The IRS's improper handling of applications for tax-exempt status from conservative groups has led to the removal of top officials, the appointment of a new Acting Commissioner, a 30-day top-down review of the agency's operations, Congressional hearings, and a criminal investigation. The outcome of all these activities may reshape how the IRS operates and how it interacts with taxpayers. In coming weeks and months, more details are expected to be uncovered about how the IRS treated conservative groups seeking tax-exempt status, who knew of a problem, and what can be done to prevent any reoccurrence in the future.

The IRS's improper handling of applications for tax-exempt status from conservative groups has led to the removal of top officials, the appointment of a new Acting Commissioner, a 30-day top-down review of the agency's operations, Congressional hearings, and a criminal investigation. The outcome of all these activities may reshape how the IRS operates and how it interacts with taxpayers. In coming weeks and months, more details are expected to be uncovered about how the IRS treated conservative groups seeking tax-exempt status, who knew of a problem, and what can be done to prevent any reoccurrence in the future.

Applications for tax-exemption

In 2012, a House Committee asked the Treasury Inspector General for Tax Administration (TIGTA) to investigate reports of the IRS improperly handling applications for tax-exempt status from conservative groups. TIGTA launched a lengthy investigation that included interviewing IRS employees in Cincinnati, who process applications for tax-exempt status. On May 10, a few days before TIGTA was scheduled to release its findings, an IRS official apologized for the agency's inappropriate treatment of applications for tax-exemption from conservative groups.

TIGTA confirmed what the IRS official had said. TIGTA found that the IRS personnel in Cincinnati had used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions. These included names such as Tea Party, Patriots and 9/12.

TIGTA further discovered that the IRS had sent requests for unnecessary information to these organizations. According to TIGTA, examples of this unnecessary information included the names of past and future donors, listings of all issues important to the organization and what the organization's positions were regarding the issues, and whether officers or directors have run for public office or would be running for public office in the future. TIGTA told Congress that all of the IRS's actions were inappropriate because they went beyond what was authorized by federal law and regulations. The IRS's inappropriate criteria may have led to inconsistent treatment of organizations applying for tax-exempt status, TIGTA concluded.

New leader, 30-day review

On May 15, President Obama announced that the Acting Commissioner of the IRS had resigned at his request. President Obama appointed Daniel Werfel, a career government employee, as the new Acting Commissioner.  "The American people deserve to have the utmost confidence and trust in their government as we work to get to the bottom of what happened in the IRS," the President said.

Werfel has been ordered by the White House to undertake a 30-day review of the agency's operations, processes and practices. Werfel is to report his findings and recommendations for improvements to President Obama before the end of June. Since Werfel's appointment, the head of the IRS Tax-Exempt Division has retired and the official who oversaw the Cincinnati office was placed on administrative leave, after reportedly being asked to resign by Werfel. White House officials have indicated that more personnel changes may take place after the results of the 30-day review are announced.

Congressional investigations

Three Congressional Committees - the Senate Finance Committee, the House Oversight and Government Reform Committee and the House Ways and Means Committee - held hearings in May. The former Commissioner of the IRS, Douglas Shulman, and the ex-Acting Commissioner, Steven Miller, both told lawmakers that they were dismayed at TIGTA's report. "As a general principle, as the IRS commissioner, I didn't touch individual cases and I certainly didn't touch cases that involved political activity." Shulman said. Shulman added that he was "saddened" that these activities occurred on his watch.  Miller acknowledged that the IRS had acted improperly but denied any partisan motivation for the conduct of employees.

For many lawmakers, the key question is whether IRS officials mislead them in previous hearings. "We are concerned about the extent to which senior officials became aware of these practices, when they found out, and what they did or did not do to put a stop to them. And, perhaps most important, we want to know why the IRS purposefully misled Congress when they led us to believe that no groups were being targeted," Sen. Orrin Hatch, R-Utah, said.

More Congressional hearings are scheduled. "We need to understand how and why this targeting occurred," Senate Finance Committee Chair Max Baucus, D-Montana, said. "We need to know who was involved and who was responsible, and we need to install new safeguards to ensure this targeting never happens again."

Criminal investigation

The U.S. Department of Justice has opened a criminal investigation into the IRS's scrutiny of applications from conservative groups.  "The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters related to the IRS," Attorney General Eric Holder said on May 14. Holder has not said when the results of the investigation will be released.

The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.

The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.

The health law provisions interact. Individuals are supposed to carry health insurance or pay a tax. Employers are supposed to offer coverage or pay a tax. The exchanges will provide information about the availability of different health care plans and will certify individuals eligible for the premium assistance tax credit. Individuals who cannot obtain affordable coverage may purchase insurance through an exchange and may be entitled to a premium assistance tax credit.

Exchanges

The DOL, in a technical release, provided temporary guidance to employers about their obligation to notify their employees of the availability of health insurance through an exchange and of the potential to qualify for the premium assistance tax credit if they purchase insurance through an exchange. Exchanges will begin operating January 1, 2014 and will provide open enrollment for their coverage beginning October 1, 2013. DOL provided model notices for employers to send out beginning October 1, 2013. Notices must be issued to all employees, whether or not the employer offers insurance and whether or not the employee enrolls in the employer's insurance.

Employer mandate

As part of the regulatory process, the IRS recently held a hearing on proposed regulations regarding the employer mandate, which imposes a penalty on employers who fail to provide adequate health insurance coverage in certain circumstances. The employer mandate takes effect January 1, 2014. Twenty different groups testified on relevant issues, including: the definition of a large employer subject to the penalty, the definition of a full-time employee who must be offered coverage, and the determination whether the coverage is affordable.

Minimum value

The IRS issued proposed regulations to clarify the minimum value requirement for employer-provided health insurance. The regulations provide additional guidance on how to determine whether an individual is eligible for the premium assistance tax credit. Taxpayers will not be eligible for the credit if they are eligible for other "minimum essential (health insurance) coverage" (MEC). MEC includes employer-sponsored coverage that is affordable and that provides minimum value. Employer coverage fails to provide minimum value if the employer pays less than 60 percent of the cost of plan benefits. Taxpayers may rely on the proposed regulations for years ending before January 1, 2015.

Medical loss ratio (MLR)

The IRS issued proposed regulations on MLRs. Insurance companies must provide premium rebates to their customers if they fail to spend at least 80 percent (85 percent for large companies) of their premiums directly on health care, as opposed to executive salaries and other expenses. The provision took effect in 2012; and the first round of MLR rebates was distributed in 2012. The IRS issued several notices to implement the program; the proposed regulation would apply to tax years beginning after December 31, 2013.

Annual limits on benefits

PPACA generally prohibits group health plans and health insurance issuers that offer group or individual health insurance from imposing annual or lifetime limits on the value of essential health benefits. Although some limits are allowed for plan years beginning before January 1, 2014, HHS regulations provide that HHS may waive the limits if they would cause a significant decrease in benefits or significant increase in premiums. IRS, DOL, and HHS issued frequently asked questions (FAQs) to clarify that plan or issuer receiving a waiver may not extend the waiver to a different plan or policy year.

Summary of benefits and coverage

PPACA generally requires insurers, employers and other health care plan providers to give a Summary of Benefits and Coverage (SBC) to participants and other affected individuals. In recent FAQs, the three government agencies advised that an updated SBC template and a sample SBC are available on the DOL's website. These documents can be used for coverage beginning in 2014. The agencies also extended certain enforcement relief. The agencies issued final regulations in 2012, and indicated that providers can continue to use coverage examples in current guidance, without adding new examples to their SBC.

Employer reporting

The Treasury Inspector General for Tax Administration (TIGTA) issued a recent report on some of the new information reporting requirements that PPACA has imposed on employers. For example, health insurance providers must report information for each individual who receives coverage. Large employers must report details about the coverage offered to employees and their dependents, including the premiums and the employer's share of costs. Employers must also report the cost of coverage to employees on their Forms W-2. The IRS will use these reports to administer PPACA's requirements.

PPACA is a complicated law. Many of its most important provisions take effect in 2014. The IRS and other responsible federal agencies continue to issue guidance and to take comments on the administration of the law.

If you have any questions about PPACA and what strategies you or your business might adopt, please contact our office.

On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (a.k.a, the "Internet Sales Tax Bill" by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales. The bill, if passed in the House and signed by the President, would enable states to collect from certain online sellers sales and use tax on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a seller to collect the state's tax unless the seller has a physical presence within that state.

On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (a.k.a, the "Internet Sales Tax Bill" by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales. The bill, if passed in the House and signed by the President, would enable states to collect from certain online sellers sales and use tax on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a seller to collect the state's tax unless the seller has a physical presence within that state.

Small seller exemption

The Marketplace Fairness Act includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act.

Proponents of the bill say that the main issue is fairness. Brick-and-mortar retailers have long argued that the physical presence restriction provides Internet sellers with an unfair advantage. By not collecting sales tax, an online retailer seller can, in effect, sell an item at a lower price than a store. Retailers who operate stores have increasingly complained of "showrooming" by customers who come to a store to browse and then order the same merchandise online where they will not be charged for sales tax.

On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 jurisdictions. Conservative groups also contend that the Marketplace Fairness Act allows overreaching by state governments.

Authority to require tax collection

The Marketplace Fairness Act would allow a state to require all online sellers that do not qualify for the small seller exemption to collect tax on all taxable sales sources to that state. Streamlined sales tax member states would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.

Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to exercise the authority and implements the Marketplace Fairness Act's mandatory simplification requirements.

The Marketplace Fairness Act is currently sitting in the House of Representatives. For information on any recent developments, please contact our offices.

Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.

Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.

Capital gain on vacation properties. Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There's no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.

Vacation home rentals. Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

1. Income from rentals totaling not more than 14 days per year is nontaxable.
2. Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
3. Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitled them to a greater number of deductions.

Loans without interest or at below-market interest rates are recharacterized so that the lender must recognize market-rate interest income. Put another way, below-market loans are loans for which a rate of interest that is lower than the applicable federal rate (AFR) (which is computed by the government and released by the IRS on a monthly bases). Special adjustments might be necessary to determine the interest rate on short period loans, variable rate loans, and loans denominated in foreign currencies.

Loans without interest or at below-market interest rates are recharacterized so that the lender must recognize market-rate interest income. Put another way, below-market loans are loans for which a rate of interest that is lower than the applicable federal rate (AFR) (which is computed by the government and released by the IRS on a monthly bases). Special adjustments might be necessary to determine the interest rate on short period loans, variable rate loans, and loans denominated in foreign currencies.

Categories of bargain-rate loans. 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.

A below-market loan is further characterized as either a demand loan or a term loan:

Below-market demand loans. 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.

Below-market 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 principal distinction between the treatment of a gift or demand below-market loan and a term below-market loan, therefore, is in the timing of the consideration deemed transferred by the lender to the borrower. In both instances, the borrower is treated as paying interest and the lender as receiving interest income.

Exceptions/exemptions

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. Special rules apply to below-market employee relocation loans, loans from foreign persons, loans between spouses, and interest obligations that are cancelled, waived or forgiven. A lender must attach a statement to an income return that reports income or deductions arising from below-market loans.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2013.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2013.

June 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 29-31.

June 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 1-4.

June 10
Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070.

June 12
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 5-7.

June 14
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 8-11.

June 17
Individuals, partnerships, passthrough entities and corporations make the second installment of 2013 estimated quarterly tax payments.

Individuals who were living abroad on April 15, 2013, must now file their 2012 tax year income tax return under the extended deadline. Extension to file but not to pay until October 15, 2013, are available upon application.

June 19
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 12-14.

June 21
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 15-18.

June 26
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 19-21.

June 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 22-25.

June 30
Employees and officers report any financial interest in, or signature authority over, a foreign financial account that exceeded $10,000 at any time during the 2012 calendar year on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

Employers. The deadline for certain employers to enter the expanded Voluntary Classification Settlement Program.

July 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 26-28.

July 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 29-30.

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.

Many businesses are foregoing salary increases this year because of the economic downturn. How does a business find and retain employees, as well as keep up morale, in the face of this reality? The combined use of fringe benefits and the tax law can help. Some attractive fringe benefits may be provided tax-free to employees and at little cost to employers.

De minimis fringe benefits

A de minimis fringe benefit is any property or service whose value is so small or minimal that accounting for it would be administratively impracticable. Such benefits are excluded from an employee's gross income. Examples of de minimis fringe benefits include:

Occasional overtime meals and meal money. To qualify as a tax-free de minimis fringe benefit, the meal or meal money must be provided to your employees so that they can extend their normal workday, thereby enabling them to work overtime. Such meals and meal money can only be provided occasionally. This means that they generally cannot be provided routinely, when overtime work is a common occurrence or are contractually mandated for overtime work. Occasional snacks may also qualify as a de minimis fringe benefit but if the snacks are provided daily, they would not qualify.

Occasional transportation. Transportation costs can also qualify as de minimis fringe benefits. Taxi-fare for an employee to return home after working late, for example, may be a de minimis fringe benefit. The transportation must be occasional.

Holiday gifts. Traditional holiday gifts, such as a Thanksgiving turkey, with a low fair market value can generally qualify as a de minimis fringe benefit. However, cash or a cash equivalent such as a gift certificate in lieu of the property, do not qualify. In fact, cash and cash equivalent fringe benefits, no matter how little, are never excludable as a de minimis fringe benefit, except for occasional meal money or transportation fare.

E-filing. Electronically filing an employee's tax return, but not paying for someone to prepare the return, may qualify as a de minimus fringe benefit.

Telephone calls. An employer may treat the cost of local telephone calls made by employees as a de minimis fringe benefit.

Working condition fringe benefits

A working condition fringe benefit is any type of property or service provided to your employees to the extent that the cost of such property or services would have been deductible by the employee as a trade or business expense, depreciation expenses, or as if the employee paid for the property/services himself or herself. Working condition fringe benefits have special tax rules for employers and employees.

Vehicles. If an employer-provided vehicle is used 100 percent for business and the use is substantiated, use of the vehicle is considered a working condition fringe benefit. The value of use of the vehicle is not included in the employee's wages. However, when an employer-provided vehicle is used by the employee for both personal and business purposes, an allocation between the two types must be made. The portion allocable to the employee's personal use is generally taxable to the employee as a fringe benefit. The portion allocable to business use is generally considered a working condition fringe benefit and is excludable from the employee's income. 

No additional cost services

If an employer-provided service does not cause the employer to incur any substantial additional costs, it may qualify as a "no additional cost service" and be excludible from the employee's income. The service must be offered to customers in the employer's ordinary course of business. Some of the most common examples are airline, rail and bus tickets and hotel and motel rooms provided at a reduced rate or at no cost to employees. This benefit can be offered to retired employees as well as active employees. There are special rules for highly-compensated employees.

If you are considering alternatives to salary compensation, and would like to know what your options are, please contact our office. We can discuss the tax benefits and drawbacks of providing your employees with various types of fringe benefits.

The IRS is moving quickly to issue guidance on the many tax incentives for individuals and businesses in the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act). Since Congress passed the multi-billion dollar stimulus package in February, the IRS has released guidance on the extended net operating loss (NOL) carryback for small businesses, the new Making Work Pay credit, the enhanced first-time homebuyer tax credit, the new COBRA subsidy, and the new sales tax deduction for motor vehicles.

Net operating losses

One of the most valuable tax breaks in the 2009 Recovery Act is the extended NOL carryback. Small businesses with an NOL in 2008 can offset this loss against income earned in up to five prior years. This special treatment will accelerate refunds and generate an immediate infusion of cash into a struggling business. The IRS expects record numbers of small businesses to be eligible for the carryback and has promised to expedite refunds.

To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts can carry back their 2008 NOL for two years.

Generally small businesses that are not corporations (including sole proprietorships filing schedule C with their Form 1040) may accelerate a refund by using Form 1045, Application for Tentative Refund. Corporations with NOLs may accelerate a refund by using Form 1139, Corporation Application for Tentative Refund.

If your small business is in a loss position this year, the extended NOL carryback should not be overlooked. The requirements for the extended carryback are complex. Our office can help you elect this special treatment and maximize your refund.

Making Work Pay credit

Many employers have already implemented the new Making Work Pay credit. The credit reaches $400 for single individuals and $800 for married couples filing jointly. Like other incentives, the Making Work Pay credit phases out for higher income taxpayers (single individuals with modified AGI above $75,000 and married couples filing jointly with modified AGI above $150,000).

Taxpayers do not have to submit a new Form W-4 to their employers; the credit is automatic. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may want to submit a revised W-4 to ensure sufficient withholding. Our office can determine if you need to adjust your withholding.

First-time homebuyer credit

The 2009 Recovery Act raised the maximum first-time homebuyer credit from $7,500 to $8,000 ($4,000 for married couples filing separately) for qualified homes purchased before December 1, 2009. Congress also removed the repayment requirement for homes purchased in 2009. Like other tax incentives, the first-time homebuyer credit has income restrictions. The credit begins to phase out for single individuals with modified AGI above $75,000 ($150,000 for married couples filing jointly).

The IRS recently announced that taxpayers can claim the $8,000 credit on their 2008 tax returns due April 15, 2009 or on their 2009 tax returns next year. Consequently, taxpayers have several filing options.

Taxpayers purchasing a home in the near future and who have already filed their 2008 returns may want to file an amended return. This will allow them to claim the credit almost immediately. However, some individuals may want to wait and take the credit in 2009.

Taxpayers purchasing a home who have not yet filed their 2008 returns may want to request a six-month extension (until October 15, 2009). Alternatively, they can file as planned and then file an amended return to take the credit.

If you are a first-time homebuyer in 2009, don't miss out on this valuable credit. Our office can recommend the best time to take the credit.

Economic recovery payment

Social Security recipients, disabled veterans and retired government employees may be eligible for one-time economic recovery payments of $250. These payments are in lieu of the Making Work Pay credit. However, the economic recovery payment will be a reduction to any Making Work Pay credit for which the recipient qualifies.

The IRS will not be distributing the economic recovery payments. Individuals will receive them from the Social Security Administration, Department of Veterans Affairs, or other agency. The SSA expects to start making the payments in May.

COBRA subsidy

Individuals who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009 may qualify for a 65 percent COBRA premium subsidy for up to nine months. Family members may also be eligible for the subsidy. Eligible individuals will pay 35 percent of the COBRA premium and employers will pay the remaining 65 percent. The COBRA subsidy, however, phases out for individuals whose modified AGI exceeds $125,000 ($250,000 for married couples filing jointly). Individuals with modified AGI exceeding $145,000 ($290,000 for married couples filing jointly) do not qualify for the subsidy.

Employers will recover their share through a payroll tax credit. The IRS has instructed employers to use Form 941, Employer's Quarterly Federal Tax Return, to report their COBRA premium assistance payments. In some cases, such as multi-employer plans, the plan provides the subsidy and will be reimbursed by taking a credit on Form 941.

Sales tax deduction for vehicle purchases

Congress created a temporary deduction in the 2009 Recovery Act for state and local sales and excise taxes paid on the purchase of new motor vehicles. Cars, light trucks, motor homes, and motorcycles are eligible for the deduction. The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. Because this is an above-the-line deduction, taxpayers who do not itemize their deductions can also take advantage of it.

Similar to other incentives, there are income limitations. The deduction phase out for single individuals with modified AGI between $125,000 and $135,000 and married couples with modified AGI between $250,000 and $260,000.

We've covered a lot of material in a short time. As always, please contact our office if you have any questions about these valuable tax incentives.

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) provides more than $75 billion worth of tax benefits for business for 2009 and 2010, in addition to numerous individual tax breaks. This article highlights some of the valuable tax breaks for businesses in the new law.

Bonus Depreciation. The ARRTA extends bonus depreciation under the 2008 Economic Stimulus Act, allowing businesses to immediately write-off an additional 50-percent of the cost of qualifying depreciable property placed in service before 2010. The additional 50-percent first-year bonus depreciation applies retroactively to capital expenses incurred on or after January 1, 2009. Qualified property includes most types of new property, including equipment, computers, tractors, wind turbines and solar panels.

The ARRTA also extends through 2010 additional first-year bonus depreciation for property with a recovery period of 10 years or longer, for transportation property (for example, tangible personal property used to transport people or property, and for certain aircraft).

Note. Effective January 1, 2009, the ARRTA law also increases the regular dollar caps for new passenger vehicles placed in service after 2008 and before 2010 by $8,000 when bonus depreciation is claimed.

Code Sec. 179 Expensing. For 2009, the ARRTA extends the Code Sec. 179 expensing amounts, which had been increased by the 2008 Economic Stimulus Act. For 2009, the Code Sec. 179 expensing amount is $250,000 and the investment ceiling is $800,000.

Five-Year NOL Carryback. The ARRTA allows certain small businesses to elect a five-year carryback of net operating losses (NOLs) arising in 2008. Only qualified small businesses with average gross receipts of $15 million or less qualify for the longer carryback. Eligible businesses can elect to carryback 2008 NOLs three, four or five years. The new carryback treatment applies only to NOLs arising in tax years beginning or ending in 2008. Quick refunds apply if your business qualifies.

AMT/R&D Credits Election. Through 2009, the ARRTA temporarily extends the ability of businesses to accelerate the recognition of a portion of their accumulated AMT and research and development (R&D) credits instead of taking bonus depreciation. In effect, this allows an immediate cash refund for these credits.

Work Opportunity Tax Credit. Businesses can claim a Work Opportunity Tax Credit (WOTC) generally equal to 40 percent of the first $6,000 of wages paid to employees who are in one of nine targeted groups. The ARRTA adds (1) unemployed veterans and (2) disconnected youth to the list of targeted groups. The new categories apply to individuals who are hired and begin work in 2009 or 2010.

Cancellation of Debt Income. Under the ARRTA, eligible businesses can make an (irrevocable) election to recognize certain cancellation of debt income (CODI) ratably over a five-year period, beginning in 2014. The election applies to certain types of business debt repurchased by the business during 2009 and 2010.

S Corp Built-In Gain Period. Current law provides that if a C corporation converts to an S corporation the conversion is not a taxable event. However, the S corporation usually must hold its assets for 10 years after the conversion in order to avoid being taxed on any built-in gains that existed at the time of the conversion. For S corp sales of their C corp assets  in 2009 and 2010, however, the ARRTA temporarily shortens the holding period, from 10 to seven years, for sales of assets subject to the built-in gains tax imposed after such a conversion.

Qualified Small Business Stock. Pre-ARRTA law allowed noncorporate investors to exclude 50 percent of the gain from the sale of certain qualified small business stock (QSBS) held for more than five years. The ARRTA increases the exclusion to 75 percent for QSBS acquired after February 17, 2009 and before 2011. A "qualified small business" is one that does not have more than $50 million in assets and conducts an active trade or business.

Estimated Tax Payments. For individual taxpayers with income from small businesses, the ARRTA temporarily reduces 2009 required estimated tax payments for certain small businesses. Under the new law, 2009 quarterly estimated tax payments may now be based on 90 percent - instead of 100 percent - of the taxpayer's 2008 returns. For purposes of the new provision, a "small business" is one that does not employ more than an average of 500 people, and the individual's adjusted gross income is less than $500,000. The individual also must certify that at least 50 percent of the gross income shown on his or her return for the preceding tax year was income from a "small trade or business."

Energy Incentives. A number of the energy tax incentives in the ARRTA are targeted to businesses. The ARRTA:

• Extends and modifies the Code Sec. 45 renewable production tax credit.
• Expands the Code Sec. 48 energy investment credit to include qualified small wind energy property.
• Allows the Code Sec. 48 investment tax credit to be claimed in lieu of the Code Sec. 45 production tax credit.
• Removes the individual dollar limits on certain energy tax credits for qualified small wind energy property, qualified solar water heating property, and qualified geothermal heat pumps.

If you have any questions about the business incentives in the ARRTA, please contact our office.

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) is loaded with various tax incentives for individuals for 2009 and 2010. Among the individual tax breaks in the new law are incentives for homeownership, help for the unemployed and employed, as well as education assistance and tax breaks for taxpayers with children. This article provides an overview of the major individual tax incentives provided by the ARRTA.

Making Work Pay Credit. The Making Work Pay credit is a new but temporary refundable credit. Qualified taxpayers will either take the credit through a reduction in the amount of income tax withheld from their paycheck by allowing a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual's earned income or $400 ($800 for married couples filing jointly), or in a lump sum when filing their income tax return for the tax year.

Note. Individuals who are self-employed may qualify for the credit as well, to the extent earnings from self-employment are taken into account in computing taxable income.

The credit applies retroactively to the start of 2009 and extends through 2010. Up to the maximum $400/$800 credit amount is allowed for each year.  The credit begins to phase out for individuals with modified adjusted gross income (MAGI) exceeding $75,000 ($150,000 in the case of married couples filing jointly). The credit will be phased out at a rate of 2 percent above the MAGI limits.

$250 Economic Recovery Payment. The ARRTA also provides a one-time payment of $250 to individuals on a fixed income, including railroad retirement beneficiaries, Social Security recipients, disabled veterans, as well as retired government workers who are not eligible for Social Security benefits. The $250 payment will reduce the individual's otherwise allowable Making Work Pay credit to which they may be entitled. This payment will only be made in 2009, likely around mid-year.

New Car Deduction. Both itemizers and non-itemizers can take advantage of a new but temporary above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase of a new (qualifying) motor vehicle. Both domestic and foreign vehicles qualify as well as motor homes, SUVs, light trucks and motorcycles weighing no more than 8,500 gross pounds.

The deduction is allowed in computing AMT, but is not available to taxpayers who elect to deduct state and local sales and use taxes in lieu of income taxes as an itemized deduction. The deduction begins to phase-out for taxpayers with adjusted gross income (AGI) exceeding $125,000 ($250,000 for joint filers). Additionally, deductible sales/excise taxes cannot exceed the portion of tax attributable to the first $49,500 of the purchase price.

Enhanced First-Time Homebuyer Tax Credit. The ARRTA raises the maximum amount of the first-time homebuyer tax credit to $8,000 (up from $7,500) and extends the credit through December 1, 2009. The ARRTA also completely eliminates any repayment requirement for purchases made after January 1, 2009 if the taxpayer does not sell or otherwise dispose of the property within 36 months from the date of purchase. However, if the taxpayer does dispose of the residence within this time, pre-ARRTA rules for recapture apply, requiring the homebuyer to repay any credit amount received to the government over 15 years in equal installments. Purchases on or after April 9, 2008 and before January 1, 2009 are still governed by the original first-time homebuyer tax credit rules enacted last year in the Housing and Economic Recovery Act of 2008.

Education Credit. The ARRTA temporarily enhances and expands the Hope education tax credit (renaming it the American Opportunity education tax credit) for 2009 and 2010. The credit is increased in amount, to a maximum of $2,500 per year and extended to all four years of college education. Additionally, the credit is subject to more generous phase-out levels of $80,000 of AGI for individuals and $160,000 for joint filers. For 2009 and 2010, up to 40 percent of the American Opportunity credit is refundable.

Qualified Tuition Programs ("529 plans"). Distributions from qualified tuition programs (also known as "529 plans") used to pay a beneficiary's qualified higher education expenses are tax-free. For 2009 and 2010, ARRTA allows beneficiaries to use distributions from QTPs to pay for computers, laptops and computer technology, including internet access.

Child Tax Credit. The ARRTA increases the refundable portion of the child tax credit for both 2009 and 2010. For 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer's earned income in excess of $3,000.

Enhanced Earned Income Tax Credit. For 2009 and 2010, the ARRTA temporarily increases the Earned Income Tax Credit (EITC) for working families with three or more children. The new law (1) increases the credit to 45 percent of a family's first $12,570 of earned income for families with three or more children and (2) adjusts the start of the EITC phase-out range upwards by $1,880 for joint filers, regardless of the number of children.

AMT Patch. The ARRTA boosts alternative minimum tax (AMT) exemption amounts for 2009. The new amounts are slightly higher than last year's exemptions but much higher than the amounts they had been set to revert to had this remedial provision not been passed.

The 2009 exemption amounts are:

• $46,700 for individuals and heads of household; and
• $70,950 for joint filers and surviving spouses.

The new law also provides that for 2009 nonrefundable personal credits may offset both regular tax and the AMT.

Partial Exclusion of Unemployment Benefits. The ARRTA temporarily excludes up to $2,400 of unemployment compensation from a recipient's gross income for 2009. Unemployment benefits are otherwise includible in a recipient's gross income for tax purposes. As such, any unemployment benefits over $2,400 in 2009 will be subject to federal income tax.

Increased Transit Benefits For Workers. Beginning in March 2009, and effective for 2009 and 2010, the ARRTA increases the income exclusion for transit passes and van pooling to $230 per month.

Energy Incentives. Code Sec. 25C provides a tax credit for energy efficient improvements made to a taxpayer's home. The ARRTA increases the Code Sec. 25C residential energy property credit to 30 percent (up from 10 percent), raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the pre-2008 $500 lifetime cap, and makes other modifications to the credit. Taxpayers can use the credit for insulation materials, exterior windows and doors, skylights, central air conditioning, and hot water boilers, among many other energy efficient improvements.

The ARRTA also removes the individual dollar caps under the Code Sec. 25D residential energy efficient property credit for solar hot water property, wind energy property and geothermal heat pumps. Moreover, if you are interested in an environmentally-friendly car, the ARRTA modifies the credit for plug-in electric vehicles, although they are not yet on the market.

If you have any questions about the individual tax incentives in the ARRTA, please contact our office.

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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.

Nonbusiness creditors may deduct bad debts when they become totally worthless (i.e. there is no chance of its repayment). The proper year for the deduction can generally be established by showing that an insolvent debtor has not timely serviced a debt and has either refused to pay any part of the debt in the future, gone through bankruptcy, or disappeared. Thus, if you have loaned money to a friend or family member that you are unable to collect, you may have a bad debt that is deductible on your personal income tax return.

The fact that the debtor is a family member or other related interest does not preclude you from taking a bad debt deduction, provided that the debt was bona fide and that worthlessness has been established. A direct or indirect transfer of money between family members may create a bona fide debt eligible for the bad debt deduction. However, these transactions are closely scrutinized to determine whether the transfer is a bona fide debt or a gift.

Bona-fide debt and other requirements for deductibility

You may only take a bad debt deduction for bona-fide debts. A bona-fide debt is a debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. You must also have the present intention to seek repayment of the debt. Additionally, for a bad debt you must also show that you had the intent to make a loan, and not a gift, at the time the money was transferred. Thus, there must be a true creditor-debtor relationship.

Moreover, nonbusiness bad debts are only deductible in the year they become totally worthless (partially worthless nonbusiness bad debts are not deductible).

To deduct a bad debt, you must also have a basis in it, which means that you must have already included the amount in your income or loaned out your cash (for example, if your spouse has not paid court-ordered child support, you can not claim a bad debt deduction for the amount owed as this amount was not previously included in your gross income).

Reporting bad debts

You can deduct nonbusiness bad debts as short-term capital losses on Schedule D of your Form 1040. On Schedule D, Part I, Line 1, enter the debtor's name and "statement attached" in column (a). Enter the amount of the bad debt in parentheses in column (f). If you are reporting multiple bad debts, use a separate line for each bad debt. For each bad debt, attach a statement to your return containing the following:

•  A description of the debt, including the amount and date it became due;
• The name of the debtor, and any business or family relationship between you and the debtor:
• The efforts you made to collect the debt; and
• An explanation of why you decided the debt was worthless (for example, you can show the debtor has declared bankruptcy or is insolvent, or that collection efforts such as through legal action will not likely result in the debt being paid).

If you did not deduct a bad debt on your original income tax return for the year it became worthless, you can file a refund claim or a claim for a credit due to the bad debt. You must use Form 1040X to amend your return for the year the debt became worthless. It must be filed with 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.

Note. If you deduct a bad debt and in a later year collect all or part of the money owed, you may have to include this amount in your gross income. However, you can exclude from your gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year you deducted the debt.

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

Capital or ordinary loss treatment

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

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

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

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

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

More hurdles to overcome

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

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

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

Contributions to political campaigns are nondeductible. Nondeductible campaign contributions include, for example, contributions to pay for campaign expenses as well as contributions to pay for a candidate's personal expenses while the candidate is campaigning. The line sometimes gets gray, however, when a contribution is being made for a charitable purpose that is being sponsored by a political candidate or is being made to a charity that also appears to be endorsing a political candidate as opposed to a particular position within the public discourse.

Nondeductible contributions and expenses

Admission prices to political dinners and inaugural events, such as balls, galas, parades or concerts, as well as advertising in convention programs and other publications may be nondeductible if the proceeds "inure to the benefit" of a political party or candidate. Proceeds "inure to the benefit" of a political party when the party has the ability to spend any part of the money on the types of expenses enumerated above, or the ability to spend any part of the proceeds even if the money is restricted to a particular purpose that is unrelated to the election of a specific candidate. Proceeds "inure to the benefit" of a candidate if the money can be used, directly or indirectly, to further the selection, nomination or election of the candidate to office. It doesn't matter in that case that the expense (for example, advertising in a dinner program) also furthers the business of the contributor.

Example. The Libertarian Party holds a dinner to raise money for a voter registration drive and a voter education program. Even though the proceeds of the dinner cannot be used for any purpose that is related to the election of specific candidates to public office, the proceeds still inure to the benefit of the Libertarian Party and a taxpayer cannot deduct the costs of any tickets to the dinner that the taxpayer purchases.

Deductible nonpartisan or impartial election expenses

On the other hand, expenses that support certain nonpartisan and impartial election campaign programs may be deductible. Expenses that are paid or incurred by a taxpayer engaged in a trade or business for contributions that support certain nonpartisan or impartial election programs are deductible. Examples of expenses a taxpayer may deduct include:

• Expenses incurred in supporting a debate that gives all candidates for the same public office an equal opportunity to present themselves to the public, provided the expenses are related to a taxpayer's expected future patronage and other otherwise deductible trade or business expenses;
• Expenses incurred in holding an impartial debate for candidates for public office sponsored by the taxpayer and wherein the taxpayer's name is read before and after the debate;
• Expenses in connection with a voter registration drive, even though polls indicate that those who are registered in the drive would more likely support a particular candidate.

The flagging state of the economy has left many individuals and families to cope with rising gas prices and food costs, struggle with their mortgage and rent payments, and manage credit card debt and other common monthly bills. Whether individuals are contemplating how to pay off their credit card or obtain a mortgage amid the "credit crunch" and "economic downturn," many people may be considering alternative sources of financing to reach their goals, including the tapping of a retirement account.

You can generally withdraw funds from your 401(k) three ways: through regular distributions, hardship withdrawals or plan loans. Many employers have adopted 401(k) plan provisions that allow employees to borrow money from their retirement account. Although borrowing from your 401(k) may be an option, there are several important considerations you should take into account before tapping your retirement fund.

The basics of borrowing from your 401(k) plan

The amount that you can borrow from a 401(k) plan is limited to 50 percent of the value of your vested benefit or $50,000, whichever amount is less. However, you can take a loan up to $10,000 even if it is more than one-half of the present value of your vested accrued benefit. Interest on a 401(k) plan loan is not deductible. Despite withdrawing funds from your 401(k) through a plan loan, you will remain vested in your account, subject to your obligation to repay the loan.

If certain requirements are not met, a loan from your 401(k) plan will be treated as a premature distribution for tax purposes, subjecting you to current income tax at ordinary rates plus a 10 percent early withdrawal penalty on the amount distributed, certain requirements must be met. You must repay a loan from your 401(k) within five years, subject to only one exception for a loan used to make a first-time home purchase (a principal residence, not a vacation or secondary home). This "residence exception" allows for a loan term as long as 30 years.

Loan repayments must be made at least every quarter, and are generally automatically deducted from your paycheck. If you are unable to repay the loan and default, the IRS treats the outstanding loan balance as a premature distribution from your 401(k), subject to income tax and the 10 percent early withdrawal penalty. Additionally, most plan terms require that you repay the loan within 60 days if you leave or lose your job.

Drawbacks to borrowing from your 401(k)

Before you dip into your 401(k), you need to be aware of the many disadvantages to taking money from your retirement savings. First, and foremost, many plans contain provisions that prohibit you, and your employer, from making contributions to your 401(k) until you repay the loan or for up to 12 months after the distribution. This is a critical disadvantage to borrowing money from your 401(k) because you are not saving for retirement during the time you are repaying the loan, which may take up to five years, or for the year in which contributions are prohibited. This not only means that you are not saving for retirement for a substantial period, you are also not earning a return on the money you could have contributed albeit for the suspension.

It is imperative that you consider the effects of suspended contributions and the lost earnings and tax-free compounding you could have earned on the money you borrowed from your 401(k). And, as previously discussed, if you default and are unable to pay the loan balance, the outstanding amount is treated by the IRS as a premature distribution and subject to income tax at your ordinary tax rate as well as a 10 percent early withdrawal penalty. Additionally, the maximum contribution you will be allowed to make in the year following the suspension will be reduced by the amount contributed in the prior year.

Another point to consider: the money you borrow will only earn the interest you pay on the loan. Typically, on a 401(k) plan loan, administrators use an interest rate of one to two percentage points above prime interest rates. While paying a lower interest rate to yourself may be more favorable then paying a higher interest rate to a bank, you aren't necessarily earning money, especially considering that the interest you pay on the loan could be significantly lower than the potential earnings you could be making if the money remained in your account.

Potential double taxation

In fact, the interest you pay on the loan is money taken from your paycheck, after-taxes. While it is not an additional cost you'd be paying to a bank, but paying yourself, it is money you may essentially be paying tax on twice. That is because the money you pay yourself interest with is taxed in your paycheck currently, then later when it is distributed to you from the plan in retirement as ordinary income.

Often, individuals end up with an unexpected tax liability on April 15. There are several options available to pay off your tax debt, stop accruing penalties and interest and secure peace of mind. Each payment method has its advantages and disadvantages depending on your financial, and personal, circumstances, and each option should be discussed with a tax professional prior to making a decision. Our office would be glad to answer any questions you have about each payment method.  

Stop accruing interest and penalties

Remember, if you filed on time but were unable to pay the entire amount, or any amount, showing as due on your return when you filed, and you have an outstanding balance with Uncle Sam, you are incurring interest and a "failure to pay" penalty imposed by the IRS. The failure to pay penalty is one-half of one percent (0.5%) owed for each month, or part of a month, that your tax remains unpaid after the due date. The late payment penalty can climb to a maximum of 25 percent on the amount actually shown as due on the return, even if you paid some of the tax debt off when you filed your return. This is the reason why it is imperative that you pay off your tax debt as quickly as possible, under a plan that avoids this steep penalty.

Here are some of the most common payment options available to taxpayers who still have an outstanding balance with the IRS:

Pay by credit card. Depending on your situation, paying the balance of your tax liability with a credit card (or by another form of personal loan) may be the best option in order to stop accruing interest and penalties for failing to pay the entire amount due. If this is an option, make sure you use a card with the lowest interest rate and the lowest account balance. The IRS has contracted with two private, third-party servicers that process credit card tax payments, and both (Official Payments Corporation and Link2Gov Corporation) accept most major credit cards such as American Express, Visa, and MasterCard. Additionally, you can use a credit card regardless of whether you filed your return electronically or by mail. Finally, be mindful that interest on a credit card or other personal loan to pay off your taxes is non-deductible.

Apply for an installment plan. The IRS offers taxpayers the ability to apply for an installment agreement plan. There are many requirements and rules regarding the installment plan method, which a tax professional can discuss with you. A request for an installment plan is made by filing Form 9465 with the IRS. Although there is a fee for apply for the agreement of approximately $105, this amount is deducted from your first payment upon approval of your request. However, even if your request is granted, you will continue to be charged interest on any tax not paid by the due date. But, the late payment penalty will generally be half the usual rate (i.e. 2 percent, instead of 4 percent per month).

Offer in compromise. In some situations, the IRS may allow you to strike a deal by accepting an offer-in-compromise (OIC). In general, an OIC allows you to make a one-time lump sum payment to the IRS that is less than the total amount of the taxes you owe. However, if your tax debt can be fully paid through an installment agreement or by other means, in most cases you may not be eligible for an OIC. Additionally, the amount of tax you propose to pay must reasonably reflect the liability you actually owe to have any success of being accepted by the IRS. You must include a $150 application fee with your OIC request, which is made on Form 656. If the IRS accepts your offer, this amount goes towards reducing your tax liability.

These are only some of the common options available to taxpayers who remain saddled with unpaid tax debt. Each available payment option should be discussed with a tax professional. Our office can help you understand your options and choose a payment method that is best for you, personally and financially. 

The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) extended the 50-percent additional first-year bonus depreciation allowed under the Economic Stimulus Act of 2008, providing a generous boost for many businesses in 2009 in light of the economic downturn. Under the 2009 Recovery Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2009, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended through 2009.

Bonus basics

The 2009 Recovery Act (just as with the 2008 Stimulus Act) allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 1, 2009, and generally before January 1, 2010. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.

Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.

Computing your bonus depreciation

To figure your allowable 50-percent bonus depreciation deduction, you must multiple the unadjusted depreciable basis of the property by 50 percent. This is the amount of additional first-year depreciation you can deduct in 2009. For example, you purchase qualifying property for your business in 2009 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.

Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in case, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).

Regular depreciation. After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2009 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.

Example. Assume that in 2009 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5-year property. Thus, 20 percent, or $100, is apportioned to 2009, which computes to an additional $50 regular depreciation deduction in 2009 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2009 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.

Code Sec. 179 expensing. The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.

Example. On April 14, 2009, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of the 2009 special bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2009 and the years thereafter.

Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2009, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of the 2009 special bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2009 and the years thereafter.

Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings.

Q. My company recently downsized its workforce and eliminated my position. I thought this would be a good opportunity to start my own consulting business in the same industry. What are some of the things I should consider before my last day on the job?

Q. My company recently downsized its workforce and eliminated my position. I thought this would be a good opportunity to start my own consulting business in the same industry. What are some of the things I should consider before my last day on the job?

A. Corporate downsizing and restructuring has swelled the ranks of the self-employed in recent years as those employees with an entrepreneurial spirit venture out on their own. Planning ahead for your career change while you are still on the job is a wise move and one that will most likely improve your chances for success.

Know your rights as a former employee. If you plan on bringing any of your current customers/clients with you, make sure you are familiar with the terms of any existing noncompete agreement with your employer. Violating such an agreement can put you out of business before you even get started. Consult an attorney if you are unclear on any of the details. Also confirm what your rights are to unemployment benefits and whether earnings from your new business will reduce or eliminate those rights.

Save for a rainy day. It may take a while to adjust to living without a paycheck while building your new business so make sure you have a decent cash reserve set aside before you leave your job. Many small businesses can take a year or more to become profitable so it pays to be prepared. Restrict expenditures to only items that are absolutely necessary. Consider using credit cards and/or lines-of-credit to buy furniture, inventory and other essentials for your business to conserve cash. The use of credit should, of course, be monitored closely to ensure that you don't get in over your head. Note: arrange for adequate credit before you quit, as the same credit may be difficult to get once you lose your employee status and become self-employed.

Keep your health insurance. Finding the right health insurance as a self-employed individual can take time. If your spouse has insurance through his/her employer, you may be able to be added to that policy. However, if you would like to continue with your current insurance, consider making a COBRA election with your employer to get coverage for up to 18 months following the end of your employment with the company. Contact the benefits department of your company for more information about terms and pricing.

Note. The American Recovery and Reinvestment Tax Act of 2009 alters COBRA coverage for individuals who are involuntarily separated from their employment between September 1, 2008 and January 1, 2010. Eligible individuals may elect to pay 35 percent of his or her COBRA coverage, with the former employer required to pay the remaining 65 percent under a reimbursement arrangement with the federal government.

The decision to go out on your own can be exciting and unsettling at the same time, but if you prepare well before you leave your job, your chances of a smooth transition should greatly increase. Please let us know if you need any assistance or support in this area.

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

BENEFITS

• Since you own the property personally, it is protected from the creditors of the Company should it be sued or run into financial difficulty.

• Real estate leasing outside of the corporation will offer better tax and financial advantages compared to the rental of personal property such as equipment. These advantages can include the avoidance of corporate double tax on the appreciation of the real estate, along with estate planning advantages from the step up in basis if the property is owned by the individual or partnership.
• Allows the individual taxpayer to remove earnings from the company without payment of employment taxes or increasing the possibility of unreasonable compensation issues.

DRAWBACKS

• If you are a non-corporate lessor and leasing personal property (machinery, equipment, etc.), you will have to comply with special rules in order to claim the Sec. 179 expense deduction.
• You need to charge a fair rental for your real estate or equipment. Inflated rental rates may be recharacterized as dividends if coming from a corporation.
• Leasing property to your own C Corporation cannot generate passive income. Income will be reclassified as "active" while losses will remain "passive", removing the ability to use this transaction to offset other "passive" losses.

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