a vehicle is less than 100%. For example, assume you are self-employed and you buy a new $30,000 passenger vehicle which you use 60% for business and 40% for personal driving in the first year. Your first year depreciation dollar limit for 2009 would be $6,576 ($10,960 x 60%). Tax Tip. If you wait until early 2010 to purchase the same vehicle and the first year cap is the same for 2010 as for 2009, your first year limit would be only $1,776 ($2,960 x 60%). If you purchase the passenger vehicle late in 2009, be sure to use it as much as possible for business through December 31, 2009, and keep your personal use to a minimum. This will maximize your business percentage for 2009, and could dramatically increase your 2009 depreciation deduction. Caution! If you take an additional $8,000 first year depreciation deduction on your passenger vehicle purchased in 2009, and your business use percentage later drops to 50% or below, you may be required to bring into income a significant portion of the depreciation taken. Therefore, it is imperative that the business use of the vehicle exceeds 50% for subsequent years. Trucks And SUVs Over 6,000 Lbs. Trucks and SUVs with loaded vehicle weights over 6,000 Ibs are generally exempt from the passenger auto annual depreciation caps discussed above. However, the §179 deduction for an SUV is limited to $25,000 (instead of $250,000). On the other hand, pickup trucks with loaded vehicle weights over 6,000 Ibs are not subject to the $25,000 limit imposed on SUVs, if the truck bed is at least six feet long.

New Incentives To Hire “Unemployed Veterans” And “Disconnected Youth.” If your businesses employs workers who are members of certain targeted groups (e.g., certain low income employees, welfare recipients, ex-felons, summer youth employees), you may qualify for the Work Opportunity Tax Credit (WOTC). The credit is 40% of the first $6,000 of qualifying wages (up to $2,400 per employee). For employees who begin work in 2009 or 2010, the 2009 Act created two new categories of individuals qualifying an employer for the 40% WOTC: 1) unemployed veterans, and 2) disconnected youth. Planning Alert! A business must properly certify the employee in order to qualify for the WOTC. You can generally satisfy this certification requirement by having the employee complete a pre-screening notice (IRS Form 8850) before the employee begins working. Also, no later than 28 days after the employee begins working, you must submit the properly executed notice to the appropriate state employment security agency for certification. Tax Tip. Be sure to use the most recent Form 8850 and the related instructions which contain information on the two new categories of qualifying employees (unemployed veterans and disconnected youth) as well as the other targeted groups qualifying for the WOTC. Form 8850 and the related instructions are available at www.IRS.gov.

Deferral Of Income Recognition From Cancellation Of Business Debt in 2009 Or 2010. Generally, a business has cancellation of debt (COD) income where the debt of the business is cancelled or where the business reacquires its debt for an amount less than its face amount. However, under the 2009 Act, a business may elect to defer its COD income resulting from the cancellation or the reacquisition of a debt instrument that was issued by the business if the forgiveness or reacquisition takes place in 2009 or 2010. If the election is made, qualified COD income that would otherwise be recognized in 2009 or 2010 will be deferred until 2014, and then included ratably in income over the next 5 tax years (i.e., from 2014 through 2018). Tax Tip. The IRS has recently released detailed guidance on the technical application of these rules, and the procedures for making the election. These rules are quite detailed, please call our firm if you need additional information.

DON’T OVERLOOK “OTHER” EXPIRING BUSINESS TAX BREAKS

Even before the 2009 Act, discussed above, Congress had previously given us an ever expanding list of
temporary business tax breaks that expire after a certain date. Some of the more popular tax benefits that are currently scheduled to expire at the end of 2009 include the: 1) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Leasehold Improvements;” 2) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Restaurant Improvement Property;” 3) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Retail Improvement Property;” 4) 5-Year (instead of 7 year) Depreciation Period for Certain Farming Business Machinery and Equipment; 5) Research and Development Credit; 6) Employer Differential Wage Credit for Payments to Military Personnel; 7) Various Tax Incentives for Investing in the District of Columbia; 8) Favorable S Corporation Charitable Contribution Provisions; 9) Enhanced Charitable Contribution Rules for Qualifying Business Entities Contributing Computer Equipment, and Book and Food Inventory; and 10) Extension of Increased Rehabilitation Credit for Structures in the Gulf Opportunity Zone. Planning Alert! In the past, many of these tax breaks have been extended before they actually terminated. However, given the current political environment of rising deficits, there is uncertainty as to which provisions Congress will extend beyond 2009. Therefore, if you wish to take advantage of these tax benefits, the property should be placed in service, or the expenditures should be made before the provision expires.

PLANNING WITH OTHER RECENT TAX CHANGES

Temporary 15-Year Write-Off For Improvements To Qualifying Buildings (2009 Only). Last year, Congress enacted a temporary 15-year depreciation recovery period (instead of 39 years) for the following two new categories of depreciable realty placed in service after 2008, and before 2010: 1) “qualified retail improvement property,” and 2) “qualified restaurant property.” Qualified Retail Improvement Property generally includes improvements made to the interior portion of a commercial building (i.e., nonresidential real property), that are placed in service more than 3 years after the building was first placed in service, and that are made to a building, the interior portion of which is open to the general public for the sale of tangible personal property. The following capital expenditures will not qualify: improvements that enlarge the building; any elevator or escalator; any structural component benefitting a common area; and any cost relating to the internal structural framework of the building. Qualified Restaurant Property generally includes any building or improvement to a building, if more than 50% of the building’s square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. Tax Tip. If a newly-constructed or newly acquired qualifying restaurant building is placed into service in 2009, the entire cost of the building will qualify for the 15-year write off. Planning Alert! If you are currently making capital improvements that might constitute qualified “retail improvement property” or “restaurant property,” or you are purchasing a restaurant building, and you want to use the 15-year write-off, you must place the building in service by December 31, 2009! This will allow you to write off these capital improvements over 15 years (rather than 39 years). A certificate of occupancy will generally constitute “placing the building in service.” Caution! The rules dealing with improvements to leased commercial buildings, buildings used for retail, and buildings used as restaurants are extremely tricky and time sensitive. Furthermore, the depreciation rules become even more complicated if you are planning to do a cost segregation study where you break out nonstructural components of a building for depreciation purposes. Please call our firm if you are incurring capital expenditures for buildings (including acquiring or constructing a building), and we will help you devise a strategy that will provide for optimum depreciation.

TRADITIONAL PLANNING FOR C CORPORATIONS

Recession May Favor Closely-Held Corporations Paying Dividends Over Year-End Bonuses. Since your
corporation can generally deduct a bonus, and cannot deduct a dividend, the advisability of paying a shareholder/employee a dividend in lieu of a year-end bonus is based largely on the tax brackets of both the corporation and the shareholder. If your corporation is feeling the effects of the recession and would receive little or no tax benefit from a bonus deduction (e.g., it is incurring current losses and/or has net operating loss carryovers to the current year), then a dividend taxed at a maximum rate of 15% will generally save taxes. On the other hand, if your corporation has significant income and is currently in a high tax bracket, then a bonus would likely save taxes. Planning Alert! If your corporation pays compensation to a shareholder/employee that is considered unreasonably high, the IRS may attempt to re-classify the payment as a dividend payment. Therefore, the corporation should document the reasonableness of compensation paid to shareholder/employees. Caution! Paying dividends to shareholders of Personal Service Regular “C” Corporations (in lieu of compensation) will generally not save you taxes. Personal Service Corporations generally are required to pay a flat 35% corporate tax rate on all taxable income (as discussed below).

Year-End Planning For Personal Service Corporations. If you own a “C” corporation that is a personal service corporation (PSC), all income retained in that corporation is taxed at a flat rate of 35%. Your C corporation is a PSC jf its business is primarily in the areas of health, law, accounting, engineering, actuarial sciences, performing arts, or consulting. Furthermore, in order to be classified as a PSC, substantially all of your corporation’s stock must be held by employees who are performing those services. Tax Tip. Generally, it is preferable from a tax standpoint to leave as little taxable income in a PSC as possible. This may be accomplished by paying reasonable salaries and compensation tothe stockholders/employees by year-end.

Be Wary Of Passive Loss Trap When Leasing Property To Your Closely-Held Corporation. Owners of a closely-held C corporation frequently own the business’s office building, warehouse, etc. individually (or through a partnership or LLC), and lease the facility to their corporation. However, a recent Tax Court case reminds us that this leasing arrangement can also create a “passive loss” trap. In this case, the Tax Court concluded that any rental loss generated from the shareholders’ leasing property to their controlled C corporation, will generally be classified as a “passive loss.” Therefore, the shareholders must “suspend” the loss, and will not be able to deduct the rental loss on their current returns unless they have other passive income. Tax Tip. To avoid this trap, the shareholders should set the lease payments at a level (assuming the lease amount is reasonable) so that the rental property does not generate a tax loss.

TRADITIONAL PLANNING FOR S CORPORATIONS

Check Your Stock And Debt Basis Before Year End. If your S corporation is anticipating a taxable loss this
year, you should contact us as soon as possible. These losses will not be deductible on your personal return unless you have adequate “basis” in your S corporation. You will have basis to the extent of the amounts paid for your stock (adjusted for net pass-through items and distributions) plus any amounts you have personally loaned to your S corporation. If you do not have sufficient stock basis for the pass-through loss, a mere guarantee of a third-party loan made to your S corporation will not give you basis. Tax Tip. It may be possible to restructure an outside loan to your corporation in a way that will give you adequate basis. However, this restructuring must occur before the end of the tax year. Planning Alert! The rules for restructuring loans to an S corporation are complicated. Please do not attempt to restructure your loans without contacting us first.

Pay Careful Attention To Payments On S Corporation Shareholder Loans. If a shareholder has loaned funds to an S corporation, and all or a portion of the loan is paid back after the loan’s basis has been reduced by previous pass-through losses, the shareholder will recognize a gain on the repayment. The amount, character, and timing of the gain is dependent on several factors. Planning Alert! The IRS has recently issued exhaustive final regulations establishing detailed rules for the tax treatment of payments on S shareholder loans that have a tax basis less than the face amount of the debt. The regulations create several tax traps as well as planning opportunities. Tax Tip. Please consult with us before you make any payments on your shareholder loans. We will help you structure the loans and any loan repayments to your maximum tax advantage.

Salaries For S Corporation Stockholders/Employees. The combined employer and employee FICA tax
rate is 15.3% of your wages up to $106,800 for 2009. The combined rate drops to 2.9% for wages in excess of $106,800. Tax Tip. If you are a stockholder/employee of an S corporation, you may wish to take no more than a “reasonable salary” from your corporation to minimize your FICA tax. Other income that passes through to you or is distributed to you as a distribution on your stock is not subject to FICA tax. Planning Alert! Determining “reasonable salaries” for S corporation stockholders/employees is a hot audit issue. Also, minimizing your FICA tax could also reduce your Social Security benefits when you retire, and may reduce the amount of contributions that can be made to your retirement plan where the contributions to the plan are based upon your “wages.”

TRADITIONAL GENERAL BUSINESS PLANNING

Self-Employed Business Income. If you are self-employed and use the cash method of accounting, consider delaying year-end billings to defer income until 2010. Planning Alert! If you have already received the check in 2009, deferring the deposit does not defer the income. Also, you may not want to defer billing if you believe this will increase your risk of not getting paid. Caution! If your 2010 tax rates are higher than your 2009 tax rates, deferring income may not be a good option.

Year-End Accruals To Employees. Generally, if an accrual-basis business accrues year-end compensation to its rank-in-file employees (nonshareholder employees), the accrual must be paid no later than the 15th day of the third month after year-end to be deductible for the year of the accrual. Otherwise, the accrual is not deductible until paid. Planning Alert! These rules also apply to accrued vacation pay, and to accruals for services provided by independent contractors (e.g., accountants, attorneys, etc.).

Accruals To “Related Parties.” Year-end accruals to certain cash-basis recipients must satisfy various time-sensitive rules in order for an accrual-basis business to deduct the accruals. Regular C Corporations. If your regular C corporation accrues an expense (e.g., compensation, interest, etc.) to a cash basis stockholder owning more than 50% (directly or indirectly) of the company’s stock, the accrual is not deductible by the corporation until the “day” it is includable in the stockholder’s income. Tax Tip. If the corporation’s tax rate for 2009 is significantly greater than the more-than-50% stockholder’s individual rate for 2009, the accrued amount should be paid by the end of 2009. S Corporations And Personal Service Corporations. If your S corporation or personal service C corporation accrues an expense to any shareholder (regardless of the amount of stock owned), the accrual is not deductible until the day it is includable in the shareholder’s income.

Partnerships, LLCs, LLPs. If your business is taxed as a partnership, its accrual of an expense to any owner will not be deductible until the day it is includable in the owner’s income. Other Related Entities. Generally, an expense accrued by one related partnership or corporation to another cash-basis related partnership or corporation is not deductible until the day it is includable in the cash-basis entity’s income.

Establishing A New Retirement Plan For 2009. Calendar-year taxpayers wishing to establish a qualified
retirement plan for 2009 (e.g. profit-sharing, 401(k), or defined benefit plan) generally must adopt the plan no later than December 31, 2009. However, an SEP may be established by the due date of the tax return (including extensions), and a SIMPLE plan must be established no later than October 1, 2009.

Recent Tax Law Changes Further Encourage Hiring Children By Family Businesses! There has long been a tax incentive for high-income owners of a family business to hire their children to work in the business. Generally, the parents could deduct their child’s wages against their business income (which could be taxed as high as 35%), while the child would be taxed at rates as low as 10% (to the extent of child’s unused standard deduction, the child’s wages may avoid federal income taxes completely). Furthermore, if a child is under age 18 and working for a parent’s sole proprietorship or a partnership where the only partners are the parents, the child’s wages will be exempt from FICA tax while, at the same time, reducing the parents’ self-employment (SECA) tax. Recent tax law changes have added additional incentives to hire children. Expanded Refundable Credits. Let’s say your child is an unemployed single parent. Paying your child W-2 wages for working in your business could enable your child to receive recently-expanded refundable credits. For example, assume that your single child has a daughter who is her “qualifying child” for tax purposes. For 2009, your single child would only need: 1) earned income of at least $9,667 to get the full $1,000 refundable child credit, 2) earned income of at least $6,452 to get the full $400 refundable making work pay credit; and 3) earned income of at least $8,950 to get the full refundable $3,043 earned income credit. Planning Alert! Thus, assuming your child meets the other requirements for these credits and does not have any other income, paying the child $10,000 of salary in 2009 could result in the child receiving $4,443 of refundable credits from the IRS. Caution! If you employ your children, be sure to 1) carefully document that the wages are reasonable for the work actually performed, 2) pay the wages as part of the regular payroll, 3) make sure the payroll checks are timely cashed and placed in the child’s account, and 4) comply with all laws relating to the employment of children.

FINAL COMMENTS

Please call us if you are interested in a tax topic that we did not address in this letter. Tax law constantly changes due to new legislation, cases, regulations, and IRS rulings. Our firm closely monitors these changes and we will be glad to discuss any current tax developments and planning ideas with you. We urge you to call us before implementing any planning ideas addressed in this letter, or if you need more information.

Note: The information contained in this material represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.

Circular 230 Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Let Accounting & Tax Solutions, Inc. help you navigate through the many regulations and nuances of the tax laws, to ensure that you receive the expert advice of a licensed tax practitioner: Contact Form

IRS Announces 2009 Standard Mileage Rates

By 2008, Tax Tips

WASHINGTON – The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2008-72 contains additional information on these standard mileage rates.

Let Accounting & Tax Solutions, Inc. help you navigate through the many regulations and nuances of the tax laws, to ensure that you receive the expert advice of a licensed tax practitioner: Contact Form

The Best Tax Shelter Around – Your Personal Residence!

By 2007, Tax Tips

If you’re a homeowner, Uncle Sam has thrown you a tax shelter that’s beyond compare. You may deduct the mortgage interest paid on your annual tax return and deduct the property taxes on your Schedule A. If you don’t currently own a home, this tax benefit is significant enough to make you look seriously at home ownership.

“Points”
The concept is simple, but it starts to get a little more complicated when you add in “points.” Points are one type of fee paid at closing to your lender. If you pay points when you buy your new home, these may be deducted in full in the year of purchase. However, if you refinance your loan, the points must then be deducted over the life of the new loan. In the event you are deducting points annually and then decide to refinance again, you will be able to deduct the balance of the points when you pay off the old mortgage. Of course, all these deductions are based on being able to itemize your deductions on Schedule A.

There are some limitations.

  • Points must not be more than amounts generally charged in your area.
  • Funds provided at closing must be at least equal to the points.
  • Loan must be used to buy or build taxpayer’s main home.
  • Points are stated as a percentage of the principal amount of loan.
  • Points are clearly stated on the settlement statement as charged for the mortgage.

Predictably, there are limits on mortgage interest deduction. Only the interest on the first $1 million of home acquisition debt is deductible. (Acquisition debt is defined as debt to purchase, build or substantially improve the residence.) Home equity debt limits are the lesser of the fair market value of the home reduced by the acquisition debt or $100,000 ($50,000 if married filing separately).

Probably the greatest advantage of home ownership occurs when you decide to sell your home. If you have owned and lived in your personal residence for two out of five years, you can sell the home and not be taxed on a profit up to $250,000 for singles and $500,000 for couples. The way home values have increased in recent years, this can be a tremendous investment opportunity. This rule seems very straight forward and simple, but beware! There are a number of exceptions.

Job related move – if you have to move out of your area (a 50-mile radius), and are unable to meet the two year time period, you can prorate the time based on a formula utilizing a ratio consisting of the number of days that you owned and lived in the home to the total number of days in the relevant 24-month period (approximately 730), multiplied by the exclusion amount.

Health problems requiring a sale – if health problems force you to move from your principal residence, you can prorate the time and exclusion based on the formula above.

Ideally, a couple that kept good records of time of ownership could buy and live in a home for two years, sell for a profit and then repeat this process. Still, there are a number of pitfalls that cause tax problems, such as the special rules surrounding home offices and move out/rent/return situations that effect the two in five requirement (this involves adjusting for depreciation recapture).

Let Accounting & Tax Solutions, Inc. help you navigate through the many regulations and nuances of the tax laws, to ensure that you receive the expert advice of a licensed tax practitioner: Contact Form

Tis the Season to be GIVING…

By 2007, Tax Tips

Face it, you’ve been putting it off all year. Maybe you have to turn sideways to get in the storage room or have given up on parking your car in the garage. Well, it’s the end of the year and now you have a big incentive to clean out all that stuff! You could get a tax deduction for it.

If you itemize your deductions (use Schedule A), Uncle Sam will give you a bonus – a deduction on your tax return for donating all that stuff to a charity. This could result in a larger refund for you, but there are a few simple rules you must follow to benefit from this tax break.

First, the charity must be recognized as an exempt charitable entity. Qualifying are churches, schools, Red Cross, Amvets, Scouts, Salvation Army, Disabled American Vets, public libraries, etc. If in doubt, ask the organization or check the IRS website at IRS.gov.

Second, make sure you get a receipt from the charity for the donation. You’ll need it as proof of your donation. If your total non-cash donations are less than $500, you can list the amount on Schedule A. If more than $500, you are required to attach Form 8283 with the following information:

Make a list of the items you are donating to attach to your receipt. (Keep this receipt with your records – do not send in). Form 8283 asks for date of purchase (can be various) and the date of the gift, the name of the charity and a list of the items donated. Additionally, you must indicate how you determined fair market value. Cost is what you paid and value is what you could have sold it for at a thrift shop or garage sale.

Think of all those kitchen appliances no longer used; old toys the kids have outgrown; clothes that don’t fit or are out of date; books, tools, games, furniture and anything else you no longer want. It is fairly easy to rack up $1000 in fair market value resulting in an additional refund of $250 if you are in the 25% tax bracket. A new wrinkle beginning for tax year 2006 deductions is that clothing must be in above average condition – no more old socks, underwear and soiled clothes you used for painting! So, get busy – get rid of the extra stuff, simplify your life and enjoy that larger refund!

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Education Credits from Uncle Sam

By 2007, Tax Tips

A good education is the best thing you can give yourself and your children. Uncle Sam recognizes the value of education and has given us credits and deductions to help.

Hope Scholarship Credit – this credit is allowed for tuition and related expenses for the first two years of post secondary education. Students must be attending classes at least half time pursuing a degree or recognized credential at an eligible educational institution. The credit may be claimed for more than one family member. A maximum credit of $1650 is allowed for tax year 2006.

Lifetime Learning Credit – this credit is allowed for up to 20 percent of the amount of the qualified tuition and related expenses, not to exceed $10,000. The maximum credit is $2000 and is allowed for undergraduate and graduate level courses as well as any course of instruction at an eligible institution to acquire or improve job skills. There is no requirement to be a half-time student, but the credit is calculated on a per family basis rather than per student.

Credits may be taken for the taxpayer, spouse, or a dependent. Dependents are not allowed to take the credit. The credits are not available for married filing separate returns or for nonresident aliens. Both credits have an income phase-out which is $45,000 to $55,000 for single and $90,000 to $110,000 for married joint returns.

Eligible expenses for both credits are tuition and fees, including tuition paid by loans in the year the tuition is paid, not when the loan is repaid. There is a prepayment rule that allows a credit for expenses paid in one tax year for an academic period that begins in the first 3 months of the following year.

For a deeper understanding of education tax credits, you may wish to contact a licensed tax practitioner, such as an enrolled agent.

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Staying Off the IRS Radar Screen

By 2007, Tax Tips

Nothing strikes terror in the heart of the American taxpayer quite like finding a letter in the mailbox from the IRS! In an effort to help you avoid that unpleasant scenario, provided below are examples of some common pitfalls to avoid if you don’t want the IRS lining up to be your new pen pal.

It’s surprising how many people mail their returns to the IRS without a signature. Before mailing, be sure to recheck everything and don’t forget to sign your return. An even better solution is to file electronically. Returns filed electronically have safeguards and controls to eliminate common errors. Additionally, the return goes directly to the processing center and the information does not have to be keyed into a computer by an IRS employee, which could result in additional errors.

Did you remember to include all income on the return? If you received a Form 1099 from anyone, be sure this income is on the return in the right place or you will receive a notice. Even if you did not receive a 1099 for work done independently, you are required to report the income. IRS receives copies of 1099s from banks, stock brokerage firms, rental agencies, and subcontractors and these are checked against income reported.

If you made estimated payments or paid your taxes quarterly, check the amounts and the dates the taxes were paid. Forgetting to include a payment is a frequent error that makes your tax burden look heavier. Many people forget to include the January payment, so keep in mind that the first payment of the year is sent in April, followed by June and September payments and concluding with the January payment for the fourth quarter of the preceding year.

If you file or pay late, you will receive a notice of delinquency and be charged interest and penalties, so try hard to avoid that. If you can’t pay taxes that are due by April 15, be sure to file the return on time with a note requesting an installment agreement to pay the remainder of taxes due.

Incorrect social security numbers will generate a notice or a disallowance of your dependents. Don’t mail the return without verifying that all social security numbers have been entered correctly. Transposing those numbers is more common than you’d think.

A few minutes of extra time reviewing your return will pay off in peace of mind and help you stay off the IRS radar screen.

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Solace for the Non-Filer

By 2007, Tax Tips

Has it been awhile since you filed a tax return? Feeling guilty? Scared? Don’t know what to do? Do you even need to file?

Many people become non-filers each year for a number of reasons. They lose the paperwork, they couldn’t pay, or they forgot about it. Sometimes illness, family crisis or depression plays a role. The list goes on and on.

If you are a non-filer, don’t procrastinate any longer. You may be hoping the IRS has forgotten about you, but that rarely happens. In truth, the more you wait, the more costly it will be if you owe money. And if you are due a refund, the statute of limitations on that refund expires three years from the date the return should have been filed. Don’t risk losing your money.

It’s not uncommon to feel overwhelmed when you haven’t filed for a while, but don’t despair. Lost paperwork can be reconstructed. If you owe, it’s better to file and negotiate an installment agreement because this will stop the late filing penalties although interest will continue until the tax bill is paid. Sometimes, penalties can be abated if the circumstances are serious, such as family crisis, illness or other catastrophic situations.

Contact a tax professional to help you get the monkey off your back. An Enrolled Agent (EA) is licensed by the Treasury Department to represent clients who have problems with tax filing and with the IRS. EAs must pass a rigorous exam to act on a client’s behalf and can help to get taxes filed, negotiate an installment agreement for those who can’t pay in full or, possibly, negotiate an offer in compromise to reduce taxes, penalties and interest. Don’t wait for the IRS to come looking for you; it’s far better to voluntarily come forward.

Every U.S. citizen and resident is required to pay his or her fair share of tax. No more, no less. The IRS has a matching program whereby all 1099s, W-2s, etc., are entered in their computers. They match this information with the tax returns that have been filed to insure that all income has been reported and that everyone who is legally required to do so has filed a return. So, if you haven’t filed for whatever reason, get moving before the IRS comes looking for you!

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Greetings from the IRS

By 2007, Tax Tips

You’ve just picked up your mail and … uh oh, there among the ads, bills and too numerous offerings for credit cards is that official looking letter from the Internal Revenue Service. A feeling of dread comes over you…but don’t panic or toss it, and please DO open it. It might even be good news.

Usually, mail from the IRS is a notification that they need verification of documents or substantiation of an amount you have claimed on your tax return. Read the letter thoroughly. Determine what they are looking for, and then provide the information. Some of the most commonly missed items on a return are simple things: You forgot to sign the 1040; You didn’t attach W-2’s and required statements; If you’re paying quarterly, maybe you claimed the wrong amount as estimated tax; Or, perhaps the income you listed doesn’t match the figure that was reported to the IRS on a Form 1099 by someone who paid you during the tax year.

If you have the correct information, it’s a simple matter to fix. Make copies of your documents verifying the information on your return and send the copies back to the IRS along with a copy of the letter they sent to you. If, in fact, you didn’t include an amount on your return that should have been there, sign the form agreeing to the change and send them a check for the amount of tax due by the deadline date given for compliance. Usually, penalties and interest will be added – so, the sooner you comply, the less it will cost.

If your IRS letter advises you that your return has been selected for audit, you would be wise to seek professional advice. If the tax professionals at Accounting & Tax Solutions, Inc. prepared your return, contact us immediately. If you prepared your own return, contact us. An Enrolled Agent (EA) or CPA can help with the audit. Enrolled Agents are authorized by the U.S. Treasury Department to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals.

Now you’re thinking, what about that possible good news mentioned earlier? An unexpected refund, of course. Now, open that letter!

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Paying For College

By 2007, Tax Tips

You’ve probably heard about the 529 College Savings Plan. But what is it exactly? The 529 College Savings Plan is one of the best savings incentives for college and something you don’t want to miss out on if you have children or grandchildren. This plan is named for Section 529 of the Internal Revenue Code, which was passed into law by Congress in 1997. This plan includes credits, deductions, and savings incentives for education.

The 529 incentive is designed to help families save for the cost associated with future qualified higher education. Contributions to this savings plan are not tax-deductible. However, provisions in the code allow for the earnings to grow tax-deferred until the funds are withdrawn to pay for higher education expenses. The plan allows flexibility in choosing the portfolio that best fits your needs, while simultaneously allowing you to control withdrawals from the account for as long as it is maintained.

As of January 1, 2002, withdrawals from plans used for qualified college expenses are free of federal tax. Family members or friends can make contributions to 529 plans as well as parents. There is a much higher contribution limit for the 529 plan than for other education savings plans. An added bonus is the less binding income restrictions. Most states offering the plan are partnered with mutual fund companies that actually manage the funds.

In addition to the 529 plan, there are other methods to help defray the high cost of college, such as Coverdell Education Savings accounts, education savings bonds, Hope Scholarship Credit, Lifetime Learning Credit, and the education loan interest deduction.

If college plans are in your future, be sure to check out all the different ways your Uncle Sam has established to help you with ever-increasing college expenses.

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Home Office Deduction

By 2007, Tax Tips

You’ve decided to start a small business working out of your home. Life is great and you can’t beat the commute. Now, how will this affect your income taxes? Can you deduct expenses for use of your home? The answer is that it depends…on a lot of things.

First of all, the business must be for profit or an expectation of profit. Next, you must set aside an area that is used exclusively for this business. Perhaps you’ve set up a room with a desk, computer, file cabinets, and storage for your product. Use the room entirely and exclusively for business purposes and it will be deductible. Beware, however, that as soon as you add a sofa bed in the corner for your in-laws to use when they come to visit, the space is no longer exclusive and you lose the deduction.

What is eligible for a deduction? This is where the math comes in. You must determine the total square footage of your home and the total square footage of the office. Example: Total house is 2000 square feet and the office area is 200 square feet. This will give you a 10% office usage equation. You will then be allowed to deduct 10% of your costs for the upkeep and maintenance of your home which includes insurance, taxes, mortgage interest (or rent if you do not own), electricity, gas, and repairs for the entire house. Additionally, you can take specific fix-up and maintenance costs in full if they are solely for the business space.

Also available is a deduction for depreciation on the home. To determine this figure, use the cost of the house, less the value of the land, and depreciate this value over 39.5 years (commercial use value). When you sell the home, you must make an adjustment for the amount of the depreciation taken. This depreciation adjustment is recaptured on your tax return at the 25% tax rate.

Be sure you fully understand the home office deduction and subsequent depreciation recapture before using it. Rules for the home office deduction can be tricky; therefore it is wise to get professional tax help from an Enrolled Agent or other licensed tax practitioner.

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