John Ellis CPA at the John Ellis Company

WHAT IF A PAYEE REFIUSES TO COOPERATE WITH THE PREPERATION OF 1099s

2011-01-26T13:18:00.000-08:00

As part of the 1099 process, payees are required to provide their Tax Identification Number which is either their Social Security Number or Corporate ID Number. But what happens if a payee refuses? What do we do then?

Per the IRS, the 1099 still needs to be prepared and sent to the IRS, but with the tax identification Number blank. Then send the payee the following:
(1) A copy of the 1099 that is being sent to the IRS
(2) Form W-9, which is the form that the payee reports their Tax Identification Number to you
(3) A letter, on company letterhead, informing them that (a) The enclosed 1099 is being provided to the IRS,(b) Requesting them to return the enclosed completed orm W-9, (c) The IRS will assess a penalty against them for refusing to provide their tax identification number and (d) 28% will be withheld from all future payments
(4) A return envelope

You need to keep copies of all of this in a file to show the IRS that you did your best effort to get the payee’s Tax Identification number.

The IRS will then assess you a $50 penalty. The penalty can be waived if copies of the above are provided

If you need help in preparing 1099s, please give us a call today at 562-912-4334.

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

Be prepared to provide 1099s

2011-01-24T20:38:00.000-08:00

ENSURING FINANCIAL SUCCESS FOR YOUR BUSINESS

2011-01-03T09:29:00.000-08:00

Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination?

Not quite. You can't let your business run on autopilot and expect good results. Any business owner knows you need to make numerous adjustments along the way - decisions about pricing, hiring, investments, and so on.

So, how do you handle the array of questions facing you? One way is through cost accounting.

Cost Accounting Helps You Make Informed DecisionsCost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions - raw materials, labor, inventory, and overhead, among others.

Note: Cost accounting differs from financial accounting because it's only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:
1. Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?
2. Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.
3. Budgeting. You can't create an effective budget if you don't know the real costs of the line items.

Is It Hard?
To monitor your company's costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs don't fluctuate with changes in production or sales. They include:
• rent
• insurance
• dues and subscriptions
• equipment leases
• payments on loans
• management salaries
• advertising

Variable costs DO change with variations in production and sales. Variable costs include:
• raw materials
• hourly wages and commissions
• utilities
• inventory
• office supplies
• packaging, mailing, and shipping costs

Tip: Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company's functioning.

We Can Help
If you'd like to better understand the ins and outs of your business and create sound guidance for internal decision making, you might consider cost accounting. Allow us to evaluate your business from top to bottom and determine the real cost of each component. With that as a foundation, we can help you draft budgets, adjust pricing, keep an appropriate level of inventory, and much more. Give us a call today at 562-912-4334.

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

YOUR PENSION PLAN - SMALL CHANGES FOR 2011

2010-12-24T13:09:00.000-08:00

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

2010-12-10T10:25:00.000-08:00

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?

2010-12-06T11:41:00.000-08:00

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

2010-11-22T19:49:00.000-08:00

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

2010-11-15T10:25:00.000-08:00

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

2010-11-05T15:33:00.000-07:00

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

2010-10-12T17:03:00.000-07:00

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

2010-10-02T12:29:00.000-07:00

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

2010-09-27T17:26:00.000-07:00

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

2010-09-18T15:30:00.000-07:00

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

2010-09-10T14:44:00.000-07:00

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

2010-09-07T22:46:00.000-07:00

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

2010-09-06T10:40:00.000-07:00

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

2010-08-27T08:30:00.000-07:00

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

2010-08-21T10:38:00.000-07:00

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

2010-08-13T09:27:00.000-07:00

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

2010-08-12T15:02:00.001-07:00

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

2010-07-17T16:47:00.000-07:00

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

2010-07-02T11:15:00.000-07:00

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

2010-07-01T08:43:00.000-07:00

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

2010-06-27T10:50:00.000-07:00

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

2010-06-26T12:04:00.000-07:00

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

2010-06-19T11:05:00.000-07:00

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

2010-06-12T10:21:00.000-07:00

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

2010-06-11T09:45:00.000-07:00

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

2010-06-10T11:06:00.000-07:00

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

2010-06-07T09:54:00.000-07:00

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.

CALIFORNIA ADOPTS PERMANENT REGULATIONS FOR FILM CREDIT

2010-06-04T09:57:00.000-07:00

Effective May 19, 2010 the California Film Commission (CFC) adopted eight final regulations that implement the Film and Television Tax Credit Program; which was previously adopted as an emergency regulation. The final regulations specify the process for the tax credit application and certificate issuance process, the application's contents, and the kind of production and wage expenditure that qualify. The CFC has issued a release summarizing the more significant changes in the regulations, including the following requirements:

(1) All productions' Financing Sources Report must be accompanied by documentation confirming at least 60% of the production's financing
(2) A new TV series for basic cable must have a running time of no less than 60 minutes
(3) A miniseries must consist of two or more episodes with a total running time of at least 150 program minutes.

Please call our office if you want more information or need assistance

IMPORTANT INFORMATION FOR CALIFORNIA REGISTERD DOMESTIC PARTNERS

2010-06-03T09:44:00.000-07:00

On February 24, 2006 the IRS issued a determination that an individual who is a Registered Domestic Partner (RDP) in California must report all of his or her income earned from the performance of personal services. However, California law changed on January 1, 2007 to treat the earned income of an RDP as community property for property law and state income tax purposes. Consequently, a California RDP must report one-half of the community income, whether received as compensation for personal services or income from property, on his or her federal income tax return. Similarly, an RDP is entitled to one-half of the income tax withheld on the income. Finally, the requirement under California law to treat an RDP's earnings as community property and thus one-half vested in the partner, does not result in a transfer of property to the partner for federal gift tax purposes.

For tax returns for 2009 and before a Registered Domestic Partner can amend prior returns to report his or her income in this manner.

Consequently, a Registered Domestic Partner in California who prepares an Offer in Compromise must include the assets of the other partner in figuring the Taxpayer's ability to pay their income taxes even if they file separate. This is because California law provides that both domestic partners have an equal interest and liability in the community property.

HIRE ACT PAYROLL TAX EXEMPTION

2010-06-02T08:52:00.000-07:00

Following changes by the HIRE Act signed by President Obama on 3/18/10, employers hiring unemployed workers after 2/3/10 and before 1/1/11 may qualify for a 6.2% payroll tax incentive, in effect exempting them from their share of the Social Security tax on wages paid to these workers after 3/18/10. A revised Form 941 (Employer's Quarterly Federal Tax Return) and instructions, to be used in claiming the exemption beginning with the second calendar quarter of 2010, are now available for download on www.irs.gov . The IRS also updated its series of Frequently Asked Questions (FAQs) on the HIRE Act payroll tax exemption—click on www.irs.gov/businesses/small/article/0,,id=220750,00.html
News Release IR-2010-64.

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

TAX INCENTIVES FOR SMALL BUSINESS - RECENT LIGISLATION

2010-06-01T13:08:00.000-07:00

A variety of business tax deductions and credits were created, extended and expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), this year's Hiring Incentives to Restore Employment (HIRE) Act and the Affordable Care Act. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a rundown of some of the key provisions.

New Health Care Tax Credit Helps Small Employers
The small business health care tax credit, created under the Affordable Care Act, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. The maximum credit goes to smaller employers - those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average wages of more than $50,000.
Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS website.

Two New Benefits for Employers that Hire and Retain Recently Unemployed
Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer's share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.

These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.
Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement. Further details, including answers to frequently asked questions, are posted on IRS.gov.

Work Opportunity Tax Credit Aids Employers That Hire Certain Workers
The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.

Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.

An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee's hiring date.

Exclusion of Gain on the Sale of Certain Small Business Stock
An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.

COBRA Credit
Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit.

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© 2010 Thomson Reuters/RIA. All rights reserved.

NEW BUSINESS INFORMATION REPORTING

2010-05-31T10:34:00.000-07:00

Effective for payments made after 2011, newly enacted IRC Sec. 6041(h) requires businesses that pay more than $600 during the year to corporate providers of property and services to file an information report with each provider and the IRS. According to recent comments by IRS Commissioner Doug Schulman, the IRS will look for opportunities to minimize burden and avoid duplicative reporting. Specifically, he said that the IRS plans to use its "administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the new law." News Release IR-2010-68

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

Business Changes in HIRE Act

2010-04-02T12:57:00.000-07:00

This is an overview of two key tax changes affecting business in the recently enacted “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P.L. 111-147 ). The centerpiece of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers which gives business a maximum tax benefit of $7,621 in paying an unemployed worker $106,800 per year. The act also creates a similar new set of rules allowing a payroll tax holiday for railroad retirement tax purposes. In addition the HIRE Act includes a one-year extension of the enhanced small business expensing option under Code Sec. 179.

Payroll tax holiday for employers who hire unemployed workers.
The new law exempts private-sector employers from the 6.2% OASDI tax per new hire for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to the OASDI. The qualifications are:
(1) The new hire must have been unemployed for at least 60 days before employment
(2) Applies to workers hired after February 3, 2010 [Date of introduction of the legislation]
(3) A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
(4) Applies to wages paid from March 19, 2010 to on December 31, 2010
(5) Applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.
(6) Hiring family members do not quality.
(7) An employer cannot claim both the HIRE act provisions and the Work Opportunity Tax Credit or another type of employment tax credit. The employer must select one benefit or the other for 2010. There is no double dipping.
(8) There is no minimum weekly number of hours that the new employee must work for the employer to be eligible.

Credit for employers who retain new workers
An employer is eligible for an additional non-refundable tax credit of the lesser of $1,000 or 6.2% of the wages paid after a 52-week threshold is reached. This is taken on the employer’s 2011 tax return. In order to be eligible:
(1) All of the qualifications listed above must be meet, AND
(2) The employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Changes to tax forms
Per Thomson Reuters/RIA, the IRS explained changes to tax forms in an April 1 payroll industry teleconference call as follows:
(1) Form 941. IRS will be revising the second quarter Form 941, Employer's Quarterly Federal Tax Return, due on Aug. 2, 2010. It expects to finalize the new version on April 6. The electronic specifications for the form will be revised at a later date. A draft version of the form included a new line to report tip adjustments. That line will not be included in the final version of the form. IRS expects to include the tip adjustment line on the 2011 Form 941.
(2) New Form W-11. An employer may not claim the payroll tax exemption unless the new hire certifies by signed affidavit (under penalties of perjury) that he was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins. IRS has drafted Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, to help employers meet this requirement. It expects to finalize this form the week of Apr. 5. The form does not need to be notarized. IRS expects employees to be able to sign the form electronically at some point.
(3) Form W-2/W-3. There will be a new code on box 12 of the 2010 Form W-2 (Code CC) to indicate that a new hire had wages that qualified for the payroll tax exemption. Form W-3, Transmittal of Wage and Tax Statements, will be revised to include a line for total aggregate exempt wages.

Extension of enhanced small business expensing.
The new law also gives a one-year lease on life to enhanced expensing rules. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009. Had the HIRE Recovery Act not been passed and signed into law, these dollar limits would have dropped this year to $134,000 and $530,000 respectively.

If you have any questions on how this applies to your business, please call the office of The John Ellis Company.

2009 Tax Strategy XIII – Deducting Prepaid Business Expenses

2010-02-25T22:57:00.000-08:00

A question that often arises is whether prepaid business expenses can be deducted in the year it is paid. Unfortunately, they cannot. Generally, where an expense relates to a period covering more than 12 months, the IRS and most courts agree that the deduction must be spread over the period to which the expense applies.

For example, you purchase a three-year maintenance plan for your office photocopy machines. The service company offers you a discount to prepay the contract, which you end up doing. In this case, the expense must be amortized (ratably deducted) over the three-year period and not all at once in the year paid. If you had only prepaid three months of the contract, that amount would have been deductible in the year paid. This rule precludes business owners from prepaying expenses as a means to reducing their profits for a particular year.

2009 Tax Strategy XII – Charitable Contribution

2010-02-24T20:07:00.000-08:00

In order for donations to be deductible, it must be given to a “qualified U.S. organization.” Not all nonprofit organizations qualify, but the IRS regularly publishes a list of the ones that do.

Limits on Charitable Deductions
In general, deductions for charitable gifts are limited to 50% of a taxpayer's adjusted gross income. However, depending on the kind of organization and the type of property being given, that limit can dip as low as 20%. In addition, if the individual's income is high enough, the partial benefit of his or her charitable deductions can be lost due to an overall limit the IRS imposes on itemized deductions.

Gifts That Return a Benefit to You
If a taxpayer is audited on his or her contributions, the IRS looks to see whether voluntary donations were made intentionally or whether it was just payment for services provided by a charitable organization. For example, payments to a parochial school for a child’s tuition or to a church for a family wedding give the taxpayer a benefit and do not qualify as contributions. Payments to charities for raffle tickets, lotteries, or bingo also fall in this category and aren’t deductible – with these one is really purchasing the chance to win that new TV, trip to Hawaii, etc. In certain situations, only a partial benefit may be received for what is given. In that case, one can generally deduct the amount of the gift that is over and above the value of what is received. Say you paid $50 to attend a fundraising dinner at your church. The church determines that the value of the dinner and program is $15.Your deductible charitable contribution is $35, i.e., the amount of your payment that exceeds $15.

Giving Your Time
Although you may volunteer many hours working for a charitable organization, the value of your time is not deductible. However, if you incur expenses (e.g., travel costs to and from the charity’s location) related to volunteer work, those costs are deductible. Other out-of-pocket costs incurred on behalf of the charity may be deductible as well.

Travel Away From Home for Charity
A charitable deduction can be taken for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. However, two important criteria need to be met in order to get this deduction:

(1) You must perform services for the organization in an official capacity while you are away from home.
(2) No “significant element of personal pleasure” must be connected with the travel.

Does this mean your trip cannot be enjoyable? No, but it does mean that the primary purpose of your travel must be related to your charitable duties and not be a personal vacation.

Non-Cash Donations
Donations do not always have to be in cash. One can also deduct the “fair market value” (FMV) of donated items like used clothing, furniture, and appliances (FMV is the price goods are likely to sell for on the open market).

Condition of Contributed Items:
The condition of the contributed item is important, because except as noted below, tax law does not permit a charitable contribution for clothing or household items unless the contributed items are in “good used condition” or “better.”

Tax law also does not allow a deduction for items with minimal monetary value, such as used socks or undergarments. There is a provision that permits a deduction for clothing and household goods that are not in good used condition or better. Under this provision, a deduction can be taken if (1) the amount claimed as a deduction is greater than $500, and (2) the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property.

Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items for this purpose.

Large Donations:
There are other rules that apply to certain types of non-cash contributions including limitations, appraisal requirements, deduction recapture, etc. Therefore, when contemplating an unusual or substantial non-cash contribution, it is appropriate to consult with this office.

Valuing Your Donation:
Perhaps the most difficult part of making non-cash donations is determining the value of the goods being given away. The decision about value is left to you and, unfortunately, there are not any cast-in-concrete formulas to give you the “right” answer. Here are a few general guidelines that may help:

• Consider the condition of each item being given away. Compare the style of your donation with current styles. Categorize each item being given by its condition (e.g., good, excellent, new, etc.)

• Do a little detective work to find out what the item you are donating would sell for in the current market. A visit to the local thrift shop, a quick glance through newspaper classified ads, or a stop at a neighborhood garage sale should provide you with a pretty good idea of the prices of goods like yours.

• If your donation includes equipment or machinery, consult with publications of commercial firms or trade organizations to find out your property’s value. Many of these organizations regularly publish information about going sales prices for cars, boats, airplanes, etc. Caution: When donating used vehicles to charity, special rules apply. See the paragraph on "Donating Used Vehicles to Charity.”

Your research will probably show that most used merchandise has a value that is considerably less than your property’s original cost! However, some items you give away may have actually gone up in value (e.g., antiques, jewelry, or artwork). To determine the value of these, hire a qualified appraiser. Regardless of whether the value of a donated item has gone up or down, if its current value is more than $5,000, a professional appraisal is mandatory (exception: most publicly-traded securities do not require an appraisal). Check with your tax advisor about the details that must be included in the appraisal and the IRS-required form.

Donating Used Vehicles to Charity:
Congress has imposed some tough new rules that substantially limit the deduction for a car donation. If the deduction exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS provides form 1098-C for this purpose. There is an exception to these rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities.” Please call this office for more information.

Record of Non-Cash Donations:
Keep a list of the donated items and include a description of the property, its cost and FMV, how you determined the FMV, and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser’s report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address. If the value of donated items is $250 or more, in addition to the information noted above, a written acknowledgment from the organization must state whether the charity provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided. You must have this written acknowledgment by the date you file your return or the extended due date of the return, whichever date is earlier.

Recordkeeping for Cash Donations
For monetary (cash, check) gifts, regardless of the amount, you should have a canceled check (bank record) or a written communication from the donee showing:

• The name of the donee organization,
• The date of the contribution, and
• The amount of the contribution.

The recordkeeping requirements may not be satisfied by maintaining other written records. This means that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Bank records can substantiate donations by debit or credit card.

While many organizations may take the responsibility of providing a receipt, the tax law actually places this responsibility of getting acknowledgment on the gift donor. “This provision does not impose an information requirement upon charities; rather it places the responsibility upon taxpayers who claim an itemized deduction, without a bank record for substantiation, to request (and maintain in their records) substantiation from the charity.”

The charity’s acknowledgment must contain the following:

• The amount of money and a description of the value of other property, if any, contributed
• Whether the charity provided any goods or services in return for the gift
• A description and reasonable estimate of the value of the goods or services provided

2009 Tax Strategy XI – Be prepared to receive your 1099

2010-02-15T12:22:00.000-08:00

Form 1099s are the counter part to the W-2s, they are for payments made by all types of business and nonprofit organizations for non payroll payments like interest, dividends or self employment income. There are 16 different types of 1099s and are due to recipients by February 1, 2010 and copies to the IRS by March 1, 2010. Listings of these are at the bottom of this blog.

One of the more prevalent 1099s is the 1099-MISC, which is for Miscellaneous Income. 1099-MISC covers the following:
(1) Royalties or broker payments in lieu of dividends or tax-exempt interest
(2) Services - If you received less than $600 in the year a 1099 is not required
(3) Rents
(4) Prizes and awards
(5) Other income payments

Payments to Corporations are exempt except for the following:
(1) Medical and health care payments
(2) Fish purchases for cash. “Fish” means all fish and other forms of aquatic life
(3) Attorneys’ fees
(4) Substitute payments in lieu of dividends or tax-exempt interest
(5) Payments by a federal executive agency for services

There are detailed rules in preparing and filling a 1099. To get more detailed information, visit the IRS web site www.irs.gov/pub/irs-pdf/i1099gi_09.pdf

Listing of 1099s
Form 1099-A: Acquisition or Abandonment of Secured Property
Form 1099-B: Proceeds from Broker and Barter Exchange Transactions
Form 1099-C: Cancellation of Debt
Form 1099-CAP: Changes in Corporate Control and Capital Structure
Form 1099-DIV: Dividends and Distributions
Form 1099-G: Certain Government Payments
Form 1099-H: Health Coverage Tax Credit (HCTC) Advance Payments
Form 1099-INT: Interest Income
Form 1099-LTC: Long Term Care and Accelerated Death Benefits
Form 1099-MISC: Miscellaneous Income
Form 1099-OID: Original Issue Discount
Form 1099-PATR: Taxable Distributions Received From Cooperatives
Form 1099-Q: Payments from Qualified Education Programs (Under Sections 529 and 530)
Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 1099-S: Proceeds from Real Estate Transactions
Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA

2009 Tax Strategy X – Do you have your W-2 Yet?

2010-02-14T14:40:00.000-08:00

You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2009 earnings and withheld taxes no later than February 1, 2010 (if mailed, allow a few days for delivery). If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.

If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:
• The employer's name and complete address, including zip code, the employer's identification number (if known), and telephone number,
• Your name and address, including zip code, Social Security number, and telephone number; and
• An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a "reissued statement." Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.

You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax-filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.

If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

2009 Tax Strategy IX – Avoid Identity Theft During Tax Season

2010-02-13T15:31:00.000-08:00

Consumers should protect themselves against online identity theft and other scams that increase during and linger after the filing season. Such scams may appropriate the name, logo or other appurtenances of the IRS or U.S. Department of the Treasury to mislead taxpayers into believing that the scam is legitimate. Scams involving the impersonation of the IRS usually take the form of e-mails, tweets or other online messages to consumers. Scammers may also use phones and faxes to reach intended victims. Some scammers set up phony Web sites.

The IRS and E-mail
Generally, the IRS does not send unsolicited e-mails to taxpayers. Further, the IRS does not discuss tax account information with taxpayers via e-mail or use e-mail to solicit sensitive financial and personal information from taxpayers. The IRS does not request financial account security information, such as PIN numbers, from taxpayers.

Object of Scams
Most scams impersonating the IRS are identity theft schemes. In this type of scam, the scammer poses as a legitimate institution to trick consumers into revealing personal and financial information - such as passwords and Social Security, PIN, bank account and credit card numbers - that can be used to gain access to and steal their bank, credit card or other financial accounts. Attempted identity theft scams that take place via e-mail are known as phishing. Other scams may try to persuade a victim to advance sums of money in the hope of realizing a larger gain. These are known as advance fee scams.

How an Identity Theft Scam Works
Most of the scams that impersonate the IRS are identity theft scams. Typically, a consumer will receive an e-mail that claims to come from the IRS or Treasury Department. The message will contain an enticing or intimidating subject line, such as tax refund, inherited funds or IRS notice. Usually, the message will state that the recipient needs to provide the IRS with information to obtain the refund or avoid some penalty. The message will instruct the consumer to open an attachment or click on a link in the e-mail. This may lead to an official-looking form to be filled out online or send the taxpayer to a seemingly genuine but bogus IRS Web site. The look-alike site will then contain a phony but genuine-looking online form or interactive application that requires the personal and financial information the scammer can use to commit identity theft.

Alternatively, the clicked link may secretly download malware to the consumer's computer. Malware is malicious code that can take over the computer's hard drive, giving the scammer remote access to the computer, or it could look for passwords and other information and send them to the scammer.

Phony Web or Commercial Sites
In many IRS-impersonation scams, the scammer sends the consumer to a phony Web site that mimics the appearance of the genuine IRS Web site, IRS.gov. This allows the scammer to steer victims to phony interactive forms or applications that appear genuine but require the targeted victim to enter personal and financial information that will be used to commit identity theft.

The official Web site for the Internal Revenue Service is IRS.gov, and all IRS.gov Web page addresses begin with http://www.irs.gov/.

In addition to Web sites established by scammers, there are commercial Internet sites that often resemble the authentic IRS site or contain some form of the IRS name in the address but end with a .com, .net, .org or other designation instead of .gov. These sites have no connection to the IRS. Consumers may unknowingly visit these sites when searching the Internet to retrieve tax forms, publications and other information from the IRS.

Frequent or Recent Scams
There are a number of scams that impersonate the IRS. Some of them appear with great frequency, particularly during and right after filing season, and recur annually. Others are new.

• Refund Scam: This is the most frequent IRS-impersonation scam seen by the IRS. In this phishing scam, a bogus e-mail claiming to come from the IRS tells the consumer that he or she is eligible to receive a tax refund for a specified amount. It may use the phrase "last annual calculations of your fiscal activity." To claim the tax refund, the consumer must open an attachment or click on a link contained in the e-mail to access and complete a claim form. The form requires the entry of personal and financial information. Several variations on the refund scam have claimed to come from the Exempt Organizations area of the IRS or the name and signature of a genuine or made-up IRS executive. In reality, taxpayers do not complete a special form to obtain their federal tax refund; refunds are triggered by the tax return they submitted to the IRS.
• Lottery winnings or cash consignment: These advance fee scam e-mails claim to come from the Treasury Department to notify recipients that they'll receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees. In reality, the Treasury Department does not become involved in notification of inheritances or lottery or other winnings.
• Beneficial Owner Form: This fax-based phishing scam, which generally targets foreign nationals, recurs periodically. It's based on a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. The scammer, though, invents his or her own number and name for the form. The scammer modifies the form to request passport numbers, information that is often used for account security purposes (such as mother's maiden name) and similar detailed personal and financial information, and states that the recipient may have to pay additional tax if he or she fails to immediately fax back the completed form. In reality, the real W-8BEN is completed by banks, not individuals.

Other Known Scams
The contents of other IRS-impersonation scams vary but may claim that the recipient will be paid for participating in an online survey or is under investigation or audit. Some scam e-mails have referenced Recovery-related tax provisions, such as Making Work Pay, or solicited for charitable donations to victims of natural disasters. Taxpayers should beware of an e-mail scam that references underreported income and the recipient's "tax statement", since clicking on a link or opening an attachment is known to download malware onto the recipient's computer.

How to Spot a Scam
Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:
• Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother's maiden name, either in the e-mail itself or on anther site to which a link in the e-mail sends the recipient.
• Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
• Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient's funds.
• Gets the Internal Revenue Service or other federal agency names wrong.
• Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
• Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (http://www.irs.gov). The actual link's address, or url, is revealed by moving the mouse over the link included in the text of the e-mail.

What to Do
Taxpayers who receive a suspicious e-mail claiming to come from the IRS should take the following steps:
• Avoid opening any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Avoid clicking on any links, for the same reason. Alternatively, the links may connect to a phony IRS Web site that appears authentic and then prompts for p ersonal identifiers, bank or credit card account numbers or PINs.
• Visit the IRS Web site, www.irs.gov, to use the "Where's My Refund?" interactive tool to determine if they are really getting a refund, rather than responding to the e-mail message.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from their inbox.
• Consumers who believe they are or may be victims of identity theft or other scams may visit the U.S. Federal Trade Commission's Web site for identity theft, www.OnGuardOnline.gov, for guidance in what to do. The IRS is one of the sponsors of this site.

More information on IRS-impersonation scams, identity theft and suspicious e-mail is available on IRS.gov.

2009 Tax Strategy VIII – Special Tax Treatment for Dividend Income

2010-02-12T15:11:00.000-08:00

Does the dividend you receive qualify for special treatment? When you receive a 1099-DIV, the dividends reported could be Qualifying Dividends, Non-Qualifying Dividends, Ordinary Dividends or Capital Gain Dividends. Qualifying Dividends get special tax treatment.

Qualifying Dividends are taxed at different rates than the income tax rate, thus in 2009 the tax on Qualifying Dividend Income needs to be calculated separately at 15% for Taxpayers in the 25% income tax bracket or higher and are not taxable for Taxpayers below the 25% income tax bracket.

WHAT IS A DIVIDEND
A dividend defined by IRC Section 316 is a distribution by a corporation to its shareholders out of accumulated earnings and profits. Thus the distribution MUST be:
(1) From a corporation and not any other entity
(2) Received by shareholders in their capacity as shareholders and not as employees, vendors or creditors.
(3) The corporation MUST have earnings and profits

WHAT IS A QUALIFYING DIVIDEND
The following are the requirements for a dividend to be classified as a Qualifying Dividend
(1) Must be from a US domestic corporation or a qualified foreign corporation
(2) The corporation CANNOT be tax-exempt
(3) Must be received by non-corporate taxpayers. Dividends received by partnerships, “S” corporations or any other legal entity do not qualify.
(4) Must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
(5) Dividends paid by an Employee Stock Ownership Plan [ESOP] do not qualify
(6) A Qualified Foreign Corporation is a corporation that is incorporated in the US or in a US possession and traded on a US exchange but has non-US citizens as majority stockholders. In addition, a corporation incorporated in a foreign country that is covered by a comprehensive tax treaty with the US is a Qualified Foreign Corporation.

EXAMPLES OF DISTRIBUTIONS THAT ARE QUALIFYING DIIVIDENDS
(1) Common Stock
(2) Preferred Stock [Special Rules Apply]
(3) Some Mutual Funds [Special Rules Apply]
(4) Real Estate Investment Trusts - REITs [Special Rules Apply]

EXAMPLES OF DISTRIBUTIONS THAT ARE NOT QUALIFYING DIVIDNEDS
(1) Money Market and Bonds Funds
(2) Credit Union Dividends
(3) “S” Corporations
(4) Payment in Lieu of Dividends
(5) Return of Capital

2009 Tax Strategy VII – Tax Credits

2010-02-11T13:15:00.000-08:00

Each year, many taxpayers overlook tax credits, even though they often qualify for one or more of them. Though both tax deductions and credits save you money, they do it in different ways. A deduction lowers the income on which tax is figured. The tax credit is even better because it lowers the tax itself. Take time now to review your records and see if you qualify for one of these tax credits; many are new or expanded for the 2009 tax filing year.

First-time Homebuyer's Credit
A credit limit of $8,000 for qualified first-time homebuyers is available in 2009. Further, long-time residents who owned and used the same principal residence for any 5 consecutive years of the last 8 years prior to purchasing a subsequent new principal residence, may now qualify for a tax credit of up to $6,500. Contact us for further information regarding this credit.

Energy Improvements Qualify for Expanded Tax Credits
People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the Residential Energy Property Credit and the Residential Energy Efficient Property Credit.
• Residential Energy Property Credit: The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.
• Residential Energy Efficient Property Credit: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.

American Opportunity Credit Helps Pay for First Four Years of College
More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

New Vehicle Purchase Incentive
New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.

Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) helps low- and moderate-income workers and working families. Working families with incomes below $48,279 (married filing jointly in 2009) and childless workers with incomes under $18,440 often qualify. Ordinarily, you must have earned income as an employee, independent contractor, farmer or business owner. Some disability retirees are also eligible. There is only a slight increase in these income levels for 2010; for example, working families with incomes below $48,362 (married filing jointly) and childless workers with incomes under $18,470, may quality in 2010.

Child Tax Credit
If you have a dependent child under age 17 at the end of 2009, you probably qualify for the child tax credit. This credit, which can be as much as $1,000 for each qualifying child, is in addition to the regular $3,650 personal exemption for 2009 you can claim for each dependent. A change in the way the credit is figured means that more low- and moderate-income families will qualify for the full credit on their 2009 returns. Don't confuse the child tax credit with the child care credit.

Note: In IRS Publication 972, there is a Child Tax Credit Worksheet to help you determine if you can claim the tax credit.

Credit for Child and Dependent Care Expenses
If you pay someone to care for your child so you can work or look for work, you probably qualify for this credit. Normally, your child must be your dependent and under age 13. Though often referred to as the child care credit, this credit is also available if you pay someone to care for a spouse or dependent, regardless of age, who is unable to care for himself or herself. In most cases, you need to obtain the care provider's social security number or taxpayer identification number and enter it on your return.

Note: Form 1040 filers claim the credit for child and dependent care expenses on Form 2441. Form 1040A filers claim it on Schedule 2.

Saver's Credit
The saver's credit helps low-and moderate-income workers save for retirement. You probably qualify if your income is below certain limits and you contribute to an IRA or workplace retirement plan, such as a 401(k). Income limits for 2009 are $27,750 for singles and married filing separately, $41,625 for heads of household and $55,500 for joint filers. These income limits are adjusted annually for inflation, however, will remain unchanged for 2010. The credit, up to $1,000, is based on a percentage (10-50%) of each dollar placed into a retirement plan, up to the first $2,000. The lower the adjusted gross income, the higher the credit percentage; resulting in the maximum credit of $1,000 (50% of $2,000).

Tip: Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply. You still have time to put money in an IRA and get the saver's credit on your 2009 return. 2009 IRA contributions can be made until April 15, 2010. Use Form 8880 to claim the saver's credit.

Caution: Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum saver's credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.

Other Credits Available
IRS.gov has information on these additional credits:
• Foreign tax credit, claimed on Form 1040 Line 47
• Credit for the elderly or the disabled, claimed on Form 1040 Schedule R
• Adoption credit, claimed on Form 8839
• Alternative motor vehicle (including hybrids) credit, claimed on Form 8910
• Credit for prior year minimum tax, claimed on Form 8801

Tax Credits Can Save You Money
These credits can increase your refund or reduce the tax you owe. Usually, credits can only lower your tax to zero. But some credits, such as the EITC and the child tax credit, can actually exceed your tax. Though some credits are available to people at all income levels, others have income restrictions. These include the EITC, saver's credit, education credits and child tax credit.
Tip: If you qualify, you can claim any credit, regardless of whether you itemize your deductions. Any credit can be claimed on Form 1040.

Tax credits help you pay part of the cost of raising a family, going to college, savings for retirement, or getting daycare so you can work or go to school.

2009 Tax Strategy VI – Deductable Taxes

2010-01-21T19:35:00.000-08:00

This is my sixth posting of a daily tax tip. This is about Tax Deductions

Generally, the following taxes are deductable:
(1) State and local income tax [Includes the California SDI]
(2) Real Property Tax
(3) Personal Property Tax
(4) Foreign Tax Paid
(5) The larger of
(a) State and Local Income Tax paid
(b) Sales tax paid
(6) If 4(b) is not used, sales or excise tax paid on the purchase of a new vehicle

To deduct the above taxes, two general tests must be meet
(1) The tax must be imposed on the Taxpayer (except where local law does not specify on whom the tax is imposed).
(2) The tax must be paid during the year.

In the case of sales tax, either the Taxpayer can deduct the actual amount paid during the year or use an IRS income based schedule. If the Taxpayer decides to deduct actual tax paid, they must have all receipts to support the deduction. Generally, Taxpayers have not kept all of their receipts, so using the IRS table is recommended

For the sales tax on new vehicles, there are additional requirements.
(1) This includes tax on cars and motorcycles
(2) The maximum cost of the vehicle cannot exceed $49,500.

For property taxes, if the Taxpayer does not itemize deductions, an additional amount can be added to the standard deduction, but no more than $500 for single Taxpayers and $1,000 for Married filling Joint Taxpayers.

It is important to understand that under the Tax Benefit Rule, the amount deducted or credited for income tax in an earlier tax year needs to be included in income in the current year. However, if the Taxpayer chooses to deduct sales tax instead of stat income tax and receive a state refund for that year that refund is not 100% taxable. The amount of refund includable in income is limited to the excess of the income tax the taxpayer chose to deduct over the sales tax they did not choose to deduct.

Example 1 – Assume in 2008 the Taxpayer chooses an $11,000 state income tax deduction over a $10,000 sales tax deduction. Since the state income tax deduction is the largest, he chooses to deduct the state income tax. In 2009, he receives a $2,500 state income tax refund. According to the Tax Benefit Rule by deducting the $11,000 state income tax was only $1,000 more than, if the $10,000 sales tax deduction was used. Thus, only $1,000 of the $2,500 refund is taxable.

Example 2 - If in the above example the facts are reversed, the Taxpayer chooses an $11,000 sales tax deduction over a $10,000 state income tax deduction. In this case, none of the income tax refund is deductable

2009 Tax Strategy V – Roth Plans

2010-01-19T00:33:00.000-08:00

This is my fifth posting of a daily tax tip. This is about Roth Plans. There are many rules and exceptions so this blog is only intended as an introduction; you need to consult with your CPA for more detailed and individual advice.

As discussed in my last posting much Tax Planning (as it relates to retirement plans) has been focused on delaying tax to a future date believing tax rates will decrease. However, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. In this case, the goal is to have as much income taxed in the current year. A Roth is a good vehicle to achieve this for contributions by the Taxpayer are not tax deductable, but income earned in the Roth is tax free at the later of the Taxpayer reaches 59 1\2 or the account has been in existence for five years.

Types of Plans: There are several types of Roth plans, an employer sponsored plan [401(k) or Roth 403(b) - known as tax-sheltered annuity] or an individual Roth IRA. There are similarities but a major difference being the employer-sponsored plans have employer matching of all or a portion of an employee contribution. The employer matching is pre tax and taxed when distributed.

Contribution Limits: For 2009, the contribution limits for a Roth IRA is $5,000 for Taxpayers under 50 and $6,000 for Taxpayers 50 or over. For an employer-sponsored plan, the limits are $16,500 for Taxpayers under 50 and $22,000 for Taxpayers 50 or over. Unused employee PTO can be used as a contribution to an employer sponsored plan.

Rollovers: Rollovers are allowed from non-Roth plans to Roth plans, but special rules apply including Adjusted Gross Income [AGI] limitation of $100,000 in 2009 [There is no AGI limitations in 2010]. This is a good feature if a Taxpayer’s goal is to tax as much income as possible in the current year. However, a word of caution is need here. If a retirement account funded by pre-tax dollars is rolled over into a Roth, taxable income will increase and could place the Taxpayer into the Alternative Minimum Tax [AMT] and effect the qualification of some popular tax credits,

AGI limits: Contribution to a Roth IRA are phased out starting at $167,000 for married filling a joint return and $105,000 for all others, except for married filling separate returns. For them the phase out starts at zero income and is eliminated at AGI of $9,999. However, there are no AGI limitations for an employer-sponsored plan.

2009 Tax Strategy IV – Types of Retirement Plans for Self Employed and Small Business

2010-01-17T19:45:00.000-08:00

This is my fourth posting of a daily tax tip. This is about Retirement Plans for Self Employed and Small Business. Like a traditional IRA, these retirement plans are a good vehicle to save for retirement. Income is taxed either in the current tax year or in the future. As discussed in my last posting it has been traditionally assumed that the tax rates will be lower in the future thus much Tax Planning (as it relates to retirement plans) has been focused on delaying tax to a future date. However, as discussed, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. Some of the plans listed below delays tax to a future date, but with the ROTH plans, income is taxed in the current year and the revenue generated is tax-free in the future. There are important changes to the ROTH plans for 2010, which will be discussed in a future Blog. Please feel free to call me if you have any questions.

Self Employed and Small Business Retirement Plans

(1) Keogh
(a) Contribution limit for 2009
 The lesser of 25% of compensation [max $245,000] or $49,000
(b) 2 types of plans
 Money Purchase plan [based on compensation and are mandatory]
 Profit-Sharing plans [based on companies profits and are NOT mandatory]
(c) Must be set up prior to 1-1-2010
(d) Contributions are to be made by the extended due date of return
(e) Needs to have an administrator and file From 5500

(2) SEP
(a) Contribution limit for 2009 is the lesser of:
 25% of compensation [max 20% of Net income less SEP ] or $49,000
(b) Can be set up after 12-31-2009, but by the extended due date of return
(c) Contributions are to be made by the extended due date of return
(d) Needs to have an administrator and file From 5500

(3) Traditional 401(k) Plan
(a) Contribution limit for 2009
 Under Age 50: $16,500
 Over Age 50: $22,000
(b) Plan must meet specific qualifications & have employees
(c) Must have 3rd party administrators
(d) Must be set up prior to 1-1-2010
(e) Contributions are to be made by 4-15-2010

(4) Solo (mini) 401(k)
(a) Similar to Traditional 401(k), but relaxed rules to allow for No Full Time Employees
(b) Contribution limit for 2009
 Salary Deferral same as a Traditional 401(k)
PLUS
 Profit Sharing same as SEP or KEOGH
(c) No need for 3rd party administrators
(d) Must be set up prior to 1-1-2010
(e) Contributions are to be made by 4-15-2010

(5) Deferred Compensation Plans – Sec 457
(a) Only for Employees and Independent Contractors of State and Local Governments and tax-exempt organizations [except churches]
(b)Contribution limit for 2009 same as for Traditional 401(k)

(6) Tax-Sheltered Annuities
(a) For all Tax Exempt organizations including [including churches] and public school employees
(b) Must be set up prior to 1-1-2010
(c) Contribution limit is the same s 401(k)
(d) Additional $3,000 annual contribution is allowed for those with 15 years or more of service

(7) ROTH IRAs
(a) Contributions are not deductable, but distributions are tax free
(b) Good if one believes tax rates will increase in future
(c) Can convert Traditional IRA, SEP-IRA, SIMPLE-IRA or rollover IRA into ROTH
 The pre-tax contributions will be taxed.
(d) The AGI ceiling of $100,000 is eliminated in 2010

2009 Tax Strategy III – Types of Retirement Plans

2010-01-16T01:46:00.000-08:00

This is my third posting of a daily tax tip about Traditional IRAs. An IRA can be a good vehicle not only to save taxes, but also to save for retirement. With Traditional IRAs, taxability of income is delayed to future years, normally when one retires.

Traditionally it has been assumed that the tax rates will be lower in the future, especially upon retirement. However, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. The Taxpayer, with consultation with his/her CPA, should develop a philosophy on this and if it is determined that tax rates will increase in the future, a strategy of speeding up the taxability of income. Please feel free to call me if you have any questions.

Traditional IRAs

(1) Contribution Limit for 2009:
(a) Under Age 50: $5,000
(b) Age 50 to 70 1/2: $6,000
(c) If Taxpayer is an Active Participant, the contributions are phased out at Modified AGI:
 Single: $55,000 to $65,000
 Married Filling Joint [Each spouse if both participating – See (d) bellow)]: $89,000 - $109,000
 Married Filling Joint [With one participating – See (d) bellow)]: $166,0000 to $176,000
 Head of Household: $89,000 to 109,000
 Married Filling Separate: $0.00 to $10,000
 Delta Amount: Single $10,000 / Married $20,000
 Formula: [(“Delta Amt” – “AGI over threshold”)/”Delta Amt”] X Maximum

(d) Definition of Active Participant: When the Taxpayer or his/her spouse is participating in one of the following:
 Qualified Annuity Plan
 Tax-Sheltered Annuity
 Simplified Employee Pension (SEP)
 Government or Tax Exempt Origination Plan [special rule exempt members of the Armed Forces Reserves and Volunteer Firefighters]

(e) Definition of Modified AGI: AGI [Line 37 on 1040] added back
 Saving Bond Proceeds
 Adoption Expense
 Student Loan Interest Deduction
 Higher Education Expense
 Foreign Tax Deduction

(f) Victimized Employees Can contribute additional $3,000
 Victimized employee is -- the Employer matching of the 401(k) was in Employers stock and the Employer either filed bankruptcy or was indicted
(g) Contributions to be made by 4-15-2009
(h) Taxpayers who where in combat has 3 years to make the contribution

(2) Spousal IRA
(a) A spouse who has lower income or none can deduct the full amount of an IRA deduction using the other spouse income

2009 Tax Strategy II – When is an Expense Deductable

2010-01-14T10:12:00.000-08:00

This is my second posting of a daily tax tip about when is an expense deductable for taxes. Please feel free to call me if you have any questions.

When is an Expense Deductable

I was recently asked if parents could take a partial deduction for Property Taxes paid by their daughter and son-in-law. The parents sold their home and moved in with their children and paid for an addition to the home in which they lived.

The parents are not allowed to deduct the property taxes because of two general rules that dictate when a Taxpayer is allowed to take a tax deduction:

(1) The expenditure must be in payment of a legal obligation of the taxpayer or the Taxpayer must have benefited from or consumed the expenditure
(2) The Taxpayer must make the payment of the expenditure himself/herself.

So in this case a tax deduction for property taxes is not allowed because the parents:

(1) Were not legally required to pay the property taxes; and
(2) They did not pay the tax directly

Another example: In order to take a medical deduction the person receiving the services is the only person that can take the deduction, PROVIDING the person paid for the medical expense. The only exception is in case of dependents of the Taxpayer.

To help with your 2009 US taxes, I will post a daily tax tip on my Blog from now until April 15.

2009 Tax Strategy I - Sales Tax and State Tax Refund

2010-01-13T17:27:00.000-08:00

With the beginning of 2010, it is time to start thinking about our 2009 taxes, as painful as that might be. To help out, I am going to be posting a daily tax tip from now until April 15. Please feel free to call me if you have any questions.

Sales Tax and State Tax Refund

Under the tax benefit rule, the recovery of an amount deducted or credited in an earlier tax year is included in a taxpayer's income in the current (recovery) year, except to the extent the deduction or credit didn't reduce federal income tax (or alternative minimum tax). (IRC §111(a))

For tax years 2004 through 2007, a taxpayer has the option to deduct as an itemized deduction either the state (and local) income tax paid during the year or state and local sales tax. On first examination would assume that (1) if the client chooses to deduct state income tax and subsequently receives a refund from the state, then that refund is taxable. However, (2) if they choose to deduct sales tax instead of state income tax and receive a state refund for that year that refund is not taxable! Actually, the IRS has taken a much more liberal approach to this issue. Their position is that for purposes of the tax benefit rule the amount of refund includable in income is limited to the excess of the tax the taxpayer chose to deduct over the tax they did not choose to deduct.

Example – Assume the taxpayer can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. Since the state income tax deduction is the largest, he chooses to deduct the state income tax. In the subsequent, he receives a $2,500 state income tax refund. Using the IRS’s more liberal approach the tax benefit derived from by deducting the $11,000 state income tax was only $1,000 more than, if the $10,000 sales tax deduction was used. Thus, the benefit from only $1,000 of the state tax deduction and as a result only $1,000 of the $2,500 refund is taxable the next year.

Strategy – In order to benefit from the IRS’ liberal tax benefit rule position you must be able to compute the difference between sales tax deduction and state tax deduction. Thus it is important (when there is a state tax refund and the state tax deduction exceeds the sales tax deduction) to determine the allowable sales tax deduction for the client and record it in your file. Otherwise, there is no way of computing the tax benefit rule. Be Sure To Look Back – And take advantage of this tax benefit rule.

Tax Deductions: How Much $$$ Are They Saving You?

2009-11-23T19:17:00.000-08:00

Taxpayers frequently ask what benefit is derived from a tax deduction. Unfortunately, there is no straightforward answer. The reason why the benefit cannot be determined simply is because some deductions are above-the-line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for each individual, depending upon his or her situation.

For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 25% tax bracket, a $1,000 deduction would save you $250 in taxes. However, if taxable income is close to transitioning into the next-lower tax bracket, the benefit will be less. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings.

Some deductions such as IRA and self-employed retirement plan contributions, alimony, student loan interest, moving expenses, etc., are adjustments to income or what we call “above-the-line” deductions. These deductions provide a dollar-for-dollar benefit. Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit is derived. In addition, the medical deductions are reduced by 7.5% of your AGI (income), and the miscellaneous deductions are reduced by 2% of your AGI. For taxpayers subject to the alternative minimum tax, the medical adjustment raises to 10%, while the deductions for taxes, home equity interest, and the miscellaneous deductions above the 2%-of-AGI floor are not allowed at all.

The most beneficial deductions, business deductions, fall into two categories: employee business expenses, which are treated as miscellaneous itemized deductions subject to the limitations described previously, and self-employed business expenses that offset both income tax and, depending upon the circumstances, self-employment tax. For 2008, the self-employment tax rate is 12.4% of the first $102,000 of income subject to SE tax plus 2.9% for the Medicare tax with no cap. For self-employed businesses with less than $102,000 of net income, the effective SE tax rate is 15.3%. Thus, for small businesses with profits of less than $102,000, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 25% tax bracket, the benefit could be as much as 38.3% (25% 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $766 - and even more when the taxpayer’s state income tax bracket is included.

If you are planning an expenditure and expect the tax deductions to help cover the cost, please give us a call in advance to ensure that the tax benefit is what you anticipate it to be.

Bill Would Extend COBRA Coverage by Six Months

2009-10-29T14:24:00.000-07:00

The Extended COBRA Continuation Protection Act of 2009 (H.R. 3930) has been introduced to extend by six months the maximum COBRA continuation coverage period. See www.dcemploymentlawupdate.com/2009/10/articles/employee-benefits/bill-would-extend-cobra-coverage-by-six-months/

WHAT IS COBRA?
COBRA stands for Consolidated Omnibus Budget Reconciliation Act. It was passed by congress in 1986 which amended the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Public Health Service Act to provide continuation of group health coverage that otherwise would be terminated do to the of employment. It covers former employees and retirees as well as their spouses and dependent children. It provides the right to temporary continuation of health coverage at group rates. The coverage is extended to18 months for the person whose employment ended [in some cases 36 months in the case of death or divorce]. The coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer formerly paid a part of the premium. It is ordinarily less expensive, though, than individual health coverage. This can be a burden for the person who unexpectedly loss employment for it creates an unexpected financial burden; they not only loose income but health care expenses increase due to the former employee paying the former employer’s share of health insurance.

The American Reinvestment and Recovery Act [ARRA] passed in February 2009 gave relief to employees who lost their job as a result on the recession from September 1, 2008 to December 31, 2009. It gave eligible individuals a 65% subsidy on the COBRA premiums. The Federal government through a tax credit on the payroll tax returns would reimburse the former employers.

WHEN WILL IT END?
The subsidy as part of ARRA is to end on December 31, 2009. However, the Extended COBRA Continuation Protection Act of 2009 would extend COBRA benefits in three ways. First, the bill would extend from 9 to 15 months the total allowable time an unemployed worker can receive COBRA premium assistance. Second, the bill extends this assistance to individuals who are involuntarily terminated between January 1 and June 30, 2010. Third, it would extend eligibility for traditional COBRA coverage an additional 6 months, from 18 to 24 months, for individuals terminated at the beginning of the economic recession in 2008. No extended COBRA premium assistance or extended COBRA benefits would extend beyond December 31, 2010.

HOW DOES THIS AFFCT EMPLOYES/EMPLOYERS?
This will be a tremendous assistance to employees who lost their job as the result of the recession. With more people, being added to the unemployment rolls and more people applying for extended unemployment benefits, extending the subsidy and including people who lost employment after December 31, 2008 can make a big difference in their health and the health of their families.

This should have no impact on most employers for they reduce by the amount of the subsidy the payroll tax liability on the quarterly payroll tax returns and payroll tax deposits during the quarter.

ANYTHING EMPLOYEES SHOULD DO BEFORE THE END OF THE YEAR?
The only thing employees should do is to stay in contact with the COBRA administer. For many companies that is a company hired specifically for administrating COBRA premiums and not the HR department of the company. The employee should automatically get communications from the administrator, but it is a good practice for the employee to be proactive and find out who the COBRA administrator is. Giving them a call is a good way to make sure the employee does not “fall in-between the cracks”

Contact me for more information or visit me on the web at www.TheJohnEllisCompany.com

UPDATE OF TAX AND BENEFIT BILLS MOVEING THOUGH CONGRESS

2009-10-10T13:37:00.000-07:00

FIRST TIME HOME BUYER CREDIT
Currently the $8,000 tax credit will expire on November 30, 2009. Congress is expected to extend the expiration date to January 31, 2010 and there will not be a requirement for the sale to be completed, just a signed contract. There is extra relief for members of the Armed Forces who are not able to take the credit because of extended duty overseas; they have until the end of 2010. There are amendments to include people who are not first time home buyers and increase the credit to $15,000, but not expected to pass

MEDICARE PART B PREMIUMS
The increase in higher Medicare Part B premiums is expected to be blocked by Congress. In addition an extra payment to beneficiaries is expected be OK’d this fall of $150 to $250 per beneficiary.

UNEMPLOYMENT BENEFITS
It appears an extension of unemployment benefits for 13 weeks is a done deal. This will help those who have had been unemployed more then 12 months. However to pay for this an additional 0.2% Federal unemployment surtax on employers will be extended for one year through 2010.

OTHER INCOME TAX BREAKS TO BE EXTENDED
Research and Development Tax Credit, write-offs for state sales tax, college tuition, and teachers’ classroom supplies and tax-free IRA payouts to charity are expected to be extended through 2010

INCOME TAX BREAKS TO RE REPEALED
Waver of mandatory payouts from IRAs and plans for people over 70 ½ and the repeal of the estate tax. Currently the estate tax is to disappear in 2010 and Congress is expected to keep it. However, the $3.5 million exemption for 2009 will be kept as well as the estate tax rate of 45%.

AMT EXEMPTIONS
AMT exemptions are expected to be raised so they will not revert to pre-2001 levels.

For more information, call John Ellis CPA at The John Ellis Company [310-426-2101]

APPLYING TO BE AN EXEMPT ORGANIZATION WILL COST MORE NEXT YEAR.

2009-10-01T09:27:00.000-07:00

Applications to the IRS postmarked January 3, 2010 or later will require a $400 fee in lieu of the current fee of $300 if gross receipts are $10,000 or less. If gross receipts are over $10,000 the fee charged by the IRS will be $850, up from $750. However if the application is made over the internet, the fee will be only $200, regardless of size. The IRS new Web based system is NOT yet up and running but they say it will be sometime in 2010.

COURT RULES AGANST CONCERT PIANIST

2009-09-28T16:23:00.000-07:00

A district court ruled that a concert pianist cannot deduct the cost of fancy clothing that she wore while performing. She shopped at high-end stores for special gowns, dresses, shoes and jewelry to wear only at concerts and deducted the cost as business expenses. She did not wear the items outside of the concert hall. The court disallowed the deduction because other people wear similar clothing in other settings [Tilman, D.C., N.Y.]

8 Tips for Taxpayers Who Owe Money to the IRS

2009-09-11T12:51:00.000-07:00

The vast majority of Americans get a tax refund from the IRS each spring, but what do you do if you are one of those who received a tax bill? Here are eight tips for taxpayers who owe money to the IRS.

If you get a bill this summer 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 to the IRS.

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).

The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

You can also 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.

An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS 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.

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.

You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS. The IRS will inform you usually within 30 days whether your request is approved, 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. 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 full 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 upon your financial information.

If an agreement is approved, a one-time user fee will be charged. 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, and is automatically figured based on your income.

For more information about installment agreements and other payment options call us at 310-426-2101 or visit the IRS Web site at IRS.gov.

Clean Energy Equipment Tax Credits Ending Soon

2009-09-04T08:15:00.000-07:00

The Sept. 16 deadline is nearing for submitting a preliminary application for the federal government’s Section 48C tax credit program for manufacturers of clean energy equipment.

The American Reinvestment and Recovery Act authorizes the Treasury Department to award $2.3 billion in tax credits for qualified investments in advanced energy projects to support new, expanded or re-equipped domestic manufacturing facilities. The $2.3 billion will be distributed via a new program that provides an investment tax credit of 30 percent for manufacturers of particular types of energy equipment and materials.

The credits will support an estimated $7.7 billion in total capital investments in new renewable and advanced energy-manufacturing projects. The tax credit will apply to manufacturing facilities that support generation and conservation, but not the energy generation projects themselves, which are being supported by separate tax incentive programs.

For more information call John Ellis CPA at The John Ellis Company [310-426-2101]

New Credit Card Scam

2009-05-19T10:06:00.000-07:00

This article was posted on snopes.com

This [fraud] is pretty slick since they provide YOU with all the information, except the one piece they want.

The callers do not ask for your card number; they already have it... One of our employees was called on Wednesday from 'VISA', and I was called on Thursday from 'Master Card'.. The scam works like this:

"This is (name), and I'm calling from the Security and Fraud Department at VISA. My Badge number is 12460. Your card has been flagged for an unusual purchase pattern, and I'm calling to verify. This would be on your VISA card which was issued by (name of bank). Did you purchase an Anti-Telemarketing Device for $497.99 from a Marketing company based in ?"

When you say 'No', the caller continues with,

"Then we will be issuing a credit to your account. This is a company we have been watching and the charges range from $297 to $497, just under the $500 purchase pattern that flags most cards. Before your next statement, the credit will be sent to (gives you your address), is that correct?"

You say 'yes'. The caller continues:

"I will be starting a Fraud investigation. If you have any questions, you should call the 1- 800 number listed on the back of your card (1-800 -VISA) and ask for Security. You will need to refer to this Control Number. The caller then gives you a 6 digit number. 'Do you need me to read it again?"

Here's the IMPORTANT part on how the scam works.

The caller then says, 'I need to verify you are in possession of your card'. He'll ask you to 'turn your card over and look for some numbers'. There are 7 numbers; the first 4 are part of your card number, the next 3 are the security Numbers that verify you are the possessor of the card. These are the numbers you sometimes use to make Internet purchases to prove you have the card. The caller will ask you to read the 3 numbers to him. After you tell the caller the 3 numbers, he'll say, 'That is correct, I just needed to verify that the card has not been lost or stolen, and that you still have your card. Do you have any other questions?' After you say No, the caller then thanks you and states, 'Don't hesitate to call back if you do, and hangs up.

You actually say very little, and they never ask for or tell you the Card number.. But after we were called on Wednesday, we called back within 20 minutes to ask a question.. Are we glad we did! The REAL VISA Security Department told us it was a scam and in the last 15 minutes a new purchase of $497.99 was charged to our card.

Long story - short - we made a real fraud report and closed the VISA account. VISA is reissuing us a new number. What the scammers want is the 3-digit PIN number on the back of the card Don't give it to them. Instead, tell them you'll call VISA or Master card directly for verification of their conversation. The real VISA told us that they will never ask for anything on the card as they already know the information since they issued the card! If you give the scammers your 3 Digit PIN Number, you think you're receiving a credit. However, by the time you get your statement you'll see charges for purchases you didn't make, and by then it's almost too late and/or more difficult to actually file a fraud report.

What makes this more remarkable is that on Thursday, I got a call from a 'Jason Richardson of Master Card' with a word-for-word repeat of the VISA scam. This time I didn't let him finish. I hung up! We filed a police report, as instructed by VISA. The police said they are taking several of these reports daily! They also urged us to tell everybody we know that this scam is happening.

“Making Work Pay” Tax Credit

2009-05-11T10:57:00.000-07:00

In 2009 and 2010, the "Making Work Pay" provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

Note: This tax credit is calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the credit is typically handled by their employers through automated withholding changes. These changes needed to begin by April 1, 2009 and may result in an increase in take-home pay. The amount of the credit will be computed on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return. It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may choose to submit a revised W-4 to ensure enough withholding is held to cover the tax for his or her combined income.

If you have questions about the Making Work Pay provision, these questions and answers might help.

Making Work Pay Questions and Answers: General Issues

Question: What is the Making Work Pay Credit?
Answer: In tax years 2009 and 2010, the Making Work Pay provision will provide a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.

Question: How will taxpayers get this credit?
Answer: For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes to be made in early spring 2009. These changes may result in an increase in the amount of take-home pay. The amount of the credit will be reported on the 2009 income tax return. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return filed in 2010.

Question: How will the self-employed (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
Answer: Self-employed taxpayers can claim the Making Work Pay credit on their 2009 return filed in 2010. Self-employed individuals should evaluate their expected income tax liability and determine whether they want to make any adjustments in their estimated tax payments.

Question: Can private pensioners (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
Answer: Private pension recipients are not eligible for the Making Work Pay credit unless they have earned income. However, because the new withholding tables reduce the taxes withheld from all taxpayers, pension recipients may not have enough tax withheld from their pension benefits to cover their tax liability on those payments. The IRS recommends that pension recipients evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding on Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Question: Are employees required to have a valid Social Security number (SSN) to be eligible for the Making Work Pay tax credit?
Answer: Yes, eligibility for this credit is conditioned upon providing a valid SSN.

Question: If a taxpayer is eligible for more of a credit, how can it be claimed?
Answer: The modified tables take the anticipated credit into account through reduced withholding. However, the Making Work Pay credit will be reported on all filed 2009 income tax returns, along with the taxpayer’s withheld income tax. Taxpayers receiving less than the full amount of the anticipated credit through reduced withholding will still be entitled to the full credit on their return.

Making Work Pay Questions and Answers: Form W-4

Question: Do I need to change my W-4?
Answer: Generally, for people who receive a paycheck, the credit will typically be handled by their employers through automated withholding changes. A Form W-4, Employee Withholding Allowance Certificate, will not need to be submitted for the automatic withholding change. An employee with multiple jobs or married couples whose combined income place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough withholding is held to cover the tax for his/her combined income. IRS Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding.

Question: Should employees who are nonresident aliens or who can be claimed as a dependent on someone else's return ask for additional withholding on line 6 of the Form W-4?
Answer: Because nonresident aliens and those who can be claimed as dependents on someone else’s income tax return are not eligible for the Making Work Pay Credit, the new withholding tables may cause them to be underwithheld. These taxpayers need to evaluate their expected tax liability for the year and determine if they need to either make appropriate estimated tax payments or adjust their withholding on Form W-4. However, Publication 15-T, New Wage Withholding and Advanced Earned Income Credit Payment Tables (for wages paid through December 2009), does include additional amounts to be added to the pay of nonresident aliens to figure their income tax withholding.

Question: Will employers be required to determine if employees received the maximum credit and discontinue any further related withholding tax reductions?
Answer: Employers are not required to make determinations with regard to an employee’s eligibility for the Making Work Pay credit. Withholding should be made consistent with the employee's filed W-4 and the newly modified withholding tables.

New Recovery Package - Questions and Answers

2009-04-21T23:32:00.000-07:00

Taxpayers, like you, have many questions related to the American Recovery and Reinvestment Act of 2009, especially since the legislation was enacted while many taxpayers are working to file their 2008 tax returns. How will this new legislation affect you? Here are a few questions and answers to help guide you.

Could the new law affect 2008 tax returns?
Generally, no. The new law does not have any major impact for the vast majority of individuals preparing their 2008 tax returns due April 15. Instead, these changes will largely impact 2009 tax returns filed next year, in 2010. Taxpayers should continue to prepare their 2008 tax returns as they normally would.

Note: There are a few limited areas in the law that could impact 2008 tax returns. For some small businesses, changes in the net operating loss provisions could affect 2008 tax returns. For first-time homebuyers, there is an expanded credit available on 2008 tax returns.

Does this new recovery program have any impact on the recovery rebate credit for 2008 tax returns being filed now?
No. But the IRS reminds taxpayers and tax preparers to make sure they properly determine eligibility for the recovery rebate credit before they file their 2008 federal tax returns.

COBRA health insurance subsidies now available

2009-04-17T23:46:00.000-07:00

Employers and health plans have until Saturday to notify laid-off employees of COBRA health insurance subsidies now available under the federal stimulus plan.

With unemployment at historic highs, the U.S. government has authorized $25 billion to help an estimated 7 million laid-off workers retain health coverage. The subsidies pay 65 percent of COBRA premiums and apply to those laid off between Sept. 1, 2008, through Dec. 31 this year.

On average, the typical family pays $1,069 a month to continue employer- sponsored health coverage, according to Families USA, a health advocacy group based in Washington, D.C.

For many, the cost is prohibitive, the group said, leaving millions of Americans uninsured.

Those involuntarily unemployed since Sept. 1, 2008, are eligible for the 65 percent subsidies even if they declined COBRA coverage when they first lost their jobs.

Company health plans are required by the American Recovery and Reinvestment Act, signed into law in February, to notify workers of their second chance to enroll in COBRA. If they haven't been notified, workers should contact their former employer or health plan provider.

The U.S. Labor Department has a telephone hotline, (866) 444-3272, to answer COBRA questions. Or go to www.dol.gov/COBRA.

- Bobby Caina Calvan of the The Sacramento Bee [Friday, April 17, 2009]

Beware of Tax Consequences of a Job Loss

2009-04-16T21:47:00.000-07:00

Given the current economic conditions, you may be faced with tax questions surrounding a job loss and unemployment issues.
Here's some answers:

What if I receive unemployment compensation?
Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.
Note: The American Recovery and Reinvestment Act will temporarily change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on tax returns filed in 2010.

What if I lose my job?
The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues.

What if I am searching for a job?
You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible.

What if my employer goes out of business or in bankruptcy?
Your employer must provide you with a 2008 W-2 Form showing your wages and withholdings by January 31, 2009. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and I can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.

If you have experienced a job loss and have questions, please call call me at 310-426-2101. You need to be prepare for the tax consequences.