Tax Impact – July/August 2010

Tax Impact – July/August 2010 (PDF)

Peterson Sullivan’s quotes of interest from this season’s tax newsletter:

“If you’re thinking about adding to your workforce, keep in mind that the HIRE act’s payroll tax incentives are available for wages paid through the end of 2010, so the sooner you act, the greater the benefits . . .”
“IRAs and employer-sponsored ‘qualified’ plans, such as 401(k)s can effectively build wealth for your family because no taxes are due until funds are withdrawn, which allows you to take advantage of tax-deferred compounding . . .”
“The mortgage interest deduction is available for interest on loans secured by your principal home or a second home . . .”

Peterson Sullivan provides tax, accounting, and business consulting services to a variety of clients including closely held businesses, publicly traded companies, nonprofits, auto dealerships, individuals, and many more. The following individuals lead our Tax Department: Jim Schneidmiller, John Smolke, Al Dunnell, Don Murphy, Chris Ebert, and Jack Pauw.

Please visit our company directory for links to their profiles.

Congress extends homebuyer tax credit

Just before an important deadline was set to expire, the House and Senate extended the homebuyer tax credit for certain taxpayers. Previously, the credit was available to qualified taxpayers for purchases made before May 1, 2010 — or July 1 if a binding contract was in place before May 1. Congress has extended the July 1 deadline to Oct. 1, 2010.

It’s important to note that the May 1 deadline was not extended — for a taxpayer to benefit from the credit, a binding contract still must have been in place before that date. The extension simply gives taxpayers with such a contract in place more time to complete the closing.

The maximum credit is $8,000 ($4,000 for married filing separately) for “first-time” homebuyers and $6,500 ($3,250 for married filing separately) for “long-time” homeowners. The credit starts to phase out for joint filers with modified adjusted gross incomes (MAGIs) exceeding $225,000 ($125,000 for single filers). It’s completely eliminated for joint filers with MAGIs exceeding $245,000 ($145,000 for single filers).

Additional rules apply regarding who is eligible and what their maximum credit is, so it’s important to consult your tax advisor to determine how the credit may apply to you. Don’t hesitate to contact us at marketing@pscpa.com with questions.

Tax Impact – May/June 2010

Tax Impact – May/June 2010 (PDF)

Peterson Sullivan’s quotes of interest from this season’s tax newsletter:

“From an income tax perspective, whether it makes sense to convert to a Roth IRA depends on whether you’re better off paying the tax now or later. When you do a Roth conversion, you have to pay taxes on the amount you convert . . .”
“There are still some limits on a state’s ability to extend the reach of its taxes, though many states are pushing to have these restrictions relaxed . . .”
“From an estate planning perspective, basis is important because it affects the amount of taxable gain or loss your beneficiary will realize should he or she sell the asset . . .”

Please visit our company directory for links to their profiles.

Tax Changes Affecting Small Business In The 2010 Health Reform Legislation

John Smolke, Tax Partner

For owners of small businesses and their workers, the recently enacted health reform legislation has some key provisions to pay attention to. The major ones include: tax credits; excise taxes; and penalties. But whether a business will be affected by them depends on a variety of factors, such as the number of employees the business has. I’m writing to give you an overview of the provisions in the new law with the biggest impact on small business. Please call our offices for details of how the new changes may affect your specific business.

Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.

Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won’t have to worry about this provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn’t offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

Higher Medicare tax on wages and self-employment income. The Medicare tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries who are 65 and older or disabled.

Under current law, wages are subject to a 2.9% Medicare tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes).

Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker’s wages without limit.

Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare tax, but single people earning more than $200,000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed persons will pay 3.8% on earnings over those thresholds.

It should be noted that the $200,000/$250,000 thresholds aren’t indexed for inflation, so it is likely that more and more people will be subject to the higher tax in coming years.

Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. However, companies won’t be responsible for determining whether a worker’s combined income with his or her spouse made them subject to the tax.

Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Married couples with combined incomes approaching $250,000 will have to keep tabs on both spouses’ pay to avoid an unexpected tax bill.

Medicare tax extended to investments. Under current law, the Medicare tax only applies to wages and self-employment income. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed).

Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by the deductions that are allocable to that income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans.

Because the new tax on investment income won’t take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax actually takes hold in 2013.

Employer requirement to offer coverage in the 2010 health reform legislation

The recently enacted health overhaul legislation requires certain employers to offer and contribute to their workers’ health insurance or pay a penalty. Under the new law, effective for months beginning after Dec. 31, 2013, a large employer that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. Here are the details:

Who is subject to the employer mandate? Only an “applicable large employer,” defined as someone who employed an average of at least 50 full-time employees during the preceding calendar year, is subject to the requirement to offer coverage. Most small businesses, since they have fewer than 50 employees, are thus exempt from the employer requirement. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a pro-rated basis. However, even an employer with 50 or more employees isn’t subject to the penalty for not offering coverage if the employer doesn’t have any full-time employees who are certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. In other words, if an employer doesn’t have any full-time employees who have a lower income that might qualify him or her to receive a subsidy when purchasing a health plan in the proposed health insurance exchange, the employer will not pay a “pay or play” penalty.

Penalty for employers not offering coverage. An applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee. The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000. For example, if an employer fails to offer minimum essential coverage and has 60 full-time employes, ten of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe $2,000 for each employee over the 30-employee threshold, for a total penalty of $60,000 ($2,000 multiplied by 30 (60 minus 30)). This penalty is assessed on a monthly basis.

Penalty for employers that offer coverage but have at least one employee receiving a premium tax credit. An applicable large employer who offers coverage but has at least one full-time employee receiving a premium tax credit or cost-sharing reduction is subject to a penalty. The penalty is an excise tax that is imposed for each employee who receives a premium tax credit or cost-sharing reduction for health insurance purchased through a state exchange. For each full-time employee receiving a premium tax credit or cost-sharing subsidy through a state exchange for any month, the employer is required to pay an amount equal to one-twelfth of $3,000. The penalty for each employer for any month is capped at an amount equal to the number of full-time employees during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth of $2,000. For example, if an employer offers health coverage and has 60 full-time employees, 15 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe a penalty of $3,000 for each employee receiving a tax credit, for a total penalty of $45,000. The maximum penalty for this employer is capped at the amount of the penalty that it would have been assessed for a failure to provide coverage, or $60,000 ($2,000 multiplied by 30 (60 minus 30)). Since the calculated penalty of $45,000 is less than the maximum amount, the employer pays the $45,000 calculated penalty. This penalty is assessed on a monthly basis.

Requirement to offer “free choice vouchers.” After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage will have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange. Qualified employees would be those employees: who do not participate in the employer’s health plan; whose required contribution for employer sponsored minimum essential coverage exceeds 8%, but does not exceed 9.8% of household income; and whose total household income does not exceed 400% of the poverty line for the family. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan. Employers providing free choice vouchers will not be subject to penalties for employees that receive a voucher.

For specific details regarding these updates, please do not hesitate to contact John Smolke at jsmolke@pscpa.com or by phone (206) 382-7777.

Tax Changes Affecting Individuals In The 2010 Health Reform Legislation

John Smolke, Tax Partner

The following is a brief overview of the key tax changes affecting individuals in the recently enacted health reform legislation. Please call our offices for specific details of how the new changes may affect your situation.

Individual mandate. The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an exchange. Under the provision, an eligible individual enrolls in a plan offered through an exchange and reports his or her income to the exchange. Based on the information provided to the exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.

Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker’s wages without limit.

Under the provisions of the new law, which take in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn’t be responsible for determining whether a worker’s combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on their spouses’ pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.

Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won’t take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax is actually rolled out in 2013.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans. Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.

Ten Tips for Deducting Charitable Contributions

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. If you made qualified donations last year, you may be able to take a tax deduction if you itemize on IRS Form 1040, Schedule A.

The IRS has put together the following 10 tips to help ensure your contributions pay off on your tax return.

1.	Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.
2.	You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
3.	If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
4.	Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.
5.	Clothing and household items donated must generally be in good used condition or better to be deductible.
6.	Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given.
7.	To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.
8.	If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
9.	Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
10.	To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.

For more information on charitable contributions, please contact your Peterson Sullivan LLP service provider, or call (206) 382-7777 and we will put you in touch with a tax expert.

Tax Impact – March/April 2010

Tax Impact – March/April 2010 (PDF)

Peterson Sullivan’s quotes of interest from this season’s tax newsletter:

“IRS regulations establish several objective tests you can apply to determine whether a passive activity qualifies for a deduction…”
“A cash-basis business may be able to claim a bad debt deduction if it makes a business-related loan that becomes uncollectible…”
“When buying a home, the first tax benefits many people think of are the income tax deductions. But there are other important tax-saving opportunities to consider…”

Please visit our company directory for links to their profiles.

2009 Shareholder’s Instructions for Schedule K-1 (Form 1120S)

2009-Shareholders-Instructions-for-Schedule-K1-Form-1120S (PDF)

2009 Partner’s Instructions for Schedule K-1 (Form 1065)

2009-Partners-Instructions-for-Schedule-K1-Form-1065 (PDF)

2009 Instructions for Beneficiary Filing (Form 1041)

2009-Instructions-for-Beneficiary-Filing-form-1041 (PDF)

Tax Impact – January/February 2010 (Premier Issue)

Tax Impact – January/February 2010 (PDF)

Peterson Sullivan’s quotes of interest from this season’s tax newsletter:

“In today’s tough economy, every dollar counts. But many businesses lose out on thousands of dollars in tax savings every year by failing to claim tax credits to which they’re entitled…”
“With ever-changing estate tax laws and the possibility that other unexpected situations may arise, it’s not unusual to be concerned about the strength of your estate plan…”
“For many people, tax planning is something they don’t begin to think about until December… however, these tax payers often miss opportunities to increase their overall wealth…”
“If you or someone in your family is looking for a new job, check with your tax advisor to see if the job search expenses are deductible and, if so, document them…”
“If you have substantial balances in a traditional IRA, now’s the time to start considering a conversion to a Roth IRA…”

Please visit our company directory for links to their profiles.

FAQs for Nonprofit Entities

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Our tax experts tackle your most frequently asked nonprofit tax questions.

1. What are the limits for filing Forms 990-N, 990-EZ and 990?

2. When is my 990 due?

3. Is my organization required to electronically file its 990?

4.For the new 990 questionnaire, whom do I list as a “highly paid individual”? And furthermore, under the “Compensation” tab it says to list all officers. Who are considered the “top management” and “top financial” people? Does that mean the Financial Director or the Board Treasurer?

5. Does the provision that the Form 990 be reviewed by voting members prior to filing refer to our Executive Committee or the full Board of Directors?

6. What needs to go under the “If 501(c)(3), what is ‘Public status’ of entity” column of the Schedule R in the 990 schedules file?

7. I have a question about donated art: is there a dollar threshold for this or does every piece of “art” that is donated to our auction need to be listed? Is every item and service donated to our auction suppose to be listed on Schedule M?

8. What employees should we report as “former” highly compensated employees in Part III of the compensation schedule? How about “former” officers or key employees? What individuals do we report as “former” directors/trustees in Section IV of the compensation schedule?

9. Our company is incorporated in Oregon but we reside and file in Washington. Should I list Oregon or Washington as the “State of Legal Domicile”?

Can’t find what you’re looking for? Email your questions to marketing@pscpa.com and let us know how we can help you.

Q: What are the limits for filing Forms 990-N, 990-EZ and 990?

A: Your (likely very small) organization will want to file a Form 990-N if your gross receipts are normally less than $25,000 ($50,000 for 2010).

Your organization will want to file a 990-EZ if:

2008: Your assets are less than $2,500,000 AND your gross receipts are less than $1,000,000.
2009: Your assets are less than $1,250,000 AND your gross receipts are less than $500,000.
2010: Your assets are less than $500,00 AND your gross receipts are less than $200,000.

Please note that supporting organizations, organizations with donor advised funds, or organizations that own 50% or more of a business must file Form 990.

Everyone else (those of you who do not fit the above descriptions) will want to file the full Form 990.

You can access this information here on the IRS web site.

Q: When is my 990 due?

A: Forms 990 and 990-EZ must be filed by the 15th day of the fifth month following the close of the year. If your organization has a calendar year, its 990 will be due May 15th. If your organization has a fiscal year, you have four and a half months to file, so if your organization had a June 30 year end, its 990 would be due November 15.

An organization can request an extension to file. The first extension is an automatic three month extension and is filed on page one of Form 8868, Application for Extension of Time to File an Exempt Organization Return. The organization can also request an additional three month extension, but in this case, it must be approved by the IRS. Second extensions are requested on page two of Form 8868. Second extensions must provide a reason for the additional three month request. If the extension is turned down, the organization must file the return by the original due date or 10 days from the date of the letter denying the second extension.

Q: Is my organization required to electronically file its 990?

A: All organizations that have total assets of $10 million or more at the end of the tax year and file 250 or more returns with the IRS during the year are required to e-file their 990. The 250 count for the number of returns is generally based on any forms containing the organization’s employer identification number. This includes each individual W-2, 1099, and payroll tax returns. If an organization is required to file a return electronically but does not do so, the organization is considered to have failed to file its return, even if a paper return was filed.

Q: For the new 990 questionnaire, whom do I list as a “highly paid individual”? And furthermore, under the “Compensation” tab it says to list all officers. Who are considered the “top management” and “top financial” people? Does that mean the Financial Director or the Board Treasurer?

A: You should consider any employee earning over $100,000 annually a “highly paid individual” (list them in Part 2 of the “Compensation” tab). However, all officers and directors should be listed in Part 1 no matter their amount of compensation. Additionally, if your organization is paying compensation to any former officers or directors, those individuals should be listed in Parts 3 and 4.

The IRS defines the “top financial official” as “the person who has ultimate responsibility for managing the organization’s finances.” You should list your Board Treasurer if they fit that description. You should also include your organization’s Chief Financial Officer if you have one. Additionally, the “top management official” is the person who has ultimate responsibility for implementing the decisions of the governing body or supervising the management, administration, or operation of the organization. This would include the President, Chief Executive Officer, and/or Executive Director.

Q: Does the provision that the Form 990 be reviewed by voting members prior to filing refer to our Executive Committee or the full Board of Directors?

A: The 990 needs to be provided to all voting members of the board before the return is filed to be able to answer “yes” to the question on the Form 990. You can provide the copy in paper or electronic format. You are also not required to verify that they actually reviewed the 990 before it was filed.

Q: What needs to go under the “If 501(c)(3), what is ‘Public status’ of entity” column of the Schedule R in the 990 schedules file?

A: The public status box is completed on the questionnaire when the organization is reporting transactions with related charitable organizations. The form is looking for the public status number the related entity checks on the Schedule A page one. The number can be 1 through 11(d). If the related entity is a supporting organization, the organization completing the questionnaire must also indicated the type of supporting organization. There are 4 types. For information regarding the different types of supporting organizations, please see the glossary we provide.

The organization would enter the number corresponding to the box that the related charitable entity checks on its Schedule A. Example: If the related entity is a school. The organization would enter “2” in the public status box on the questionnaire. If the related charitable entity was charity that receives must of its support from the general public, the organization would enter “7” in the public status box on the questionnaire.

If the related entity is a private foundation, the organization should enter “PF” in the public status box.

Q: I have a question about donated art: is there a dollar threshold for this or does every piece of “art” that is donated to our auction need to be listed? Is every item and service donated to our auction suppose to be listed on Schedule M?

A: There is a minimum threshold of $25,000 in noncash donations recorded on the books before you are required to complete the form. Once you are required to complete the form, there is no minimum threshold for reporting the separate items on the Schedule M.

We do not need the detail of each item of noncash items donated to the organizations. We just need them by type. Example: say the organization received seven pieces of art from five different donors for an auction. You will need to provide us with the number of pieces of art donated (seven) and the revenue recognized on the books for those seven pieces (say $15,000). We do not require to know the value of each piece. You should keep that information for the organization’s records.

If the organization is receiving stock, we do not need to know the number of shares donated. We will just need to know how many different contributions of stock were made during the year. This is different than the donation of other noncash items. Example: the organization receives 1,000 shares of Microsoft from a donor. This would be counted as one contribution instead of 1,000 where the art donated above would be considered seven contributions.

If the organization received donated items for the auction, separate from the items sold at auction (food, floral centerpieces, etc.), please show these items in the “other” section on the schedule and please describe the items donated. Example: food for auction, $1,500, wine donated for auction, $500, etc.

Please do not include the donation of services or use of facilities in these amounts on the Schedule M. They are not included in the noncash donations that the IRS is looking for. The total amount of in-kind donations are reported in a separate section of the form.

Q: What employees should we report as “former” highly compensated employees in Part III of the compensation schedule? How about “former” officers or key employees? What individuals do we report as “former” directors/trustees in Section IV of the compensation schedule?

A: An individual must meet the following four conditions to be considered a “former” highly compensated employee who would need to be disclosed in Part III on the compensation schedule assuming the organization’s tax year ends on December 31:

1. The individual was not an employee of the organization at any time during the organization’s tax year.

2. The individual was reported (or should have been reported as a highly compensated person in the past according to instructions at the time) on the organization’s Form 990, 990-EZ or 990-PF on any of the five prior years as one of the five highest compensated employees.

3. The individual’s reportable compensation exceeded $100,000 for the organization’s tax year including compensation from related organizations.

4. The reportable compensation would place the individual among the organization’s current five highest compensated employees if they were a current employee.

To be reported as a “former” director, officer, trustee, or “key” employee, they must meet both of the following requirements:

1. The organization reported (or should have reported applying instructions in effect for the year) an individual on the organization’s Form 990, 990-EZ, or 990-PF, for any of the five previous years as an officer, director, trustee, or key employee.

2. Former directors or trustees are listed if their reportable compensation (W-2 or 1099) for the calendar year within the organization’s tax year was greater than $10,000 (for the organization or related organizations). Former officers or key employees are listed if their reportable compensation exceeds $100,000 for the calendar year ending with or within the organization’s tax year.

For “former” directors, officers, trustees, or key employees, they would must be reported if they continue to work for the organization (or related organization) in a lesser capacity from their prior position.

For fiscal year organizations, the organization must use the reportable compensation (W-2 or 1099) for the calendar year ending within the organization’s fiscal year. Example, if the organization’s fiscal year ends June 30, 2009, the organization must use the W-2 or 1099 amounts from the calendar year 2008.

Q: Our company is incorporated in Oregon but we reside and file in Washington. Should I list Oregon or Washington as the “State of Legal Domicile”?

A: For corporations, the State of Legal Domicile is the State of Incorporation. For others, like trusts, the State of Legal Domicile is the State whose law governs the organization’s affairs.

Estate and Gift Tax Update – May 2009

by Jim Schneidmiller, Partner, John Smolke , Partner

The current “down economy” may be an excellent time for individuals to transfer ownership of portions of their closely-held businesses to family members or to engage in other estate and gift planning. This article describes possible changes in the estate and gift tax laws in the near future and offers some wealth transfer and estate planning techniques that take advantage of the current low interest rate environment.

The Law Today & Possible Changes

Many individuals have delayed making decisions about their estate and gift planning, hoping that the laws would be repealed. In recent years, several Congressmen and Senators have offered up bills to simply get rid of these taxes; however, none have come close to being enacted. At present, it appears that estate and gift taxes will continue to be part of the overall tax landscape for the foreseeable future. President Obama stated that he would like estate and gift taxes to continue at their current rates and also said he would like to lock the estate exemption amount at its current level. Recent bills introduced in Congress provide insight as to how the estate and gift tax laws could be changed for future years.

By way of background, in 2001 the estate tax law was changed to provide increases in the estate exemption amount over a period of years as follows:

2001		$675,000
2002-2003		$1,000,000
2004-2005		$1,500,000
2006-2007		$2,000,000
2009		$3,500,000

The “estate exemption amount” represents the net value of assets owned by an individual that will escape estate transfer taxes upon the individual’s death. This amount may be reduced as a result of lifetime gifts made by the individual. So, the entire estate exemption amount may not be available at death to shelter the decedent’s estate.

The 2001 Tax Act also reduced the maximum estate tax rate from 55 percent in 2001 to 45 percent beginning in 2007.

Additionally, the 2001 Tax Act provides that the estate tax is to disappear for one year in 2010. In 2011, current law states that the estate exemption amount and the maximum tax rate will revert to their unfavorable 2001 levels ($675,000 and 55 percent). Congress and the President appear poised to pass legislation to avoid this disappearing act in 2010 and the reinstatement in 2011.

During his presidential campaign, President Obama stated that he would like the estate exemption amount to be frozen at its current level of $3,500,000 and the maximum estate and gift tax rate to be frozen likewise at 45 percent. On March 26, 2009, Senator Max Baucus, the Chairman of the Senate Finance Committee, introduced proposed legislation that, if enacted, would carry out President Obama’s wishes. Incidentally, candidate McCain also called for continuation of the estate and gift tax laws, however at a higher estate exemption amount and a lower tax rate.

The Baucus legislation would make permanent the $3,500,000 estate exemption amount and would cap the maximum estate and gift tax rate at 45 percent. In addition, for deaths occurring after 2010, the $3,500,000 exemption amount would be increased by an inflation-based amount. The proposal would also reunify the lifetime gift tax exclusion with the estate exemption amount by providing that lifetime taxable gifts up to $3,500,000 are exempt from gift tax. (At present, gift tax must be paid if lifetime taxable gifts exceed $1,000,000.) The Baucus bill would also allow for “portability” of the exemption amount between spouses. This means that a surviving spouse could elect to take over the unused estate exemption amount of his/her predeceased former spouse and therefore: 1) not waste any of the exemption of the first spouse to die; and 2) potentially reduce the amount of assets passing into a trust formed as a result of the first spouse’s death.

As an aside, it should be noted that estate transfer taxes payable to Washington State are based upon a lower $2,000,000 estate exemption amount. Therefore, it is possible to have a taxable estate for Washington purposes even though there is no taxable estate for federal purposes because the net estate is less than $3,500,000.

Potential Planning Strategies In A Low Interest Rate Environment

If you believe that the estate and gift tax laws will continue into the future and also think you will have a taxable estate, there are a number of fairly straight-forward techniques that might be used to take advantage of current low interest rates. Many assets have recently experienced a decrease in value due to the current recession, so now may be an excellent time to transfer wealth to children and grandchildren by taking advantage of estate planning techniques that benefit from these conditions. Some of these techniques can be coupled with minority and marketability discounts in valuing the assets transferred or sold, which makes the transfer or sale even more compelling. However, a bill has been introduced in Congress that would eliminate minority or marketability discounts when property is transferred to a relative. This bill, if enacted in its current form, would apply only to transfers after the date of enactment.

The wealth transfer and estate planning techniques described below require that interest be charged at minimum rates set monthly by the IRS. These rates are known collectively as the “Applicable Federal Rates” (AFRs) and are generally much lower than commercial loan rates. The AFRs for loans established during May 2009 which require monthly payments are:

Loan Term Interest Rate

Three years or less (short-term) .76%

More than three years but not more 2.03%
than nine years (mid-term)

More than nine years (long-term) 3.52%

Strategies that benefit from low interest rates include:

GRATs. In a GRAT (Grantor Retained Annuity Trust), the owner of a property (“the grantor”) transfers the property to a trust in exchange for a fixed annuity payment for a defined period of time. A beneficiary, often a family member, is named to receive assets remaining in the trust upon its termination. During the term of the trust, the grantor receives an annuity payment of cash or other assets determined with reference to the value of the property placed in the trust and the applicable interest rate. It is possible to define the amount of the annuity payments so that little or no part of the transfer to the trust counts as a gift made on behalf of the beneficiary. For GRATs established during May 2009, the applicable interest rate is 2.4 percent. If the property placed in the trust appreciates more than 2.4 percent over the term of the trust, the excess transfers to the named beneficiary at termination, free from any additional estate or gift tax, along with the other remaining trust assets. Under the right circumstances, GRATs can be used to transfer large amounts of high value assets at relatively low estate and gift tax cost.
Intra-Family Loans. Loans to family members can be made using the AFRs as their stated interest rates. A loan, documented in writing, from a parent to a child might allow the child to make an investment that yields a much higher rate of return than the interest that must be paid on the loan at the AFR by the child to the parent. Any excess earnings are retained by the borrower, free from estate or gift taxes. As another example, a parent or grandparent might finance part or all of the acquisition of a child or grandchild’s principal residence at the long-term AFR, a rate which is currently at least one percentage point below the rate that would be payable to a commercial mortgage lender. Note that to make the interest deductible by the borrower, the loan must be secured by the residence and officially recorded with the county or other authorities, just as a commercial lender would do.
Installment Sales. Stock in a closely-held business, the value of which has been temporarily depressed by the current recession, is an excellent candidate for an installment sale to a lower generation family member. If the business is still producing income and cash yield in excess of the AFR interest rate that must be charged on the loan, distributions from the business can be used to make the payments. All appreciation in the value of the transferred stock after the sale and all excess earnings will be transferred to the purchaser, free from estate or gift tax.

The suggestions above are just a few of the many possible techniques that take advantage of the current low interest rates and allow the transfer of wealth to younger generations at little or no estate or gift tax cost. However, before engaging in any wealth transfer or estate planning, you should consult an attorney, accountant, or other tax advisor who is knowledgeable regarding your situation and the suitability of a particular technique for you.

Associated Files
Estate Gift Tax Update – May 2009 (PDF)

Related Professionals

Related Areas

Page 1 Schedule A

Associated Files
Page 1 Schedule A (PDF)

New and/or Notable for 2008 Tax Season and the 2009 Tax Year

It’s that time of year again and to make things a little easier for you, Peterson Sullivan has outlined the following notable tax issues. Peterson Sullivan values its clients. We hope that this helps with organizing your 2008 tax data and your 2009 tax planning.Sales Tax Deduction This deduction has been extended through tax year 2009. This deduction allows taxpayers who itemize deductions to opt to deduct either their state and local sales tax or state income tax. Taxpayers who take the sales tax deduction may deduct their actual sales tax by accumulating their receipts throughout the year or they may use IRS published tables. Taxpayers using the published tables may, in addition to the table amount, deduct eligible sales tax paid with respect to major purchases such as autos, boats and other items specified by the IRS. At the time of this printing, Congress has not acted to extend this deduction beyond 2009.

Children With Unearned Income Subject to Tax Under the so called “kiddie tax,” the unearned income (such as interest, dividends and capital gains) of certain “minor” children in excess of $1,800 is taxed at the parents’ marginal rate. In 2008, the rule applies to children under age 19 at the close of the tax year and to full-time students who have not attained the age of 24 by the end of the year. This expanded rule for 2008 applies only to children whose earned income does not exceed one-half of the amount of their support. Note that beginning with the 2008 tax year, the kiddie tax rules can apply to college-age children.

Adoption Tax Credit of up to $11,650 is available for qualified adoption expenses.

Teacher Classroom Expenses This deduction is still available through tax year 2009. Eligible educators are allowed a deduction, up to $250 for unreimbursed expenses incurred for items used in the classroom. To qualify, you must work at least 900 hours during the year as a K-12 teacher, instructor, counselor, principal, or aide. As of this printing, Congress has not acted to extend this above the line deduction beyond 2009.

Standard Mileage Rate The rate for the business use of your car is 50.5 cents per mile for the period January 1, 2008 to June 30, 2008. From July 1, 2008 through December 31, 2008, the standard mileage rate increases to 58.5 cents per mile. The medical care use rate is 19 cents per mile from January 1, 2008 to June 30, 2008 and 27 cents per mile from July 1, 2008 through December 31, 2008. The charitable contribution rate remains at 14 cents per mile for all of 2008.

For 2009, the standard mileage rate for business use is 55 cents per mile, the medical use rate is 24 cents per mile and the charitable mileage rate stays at 14 cents per mile.

Tax Rebate Checks In February, Congress passed the Economic Stimulus Act of 2008 which authorized advance tax rebate checks for certain taxpayers. The rebate amounts varied based on filing status and family size. The rebate checks were completely phased out for single taxpayers with AGI over $87,000 and for married filing joint taxpayers with AGI over $174,000. If you received a rebate check in 2008, please be sure that you inform us of the amount you received as we will need that information to prepare your 2008 tax return. While the rebate is not taxable, the amount received must be compared to the maximum amount for which the taxpayer is eligible; some taxpayers will receive a benefit when they file their 2008 return.

Property Tax Deduction for those who do not Itemize Deductions The Housing Assistance Act of 2008 added a new additional standard deduction amount. Taxpayers who are home owners and claim the standard deduction may deduct an additional amount for property taxes that is the lesser of the amount of property taxes paid or $500 ($1,000 for married filing joint filers.) This additional deduction for non-itemizers is available for the 2008 and 2009 tax years.

First-Time Homebuyer Credit The Housing Assistance Act of 2008 also included a first-time homebuyer credit for qualified individuals that purchase a principal residence after April 8, 2008 and before July 1, 2009. The credit amount is equal to the lesser of 10% of the purchase price of the house or $7,500. The credit amount phases out for taxpayers with AGI in excess of $75,000 for single and $150,000 for joint filers.

A first-time homebuyer is an individual or married couple who had no present ownership interest in a principal residence in the prior three-year period ending on the date of the home purchase. A purchase of a home from a related party does not qualify for the credit. A newly constructed home is treated as purchased on the date it is first occupied.

There is a catch. The credit must be recaptured ratably over a 15 year period. The recapture amount is treated as an addition to tax for each year of the recapture period. The recapture period begins with the second tax year following the year of purchase. For example, if the maximum credit was claimed, the taxpayer would pay additional tax of $500 for 15 years starting in the second year after purchase.

New Plug-in Electric Drive Vehicle Credit For tax years beginning after 2008, a taxpayer can claim a credit for a new qualified plug-in electric drive vehicle purchased before 2015. The credit is subject to a limit based on gross vehicle weight and can range from $7,500 to $15,000. The credit can be claimed against AMT.

Hybrid Vehicle Credit Purchasers of certain new hybrid vehicles may be eligible for a Qualified Hybrid Motor Vehicle Credit. Models eligible for the credit include the following:

Model Year 2009

Ford Escape Hybrid 2WD – $3,000
Ford Escape Hybrid 4WD – $1,950
Mercury Mariner Hybrid 2WD – $3,000
Mercury Mariner Hybrid 4WD – $1,950

Model Year 2008

Ford Escape Hybrid 2WD – $3,000
Ford Escape Hybrid 4WD – $2,200
Mercury Mariner 2WD Hybrid – $3,000
Mercury Mariner 4WD Hybrid – $2,200
Mazda Tribute 2WD Hybrid -$3,000
Mazda Tribute 4WD Hybrid – $2,200
Chevrolet Malibu Hybrid – $1,300
Saturn Aura Hybrid – $1,300
Honda Civic GX – $4,000 *
Nissan Altima Hybrid – $2,350
GMC Yukon Hybrid – $2,200
Saturn VUE GreenLine – $1,550

Model Year 2007

Nissan Altima Hybrid – $2,350
Honda Civic GX – $4,000 *
Saturn Aura Hybrid – $1,300
Saturn VUE Green Line — $650
Ford Escape Front WD Hybrid – $2,600
Ford Escape 4WD Hybrid – $1,950
Mercury Mariner 4WD Hybrid — $1,950
GMC Sierra 4WD Hybrid Pickup Truck — $650
GMC Sierra 2WD Hybrid Pickup Truck — $250
Chevrolet Silverado 4WD Hybrid Pickup Truck — $650
Chevrolet Silverado 2WD Hybrid Pickup Truck — $250

* This credit amount does not phase out. The full amount of the alternative fuel vehicle credit will be available for vehicles purchased on or before December 31, 2010.

The IRS announced that Honda reached the 60,000 vehicle limit during the calendar quarter ended September 30, 2007. Therefore, the credit for buying any Honda hybrid vehicle began to phase out starting January 1, 2008. The new credit amounts are as follows:

For purchases between January 1, 2008, through June 30, 2008:

2007 Honda Accord Hybrid AT – $650
2007 Honda Accord Hybrid Navi AT – $650
2007 Honda Civic Hybrid CVT – $1,050
2008 Honda Civic Hybrid CVT – $1,050

For purchases between July 1, 2008, through December 31, 2008:

2007 Honda Accord Hybrid AT – $325
2007 Honda Accord Hybrid Navi AT – $325
2007 Honda Civic Hybrid CVT – $525
2008 Honda Civic Hybrid CVT – $525

No credit is allowed for purchase of these vehicles after December 31, 2008.

Toyota and Lexus both reached the 60,000 vehicle limit during the calendar quarter ending June 30, 2006. No credit is allowed for the following vehicles purchased after September 30, 2007:

Toyota Prius Hybrid
Toyota Camry Hybrid
Toyota Highlander Hybrid 2WD and 4WD
Lexus LS 600h L Hybrid
Lexus RX 400h 2WD and 4WD
Lexus GS 450h

Expensing and Depreciation The Section 179 equipment expense election limit is $250,000 for 2008. Reduction of the expense election starts when there is more than $800,000 of qualifying purchases during the year. The amount of expensing is limited to $25,000 for heavy sport utility vehicles which generally have gross vehicle weights between 6,000 and 14,000 pounds. The maximum Section 179 amount is currently set at $125,000 for 2009 and 2010 and will return to $25,000 for tax years beginning in 2011 unless Congress extends the current law.

In addition to the increased Section 179 limits, Congress brought back “Bonus Depreciation” in the Economic Stimulus Act of 2008. The Act provides for additional first-year bonus depreciation of 50% of the adjusted basis of qualified property placed in service after December 31, 2007 and before January 1, 2009. Qualifying property must be new, tangible personal property and includes computer software and certain leasehold improvements.

Washington State Sales Tax Exemption for Hybrid Vehicle Purchases Effective January 1, 2009 through December 31, 2010, sales of new hybrid passenger cars, light duty trucks and medium duty passenger vehicles are exempt from Washington state sales and use tax so long as the hybrid vehicle purchased has an estimated highway gas mileage rating of at least 40 miles per gallon.

Penalty for Failure to Report Foreign Financial Account Citizens, residents, or persons doing business in the U.S. must keep records and file a report when they maintain an account with a foreign bank or other financial institution. The 2004 American Jobs Creation Act added an additional civil penalty that may be imposed on persons who violate the reporting requirements. Penalties range from $10,000 to $100,000 for violations of this provision. Please be sure to inform us if you have any foreign bank or financial accounts.

Charitable Contributions

For 2008 and 2009, individual taxpayers who are at least 70 ½ years old are permitted to make charitable contributions out of their IRAs or Roth IRAs of up to $100,000 and such distributions will be excluded from the taxpayer’s gross income. Such an IRA distribution will count against the annual minimum distribution amount.

No deduction is allowed for used clothing and household items unless the items are at least in “good” condition. The IRS may deny a deduction for any item that has minimal monetary value. Taxpayers must be prepared to prove both the condition and the value of their donation. The donation of a single item worth more than $500 but not in good condition will be allowed as long as a qualified appraisal is included with the return.

No deduction is allowed to individual taxpayers for any cash, check, or other monetary gift unless the donor can show a bank record or a written acknowledgement from the charity showing the charity’s name, address, amount of the gift, and date. For example, there is no allowable deduction for cash put into the collection basket at church, unless an appropriate written acknowledgement is somehow obtained.

For each contribution you made of $250 or more, you must obtain a written acknowledgment from the organization to deduct the contribution. A canceled check alone is not enough. If you paid a charitable organization more than $75 and received goods or services, the organization must give you a written statement telling you how much you can deduct as a donation. The statement will also give you a good faith estimate of the value of those goods or services.

Don’t send these statements to us. These written statements do not need to be attached to your tax return. You must retain them with your tax records in case of audit.

In figuring whether a gift is $250 or more, do not combine separate donations. For example, if you made a $20 donation to your church each week for a total of $1,040 during 2008, treat each $20 payment as a separate gift.

If you do not yet have the required statement, you must get it before you file your tax return. (If you file after April 15, 2009, you must get the acknowledgment before the extended due date for filing the return.)

Strict rules are in effect for donations of autos, boats, and airplanes to charitable organizations. In general, for vehicles valued in excess of $500, the donor’s deduction is limited to the amount the charitable organization receives as proceeds from the sale of the vehicle (unless the charity intends to significantly use the vehicle in its regularly conducted activities or if material improvements are made to the vehicle). The charitable organization must provide the donor with an acknowledgement via Form 1098-C containing information specified by the IRS and such acknowledgement must be attached to the donor’s tax return in order to claim the deduction.

Business Meals and Entertainment – Club Dues

Please list separately meals and entertainment which are subject to the 50% deduction limit.

Please indicate whether you are listing the expenses at 100% or at 50%. This will allow us to correctly enter the data into your return.

List club dues separately (including initiation fees). You can’t deduct dues to purely social and recreation clubs and to business luncheon clubs. Dues to professional societies and service clubs (Kiwanis, Lions, etc.) might still be deductible from your business income.

Deduction for Self-Employed Health Insurance

If you are self-employed or a 2% or more owner of an S Corporation, please provide the amount you paid for health insurance and to whom you paid it. You may be able to deduct up to 100% of the cost of your health insurance in figuring your adjusted gross income.

Deduction of Long-Term Care Insurance Premiums

The limit for the amount of long-term care insurance premiums that you can include as an itemized medical deduction has increased. The 2008 limit is a per-person limit, beginning at $310 for age 40 or under, up to $3,850 for age 71 or over.

Information for Seller-Financed Mortgages

If you are a buyer or seller with a “seller-financed residential mortgage,” please provide the name, address, and taxpayer ID number of the person to whom the interest was paid or from whom it was received. The IRS will charge a $50 penalty if the complete information is not on your return.

A “seller-financed residential mortgage” arises from the acquisition of a principal residence or a second home where the seller provides some or all of the mortgage financing to the buyer. If you don’t already know the taxpayer ID number of the other person, use Form W‑9 to obtain it. Please contact us if you need assistance in this area.

Reporting Household Employees on Your 1040

Do you have household employees? During 2008, did you pay someone $1,600 or more to work in or around your home or to watch the children? You must report household employees on your 1040 using Schedule H. You must pay the taxes due along with any other taxes due by April 15, 2009.

If this applies, you need to provide each employee with a W-2 by January 31, 2009. You will have to file copies of the W-2s with the Social Security Administration. We can help you with this. Please call right away since there are penalties for failure to report on a timely basis.

Please provide us the amount of state unemployment tax you paid during 2008 for your household employees. Please send copies of the quarterly Employment Security Department reports you filed for 2008.

Maximum 401(k) Deferral for 2008 & 2009

The maximum elective deferral which may be made to a 401(k) plan is $15,500 for tax year 2008 and $16,500 for tax year 2009. If you are age 50 or older by the close of the tax year, you can contribute an additional $5,000 for 2008 and $5,500 for 2009. Catch-up contributions may only be made if the plan permits this type of contribution. Any deferral you made for 2008 should already be noted on your W-2.

Child Tax Credits

You may be eligible for the child tax credit of up to $1,000 for each qualifying child under 17 (one for whom you can claim a dependency exemption and who is your child or other direct descendant or your eligible foster child). The credit begins to phase out when AGI (as specially modified) exceeds $110,000 for joint filers, or $75,000 for single filers and head of households, and $55,000 for marrieds filing separately.

Education Tax Incentives

Hope Credit You may be able to claim a Hope tax credit of up to $1,800 per student for tuition and related expenses incurred during the first two years of post-secondary education (100% of the first $1,200 of tuition and fees required for enrollment or attendance, and 50% of the next $1,200 paid for each of the first two years of post-secondary education).

Lifetime Learning Credit There’s also a Lifetime Learning Credit of up to $2,000 annually per family (20% of up to $10,000 of tuition and related expenses). You can’t claim both credits for the same student, however. Both credits phase out over $96,000 to $116,000 of AGI as specially modified if you file a joint return ($48,000 to $58,000 for single filers and heads of households).

Student Loan Deduction You can deduct up to $2,500 of interest paid on an education loan. The deduction phases out over $55,000 to $70,000 of AGI as specially modified ($115,000 to $145,000 on joint returns).

Tuition and Fees Deduction Congress renewed this deduction through 2009. You may be able to deduct up to $4,000 for qualified post-secondary education tuition and fees that you paid in 2008 for yourself, your spouse, or you dependent(s) if your AGI is less than $65,000 ($130,000 for joint returns).

You cannot take the deduction if you are married filing separately. The deduction will be reduced by the other educational tax benefits you use.

Traditional IRAs

If you are not an active participant in an employer’s retirement plan and you have sufficient compensation or self-employment income, you may make deductible contributions to an IRA. The 2008 deductible limit is 100% of compensation up to $5,000. For 2009, the maximum IRA contribution is also $5,000.

If you are covered by a company-sponsored retirement plan, you may still be able to deduct some or all of your IRA contribution depending on your AGI. For 2008, the AGI phase-out range is between $53,000-$63,000 for single taxpayers, and $85,000-$105,000 for married filing joint taxpayers. Above these ranges, no deduction is allowed.

In addition, for 2008 and 2009 a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, subject to the same limitations above.

Roth IRAs

If during 2008 you converted part or all of a traditional IRA, SEP, or SIMPLE IRA to a Roth IRA, please provide complete details.

Further, please inform us if you made or wish to make nondeductible contributions to an existing or new Roth IRA. The ability to make contributions begins to phase out for joint filers with an AGI of more than $159,000 ($101,000 for singles). Contributions are also limited by compensation or self-employment income.

For 2008, if you have sufficient compensation or self-employment income, you can make a nondeductible contribution of up to $5,000 ($6,000 if age 50 or older) annually to a Roth IRA (reduced by your other IRA contributions). The account builds up tax-free and distributions from it are tax-free, too, if made after a 5-year period for one of several specified reasons (e.g., after age 59½). For 2009, the maximum nondeductible contribution is $5,000 ($6,000 if age 50 or older).

Deductible IRAs Available to Spouses

The IRA rules allow a spouse who isn’t a participant in a company-sponsored retirement plan to make a deductible IRA contribution. This is so even if the other spouse is an active participant in a retirement plan. A nonworking spouse can utilize this rule to make a deductible IRA contribution based upon the working spouse’s earned income. A fully deductible IRA contribution for 2008 can be made if the joint return shows AGI of $159,000 or less. The deduction is phased out for AGIs between $159,000 – $169,000. Contributions must be made by April 15, 2009, to be deductible in 2008. However, you should consider making any IRA contribution to a Roth IRA instead of a deductible IRA. Depending on the circumstances, the Roth may make more sense, even though the contributions are not deductible.

Required IRA Distributions Beginning at Age 70½

You must begin taking minimum distributions from your IRAs no later than the Required Beginning Date, which is April 1 of the year following the calendar year in which you reach age 70½. Severe penalties are imposed if you fail to take your required minimum distribution (“RMD”) each year.

The IRS has simplified the calculation of the minimum amount and made designation of a beneficiary more flexible. Please contact us before you reach age 70 so that we may help you with these important decisions.

A key provision in the recently passed Worker, Retiree and Employer Recovery Act of 2008 suspends the required minimum distribution from retirement accounts for 2009 only. This waiver, which is available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans including 401(k), 403(b), 457(b) and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some of their losses due to the recent financial upheaval in the markets.

Please note that the Act’s relief provision would not help a taxpayer who attained age 70 ½ in 2008 but chose to wait until April 1, 2009, to receive his first RMD (for 2008). He would still have to take his first RMD by April 1, 2009. However, he would not have to take the otherwise-required RMD for 2009.

Direct Deposit of Tax Refunds

If you have a refund on your 2008 Form 1040, you can have it deposited directly into your bank account.

If you wish us to complete the deposit information, please send us a deposit slip from your account. This is the easiest way for us to get the “routing transit number” and the “depositor account number” needed on IRS Form 8888. This information must be exact for you to get your refund directly.

The IRS will not alert you when they have made the refund deposit. You will have to check with the bank.

We recommend that you take advantage of this service to avoid problems of checks being lost or mishandled.

Payment of Taxes Via Credit Card

You can pay by check, money order, or now by credit card (American Express Card, MasterCard, Visa, or Discover Card).

A convenience fee of 2.49% will be charged by the credit card processor based on the amount you are paying.

To pay by credit card, call 1-800-2PAY-TAX (1-800-272-9829) toll-free and follow the instructions. You will be told what the fee is when you call and you will have the option to either continue or cancel the call. You can also find out what the fee will be on the Internet at www.officialpayments.com.

If you paid by credit card, enter the confirmation number you were given at the end of the call on page 1 of Form 1040 in the upper left corner.

Sale of Your Home

Generally, you will only need to report the sale of your principal residence if your gain is more than $250,000 ($500,000 if married filing a joint return). This exclusion applies to each qualifying sale. You must have owned and used the house as your principal residence for at least two years out of the five year period ending on the date of sale.

However, the exclusion of gain is not available on the sale of a principal residence acquired in a like-kind exchange within five years of acquisition.

The Housing Assistance Tax Act of 2008 added new rules to the gain exclusion provisions. For sales and exchanges after Dec. 31, 2008, the homesale exclusion will not apply to the extent gain from the sale or exchange of a principal residence is allocated to periods of “nonqualified use.” Generally, nonqualified use is any period (other than any period before Jan. 1, 2009) during which the property is not used as a principal residence of the taxpayer or spouse. This new rule restricts the availability of the exclusion for second homes and vacation homes significantly. However, several important exceptions apply. Please contact us if you would like further information on this new provision.

Installment Agreement

If you cannot pay the full amount due with your return, you may ask to make monthly installment payments. You must file your return on time to take advantage of this and the payment will be subject to the IRS defined interest rate. Your “failure to pay” penalty will go down if you apply for and pay with the installment method. The rate drops from 0.5% per month to 0.25% per month on the unpaid balance.

Alternative Minimum Tax

For 2008, the AMT exemption is $69,950 for married individuals filing joint returns and surviving spouses; $46,200 for a single taxpayers and $34,975 for a married individual filing a separate return. After 2008, these amounts will drop significantly unless Congress acts to renew them.

Refund of Old Unused AMT Credits

The Emergency Economic Stabilization Act of 2008 (Financial Bailout Bill) liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs).

The changes are highly technical but their essence is that for tax years beginning after 2007: (1) eligible individuals may now claim 50% (rather than 20%) of their long-term unused minimum tax credits attributable to Incentive Stock Options (ISO’s), and (2) the AMT refundable credit amount no longer phases out at higher levels of adjusted gross income. In addition, the new law wipes out any tax underpayments (plus interest & penalties) outstanding on Oct. 3, 2008, that are attributable to pre-2008 phantom ISO income under the AMT rules.

If we have prepared your returns for all of these years, we will be able to calculate the refund (if applicable) when we prepare your return. If you are new to us, please provide copies of all of your tax returns from 2003 onward.

Gift and Estate Tax Thresholds

The unified credit exemption equivalent amount for estate taxes is $2,000,000 for 2008 and $3,500,000 for 2009. For gift taxes, the applicable exclusion amount remains at $1,000,000. For the “Generation Skipping Tax” (“GST”), the exemption is $2,000,000 for 2008 and $3,500,000 for 2009.

The gift tax annual exclusion is $12,000 for 2008 and $13,000 for 2009.

Between now and 2011, estate and GST tax provisions change in almost every year. After significant increases to the tax thresholds, the estate tax under the current law is designed to be repealed for 2010 and then reinstated in 2011 under the old 2001 rules.

The State of Washington has a stand-alone estate tax which applies to estates of Washington residents and to the estates of nonresidents having personal property or real property located in Washington. This estate tax applies to estates of decedents dying on or after May 17, 2005. The tax is calculated on Washington taxable estates exceeding $2 million. Note that the exemption amount for Washington purposes remains at $2 million in 2009 even though the federal exemption rises to $3.5 million

You should update your estate planning and gifting program each year to be sure to take full advantage of the changing laws. We can assist you in this process.

Related Areas

The Risks & Benefits of Mazimizing Profits in the F&I Department Using PORCs

by Jeff B. Forsberg , Partner

Dealers selling service contracts and other financial products to customers can use Producer Owned Reinsurance Companies, or simply, “PORCs,” to tap additional profits from the F&I Department. The potential profits from using a PORC stem from the Dealer’s participation in insurance and investment income earned by the PORC. In addition, a PORC can potentially confer tax advantages to the owner, who should also be aware that these advantages are drawing heightened IRS interest.

IRS has a bias against PORCs, because they have the potential to be construed as abusive tax shelters. IRS put PORCs on its radar when it issued Notice #2002-70, and despite some of the cautionary language that follows, it is important to note that this IRS Notice does not have any judicial or legal authority. PORC is an unfortunate acronym, but it does help to remind everyone of the old saw that “pigs make money, but hogs will get slaughtered.” Whether you currently own one, or are contemplating setting one up, it’s important to know the difference between your farm animals. In other words, a lack of knowledge on how your PORC operates can put your tax haven in the tax penalty box.

IRS has charted a course that will likely include investigative efforts to learn of noncompliant PORCs. The difficulty with any discussion about PORCS is that they are structured in a myriad of ways, challenging even a basic understanding of the risks and benefits. The most common setup includes a cast of four parties to many reinsurance arrangements:

The Dealer Owner (“Dealer O”)
The Dealership (“Dealership A”)
The Insurance Company (“InsurCo”) that is independent and unrelated
The Producer Owned Reinsurance Company (“PORC”)

A simple example of how a PORC might operate is as follows:

Dealership A sells a vehicle service contract to a customer and remits the insurance premium to InsurCo (also known as a “direct writer” licensed to sell insurance). In the normal course of things, Dealership A retains a portion of the premium as commission income. Next, Dealer O sets up and owns a PORC, a separate legal entity created to reinsure the policies written by InsurCo, which pays claims from amounts it receives from Dealership A. InsurCo also remits a portion of the premium to the PORC, which will reinsure the risk assumed by InsurCo (reinsurance is simply something insurance companies do to spread the risk around). Any reinsurance premiums held by the PORC can earn investment income. Generally, the accumulated funds held inside the PORC, comprised of both underwriting profits and investment income, are allowed to grow with little or no income tax. Dividends of the PORC are later taxed to Dealer O at favorable tax rates.

PORCs are commonly created offshore because the regulatory environment for selling insurance products is less onerous. For example, the Turks and Caicos Islands are home to many PORCs, offering easy entry and requiring minimal capitalization. If the PORC is structured properly, it may qualify as a tax-exempt, non-life insurance company, provided that premiums written are less than $350,000 per year (Note: If premiums range between $350,000 and $1,200,000 per year, tax is levied on investment income of the PORC).

The radar blips at IRS blink brighter and faster if any of the following occurs:

Diversion of commission income earned by Dealer A to the PORC.
This is also referred to as an “over-remit” condition. For example: Dealership A is living dangerously if it instructs InsurCo to reduce its normal $500 commission to $250 with the proviso that the other $250 be remitted to the PORC, owned separately by Dealer O. Why would Dealership A do this? Dealership A effectively moved $250 out of taxable income at the corporate level. Even in the unlikely event that Dealership A is directing this kind of diversion (imagine the reaction of the F&I Manager), it’s a safe bet IRS will nonetheless scrutinize the possibility. To avoid giving IRS ammunition here, premiums between Dealership A and InsurCo need to be established at reasonable, fair-market levels.
Is the PORC an insurance company?
IRS will likely call into question the validity of the PORC as an insurance company if investment income is out of proportion to income earned from insurance premiums, a condition that will torpedo all related tax benefits. As a general rule, at least 50% of the PORC’s business activity should be comprised of writing insurance instead of an entity that disproportionately reports investment income. If you’re currently participating in a PORC, you should verify, at a minimum, that investment income of the PORC does not exceed income from insurance premiums.
Tax shelter or legitimate business activity?
IRS may challenge the economic substance of the PORC, causing Dealership A to recognize more of the insurance amount collected from the customer. However, it can be argued that Dealer O has legitimate reasons for owning a PORC because Dealer O has a vested interest in the quality of the service contracts it sells. Dealers are all too familiar with independent insurers that went bankrupt (e.g. National Warranty, etc.), leaving the Dealer to pick up the cost of repairs –not from a legal obligation but out of concern for its reputation and CSI scores. It is in the Dealer’s best interest to take a proactive stance and reinsure against this risk.

Also, if there are favorable loss ratios with claims, the PORC can realize underwriting profits formerly realized exclusively by InsurCo. In a competitive environment, Dealers will seek out alternative options that offer additional profits.
Watch out for loans between the PORC and the shareholder..
Cash transfers, particularly loans, between the PORC and Dealer O are subject to additional scrutiny by IRS. In a precedent-setting case, IRS prevailed against former Dealer, William T. Wright, wherein the reinsurance company arrangement was ruled a sham transaction. IRS won because funds held by the reinsurance company were used by Mr. Wright indiscriminately and for personal purposes. IRS won and the income of the reinsurance company was taxed to the shareholder at ordinary rates. Because shareholder loans are such a magnet for IRS interest, Dealers have been advised by some to avoid such loans altogether.

If shareholder loans exist, extra care should be taken to ensure that:

the loan is properly documented
the loan is interest-bearing at adequate rates
the loan is being repaid according to the terms of the note, and
the loan amount should not adversely affect the capitalization of the PORC

To improve the chances your current or planned PORC is deemed compliant by IRS, all participants in PORCS should be knowledgeable on how it operates and ask questions of the promoter to learn of any conditions noted above that can jeopardize the reinsurance arrangement. If IRS finds that the PORC is operating outside of what is acceptable, taxes, interest, and penalties await the unsuspecting. Despite the current visibility of PORCS at IRS, they can be an effective way to maximize your return from the sale of F&I products when the rules are followed.

Related Professionals

Jeff B. Forsberg, Partner

Related Areas

Services to the Automotive Industry

Tax Report – January 2008

Associated Files
January 08 Tax Report PDF.pdf

New limits on charitable contributions for 2006 and beyond

by Rebecca A. Olson

The Pension Protection Act of 2006 passed tougher restrictions on everyday charitable contributions. This article highlights two of the new provisions of the act that affect both cash and non-cash donations to charitable organizations.

Donor recordkeeping requirements

The new tax act disallows any monetary contribution to a charitable organization, unless the donor maintains a bank record (i.e. cancelled check) or a written communication (i.e. receipt or letter) from the donee organization that shows the name of the organization, date of the contribution and the amount of the contribution. This provision applies to any contribution of money, regardless of the amount.

Donors may find it preferable to make donations by check rather than cash, as a cancelled check directly satisfies the new requirements by showing the name of the organization, date and amount of the contribution. A credit card statement showing the charge would also satisfy the new requirements as long as it shows date, name of the organization and amount.

As an example, taxpayers putting cash into the Salvation Army kettle would not be allowed a charitable contribution for the cash donated regardless of the amount, as their would be no record of the donation that would satisfy the new rules.

This requirement is in effect for tax years beginning after August 17, 2006. For calendar year taxpayers, that would be for 2007.

Contributions of clothing and household goods

The new act limits the amount of the deductions for clothing and household items (such as furniture, appliances, electronics, linens etc.) For an individual, partnership or corporation, no charitable deduction will be allowed for these types of donations unless the item is in “good” condition or better. In addition, the IRS has the authority to deny a deduction for items that have a minimal monetary value.

There are exceptions to the above rules. In the case of a single item for which a deduction of more than $500 is claimed, the deduction will be allowed as long as a qualified appraisal is attached to the taxpayer’s return. In this case, a taxpayer can claim the deduction for an item whether or not in “good” condition, as long as the amount claimed exceeds $500 and the appraisal requirement is met. Also, these rules do not apply to donations of food, artwork, jewelry or collections such as stamps or coins.

The goal of the new provision is to encourage the donation of clothing and household items that are of meaningful use to charitable organizations. Worn out, obsolete and broken items provide no value or benefit to the organization. Some organizations such as Goodwill and Salvation Army provide a standard “value list” to assist taxpayers in determining the value of their donations.

This requirement is in effect for all non-cash charitable donations made after August 17, 2006.

The Pension Protection Act of 2006

Dear Valued Clients and Friends:

The recently enacted Pension Protection Act of 2006 (“PPA”) contains numerous provisions affecting pensions and IRAs. The Act also has provisions designed to prevent abuse in the charitable sector and provide additional tax incentives for charitable giving.

Charitable Giving Incentives

Tax-free distributions from IRAs for charitable purposes.

For 2006 and 2007, PPA permits taxpayers who are at least age 70-1/2, to exclude from gross income direct distributions to charities of up to $100,000 from an IRA or Roth IRA which would otherwise be included in income.

Food and book Donations.

The enhanced food and book donation rules under the 2004 Katrina tax act are extended to 2006 and 2007.

Qualified conservation contributions.

PPA raises the limit for 2006 and 2007, on deducting contributions of qualified conservation property by individuals—from 30% of adjusted gross income to 50%.

Charitable reform

PPA also imposes new requirements and restrictions on donors and exempt organizations. Listed below are some of the new rules.

No deduction is allowed beginning in 2007 for individuals for any cash, check, or other monetary gift unless the donor can show a bank record or a “written communication” from the charity showing name of charity, amount, and date.
No deduction is allowed after August 17, 2006, for used clothing and household items unless the items are in “good” condition. Exempt from this rule is the contribution of a single item worth more than $500 for which a qualified appraisal is included in the return. In any case, IRS may deny a deduction for an item of minimal value.
Donors must recapture the tax benefit for contributions of property to charities not used for an exempt purpose.
The rules for donating “façade easements” of buildings in historic districts are tightened. Also, any deduction is reduced by any rehabilitation tax credit that was claimed for the property.
New rules govern the contribution to charities of “fractional interests” in tangible personal property after August 17, 2006.
The thresholds are lowered for penalties on a donor for overvaluing property contributed to charities. In addition, new penalty provisions apply to substantial valuation misstatements by appraisers. These rules apply for income tax as well as estate and gift tax.

Pension Plan / IRA Changes

A 2001 tax act made temporary increases to contributions limits for pensions and IRAs for years through 2010. PPA has made many of these permanent. Many people thought these were permanent already. Some of these are as follows:

The increased maximums for contributions to pensions and IRAs, including the extra amounts for those aged 50 and over.
The increased salary limitations for profit-sharing plans.
The increased benefit allowed under

Revised Dependency Rules Effective in 2005

by Rebecca A. Olson

The Working Families Tax Relief Act of 2004 provided a simplified and uniform definition of a dependant for tax purposes which went into effect January 1, 2005. Dependants are now categorized as either a “qualifying child” or a “qualifying relative.” The new uniform definition applies for the personal exemption, child tax credit, earned income tax credit, child and dependant care credit and head-of-household status.

Qualifying Child

Under the new uniform definition, a taxpayer’s children include the taxpayer’s natural children, stepchildren, adopted children and eligible foster children. To be a “qualifying child”, an individual must meet the following criteria:

Must be a U.S. citizen or national or resident of the U.S., Canada or Mexico.
Must be under age 19 at the end of the year or be a full-time student under the age of 24.
Must share a home with the taxpayer for more than half the year.
Must not provide more than half of his or her own support.
Must be the taxpayer’s child (see definition above), or a descendant of the taxpayer’s child (i.e. grandchildren) or be the taxpayer’s brother or sister or be a descendent of the taxpayer’s brother or sister (niece or nephew, related by blood.)

Qualifying Relative

A “qualifying relative” must meet the following criteria:

Must be a U.S. citizen or national or resident of the U.S., Canada or Mexico.
Must receive at least one-half of his or her total annual support from the taxpayer.
Must not have gross income in excess of the annual exemption amount ($3,200 in 2005 and $3,300 in 2006.)
Must either be related to the taxpayer, or share the taxpayer’s home and be a member of the taxpayer’s household.

Applicable to both the definition of qualifying child or qualifying relative is the requirement that a married dependant must not file a joint tax return with his or her spouse.

Energy-Efficient Commercial Property Deduction

by Rebecca A. Olson

Under the Energy Tax Incentives Act of 2005, a taxpayer will be allowed a deduction for an amount equal to the cost of energy efficient commercial building property placed in service in 2006 or 2007.

The overall purpose of the deduction is to encourage energy-efficient renovation of older commercial buildings. The deduction is also allowed for qualifying improvements in the construction of new commercial property if the property is placed in service in 2006 or 2007.

The maximum amount that can be deducted is $1.80 per square foot of the building in question, less the total amount of deductions taken under this provision in prior years.

Energy-efficient commercial building property is property that meets all of the following requirements:

Qualifying energy efficient property (“property”) for which depreciation is allowed or allowable.
The property is installed in or on a building.
The building for which the property is installed is located in the United States.
The property must be within the scope of Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineers of North America. Copies of Standard 90.1-2001 can be purchased from the American Society of Heating, Refrigerating, and Air Conditioning Engineers. The website address is http://www.ashrae.org.

NEW RULES ON WRITTEN FEDERAL TAX ADVICE UNDER TREASURY CIRCULAR 230

Effective June 21, 2005, new IRS regulations impose even more restrictions on how accountants and lawyers provide written advice about federal tax issues.

These new requirements mean you will see revised practices in our communication with you. These requirements apply even to informal e-mail correspondence.

All written federal tax advice that we may provide to you must either:

be a formal written opinion that addresses all material federal tax issues involved and complies with other stringent requirements; or
contain the following legend: “This written communication was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties that may be imposed under federal tax law.” (This legend is provided according to Circular 230).

We recognize that in most cases the time, effort and expense involved in preparing a formal tax opinion on which you may rely to avoid federal tax penalties will not be cost-effective. We have chosen, out of an abundance of caution, to include the legend above automatically in all of our e-mail correspondence, memoranda, letters and other written advice, except where it is clear that no tax issue is involved or where the advice is given in the context of a formal opinion that complies with the new requirements under Circular 230 and intended to provide the recipient with penalty protection. Unfortunately, our policy may result in some communications bearing the legend in situations where no tax issue is addressed.

The presence of the legend on any written communication from us does not imply that any lesser degree of care or expertise has been brought to bear on the issues addressed. The sole effect of the legend is to notify you that the advice is not in a form that will permit anyone to rely upon it to avoid federal tax penalties. By using the legend we will be able to continue to provide federal tax advice in ways that are appropriate to the context in which the advice is requested, without forcing our clients to incur the significant costs associated with a formal opinion. Of course, when a formal opinion is appropriate and requested, we will comply with the requirements for preparing such an opinion and will not include the legend in the opinion.

If you have any questions or concerns about these new rules, please do not hesitate one of our CPAS in the tax department.

Tax Impact – July/August 2010

Congress extends homebuyer tax credit

Tax Impact – May/June 2010

Tax Changes Affecting Small Business In The 2010 Health Reform Legislation

Tax Changes Affecting Individuals In The 2010 Health Reform Legislation

Ten Tips for Deducting Charitable Contributions

Tax Impact – March/April 2010

2009 Shareholder’s Instructions for Schedule K-1 (Form 1120S)

2009 Partner’s Instructions for Schedule K-1 (Form 1065)

2009 Instructions for Beneficiary Filing (Form 1041)

Tax Impact – January/February 2010 (Premier Issue)

FAQs for Nonprofit Entities

Estate and Gift Tax Update – May 2009

Related Professionals

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Page 1 Schedule A

New and/or Notable for 2008 Tax Season and the 2009 Tax Year

Related Areas

The Risks & Benefits of Mazimizing Profits in the F&I Department Using PORCs

Related Professionals

Related Areas

Tax Report – January 2008

New limits on charitable contributions for 2006 and beyond

The Pension Protection Act of 2006

Revised Dependency Rules Effective in 2005

Energy-Efficient Commercial Property Deduction

NEW RULES ON WRITTEN FEDERAL TAX ADVICE UNDER TREASURY CIRCULAR 230

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