The IRS has announced the launch of two new online tools to help families verify, manage and monitor monthly payments of child tax credits under the American Rescue Plan Act (ARP) ( P.L. 117-2). These are in addition to the Non-filer Sign-up tool announced last week, which helps families register for child tax credits. The tools are both available through the Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.

The IRS has announced the launch of two new online tools to help families verify, manage and monitor monthly payments of child tax credits under the American Rescue Plan Act (ARP) (P.L. 117-2). These are in addition to the Non-filer Sign-up tool announced last week, which helps families register for child tax credits. The tools are both available through the Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.

The Treasury and IRS have urged taxpayers to use a special online tool to determine eligibility for the Child Tax Credit (CTC) and the special monthly advance payments beginning on July 15. The new CTC Eligibility Assistant is interactive and easy to use. It is particularly useful to those who do not normally file a federal tax return and have not yet filed either a 2019 or 2020 return.

"This new tool provides an important first step to help people understand if they qualify for the CTC, which is especially important for those who don’t normally file a tax return," said IRS Commissioner Chuck Rettig. "The eligibility assistant works in concert with other features on IRS.gov to help people receive this important credit. The IRS is working hard to deliver the expanded Child Tax Credit, and we will be rolling out additional help for taxpayers in the near future. Where possible, please help us help others by distributing CTC information in your communities," he added.

The CTC Eligibility Assistant does not request any personally-identifiable information for any family member. The tool can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant.

In addition to verification of their eligibility, the Update Portal allows a taxpayer to unenroll from receiving monthly payments, in order to receive a lump sum. The tool can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. The unenroll feature is helpful to families that no longer qualify for the child tax credit or believe they will not qualify when they file their 2021 return. This could happen if:

• their income in 2021 is too high to qualify for the credit;
• someone else (an ex-spouse or another family member, for example) qualifies to claim their child or children as dependents in 2021; or
• their main home was outside of the United States for more than half of 2021.

Further, future versions and new features of the tool are planned for the summer and fall. These updates will allow taxpayers to view their payment history, adjust bank account information or mailing addresses. In general, these payments will go to families who:

• filed either a 2019 or 2020 federal income tax return;
• used the Non-Filers tool register for an Economic Impact Payment; or
• registered for the advance child tax credit using the new Non-filer Sign-up tool.

Next, eligible families will receive advance payments, either by direct deposit or check. Each payment will be up to $300 per month for each child under age six and up to $250 per month for each child ages six through 17. Filing soon will ensure that the IRS has taxpayers’ most current bank account information and key details about qualifying family members. This includes individuals who do not normally file tax returns, including families experiencing homelessness and individuals in undeserved groups.

The IRS also announced pertinent child tax credit changes. The ARP raised the maximum child tax credit to $3,600 for children under the age of six and to $3,000 per child for children ages six through 17. Finally, the IRS urged community groups, non-profits, associations, education organizations and taxpayers with connections to individuals with children to share this critical information about the child tax credit as well as other important benefits.

Partnerships, S corporations, and U.S. persons with interests in foreign partnerships may rely on transition relief from penalties for tax years beginning in 2021 with respect to new Schedules K-2 and K-3.

Partnerships, S corporations, and U.S. persons with interests in foreign partnerships may rely on transition relief from penalties for tax years beginning in 2021 with respect to new Schedules K-2 and K-3. These schedules may be required for:

• Form 1065, U.S. Return of Partnership Income,
• Form 1120-S, U.S. Income Tax Return for an S Corporation, and
• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

The IRS also released new draft instructions for Schedules K-2 and K-3. Comments are requested.

Reporting Requirement for Interests in Foreign Partnerships
For tax years beginning in 2021, two new forms may be required when a partnership files Form 1065 or Form 8865, or an S corporation files Form 1120-S (1) Schedule K-2, Partners’ Distributive Share Items—International, and (2) Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.

The IRS released final versions of these schedules on June 3 and 4, 2021, after receiving comments on draft versions it released in July of 2020.

Waived Penalties for Failing to File or Furnish Schedules K-2 and K-3
The IRS recognizes that a filer may not have systems or procedures in place to obtain information about its partners, shareholders, or the controlled foreign partnership (CFP) to determine whether and how it must file a part of Schedules K-2 and K-3.

Accordingly, for tax years beginning in 2021, penalties will not be imposed for incorrect or incomplete reporting on Schedules K-2 and K-3 if the partnership or S corporation establishes to the satisfaction of the IRS that it made a good faith effort to comply with the requirements to file or furnish the schedules. A Schedule K-2 or K-3 filer that does not establish that it made a good faith effort to comply with the new requirements is not eligible for this penalty relief.

Good Faith Effort to Complete Schedules K-2 and K-3
In determining whether a filer makes a good faith effort to complete Schedules K-2 and K-3, the IRS will take into account:

• the extent to which the filer has changed its systems, processes, and procedures for collecting and processing relevant information;
• the extent to which the filer has obtained information from partners, shareholders, or the CFP, or applied reasonable assumptions when information is not obtained; and
• the steps the filer has taken to modify the partnership or S corporation agreement or governing instrument to facilitate the sharing of information with partners and shareholders that is relevant to determining whether and how to file Schedules K-2 and K-3.

With respect to relevant information about partners, shareholders, or the CFP, the IRS will assess the effort the Schedule K-2/K-3 filer made to obtain this information and the reasonableness of any assumptions, taking into account the relationship between the Schedule K-2/K-3 filer and its partners, shareholders or the CFP. For example, the appropriate level of diligence and/or the reasonableness of an assumption may differ with respect to a partner that manages or controls the partnership, or a partner with a significant interest in the partnership, as compared to partners holding small interests for which there may not be the same ease of access to information. A Schedule K-2/K-3 filer may have made a good faith effort despite being unsuccessful in obtaining information from its partners, shareholders, or the CFP.

Comments Requested
The IRS requests comments on the new draft instructions to Schedules K-2 and K-3 for tax years beginning in 2021. The IRS is especially in comments regarding:

• instances where the instructions do not provide sufficient guidance on how to complete the returns or where additional clarity is needed;
• suggestions for addressing structures and situations that make it difficult to determine certain information (for example, tiered partnership structures or publicly-traded partnerships; and
• reasonable assumptions Schedule K-2/K-3 filers could make in determining whether and how to complete Schedules K-2 and K-3 for tax years beginning after 2021, and whether these assumptions may differ between various parts of the Schedules K-2 and K-3.

Comments must be submitted in writing and should include a reference to Notice 2021-39. The IRS strongly encourages electronic comments submitted via the Federal eRulemaking Portal at https://www.regulations.gov (type IRS-2021-0006 in the search field on the regulations.gov homepage to find this notice and submit comments). However, to the extent practicable, the IRS will also consider paper comments it receives by mail.

The Departments of the Treasury, Labor, and Health and Human Services (the Departments), have issued interim final rules and identical proposed regulations to implement provisions of the No Surprises Act.

The Departments of the Treasury, Labor, and Health and Human Services (the Departments), have issued interim final rules and identical proposed regulations to implement provisions of the No Surprises Act. On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA), which included the No Surprises Act, was signed into law. The No Surprises Act provides federal protections against surprise billing and limits out-of-network cost sharing under many of the circumstances in which surprise bills arise most frequently. The regulations are generally applicable for plan years (in the individual market, policy years) beginning on or after January 1, 2022.

Application of No Surprises Rules
The interim and proposed Treasury regulations implement the rules under the new Code Sec. 9816 regarding the prevention of surprise medical bills, Code Sec. 9817 regarding surprise ambulance bills, and Code Sec. 9822 regarding the choice of health care professional. The regulations apply to group health plans, including grandfathered plans. They do not apply to excepted benefits, short-term, limited-duration insurance, or health reimbursement arrangements or other account-based group health plans.

The interim regulations also include largely overlapping HHS and DOL regulations that apply to health insurance issuers offering group or individual health insurance coverage, and carriers in the Federal Employees Health Benefits Act (FEHB) Program to provide protections against balance billing and out-of-network cost sharing with respect to emergency services, non-emergency services furnished by nonparticipating providers at certain participating health care facilities, and air ambulance services furnished by nonparticipating providers of air ambulance services.

The new regulations prohibit nonparticipating providers, health care facilities, and providers of air ambulance services from balance billing participants, beneficiaries, and enrollees in certain situations, and permit these providers and facilities to balance bill individuals if certain notice and consent requirements in the No Surprises Act are satisfied. They also require certain health care facilities and providers to provide disclosures of federal and state patient protections against balance billing.

The regulations recodify certain patient protections that initially appeared in the Affordable Care Act and provide that the No Surprises Act applies to grandfathered plans. They also set forth complaints processes with respect to violations of the protections against balance billing and out-of-network cost sharing under the No Surprises Act.

These new rules protect individuals from surprise medical bills for emergency services, air ambulance services furnished by nonparticipating providers, and non-emergency services furnished by nonparticipating providers at participating facilities in certain circumstances. Among other requirements, they require emergency services to be covered without any prior authorization, without regard to whether the health care provider furnishing the emergency services is a participating provider or a participating emergency facility with respect to the services, and without regard to any other term or condition of the plan or coverage other than the exclusion or coordination of benefits or a permitted affiliation or waiting period.

Additionally, emergency services include certain services in an emergency department of a hospital or an independent freestanding emergency department, as well as post-stabilization services in certain instances.

Effective Dates and Comments
The regulations are generally applicable for plan years (in the individual market, policy years) beginning on or after January 1, 2022. However, the HHS-only regulations that apply to health care providers, facilities, and providers of air ambulance services are applicable beginning on January 1, 2022. The OPM-only regulations that apply to health benefits plans are applicable to contract years beginning on or after January 1, 2022.

Comments must be received no later than 5 p.m. on September 7, 2021. Comments, including mass comment submissions, must be submitted in one of the following three ways: electronically at https://www.regulations.gov by entering the file code in the search window and then clicking on “Comment”; by regular mail to the Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9909-IFC, P.O. Box 8016, Baltimore, MD 21244-8016; or by express or overnight mail to the Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9909-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

The IRS has proposed regulations that would amend the rules for filing electronically and affects persons required to file partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns.

The IRS has proposed regulations that would amend the rules for filing electronically and affects persons required to file partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns.

The proposed amendments reflect changes made by the Taxpayer First Act of 2019 (TFA), P.L. 116-25, and are consistent with the TFA’s emphasis on increasing electronic filing.

The IRS is also withdrawing proposed regulations ( REG-102951-16) published in the Federal Register on May 31, 2018, that would amend the rules for determining whether information returns must be filed electronically.

Electronic Filing
Amendments are proposed to:

• income tax regulations under Code Secs. 1461 and 1474, which provide that persons required to deduct and withhold tax are liable for such tax; and Code Sec. 6050I, which requires persons to report information about financial transactions to the IRS;
• pension excise tax regulations under Code Sec. 6011, which require persons to report information for certain excise taxes related to employee benefit plans;
• regulations under Code Secs. 1474, 6011, 6012, 6033, 6057, 6058, and 6059, for determining whether returns must be filed using magnetic media; and
• regulations under Code Sec. 6011 to remove the option available to a person required to report certain excise taxes on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, to designate a Form 4720 filed by a private foundation or trust as that person’s return if the foundation is reporting the same transaction.

Under Code Sec. 6011(e) and related regulations, filers are already required to file returns and statements electronically if, during a calendar year, they are required to file 250 or more returns. Eight related proposed rules would lower the 250-return threshold as authorized by Code Sec. 6011(e), as amended by section 2301 of the TFA. A filer can request that the IRS waive the electronic-filing requirement if the filer’s cost to comply with the rule would cause a financial hardship, and the IRS routinely grants meritorious hardship waiver requests.

Under Code Sec. 6050I and related regulations, filers are required to file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if, in the course of their trade or business, they receive more than $10,000 in cash in one transaction or in two or more related transactions. The related proposed rule would require filers of Forms 8300 to file those forms electronically if such filers are also required to file returns electronically under Reg. §§301.6011-2(b)(1) and (2). The Treasury Department and the IRS expect filers of Form 8300 to use FinCEN’s BSA E-Filing System, which is free, requiring only an internet connection.

Under Code Sec. 6011(e)(4) and related regulations, financial institutions defined in Code Sec. 1471(d)(5) already are required to electronically file Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. The related proposed rule would extend this filing requirement to Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, filed by the same financial institutions.

Under Code Sec. 6011(h), as amended by section 3101 of the TFA, organizations required to file annual returns relating to any tax imposed by Code Sec. 511 must file those returns in electronic form. A proposed regulation implements this statutory requirement.

Under Code Sec. 6033(n), as amended by section 3101 of the TFA, organizations required to file returns under Code Sec. 6033 must file those returns in electronic form. Proposed regulations implement this statutory requirement.

Seven proposed regulations would require electronic filing for certain returns not currently required to be filed electronically. Because electronic filing has become more common, accessible, and economical, the economic impact of these proposed rules on small entities is expected be insignificant. If the cost to comply with these electronic-filing requirements would cause a financial hardship, an entity may request a waiver, and the IRS routinely grants meritorious hardship waiver requests.

Comments Requested
The proposed rules are scheduled to be published in the Federal Register on July 23, 2021, and available online at federalregister.gov/d/2021-15615, and on govinfo.gov. Written or electronic comments must be received by September 21, 2021, the date that is 60 days after the date the proposed rules are published in the Federal Register. Comments may be submitted electronically at www.regulations.gov (indicate IRS and REG-102951-16), or by mail.

The public hearing is being held by teleconference on September 22, 2021, at 10 a.m. EST. Requests to speak and outlines of topics to be discussed at the public hearing must be received by September 21, 2021. If no outlines are received by that date, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5:00 p.m. EST on September 20, 2021.

Secretary of the Treasury Janet L.Yellen addressed the support for a global minimum tax for corporations at a press conference at the close of the G20 Finance Ministers and Central Bank Governors Meetings, on July 11, 2021.

Secretary of the Treasury Janet L.Yellen addressed the support for a global minimum tax for corporations at a press conference at the close of the G20 Finance Ministers and Central Bank Governors Meetings, on July 11, 2021, see https://home.treasury.gov/news/press-releases/jy0270. Secretary Yellen stated that now 132 countries, representing more than 90 percent of global GDP have agreed to the outline of a global tax deal. Secretary Yellen praised what she sees as a "revival of multilateralism" on taxation and other issues. She stated, "we continue to see consensus around – and enthusiasm for – a global corporate minimum tax rate of at least 15%, as well as a partial reallocation of taxing rights to reflect the realities of the modern business world. … This deal will end the race to the bottom. Instead of asking the question: ‘Who can offer the lowest tax rate?,’ it will allow all of our countries to compete on the basis of economic fundamentals – on the skill of our workforces, our capacity to innovate, and the strength of our legal and economic institutions. And this deal will give our nations the ability to raise the necessary funding for important public goods like infrastructure, R & D, and education."

Implementation in the United States
In response to a question on OECD Pillar One (nexus and source rules), Secretary Yellen said the details of Pillar One remain to be negotiated, and she would say that OECD Pillar Two is further along. Secretary Yellen stated, "Pillar Two [the minimum tax rate], we're hoping to have incorporated in the coming budget resolution and reconciliation bill the changes that are necessary to put it into effect, but Pillar One will be on a slightly slower track. We will work with Congress. Maybe it will be ready in the Spring of 2022 and we will try to determine at that point what's necessary for implementation."

The IRS has provided a procedure for making elections and revocations under Act Sec. 2303(e) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136) for taxpayers with a net operating loss (NOL) for any tax year beginning in 2018, 2019, or 2020, all or a portion of which consists of a farming loss (farming loss NOLs). The procedure is effective on the date of its release, June 30, 2021.

The IRS has provided a procedure for making elections and revocations under Act Sec. 2303(e) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136) for taxpayers with a net operating loss (NOL) for any tax year beginning in 2018, 2019, or 2020, all or a portion of which consists of a farming loss (farming loss NOLs). The procedure is effective on the date of its release, June 30, 2021.

Specifically, the procedure:

• prescribes when and how to make an election with regard to all NOLs of the taxpayer, regardless of whether the NOL is a farming loss NOL;
• provides that a taxpayer is treated as having made a deemed election under Act Sec. 2303(e)(1) of the CARES Act if the taxpayer, before December 27, 2020, filed one or more original or amended tax returns, or applications for tentative refund, that disregard the CARES Act amendments with regard to a farming loss NOL; and
• prescribes when and how to revoke an election made under Code Sec. 172(b)(1)(B)(iv) or (b)(3) to waive the two-year carryback period for the farming loss portion of a farming loss NOL incurred in a tax year beginning in 2018 or 2019.

TCJA Amendments to NOL Rules
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) amended the NOL rules to provide that, with regard to NOLs arising in a tax year beginning after 2017, the amount allowed as an NOL deduction cannot exceed 80 percent of the taxable income computed without regard to any NOL deduction (the 80-percent limitation). The 80-percent limitation does not apply in the case of a non-life insurance company. The TCJA also eliminated NOL carrybacks, except that a two-year carryback period is allowed for the portion of an NOL that is a farming loss. Taxpayers entitled to this two-year carryback period may make an irrevocable election to waive it. A separate rule provides that any taxpayer entitled to an NOL carryback period may irrevocably elect to relinquish the entire carryback period with respect to that NOL for any tax year. The TCJA changes relating to loss carrybacks apply to NOLs arising in tax years beginning after 2017.

CARES Act Amendments to NOL Rules
The CARES Act temporarily suspended the 80-percent limitation so that it applies only to NOLs arising in tax years beginning after 2017 that are deducted in tax years beginning after 2020. In addition, it provided a five-year carryback period for any NOL arising in a tax year beginning after 2017 and before 2021. The two-year carryback period for farming losses does not apply to any such NOL.

CTRA 2020 Amendments to CARES Act
The COVID-related Tax Relief Act of 2020 (CTRA 2020), which was enacted as part of the Consolidated Appropriations Act, 2021 (CAA 2021) ( P.L. 116-260) amended Act Sec. 2303 of the CARES Act by adding a new subsection (e), which took effect as if originally included in that CARES Act, to provide that a taxpayer with a farming loss NOL for any tax year beginning in 2018, 2019, or 2020, may make an election to disregard the CARES Act amendments.

If a taxpayer makes the election: (i) the 80-percent limitation applies to determine the NOL deduction for each tax year beginning in 2018, 2019, or 2020 to the extent the deduction is attributable to NOLs arising in tax years beginning after 2017, but the 80-percent limitation does not apply to determine the NOL deduction for any tax year beginning before 2018, (ii) the modified taxable income rule applies with regard to each tax year beginning in 2018, 2019, or 2020, and (iii) the NOL carryback period is determined under Code Sec. 172(b), as amended by the TCJA and effective prior to enactment of the CARES Act, for any NOL arising in any tax year beginning in 2018, 2019, or 2020.

An election to disregard the CARES Act amendments (an affirmative election) must be made in the manner prescribed by the IRS. Once made, an election is irrevocable. An affirmative election must be made by the due date, including extensions of time, for filing the taxpayer’s tax return for the first tax year ending after December 27, 2020.

In the case of any taxpayer with a farming loss NOL that files a tax return before December 27, 2020, that disregards the CARES Act amendments, the taxpayer is treated as having made a deemed election (a deemed election) unless the taxpayer amends the return to reflect such amendments by the due date (including extensions of time) for filing the taxpayer’s tax return for the first tax year ending after December 27, 2020.

A taxpayer can revoke an election made under Code Sec. 172(b)(1)(B)(iv) or (b)(3) to waive the two-year carryback period if the election (i) was made before December 27, 2020; and (ii) relates to the two-year carryback period for the portion of any farming loss NOL that is a farming loss arising in tax years beginning in 2018 or 2019.

Procedure for Making Elections to Disregard CARES Act Amendments
Affirmative election. A taxpayer with a farming loss NOL, other than a taxpayer making a deemed election described below, may make an affirmative election under Act Sec. 2303(e)(1) of the CARES Act if: (i) the farming loss NOL arose in any tax year beginning in 2018, 2019, or 2020; and (ii) the taxpayer:

• makes the affirmative election on a statement described below by the due date, including extensions of time, for filing the taxpayer’s tax return for the first tax year ending after December 27, 2020; and
• attaches a statement to its tax return for the first tax year ending after December 27, 2020, that provides at the top: "The taxpayer elects under § 2303(e)(1) of the CARES Act and Revenue Procedure 2021-14 to disregard the amendments made by § 2303(a) of the CARES Act for taxable years beginning in 2018, 2019, and 2020, and the amendments made by § 2303(b) of the CARES Act that would otherwise apply to any net operating loss arising in any taxable year beginning in 2018, 2019, or 2020. The taxpayer incurred a Farming Loss NOL, as defined in section 1.01 of Revenue Procedure 2021-14, in [list each applicable taxable year beginning in 2018, 2019, or 2020]." The taxpayer should also attach a copy of the statement to any original or amended tax return or application for tentative refund on which the taxpayer claims a deduction attributable to a two-year NOL carryback pursuant to the affirmative election.

Deemed election. A taxpayer is treated as having made a deemed election under Act Sec. 2303(e)(1) of the CARES Act if the taxpayer, before December 27, 2020, filed one or more original or amended tax returns, or applications for tentative refund, that disregard the CARES Act amendments with regard to a farming loss NOL. Special procedure is provided for certain taxpayers whose two-year carryback claims filed before December 27, 2020, were rejected. Generally, if such a taxpayer wants to continue to pursue those claims, the taxpayer should submit complete copies of their rejected applications or claims, including the original or amended tax returns for the tax years in which the NOLs arose, in the manner set forth in the procedure.

A taxpayer will not be treated as having made a deemed election if, for each tax year for which the taxpayer filed an original or amended tax return or an application for tentative refund that treated a farming loss NOL in a manner that disregards the CARES Act amendments, the taxpayer subsequently files either (i) an amended return by the due date, including extensions of time, for filing the taxpayer’s tax return for the first tax year ending after December 27, 2020, or (ii) an application for tentative refund within the required time for filing such an application and also by the due date, including extensions of time, for filing the taxpayer’s tax return for the first tax year ending after December 27, 2020. The amended return or application must properly reflect the treatment of each farming loss NOL under the CARES Act amendments.

Procedure for Revocation of Election Not to Apply the Two-year Carryback Period for Farming Losses
A taxpayer that elected under Code Sec. 172(b)(1)(B)(iv) or (b)(3) not to have the two-year carryback period apply to the farming loss portion of a farming loss NOL incurred in a tax year beginning in 2018 or 2019 may revoke that election, if the taxpayer:

• made that election before December 27, 2020;
• makes the revocation by the date that is three years after the due date, including extensions of time, for filing the return for the tax year the farming loss NOL was incurred; and
• attaches a statement to an amended return for the loss year that provides at the top: "Pursuant to section 4.01 of Rev. Proc. 2021-14 the taxpayer is revoking a prior §172(b)(1)(B)(iv) or § 172(b)(3) election not to have the two-year carryback period provided by § 172(b)(1)(B)(i) apply to the Farming Loss NOL, as defined in section 1.01 of Rev. Proc. 2021-14, incurred in the taxable year."

Consolidated Groups
The procedure provides special rules for consolidated groups for making an affirmative election, consequences of affirmative and deemed elections, and reliance on rules in Reg. §1.1502-21 regarding the application of the 80-percent limitation.

The IRS has provided answers to questions that certain transportation companies may have regarding Treasury grants and related taxes.

The IRS has provided answers to questions that certain transportation companies may have regarding Treasury grants and related taxes, https://www.irs.gov/newsroom/coronavirus-economic-relief-for-transportation-services-certs-frequently-asked-questions. These companies must largely prioritize the use of the grants for payroll costs, though grants may be used for operating expenses, including the acquisition of services and any equipment needed to protect workers and customers from COVID-19. In addition, the funds may also be used for the repayment of debt accrued to maintain payroll. The IRS reminded the companies that funds not used for eligible activities within one year of receipt of the grant, must be returned to the Treasury.

The Service reminded the companies that the Coronavirus Economic Relief for Transportation Services (CERTS) Act ( P.L. 117-24) authorizes the Treasury to provide grants to transportation service providers that experienced annual revenue losses of 25 percent or more as a result of COVID-19. Under which, the IRS posted answers to two questions:

• are the grants taxable? Yes, the receipt of a CERTS Act grant is not excluded from the recipient’s gross income under the Code and therefore is taxable; and
• are costs for which the grants are used deductible? Yes, the costs are deductible to the extent that they are otherwise deductible under the law. The tax law generally permits the payment of wages, salaries, and benefits to employees and other amounts paid to carry on a trade or business to be deducted as ordinary and necessary business expenses.

The IRS reminded taxpayers that their website (www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules.

The IRS reminded taxpayers that their website ( www.irs.gov) provides millions of visitors with the answers they need to fit their busy summer schedules. Taxpayers who requested an extension to October 15 or missed the May 17 deadline can still prepare and e-file tax returns for free with the IRS Free File tool. Further, taxpayers can view, download or print tax products, and do the following:

Use the "File" tab on the home page for most federal income tax needs. Access the Interactive Tax Assistant tool that can answer many tax law questions.
See their tax account with the View Your Account tool. With this, they can find information such as a payoff amount, the balance for each tax year owed, up to 24 months of their payment history and key information from their current tax year return as originally filed.
Use the Get Transcript tool to view, print or download their tax transcripts after the IRS has processed the return.
Find the most up-to-date information about tax refunds using the Where's My Refund? tool on the IRS website and on the official IRS mobile app, IRS2Go. Taxpayers can start checking on the status of their refund 24 hours after the IRS acknowledges receipt of an e-filed return.
Additionally, many pages on the IRS website are now available in Spanish, Vietnamese, Russian, Korean, Haitian, Creole, and Chinese—simplified and traditional. Earlier this year, the agency posted a Spanish language version of Form 1040 PDF and the related instructions.

Assistive Technology
Moreover, at the online Alternative Media Center (AMC), taxpayers can find a variety of accessible products like screen reading software, refreshable Braille displays, and screen magnifying software. These products include tax forms, instructions, and publications that can be downloaded or viewed online as Section 508 compliant PDF, HTML, eBraille, text, and large print. However, every product is not available in all formats. For example, tax forms are not available as HTML. To request paper copies of tax forms, instructions or publications in Braille or large print, taxpayers must call the tax form telephone number at 800-829-3676.

Coronavirus Tax Relief Information
Further, the IRS has published ready-to-use articles, e-posters, videos, and much more on the website about Economic Impact Payments, the Recovery Rebate Credit, and the Advance Child Tax Credit. The IRS placed a special emphasis on partnering with organizations that work with groups focusing on veterans, homeless and low-income taxpayers as well as non-English speaking audiences to share information. In all, the IRS worked with thousands of partners across the country reaching organizations representing hundreds of millions of taxpayers.

IRS Tax Withholding Estimator
Finally, the IRS Tax Withholding Estimator helps employees assess their income tax, credits, adjustments and deductions and determine whether they need to change their withholding by submitting a new Form W-4, Employee's Withholding Allowance Certificate. However, taxpayers should remember that, if needed, they should submit their new W-4 to their employer, not the IRS.

On November 21, President Obama signed into law the 3% Withholding Repeal and Job Creation Act. The new law does much more than merely repeal withholding on government contractors. The new law enhances the Work Opportunity Tax Credit (WOTC) for veterans of the U.S. Armed Forces, expands the IRS’ continuous levy authority, and more.

Government withholding

The Tax Increase Prevention and Reconciliation Act of 2005 (2005 Tax Act) created a new withholding requirement for government agencies. The federal government, and every state and local government, would be required to withhold income tax at the rate of three percent on certain payments to persons providing any property or services. Some payments, such as payments of interest, were exempt.

The government withholding requirement was originally scheduled to apply to payments made after December 31, 2010. Congress delayed the effective date to payments made after December 31, 2011. The IRS issued final regulations in 2011, further delaying the effective date to payments made after December 31, 2012.

Since passage of the 2005 Tax Act, momentum for the repeal of withholding on government contractors has grown. The Senate approved the 3% Repeal Act unanimously on November 10, and the House voted 422–0 in favor of the bill on November 16. The 3% Repeal Act repeals government withholding as if it had never been enacted.

Veterans

The WOTC provides employers an incentive to hire individuals from various target groups, including veterans, The 3% Repeal Act modifies the WOTC for qualified veterans. The WOTC enhancements for veterans are called the Returning Heroes Tax Credit and the Wounded Warrior Tax Credit.

Returning Heroes Tax Credit. The Returning Heroes Tax Credit encourages employers to hire unemployed veterans. Employers hiring short-term unemployed veterans (generally veterans who have been unemployed for at least four weeks but less than six months) may be eligible for a credit of up to $2,400 per employee. The credit reaches $5,600 per employee if the employer hires a veteran who has been unemployed for longer than six months.

Wounded Warriors Tax Credit. The Wounded Warriors Tax Credit rewards employers that hire unemployed veterans with service connected disabilities. The credit reaches $9,600 per employee for employers that hire long-term unemployed veterans with service connected disabilities and $4,800 per employee for employers that hire short-term unemployed veterans with service-connected disabilities.

The 3% Repeal Act also extends the current WOTC for qualified veterans who receive food stamps through the end of 2012. The credit for qualified veterans in this target group can reach $2,400 per employee. Additionally, the 3% Repeal Act makes the WOTC for qualified veterans available to tax-exempt employers and streamlines the certification process.

The changes to the WOTC under the 3% Repeal Act are effective for veterans who begin work for an employer after November 21, 2011 (the date of enactment of the new law). The 3% Repeal Act, however, is temporary and its enhancements to the WOTC for veterans will expire after 2012 unless extended by Congress.

IRS continuous levy

The Taxpayer Relief Act of 1997 authorized the IRS to collect overdue tax debts of individuals and businesses that receive federal payments by levying up to 15 percent of each payment until the debt is paid. In 2004, Congress increased the percentage to 100 percent in case of certain payments due to vendors of services or goods sold or leased to the federal government. The 3% Repeal Act authorizes the IRS to continuously levy at 100 percent on payments for goods, services and property due to vendors of the federal government. This change is effective for levies issued after November 21, 2011 (the date of enactment of the new law).

More provisions

The 3% Repeal Act also:

• Changes the definition of modified adjusted gross income for purposes of the Code Sec. 36B health insurance premium assistance tax credit and certain other federal health care programs
• Extends information sharing between the IRS and the U.S. Department of Veterans Affairs (VA)
• Enhances federal job training programs for veterans
• Directs the Treasury Department to prepare a report on the tax gap and government contractors

If you have any questions about the 3% Withholding Repeal Act, please contact our office.

Depreciation is a reasonable allowance for wear and tear on property used in a trade or business or for the production of income. Property is depreciable if it has a useful life greater than one year and depreciates in value. Property that appreciates in value may also  depreciate if subject to wear and tear. Depreciation ends in the tax year that the asset is retired from service (by sale, exchange, abandonment or destruction) or that the asset is fully depreciated.

Assets with useful lives of one year or less can be deducted as current expenses in the year of their costs. Depreciation cannot be claimed on an asset that is acquired and disposed of in the same year.

Depreciation begins in the tax year that the property is placed in service for either the production of income or for use in a trade or business. Property generally is considered placed in service when it is in a condition or state of readiness to be used on a regular, ongoing basis. The property must be available for a specifically assigned function in a trade or business (or for the production of income).

An asset actually put to use in a trade or business is clearly considered placed in service. If, on the other hand, an asset is not actually put to use, it is generally not considered placed in service unless the taxpayer has done everything he or she can to put the asset to use. For example, a barge was considered placed in service in the year it was acquired, even though it could not be actually used because the body of water was frozen. For a building that is intended to house machinery and equipment, the building's state of readiness is determined without regard to whether the machinery and equipment has been placed in service. Leased property is placed in service by the lessor when the property is held out for lease.

Generally, the year property is placed in service is the tax year of acquisition, but it could be a later time. An asset cannot be placed in service any sooner than the time that the business actually begins to operate.

In the case of agriculture, livestock cannot be depreciated until it reaches maturity and can be used; orchards cannot be depreciated until the trees produce marketable quantities of crops. Prior to those times, costs must be capitalized and cannot be written off.

Especially at year-end, placing an asset in service before the new year can mean the difference between claiming a substantial amount of depreciation on this year's return instead of waiting a full year. If you have any questions on how to qualify a business asset under this deadline, please contact this office.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.

The start of the school year is a good time to consider the variety of tax benefits available for education. Congress has been generous in providing education benefits in the form of credits, deductions and exclusions from income. The following list describes the most often used of these benefits.

Exclusion From Income

Scholarships. A student enrolled in an educational program may receive a scholarship or fellowship to pay for all or part of the student‘s tuition and fees. These amounts are not included in the student‘s (or the parent’s) income. Need-based education grants, such as a Pell Grant, and tuition reductions are also excluded from income. However, amounts paid for work on campus may be taxable as compensation for services. Payments to cover room and board as opposed to tuition are also subject to tax.

Loan cancellation. Most students take out loans to pay for education expenses. Normally, if a debt is cancelled, the debtor has taxable income. However, if a student loan is canceled or reduced, the cancelled amount is not included in income.

Employer assistance. If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. Courses do not have to be related to your job. If they are related, further tax benefits may be available.

Education plans. Generally, amounts paid to establish an education plan, account or savings bond are not deductible. However, income on the account can grow tax-free (unlike a bank account, for example), and distributions of income from the account are not taxable if they are used for tuition and other qualified education expenses. These general rules apply to a Coverdell Education Savings Account (an education IRA), a qualified tuition program (QTP or “529 plan”), and certain U.S. savings bonds. In the last category or Series EE bonds issued after 1989 and Series I bonds.  A qualified tuition program is established by a state and may provide payments for prepaid tuition or an account with tax-free earnings.

Tax Credits

LLC and AOTC. A lifetime learning credit (LLC) of up to $2,000 is available education expenses for a dependent for whom you claim an exemption. More recently, parents can claim an American Opportunity Tax Credit (AOTC) of up to $2,500 for college expenses paid for each eligible student. The current, enhanced level of the AOTC is scheduled to expire at the end of 2012, but the Obama administration has asked Congress to make it permanent. 

Dependent care. Parents can take a credit for dependent care expenses paid so that they can work. Expenses for care do not include amounts paid for education. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are expenses for care. Expenses to attend kindergarten or a higher grade are not expenses for care. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care, so that a credit can be claimed.

Deductions

Some deductions can be taken directly against gross income, in determining adjusted gross income. These are adjustments to income or “above-the-line“ deductions. Other deductions can only be taken as an itemized deduction. An above-the-line deduction is more valuable.

Above-the-line. Tuition expenses of up to $4,000 can be deducted directly against income. Tuition that also qualifies for one of the education tax credits, however, can be used only once, either for a credit or this above-the-line deduction. Ordinarily, interest paid is a nondeductible personal expense (other than home mortgage interests). However, interest paid on a student loan interest is deductible and can also be taken as an adjustment to income.

Itemized. Not all education-related expenses are deductible. However, a taxpayer may be able to claim a deduction for the expenses paid for your work-related education. The deduction will be the amount by which qualifying work-related education expenses exceed two percent of adjusted gross income. These expenses are added to other itemized deductions, to determine whether the taxpayer will itemize or claim the standard deduction.

Gift tax

Generally, a person making a gift must pay gift tax if the gift exceeds a specified amount ($13,000 currently). However, tuition paid directly to an educational institution to cover tuition for someone else’s benefit (e.g. a grandchild) is not taxable gift irrespective of amount. Prepaid tuition plans can qualify for this benefit.

A variety of educational benefits are available. In some cases, a deduction or a credit (but not both) may be available for the same payment. Thus, it is important to determine the exact requirements for each benefit and the amount of the benefit. Our office can help you determine how to maximize these benefits.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Most people are familiar with tax withholding, which most commonly takes place when an employer deducts and withholds income and other taxes from an employee's wages. However, many taxpayers are unaware that the IRS also requires payors to withhold income tax from certain reportable payments, such as interest and dividends, when a payee's taxpayer identification number (TIN) is missing or incorrect. This is known as "backup withholding."

Backup Withholding in General

A payor must deduct, withhold, and pay over to the IRS a backup withholding tax on any reportable payments that are not otherwise subject to withholding if:

• the payee fails to furnish a TIN to the payor in the manner required;
• the IRS or a broker notifies the payor that the TIN provided by the payee is incorrect;
• the IRS notifies the payor that the payee failed to report or underreported the prior year's interest or dividends; or
• the payee fails to certify on Form W-9, Request for Taxpayer Identification Number and Certification, that he or she is not subject to withholding for previous underreporting of interest or dividend payments.

The backup withholding rate is equal to the fourth lowest income tax rate under the income tax rate brackets for unmarried individuals, which is currently 28 percent.

Only reportable payments are subject to backup withholding. Backup withholding is not required if the payee is a tax-exempt, governmental, or international organization. Similarly, payments of interest made to foreign persons are generally not subject to information reporting; therefore, these payees are not subject to backup withholding. Additionally, a payor is not required to backup withhold on reportable payments for which there is documentary evidence, under the rules on interest payments, that the payee is a foreign person, unless the payor has actual knowledge that the payee is a U.S. person. Furthermore, backup withholding is not required on payments for which a 30 percent amount was withheld by another payor under the rules on foreign withholding.

Reportable Payments

Reportable payments generally include the following types of payments of more than $10:

• Interest;
• Dividends;
• Patronage dividends (payments from farmers' cooperatives) paid in money;
• Payments of $600 or more made in the course of a trade or business;
• Payments for a nonemployee's services provided in the course of a trade or business;
• Gross proceeds from transactions reported by a broker or barter exchange;
• Cash payments from certain fishing boat operators to crew members that represent a share of the proceeds of the catch; and
• Royalties.

Reportable payments also include payments made after December 31, 2011, in settlement of payment card transactions.

Failure to Furnish TIN

Payees receiving reportable payments through interest, dividend, patronage dividend, or brokerage accounts must provide their TIN to the payor in writing and certify under penalties of perjury that the TIN is correct. Payees receiving other reportable payments must still provide their TIN to the payor, but they may do so orally or in writing, and they are not required to certify under penalties of perjury that the TIN is correct.

A payee who does not provide a correct taxpayer identification number (TIN) to the payer is subject to backup withholding. A person is treated as failing to provide a correct TIN if the TIN provided does not contain the proper number of digits --nine --or if the number is otherwise obviously incorrect, for example, because it contains a letter as one of its digits.

The IRS compares TINs provided by taxpayers with records of the Social Security Administration to check for discrepancies and notifies the bank or the payer of any problem accounts. The IRS has requested banks and other payers to notify their customers of these discrepancies so that correct TINs can be provided and the need for backup withholding avoided.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

• Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
• Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
• Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
• Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
• Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
• Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
• Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
• Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
• Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
• Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
• Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

• Proof of medical and dental expenses;
• Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
• Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
• Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
• Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
• Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

What your return says is key

If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS's interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven't complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Employees and wages

An employer can claim the maximum 35 percent credit if it has no more than 10 full-time equivalent (FTE) employees receiving average annual wages of $25,000 or less. The credit is phased out as the number of FTEs increases to 25 and as average annual wages increase to $50,000.  An employer with 25 or more employees, or paying average annual wages of $50,000 or more per employee, will not receive a credit.

In counting FTEs, the employer should not include owners and family members.  Seasonal employees are not counted unless they work at least 120 days during the year. In determining average annual wages, employers must count all wages, bonuses, commissions or other compensation, including sick leave and vacation leave.

Applicable years

The credit took effect in 2010.  It did not expire at the end of 2010 but can be claimed from year to year.  The credit applies at the 35/25 percent levels for four years, through 2013. After 2013, the maximum credit increases to 50 percent for for-profit employers and 35 percent for tax-exempt employers, but only for two years. Thus, the credit can be claimed every year for the six years from 2010 and 2015.  The credit is recalculated every year based on the total health insurance premiums paid. Only non-elective employer premiums are counted; salary reduction contributions paid through a cafeteria plan or other arrangement are not counted.

Premiums

An employer must pay at least 50 percent of the premium cost of health insurance coverage, and must pay the same uniform percentage of costs for each employee who obtains health insurance through the employer. A transition rule for 2010 treats an employer as satisfying the uniformity rule as long as the employer pays at least 50 percent of the coverage costs of each employee, based on the cost of employee-only (single) coverage, even if the employer does not pay the same percentage of costs for each employee.

The premiums must be paid for qualified health insurance, such as a hospital or medical service plan or health maintenance organization. It includes coverage for dental, vision, long-term care, nursing home care, and coverage for a specified disease or illness.  Coverage does not accident insurance, disability income insurance, and workers' compensation.

Claiming the credit

The credit is determined on Form 8941, Credit for Small Employer Health Insurance Premiums. For-profit employers report the amount of the credit on Form 3800, General Business Credit, and attach the forms to their income tax return. As a general business credit, any unused credit (in excess of taxable income) can be carried back one year (except for a credit arising in 2010, the first year) or carried forward 20 years.  For-profit employers deduct the credit from the premiums paid for health insurance, when computing the deduction for health insurance premiums.

Tax-exempt employers report the credit on Form 990-T, Exempt Organization Business Income Tax Return, regardless of whether the organization is subject to tax on unrelated business income. The credit is refundable for tax-exempt employers, provided it does not exceed the employer’s income tax withholding and Medicare taxes. The credit is not refundable if the employer does not claim the credit on Form 990-T.

When you experience a change in employment, probably the last thing on your mind is your 401(k) plan distribution. There are a number of options to choose from when determining what to do with your 401(k) when changing employment - from keeping your account with your past employer, taking it with you, cashing out, or rolling the amounts over into a different account. However, mishandling this transaction can have detrimental tax effects, so make sure that you understand all aspects of the distribution options available to you and act accordingly before you walk out the door.

Often, individuals leave their 401(k) plans with their past employer because of confusion about the options. Generally, there are five moves departing employees can make regarding their 401(k) plans:

Take the cash. Cashing out of a 401(k) plan is rarely a wise decision. Although leaving your job with a nice roll of cash in your pocket sounds tempting (especially if you don't have another job lined up and are short on cash), this decision comes at a very high price. If you cash out of your plan, your current employer is required to withhold 20 percent of the amount for federal income taxes, on top of any state income tax withholding that will be required. Moreover, you face federal income taxes on the distribution (as well as any state income taxes) and a 10 percent penalty tax on the distributed amount if you are under the age of 59 and 1/2 at the time of the distribution. In total, these taxes could eat up over half of your distribution. Additionally, when you cash out of your plan you lose out on the opportunity for continued tax-deferral and tax-compounding of the amount in your account.

Roll your funds over into an IRA. An IRA rollover is probably the most popular option for handling a distribution upon a change of employment due to the high level of flexibility and control that the taxpayer has over the funds. With an IRA rollover, you have the ability to take your time to consider the other options such as taking the distribution in cash or investing the funds in your new employer's qualified plan. You also have a great amount of flexibility as to how the funds are invested.

Keep in mind, however, that only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for rollover into an IRA. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the IRA.

Important note: The transfer of funds between your former employer's plan and your IRA rollover account must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20 percent withholding requirement. When you receive the distribution check (it will be in the name of the IRA trustee), you have 60 days to deposit it into your IRA account to qualify for rollover treatment.

Invest in your new employer's plan. You may be able to roll your 401(k) account from your past employer into a plan maintained by your new employer. Although your new employer is not required to accept your 401(k) rollover, most do. Thus, your new employer may allow you to invest your 401(k) distribution in the new company's qualified retirement plan. However, only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for this type of rollover. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the new plan.

Note. The transfer of funds between your former employer and your new employer must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20% withholding requirement. When you receive the distribution check (it will be in the name of the new employer's plan trustee), your new employer must deposit it into the new company's plan within 60 days to qualify for rollover treatment.

Keep your funds in your current plan. If you have been satisfied with your company's plan performance in the past, have significant after-tax moneys in the fund, and/or you just don't want to make a decision on your distribution at this time, you may have the option of leaving your 401(k) funds where they are with your previous employer. Keep in mind that this option is not a given and is at the discretion of your former employer. For example, employers may not permit departing employees to remain in their 401(k) if the account value is less than $5,000, since maintaining accounts with small values creates administrative burdens. Generally, former employees are also not allowed to add to the account maintained with the past employer and can not borrow against the funds in the 401(k).

One important thing to consider here though is whether keeping your funds with your former employer will limit distribution or access options since you are no longer an employee of the company. Contact your company's benefits department to determine if there are any restrictions that you should know about.

Roll over your 401(k) into a Roth account. Beginning in 2010, all individuals, regardless of income or filing status, can roll over a 401(k) into a Roth IRA. Prior to 2010, eligibility for rolling over a 401(k) into a Roth IRA was limited to individuals with adjusted gross incomes that did not exceed $100,000. This move may be a beneficial if you expect to be in a higher tax rate bracket in retirement than you are now, since qualified distributions from a Roth IRA are tax-free. However, you will pay tax on the amount rolled over into the Roth IRA. If you roll over your 401(k) into a Roth account in 2010, you can elect to recognize the amount subject to tax ratably in 2011 and 2012. However, talk with your financial or tax advisor about this and other options, since as of now, the individual income tax rate brackets are scheduled to rise beginning in 2011 as the lower Bush-era tax rates sunset on December 31, 2010.

Since the distribution of funds from any retirement account can have serious tax consequences, when faced with a change of employment that may result in a distribution of any such funds, please contact the office for additional advice and guidance before you choose a distribution option.

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we’ll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we’ll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Payroll deduction IRAs

Many small employers find a payroll deduction IRA very attractive because it allows them to offer their employees a retirement savings vehicle at little cost. A business of any size, even self-employed individuals, can establish a payroll deduction IRA.Under a payroll deduction IRA, only your employees make contributions to an IRA.Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution that maintains the IRA. 

The IRA is set up with a financial institution, such as a bank, mutual fund or insurance company. You can limit the number of IRA providers to as few as one. The employee establishes a traditional IRA or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions.As the employer, you withhold the payroll deduction amounts authorized by your employees and send the funds to the financial institution.

An employee’s decision to participate in a payroll deduction IRA is entirely voluntarily. If an employee decides to participate, he or she can only contribute up to a certain amount to the payroll deduction IRA every year. For 2010, the contribution limit is $5,000. An employee age 50 or older may make an additional “catch-up” contribution of $1,000 for a yearly total of $6,000. Every employee who participates is 100 percent vested in the contributions to their payroll deduction IRA.

Let’s look at an example of a payroll deduction IRA:

Aidan’s employer offers its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees have set up for themselves. Aidan signs up for the program and has $100 from his $1,000 bi-weekly paycheck deposited into his IRA for a yearly total of $2,600. At the end of the year, Aidan’s employer would report the full $26,000 he earned on his Form W-2 and Aidan would add the $2,600 to any other IRA contributions he made during the year for Form 1040 deduction purposes.

The costs of a payroll deduction IRA are low. Moreover, payroll deduction IRAs are not subject to the often complex filing, documentation and administration requirements that are imposed on other employer-sponsored retirement arrangements, such as 401(k) plans.

SEP plans

“SEP” stands for “Simplified Employee Pension” plan. While there are filing, administration and documentation requirements for SEP plans, the goal of an SEP plan is to keep these as simple as possible. The IRS has created, for example, model SEP language for plan documents.

An SEP plan is similar to a payroll deduction IRA. Under an SEP plan, employers make contributions to traditional IRAs set up for employees (including self–employed individuals). An SEP-IRA is funded solely by employer contributions whereas a payroll deduction IRA is funded solely by employee contributions.

As the employer, you must select the financial institution for your SEP. This decision must be made carefully because you and the financial institution will very work closely to administer the plan. After you send the SEP contributions to the financial institution, the financial institution will manage the funds.  Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other similar types of investments.

Federal law requires you and the trustee to keep employees informed about the administration and health of the SEP. Employees must be provided with plan documents, an annual statement that reports the fair market value of each employee’s account and a copy of an annual statement that is filed by the financial institution with the IRS. Like a payroll deduction IRA, each employee is 100 percent vested in his or her SEP-IRA.

Generally, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:

-- 25 percent of compensation, or

-- $49,000 for 2010.

Generally, contributions are not required to be made every year to an SEP. In years that contributions are made to an SEP, they must be made to the SEP-IRAs of all eligible employees.

Contributions to an SEP-IRA must be made in cash; property cannot be contributed to an SEP-IRA. Special rules apply if you, as the employer, also contribute to a 401(k) or similar plan on the employee’s behalf.

All eligible employees must be allowed to participate. An eligible employee is any employee who is at least age 21 and has worked for you in at least three of the immediate past five years.

To encourage employers to establish SEPs, the government offers a tax credit. You may be eligible for a tax credit of up to $500 for each of the first three years for the cost of starting the SEP.

SIMPLE IRAs

A “SIMPLE IRA” is a Savings Incentive Match Plan for Employees IRA. Like an SEP plan, a SIMPLE IRA is intended to be easily created and administrated.

A SIMPLE IRA is funded both by employer and employee contributions. As the employer, you can choose either to (1) match the contributions of employees who decide to participate or (2) contribute a fixed percentage of all eligible employees’ pay. Under option (2), which is known as the nonelective contribution formula, even if an eligible employee does not contribute to his or her SIMPLE IRA, you must make a contribution to the employee’s SIMPLE IRA equal to a fixed percent of the employee’s salary. Each employee is 100 percent vested in his or her SIMPLE IRA.

While similar to a payroll deduction IRA, a SIMPLE IRA has additional requirements. One important requirement is the number of employees. Generally, your business must have 100 or fewer employees to be eligible for a SIMPLE IRA.

Let’s look at an example of a SIMPLE IRA. In this example, the employer matches the employee contributions of employees who decide to participate.

Allison’s employer has established a SIMPLE IRA plan for its employees. The employer will match its employees’ contributions dollar-for-dollar up to three percent of each employee’s salary. If an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive a matching employer contribution. Allison decides to contribute five percent ($2,500) of her annual salary of $50,000 to a SIMPLE IRA. The employer’s matching is $1,500 (three percent of $50,000). Therefore, the total contribution to Allison’s SIMPLE IRA that year is $4,000.

There are contribution limits for SIMPLE IRAs. For employees, the annual contribution limit is $11,500 in 2010. Employees age 50 and older may make additional catch-up contributions of $2,500 in 2010.

The SIMPLE IRA contribution for the employer is dependent upon which contribution formula you select. If you decide to make matching contributions, only eligible employees who have elected to make contributions will receive an employer contribution.If you decide to make a nonelective contribution, each eligible employee must receive a contribution regardless of whether the employee makes contributions.

As with an SEP plan, a SIMPLE IRA creates a relationship between you and the financial institution that manages the funds. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

As with SEP plans, you may be eligible for a tax credit to help you offset start-up costs. The tax credit can reach up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan.

We’ve covered a lot of material about retirement plans for small businesses. There are more detailed requirements, especially for SEP plans and SIMPLE IRAs, which we can discuss in depth. Please contact our office to set up an appointment to explore these and other retirement arrangements for small businesses.

Individual retirement accounts (IRAs) -- both traditional and Roth IRAs -- are among the most popular retirement savings vehicles today. Protecting the value of your IRA (and other retirement accounts) is incredibly important. While some factors affecting the value of your retirement savings may be out of your control, there are many things within your control that can help you safeguard the wealth of those accounts and further their growth. This article addresses common mistakes regarding IRA distributions and contributions, and how to avoid them.

 A recent report by the Treasury Inspector General for Tax Administration, which oversees IRS activities through investigative programs, reports that an increasing number of taxpayers are not complying with IRA contribution and distribution requirements. Mistakes include, among other things, making excess contributions that are left uncorrected or failing to take required minimum distributions from their IRAs.

 Making excess contributions

 Knowing the maximum amount that you can contribute to your IRA is imperative to avoid negative tax consequences. A 6-percent excise tax applies to any excess contribution made to a traditional or Roth IRA. In 2010, individuals can contribute up to $5,000 to both traditional and Roth IRAs. Individuals age 50 or older can also make “catch-up” contributions of up to $1,000 to their IRA in 2010 as well.

 If you withdraw the excess contribution amount on or before the due date (including extensions) for filing your federal tax return for the year, you will not be treated as having made an excess contribution and the 6-percent excise tax will not be imposed. You must also withdraw any earnings on the contributions as well.

 Not contributing enough

 On the opposite end of the spectrum, you may be contributing too little to your IRA. Although your financial and personal situation will dictate how much you contribute to your IRA each year, and whether you are able to contribute the maximum amount, there are benefits to making the maximum contribution. Contributing the maximum amount means larger tax-free or tax-deferred growth opportunity for your dollars, and a higher – expectedly – account value upon retirement. Moreover, contributing more to your traditional IRA means a larger tax deduction come April 15. Thus, failing to contribute the maximum allowable amount means you may be missing out on tax deductions in addition to tax-deferred, or tax-free earnings.

 Not taking your RMDs

 Required minimum distributions (RMDs) are minimum amounts that a traditional IRA account owner must withdraw annually beginning with the year that he or she reaches age 70 ½. The RMD rules also apply to 401(k) plans, Roth 401(k)s, 403(b) plans, 457(b) plans, SIMPLE IRAs, and SEP IRAs. However, Roth IRAs are not subject to RMD rules (beneficiaries of Roth IRAs must take RMDs, however).

If you fail to take a RMD, or fail to take the correct amount for the year, the IRS imposes a 50 percent penalty tax on the difference between the actual amount you withdrew and the amount that was required. This is a stiff penalty to pay. A specific formula is used to compute annual RMDs, based on your current age, the amount in your IRA as of a certain date, and your life expectancy. Generally, RMDs are calculated for each account (if more than one) by dividing the prior December 31st balance of the IRA (or other retirement account) by a life expectancy factor that the IRS publishes in Tables in IRS Publication 590, which can be found on the agency’s website.

Note. RMDs were suspended for the 2009 tax year, in order to help retirement plans hit by the economic downturn. However, individuals must begin taking RMDs again in 2010 and thereafter.

Failing to rollover IRA funds within 60-days

If you receive funds from an IRA and want to roll over the money to another, you have only 60 days to complete the rollover in order to escape paying taxes on transaction. In general, failing to complete a rollover from one IRA to another within the 60-day window has significant tax ramifications. If the funds are not rolled over within this timeframe, the amount is considered taxable income, subject to ordinary income tax rates. And, if you are younger than age 59 ½, you will pay an additional 10 percent tax. The distribution may also have state income tax consequences as well. (Note: Rollovers from traditional IRAs to Roth IRAs are taxable, regardless of whether they are completed within 60 days). If you have the option, make a direct rollover or transfer. A direct, trustee-to-trustee transfer involves your funds being directly rolled over from one financial institution to the other, avoiding the 60-day requirement since you never directly receive the money.

Also, you can generally only make a tax-free rollover of amounts distributed to you from IRAs only once in 12-month period. As such, you can not make another rollover from the same IRA to another IRA (or from a different IRA to the same IRA) for one year without the amount being subject to tax.

And, individuals age 70 ½ or older cannot rollover any RMD amounts. Make sure that if you must take an RMD for the year, you withdraw the amount prior to rolling over the IRA.

Make Roth IRA contributions after age 70 ½

 If you continue earning income after reaching age 70 ½, you can continue contributing to your Roth IRA, on top of not having any RMD requirement. Therefore, you continue to accumulate tax-free savings. If you have earned income, and your financial and personal situation allow, consider continuing contributions to your Roth, building up tax-free money when you withdraw the funds.

 Failing to name an IRA beneficiary

 Don’t make the mistake of neglecting to name a beneficiary for your IRA. IRAs do not pass by will, but rather pass under the terms of an IRA Beneficiary Designation Form. If you have not named a beneficiary of your IRA, such as your spouse or child(ren), the “default” beneficiary usually is the account holder’s estate. Where there is no named beneficiary, distributions from the IRA must then generally be made as a lump sum or within five years after the owner’s death.

 When you designate your child(ren) as the IRA beneficiary, the rules regarding distributions differ from those that govern IRAs held by a surviving spouse beneficiary. Non-spouse IRA beneficiaries must generally begin taking required distributions over their life expectancy or within five years after the IRA owner's death. Although taking required distributions, the undistributed IRA assets continue to grow in a tax-deferred manner. On the other hand, a surviving spouse beneficiary may elect to treat the IRA as his or her own, or take minimum distributions as a non-spouse beneficiary would.

 Distributions from inherited IRAs are taxable to the recipient as ordinary income. Generally, the income tax rate tends to be higher when an IRA is paid to the estate instead of an individual beneficiary.

 Roth IRA conversions

 This year may be the first time you are eligible to convert your traditional IRA to a Roth. Beginning in 2010, any individual regardless of adjusted gross income (AGI) or filing status can take advantage of a Roth IRA conversion. Prior to 2010, the ability to convert a traditional IRA to a Roth was limited to individuals with AGIs of less than $100,000. Also, married individuals filing a separate return could not convert to a Roth IRA either. If you convert in 2010, you can elect to split (and defer) the tax you will owe on the conversion and pay half in 2011 and half in 2012.

 The decision to convert to a Roth IRA depends on many factors, including the financial and tax consequences of the transaction. Sometimes, it may be wiser depending on your situation to stick with your traditional IRA, especially if you will pay more tax on the conversion than in the account, or you don’t have outside funds to pay for the conversion tax. Do the math carefully and talk with your tax advisor beforehand.

The health care reform package (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010) imposes a new 3.8 percent Medicare contribution tax on the investment income of higher-income individuals. Although the tax does not take effect until 2013, it is not too soon to examine methods to lessen the impact of the tax.

Net investment income

"Net investment income" includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property not used in an active business and income from the investment of working capital are also treated as investment income. Further, an individual's capital gains income will be subject to the tax. This includes gain from the sale of a principal residence, unless the gain is excluded from income under Code Sec. 121, and gains from the sale of a vacation home. However, contemplated sales made before 2013 would avoid the tax.

The tax applies to estates and trusts, on the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount ($11,200) for the highest tax bracket for trusts and estates, and to investment income they distribute.

However, the tax will not apply to nontaxable income, such as tax-exempt interest or veterans' benefits.

Deductions

Net investment income is gross income or net gain, reduced by deductions that are "properly allocable" to the income or gain. This is a key term that the Treasury Department expects to address in guidance, and which we will update on developments. For passively-managed real property, allocable expenses will still include depreciation and operating expenses. Indirect expenses such as tax preparation fees may also qualify.

For capital gain property, this formula puts a premium on keeping tabs on amounts that increase your property's basis. It also focuses on investment expenses that may reduce net gains: interest on loans to purchase investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers' fees, may increase basis or reduce the amount realized from an investment. As such, taxpayers may want to consider avoiding installment sales with net capital gains (and interest) running past 2012.

Thresholds

The tax applies to the lesser of net investment income or modified AGI above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married filing separately. MAGI is your AGI increased by any foreign earned income otherwise excluded under Code Sec. 911; MAGI is the same as AGI for someone who does not work overseas.

Example. Jim, a single individual, has modified AGI of $220,000 and net investment income of $40,000. The tax applies to the lesser of (i) net investment income ($40,000) or (ii) modified AGI ($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8 percent of $20,000, or $760. In this case, the tax is not applied to the entire $40,000 of investment income.

Exceptions to the tax

Certain items and taxpayers are not subject to the 3.8 percent Medicare tax. A significant exception applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. There is no exception for distributions from nonqualified deferred compensation plans subject to Code Sec. 409A. However, distributions from these plans (including amounts deemed as interest) are generally treated as compensation, not as investment income.

The exception for distributions from retirement plans suggests that potentially taxable investors may want to shift wages and investments to retirement plans such as 401(k) plans, 403(b) annuities, and IRAs, or to 409A deferred compensation plans. Increasing contributions will reduce income and may help you stay below the applicable thresholds. Small business owners may want to set up retirement plans, especially 401(k) plans, if they have not yet established a plan, and should consider increasing their contributions to existing plans.

Another exception is provided for income ordinarily derived from a trade or business that is not a passive activity under Code Sec. 469, such as a sole proprietorship. Investment income from an active trade or business is also excluded. However, SECA (Self-Employment Contributions Act) tax will still apply to proprietors and partners. Income from trading in financial instruments and commodities is also subject to the tax.

The additional 3.8 percent Medicare tax does not apply to income from the sale of an interest in a partnership or S corporation, to the extent that gain of the entity's property would be from an active trade or business. The tax also does not apply to business entities (such as corporations and limited liability companies), nonresident aliens (NRAs), charitable trusts that are tax-exempt, and charitable remainder trusts that are nontaxable under Code Sec. 664.

Income tax rates

In addition to the tax on investment income, certain other tax increases proposed by the Obama administration may take effect in 2011. The top two marginal income tax rates on individuals would rise from 33 and 35 percent to 36 and 39.6 percent, respectively. The maximum tax rate on long-term capital gains would increase from 15 percent to 20 percent. Moreover, dividends, which are currently capped at the 15 percent long-term capital gain rate, would be taxed as ordinary income. Thus, the cumulative rate on capital gains would increase to 23.8 percent in 2013, and the rate on dividends would jump to as much as 43.4 percent. Moreover, the thresholds are not indexed for inflation, so more taxpayers may be affected as time elapses.

Please contact our office if you would like to discuss the tax consequences to your investments of the new 3.8 percent Medicare tax on investment income.

The recently enacted Hiring Incentives to Restore Employment (HIRE) Act of 2010 includes a comprehensive set of foreign account compliance measures that will impact taxpayers with accounts in foreign banks and other financial institutions. Generally, for payments made beginning in 2013, taxpayers with various types of financial accounts or other interests overseas will be subject to increased reporting and disclosure requirements on those accounts, or face the imposition of 30 percent withholding.

Foreign accounts

The HIRE Act imposes on U.S. taxpayers a 30 percent withholding tax on certain assets held in a foreign financial institution, unless that foreign financial institution agrees to comply with new heightened reporting and disclosure rules. Generally, for certain payments made after December 31, 2012, a withholding agent must deduct and withhold 30 percent of any "withholdable payment" made to certain foreign financial institutions that do not agree to comply with the new rules. Generally, a "withholdable payment" is any payment of interest (including interest on deposits with foreign branches of a U.S. commercial bank), dividends, rents, fixed or determinable annual or periodical gains, gross proceeds from the sale of property that produces interest and/or dividend income.

Note. Although the new withholding rules are generally effective for payments made after December 31, 2012, they will not apply to any obligation outstanding as of two years after the enactment of the HIRE Act, which was March 18, 2010. Additionally, publicly-traded corporations and exempt organizations are excluded from the heightened reporting and disclosure rules.

Financial institutions

To avoid the 30 percent withholding requirement, the foreign institution must agree to a number of disclosure and reporting requirements on U.S. financial assets and accounts held by the foreign financial institution. Under the HIRE Act, an "account" includes any depository or custodial account maintained by the foreign financial institution, including any equity or debt interest in the institution other than equity/debt interests traded on established securities markets.

Foreign financial institutions must agree to report the identity and taxpayer identification number (TIN) of any U.S. individual with an account held at the institution (or its affiliates), and to provide annually (1) the account balance, (2) gross receipts, and (3) gross withdrawals or payments from the account. Additionally, withholding agents will be required to report the name, address and TIN of any U.S. individual that is a substantial owner of a foreign corporation, foreign partnership, or foreign trust.

Account holders

Under the HIRE Act, certain individuals holding any interest in a specified foreign financial asset must attach to his or her tax return certain information about the asset. Specified foreign financial assets include any account maintained by a foreign financial institution, among other things. Account holders must provide account numbers, the name of the financial institution maintaining the account, and the maximum value of the asset during the year. Regarding stocks and securities, account holders must provide the name and address of the issuer and the maximum value of the asset during the year. The disclosure rules apply to individuals with offshore accounts and other foreign financial assets with values of $50,000 or more during the tax year.

The new law provides an exception from the reporting requirements for certain accounts held by individuals. The aggregate value of all accounts held by the taxpayer and maintained by the same foreign financial institution must not exceed $50,000 in order to be excluded from the new reporting and withholding rules.

If you have any questions about the new reporting and disclosure rules, please contact our office.

You may have done some spring cleaning and found that you have a lot of clothes that you no longer wear or want, and would like to donate to charity. Used clothing that you want to donate to charity and take a charitable deduction for, however, is subject to a few rules and requirements.

Under IRS guidelines, clothing, furniture, and other household items must be in good used condition or better, to be deductible. Shirts with stains or pants with frayed hems just won't cut it. Furthermore, if the item(s) of used clothing are not in good used condition or better, and you wish to deduct more than $500 for a single piece of clothing, the IRS requires a professional appraisal.

For donations of less than $250, you must obtain a receipt from the charity, reflecting the donor's name, date and location of the contribution, and a reasonably detailed description of the donation. It is your responsibility to obtain this written acknowledgement of your donation.

Used clothing contributions worth more than $500

If you are deducting more than $500 with respect to one piece of used clothing you donate, you must file Form 8283, Noncash Charitable Contributions, with the IRS. For donated items of used clothing worth more than $500 each, you must attach a qualified appraisal report is to your tax return. The Form 8283 asks you to include information such as the date you acquired the item(s) and how you acquired the item(s) (for example, were the clothes a holiday gift or did you buy the items at the store).

Determining the fair market value of used clothing

You may also need to include the method you used to determine the value of the used clothing. According to the IRS, the valuation of used clothing does not necessarily lend itself to the use of fixed formulas or methods. Typically, the value of used clothing that you donate, is going to be much less than you when first paid for the item. A rule of thumb, is that for items such as used clothing, fair market value is generally the price at which buyers of used items pay for used clothing in consignment or thrift stores, such as the Salvation Army.

To substantiate your deduction, ask for a receipt from the donor that attests to the fact that the clothing you donated with in good, used condition, or better. Moreover, you may want to take pictures of the clothing.

If you need have questions about valuing and substantiating your charitable donations, please contact our office.

If you have completed your tax return and you owe more money than you can afford to pay in full, do not worry, you have many options. While it is in your best interest to pay off as much of your tax liability as you can, there are many payment options you can utilize to help pay off your outstanding debt to Uncle Sam. This article discusses a few of your payment options.

Pay Uncle Sam as much as you can

First and foremost, if you cannot pay the full amount of taxes due, you should nevertheless file your return by the April 15 deadline. Moreover, you should send in as much money as you can with your return. The IRS assesses failure-to-file penalties so you should file your return despite being unable to pay the full amount with the return. As such, it's to your benefit to file your return by its due date and pay off any outstanding balance as soon as you can in order to minimize interest and penalties.

Payment options

If you are not able to pay the full amount of tax you owe, you have options. While you can obtain an automatic six-month extension of time to file, the IRS will still assess interest on the outstanding unpaid tax liability. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Income Tax Return, by the due date for filing your calendar year return (typically April 15) or fiscal year return. However, an extension of time to file is not an extension of the time to pay your taxes. Penalties and interest continue to accrue during the extension.

Second, consider paying some or all of your tax liability by credit card or obtaining a cash advance on your credit card. The interest rate your credit card or bank charges (plus applicable fees) may be lower than the total amount of interest and penalties imposed by the IRS under the Tax Code.

You may also be eligible to take advantage of the IRS's monthly installment agreement option. This option allows eligible taxpayers to pay off their tax bill over a period of time - in monthly installments - to the IRS. However, if you have entered into an installment agreement during the preceding 5 years you cannot use this option. Additionally, even while you are making payments through an installment agreement, penalties and interest continue on the unpaid portion of that debt. To request an installment plan, you can use Form 9465, Request For Installment Agreement. Or, you can use the Online Payment Agreement (OPA) application.

There are many options for paying off your tax debt. Our office can discuss the payment options that will work best in your specific circumstances. Please don't hesitate to call our office with questions.

With the U.S. and world financial markets in turmoil, many individual investors may be watching the value of their stock seesaw, or have seen it plummet in value. If the value of your shares are trading at very low prices, or have no value at all, you may be wondering if you can claim a worthless securities deduction for the stock on your 2008 tax return.

Capital or ordinary loss treatment

When stock you own in a corporation becomes totally worthless during the tax year, you may be able to report a loss in the stock equal to its tax basis. Generally, a worthless stock loss is characterized as a capital loss because securities like stock that become worthless are usually treated as capital assets. When a security that is not a capital asset becomes wholly worthless, the loss is deductible as an ordinary loss. For example, if worthless stock is Code Sec. 1244 stock, ordinary loss treatment applies. Worthless stock is treated as if it was sold on the last day of the tax year.

Note. You may only deduct a loss on worthless securities if the loss is incurred in a trade or business, in a transaction entered into for profit, or as the result of a fire, storm, shipwreck, another casualty, or theft. It is generally assumed that an individual acquires securities for profit (although this assumption may be refuted).

Your stock is trading at $1.08 a share: Is it "worthlessness?"

A worthless stock deduction may only be taken when your securities have become totally worthless. You can not take the deduction for stock that has become only partially worthless. The Internal Revenue Code, however, does not define "worthlessness." Nonetheless, in the IRS's eyes, a company's stock is not going to be automatically considered worthless simply because the stock or security has plummeted in value and is now trading at mere dollars and cents.

With the current market turmoil, many stocks have taken big hits and dropped significantly in value, perhaps even trading for a $1.08 per share, but are nonetheless still alive and trading on an exchange. Therefore, you can not take a worthless stock deduction for a mere decline in value of stock caused by a fluctuation in market price or other similar cause, no matter how steep the decline, if your stock has any recognizable value on the date you claim as the date of loss. Even if a company in which you have stock files for bankruptcy, or lawsuits are filed against it, does not automatically qualify the stock or securities as worthlessness.

More hurdles to overcome

Even if you can establish that the stock you own has become totally worthless, the loss must be (1) evidenced by a closed and completed transaction, (2) fixed by identifiable events and (3) actually sustained during the tax year. First, you may only claim the deduction on your return for the tax year in which the stock has become completely worthless, and you must be able to show that the year in which you are claiming the loss is the appropriate tax year.

Generally, a worthless stock loss deduction can be taken in the year in which you abandon the stock. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security. But, whether the transaction qualifies as abandonment, and not an actual sale or exchange, is a facts and circumstances test.

If you would like to know whether the stock or other securities you own have become worthless, please contact our office. We can help you navigate these complex rules.

If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

• The amount of the expense;
• The amount of use (i.e. the number of miles driven for business purposes);
• The date of the expenditure or use; and
• The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

If you own a vacation home, you may be considering whether renting the property for some of the time could come with big tax breaks. More and more vacation homeowners are renting their property. But while renting your vacation home can help defray costs and provide certain tax benefits, it also may raise some complex tax issues.

Determining whether to use your vacation home as a rental property, maintain it for your own personal use, or both means different tax consequences. How often will you rent your home? How often will you and your family use it? How long will it sit empty? Depending on your situation, renting your vacation home may not be the most lucrative approach for you.

Generally, the tax benefits of renting your vacation home depend on how often you and your family use the home and how often you rent it. Essentially, there are three vacation home ownership situations for tax purposes. We will go over each, and their tax implications.

Tax-free rental income

If you rent your vacation home for fewer than 15 days during the year, the rental income you receive is tax-free; you don't even have to report it on your income tax return. You can also claim basic deductions for property taxes and mortgage interest just as you would with your primary residence.

You won't, however, be able to deduct any rental-related expenses (such as property management or maintenance fees). And, if your rental-related expenses exceed the income you receive from renting your vacation home for that brief time, you can't take a loss. Nevertheless, this is an incredibly lucrative tax break, especially if your vacation home is located in a popular destination spot or near a major event and you don't want, or need, to rent it out for a longer period. If you fit in this category of vacation homeowners and would like more information on this significant tax benefit, call our office.

Pure rental property

Do you plan on renting your vacation home for more than 14 days a year? If so, the tax rules can become complicated. If you and your family don't use the property for more than 14 days a year, or 10% of the total number of days it is rented (whichever is greater), your vacation home will qualify as rental property, not as a personal residence.

If you rent your vacation home for more than 14 days, you must report all rental income you receive. However, now you can deduct certain rental-related expenses, including depreciation, condominium association fees, property management fees, utilities, repairs, and portions of your homeowner's insurance. How much you can deduct will depend on how often you and your family use the property. But, as the owner of investment property, you can take a loss on the ultimate sale of your rental homes, which second-homeowners can't do.

Income and deductions generated by rental property are treated as passive in nature and subject to passive activity loss rules. As passive activity losses, rental property losses can't be used to offset income or gains from non-passive activities (such as wages, salaries, interest, dividends, and gains from the sale of stocks and bonds). They can only be used to offset income or gains from other passive type activities. Passive activity losses that you can't use one year, however, can be carried forward to future years.

However, an owner of rental property who "actively participates" in managing the rental activities of his or her vacation home, and has an adjusted gross income that doesn't exceed $100,000, can deduct up to $25,000 in rental losses against other non-passive income, such as wages, salaries, and dividends. It's not all that difficult to meet the "active participation" test if you try.

Personal use for more than 14 days

If you plan on using your vacation home a lot, as well as renting it often, your vacation home will be treated as a personal residence. Specifically, if you rent your home for more than 14 days a year, but you and your family also use the home for more than 14 days, or 10% of the rental days (whichever is greater), your vacation home will qualify as a personal residence, not a rental property, and complex tax issues arise.

All expenses must be apportioned between rental and personal use, based on the total number of days the home is used. For example, you must allocate interest and property taxes between rental and personal use so that a portion of your mortgage interest payments and property taxes will be reported as itemized deductions on Schedule A (the standard form for itemized deductions) and a portion as deductions against rental income on Schedule E (the form for rental income and expenses.) You will only be able to deduct your rental expense up to the total amount of rental income.  Excess losses can be carried forward to future years though.

Proper planning

With proper planning and professional advice, you can maximize tax benefits of your vacation home. Please call our office if you have, or are planning to buy, a vacation home and would like to discuss the tax consequences of renting your property.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

1. The salary history of the individual employee
2. Compensation paid by comparable employers to comparable employees
3. The salary history of other employees of the company
4. Special employee expertise or efforts
5. Year-end payments
6. Independent inactive investor analysis
7. Deferred compensation plan contributions
8. Independence of the board of directors
9. Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.

A major repair to a business vehicle is usually deductible in the year of the repair as a "maintenance and repair" cost if your business uses the actual expense method of deducting vehicle expenses. If your business vehicle is written off under the standard mileage rate method, your repair and maintenance costs are assumed to be built into that standard rate and no further deduction is allowed.

Standard mileage rate

The standard mileage rate for business use of a vehicle is 48.5 cents per mile for 2007. The standard mileage rate replaces all actual expenses in determining the deductible operating business costs of a car, vans and/or trucks. If you want to use the standard mileage rate, you must use it in the first year that the vehicle is available for use in your business. If you use the standard mileage rate for the first year, you cannot deduct your repairs for that year. Then in the following years you can use the standard mileage rate or the actual expense method.

Actual cost

You can deduct the actual vehicle expenses for business purposes instead of using the standard mileage rate method. In order to use the actual expenses method, you must determine what it actually cost for the repairs attributable to the business. If you have fully depreciated your vehicle you can still claim your repair expenses.

Exceptions

Of course, the tax law is filled with exceptions and that includes issues relating to the deductibility of vehicle repairs and maintenance. Some ancillary points to consider:

• If you receive insurance or warranty reimbursement for a repair, you cannot "double dip" and also take a deduction;
• If you are rebuilding a vehicle virtually from the ground up, you may be considered to be adding to its capital value in a manner in which you might be required to deduct costs gradually as depreciation;
• If you use your car for both business and personal reasons, you must divide your expenses based upon the miles driven for each purpose.

You may want to calculate your deduction for both methods to determine which one will grant you the larger deduction. If you need assistance with this matter, please feel free to give our office a call and we will be glad to help.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

Two documents do not apply directly to federal income taxation, but are nevertheless highly important. The first of these is a Treasury form, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Any individual or organization that owns or has control over a bank or brokerage account must complete this form if the aggregate value of all such accounts under that taxpayer's ownership or control exceeds $10,000. The second such form is not a requirement per se, but taxpayers who have income in a foreign country with which the United States has a treaty would be seriously remiss in failing to complete it. IRS Form 8802, Application for United States Residency Certification, helps to speed and simplify the application process for eligible taxpayers claiming the benefits of tax treaties in connection with foreign taxes paid. Requirements for organizations that may have dual or layered status offer complications that depend on the type of entity, so these instructions must be parsed carefully.

Taxes on real and personal property held overseas are treated quite differently for purposes of federal income taxation, as opposed to the treatment of domestic property. Individuals may claim foreign real property taxes as itemized deductions on Schedule A of Form 1040, just as they would with U.S. real estate. However, taxes on personal property may only be deductible if used in connection with a trade or business or in the production of income.

U.S. taxpayers who own homes in foreign countries are eligible for the capital gains exclusion on the sale of a principal residence subject to the same requirements as domestic homeowners. Likewise, if a taxpayer derives rental income from a home, the rules for reporting income and deductions are the same. However, claiming depreciation expenses in connection with rental income subjects taxpayers to a different set of rules. Code Sec. 168(g) indicates that tangible property used predominantly outside the United States must be depreciated using the alternative depreciation system (ADS), rather than the modified accelerated cost recovery system (MACRS), and involves longer recovery periods. This is true whether the tangible property in question is the residence itself or household appliances contained therein, as well as any other tangible property.

Intangible property such as patents, licenses, trademarks, copyrights and securities produce a variety of types of income, and the taxation of such income may be subject to different rules than similar domestic income. The provisions for taxation of foreign income are often subject to modification by treaty, and the United States has negotiated treaties with over sixty nations.

Income from all sources must be reported in U.S. dollars, regardless of how it is paid. One exception to this rule is that if income is received in a currency that is not convertible to U.S. dollars because of prohibitions placed on conversion by the issuing country, then the taxpayer may choose when to report the income. The income may be reported either in the year earned, according to the most accurate valuation means available, with the taxes paid from other income, or the taxpayer may choose to wait until the currency becomes convertible again.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

Although the IRS may compromise any tax liability, taxpayers may often find it difficult to obtain an offer-in-compromise (OIC).  However, for taxpayers experiencing especially difficult financial hardship, the IRS may be more willing to negotiate, especially if the taxpayer has been compliant in the past.

Although the IRS may compromise any tax liability, taxpayers may often find it difficult to obtain an offer-in-compromise (OIC).  However, for taxpayers experiencing especially difficult financial hardship, the IRS may be more willing to negotiate, especially if the taxpayer has been compliant in the past.

The OIC program was designed to allow the IRS to negotiate with taxpayers for a reduced settlement when the taxpayers are unable to pay their full tax bill. In the past, taxpayers seeking relief by way of OIC had to meet one of two tough conditions in order to be eligible:

1. Doubt as to collectability of tax debt
2. Doubt as to whether the debt is actually owed

The regulations create a third possible condition. If taxpayers don't meet one of the above mentioned conditions, they may now be eligible to enter into a compromise agreement if:

• Collection of the entire liability would create economic hardship
• Exceptional circumstances exist where collection of the entire tax liability would be detrimental to voluntary compliance.

The IRS stresses that these provisions are designed for taxpayers in extreme hardship situations and should not be viewed as an "out" for most taxpayers looking to get out of paying their taxes. Examples of such circumstances were given in the regulations and include the following:

• Where taxpayers (and/or their dependents) that are facing long-term illnesses or disability who have the funds to pay the tax debt but whose assets are needed to cover expenses related to the illness/disability
• Where the sale or liquidation of the taxpayers' assets would result in the taxpayers being unable to meet basic living expenses, including voluntary tax compliance
• Where taxpayers sustained a tax debt due to circumstances beyond their control, such as an extended hospital stay that left them unable to file tax returns.

If you believe that you may be eligible for relief under these regulations, please contact the office for assistance. You also should be aware that the IRS offers installment payment agreements, often given automatically upon application, for taxpayer who may not qualify for an offer in compromise but who nevertheless cannot pay what they owe. Our office can also assist you in qualifying for that payment alternative if appropriate.

The United States is currently experiencing the largest influx of inpatriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an inpatriate may have concerning his/her U.S. tax liability and filing requirements.

The United States is currently experiencing the largest influx of inpatriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an inpatriate may have concerning his/her U.S. tax liability and filing requirements.

I am a foreign national working in the United States and am paid by my foreign employer. Do I need to file a tax return and pay income taxes?

The general rule is that all wages earned while working in the United States, regardless of who pays for it or the locations of the employer, is taxable in the United States. This is true whether you are treated as a U.S. resident or not.

What is the difference in taxation of a resident alien versus a nonresident alien?

The difference in being taxed as a resident versus a nonresident is as follows: a resident alien is taxable in the U.S. on all worldwide income, regardless of what country it is earned or located in. A nonresident alien is generally taxable only on what is referred to as "effectively connected income". This is normally wages earned while in the U.S., along with earnings on property located in the United States. Certain deductions, exemptions, and filing statuses are not available to nonresidents.

I am not a resident for immigration purposes as I am here on a temporary visa. Can I still be a resident for U.S. tax purposes?

The determination of residency for tax purposes does not bear any relationship to your legal or immigration status. It is quite common for a foreign national to be a nonresident for legal or immigration purposes and yet be a resident for tax purposes. In addition, being a resident for income tax purposes can be different than being a resident for estate tax or even social security tax purposes. In some cases, it is actually more beneficial to be treated as a resident than as a nonresident. As a result, it is important to have all of the information we request in order to make the best decision for you.

How do you determine whether you are a resident or nonresident for U.S. income tax purposes?

As a foreign national working in the U.S., you must first determine if you are a "resident" for U.S. income tax purposes. There are two tests to determine whether you are a U.S. tax resident. These two tests are:

If you meet the requirements of either of these two tests, you will be treated as a U.S. tax resident (unless a treaty overrides this).

What is the difference between a lawful permanent resident and meeting the substantial presence test?

Lawful Permanent Resident Test - In its simplest form, this is when you have been issued a green card or alien registration card allowing for permanent residency.

Substantial Presence Test - This is a more complicated test that looks at the number of days of physical presence in the U.S. over a three-year period of time. If the number of days of U.S. presence exceeds 183 days in the current year, or 183 equivalent days during a three-year period, you are a resident for U.S. tax purposes. An "equivalent day" is defined as:

There are exceptions to the counting of days, but in general, any part of a day counts as a full day.

What if I meet the substantial presence test? Are there exceptions to allow me to be a nonresident anyway?

31 Day Exception - If you are present in the States for less than 31 days in the current year, the substantial presence test is not applied.

Closer Connections Exception - If you are present in the U.S. for fewer than 183 days in the current year AND you maintain a "tax home" in another country during the entire year AND you maintain a closer connection to the foreign country in which you have a tax home, then this test will not apply.

J-1 Visa - Subject to some limitations, you do not count days in the U.S., for calculating the substantial presence test, while you are here on a J-1 visa (generally for up to two years). This does not exempt the earnings, but just allows you to be treated as a nonresident alien, not a resident alien.

Treaty - Some countries have treaties with the U.S. which, in some cases, will override either the U.S. Internal Revenue Code or the income tax law of the foreign country.

If I become a U.S. taxable resident during the year, when does my residency begin?

In general, residency begins on the first physically present day in the U.S. during the year you meet the substantial presence test. There are exceptions for "nominal" days along with the closer connection exception, which can apply here. Remember that residency determines from what point you are taxable on your worldwide income, not when you are taxable.

Likewise, your residency is deemed to end on the last day that you are present in the U.S. within the year that you move from the United States. Problems can arise if you return back to the U.S. within a short period of time.

Can I elect to be treated as a taxable resident even if I do not meet any of the tests (in order to take advantage of special tax rates and laws not available to nonresidents)?

First Year Election - Sometimes it can be better to be treated as a resident than as a nonresident. There is an election available that allows a foreign national to be taxed as a resident in the initial year of a U.S. assignment even if one of the residency tests is not met for the year. To qualify, you would have to satisfy the following:

What if my home country considers me as a taxable resident at the same time the U.S. treats me as a taxable resident? Am I double taxed?

The general rules discussed above are based on the IRS Code. The United States has entered into numerous tax treaties with other countries. The purpose of these treaties is to prevent double taxation issues that may arise due to differences in the tax laws of the two countries. It is possible to be considered a resident, subject to tax in both countries. The treaties usually provide for 'tiebreaker' rules to override the IRS Code or the foreign home country tax laws. Most treaty provisions require the filing of certain documents, though, in order to take benefit of them.

I am on a short-term assignment from my home country and my employer pays for my rent and meals while I am working here in the U.S. Is any of this taxable?

The first thing you need to do is determine whether your assignment is considered "short-term" within the definition of U.S. law. An individual is treated as being on a short-term assignment in the U.S. if their tax home has not changed from their foreign location. If the intent of the assignment is to return to the original work location within one year, the assignment is considered a temporary assignment. This does not determine whether you are a resident or not. It just determines which types of payments are taxable.

The advantage of a temporary assignment is that the employer-provided benefits such as lodging, meals travel and certain other expenses are not considered taxable wages in the U.S. In this case, a resident or nonresident would not be taxed on these payments. On a long-term assignment (more than 12 months), these are typically taxed in addition to the wages.

What happens if I am a nonresident for part of the year and a resident for another part of the year?

It is possible to be taxed in one year as both a resident and a nonresident. If this is the case, a special filing is made on a single tax return, with certain forms required. During the residency period, you would be taxed on worldwide income. During the nonresidency period, you would be taxed only on effectively connected income (usually wages earned in the U.S., as noted earlier).

Can I be exempt or excluded from tax from the U.S. federal government but still be taxed by one of the States?

Yes. Please note quite a few of the 50 states of the U.S. do not follow some, or all, of the U.S. federal tax codes or recognize the Treaties between the U.S. and other countries. So, it is possible, and highly probable, you could be taxable for State purposes but may be exempt for federal. In addition, other tax filing requirements, including estate and gift taxes, social security taxes, along with other filing forms, may be required regardless of your income tax residency determination.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

Medical Expenses

Medical expenses that you pay during the tax year for yourself, your spouse, and your dependents are deductible to the extent the total exceeds 7.5% of your adjusted gross income. This limitation can be hard to reach if you claim only medical insurance premiums and the co-pay on your kid's doctors' visits. Keep these potential deductions in mind as you tally up this year's medical expenses:

To maximize your deduction, try to bunch your medical expenses into one year to exceed the 7.5% limit. For example, schedule costly elective medical and dental treatments to be performed and billed in the same tax year.

Taxes Paid

Many of the taxes that you pay such as real estate taxes for your home, state and local taxes, and auto registration fees are deductible as itemized deductions on your return. Don't forget these:

Interest Expense

Although in recent years Congress has made the tax laws regarding interest deductions more strict, much of the interest that you pay during the year is still deductible. For interest paid to be deductible, you must be legally responsible for the underlying debt and the debt must result from a valid debtor-creditor relationship. While gathering your home mortgage interest numbers, dig a little deeper to get this inf

Since personal interest paid on credit cards and other unsecured loans is not deductible, it may be wise to make that interest deductible by paying off that debt with a home-equity loan. Interest on home-equity loans of up to $100,000 is generally deductible on your return.

Miscellaneous Expenses

Miscellaneous itemized deductions such as unreimbursed employee business expenses and tax preparation fees are deductible to the extent that the total of all of these expenses is more than 2% of your adjusted gross income. Here's a few more to add to the list:

Take the time this year to evaluate all of your expenditures made last year; you may be pleasantly surprised by what you find.

Owning property (real or tangible) and leasing it to your business can give you very favorable tax results, not to mention good long-term benefits. There are some drawbacks, however, and you should consider all factors before structuring such an arrangement.

BENEFITS

DRAWBACKS

Proper planning and knowledge of the various tax issues is important when considering this type of arrangement. Feel free to contact us for a better understanding of how these situations would effect you before you proceed.

A. When you contribute an auto to a charitable organization, you must determine its fair market value at the time of the contribution to determine the amount of the charitable deduction on your tax return. For a contribution valued at over $5,000, a written appraisal is required and must be attached to the return.

While guides like the Kelly Blue Books are helpful and can provide a good estimate of the value of your auto, the values shown are not "official" and do not qualify as an appraisal of any specific donated property. Once a qualified appraisal of the property has been secured, you must complete Section B of Form 8283 for each item or group of items for which you claim a deduction of over $5,000. The organization that received the property must complete and sign Part IV of Section B. Failure to properly report the contribution on Form 8283 or attach the appraisal report can result in the IRS disallowing your deduction for your noncash charitable contribution. Please note that appraisal fees do not increase your charitable deduction but are miscellaneous itemized deductions on Schedule A of Form 1040.