YOUR PENSION PLAN - SMALL CHANGES FOR 2011

In 2011, dollar limitations for pension plans and other retirement-related items will either remain unchanged, or the inflation adjustments for 2011 will be small. Check out what to expect in the new year....

• The contribution limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government's Thrift Savings Plan, remains unchanged, at $16,500.
• The catch-up contribution limit in those plans for those aged 50 and over remains unchanged, at $5,500.
• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010.
For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple's income is between $169,000 and $179,000, up from $167,000 and $177,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
• The AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low- and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.

Questions?
Call us at 562-912-4334 for more information.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

DECEMBER 2010 TAX BRIEFING

401(k) Distribution to Disabled Spouse:
In the Fall 2010 edition of the Retirement News for Employers , the IRS stated that a distributable event in a 401(k) plan includes an employee's disability, but not a spouse's or dependent's disability. However, the 401(k) plan may allow a hardship distribution based on an immediate and heavy financial need of the employee or the employee's spouse, dependents, or beneficiaries. The distribution can be no more than necessary to satisfy the financial need, but can include amounts needed to pay taxes resulting from the distribution. The plan's terms will define "immediate and heavy financial need,"which may cover disability-related medical expenses for the employee's spouse.

Real Estate Dealer or Investor:
The Tax Court held that a couple who bought and sold real estate recognized ordinary income instead of capital gains. In finding that the real estate transactions were conducted in the ordinary course of a trade or business and not for investment, the Tax Court noted that (1) taxpayers' objective in purchasing and selling real estate was to recognize the maximum gain within a short period (most sales occurred within four months after they purchased the property); (2) the real estate transactions were entered into regularly and resulted in significant gains; (3) taxpayers engaged in at least 15 sales over three years, and (4) they did not rely on the services of a real estate agent or broker to select, promote, or sell their properties. Wendell Garrison , TC Memo 2010-261 (Tax Ct).

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.
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SOULD YOU FILE A TAX RETURN?

Do you ever wonder whether your income is high enough to warrant the filing of a tax return? Because the minimum income level varies depending on filing status, age, and the type of income you receive, it can be a bit complicated.
Use the following guide to determine whether you must file a federal income tax return for 2010.

Single Taxpayers
If you expect to file a single return, the IRS requires you to file a return for 2010 if your gross income for the year is at least $9,350 if you are under age 65 and $10,750 if you are 65 or older.

Married Filing Jointly
For married persons filing jointly, you are required to file a return if gross income for 2010 is at least $18,700 if both of you are under age 65. If one of you was at least age 65 in 2010, the limit is $19,850 - and if both of you were 65 or over, you must file if you made at least $20,900.

If you are not living with your spouse at the end of the year or you weren't living with them on the day they passed away, the IRS requires you to file a return if your gross income is at least $3,650. Each personal exemption in 2010 is worth $3,650.
For married persons filing a separate return, no matter what age, you must file a return if gross income is at least $3,650.

Head of Household
For persons filing as head of household, you must file a return for 2010 if gross income is at least $12,000 if under age 65 and $13,400 if at least age 65.

Qualifying Widow or Widower
For persons filing as a qualifying widow or widower with a dependent child, you must file a return for 2010 if gross income is at least $15,050 if under age 65 and $16,150 if at least age 65.

Other Situations That Require Filing
Even if you don't earn this much income, other situations necessitate filing a tax return. For example, a dependent has to file a return for 2010 if they received more than $950 in unearned income or more than $5,700 in earned income.

Other situations include:
You Owe Certain Taxes. If you owe FICA or Medicare taxes (also called payroll taxes) on unreported tips or other reported income that were not collected, you must file a return. You must also file a tax return if you are liable for any alternative minimum tax. Finally, you must file a return if you owe taxes on individual retirement accounts, Archer MSA accounts, or an employer-sponsored retirement plan.

Advance Earned Income Tax Credit Payments. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, which may be returned in the form of a refund. If you receive advance payments for the earned income credit from your employer, you must file a return.

Self-Employment Earnings. If your net earnings from self-employment are $400 or more, you must file a return.

Church Income. If you earn employee income of at least $108.28 from either a church or a qualified church-controlled organization that is exempt from employer-paid FICA and Medicare taxes, you must file a return.

Questions?
Call us at 562-912-4334 for more information about filing requirements and your eligibility to receive tax credits.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

Avoid Three Common Errors in Budgeting

When it comes to budgeting, it's absolutely essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them. These errors tend to throw budget estimates out of line with reality, thereby taking away from a budget's usefulness.

1. Not Setting Goals. It's almost impossible to set spending priorities without clear goals for the coming year. It's important to know, in detail, what you want or need to achieve in your business.
2. Cost Underestimation. Every business has ancillary or incidental costs that often don't get budgeted. For example, each time you buy a new piece of equipment or software, you must budget for staff training and for maintenance of the equipment, as well as the actual cost of the equipment.
3. Lack of Flexibility. Don't be afraid to update your forecasted expenditures either several times per year or whenever new circumstances affect your business. Compare estimates to what you actually pay out, and then adjust your budget figures.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

How the Bush Tax Cuts Affect Tax-Saving Strategies

Each November, we like to look at the steps you can take to reduce your tax bill. This year, it's a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.

The "Bush tax cuts" refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.

Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.

With this in mind, we're looking at year-end measures separately for these two groups: the middle class - those making less than $200,000 for singles / $250,000 for married filers - and the higher income taxpayers - those making more than $200,000 / $250,000.

But first, let's take a quick look at what's at stake.

If All the Bush Tax Cuts Expire...
Among other things, if the Bush tax cuts were allowed to expire, the following would take place:
1. Tax brackets would change, from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.
2. Long-term capital gain tax rates would rise from 15% to a maximum of 20%.
3. The child tax credit would be lowered.
4. The alternative minimum tax would cease to be indexed for inflation.
5. The marriage penalty would be reinstated.

Middle-Income Taxpayers
We don't expect Congress to allow the tax cuts to expire for this group. That means middle-income taxpayers can take the same measures this year they have in previous years to reduce their tax burden for 2010.

We recommend the following steps to save on taxes this year: defer income, accelerate your deductions, and plan out your capital gains.

Defer Income
If you are planning to sell an investment on which you have a gain, it may be best to wait until the new year. This will defer payment of the taxes for another year (subject to estimated tax requirements).
• If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. Again, this can defer the payment of taxes (other than the portion withheld) for another year. (Note that deferral of tax generally won't work where the bonus is contractually due in 2010.)
• If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by the exercise of an option. (Exercise of the option is often a taxable event; sale of the stock is almost always a taxable event.)
• If you're self-employed, and you can afford the delay in cash inflow, defer sending invoices to clients until the end of December.

Accelerate Deductions
Pay a state estimated tax installment in December instead of at the January due date. Just make sure the payment is based on a reasonable estimate of your state tax.
• Pay your entire property tax bill, including installments due in 2011, by year-end. (This is not applicable to mortgage escrow accounts.)
• Try to bunch threshold expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Caution: In most cases, credit card charges are considered paid in the year of the charge regardless of when you pay on the card. But this does not apply to store revolving credit cards. If you charge expenses on a Wal-Mart store credit card, for example, the deduction cannot be claimed until the bill is paid.

Some tax benefits are phased out if you have more than a certain level of adjusted gross income. In these cases, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2010.

Tip: Deferring income into 2011 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, either because of much-reduced income or much-increased deductible expenses.

Minimize Taxes on Investments
Judiciously match your capital gains and losses to reduce your tax burden for 2010. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses of up to $3,000.

Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.

High-Income Taxpayers
Depending on what Congress decides in this legislative session, individuals making more than $200,000 filing singly or $250,000 filing married in 2010 will owe more tax than they have since the 2001 Bush tax cuts were passed. What does this mean for end-of-year tax planning?

Don't Defer Income
If tax cuts for the richest Americans are allowed to expire at the end of the year, then many in the current 33% tax bracket will find themselves in the 36% bracket, and those currently taxed at the 36% rate will be taxed at 39.6%.

For these taxpayers, it makes sense to bump up 2010 income, to take advantage of the current lower rates. Grab that year-end bonus; sell stock acquired by the exercise of a company stock option; bill clients for as much work as possible if you're self-employed.

Take Capital Gains Now
Capital gains and qualified dividends for those in the higher tax brackets would be affected if the tax cuts are allowed to expire for the richest Americans. The capital gains rate would revert to a maximum of 20% for higher income filers (from 15% currently), and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%.

This indicates that now is a good time to take any capital gains or qualified dividends. Selling assets now as opposed to 2011 could have positive tax consequences for higher income filers.

Let Us Help You
As you can see, this is a complicated year for tax planning. Please don't hesitate to come in and meet with us about your situation. There's still a lot we can do to minimize your tax burden for 2010.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

Banks Rush to Fix Security Flaws in Wireless Apps

A number of top financial companies and banks such as Wells Fargo & Co., Bank of America Corp. and USAA are rushing out updates to fix security flaws in wireless banking applications that could allow a computer criminal to obtain sensitive data like usernames, passwords and financial information.

Read more: http://tinyurl.com/23y9hsp

NEW PENALTIES FOR FAILURE TO FILE INFORMATION RETURNS

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year. The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the recently passed Small Business Jobs Act of 2010, those penalties have been doubled. The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts. Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

In addition, the minimum penalty for each intentional failure-to-file act increases from $100 to $250.

Rental Owners Included in the Reporting Requirement Effective in 2011 – Effective for 2011 filings due in 2012, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. The new law does provide the IRS with the ability to permit exceptions to the filing requirement for hardship cases and when minimal rental income is received, but neither “hardship” nor “minimal” are yet defined.

In order to comply with these requirements and avoid these substantial penalties requires collecting the payee’s name, SSN number and contact information before making payment. If you need assistance setting up a procedure for collecting the required information or filing your information returns for the year, please give us a call at 562-912-4334

OCTOBER 2010 TAX BRIEFING

Informal Claim for Refund:
Informal claims for refund typically arise when the period of time for filing a claim on the appropriate form has expired, but to obtain a refund the taxpayer contends that a letter or some other communication sent or provided to the IRS meets the minimum requirements set forth in Reg. 301.6402-2 . Here, taxpayer and the IRS narrowed their dispute to whether taxpayer's 2004 tax year claim for refund was barred by limitations. In finding for the taxpayer, a New York District Court noted that taxpayer's January 2007 letter, although brief, "put the IRS on notice that he believed his disability pension had been improperly taxed as earned income since 1983. Although [taxpayer] did not use the word refund , the only reasonable construction of his letter is as a request for refunds for tax years since 1983 and an assurance that his pension would not be improperly taxed in the future." McMillan v. IRS , 106 AFTR 2d 2010-XXXX (DC E.D. N.Y.).

SIFL Rates for Employer-provided Aircraft:
Under Reg. 1.61-21(g) , employers can use a special computation rule to value employees' flights on an employer-piloted aircraft. The employer multiplies the Standard Industry Fare Level (SIFL) cents-per-mile rate in effect at the time of the flight by the appropriate aircraft multiple provided in Reg. 1.61-21(g)(7) , then adds the applicable terminal charge. For flights taken from 7/1/10–12/31/10, the SIFL rate will be $.2243 per mile for trips up to 500 miles, $.1710 per mile for trips from 501 to 1,500 miles, and $.1644 per mile for trips over 1,500 miles. The terminal charge will be $41.00. Rev. Rul. 2010-22, 2010-39 IRB .

Changes in 2010 Reporting of Uncertain Tax Positions:
The IRS announced significant changes to its original proposals for the reporting of Uncertain Tax Positions (UTPs) on 2010 corporate returns. The changes include: (1) a five-year phase-in of the reporting requirement based on a corporation's asset size, (2) no reporting of maximum tax adjustment, (3) no reporting of the rationale and nature of uncertainty in the description of the position, and (4) no reporting of administrative practice tax positions. Corporations with assets of $100 million (increased from $10 million for 2010) or more must file Schedule UTP starting with 2010 tax years. Instead of reporting the maximum tax adjustment for each UTP, the corporation will rank all reported positions based on U.S. federal tax reserve. The final schedule and instructions are available at www.irs.gov/businesses/corporations/article/0,,id=221533,00.html . IRS Ann. 2010-75, 2010-41 IRB .

IRS Policy of Restraint for Uncertain Tax Positions:
The IRS announced an expanded policy of restraint in seeking documents related to Uncertain Tax Positions (UTPs) coinciding with the release of newly modified Schedule UTP. Taxpayers may remove the following information from tax reconciliation workpapers provided to the IRS: (1) drafts, revisions or comments concerning the description of tax positions reported on Schedule UTP, (2) the amount of any reserves for tax positions reported on the schedule, and (3) computations determining the ranking of tax positions reported on the schedule. IRS Ann. 2010-76, 2010-41 IRB .

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

HOW UNFILED TAX RETURNS HINDER YOUR CHANCES OF SETTLEMENT WITH THE IRS

Do you think you're doing yourself justice by living underground and not filing your past year's tax returns? Think again! You may be doing yourself more harm than good. This article explains why you're better off staying current and in compliance with tax tiling requirements and the consequences one faces if one doesn't timely file their income tax returns.

LATE FILING PENALTY
Let's say you want to file but know you owe the IRS and for various reasons cannot pay the tax due with your returns. By not filing timely, you automatically subject yourself to the late filing penalty, IRC 6651(a)(1), unless you have reasonable cause for filing late. The late filing penalty is 5 percent of the amount of the tax required to be shown on the return for each month or fraction thereof, that the failure continues, not to exceed 25 percent. By filing late, you've just added to the taxes you know you already owe.

INTEREST ON PENALTIES
In general. interest on penalties will only be imposed if the penalty or addition to tax is not paid within 10 days after notice and demand, and then only for the period from the date of notice and demand to the date of payment. Most people who procrastinate and file late usually can't pay their taxes and penalties within 10 days of notice and demand to do so. Now in addition to the taxes owed and late filing penalty, you are assessed interest on penalties. This is in addition to regular interest on the balance of taxes due. Fortunately, the IRS doesn't charge excessive rates of interest.

PAYMENT OPTIONS
What are one's payment options when they can't pay their taxes after filing them? Requesting and obtaining an installment plan is one. An Offer In Compromise is another. Another is discharging the taxes through bankruptcy.

INSTALLMENT PLAN
In order to obtain an installment plan all of one's tax returns must be filed. So if you receive a wage levy at work and want to obtain an installment plan in lieu of the IRS grabbing up to 25 percent of your take home pay. You must have all of your past year's taxes filed. If not, the IRS won't deal with you because you lack -Good Faith" and are not in "compliance."

OFFER IN COMPROMISE
An Offer In Compromise (01C) is an Offer to pay the IRS in settlement of tax liabilities less than 100% on the dollar but as much as they otherwise would expect to collect.

The recent IRS Restructuring And Reform Act of 1998 includes provisions making the IRS more receptive to and even encouraging Offers In Compromise (OIC) in settlement of tax liabilities. However, all tax years must be filed or the IRS won't consider an OIC. By not filing past year's tax returns. you may be missing a great opportunity to settle with the IRS, depending on your current financial position, for substantially less than the total taxes, interest, and penalties you owe them. People think the best time to make an Offer is when they're financially sound. Actually, the best time to make an Offer is when they're financially distressed because the IRS usually accepts OIC's when they otherwise could not expect to collect the full amount owed. One other caveat, if the IRS accepts your OIC, you must remain current for five years by filing on time and paying timely otherwise the IRS can revoke your OIC.

DISCHARGING TAXES THROUGH BANKRUPTCY
In general, you can discharge personal income taxes through bankruptcy if all of the following rules are met:

1. The Three Year Rule — The tax return due date, including extensions, must be more than three years old before the bankruptcy petition date.

2. The Two Year Rule — no discharge will be allowed if a tax return, including extensions, was not filed or a delinquent tax return was filed within two years of the date of the bankruptcy petition.

3. The 240 Day Rule — Any tax must be assessed more than 240 days before the bankruptcy petition date to be dischargeable.

If a Chapter 7 is filed and the three rules above are met for each tax year, one can discharge individual income taxes completely. The rules vary for a Chapter 13. In certain circumstances a taxpayer may completely discharge his/her taxes for a given tax year even though no return was filed for that year.
For the most part, in order to completely discharge individual income taxes through bankruptcy, tax returns need to be filed.

DON'T MAKE THIS MISTAKE
I had a client engage me to prepare seven years back tax returns. Four of the seven years he was due refunds totaling S 10,000. Ile lost those refunds because he filed them too late. Yes, there is a statute of limitations on collecting tax refunds. Generally, if no return was filed, the claim for refund must be filed within two years from the time the tax was paid.

CRIMINAL IMPLICATIONS
Criminal penalties may be incurred when a taxpayer: willfully fails to file a tax return, fails to keep records, fails to supply required information, or fails to pay any tax or estimated tax. You don't want to risk the IRS construing your not filing as being willful. The cost of hiring a criminal tax attorney is expensive and the mental anguish of undergoing a criminal investigation can be devastating.

THE BOTTOM LINE
The bottom line is, if you have unfiled tax returns, stop procrastinating. You may be hurting yourself and ruining your chances of getting an installment agreement, obtaining a refund, getting an Offer In Compromise or having your taxes discharged through bankruptcy. Why live in hiding? It's not pleasant to live without a bank account. If you can't locate income records, you can hire a tax professional, give them a Power of Attorney, and they can request your income records from the IRS under The Freedom of Information Act. There's no better time to get your unfiled tax returns filed and get current. Once you start the process. you'll feel better. Once your returns are filed, your chances of settling your tax liabilities will be enhanced.

SEPTEMBER 2010 TAX BRIEFING

Reporting Receipt of Cash:
The issue in this program manager technical advice is whether a person who receives a check exceeding $10,000 in the course of a trade or business and cashes rather than deposits the check must file Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). In concluding that the transaction is not reportable under IRC Sec. 6050I , the IRS notes that a personal check is not cash under Reg. 1.6050I-1(c)(1) . Therefore, the person receiving the personal check is not a recipient of cash for Section 6050I reporting purposes. The subsequent cashing of the check was not a receipt of cash for the underlying event (the relevant transaction), nor did it relate to the underlying transaction between the payer and recipient. The cashing of the check was a separate act by the recipient at a check casher. PMTA 2010-012.

Requesting Tax Payment Extension due to Undue Hardship:
An IRS memo addresses the rules for processing Form 1127 (Applications for Extension of Time for Payment of Tax Due to Undue Hardship), which was recently revised. Form 1127 cannot be used to request an extension of time to file a return, and if filed on that basis will be returned as nonprocessible. If the taxpayer is requesting an extension of time to pay a tax due on an upcoming return, Form 1127, with supporting documents, must be filed on or before the due date of that return, excluding extensions. If the taxpayer is requesting an extension of time to pay a deficiency, Form 1127, with supporting documents, must be filed on or before the due date for payment indicated in the tax bill. IRS Memo SB/SE-05-0710-029.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

TIPS FOR RECENTLY MARRIED AND DIVORCED TAXPAYERS

Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration. A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.

• For recently married taxpayers, the tax scenario begins when the bride says, "I do." If she takes her husband's last name, but does not tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security number.
• After a divorce, a woman who had taken her husband's name and made that change known to the SSA should contact the SSA if she goes back to her previous name.

It is easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's website, www.ssa.gov, by calling 1-800-772-1213, and at local offices. The SSA Web site provides the addresses of local offices.

If you have any questions related to your requirements to the IRS after getting married or divorced, or you would like help changing your name with the SSA, give us a call at (562) 912-4334. We are happy to help.

USE OF CELL PHONES FOR BUSINESS

The following is a summary of important tax developments concerning the use of cell phones for business use. Please call us for more information at (562) 912-4334.

Regardless if the phone is owned by you or your company, business uses is deductable. However because cell phones are indentified as “listed property”, there are strict substantiation requirements. Listed property is any property that lends itself to both business and personal use like computers, cars and cell phones. A Cell Phone Log should be used to substantiate the business use. The use of this log is required to take a business deduction. Therefore, providing you used this log, the company can reimburse you for the business use. It is important to note that if the company owns the phone, then any personal usage of an employer-provided cell phone is a taxable fringe benefit.

To get around the substantiation requirements, you should have two phones, one deducted to business and the other dedicated for personal.

As of the date of this e-mail, the IRS Commissioner and the Treasury Secretary have called on Congress to simplify the rules for cell phone substantiation and asked that no tax consequences will occur to employers or employees for personal use of cell phones provided by employers. Additionally, legislation has been introduced to eliminate cell phones from the listed property definition. Practitioners should monitor this issue for further developments.

Please call us at (562) 912-433 if you have any questions..

8 TIPS FOR TAXPAYERS WHO OWE MONEY

The vast majority of Americans get a tax refund each spring. However, what if you are not one of them? What if you owe money to the IRS or your state?

Here are nine tips for individuals who need to pay taxes. The tips are similar for corporations, but more involved.

1. If you get a bill for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments.

2. You can also pay the bill with your credit card. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com).

3. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the IRS or your state.

4. You can pay the balance owed by electronic funds transfer, check, money order, cashier's check, or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or 800-945-8400 or online at www.eftps.gov.

5. You may request an installment agreement if you cannot pay the liability in full. This is an agreement between you and the Taxing Authority for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.

6. For the IRS, if you owe $25,000 or less in combined tax, penalties, and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov.

7. If you owe your state, you might b required to submit a financial statement and documents proving your inability to pay in full.

8. You can also complete and mail an Installment Agreement Request [for the IRS Form 9465]. The Taxing Authorities will inform you usually within 30 days whether your request is approved or denied or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. For the IRS, at a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will fully pay the total balance owed within 60 months.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based on your financial information.

9. If an installment agreement is approved, a one-time user fee will be charged. For the IRS the user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged. This is automatically figured and is based on your income.

For more information about installment agreements and other payment options, give our office a call at 562-912-4334.

CASH FLOW – THE PULSE OF YOUR BUSINESS

Unfortunately, many small business owners do not fully understand their cash flow statement. This is shocking, given that all businesses essentially run on cash, and cash flow is the lifeblood of your business.

Some business experts even say that a healthy cash flow is more important than your business's ability to deliver its goods and services! That is hard to swallow, but consider this: if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. However, if you fail to have enough cash to pay your suppliers, creditors, or employees, you are out of business!

What Is Cash Flow?
Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

Cash Flow Versus Profit
Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. However, more important, it is concerned with the times at which the movement of the money takes place.

Theoretically, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. However, what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing Your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.
The first step toward taking control of your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps are the key to cash flow management.

Some of the more important components to examine are:

• Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay later. The longer it takes your customers to pay on their accounts, the more negative the effect on your cash flow.
• Credit terms. Credit terms are the time limits you set for your customers' promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
• Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy - neither too strict nor too generous - is crucial for a healthy cash flow.
• Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
• Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable sometime in the near future - "near" meaning 30 to 90 days. Without payables and trade credit, you would have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Please call us at 562-912-4334 to discuss cash flow management and analysis. We are happy to help you handle your cash surplus effectively and maintain adequate funds to cover day-to-day expenses.

AUGUST 2010 TAX BRIEFING

Adequately Disclosing a Gift for Limitation Purposes:
If a gift is not adequately disclosed on a gift tax return, gift tax can be imposed on the gift at any time under IRC Sec. 6501(c)(9) . According to Reg. 301.6501(c)-1(f)(2) , a gift to a trust is adequately disclosed if the gift tax return (or a statement attached to the return) includes the trust's tax identification number and brief description of the terms of the trust, or in lieu of that description, a copy of the trust instrument. Under the facts of this informal emailed advice, the IRS lawyer concluded that the taxpayer can file an amended gift tax return for the year in question and include the additional information that he believes is necessary to adequately disclose the gift. The IRS will then decide whether to audit the gift tax return. CCA 201030029 .

Defined Benefit Plans Using Special Funding Rules:
A pair of related notices provide guidance on the availability of special funding rules for (1) single-employer defined benefit plans under IRC Sec. 430(c)(2)(D) when Form 5500 (and Schedule SB) has been filed for that year, and (2) multi-employer defined benefit plans under IRC Sec. 431(b)(8) when Form 5500 (and Schedule MB) has been filed for that year. Notice 2010-55 , 2010-33 IRB, and Notice 2010-56, 2010-33 IRB .

HIRE Act Employment-related Tax Breaks:
Thanks to the HIRE Act, employers are exempt from their share of the Social Security tax on wages paid to eligible employees and can also claim a tax credit of up to $1,000 on wages paid to qualified new employees. The IRS recently updated its series of Frequently Asked Questions (FAQs) on these temporary tax breaks on www.irs.gov . The new FAQs address (1) the new hire retention credit and who it applies to, (2) the period of employment eligible for the credit, (3) Alternative Minimum Tax (AMT) implications, (4) eligible workers, and (5) the rules for calculating and claiming the credit. The FAQs note that an employer can claim the payroll tax exemption and the new hire retention credit for the same worker as long as the requirements for each are met.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

CREDIT REPORTS: WHAT YOU SHOULD KNOW

How do lenders determine who is approved for a credit card, mortgage, or car loan? Why are some individuals flooded with credit card offers while others get turned down routinely? Because creditors keep their evaluation standards secret, it is difficult to know just how to improve your credit rating. It is important, however, to understand the factors and to review your credit report periodically for any irregularities, omissions, or errors. Reviewing your credit report annually can help you protect your credit rating from fraud and ensure its accuracy.

Credit Evaluation Factors
Many factors determine your credit. Here are some of the major factors considered:
• Age
• Residence
• "Authorized user" payment history
• Checking and savings accounts
• Bankruptcy
• Charge-offs (Forgiven debt)
• Child support
• Closed accounts and inactive accounts
• Jobs
• Payment history
• Recent loans
• Collection accounts and charge-offs
• Cosigning an account
• Credit limits
• Credit reports
• Debt/income ratios
• Department store accounts
• Payment history/late payments
• Finance company credit cards
• Income/income per dependent
• Mortgages
• Revolving credit
• Name/alias
• Number of credit accounts
• Fraud
• Inquiries

These factors may be used, and weighted, in determining credit decisions. Credit reports contain much of this information.

Obtaining Your Credit Reports
Credit reports are records of consumers' bill-paying habits. They are collected, stored, and sold by credit bureaus.
Credit reports are also called credit records, credit files, and credit histories. Under federal law, you are allowed access to free credit reports. There are three major credit bureaus and thousands of smaller ones where you can obtain a credit report.

These credit bureaus offer free credit reports, as well as monthly credit reports and services for a fee.
• Experian Credit Bureau: 888-397-3742 (cost: free or $14.95 monthly)
• Equifax Credit Bureau: 800-685-1111
• Trans Union: 877-322-8228 (cost: $11.95 monthly)

If you have been denied credit, you can request that the credit bureau involved provide you with a free copy of your credit report - but you must request it promptly. Otherwise each of the bureaus will provide you a copy of the report for a fee. You can request a copy from their websites (see links above) or toll-free numbers (also listed above).

Disputing Errors in Your Credit File
The Fair Credit Reporting Act (FCRA) protects consumers in the case of inaccurate or incomplete information in credit files. The FCRA requires credit bureaus to investigate and correct any errors in your file.

Tip: If you find any incorrect or incomplete information in your file, write to the credit bureau and ask them to investigate the information. Under the FCRA, they have about thirty days to contact the creditor and find out whether the information is correct. If not, it will be deleted. Be aware that credit bureaus are not obligated to include all of your credit accounts in your report. If, for example, the credit union that holds your credit card account is not a paying subscriber of the credit bureau, the bureau is not obligated to add that reference to your file. Some may do so, however, for a small fee.

Fair Credit Reporting Act (FCRA)
This federal law was passed in 1970 to give consumers easier access to, and more information about, their credit files. The FCRA gives you the right to find out the information in your credit file, to dispute information you believe inaccurate or incomplete, and to find out who has seen your credit report in the past six months.

Understanding Your Credit Report
Credit reports contain symbols and codes that are abstract to the average consumer. Every credit bureau report also includes a key that explains each code. Some of these keys decipher the information, but others just cause more confusion.

Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.

If the report includes accounts that you do not believe are yours, it is extremely important to find out why they are listed on your report. It is possible they are the accounts of a relative or someone with a name similar to yours. Less likely, but more importantly, someone may have used your credit information to apply for credit in your name. This type of fraud can cause a great deal of damage to your credit report, so investigate the unknown account as thoroughly as possible.

We recommend an annual review of your credit report. It is vital that you understand every piece of information on your credit report so that you can identify possible errors or omissions.

If you have any questions about how to obtain your credit report or how to interpret what's in your report, give us a call.

PAYING OFF DEBT THE SMART WAY

Being in debt isn't necessarily a terrible thing. Between mortgages, car loans, credit cards, and student loans - most people are in debt. Being debt-free is a great goal, but you should focus on the management of debt, not just getting rid of it. It's likely to be there for most of your life - and, handled wisely, it won't be an albatross around your neck.

You don't need to shell out your hard-earned money for exorbitant interest rates, or always feel like you're on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay it off faster.

Know Where You Are
First, assess the depth of your debt. Write it down, using pencil and paper, a spreadsheet like Microsoft Excel, or a bookkeeping program like Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and when it will end (if possible), the interest rate you're paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged! Remember, you're going to break this down into manageable chunks while finding extra money to help pay it down.

Identify High-Cost Debt
Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.

• Don't use them. Don't cut them up, but put them in a drawer and only access them in an emergency.
• Identify the card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.
• Don't close existing cards or open any new ones. It won't help your credit rating.
• Pay on time, absolutely every time. One late payment these days can lower your FICO score.
• Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club you've never used? Look for line items you don't need.
• Call your credit card companies and ask them nicely if they would lower your interest rates. It does work sometimes!

Save, Save, Save
Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.

Do Away with Unnecessary Items to Reduce Debt Load
Do you really need the 800-channel cable option or that dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny counts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.

Never, Ever Miss a Payment
Not only are you retiring debt, but you're also building a stellar credit rating. If you ever move or buy another car, you'll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.

Do Not Increase Debt Load
If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.

Shop Wisely, and Use the Savings to Pay Down Your Debt
If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam's or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. Use coupons religiously. Calculate the money you're saving and slap it on your debt.

Each of these steps, taken alone, probably doesn't seem like much. But if you adopt as many as you can, you'll watch your debt decrease every month.

JULY 2010 TAX BRIEFING

Addresses for Filing Elections and Statements:
Following the reorganization of the IRS (as required by the IRS Restructuring and Reform Act of 1998), the IRS issued Notice 2003-19 (2003-1 CB 703) to advise taxpayers of the revised addresses for filing elections, statements, returns, and other documents with the IRS. Since then, many of the locations listed in Notice 2003-19 for filing documents have changed and are no longer accurate. Accordingly, the IRS has revoked Notice 2003-19 . Instead, the address for filing many of the documents listed in Notice 2003-19 can be found (1) on www.irs.gov ; (2) in current IRS forms, instructions to forms, and publications; or (3) on a new IRS webpage accessible at www.irs.gov/file/article/0,,id=224931,00.html.

Bankruptcy Trustees Requesting Tax Refunds:
The IRS provided guidance to the trustee (or debtor- in-possession) representing a bankruptcy estate for properly requesting a tax refund, other than an application for a tentative carryback or refund adjustment under IRC Sec. 6411 . [ Editor's Note: The debtor in a Chapter 11 reorganization is a debtor-in-possession when the debtor remains in full control of all of the assets.] This guidance supersedes Rev. Proc. 81-18 (1981-1 CB 688) and applies to all cases commenced under the Bankruptcy Code except for Chapter 9 municipal debt adjustment cases and Chapter 15 ancillary and cross-border cases. Rev. Proc. 2010-27, 2010-31 IRB.

Gulf Oil Spill Assistance Day:
The IRS listed the Taxpayer Assistance Centers in seven Gulf Coast cities that will be open this Saturday, 7/17/10, to provide face-to-face assistance for taxpayers impacted by the BP oil spill. The following locations will be open from 9 a.m. to 2 p.m. Central Time: (1) 1110 Montlimar Drive, Mobile, Ala.; (2) 651-F West 14th St., Panama City, Fla.; (3) 7180 9th Ave. North, Pensacola, Fla.; (4) 2600 Citiplace Centre, Baton Rouge, La.; (5) 423 Lafayette St., Houma, La.; (6) 1555 Poydras Street, New Orleans, La.; and (7) 11309 Old Highway 49, Gulfport, Miss. Individuals with questions about the tax treatment of BP payments or who are experiencing filing or payment hardships because of the oil spill will be able to work directly with IRS personnel. News Release IR-2010-85.

Preventive Health Services:
Temporary regulations (found in TD 9493 ), issued in conjunction with regulations issued by other federal agencies, address preventive health services under the Patient Protection and Affordable Care Act. Group health plans and health insurance issuers offering group health insurance must provide coverage for, and may not impose any cost-sharing requirements (such as a copayment, coinsurance, or deductible) for, the enumerated list of items or services, which includes "immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved." Temp. Reg. 54.9815-2713T generally applies to plan years beginning on or after 9/23/10; however, see Temp. Reg. 54.9815-1251T for the application of these rules to grandfathered health plans.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

THE TAX COURT DISALLOWS THE EXCLUSION OF THE SALE OF HOME

In a tax court decision [David A. Gates and Christine A Gates, Petitioners v. Commissioner of the IRS, Respondent], held that taxpayers, who voluntarily demolished and constructed a new house on their property in order to enlarge and remodel their home, couldn't exclude the gain on the sale of the new house under the Code Sec. 121 exclusion for the sale of a principal residence. Although the taxpayers owned and used their old house as a principal residence for at least two of the five years before the sale, the Code Sec. 121 exclusion did not apply because they never lived in the new house and it was never used as their principal residence.

The Code Sec. 121 exclusion allows a taxpayer to exclude from income up to $250,000 of gain from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years before the sale. The full exclusion does not apply if, within the two-year period ending on the sale date, the exclusion applied to another home sale by the taxpayer. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home sale gain if (1) either spouse owned the home for at least two of the five years before the sale, (2) both spouses used the home as a principal residence for at least two of the five years before the sale, and (3) neither spouse is ineligible for the full exclusion because of the once-every-two-year limit.

If you want more information or need assistance, please call our office

CONGRESS OKs EXTEND CLOSING DATE FOR HOMEBUYER CREDIT

On June 30, Congress passed H.R. 5623, the Homebuyer Assistance Improvement Act of 2010. The Act, which is now cleared for the President’s signature, provides first-time homebuyer credit relief to taxpayers who couldn’t meet a key June 30, 2010, closing date.

Under prior law, both the regular Code 36 first-time homebuyer credit of $8,000 and the reduced credit of $6,500 for long-term residents generally expired for homes purchased after Apr. 30, 2010. However, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit could be claimed if the purchase closed before July 1, 2010.

The Act amends Code Sec. 36(h)(2) to provide that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline to complete their closing by the end of September.

The three-month extension of the closing date provides tax relief for those who couldn't close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act’s supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

The cost of the three-month closing reprieve is fully offset with revenue raisers, including these tax changes: expanding the bad check penalty under Code Sec. 6657 to cover electronic payments, effective for instruments tendered after the enactment date; and providing for disclosure of prisoner return information under Code Sec. 6103(k)(10) to state prisons, effective for disclosures after the enactment date.

© 2010 Thomson Reuters/RIA. All rights reserved.

JUNE 2010 TAX BRIEFING

First-time Homebuyer Credit:
The Treasury Inspector General for Tax Administration (TIGTA) released a report on the IRS's efforts to identify and prevent fraudulent Section 36 First-Time Homebuyer Credits claimed on 2008 Form 1040's and 1040X's—for the full report, go to www.treas.gov/tigta/auditreports/2010reports/201041069fr.pdf . TIGTA found that 10,282 taxpayers received credits for homes used by other taxpayers to claim the credit (in one case, 67 taxpayers used the same home), while $9.1 million went to 1,295 prisoners who were incarcerated when they reportedly purchased their home (including 241 prisoners serving life sentences). While admitting there were questionable claims, the IRS responded that it blocked or denied nearly 400,000 questionable credit claims, saving taxpayers more than $1 billion.

Zero Rate Interest Netting:
There is a net interest rate of zero under IRC Sec. 6621(d) for the period of time that interest is payable and allowable on equivalent underpayments and overpayments of tax by the same taxpayer. To qualify, interest must be payable under Subchapter A of Chapter 67 of the Code (interest on underpayments) and allowable under Subchapter B of Chapter 67 of the Code (interest on overpayments) by the same taxpayer. An IRS legal memo concluded that interest on an underpayment of tax paid through a Chapter 11 bankruptcy plan could not be netted against allowable overpayment interest because the interest paid through the Chapter 11 plan is not interest payable under the Internal Revenue Code, as required by IRC Sec. 6621(d) . ILM 201024040 .

Health Care Reform:
An extensive set of regulations (found in TD 9491 ) implement Public Health Service Act (PHS Act) sections 2704 (preexisting condition exclusions), 2711 (lifetime and annual dollar limits on benefits), 2712 (rescissions), and 2719A (patient protections). PHS Act section 2704 generally is effective for plan years (in the individual market, policy years) beginning on or after 1/1/14 (on or after 9/23/10 for enrollees, including applicants for enrollment, who are under 19 years of age), while the rest of the provisions generally are effective for plan years (or policy years) beginning on or after 9/23/10. The regulations are part of a multiphase rule project affecting healthcare insurance plans, and were issued in conjunction with regulations issued by the Departments of Labor, and Health and Human Services. [ Editor's Note: PPC's Guide to Health Care Reform (HCR) , which will be available by 9/1/10 and updated quarterly, will have detailed coverage of these and other health care reform provisions.]

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

IRS APPROVES EXTENDED CARRYBACK OF NET OPERATING LOSS’ FOR CONSOLIDATED GROUPS

IRS has issued temporary regulations that provide consolidated group may elect to carry back a consolidated Net Operating Loss arising in consolidated return year ending after 2007, or beginning before 2010.

The regulations are seen as necessary to provide taxpayers with immediate elective relief for the carryback of net operating losses within a consolidated group to the Extended Carryback Period. In addition, these regulations provide that a group may revoke a prior NOL election and waive the standard carryback period or Extended Carryback Period.

Please call us if you have any questions or need assistance.

Here is the entire text of the temporary regulations.

§1.1502-21T Net operating losses (temporary)

(a) through (b)(3)(ii)(B) [Reserved]. For further guidance, see §1.1502-21(a) through (b)(3)(ii)(B).

(C) Partial waiver of carryback period for an applicable consolidated net operating loss—(1) Application. The acquiring group may make an election described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section with respect to an acquired member or members only if it did not file a valid election described in §1.1502-21(b)(3)(ii)(B) with respect to such acquired member or members on or before [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].

(2) Partial waiver of entire pre-acquisition carryback period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the consolidated net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable CNOL) for which the group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the carryback period during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to five taxable years, including the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section).

However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(2) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(2) with respect to any particular portion of an Applicable CNOL if any carryback is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(2) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(2) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of loss] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.

(3) Partial waiver of pre-acquisition Extended Carryback Period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the Applicable CNOL for which the acquiring group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section) during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to three taxable years.

However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(3) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(3) with respect to any particular portion of an Applicable CNOL if a carryback to one or more taxable years that are prior to the taxable year that is two taxable years preceding the taxable year of the Applicable CNOL is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member, and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(3) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] EXTENDED CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of losses] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.

(4) Claim for a carryback. For purposes of paragraphs (b)(3)(ii)(C)(2) and (b)(3)(ii)(C)(3) of this section, a carryback is claimed with respect to a net operating loss if there is a claim for refund, an amended return, an application for a tentative carryback adjustment, or any other filing that claims the benefit of the NOL or CNOL in a taxable year prior to the taxable year of the loss, whether or not subsequently revoked in favor of a claim based on an Extended Carryback Period provided under section 172(b)(1)(H).

(5) Time and manner for filing statement. A statement described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section that relates to an Applicable CNOL shall be made by the due date (including extension of time) for filing the return for the taxpayer's last taxable year beginning in 2009.

(6) Example:
(i) Waiver in case of pre-consolidation separate return years. T was a separate corporation that was not part of a consolidated group, until December 31, 2004, when it was acquired by the X Group. On December 31, 2007, the X Group sold all of the stock of T to the P Group. P did not make the election described in §1.1502-21(b)(3)

(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback (as defined in paragraph (b)(3)(v) of this section) pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL, and the P Group elected, pursuant to paragraph (b)(3)(ii)(C)(2) of this section, to waive the portion of the carryback period during which T was included in any other consolidated group. T's fifth and fourth taxable years preceding the year of the loss were its 2003 and 2004 separate return years. Due to the P Group's election pursuant to paragraph (b)(3)(ii)(C)(2) of this section, T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which it was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv).
(ii) Split-waiver election made. The facts are the same as in paragraph (i) except that the group made the election described in §1.1502-21(b)(3)(ii)(B) with regard to its acquisition of T in 2007. Due to the P Group's election pursuant to §1.1502-21(b)(3)(ii)(B), T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which T was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv). (b)(3)(iii) and (b)(3)(iv) [Reserved]. For further guidance, see §1.1502-21(b)(3)(iii) and (b)(3)(iv).

(v) Extended Carryback Period under section 172(b)(1)(H). Section 172(b)(1)(H) allows a taxpayer to elect to carry back a single net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable NOL) to its third, fourth, or fifth taxable year preceding the taxable year of the loss (Extended Carryback Period). As contemplated by section 172(b)(1)(H), the designated taxable year within the Extended Carryback Period may be the fifth taxable year preceding the year of the loss (Five-Year Carryback), and section 172(b)(1)(H)(iv) limits the amount of the Applicable NOL that may be carried back to 50 percent of the taxpayer's taxable income (computed without regard to any NOL deduction attributable to the loss year or any taxable year thereafter) for such fifth preceding taxable year. This paragraph (b)(3)(v) provides rules for computing the 50 percent limitation under section 172(b)(1)(H)(iv) where a Five-Year Carryback is made to a consolidated return year from any consolidated return year or separate return year.

(A) Election—(1) In general. Except as otherwise provided in this section, a consolidated group may elect an Extended Carryback Period pursuant to section 172(b)(1)(H) with regard to a consolidated net operating loss arising in a taxable year ending after December 31, 2007 and beginning before January 1, 2010 (Applicable CNOL). However, no election may be made under this paragraph for a taxpayer described in section 13(f) of the Worker, Homeownership, and Business Assistance Act of 2009, Public Law 111-92, 123 Stat. 2984 (November 6, 2009). The election pursuant to section 172(b)(1)(H) applies to the entire Applicable CNOL, except as otherwise provided in paragraph (b)(3)(ii)(C) of this section or in this paragraph (b)(3)(v).

See also paragraph (c) of this section (SRLY limitation).

(2) Revoking a previous carryback waiver. A consolidated group may revoke a prior election pursuant to §1.1502-21(b)(3)(i) to relinquish the entire carryback period with respect to an Applicable CNOL, but only if the group makes the election pursuant to section 172(b)(1)(H) with regard to such Applicable CNOL.

(3) Pre-acquisition electing member. If a member (Electing Member) of a consolidated group makes an Extended Carryback Period election pursuant to section 172(b)(1)(H) with regard to a loss from a separate return year ending before the Electing Member's inclusion in a consolidated group, the election will not disqualify the acquiring group from making an otherwise available election pursuant to section 172(b)(1)(H) with regard to an Applicable CNOL incurred in a consolidated return year that includes the Electing Member.

(B) Taxpayer's taxable income. For purposes of computing the limitation under section 172(b)(1)(H)(iv) on a Five-Year Carryback to any consolidated return year from any consolidated return year or separate return year, taxpayer's taxable income as used in section 172(b)(1)(H)(iv)(I) means consolidated taxable income (CTI) (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or any taxable year thereafter) in the consolidated return year that is the fifth taxable year preceding the year of the loss.

(C) Limitation on Five-Year Carrybacks to a consolidated group.—(1)

Annual Limitation. The aggregate amount of Five-Year Carrybacks to any consolidated return year may not exceed 50 percent of the CTI for that year (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or attributable to any taxable year thereafter) (Annual Limitation).

(2) Pro rata absorption of limited and non-limited losses. All Five-Year Carrybacks and other net operating losses from years ending on the same date that are available to offset CTI in the same year are absorbed on a pro rata basis. See §1.1502-21(b)(1).

(D) Election by small business. This paragraph (b)(3)(v) does not apply to any loss of an eligible small business as defined in section 172(b)(1)(H)(v)(II) with respect to any election made pursuant to section 172(b)(1)(H) as in effect on the day before the date of the enactment of the Worker, Homeownership, and Business Assistance Act of 2009.

(E) Examples. The rules of this paragraph (b)(3)(v) are illustrated by the following examples. For purposes of the examples, all affiliated groups file consolidated returns, all corporations are includible corporations that have calendar taxable years, the facts set forth the only relevant corporate activity, and all transactions are with unrelated parties.

Example 1. Computation and Absorption of Five-Year Carrybacks. (i) Facts. P is the common parent of the P Group. On June 30, 2006, P acquired all of the stock of T from X, the common parent of the X Group. The X Group has been in existence since 1996. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL. P did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. T's fifth taxable year preceding the year of the loss was the X Group's 2004 consolidated return year. For 2004, T's separate return limitation year (SRLY) limitation for losses carried into the X Group was $400. The X Group's CTI for 2004 is $200. The X Group did not make a Five-Year Carryback election for a CNOL from its 2008 or 2009 taxable year. There are no other NOL carrybacks into the X Group's 2003 or 2004 consolidated taxable year.

(ii) Five-Year Carryback from separate return year. Pursuant to paragraph (b)(3)(v)(C)(1) of this section, the amount of T's apportioned loss that is eligible for Five-Year Carryback is limited to 50 percent of the X Group's CTI for 2004, or $100 ($200 x 50 percent). Therefore, $100 of T's apportioned loss will be carried into the X Group's 2004 consolidated return year. In addition, T's 2008 loss is subject to the SRLY limitation of $400 with respect to the X Group. Thus, the amount of T's portion of the P Group's 2008 CNOL that may offset the X Group's 2004 CTI is $100 (the lesser of $400 (T's SRLY limitation) or $100 (the amount of T's Five-Year Carryback)).

(iii) Pro rata absorption of limited and non-limited losses within a single consolidated return year. The facts are the same as in paragraph (i), except that the X Group sustained a $750 CNOL in 2008, which X elected to carry back four years to its 2004 consolidated return year (no Five-Year Carryback). Further, the X Group had CTI of $500 in 2004. Therefore, the X Group and the P Group both carry back CNOLs from years ending December 31, 2008, although only the P Group's CNOL (including the portion allocable to T) constitutes a Five-Year Carryback. The Annual Limitation on Five-Year Carrybacks will be $250 [$500 x 50 percent]. The $750 CNOL carryback within the X Group is subject to no limitation. Under §1.1502-21(b)(1), because the 2008 CNOL of the X Group and the 2008 SRLY loss of T are losses from years ending on the same date and are available to offset CTI in the same year, the two losses offset the X Group's $500 CTI on a pro rata basis. Accordingly, $375 of the X's Group's 2008 CNOL [$500 x $750/($750 + $250)] and $125 of T's portion of the P Group's 2008 CNOL [$500 x $250/($750 + $250)] offset the X Group's 2004 CTI.

Example 2. Multiple carryback years. (i) Facts. On January 1, 2004, Individual A formed X, which formed corporations S and T, and X elected to file a consolidated Federal income tax return. For its 2004 consolidated taxable year, the X Group's CTI was $1,100. For its 2005 consolidated taxable year, the X Group's CTI was $1,000. On June 30, 2007, the X Group sold all of the S stock to the Y Group and sold all of the T stock to the Z Group. The X Group terminated in 2007. Neither Y nor Z made the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to S and T, respectively, the portion of the carryback period for which S and T were members of the X Group. In 2008, the Y Group sustained an $800 CNOL, $400 of which was attributable to S under §1.1502-21(b)(2)(iv)(A). Y elected a Five-Year Carryback with regard to the Y Group's 2008 CNOL pursuant to section 172(b)(1)(H). Y did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which S was included in the X Group. In 2009, the Z Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). Z elected a Five-Year Carryback with regard to the Z Group's 2009 CNOL pursuant to section 172(b)(1)(H). Z did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the Extended Carryback Period during which T was included in the X Group.

(ii) Analysis. The $400 of Y Group's 2008 CNOL that is apportioned to S is carried back as a separate return year Five-Year Carryback to the X Group's 2004 consolidated return year. The $600 of Z Group's 2009 CNOL that is apportioned to T is also a separate return year Five-Year Carryback to the X Group's 2005 consolidated return year. The Annual Limitation on Five-Year Carryback to the X Group's 2004 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $550 ($1,100 of CTI x 50 percent). Because S is making the sole Five-Year Carryback to the X Group's 2004 consolidated return year, S will make a Five-Year Carryback of the full $550. Similarly, the Annual Limitation for Five-Year Carryback to the X Group's 2005 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $500 ($1,000 of CTI x 50 percent).

Because T is making the sole Five-Year Carryback to the X Group's 2005 consolidated return year, T will make a Five-Year Carryback of the full $500.

The SRLY limitations for S and T, respectively, may limit the absorption of the Five-Year Carrybacks within the X Group.

Example 3. Pre-acquisition election by T. P is the common parent of the P Group. On December 31, 2008, P acquired all of the stock of T from X, the common parent of the X Group. T had been a member of the X Group since 1999. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. Pursuant to section 172(b)(1)(H), the X Group elected to make a Five-Year Carryback of its 2008 CNOL back to 2003. A portion of this CNOL is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). In 2009, the P Group incurred a CNOL of $1,000, $600 of which is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). Pursuant to section 172(b)(1)(H), the P Group elected a Five Year Carryback with regard to its 2009 CNOL. P did not make the election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. The Five-Year Carryback election by the X Group with respect to its 2008 CNOL (which includes the portion of the CNOL attributable to T) does not disqualify the P Group from electing a Five-Year Carryback with regard to its 2009 CNOL. Therefore, the P Group may carry back its CNOL, including the portion attributable to T, in accordance with §1.1502-21 and the rules of this section. (c) through (h)(8) [Reserved]. For further guidance, see §1.1502-21(c) through (h)(8).

(9) Section 172(b)(1)(H)—(i) Applicability date. This section applies to any consolidated Federal income tax return due (without extensions) after

[INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER], if such return was not filed on or before such date.

However, a consolidated group may apply this section to any consolidated Federal income tax return that is not described in the preceding sentence.

(ii) Expiration date. The applicability of this section will expire on June 21, 2013 .
*****
Steven T. Miller
Deputy Commissioner for Services and Enforcement.
Approved: June 16, 2010
Michael F. Mundaca
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-15087 Filed 06/22/2010 at 8:45 am; Publication Date: 06/23/2010]

© 2010 Thomson Reuters/RIA. All rights reserved.

GETTING THE RIGHT AMOUNT OF TAX WITHELD

In most situations, the tax withheld from your pay will be close to the tax you figure on your return - if you follow these two rules.
• You accurately complete all the Form W-4 worksheets that apply to you.
• You give your employer a new Form W-4 when changes occur.

However, because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations:
• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
• You will owe additional amounts with your return, such as self-employment tax.
• Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
• Your earnings are more than $130,000 if you are single or $180,000 if you are married.
• You work only part of the year.
• You change the number of your withholding allowances during the year.

If you need help downloading Form W-4 or have questions on how to fill it out properly, give us a call. We are happy to help.

FINANCIAL PLANNING TIPS FOR JUNE 2010

Review Your Insurance Policies
You reviewed your "asset" policies in April. This month, review your life, health, and disability insurance policies. Check with your employee benefits office as to what programs are available. Make certain you have adequate coverage. Call us to determine the appropriate amounts for your age and income.

Lower Your Utility Costs
Review your utility costs for the year. Make certain you are getting the best possible deal where multiple providers are available. For example, obtain competitive quotes for long-distance phone service. For other utilities, review your usage to see if any savings are available. Consider the use of annual "budget" plans with the utilities to even out annual payments.

Analyze Budget vs. Actual
Compare May income and expenditures with your budget. Make adjustments as appropriate to your June expenditures. Make sure you have invested your planned savings amount for May.

If you have any questions or need assistance in your overall tax and financial planning please call our office.

IRS IS NOT COMPLYING WITH LEGAL REQUIREMENTS FOR SEIZURES OF ASSETS

The IRS Taxpayer Inspector General for Tax Administration recently issued a report on IRS seizures that included instances of IRS still failing to meet all legal requirements in seizures. They reviewed a random sample of 50 of the 578 seizures conducted from July 1, 2008, through June 30, 2009, looking at the required 58 guidelines for each seizure. They identified 34% of the seizures in which the IRS did not comply with the Internal Revenue Code.

If you wish to review the entire report click on the following link: http://www.treas.gov/tigta/auditreports/2010reports/201030049fr.pdf

COURT SUPPORTS IRS AGAINST “S” CORPORATION FOR UNDERPAYING EMPLOYEE-OWNER

Background
A “S” Corporation if a regular corporation that is treated like a sole proprietorship or partnership for tax purposes resulting in the net income of the corporation flowing through the individual tax returns and taxed at the lower individual tax rate in lieu of the corporate rate. Unlike an unincorporated self-employed person, that income is not subject to self-employment taxes. Consequently, the tax code requires employee – owners of “S” Corporations to be paid a “reasonable” salary thus requiring the withholding and payment of Social Security, Disability and Unemployment taxes. The salary is treated as a corporation expense, reducing the amount of income that flows through the sole proprietor or partner.

In times past, a common practice was to pay a minimal salary to the employee-owner and take out cash as a dividend. This will reduce total taxes by reducing the amount paid in Social Security, Disability and Unemployment taxes. For example, the employee-owner would take a $24,000 salary per year and withdraw cash from the corporation of $100,000 as a dividend. The Social Security, Disability and Unemployment tax would be paid on the $24,000 but not on the $100,000.

Court Ruling
In Watson v. U.S the district court ruled that a portion of the dividend distributions by an “S” corporation to its sole owner should be recharacterized as wages subject to employment taxes, the court rejected the corporation's assertion that IRS could not compel the corporation to pay a higher salary to the owner. This resulted in underreporting and underpayment penalties and interest on the corporation’s payroll tax returns over a two-year period.

Conclusion
Employee-owners of “S” corporations should pay a “reasonable” salary. What is a “reasonable” salary? That is a good question; there is no guidance in tax law or by the IRS. It is a case-by-case determination. To determine a reasonable salary, one needs to look at the prevailing wages paid for the same job description of the employee-owner and the income of the corporation.

Please call me for guidance on how this affects you personally.

Summer Travel Tax Deductions

The summer travel season is almost upon us. Keep in mind that if your summertime travel is primarily for business or career-related education, then a portion of the trip may be tax-deductible. As long as most of your travel days are for business purposes, you can deduct the cost of travel (airfare, trains, car), hotel, parking, taxi service, meals, and so on.

As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.

The key factor is that your trip must be primarily for business
Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.

Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.

Traveling with Your Spouse
If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse
1. is your employee,
2. has a bona fide business purpose for the travel, and
3. would otherwise be allowed to deduct the travel expenses.

To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.

Examples
Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary for Bill's business. Her expenses are not deductible.

Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.

Travel Outside of the United States
With travel outside of the United States, the transportation for business trips of one week or less may be deducted. However, only a portion of transportation costs for longer trips are deductible.

Example
You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.

If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.

You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round-trip airfare from New York to Dublin would have been $850.

You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 - 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).

What Expenses Are Deductible?
Here's what you can deduct when you travel away from home for business.

(1) Transportation Expenses
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.

(2) Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between the airport or station and your hotel, and the hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.

(3) Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.

(4) Car Expenses
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.

(5) Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.

(6) Cleaning Clothes
You can deduct the dry cleaning and laundry expenses you incur while away on business.

(7) Telephone
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.

(8) Tips
You may deduct the tips you pay for any expense listed above.
Other Expenses

You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.

If you have any questions about business travel this summer, just give us a call or send us an email.