Porter and Company is pleased to announce that the firm has been accepted as a full member of the AutoCPA Group of accounting firms. The AutoCPA Group is an organizaion of CPA firms which maintain a significant concentration of automobile, motorcycle and other dealerships as a focus of their client practice base. The members of the group share resources and expertise on issues affecting automobile and motorcycle dealers through group interaction, correspondence, conferences, and meetings among members of the Group.

The AutoCPA group was organized in the early 1990's and collectively represents over 10% of the new vehicle automobile dealerships in the United States. To be accepted as a member of the Group, a firm must demonstrate to the satisfaction of the other members of the Group, a significnt level of understanding of the business issues affecting dealerships and issues of concern to dealers. The member firm must demonstrate an ongoing commitment to serving the needs of dealers in its client services activities. The Group hosts a booth at the annual National Automobile Dealers Association (NADA) convention each year with which Porter & Company will partcipate.

Mr. Porter, president of the firm, presented a seminar to the Group entitled "Performance Measurement for Dealerships" in September 2004 at the Group's semi-annual meeting held in Maine.

Porter & Company is proud to associate with other high caliber CPA firms from around the United States to share resources, ideas, information and advice on areas affecting our dealership clients.

Proposed regulations spell out the critical mineral and battery component requirements of the new clean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRS guidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16. 

Proposed regulations spell out the critical mineral and battery component requirements of the new clean vehicle credit, while also clarifying several other components of the credit. The proposed regs, along with modified Frequently Asked Questions on the IRS website, largely adopt previous IRS guidance, including Rev. Proc. 2022-42, Notice 2023-1, and Notice 2023-16. Similarly, the critical minerals and battery component regs largely adopt the White Paper the Treasury Department released last December.

However, the proposed regs also:

• detail the income and price limits on the credit,
• prohibit multiple taxpayers from dividing the credit for a single vehicle, and
• coordinate the credit with other credits.

The regs are generally proposed to apply to vehicles placed in service after April 17, 2023, but taxpayers may rely on them for vehicles placed in service before that date. Comments are requested.

Critical Minerals Requirement

For purposes of the $3,750 credit for a qualified vehicle that satisfies the critical minerals requirement, the proposed regs provide a three-step process for determining the percentage of the value of the applicable critical minerals in a battery:

• 1. Determine the procurement chain for each critical mineral.
• 2. Identify qualifying critical minerals.
• 3. Calculate qualifying critical mineral content.

The proposed regs define relevant terms, including "procurement chain," "criticalminerals," "criticalmineral content," "extraction," "processing," "constituent materials," "recycling," and "value added."

For vehicles placed in service in 2023 and 2024, the proposed regs consider a critical mineral to meet the test if at least 50 percent of the value added by extracting, processing or recycling the mineral is due to extraction, processing or recycling in the U.S. or a country with which the U.S. has a free trade agreement in effect. The proposed regs identify the following countries as ones with a free trade agreement in effect with the U.S.: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. The regs also propose criteria for identifying additional countries, such as the factors that are part of the Critical Minerals Agreement (CMA) the U.S. recently entered into with Japan.

Battery Component Requirement

For purposes of the $3,750 credit for a qualified vehicle that satisfies the battery components requirement, the proposed regs provide a four-step process for determining the percentage of the value of the battery components in a battery:

• 1. Identify components that are manufactured or assembled in North America.
• 2. Determine the incremental value of each battery component and North American battery component.
• 3. Determine the total incremental value of battery components.
• 4. Calculate the qualifying battery component.

MAGI Limit

The credit does not apply if the taxpayer’s modified adjusted gross income (MAGI) for the credit year or, if less, the previous year exceeds a limit based on filing status. The proposed regs clarify that if the taxpayer’s filing status changes during this two-year period, this test applies the MAGI limit for each year based on the taxpayer's filing status for that year.

The proposed regs also clarify that the MAGI limit does not apply to a corporation or any other taxpayer that is not an individual for which AGI is computed under Code Sec. 62.

MSRP Limits

A vehicle does not qualify for the credit if the manufacturer’s suggested retail price (MSRP) exceeds $80,000 for a van, sport utility vehicle (SUV), or pickup truck; or $55,000 for any other vehicle. The proposed regs adopt the vehicle classification system the IRS announced in Notice 2023-16. This is the vehicle classification that appears on the vehicle label and on the website FuelEconomy.gov. The regs also provide a more detailed definition of "MSRP" using information reported on the label affixed to the vehicle’s windshield or side window.

Vehicle with Multiple Owners

The proposed regs generally prohibit any allocation or proration of the credit if multiple taxpayers place a vehicle in service. However, a partnership or S corporation that places a vehicle in service may allocate the credit among its partners or shareholders. The MAGI limits on the credit apply separately to each individual partner or shareholder. The seller’s report for the vehicle lists the entity’s name and TIN.

Final Assembly in North America

To qualify for the credit, the final assembly of a new clean vehicle must occur in North America. The proposed regs reiterate earlier guidance on this requirement, but they also provide more detailed definitions of "final assembly" and "North America." Taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN), or the final assembly point reported on the label affixed to the vehicle. Taxpayers may also continue to rely on the information in the "VIN decoder sites" at https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit and https://www.nhtsa.gov/vin-decoder.

Coordination with Other Credits

While the new vehicle credit is generally a nonrefundable personal credit, the credit for a depreciable vehicle is treated as part of the general business credit. If the taxpayer’s business use of a qualified vehicle is less than 50 percent of its total use, the proposed regs require the taxpayer to apportion the credit. Only the portion of the credit that corresponds to the percentage of the taxpayer’s business use of the vehicle is part of the general business credit; the rest of the credit remains a nonrefundable personal credit.

The proposed regs clarify that when the new clean vehicle credit is allowed for a particular vehicle, a subsequent buyer in a later tax year may still claim the used clean vehicle credit. However, a subsequent buyer cannot claim the commercial clean vehicle credit.

Effective Dates

Taxpayers may rely on the proposed regulations before they are published as final regs, provided the taxpayer follows them in their entirety and in a consistent manner. The regs are generally proposed to apply to new clean vehicles placed in service after April 17, the date the regs are scheduled to be published in the Federal Register.

Comments Requested

The IRS requests comments on the proposed regs. Comments may be mailed to the IRS, or submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-120080-22). Written or electronic comments and requests for a public hearing must be received by June 16, 2023.

In particular, the IRS seeks comments on the following issues:

• 1. the critical mineral and battery component requirements, including the distinction between processing of applicable critical minerals and manufacturing and assembly of battery components, and related definitions;
• 2. the 50-percent value added test for critical minerals, and the best approach for adopting a more stringent test after 2024;
• 3. the list of countries with which the United States has free trade agreements in effect, proposed criteria for identifying other such countries, and other potential approaches; and
• 4. whether rules similar to those provided for partnerships and S corporation should apply to trusts and similar entities that place a qualified clean vehicle in service.

The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deduct R&E expenses that the taxpayer failed to deduct when they were paid or accrued.

The IRS is obsoleting Rev. Rul. 58-74, 1958-1 CB 148, as of July 31, 2023. Rev. Rul. 58-74 generally allows a taxpayer that adopted the expense method for research and experimental (R&E) expenses to use a refund claim or amend a return to deduct R&E expenses that the taxpayer failed to deduct when they were paid or accrued.

Rev. Rul. 58-74 conflicts with current procedures for accounting method changes.

TCJA Changes for R&E Expenses

The decision to obsolete Rev. Rul. 58-74 is unrelated to the changes made by the Tax Cut and Jobs Act (TCJA) (P.L. 115-97), even though the ruling relates to pre-TCJA accounting methods for R&E expenses.

Taxpayers could elect to amortize R&E expenses paid or incurred in tax years beginning before 2022, or deduct them currently. If the taxpayer did not make either election, the expenses had to be capitalized. A taxpayer that elected the expense method had to use it for all qualifying expenses unless the IRS consented to a different method for some or all of the expenses.

TCJA ended the expense election for R&E expenses paid or incurred in tax year beginning after 2021. Instead, the expenses must be amortized over five years (15 years for foreign expenses).

Rev. Rul. 57-74 and Change of Accounting Method Procedures

The IRS is obsoleting Rev. Rul. 58-74 because it includes insufficient facts to properly analyze whether the taxpayer’s failure to deduct certain R&E expenditures, such as the cost of obtaining a patent, when it deducted other R&E expenditures, constituted a method of accounting or an error.

For example, Rev. Rul. 58-74 does not explain whether the taxpayer consistently treated the costs of obtaining a patent in determining its taxable income. It also fails to describe the cause and extent of the deviation in the treatment of certain R&E expenditures that were not deducted.

In addition, filing an amended return, refund claim, or administrative adjustment request (AAR) under Rev. Rul. 58-74 is inconsistent with the IRS position that a taxpayer may not, without prior consent, retroactively change from an erroneous to a permissible method of accounting by filing amended returns. Rev. Rul. 58-74 is also inconsistent with the procedures for accounting method changes that qualify for automatic IRS consent.

Prospective Application of Decision to Obsolete Rev. Rul. 58-74

A taxpayer may rely on Rev. Rul. 58-74 if the taxpayer:

However, eligibility to rely on Rev. Rul. 58-74 does not imply that the IRS will grant the refund, deduction, or AAR. Instead, the IRS will continue to challenge the applicability of Rev. Rul. 58-74 when appropriate. For example, the IRS might challenge reliance on Rev. Rul. 58-74 when the taxpayer’s facts are distinguishable from Rev. Rul. 58-74, including where the taxpayer failed to adopt the expense method under pre-TCJA law.

The IRS has issued safe harbor deed language that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0 Act of 2022.

The IRS has issued safe harbor deed language that may be used to amend eligible easement deeds intended to qualify for conservation contribution deductions under Code Sec. 170(f)(3)(B)(iii), to comply with changes to the law created by section 605(d) of the SECURE 2.0 Act of 2022. If a donor substitutes the prescribed safe harbor deed language for the corresponding language in the original eligible easement deed, and the amended deed is then signed by the donor and donee and recorded on or before July 24, 2023, the amended eligible easement deed will be treated as effective for purposes of Code Sec. 170 and section 605(d)(2) of the SECURE 2.0 Act. If these requirements are met, the amendment must be treated as effective from the date of the recording of the original easement deed.

The following are not considered an"eligible easement deed" for purposes of this safe harbor - any easement deed relating to any contribution:

• which is not treated as a qualified conservation contribution by reason of Code Sec. 170(h)(7);
• which is part of a reportable transaction under Code Sec. 6707A(c)(1), or is described in Notice 2017-10;
• if a deduction under Code Sec. 170 has been disallowed, the donor has contested such disallowance, and a case is docketed in federal court to resolve this dispute scheduled on a date before the date the amended deed is recorded by the donor; or
• if a claimed contribution deduction under Code Sec. 170 resulted in an underpayment penalty under either Code Sec. 6662 or 6663, and such penalty has been finally determined administratively or by final court decision.

If the safe harbor language is substituted according to the requirements spelled out in this Notice, the amended eligible easement deed will be treated as effective as of the date the eligible easement deed was originally recorded for federal purposes, regardless of whether the amended eligible easement deed is effective retroactively under the relevant state law.

The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.

The IRS closed out the 2023 Dirty Dozen campaign with a warning for taxpayers to beware of promoters peddling tax avoidance schemes. These schemes are primarily targeted at high income individuals seeking to reduce or eliminate their tax obligation. The IRS advice taxpayers to seek services from an independent, trusted tax professional and to avoid promotres focused on aggressively marketing and pushing questionable transactions.

The IRS has compiled a list of 12 scams and schemes that put taxpayers and tax professionals at risk. Some of them are:

• micro-captive insurance arrangements: is an insurance company whose owners elect to be taxed on the captive's investment income only;
• syndicated conservation easements: are arrangements wherein they attempt to game the system with grossly inflated tax deductions;
• offshore accounts & digital assets: unscrupulous promoters lure taxpayers into placing their asssets in offshore accounts under the pretense of being untraceable by the IRS;
• maltese individual retirement arrangements misusing treaty: are arrangements wherein the taxpayers attempt to avoid tax by contributing to foreign individual retirement arrangements in Malta; and
• puerto rican and other foreign captive insurance: are transactions wherein the business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which they have a financial interest.

Taxpayers are adviced to to rely on reputable tax professionals they know and trust to avoid such schemes. The IRS has also created the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPE) to coordinate service-wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effectuate tax evasion.

As part of the Dirty Dozen awareness effort, the IRS encourages people to report taxpayers who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns. To report an abusive tax scheme or a tax return preparer, taxpayers should mail or fax a completed and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. The postal address is: Internal Revenue Service Lead Development Center Stop MS5040 24000 Avila Road Laguna Niguel, California 92677-3405 Fax: 877-477-9135.

As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.

As part of the annual Dirty Dozen tax scams effort, the IRS and the Security Summit partners have urged taxpayers to be on the lookout for spearphishing emails. Through these emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it’s from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information.

Cyber Security Tips to Prevent Spearphishing

Spearphishing is a tailored phishing attempt to a specific organization or business and usually begins with a suspicious email that may appear as a tax preparation application or another e-service or platform. Some scammers will even use the IRS logo and claim something like "Action Required: Your account has now been put on hold." Often these emails stress urgency and will ask tax pros or businesses to click on links to input or verify information.

How to prevent spearphishing:

• Never click suspicious links.
• Double check the requests with the original sender.
• Be vigilant year-round, not just during filing season.

The IRS and its Security Summit partners continue to see spearphishing attempts that impersonate a new potential client, known as the New Client scam. Lastly, taxpayers should never respond to tax-related phishing or spearfishing or click on the URL link. Instead, the scams should be reported by sending the email or a copy of the text/SMS as an attachment to phishing@irs.gov.

The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.

The American Institute of CPAs is recommending the Internal Revenue Service place a greater emphasis on service as the agency works on its strategic plan for the $80 billion in additional appropriations provided to the IRS in the Inflation Reduction Act.

"Given the historic low levels of IRS taxpayer services, we are concerned that there was an insufficient allocation of funding to improve taxpayer services to appropriate levels" the AICPA March 28, 2023, letter to the IRS and the Department of the Treasury states, noting that the COVID-19 pandemic "made it painfully clear that the IRS was not funded to accomplish all its responsibilities."

AICPA argued that the agency’s service deficiencies "prevent taxpayers from complying with their tax obligations and hamper our members’ ability to as professional advisors to do their jobs, which is to help these taxpayers comply."

And despite funds being targeted toward enforcement and a stated goal of ensuring that wealthy individuals and corporations are paying their fair share of taxes, AICPA states that "enforcement actions must be in balance with the services the IRS provides to taxpayers."

The Inflation Reduction Act allocates $45.6 billion to enforcement activities and only $3.1 billion to service, and the AICPA suggested that more money be focused on service-related issues, including allocating sufficient funds for employee training to help replace the institutional knowledge that is expected to be lost in the coming years as the aging workforce retires.

AICPA is also calling on the IRS to develop a comprehensive customer service strategy, including creating more empowered employees; better access to timely information; and access to tailored resources, including resources designed specifically for tax professionals.

Additionally, the organization recommended that the agency develop a comprehensive plan to redesign the agency, including adopting a more customer-focused culture; integrating its technical infrastructure so the disparate legacy systems can communicate with each other; and creating a practitioner services division "that would centralize and modernize its approach to all practitioners."

Finally, AICPA recommended that IRS continue with its business systems modernizations initiatives.

"Currently, the IRS has two of the oldest information systems in the federal government making the information technology functions one of the biggest constraints overall for the IRS" the letter states. "Without modern infrastructure, the IRS is unable to timely and efficiently meet the needs of taxpayers and practitioners. … We recommend that the IRS more fully explore options to allocate IRA enforcement funding to BSM issues."

Automated Collection Notices To Resume

Another area that the organization recommends the funds be used for is the ongoing effort by the agency to reduce the backlog of unprocessed paper tax returns and other paper correspondence.

AICPA acknowledged the work done to reduce levels after the backlog spiked during the pandemic, but stated that "more needs to be done to ensure that taxpayers and practitioners are not faced at any time in 2023 with yet another year with significant levels of unprocessed returns, leading to additional delays in processing and incorrect notices and penalties."

And while this is going on, the organization recommends that the IRS "continue the suspension of certain automated collection notices until it is prepared to devote the necessary resources for a proper and timely resolution of matters. Until the IRS can respond to taxpayer replies to notices in a timely manner, these collection notices should not be restarted."

According to the letter, the agency is planning on restarting automated collection notices in June 2023, even though "this June date has not been widely publicized. The IRS should communicate the stat date of automated collection action to the public, specifically identifying what actions will be part of this process and providing resources for taxpayers on dealing with these actions."

Additionally, the organization is calling for "a streamlined reasonable cause penalty waiver without requiring a written request, similar to the procedures of the FTA administrative waiver, based solely on the pandemic’s effects on both the taxpayer and the practitioner."

By Gregory Twachtman, Washington News Editor

National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.

National Taxpayer Advocate Erin Collins offered both praise and criticism of the Internal Revenue Service’s Strategic Operating Plan outlining how it will spend the additional $80 billion allocated to the agency as part of the Inflation Reduction Act of 2022.

"This is a game changer to transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve,"Collins wrote in an April 6, 2023, blog post about the plan.

However, she reiterated criticism over how the funds would be allocated throughout the next 10 years. The IRA allocates only $3.2 billion going to taxpayer services and $4.8 billion allocated to business system modernization, two areas that are in need of funding to help improve the service the agency provides to taxpayers.

"Combined, that’s just ten percent of the total," she noted. "By contrast, 90 percent was allocated for enforcement ($45.6 billion) and operations support ($25.3 billion). The additional long-term funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer services and IT modernization."

Collins also cited the report in stating that the funds allocated for taxpayer services will be depleted within four years and cautioned that the agency needs to ensure that funds are continually being allocated for this specific purpose beyond that point.

"Although I share the long-term vision of the SOP, I want to caution that the IRS should not lose sight of its core mission and its immediate challenge of reducing the large backlog of amended returns and taxpayer correspondence."

Gregory Twachtman, Washington News Editor

On April 4, 2023, the Internal Revenue Service released the Strategic Operating Plan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.

On April 4, 2023, the Internal Revenue Service released the Strategic Operating Plan, which details the agency’s plans to use Inflation Reduction Act resources to transform the administration of the tax system and services provided to taxpayers.

The goal of the changes outlined in the Strategic Operating Plan is to "provide taxpayers with world-class customer service" and reduce the deficit by "hundreds of billions by pursuing tax evasion by wealthy individuals, big corporations, and complex partnerships," said Deputy Secretary of the Treasury Wally Adeyemo.

The Strategic Operating Plan is organized around five key objectives:

• Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
• Quickly resolve taxpayer issues when they arise.
• Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
• Deliver cutting-edge technology, data, and analytics to operate more effectively.
• Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.

The plan outlines a series of initiatives and projects aligned to each objective, including 42 key initiatives, 190 key projects, and more than 200 specific milestones designed to achieve the objectives set forth by the IRS.

Improved customer service, compliance efforts, and technology updates are also essential to achieving the goals set forth in the Strategic Operating Plan.

With long-term funding in place, the IRS has hired more than 5,000 phone assisters, increased walk-in service availability, and added new digital tools, according to IRS Commissioner Daniel Werfel.

"In the first five years of the 10-year plan, taxpayers will be able to securely file documents and respond to notices online," said Werfel. Taxpayers will also be able securely access and download account data and account history. "For the first time, the IRS will help taxpayers identify potential mistakes before filing, quickly fix errors that could delay their refunds, and more easily claim credits and deductions they may be eligible for," he said.

The Strategic Operating Plan also includes targeted efforts to ensure fair tax law enforcement and compliance with existing laws. The plan focuses on "areas where compliance has eroded the most," specifically compliance issues involving "wealthy individuals, complex partnerships, and large corporations," said Werfel. The IRS will increase hiring efforts for experienced accountants and attorneys to ensure enforcement "at the top." Werfel further noted that the IRS does not intend to increase the audit rate for small businesses or households making less than $400,000.

Finally, the Strategic Operating Plan utilizes Inflation Reduction Act funding to modernize the agency’s technology infrastructure to protect taxpayer data. In the first five years of the 10-year plan, the IRS aims to eliminate paper backlogs that have delayed taxpayer refunds by digitizing forms and returns when they are received and transitioning to fully digital correspondence processes.

"This plan is only the beginning of our work," Werfel said. "This is a unique opportunity for the IRS and the nation, and we will continue to work closely with our partners as this effort moves forward. This investment in the IRS is already helping taxpayers this tax season, and this plan shows that historic changes are coming."

The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digital asset losses affect tax obligations.

The American Institute of CPAs is calling on the Internal Revenue Service to issue guidance related to how digital asset losses affect tax obligations.

"With the complexities and recent bankruptcies involved with digitalasset exchanges, taxpayers and practitioners are facing many issues with the taxtreatment of losses of digitalassets and need guidance," Eileen Sherr, AICPA Director for Tax Policy & Advocacy, said in a statement. "Taxpayers and their advisors need clear guidance to accurately calculate their losses and properly meet their tax obligations and we urge the IRS to adopt our recommendations and provide this guidance."

In an April 14, 2023, letter to the agency, AICPA said it hopes the submission of the comments that the "IRS will provide additional guidance to clarify how digitalassetlosses are handled in various scenarios. Such guidance will provide greater certainty to taxpayers and their preparers in confidently and properly complying with their overall reporting requirements for digitalassets, and better ensure consistent application of the tax law among taxpayers."

The organization offers a range of recommendations on a number of topics related to the tax treatment of digital asset losses, with a focus on losses incurred by an individual investor rather than a trade or business.

One scenario highlighted by the AICPA is the determination of worthlessness of a digital asset. The organization notes that Chief Counsel Advice (CAA) 20230211 "states that ‘a loss may be sustained…if the cryptocurrency becomes worthless resulting in an identifiable event that occurs during the tax year for purposes of section 165(a),"’ adding that the advice notes that cryptocurrency can be valued at less than one cent but still greater than zero because it can still be traded and "that could potentially create future value."

AICPA wrote that if "the position of Treasury and the IRS s that a cryptocurrency is listed on an exchange and has liquidating value greater than absolute zero, we recommend that Treasury and IRS state this in binding guidance (published in the Internal Revenue Bulletin)."

Another topic covered by the comments was the question of when, if ever, might digital assets be securities for tax purposes.

"Authoritative guidance is needed on when, if ever, the section 156(g) worthless security capital losstreatment applies to cryptocurrency and other digitalassets," AICPA wrote. "Binding guidance should also be provided on basis determination for digitalassets (currently the special options are only in non-binding FAQs), as this is a matter relevant to measuring gains and losses."

AICPA also stated that guidance "is needed on the treatment of lending of virtual currency other digital asses under sections 162 such as if the taxpayer is in a business of ‘lending’ digitalassets), 165, 166, 469, 1001, and 1058, and possibly other provisions. This guidance should cover not only losses from ‘lending’ virtual currency and other digitalassets, but the categorization of the income generated (portfolio, business or other) and related expenses."

Other topics covered by the comment letter include:

• What facts indicate abandonment of a digital asset?
• In the case of theft of a digital asset, does the Ponzi loss guidance apply beyond Ponzi-losses to other fraudulent arrangements, including digital asset losses from certain digital asset exchange activities?
• When would section 1234A apply to termination of a digital asset?
• How should a taxpayer report digital asset activity if they are unable to access their records due to bankruptcy of an exchange?
• Is a digital asset considered disposed of by transferring the investor’s interest in a bankruptcy proceeding? Must there be proof of transfer of the underlying digital asset?

This and other tax policy and advocacy comment letters filed by the AICPA can be found here.

By Gregory Twachtman, Washington News Editor

The end of the 2009 year will also spell the end of many tax breaks for both individuals and businesses. Some of these tax breaks are "temporary" credits and deductions that Congress typically extends for another year or two at the last moment. Other sunsetting provisions are relatively new, with no previous track record on their being extended. In either case, however, the unfamiliar economic climate in which our nation finds itself makes predicting whether Congress will find the funding necessary to extend any particular tax break this time around, beyond 2009, a matter of guesswork. The following is a list of important tax breaks expiring at the end of 2009.

A word to the wise: if you can take advantage of any tax break on this list before 2009 closes, do so. At this point, you cannot -and should not-- count on having any of them available in 2010.

Homebuyer tax credit. The first-time homebuyer tax credit expires sooner rather than later in 2009. That is, the credit expires November 30 - the credit provision requires that the residence be "purchased" by November 30, with "purchase" defined as taking place when title passes and the full purchase price is paid (that is, at the "closing") and not earlier when the contract of sale is executed and a down payment is escrowed. The credit is equal to 10 percent of the purchase price of a principal residence, up to $8,000. It applies to homes purchased after December 31, 2008, and before December 1, 2009.

Itemized state and local sales tax deduction. The ability to deduct state and local sales taxes in lieu of state and local income taxes is available until December 31, 2009, when the itemized state and local sales tax deduction expires.

Higher education tuition deduction. The higher education tuition deduction, permitting taxpayers to take an above-the-line deduction for qualified tuition and related expenses, will expire this year. The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers whose income exceeds that limit but does not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses.

Additional standard deduction for real property taxes. If you claim the standard deduction and also have real estate taxes, you can take an increased deduction ($500 for individuals and $1,000 for married couples filing jointly) for your real estate taxes. This tax break is scheduled to expire at the end of 2009.

Teachers' classroom expense deduction. The $250 above-the-line deduction for qualified classroom expenses will expire at the end of 2009. The deduction benefits teachers and other educators, from teachers' aides to school principals, who used their own out-of-pocket money to purchase qualified classroom supplies, such as notebooks, scissors, paper, pens, markers and books. As an above-the-line deduction, the $250 tax break is available to non-itemizers as well.

Bonus depreciation. For businesses, bonus depreciation and enhanced "section 179 expensing," both designed to - temporarily - encourage business to make capital investments, are set to expire at the end of 2009. Bonus depreciation can be claimed for both regular tax and alternative minimum tax (AMT) liability unless the taxpayer makes an election out.

Enhanced Code Sec. 179 expensing. Enhanced "section 179 expensing," is set to expire at the end of 2009 in addition to bonus depreciation, as mentioned above. Qualified taxpayers may deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture, and other qualifying property placed in service during 2009. The $250,000 amount is reduced if the cost of all Code Sec. 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

Research and development credit. The research and development, or R&D credit, is set to expire at the end of 2009. The credit is available for businesses that increase their research expenses. The credit is 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years.

COBRA subsidy. The COBRA premium assistance provided as part of the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) will not benefit individual involuntarily terminated from employment after December 31, 2009. The COBRA subsidy is only available to individuals involuntarily terminated from work between September 1, 2008 and December 31, 2009 The COBRA subsidy under the 2009 Recovery Act provides for individuals to pay only 35 percent of their COBRA premiums with employers paying the remaining 65 percent, for nine months.

Unemployment compensation. Although unemployment compensation is typically taxable income, the 2009 tax year provides a respite from taxability for up to $2,400 of unemployment income. However, the exclusion from taxable income for unemployment compensation is only available for 2009, and will expire at the end of the year unless Congress acts to extend this benefit.

Motor vehicle sales tax deduction. The deduction for sales tax paid on the purchase a new motor vehicle is available for vehicles purchased between February 17, 2009 and December 31, 2009. Taxpayers can deduct state and local sales and use taxes paid on the first $49,500 of the purchase price of the vehicle. The deduction can be taken whether or not the taxpayer itemizes deductions. However, if you deduct state and local general sales taxes as an itemized deduction, you cannot "double dip" and take the deduction for new car sales taxes.

AMT exemption amounts. For 2009, the AMT exemption amounts increased to $46,700 for individuals and $70,950 for married taxpayers filing jointly. However, these exemption amounts will decrease in 2010 to $33,750 for single taxpayers and $45,000 married taxpayers filing jointly.

There are a number of advantages for starting a Roth IRA account, the most important being that all the investment earnings grow tax-free, and qualified distributions are tax-free. Additionally, you can continue to make contributions to your Roth after you turn 70 ½ and are not subject to the required minimum distribution rules. Currently, only individuals who have a modified adjusted gross income (AGI) of less than $100,000 and/or who do not file their return as "married filing separately" can convert their traditional IRA to a Roth.

However, beginning in 2010, everyone, no matter what their income level or filing status, will be able to have a Roth IRA. The question that remains to determine is when you should convert, if at all.

Spreading out your tax liability

A conversion is treated as a taxable distribution, but is not subject to the 10 percent early withdrawal penalty. However, taxpayers who convert to a Roth IRA in 2010 (and 2010, only) have the ability to pay taxes on the converted amount ratably over two years, in 2011 and 2012. Therefore, if you convert to a Roth in 2009, you must recognize the entire converted amount in income on your 2009 tax return.

Changes for 2010

In 2010, the $100,000 modified AGI cap that has prevented many individuals from converting from their traditional IRA to a Roth, is completely eliminated. Moreover, the filing status limitation will also be done away with, meaning that married couples filing separately will be able to convert to a Roth IRA as well. However, all other rules continue to apply, and any amount you convert to a Roth IRA will still be taxed as ordinary income at your marginal tax rate. The exception for 2010, of course is that you will have the choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

Example 1. You have $28,000 in a traditional IRA, which consists of deductible contributions and earnings. In 2010, you convert the entire amount to a Roth IRA. You do not take any distributions in 2010. As a result of the conversion, you have $28,000 in gross income. Unless you elect otherwise, $14,000 of the income is included in income in 2011 and $14,000 is included in income in 2012.

Example 2. On the other hand, if you currently meet the AGI and filing status requirements to convert to a Roth IRA (that is, your AGI for 2009 will be less than $100,000 and your filing status is not "married filing separately" you can also convert this year. But, you will recognize all the conversion income in 2009 instead of having it spread over two years. Therefore, if in the example above you convert the entire $28,000 to a Roth IRA in 2009, you will pay tax on the entire $28,000 conversion amount in 2009.

Taking advantage of lower tax rates

Currently, the income tax rates are at a historic low. But these rates are scheduled to revert to previously higher levels (and rise further for some taxpayers) after 2010. The Obama administration has proposed extending the lower individual marginal income tax rates but raising the two highest income tax brackets to 36- and 39.6-percent after 2010. This should be considered in your decision of when (and if) to convert to a Roth in 2010, or now in order to take advantage of the lower income tax rates, especially if you expect to be in one of the two highest income tax brackets after 2010.

Conversions in years after 2010 will be included in your income during the tax year in which you completed the conversion to a Roth IRA. While deferring tax is a traditional and beneficial part of tax planning, if you convert in 2010 the tax will be spread out ratably in 2011 and 2012, and therefore taxed at the rates in effect for 2011 and 2012 (which as mentioned could be higher for some taxpayers). Thus, if income tax rates go up, which they are anticipated to do, you may end up paying much more tax. Therefore, if you do not want to take this chance that your income rate will be higher in 2011 and 2012, you may want to elect to pay the full tax on the Roth conversion in your 2010 income tax return, at 2010 income tax rates.

So why would you accelerate a conversion? If you believe your IRA assets are currently valued on the low side, you might opt for a conversion if you are below the $100,000 AGI level for 2009. This reduces your tax liability on the conversion. Similarly, if you converted within the past year and the value of the assets has declined since then, you can elect to "undo" the conversion. Otherwise, you will have paid tax on the conversion when the assets were at a higher value.

Undoing the conversion later

If you convert to a Roth IRA, but later change your mind, you have until Oct. 15 of the year after the year of conversion to undue the transaction and go back to your traditional IRA. For example, if you convert in 2009, you will generally have until October 15, 2010 to recharacterize the transaction. However, to do this you must have filed your individual tax return by the normal filing deadline (April 15, generally) or if you obtained an extension, the extension due date.

For example, if the value of your Roth drastically declines after the conversion, and leaves you essentially with a Roth IRA value that is even less than the tax you paid to convert, this would be a good reason to undo the transaction. Recharacterizing the conversion would undo the tax consequences and therefore you'd get back the tax you paid on the larger amount that was converted to the Roth IRA.

Can you afford the conversion tax?

You will have to pay a conversion tax on the transaction, which can be a significant sum. In spite of all the advantages of a Roth IRA, a conversion is generally advisable if you can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10 percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

No. Many individuals may be considering buying a new home in 2009 as home prices continue to drop in many areas across the country. They may also be wondering if they can claim the $8,000 first-time homebuyer tax credit before actually purchasing the home. Although this might generate a refund you could use as a down payment, the IRS will not allow you to claim the credit in advance of a purchase.

Homebuyer credit

The first-time homebuyer credit is a temporary tax incentive. As its name implies, it is targeted to first-time homebuyers.

Congress created the first-time homebuyer credit in 2008. At that time, the maximum credit was $7,500 and it had to be repaid. The credit was more like a loan than a true credit even though repayment was interest-free. In the American Recovery and Reinvestment Act of 2009, Congress increased the maximum credit to $8,000. Congress also removed the repayment requirement for homes purchased between January 1, 2009 and December 1, 2009. With repayment no longer required, more taxpayers are expected to take advantage of the credit.

No advance claims

You cannot claim the first-time homebuyer credit in anticipation of a home purchase that has yet to happen. Taxpayers qualify for the credit when they finalize the purchase of their home, which for most purchasers occurs at the time of closing, the IRS explained.

Individuals constructing a new home may be eligible for the first-time homebuyer credit. Like purchasers of existing homes, they cannot claim the credit in advance. For new construction, the IRS explained that the purchase date is the first date that the taxpayer occupies the home.

Taxpayers claim the credit on Form 5405, First-Time Homebuyer Credit, which clearly asks for "date acquired" (past tense). A similar credit, the District of Columbia homebuyer credit, requires an actual purchase. Effectively, such language and the IRS's decision to prohibit the credit to be used in anticipation of a purchase, precludes taxpayers from using a refund from the credit as a down payment.

Amended returns

Individuals may claim the $8,000 credit for 2009 purchases on their 2008 or 2009 returns. If you filed your 2008 return without claiming the credit, you may want to consider filing an amended return. Alternatively, you can wait and claim the credit on your 2009 return, which you will file in 2010.

Other criteria

Not everyone can claim the first-time homebuyer credit. There are income limitations. Additionally, a taxpayer cannot have owned and used a home as his or her principal residence in the past three years. However, there are some exceptions. The credit also may be allocated among unmarried taxpayers. Domestic partners and family members who purchase a home together may generally allocate the credit using any reasonable method.

If you are purchasing a home in 2009, please contact our office. You may be eligible for this valuable tax break.

Individuals who have been "involuntarily terminated" from employment may be eligible for a temporary subsidy to help pay for COBRA continuation coverage. The temporary assistance is part of the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act), and is aimed at helping individuals who have lost their jobs in our troubled economy. However, not every individual who has lost his or her job qualifies for the COBRA subsidy. This article discusses what qualifies as "involuntary termination" for purposes of the temporary COBRA subsidy.

Background

The 2009 Recovery Act temporarily allows individuals involuntarily terminated from their employment between September 1, 2008 and December 31, 2009 to elect to pay 35 percent of their COBRA coverage and be treated as having paid the full amount. In most cases, the former employer pays the remaining 65 percent of the premium and is reimbursed by claiming a payroll tax credit.

Some individuals who are "qualified beneficiaries" may also be eligible for the COBRA subsidy. They include spouses and dependent children. However, domestic partners generally do not qualify for the COBRA subsidy.

Income limits

The COBRA subsidy is excludable from gross income. However, individuals with modified adjusted gross incomes (MAGI) between $125,000 and $145,000 ($250,000 and $290,000 for married couples filing jointly) must repay part of the subsidy. For individuals with MAGI exceeding $145,000 and married couples with MAGI exceeding $290,000, the full amount of the subsidy must be repaid as additional tax.

Coverage period

The COBRA subsidy applies as of the first period of coverage starting on or after February 17, 2009 (the effective date of the 2009 Recovery Act). For most plans this was March 1, 2009. The subsidy is available for nine months. However, the nine-month subsidy period may end earlier if the individual becomes eligible for Medicare or another group health plan (such as one sponsored by a new employer).

Involuntary termination

One of the most important questions for purposes of the COBRA subsidy is what is involuntary termination? The IRS has explained that involuntary termination is severance from employment due to an employer's unilateral authority to terminate the employment. However, the IRS stresses that whether an involuntary termination has occurred depends on all the facts and circumstances.

Involuntary termination can also occur when an employer:

• Declines to renew an employee's contract;
• Furloughs an employee;
• Reduces an employee's time to zero hours;
• Tells an employee to "resign or be fired;"
• Relocates its office or plant and an employee declines to relocate; or
• Locks out its employees.

Extended election

Moreover, individuals involuntarily terminated between September 1, 2008 and February 18, 2009, but who declined COBRA coverage, have a second chance under the 2009 Recovery Act. They may be eligible to re-elect COBRA coverage and receive the subsidy.

Small businesses

COBRA continuation coverage and the subsidy are generally unavailable to employees of small businesses (businesses with 20 or fewer employees). However, some states have mini-COBRA laws that extend COBRA continuation coverage and the subsidy to workers at small businesses. COBRA continuation coverage and the subsidy are also unavailable if the employer terminates its health plan.

If you would like to know more about the COBRA premium subsidy, please contact out offices. We can help determine your eligibility for this assistance.

The IRS has released the numbers behind its activities from October 1, 2007 through September 30, 2008 in a publication called the 2008 IRS Data Book. This annually released information provides statistics on returns filed, taxes collected, and the IRS's enforcement efforts.

Examinations Data

For example, the IRS reported that its examinations totaled over 1.54 million during FY 2008, or 0.8 percent of the total returns filed during the previous calendar year. This amount was a 0.65-percent drop from returns examined during FY 2007. Of all the returns examined, a little over one-percent were individual income tax returns, a 0.507-percent increase from FY 2007.  

Within the category of individual income tax returns, the IRS examined 0.93-percent less taxpayers with under $200,000 of total positive income than the previous year; i.e. a total of all sources of income, excluding losses. This figure increased by 33.23-percent for taxpayers with total positive income between $200,000 and $1 million, but decreased by 30.3-percent for individuals with total positive income over $1 million from the previous year. Also, for the first time, the IRS delineated examination percentages during FY 2008 for individual income tax returns according to adjusted gross income as follows:

Decreased Tax Collection

The IRS also reported that, while it received over $2.7 trillion in gross collections during the Fiscal Year (FY) 2008, its net tax collections (after refunds) actually decreased by 3.34-percent from FY 2007. The IRS distributed more than 237 million total refunds in FY 2008 with over 118 million going to individual tax payers. Total FY 2008 tax refunds rose to over $425 billion, while over $270 billion (63.52-percent) alone went to individual filers. The IRS also reported that $95.7 billion in economic stimulus payments were made during the year, as mandated by the Economic Stimulus Act of 2008.

One major reason for these large refunds was the large increase in individual income tax returns filed during FY 2008 as a result of the one-time economic stimulus payments under the Economic Stimulus Act of 2008. While the number of individual income tax returns received by the IRS only increased by 3.7-percent for FY 2007, it increased 11.1-percent for FY 2008. The increase was even greater for Forms 1040NR, 1040NR-EZ, 1040PR, 1040-SS, and 1040CC; which increased by 36-percent for FY 2008 (as compared to 2.3-percent for FY 2007).

The IRS also reported that the economic stimulus payments generated an increase in electronically filed income tax returns as well. During FY 2008, taxpayers electronically filed over 101.5 million returns, 89.5 million of which were individual income tax returns. Of all individual income tax returns filed, 58-percent were filed electronically during the year.

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.

Even though gas prices have gone down from their record highs six-months ago, many people are looking for ways to save on their energy costs. The Tax Code provides a number of energy tax incentives to encourage individuals and businesses to invest in energy-efficient property and also in alternative sources of energy. One of those incentives is the Code Sec. 25C residential energy property tax credit for individuals.

Improvements

If you make an eligible energy-related improvement to your home, the expenditure may qualify for the Code Sec. 25C credit. Eligible improvements include:

• Insulation materials; 
• Exterior windows, including skylights;
• Exterior doors; 
• Metal roofs with special pigmented coatings (including certain asphalt roofs);
• Electric heat pump water heaters;
• Central air conditioners;
• Natural gas, propane or oil water heaters or furnaces;
• Hot water boilers;
• Stoves using renewable plant-derived fuel; and
• Advanced main air circulating fans.

 As you can see, the list of improvements is extensive. Moreover, the qualification of some types of improvements may not be readily apparent. For example, skylights and windows installed in a new location, not only replacement skylights and windows, appear to qualify for the credit. Another example is insulated garage door replacements, which qualify as exterior doors and, if sufficiently insulated, are an energy efficiency improvement.

ENERGY STAR

ENERGY STAR is a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy. Many products with the ENERGY STAR label qualify for the Code Sec. 25C credit. For example, ENERGY STAR labeled windows and skylights are eligible for the credit.  

Residence

To qualify for the credit, the improvement must be installed on, or in connection with, a dwelling unit located in the U.S. that is owned and used by you as your principal residence.  The Code Sec. 25C credit is only available for existing homes. It cannot be used for new homes (however, other tax incentives may apply to new homes).

Amount

First, you need to keep receipts of all your qualifying purchases. Second, if you made any qualifying purchases in 2005 or 2006, and you claimed some but not all of the credit, you can use the unused portion in 2009.

The Code Sec. 25C residential energy property credit is 10 percent of the amount paid up to certain maximums. The general lifetime maximum is $500 for qualifying improvements. There is a $200 maximum for qualifying windows. Taxpayers cannot carry forward the credit. Generally, the amount of the credit will be limited by the amount of any nonbusiness energy property credit taken in 2006 or 2007.

2009 only

You need to act soon to take advantage of the Code Sec. 25C tax credit. Last year, Congress reinstated the credit but only for qualified energy property placed in service in 2009. Unfortunately, if you installed qualifying property in 2008, you cannot claim the credit. The previous credit expired as to property placed in service after December 31, 2007.

If you are considering the purchase of energy improvement property in 2009, please contact our office. Don't miss out on this potentially valuable tax break. We can review the credit in more detail as it applies to your situation.

Many taxpayers are looking for additional sources of cash during these tough economic times. For many individuals, their Individual Retirement Account (IRA) is one source of cash. You can withdraw ("borrow") money from your IRA, tax and penalty free, for up to 60 days. However, the ability to take a short-term "loan" from your IRA should only be taken in dire financial situations in light of the serious tax consequences that can result from an improper withdrawal or untimely rollover of the funds back into an IRA.

The funds must be returned, or rolled back into, an IRA within 60 days from the day after the date of the withdrawal, or income and penalty taxes are imposed on the amount withdrawn and not returned. These tax consequences can be serious. Therefore, it is imperative that you return the withdrawn funds back into an IRA within 60 days.

Tax and interest imposed

If the funds are not returned within 60 days, the withdrawal will not only be treated as a taxable distribution for individuals who are under the age of 59 1/2, but you will also face an additional 10 percent penalty tax, as well as possible state income tax.

Example

You withdraw $10,000 from your IRA on March 2. The 60-day period begins on March 3. To avoid income taxes as a result of early withdrawal treatment and an additional 10 percent penalty tax, the amounts must be returned to an IRA on May 2. Although May 2 falls on a Saturday, there is no extension as a result of weekends (or holidays).

Income tax reporting

If you decide to take the short-term, 60 day "loan" from an IRA you must report the entire amount of the withdrawal. The withdrawal is reported on line 15a of your Form 1040 for the tax year in which you took the withdrawal. If you have returned the withdrawn funds within the 60 day period, you will enter "zero" as the taxable amount of line 15b of Form 1040.

One-year rule

You can only take a "60 day loan" from a specific IRA account and return the funds to that IRA or a different account once during a one-year period. If you make a withdrawal from the same IRA more than once during a one-year period, the second withdrawal is treated by the IRS as a taxable IRA distribution, again generally subject to income taxes and a 10-percent early withdrawal penalty tax.

Moreover, if you redeposit funds back into a particular IRA account and withdraw money from that same account within the one-year period, again the withdrawn funds are again treated as a premature withdrawal subject to income taxes and the 10-percent penalty tax.

For those struggling in these economic times and looking for additional sources of cash, there are other options in addition to a 60-day loan from your IRA. Our office can discuss your options and the potential tax consequences of each. 

790

With the economic downturn taking its toll on almost all facets of everyday living, from employment to personal and business expenditures, your business may be losing money as well. As a result, your business may have a net operating loss (NOL). Although no business wants to suffer losses, there are tax benefits to having an NOL for tax purposes. Your business can use the NOL in future years to offset its taxable income. Your business can also use an NOL to offset income from the prior two years; in this type of "carryback" situation, it can mean an immediate tax refund to help with current operating expenses.

NOLs, generally

A trade or business has an NOL when its allowable deductions exceed its gross income for the tax year. A business can have an NOL whether it is a corporation, partnership or sole proprietorship. For example, NOLs can be generated if you operate a trade or business as a sole proprietorship that is taxed to the individual.

Note. The American Reinvestment and Recovery Act of 2009 (2009 Recovery Act) temporarily increases the carryback period to five years for small businesses (defined by the new law as businesses with average gross receipts of $15 million or less). These businesses can elect to carryback NOLs three, four or five years. However, this treatment applies only to NOLs beginning or ending in 2008. Businesses that qualify can apply for an immediate refund of taxes paid during the extended carryback period. Forms 1045, Application for Tentative Refund, and Form 1139, Corporate Application for Tentative Refund, must generally be filed within one year after the end of the tax year of the NOL.

Deductible expenses for computing NOLs

Generally, business deductions are those deductions related to a taxpayer's trade or business or employment. For this purpose, the following types of losses are considered business deductions that can be used to compute an NOL:

• Losses from the sale or exchange of depreciable or real property used in the taxpayer's trade or business, including Code Sec. 1231 property;
• Losses attributable to rental property;
• Losses incurred from the sale of stock in a small business corporation or from the sale or exchange of stock in a small business investment company, to the extent that these types of losses qualify as ordinary losses;
• Losses on the sale of accounts receivable (but only if the taxpayer uses the accrual method of accounting); and
• Business losses from a partnership or S corporation.

In addition, the following expenses are considered business deductions for purposes of computing an NOL:

• Personal casualty and theft losses and nonbusiness casualty and theft losses from a transaction entered into for profit;
• Moving expenses;
• State income tax on business profits;
• Litigation expenses and interest on state and federal income taxes related to a taxpayer's business income;
• The deductible portion of employee expenses, such as travel, transportation, uniforms, and union dues;
• Payments by a federal employee to buy back sick leave used in an earlier year;
• Unrecovered investment in a pension or annuity claimed on a decedent's final return; and
• Deduction for one-half of the self-employment tax.

Carryback and carryforward rules

Generally, an NOL must be carried back and deducted against taxable income in the two tax years before the NOL year before it can be carried forward and applied against taxable income, up to 20 years after the NOL year. An NOL must be used in the earliest year available; however, you can waive the use of the carryback period and immediately carry the NOL forward. To claim an NOL carryback, an individual or a corporation must file an amended return within three years of the year the NOL was incurred.

Generally, the carryback and carryforward periods cannot be extended. Any NOL remaining after the 20-year carryforward period will be lost. However, you may be able to use an expiring NOL in the final year by accelerating the recognition of income.

Comment. There are certain exceptions to the two-year carryback period. The carryback period is three years for an NOL from a casualty or theft, and also three years for losses from a Presidentially-declared disaster affecting a small business or a farmer. A "farming loss" can be carried back five years and a 10-year period is available for product liability losses and environmental claims.

Partnerships and S corporations

If your business operates as a partnership or an S corporation, the NOL flows through to the partners or shareholders who can use the NOL to offset other business and personal income. The partnership or S corporation itself cannot use the NOL.

Note. Shareholders may not deduct a C corporation's NOLs. Moreover, because a corporation is a separate taxpayer, NOLs do not automatically flow between the corporation and another entity that takes over the corporation.

Individuals

Individuals may have an NOL not only from business losses but from other expenses, although this is less common. In addition to business losses, an individual includes in his or her NOL computation the following deductions:

• Employee business expenses;
• Casualty and theft;
• Moving expenses for a job relocation; and
• Expenses of rental property held for the production of income.

If you would like to discuss whether you have an NOL and how you might use it, please contact our office.

Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?

A. Because computers and peripheral equipment are viewed as more susceptible than other business property to unwarranted deductions for personal use, they are subject to special scrutiny under the tax law. This scrutiny comes from their classification as "listed property," which limits the amount that may be deducted each year.

A computer as listed property only becomes an issue if it is not used exclusively in business. If a computer is used exclusively at the taxpayer's regular business establishment or in the taxpayer's principal trade or business, the listed property limitations don't apply at all.

Any computer that you use predominately for pleasure may not be written-off over its life nearly as quickly as exclusive-use computers. If your business usage does not meet the predominant use test, you are relegated to using a much slower depreciation method (the ADS, straight-line method) over the longer-ADS recovery period.

Your computer will meet the predominant use test for any tax year if its qualified business use is more than 50% of its total use. You must review your computer's usage and determine the percentage usage for each of its various uses (business, investment, and personal). When computing the predominant use test, any investment use of your computer cannot be considered as part of the percentage of qualified business use. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property. It's up to you to prove business use to the IRS; the IRS does not need to prove personal use to reject your deductions.

In order to claim your computer expenses, you must meet the adequate records requirements by maintaining a "log" or other documentary evidence that sufficiently establishes the business/investment percentage claimed. The log should be similar to a log you would keep to track your auto expenses, indicating date, time of usage, business or nonbusiness, and business reason. Good documentation is always the key to success if your return is ever audited.

Finally, what about application of these rules to PDA's? The shorter the designated "life" of the property, the faster you can write-off its cost. Cell phones are generally considered 7-year property (the cost is depreciated over seven years). Computers are generally considered 5-year property, and computer-software normally is 3-year property. PDA's are generally classified as 5-year property, being considered wireless computers. If a PDA includes a cell phone feature, as long as that feature is not predominant and removable, it continues to fall under the 5-year property rule. Software that you may download to your PDA is 3-year property. Software that you buy already loaded into the PDA, however, is 5-year property. Monthly charges for a wireless service provider are deductible as paid each month, just as your business would deduct any phone or internet service bill.

Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.

What can be done?

Keeping lots of receipts is one answer! Remember, it will be the gain on your home that is potentially taxable, not full sale price. Gain is equal to net sales price minus an amount equal to the price you paid for your house (including mortgage debt) plus the cost of any improvements made over the years. Bottom line: If your residence has gain that will otherwise be taxed, you will get around 30 percent back on the cost of the improvements (assume your tax bracket is about 30 percent when you sell), simply by keeping good records of those improvements.

The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements cannot be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio. It doesn't need to be a big project, however, just relatively permanent. For example, putting in a skylight or a new kitchen sink qualifies.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales before 1998.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale).

The general rule on business expenses is that you must prove everything in detail to be entitled to a deduction. Logs, preferably made contemporaneously to the business transaction, must show date, amount, and business purpose and you must produce receipts. Fortunately, the tax law has a practical side. Congress, the IRS and the courts each have applied their own brand of practicality in allowing certain exceptions to be made to the business substantiation rule.

Here is a quick review of the major exceptions to the "prove-it or lose-it" rule that exist for business expense deductions. Some are relatively new; one is brand new.

General business expenses

Deductions are a matter of legislative grace, and the taxpayer must establish that he or she is entitled to them. A business taxpayer is required to maintain books and records sufficient to substantiate the items of income and deductions claimed on the return.

If the taxpayer is unable to substantiate expenses through adequate records, the courts have allowed the taxpayers to deduct an estimate of the expenses under the so-called Cohan rule named after the precedent-setting case of that name. This rule states that when a taxpayer has no records to prove the amount of a business expense deduction but the court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate. However, in determining the amount deductible, the courts may bear heavily on the taxpayer "whose inexactitude is of his own making."

The courts, however, cannot apply the Cohan rule to unsubstantiated travel or entertainment expenses. The Cohan rule also may not be applied to expenses for vehicles and other listed property, such as personal computers.

Travel & entertainment

Expenses for travel, meals, and entertainment are subject to strict substantiation requirements. Travel expenses in this case include meals, lodging, and incidental expenses. The Internal Revenue Code, however, gives the IRS an "out" and allows it to create exceptions to this general rule through its own regulations. The IRS has chosen to do so in a number of limited circumstances. The reason behind most of these exceptions is "administrative convenience" both for the business to maintain records in certain circumstances and for the IRS to spend an inordinate amount of audit resources in policing them. Here are the principal recordkeeping exceptions:

$75 rule.  Documentary evidence, such as receipts, paid bills, or similar evidence, is required for: (1) any expenditure for lodging while away from home; and (2) any other expenditure of $75 or more, except for transportation charges if documentary evidence is not readily available.  For expenses under $75, you do not have to provide receipts but still must maintain adequate records, such as a diary, account book, or some other expense statement.

Per diem.  IRS provides an optional per diem method for substantiating expenses reimbursed by the employer. The method applies to travel expenses for lodging, meals and incidentals, or for meals and incidental expenses (M&IE). Using per diem rates can avoid a great deal of paperwork.

Expenses are deemed substantiated if they do not exceed the per diem rates recognized by IRS. The per diem allowance must cover lodging, meals, and IE, and is not available for an allowance that only covers lodging. The employer still must be able to substantiate the time, place, and business purpose of the travel.

The current rates apply to travel within the continental United States (CONUS) on or after October 1, 2007. Rates vary by locality; where the employee sleeps determines which rate to apply. Different rates apply to travel outside the continental United States, including Alaska, Hawaii, and Puerto Rico.

IRS also provides a separate per diem rate for unreimbursed meals and incidental expenses. These rates can be used only by employees and self-employed individuals to compute the deductible costs of meals and incidental expenses. Lodging expenses still must be substantiated.

Standard mileage rate.  Taxpayers may use a standard mileage rate for the costs of using their car, rather than actual expenses. The 2008 business mileage rate is 50.5 cents per mile. Parking fees and tolls may be deducted separately.

Small fringe benefits.  De minimis fringe benefits are excluded from income and do not have to be substantiated. Examples of these benefits include monthly transit passes and occasional meal money and transportation for employees working overtime.

Statistical sampling. The IRS provided significant relief from the substantiation requirements for certain meal and entertainment (M&E) expenses. By using a statistical sampling method specified by IRS, employers can avoid the need to review every meal and entertainment expense deduction.

The sampling method can be used for expenses that are not subject to the rule that normally limits M&E expense deductions to 50 percent. These exceptions include meals and entertainment treated as compensation, such as a paid vacation; recreation benefits for rank-and-file (but not highly compensated) employees, such as a company party; tickets to charitable sports events; and meal expenses excludible as de minimis fringe benefits. An employee cafeteria or executive dining room used primarily by employees comes under this exception.

The sampling method cannot be used for the costs of entertaining business clients.

If you need advice on how your current recordkeeping practices for travel, meals and entertainment square up against these exceptions, please do not hesitate to call this office.

Loans without interest or at below-market interest rates are recharacterized so that lenders must recognize market-rate interest income. Below-market loans are loans for which a rate of interest that is lower than the applicable federal rate (AFR) -a traditional interest benchmark issued each month by the Treasury Department-- is charged.

The below market loan rules apply to a loan within one of six categories: gift loans; compensation-related loans; corporation-shareholder loans; tax avoidance loans; loans to qualified continuing care facilities; or other below-market loans.

Below-market loans. A below-market loan is further characterized as either a demand loan or a term loan. Below-market demand loans are restructured for tax purposes so that the foregone interest is treated as transferred from the lender to the borrower, either as a gift, charitable contribution, dividend, compensation, or other payment, and retransferred by the borrower to the lender as interest. The foregone interest attributable to each calendar year is treated as transferred and retransferred on the last day of that year.

Term loans. Below-market loans other than gift or demand loans are term loans, which are restructured for tax purposes so that the excess of the loan amount over the present value of all required loan payments, that is, the loan's original issue discount (OID), is treated as transferred from the lender to the borrower on the date of the loan. The lender and borrower recognize the interest under the OID rules over the life of the loan.

The below-market loan rules include several exceptions and exemptions. There is a $10,000 de minimis exception for gift loans, compensation-related loans, and corporation-shareholder loans. Israeli bonds, loans between an employer and an employee stock ownership plan (ESOP), and loans to qualified continuing care facilities are also excepted from the rules. For gift loans directly between individuals, the imputed interest payment cannot exceed the borrower's net investment income for the borrower's tax year.

Examples

Example #1: ABC corporation makes a $50,000 loan to Smith, a shareholder, that bears no interest. The principal amount of the loan is due five years from the date the loan is made. On the date the loan is made, ABC is deemed to have paid a dividend to Smith of the difference between $50,000 (the amount loaned) minus the present value of the right to receive $50,000 in five years (all payments required under the loan). The amount of this deemed dividend is treated as interest in the form of OID, to be recognized by ABC as interest income, and by Smith as interest deductions, during the term of the loan.

Example #2: On January 1, Year 1, XYZ corporation makes a $100,000 interest-free five-year term loan to Jones, a shareholder. The AFR is 8 percent, compounded semiannually. The present value of the principal payment to be made at the end of five years is $67,556, determined by discounting the amount of the payment ($100,000), using an 8-percent discount factor, over the five-year period between the date on which the loan was made and the due date. Thus, on January 1, Year 1, XYZ is treated as transferring to Jones the excess of the amount loaned ($100,000) over the present value of the required repayments ($67,556), or $32,444. On January 1, Year 1, this amount is treated as an imputed dividend to Jones. In addition, this amount is treated as OID and will result in an interest expense for the shareholder and interest income for the corporation over the term of the loan.

Asset protection planning is the process of organizing one's assets and affairs in advance to guard against risks to which the assets would otherwise be subject. The phrase "in advance" warrants strong emphasis. One who is planning to protect assets must be cautious and avoid the negative implications that may follow if there are creditors who are entitled to remedies under applicable fraudulent transfer and similar laws. Asset protection planning may be applied to protect every type of asset, including an operating business or a professional practice.

Why asset protection planning? Safeguarding assets from the many risks involved is not a new idea or planning goal. However, asset protection is more in the forefront of planning because of expanding theories of liability. New liability theories are sometimes coupled with results-oriented judges and juries who decide things based more upon a perceived desired outcome than upon the law. An ever-present concern includes some of the high dollar amounts of jury awards that we hear about today.

Planning tools. Although developing an asset protection plan can be a difficult undertaking, there are many common techniques that exist for protecting assets from potential creditors. No single asset protection technique will unconditionally protect all of a taxpayer's assets. A plan needs to involve a mix of the various tools and techniques available to the planner. Various "ladders of asset protection vehicles" represent one tool used to identify the various tools available to the asset protection planner who arranges them in ascending order of efficacy. At the bottom of the ladder is gifting, midway up the ladder is the family limited partnership, and close to the top of the ladder is the foreign integrated estate planning trust (IEPT).

As important as it is to know what an asset protection planning component is, it is equally important to know what it is not. Asset protection planning will not aid a client in evading the payment of taxes. Asset protection planning does not use the concept of hiding assets but works in general to protect those assets. A hidden asset may be found, but a protected asset is a more secure one.

Please contact this office if you would like to know more about how an asset protection plan might be designed specifically to address those risks that you may face now or in the future.

Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.

Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.

Traditional and Roth IRAs

Two types of individual retirement accounts are the traditional IRA and the Roth IRA. To contribute to an IRA account, whether it's a traditional or a Roth, an individual must have earned income. In general, the maximum amount that can be deposited in either type of IRA is $3,000 in 2004; $4,000 in 2005 through 2007.

Contributions to a traditional IRA are tax deductible. Amounts earned in a traditional IRA are not taxed until a distribution is made. If money is withdrawn from a traditional IRA before the individual reaches age 59 1/2, a 10 percent penalty applies to the principal. Mandatory withdrawals are required when the individual reaches age 70 1/2.

Contributions to Roth IRAs are not tax deductible, but all earnings are tax-free when the money is withdrawn from the account, if certain requirements are met. Tax-free withdrawals are a big advantage to the Roth IRA that will likely outweigh the lack of a tax deduction on contributions. Qualified distributions from a Roth IRA are not included in the individual's income if a five-year holding period and certain other requirements are met; otherwise, the 10 percent penalty applies. Unlike the traditional IRA, individuals can make contributions to a Roth IRA even after age 70 1/2.

Penalty flexibility

Both the traditional and the Roth IRAs offer some flexibility on the 10 percent penalty. Early withdrawals, without penalty, are allowed if the money is used for:

--College expenses;

--First home purchase (up to $10,000);

--Medical insurance in case of unemployment for a certain amount of time; or

--Expenses attributable to disability (Roth IRA).

Although designed for retirement planning, flexibility in how the money can be used makes IRAs very attractive for young family members.

Kid with a job

In order to contribute to an IRA, however, the child or young adult must have earned income. In other words, the kid needs a W-2, a 1099 or some other "proof" that wages were earned. Although occasional baby-sitting or lawn-mowing generally doesn't count, the money made on those jobs could qualify as earned income if adequate receipts and records are kept.

Working for the parents

Some moms and dads, who own their own businesses, are taking the "kiddy IRA" concept a step further: their sons and daughters come to work for the family business. The child earns income, making him or her eligible to contribute to an IRA. The parents, as their employers must pay employment tax and issue a W-2, but they can also make a business deduction for the child's wages, just like for any other employee. Parents should be mindful that the wage their child earns for the work performed is comparable to the going rate. If the child's wage is too large, the IRS will disallow the deduction.

Let's make a deal

The tough part of the plan may be getting the young person to "lock away" his or her hard-earned cash. After all, retirement is much harder to imagine compared to more pressing, front-burner issues like college expenses or a car. Some parents, however, are convincing their kids to put their earnings to work for their future in an IRA by promising to match their child's pay as an extra incentive to save. For example, if Susan earns $3,000, her dad promises to put $3,000 in her IRA. Susan keeps the money she made. There's no rule that restricts the origin of the IRA contribution, so long as the IRA owner earned at least that amount and the contribution doesn't exceed the cap for that year.

Conclusion

Individual retirement accounts for children and young adults are a growing part of family financial planning. A potential hazard, however, is that the money in the IRA belongs to the child. The child, or young adult, has the right to do whatever they wish with the IRA and its assets, including making a withdrawal for a new car or exotic trip. Parents do not "own" the IRA, even if they contributed the dollars as a match to their child's earnings. Families who utilize IRAs for their offspring will have to consider the risk and stress to the youngsters that the money is better off in the IRA. Through investing in an IRA, a young person's earnings from working part-time at the local ice cream parlor, or a summer job loading trucks, can have lasting effects.

Please feel free to contact this office for advice more specific to your family situation.

Entertaining business clients and employees at sports events or arts performances can be good for the bottom line; and tax deductible, too. Whether to maintain contacts with existing customers, woo new business, or reward your employees; footing the bill at the ball game or hosting an evening at the theater can go a long way to generate positive returns.

General rule

In general, you can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses are either directly related or associated with your business. An "ordinary" expense is one that is common and accepted in your trade, business, or profession. For example, a contractor may have the ordinary expense of taking clients to lunch to discuss the business deal.

A "necessary" expense is one that is helpful and appropriate for your business. However, an expense does not have to be required to be considered "necessary." For example, the cost of fresh flowers, periodically sent to a business contact's office, may help maintain your professional network. Likewise, basketball tickets may be appropriate for keeping business communication lines open.

"Directly-related" test

Ordinary and necessary entertainment expenses must also be directly related to, or associated with, your trade or business. To satisfy the "directly-related" test, you must show that:

-- The active conduct of business was the entertainment's main purpose;

-- You engaged in business with the person during the entertainment period; and

-- There was an expectation of garnering specific business or income in the future.

You do not have to spend more time on business than on entertainment, but if business is only incidental, then the entertainment expenses do not meet the "directly-related" test.

Entertainment expenses are not directly related to business if you do not attend the event with your client. In addition, costs are not considered "directly-related" if the event is so distracting that you are prevented from actively conducting business.

"Associated" test

Although the theater or sporting events may be too riveting for continued business talk, these activities may still qualify as deductible business entertainment expenses. Even if they do not meet the directly-related test, expenses may still be deductible as "associated" with the active conduct of your trade or business if the expenses are incurred either directly before, or after, a substantial business discussion. A business presentation just before the game, or a meeting right after the concert, can qualify the recreational activities as business entertainment expenses.

Deductible amount

In general, the deductible amount is 50 percent of un-reimbursed entertainment expenses. Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Handling fees are not included in the amount you can deduct. Deductions for sky boxes and other luxury seats that are rented for more than one event are limited to the price of regular, non-luxury seats (subject to the 50 percent rule). Luxury seats are for "more than one event" if they are rented for a series of games or performances.

Expenses for non-business guests are not deductible as entertainment expenses. The cost of the entire outing must be pro- rated if it's difficult to separate the costs for business and non-business guests. However, if a business contact's spouse attends the event because it would be inconvenient not to, the cost for the spouse's ticket is also a business expense.

Casualty losses are damages from a sudden, unexpected or unusual event, including natural disasters. These losses are deductible to the extent they fit under specific tax rules. Ironically, however, due to insurance reimbursements and other payments, you may actually have taxable "casualty gain" as the result of a disaster or accident. Casualty losses and gains are reported on Form 4684.

Casualty losses are damages from a sudden, unexpected or unusual event, including natural disasters. These losses are deductible to the extent they fit under specific tax rules. Ironically, however, due to insurance reimbursements and other payments, you may actually have taxable "casualty gain" as the result of a disaster or accident. Casualty losses and gains are reported on Form 4684.

Casualty loss

The amount of casualty loss is based on the fair market value of the property immediately before it was damaged compared to its value immediately after the event. Alternatively, the loss determination can be based on the property's adjusted basis just before the loss. However, if business property (or property that produces income) is totally destroyed, the casualty loss is the adjusted basis of the property regardless of its fair market value. Whatever value you place on the loss, however, you then must deduct any insurance reimbursement that you receive or are likely to receive for that loss. That final figure is your official casualty loss for tax purposes.

Deductions

You can deduct a personal casualty loss only as an itemized deduction, only to the extent that it is more than $100 for any one event and only to the extent that all such losses over the course of the tax year are than 10 percent of your adjusted gross income. If the property is covered by insurance, you must file a claim for reimbursement. Otherwise, the loss cannot be deducted as a casualty loss. If the loss is on business property, the deduction is not restricted by the $100 or 10 percent rule. These restrictions apply only to personal casualty loss.

Disaster loss

A disaster loss can receive special treatment if it occurs in an area declared by the President of the United States to be eligible for federal disaster assistance. Typically, these are areas damaged by fire, hurricane or other natural disasters. A special rule allows you to deduct the loss in either the year in which the loss occurred or the preceding year. Claiming it in the preceding year typically allows you to file a refund claim immediately and, therefore, have immediate cash-in-hand from the deduction.

Gain

If your insurance reimbursement is more than your personal property's cost or basis (which may be the case if your property has increased in value since you bought it), you have a "personal casualty gain." If personal casualty gains from any year exceed personal casualty losses, a net capital gain results. Net capital gain generally is taxed at a maximum rate of 15 percent.

You may, however, be able to pay no tax on your gain. You can postpone net casualty gain using the so-called involuntary conversion rules. To postpone gain, you must purchase replacement property for a price equal to or more than the reimbursement you received.

You should beware of fancy footwork when it comes to estimating, filing, and paying federal taxes. One misstep can lead to harsh penalties. Willful or fraudulent mistakes can generate criminal sanctions as well.

Failure to pay tax

If you don't pay your taxes when due, the IRS may impose a penalty in addition to the tax. The addition to tax is one-half of one percent of the amount not paid, for each month (or part of a month) it remains unpaid, up to a maximum of 25 percent.

Delinquent returns

Failure to file on time may result in an "addition to tax" (the formal name that the IRS gives to its late-payment fee). This penalty is five percent for each month that no return is filed, up to 25 percent. If the return is not filed within 60 days of the due date (including extensions), the penalty will be at least $100 or 100 percent of the tax due on the return, whichever is less.

The penalty doesn't apply if you can show a reasonable cause for not filing. However, a "reasonable cause" for failure to file does not include (1) reliance on the advice of an agent; (2) reliance on the accountant to do the filing; or (3) misjudging the extension date.

Understatement of tax

If you substantially understate taxes due, the IRS can impose a 20 percent accuracy-related penalty. A "substantial understatement" occurs if the amount is (1) 10 percent of the tax required to be shown on the return (including self-employment tax) or (2) $5,000, which ever is greater.

You may be able to avoid this penalty if:

-- You acted in good faith and there was reasonable cause for the understatement;

-- The understatement was based on substantial authority; or

-- There was a reasonable basis for the tax treatment and the relevant facts were adequately disclosed.

Negligence, fraud, and criminal acts

If underpayment is due to negligent, reckless or intentional disregard of the tax laws, the IRS may impose a 20 percent accuracy-related penalty. Negligence includes failure to reasonably comply with the tax laws, to exercise reasonable care in preparing a tax return, to keep adequate books and records, or to properly substantiate items.

Fraud is punished more harshly. A penalty may be imposed on 75 percent of the underpayment due to fraud. The fraud penalty will not apply, however, if no return is filed, other than a return prepared by the IRS when a person fails to file a return. Criminal sanctions also are likely.

Frivolous returns

If you file a frivolous return, you risk a $500 penalty. A return is "frivolous" if it omits necessary information, shows a substantially incorrect tax, is based on a frivolous position, or is filed in an attempt to avoid tax collection. Changing or crossing-out the "penalty of perjury" language above the signature line on a return is treated as filing a frivolous return.

FAQ: Must I retain original business expense receipts if I computer scan them?

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of Code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

Traditional IRAs

Individuals who receive compensation and who are not age 70½ or older can make contributions to Individual Retirement Accounts (IRAs). Money saved in a traditional IRA is not taxed until you take it out. Contributions are tax deductible.

For 2009, the maximum amount you can contribute to an IRA is $5,000 (not including rollover contributions) if you are under the age of 50. Individuals age 50 or older can add $1,000 for a total contribution of $6,000 in 2009. These are so-called "catch-up" contributions to help older workers save for retirement. Keep in mind, your contribution may be limited if your income is higher than thresholds set by Congress and you participate in certain employer-sponsored retirement plans. Sometimes, a taxpayer can also contribute to his or her spouse's IRA.

Deductible contributions to a traditional IRA must be made on or before April 15, 2009 (which is generally the deadline to file your federal individual income tax return).

Roth IRAs

Contributions to a Roth IRA are not deductible. Contributions, therefore, are made with after-tax dollars. However, income accrued on Roth IRA contributions is not taxed when it is withdrawn if it is a qualified distribution. A qualified distribution is any one of the following: -- On or after the date the individual attains age 59 ½;

-- For a qualified first-time home purchase

-- To a beneficiary or to the estate of the individual on or after the death of the individual; or

-- As a result of the individual becoming disabled.

As with a traditional IRA, the maximum annual contribution to a Roth IRA is $5,000 in 2009. And, like a traditional IRA, individuals who are 50 or older can make an additional $1,000 in "catch-up" contributions, for a total of $6,000.

Note. For tax years beginning after December 31, 2009, a taxpayer can convert a traditional IRA or make rollover from an eligible retirement plan to a Roth IRA without regard to the his or her income and without regard to whether he or she is a married individual filing a separate return. For conversions taking place before 2010, the taxpayer's adjusted gross income (AGI) cannot exceed $100,000 and the taxpayer cannot be a married individual filing a separate return. For conversions taking place in 2010, the taxpayer recognizes the conversion amount ratably in AGI in 2011 and 2012, unless the taxpayer elects to recognize it all in 2010. However, 2009 is a perfect year to start planning in order to take advantage of the new Roth IRA rules.

401(k)s

An employee can defer as much as $16,500 in 2009 on a pre-tax basis under a 401(k) plan. Employees who are 50 years old by the end of the plan year may make additional "catch-up" payments of up to $5,500 in 2009 (for a total contribution of $22,000). "Catch-up" contributions are also pre-tax, but only can be made if the plan permits. Employers can also make 401(k) contributions for their employees' benefit. In general, an employer's matching 401(k) contributions are not subject to the same annual limit as are employee contributions.

SIMPLE IRA and 401(k) plans

Employers can establish a Savings Incentive Match Plan for Employees (SIMPLE) if 100 or fewer of its employees received at least $5,000 in compensation from the employer last year. Eligible employees can make contributions of up to $11,500 in 2009 (indexed for inflation). Employees who are 50 and over can make additional catch-up contributions of $2,500 in 2009 (for a total of $14,000). Employer contributions to the SIMPLE plan are not included in the annual limit.

Tax-shelter annuity arrangements - 403(b) plans

Public school systems and certain types of tax-exempt organizations may provide retirement benefits to their employees through a tax shelter annuity plan, also referred to as a 403(b) plan. In 2009, employees can contribute up to $16,500 to a 403(b) plan and the maximum catch-up contribution is $5,500. As with other retirement plans, employees who are age 50 and above can make catch-up contributions.

Please contact this office if you have any questions concerning how much, or in what combinations, you can save in 2009 for your retirement on a tax-favored basis.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation?  In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation? In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

A corporation can make a distribution of a "dividend in kind" - which is a property distribution. For such purposes, a distributing corporation's stock and rights for such stock acquisition are not considered to be property. Dividend distributions in these forms are not treated as income that is taxable to the corporation's shareholders, with some important exceptions (e.g., distributions made instead of money; certain distributions made on preferred stock; distributions that are disproportionate; etc.).

A whole host of items can form the basis for your company's next property dividend:

• bonds issued by the government;

• real property;

• the distributing corporation's bonds;

• another corporation's bonds;

• assumption of the indebtedness to a third party of a shareholder;

• transferable vouchers enabling shareholders to receive company products or corporate services discounts;

• promissory notes from customers or other corporate asset purchasers;

• accounts and bills receivable;

• issued transferable vouchers for transportation, by an airline company;

• acquisition options for another corporation's stock; and

• rare coins (e.g., coins having a value that exceed their value as legal tender).

When a corporation distributes property that has increased in value, the corporation will recognize gain, for tax purposes, as if it had sold the property to the shareholder at the property's fair market value. However, the corporation recognizes no loss on distributions of property that have decreased in value. So it you're trying to get rid of property that is not much value to your company anyway, unfortunately, you can't get the added benefit of a loss deduction in planning a property dividend. The distribution amount that is received by a shareholder will be equal to the property's fair market value - decreased by any liabilities that the property is subject to or by any liabilities that the shareholder assumes.

Caution. For shareholders who are not corporations: according to the Tax Court, if a corporation assumes the liability of its shareholder, then at the time of liability assumption the shareholder has a dividend. The shareholder cannot assert a decrease to zero of the dividend due to secondary liability on his or her part. However, the Eighth Circuit has held that when there is a decrease in the shareholder's liability from primary to secondary, there can be no objective assessment of the shareholder's economic benefit so that the shareholder is treated as having no dividend until the corporation pays the debt.

The distribution amount is taxed as a dividend to the extent the corporation has enough earnings and profits in order to cover the distribution. Should the property's value (decreased by any debt) be greater than earnings and profits, the excess does not constitute a dividend. Rather, it is a capital return that is not taxable and is applicable first against the shareholder's basis until there is reduction to zero, at that point representing gain that is subject to taxation.

The shareholder's basis can differ from the corporation's basis in the same property. The shareholder's basis in the property that is distributed is equivalent to the fair market value of the property when it was distributed. Debt does not decrease the value for purposes of basis and the shareholder's basis is a measure of the shareholder's future gain or loss when the property is sold or deductions for depreciation if, in the possession of the shareholder, the property is depreciable.

Property distribution impacts corporate earnings and profits, which increases from gain which a corporation may recognize and decreases by the greater amount of the basis the corporation has in the distributed property or the property's value. The earnings and profits reduction decreases by any debt amount to which the property is subject.

Property dividends may make sense in a variety of circumstances, especially if the property can no longer be put to productive use by your business and only a small amount of taxable gain is at risk of being realized on the distribution. If the property's value is lower than its tax basis, however, a sale followed by a distribution of the cash proceeds may be the better way to go. Please consult the office if you wish to explore the opportunities presented by a possible property dividend in your business situation.

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes.  What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together. 

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes. What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together.

Retirement plan assets are part of taxable estate

When we begin to think about estate planning, one of the first things that we usually do is to take an inventory of what our current assets are and then we project into the future and try to estimate the assets we will have when we die. If you take a moment and think about this right now, aside from your residence, the most valuable asset you currently own (and that you will own at the time of death) is most likely to be your retirement savings (your IRAs, 401(k) accounts, and other employer-sponsored retirement plans). Looking at things from this perspective really drives home the importance of estate planning in connection with saving for retirement.

One of the reasons why we may not think about estate planning in connection with our retirement benefits is that we may have the false notion that these benefits are not part of our "estate" and therefore are not subject to estate tax. This is not true. All of your assets, regardless of the source are part of your estate and subject to estate tax (or, in other words, part of your taxable estate).This means that all of the issues that you may address with a lawyer or accountant or other financial professional regarding planning your estate will also need to be considered when planning for your retirement. When you sit down with a professional to help you plan your estate it is critical that you gather and provide as much information as possible regarding any and all retirement plans in which you participate-all IRAs, 401(k), and other plans sponsored by your employer.

Special issues involved with estate planning for retirement plan assets

Even though the funds that you have in your retirement plans are subject to the same estate planning rules and considerations as any other assets that are part of your estate, there are certain special or unique issues that come into play when you incorporate retirements savings into estate plans. Decisions made with respect to these issues may also have income tax consequences as well as estate tax repercussions. Some of the most important of these issues are:

•  Whether to elect for survivor benefits to be paid to a spouse (sometimes referred to as a joint and survivor annuity);

• Whether you should choose or designate a beneficiary with respect to your interest in an IRA or another retirement plan;

•  The tax differences to beneficiaries who receive benefits on your death but before you have begun to receive pay-out of your benefits and those beneficiaries who begin receiving benefits after retirement payments to you have commenced; and

• Benefits that may be subject to both income tax and estate tax (and are sometimes provided an income tax deduction due to the double taxation)

You must plan carefully to ensure that you get the best possible results regardless of the estate tax rules that are in effect. As you consider becoming more involved in estate and/or retirement planning, please contact the office for additional guidance.

During uncertain economic times, it's easy to feel pessimism and react hastily amid media reports about growing unemployment rates and stock market downturns. However, such actions can wreak havoc on your long-term personal and financial goals. Taking some time out now to put the uncertain future into perspective can help minimize the impact that many external forces can have on your personal and financial life.

During uncertain economic times, it's easy to feel pessimism and react hastily amid media reports about growing unemployment rates and stock market downturns. However, such actions can wreak havoc on your long-term personal and financial goals. Taking some time out now to put the uncertain future into perspective can help minimize the impact that many external forces can have on your personal and financial life.

Prepare for the unexpected. "Always be prepared" is a good motto to live by in order to position yourself, your family, and/or your business to survive and thrive in uncertain economic times. Getting your personal and financial houses in order can result in a viable fallback plan as well as peace of mind.

• Build an emergency fund. We've all heard the sage financial advice to keep 3-6 months of expenses in cash on hand - and many of us have quickly rejected this advice. How much sense does it make to have tens of thousands of dollars sitting around when there are credit card balances to pay off and children's college funds to contribute to? Well, just ask anyone who has unexpectedly lost their job or been faced with a devastating personal tragedy - cash is king. Make your emergency fund priority number one and if 3-6 months of cash seems unreachable to you, consider getting a home equity loan. Low interest rates coupled with high home values can get you into a home equity loan that will cost you little or nothing to maintain each year - an instant emergency fund. And don't procrastinate here - any kind of loan is tough to qualify for when you are unemployed or buried in debt.
• Keep your networking ties fresh. Keeping in touch with peers in your industry can cushion the blow of a job loss as you utilize this network to discover potential job openings. Since people are so mobile in the workplace these days, it's important that you make the effort to stay connected with those who may someday provide you with valuable leads and/or referrals. Remember, networking is a two-way street -- make sure these peers know that they can come to you for the same type of assistance should their careers hit a road bump.

Revisit your portfolio. Call it returning to the scene of the crime - your perhaps battered portfolio probably needs some attention. Revisiting your investment portfolio periodically to make adjustments to take into consideration current economic factors can help you feel a bit more in control of events outside of your control.

• Diversify, diversify, diversify. Diversification is key. It's worth taking the time to ascertain that your portfolio is properly allocated among many different investment vehicles in order to buffer it from potential market downturns or other uncontrollable financial events.
• Keep things in perspective. The stock market moves in a cycle with historically good times as well as bad. Keep your eye on your long-term goals and make sure that any short-term anxiety you may have doesn't knock your portfolio off track and keep you from maximizing your long-term average return.
• Be proactive, not reactive. Certain events - both major and minor - have the ability to send the financial markets on a white-knuckle roller coaster ride. Knee-jerk reactions to daily events unfortunately add more fuel to the fire and can result in an unstable investing environment. On a smaller scale, this same type of reaction can seriously affect your personal investment portfolio as long-term goals are derailed by short-term reactions. This is not to say you should turn a blind eye to current events - on the contrary, it is important to consider these events and their potential impact on your portfolio. However, any changes to your portfolio should be made in a proactive - not reactive - manner, and should take into consideration historical performance as well as possible future trends.

Relax and breathe. Dealing with uncertainty - whether related to your job, investments, health, etc., is never easy and can cause a certain level of anxiety and stress. However, how a person uses this new energy (positively or negatively) can determine their ability to not only survive through the bad times but to thrive as they open themselves up to new opportunities - to get their financial house in order or to prepare themselves to seek out another more fulfilling or secure job or career.

As illustrated above, preparation and perspective are two very important elements need to survive and thrive in an uncertain economy. If you find you need any assistance, do not hesitate to contact the office for additional guidance.