A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

Tax Reform "2.0" Timeline

The precise timing of a "phase two" tax reform bill or discussion draft release remains "to-be-determined," a House Ways and Means Committee spokesperson told Wolters Kluwer on June 14. However, Brady told reporters he expects to see a legislative package outlined before the House’s August recess.

Previously, White House Legislative Affairs Director Marc Short predicted a late-summer release of the House’s tax bill. Further, House Majority Leader Kevin McCarthy, R-Calif., has predicted that the House will approve the measure before midterm elections in November.

Individual Tax Cuts

Brady reiterated to reporters that "phase two" will focus on the individual side of the tax code. Moreover, making permanent the individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be the "centerpiece" of a " phase two" bill, Brady reportedly said. Additionally, Republican tax writers are considering proposals that would streamline the retirement savings process, a Ways and Means spokesperson previously told Wolters Kluwer.

Phase Two Fate Uncertain

The next major tax bill’s fate in the Senate remains uncertain. At least nine Democratic votes will be needed to reach the Senate’s 60-vote threshold. Brady has said he is hopeful for Democratic support.

However, Democratic lawmakers in the House and Senate remain largely opposed to the TCJA. Democrats have criticized the TCJA for primarily benefiting corporations. However, House Republicans are hopeful for bipartisan support on a new measure that focuses primarily on individual tax cuts.

A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

Rehabilitation Credit

As amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the rehabilitation credit under Code Sec. 47 is limited to 20 percent of qualified rehabilitation expenditures (QREs) of the taxpayer for qualified rehabilitated buildings. The credit is claimed ratably over a five-year period beginning in the tax year in which the rehabilitated building is placed in service. A "qualified rehabilitated building" (QRB) is a building and its structural components for which depreciation is allowable, and that has been substantially rehabilitated and placed in service before the beginning of the rehabilitation. The building must be a certified historic structure, but any expenditure attributable to rehabilitation of the structure is not a QRE unless it is a certified rehabilitation.

Property is considered substantially rehabilitated only if the expenditures during an elected 24-month measurement period (60-month period for phased rehabilitations) ending with or within the tax year are greater than the adjusted basis of the property or $5,000.

Basis-Adjustment Requirement

The bipartisan Historic Tax Credit Enhancement Bill, introduced June 13, would eliminate the existing basis-adjustment requirement. Eliminating this requirement would "bring the HTC in line with other tax credits claimed over multiple years," according to a joint press release by the bill’s sponsors.

The measure was introduced by Sens. Bill Cassidy, R-La., Ben Cardin, D-Md., and Susan Collins, R-Me., and Reps. Darin LaHood, R-Ill., and Earl Blumenauer, D-Ore. "Protecting this credit was one of my top priorities in tax reform, and I’m glad there is bipartisan support for making it even better," Cassidy said in the joint press release. Cardin praised the measure for helping to create economic growth.

Improved HTC

Likewise, Collins said the bill would make the HTC easier to use as well as create economic development across the country. Additionally, an improved HTC would create jobs, according to Blumenauer. "Strengthening the Historic Tax Credit will further revitalize American cities while creating local jobs and spurring economic development in communities large and small," Blumenauer said.

House tax writers have moved two bills through committee. The bills focus on IRS hiring and the tax treatment of mutual ditch irrigation companies. The House Ways and Means Committee approved the measures in a June 21 markup.

House tax writers have moved two bills through committee. The bills focus on IRS hiring and the tax treatment of mutual ditch irrigation companies. The House Ways and Means Committee approved the measures in a June 21 markup.

IRS Hiring

The Ensuring Integrity in the IRS Workforce bill (HR 3500) would set certain restrictions on the IRS’s hiring policy. The bipartisan bill would amend Code Sec. 7804 to prohibit the rehiring of any employee previously dismissed for certain misconduct issues.

The bill comes after two Treasury Inspector General for Tax Administration (TIGTA) reports noted that the IRS rehired hundreds of former employees with conduct violations. Over 200 of the more than 2,000 former employees rehired between January 2015 and March 2016 were previously terminated from the IRS for a substantiated conduct or performance issue, according to a July 2017 TIGTA report. Inspector General J. Russell George previously told lawmakers that the particular IRS hiring process is "bad decision making."

The bill, sponsored by Reps. Kristi Noem, R-S.D., and Kyrsten Sinema, D-Ariz., originally passed the House with bipartisan support in the 114th Congress. However, the Senate never took up the measure. Also, Sen. Richard Burr, R-N.C., introduced a related bill in the Senate.

"If a person is fired for falsifying information or mishandling sensitive taxpayer data, it’s common sense that individuals should not be rehired," Noem said in a June 21 press release. "Nonetheless, the IRS has done this repeatedly."

Agriculture Tax Reform

Additionally, the Ways and Means Committee approved the Water and Agriculture Tax Reform bill (HR 519). The bill aims to facilitate water leasing and transfers to promote conservation and efficiency. HR 519 would amend the "tax treatment of mutual water storage and delivery companies so that they can maintain their nonprofit status even if more than 15 percent of their revenue comes from nonmembers," according to a June 21 press release by the bill’s sponsor, Rep. Ken Buck, R-Colo.

HR 519 and HR 3500 are now headed to the House floor.

The American Bar Association (ABA) Section of Taxation has expressed concerns to top Senate tax writers about certain congressional IRS reform efforts. The ABA Section of Taxation sent a June 6 letter to Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah and ranking member Ron Wyden, D-Ore., regarding the House-approved bipartisan Taxpayer First Act (HR 5444).

The American Bar Association (ABA) Section of Taxation has expressed concerns to top Senate tax writers about certain congressional IRS reform efforts. The ABA Section of Taxation sent a June 6 letter to Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah and ranking member Ron Wyden, D-Ore., regarding the House-approved bipartisan Taxpayer First Act (HR 5444).

IRS Reform

"The administrative reforms included in the House bills are a welcome step forward," Hatch previously told Wolters Kluwer. The House passed a package of bills in April, which aims to restructure the IRS for the first time in 20 years. Hatch told Wolters Kluwer that he is looking forward to working with his colleagues to find a path forward that reflects both House and Senate views on IRS reform.

While the SFC considers the House’s IRS reform package, the ABA Section of Taxation has asked Senate tax writers to consider certain suggestions to enhance IRS restructuring efforts. "We appreciate that Congress has turned its attention to the relationship between taxpayers and the agency charged with the assessment and collection of taxes," the letter said. The ABA Section of Taxation agrees with most of the House-proposed changes but has concerns with certain aspects of the bill, the letter noted.

Appeals

The House bill, HR 5444, proposes the establishment of an independent Office of Appeals along with a "generally available" right to appeal for taxpayers. While the letter to Hatch and Wyden supports a statutory right to appeals, among other things, it expresses concern that the IRS could limit certain taxpayer’s access to an appeal. "To the extent that the Service wishes to deny appeal rights to taxpayers, it should be required to articulate objective standards for when appeals will not be available, so that any Service determination to deny appeal rights can be measured against those standards," the letter said.

Additionally, the letter proposes that Congress remove certain limiting words from the bill’s provisions that discuss taxpayers’ rights to access case files. Currently, the bill states that only "specified taxpayers" will automatically be provided access to their case files. The ABA Section of Taxation urges Congress to allow all taxpayers access to information in their case file, regardless of income thresholds.

Senate Timeline

As for when the SFC will release its anticipated amendments to the House-approved IRS reform package remains unclear. The Senate’s legislative efforts toward restructuring the IRS are expected among lawmakers to be bipartisan.

The U.S. Supreme Court has determined that nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act (RRTA). The term "money remuneration" in the Act unambiguously excludes "stock."

The U.S. Supreme Court has determined that nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act (RRTA). The term "money remuneration" in the Act unambiguously excludes "stock."

Background

Several railroads filed a refund claim for overpaid Railroad Retirement taxes. The railroads claimed they overpaid their taxes because they included the value of employee stock options when calculating the tax.

The IRS denied the refund request. The IRS argued that stock options were taxable "money remuneration" under the RRTA because stock can be easily converted into money.

The railroads replied that stock options are not money. Moreover, they argued that when Congress passed the RRTA, it sought to mimic existing industry pension practices. Generally, those practices ignored in-kind benefits like food, lodging, and railroad tickets.

Stock Options Not Money

When Congress adopted the RRTA in 1937, it understood "money" as "currency issued by a recognized authority as a medium of exchange." Stock options do not fall within this definition.

Further, while stock can be bought or sold for money, it is not usually considered a medium of exchange. Few people value goods and services using stock, or buy groceries or pay rent with stock.

Also, adding the word remuneration did not alter the meaning of the word money. Thus, "any form of money remuneration" indicated that Congress wanted to tax money compensation. It did not indicate that Congress wanted to tax things, like stock, that are not money.

Statutory Context

Moreover, the broader statutory context pointed to the same conclusion. For example, the 1939 Internal Revenue Code treated money and stock differently. However, the Federal Insurance Contribution Act taxes all remuneration, including benefits paid in a medium other than cash.

Further, a contemporaneous IRS rule explained that the RRTA taxed all money compensation. The rule lists examples like salaries, wages, commissions and bonuses. It also included things that could be used as money, like scrip. However, the rule did not suggest that stock was taxable compensation.

Thus, Congress knew the difference between money and other forms of compensation. The choice of Congress to use the narrower term for railroad pensions had to be respected.

Reversing and remanding CA-7, 2017-2 ustc ¶50,295.

A member of the Miccosukee Tribe of Indians of Florida had to pay federal income tax on distributions of gaming income that she and her family received from the tribe. The payments were taxable income under the Indian Gaming Revenue Act, rather than Indian general welfare benefits that were excluded from tax under Code Sec. 139E. Both the taxpayer and the tribe were bound by the decision.

A member of the Miccosukee Tribe of Indians of Florida had to pay federal income tax on distributions of gaming income that she and her family received from the tribe. The payments were taxable income under the Indian Gaming Revenue Act, rather than Indian general welfare benefits that were excluded from tax under Code Sec. 139E. Both the taxpayer and the tribe were bound by the decision.

Tribal Distributions

The Miccosukee Tribe distributed income to its members in quarterly payments. Historically, these payments were in the $20 to $25 range. In 1990, however, the tribe opened a gaming center that offered high-stakes bingo, poker, and video pull-tab machines. The tribe’s income, and its distributions to its members, increased substantially.

Each quarter, the tribe used the revenue of the gaming activities to fund per capita distributions to its members. But the tribe disregarded its federal tax obligations on these distributions. It neither reported the distributions nor withheld taxes on them. The tribe also told its members not to discuss the payments with outsiders, not to report them to credit card agencies, and not to cash the distribution checks in places that would report them to the IRS.

For the tax year at issue, the taxpayer received a total of $272,000, which represented payments for herself, her husband, and her two children. She did not file a tax return or pay any income tax for that year.

After the IRS assessed tax, interest and penalties against her, the taxpayer attempted to file a late return that reported the $272,000 as nontaxable income. She did not pay any of her assessment. The tribe intervened in her case as a matter of right.

District Court Decision

The District Court agreed with the IRS that the payments were distributions of gaming income that were fully taxable to the taxpayer. Most of the funds came from the gaming operation. The taxpayer and the tribe did not show what portion may have come from other, nontaxable sources.

Although the $272,000 included payments on behalf of the taxpayer’s husband and children, the taxpayer was responsible for tax on the entire amount. The tribe was structured as a matriarchy. Thus, the taxpayer was the head of her household, and the payments were all made available to her. She also spent all of the payments on household expenses, and she had reported all of the payments as her income when she tried to file a late return.

IGRA vs GWEA

The main issue on appeal was whether the tribe’s distributions were covered by the Indian Gaming Revenue Act or the Tribal General Welfare Exclusion Act.

The Indian Gaming Revenue Act (IGRA) was passed in 1988. It allows an Indian tribe to engage in gaming and distribute the revenue to members on a per capita basis. It also explicitly includes those distributions in a tribe member’s taxable income.

Code Sec. 139E was enacted in 2014 as part of the Tribal General Welfare Exclusion Act (GWEA). It excludes from federal taxation any payment made or services provided to or on behalf of an Indian tribe member under an Indian tribal government program. To be excludible, benefits provided under the program must be for the promotion of general welfare.

The court held that the exemption for Indian general welfare benefits under Code Sec. 139Edoes not apply to the per capita payments an Indian tribe makes from gaming revenue.

The taxpayer and the tribe claimed that GWEA effectively amended IGRA because it was more recent. The court disagreed, clarifying that IGRA applied only to gaming income, while GWEA was a law of general application. Thus, under the rules of statutory construction, IGRA continued to apply to distributions of gaming income because it was more specific than GWEA.

The court also rejected the characterization of the payments as distributions of the tribe’s tax revenues rather than its gaming income. The tax did not affect the nature of the gaming income. Instead, it was merely a mechanism to collect the income and distribute it to members.

The distributions also were not nontaxable income from Indian land, because they did not come directly from the use of the reservation land or its resources. Instead, the distributions came from improvements and related business activities–that is, gambling in the casino.

Effect on the Tribe

The tribe argued that it should not be included in the District Court’s judgment. However, the tribe had intervened as a matter of right because, if the court determined the payments were taxable, the tribe would have to report them and withhold income tax from them.

As an intervenor, the tribe had the same status as an original party. It also fully participated in the trial by arguing motions, attending depositions, presenting evidence, and examining witnesses. Thus, it was bound by the District Court’s judgment.

Affirming a DC Fla. decision, 2016-2 ustc ¶50,474.

An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

Background

The restaurants owned by the S corporation had hired “tipped employees” whose earnings came partly from customer tips. The S corporation was required to pay taxes on these tips as part of its FICA tax payments. For the two tax years at issue, the S corporation did not claim any FICA tip credits. Instead, the S corporation deducted its payments of the FICA tip taxes on its Forms 1120S, and did not later amend those returns.

On his amended Forms 1040 for those tax years, the shareholder claimed he was entitled to flowthrough FICA tip credits with respect to his interest in the S corporation.

FICA Tip Credit

Code Sec. 45B allows an employer working in the food and beverage industry to claim business tax credits for the portion of the FICA taxes—i.e., social security and Medicare taxes—that it paid on employee tips in excess of the minimum wage. The employer must have employees who receive tips from customers for providing food or beverages for consumption, and must be deemed to have paid FICA taxes on the tips in excess of the minimum wage. The employer must not have already claimed a deduction for the FICA tax payment. An employer claims its FICA tip credits on Form 8846.

Here, when the S corporation chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits. The S corporation never claimed or intended to claim FICA tip credits. Based on this reporting position, the shareholder was not entitled to any flowthrough FICA tip credits for either tax year.

S Corporation Elections

Under Code Sec. 1363(c) and its regulations, elections that affect the computation of items derived from an S corporation generally must be made by the S corporation, not separately by its shareholders. There are two exceptions: the shareholder claims any elections (1) for the deduction and recapture of certain mining exploration expenditures, and (2) for foreign tax credits.

In this case, the shareholder argued in effect that the S corporation’s election to deduct FICA tax payments could be changed unilaterally by his request, made in his capacity as a shareholder, that the S corporation amend its returns to claim the FICA tip credit. The shareholder’s position was rejected based on the plain text of Code Sec. 1363(c), and of Code Sec. 45B(d), which states that the credit does not apply to a taxpayer if the taxpayer elects to have the credit provision not apply.

Further, the Tax Court stated that it refused to create a new precedent that would give each individual shareholder the power to change an S corporation’s tax election unilaterally. Such a change, stated the court, would not only affect the tax liabilities of the requesting shareholder, but could also affect the tax liabilities of the shareholders who have not consented to the change.

The Treasury Department and the IRS have issued final regulations that:

• prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities;
• allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for purposes of limiting the application of rules that might otherwise cause basis reduction or gain recognition; and
• require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

The Treasury Department and the IRS have issued final regulations that:

• prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities;
• allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for purposes of limiting the application of rules that might otherwise cause basis reduction or gain recognition; and
• require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

The Treasury Decision adopts as final certain rules set forth in proposed regulations issued in 2015, under Code Sec. 337(d) (with only minor, nonsubstantive clarifications) ( NPRM REG-149518-03), and Code Sec. 732(f) ( NPRM REG-138759-14).

The final regulations affect partnerships and their partners, and apply to transactions occurring on or after June 12, 2015. The regulations are effective on June 8, 2018.

Acquisition of Interest in Stock to Avoid Gain on Appreciated Property

A corporation that distributes appreciated property to its shareholders has to recognize gain under Code Secs. 311(b) and 336(a) as if the property were sold to the shareholders for its fair market value. However, taxpayers have tried to postpone or avoiding the recognition of that gain.

For example, if a corporation exchanges appreciated property for its own stock, the corporation would recognize gain on the exchange. But corporations have tried to avoid recognizing that gain by, for example, taking these steps:

• the corporation enters into a partnership and contributes appreciated property;
• the partnership acquires stock of that corporate partner; then
• the partnership makes a liquidating distribution of the stock to the corporate partner.

The final regulations under Code Sec. 337(d) aim to prevent a corporate partner from avoiding gain recognition when it acquires or increases its interest in stock held by a partnership in exchange for appreciated property. Under the final regulations, a corporate partner may recognize gain when it is treated as acquiring or increasing its interest in stock of the corporate partner held by a partnership in exchange for appreciated property in a manner that avoids gain recognition under Code Sec. 311(b) or Code Sec. 336(a). The final regulations also provide exceptions under which a corporate partner is not required to recognize gain.

Limit on Basis Reduction or Gain Recognition for Consolidated Group Members

The final regulations limit rules that cause basis reduction or gain recognition for consolidated group members that are partners in the same partnership. Code Sec. 732(f)limits the basis of a distributed corporation’s property if—

• a corporate partner receives a distribution from a partnership of stock in another corporation (distributed corporation);
• the corporate partner has control of the distributed corporation, defined as ownership of stock meeting the requirements of Code Sec. 1504(a)(2), immediately after the distribution or at any time thereafter (control requirement); and
• the partnership’s basis in the stock immediately before the distribution exceeded the corporate partner’s basis in the stock immediately after the distribution.

Under these circumstances, the basis of the distributed corporation’s property must be reduced by this excess. Further, the corporate partner must recognize gain to the extent that the basis of the distributed corporation’s property cannot be reduced.

In applying this rule, the final regulations allow the bases of consolidated group members to be aggregated if when two conditions are met: (1) two or more of the corporate partners receive a distribution of stock in a distributed corporation from the partnership; and (2) the distributed corporation is or becomes a member of the distributee partners’ consolidated group after the distribution.

Elimination Transactions

Final regulations restrict corporate partners from entering into gain elimination transactions. They focus on attempts to eliminate gain in the stock of a distributed corporation while avoiding the effects of a basis step-down in transactions. Under the regulations, in the event of a gain elimination transaction, Code Sec. 732(f) will apply as though the corporate partner acquired control of the distributed corporation immediately before the gain elimination transaction.

Future Proposed Regs?

The Treasury and IRS are considering publishing a new notice of proposed rulemaking to propose more substantive amendments to the final 337(d) regulations, and to allow for additional public comment with respect to proposals in response to certain comments received, further reflection by the Treasury IRS, and concerns raised by practitioners.

Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Son-of-BOSS Arrangements

Son-of-BOSS is a variation of a slightly older tax shelter known as the "bond and options sales strategy," or BOSS. Son-of-BOSS transactions take many forms, but they all have one thing in common: Assets that are encumbered by significant liabilities must always be transferred to a partnership. The goal is to increase basis in that partnership or in the assets themselves.

The liabilities are usually obligations to buy securities. However, they are typically not completely fixed when they are transferred to the partnership.

This contingency is supposed to let the partnership treat the liabilities as uncertain. This, in turn, is supposed to let the partnership ignore the liabilities in computing basis. The result is supposed to give the partners basis in the partnership or in the assets themselves. This increased basis is supposed to translate into large loss deductions for the partners, all with no actual economic losses.

The Tax Court has yet to fall for the scheme.

Invalid Partnerships

The court has used several theories to reject Son-of-Boss losses. In this case, the court once again relied on the fact that the two partnerships involved in the transactions did not actually exist.

The partnerships were invalid because they were created only to carry out tax avoidance schemes. Thus, their members never intended to run any business through them.

The partnerships also failed the “prongified” test for determining whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise. One managed to scrupulously adhere to the formal requirements for looking like a partnership. However, it did not display any objective indication of a mutual combination for the conduct of an ongoing enterprise.

The second partnership barely even went through the motions. It filed partnership returns and issued K-1s to its purported partners. However:

• There was no evidence the purported partners made any contributions to the partnership;
• The partnership did not have a formal operating agreement;
• The partnership did not conduct any business in its own name;
• There was no real profit for the partners to control or withdraw; and
• The partnership did not keep any books or records.

Since the partnerships were invalid, they were simply disregarded. Thus, the purported partners were treated as directly engaging in the partnerships’ activities and directly owning the partnerships’ property. This meant that the supposedly separate long and short options that were the heart of the transaction were actually a single-option spread. Thus the options were part of one contract, and they could not be separated to produce artificial losses.

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

Rising healthcare costs affect small businesses

If you are like most employers today, you have been dealing with the sting of rising prices for health benefits for some time. As a matter of economic survival, many small businesses have had to pass on at least some of the cost of providing health, dental and prescription benefits to their employees. As the prices continue to rise to fund these benefits, employees have been required to pay an increasing share of these costs. Establishing a cafeteria plan can be a way to make this problem more palatable for your employees at relatively little cost to your business.

Cafeteria plans defined

Technically, a cafeteria plan is a program through which you can offer your employees a choice between two or more "qualified benefits" and cash. The plan must be set forth in a written document and it can only be offered to employees. Depending on what you want to accomplish through a cafeteria plan, the plan can vary from being extremely simple (e.g., premium conversion plans) to being somewhat more complex as more features are added (e.g. flexible spending accounts).

Premium conversion plans: Popular and simple

A very simple type of cafeteria plan that is very popular among small to mid-size employers is sometimes referred to as a "premium conversion" plan. Establishment of a premium conversion plan would not require you to provide any significant additional funding for benefits other than what you are currently spending.

Here's how it works: through the structure of a cafeteria plan, you can offer your employees the ability to use pre-tax dollars to pay the portion of premiums you require them to contribute for their health, dental, and prescription benefits (including the cost of dependent benefits). Using pre-tax dollars to pay for their portion of health care premiums saves your employees money and will result in more net dollars in their paychecks. It may seem surprising, but your employees will appreciate even this small dollar-saving benefit.

With a premium conversion plan, the only costs to you as an employer is the expense of hiring an attorney or other benefits professional to draft a cafeteria plan document for you and the expense of making the small adjustment to your system of payroll deductions so that the employees' portion of the health benefit premiums is deducted from their gross pay rather than their after-tax pay.

Flexible spending accounts

Another benefit that can be made available under a cafeteria plan is a flexible spending account option. These accounts permit employees to have a specific amount withheld from each paycheck and set aside to be used for reimbursement of medical expenses not covered by the group health insurance plan or to be used to cover dependent care expenses. Keep in mind, however, that if you want to establish flexible spending accounts through a cafeteria plan, it will involve more ongoing administrative expense on your part than a simple premium conversion cafeteria plan.

Additional options

You also may want to offer your employees a cafeteria plan which provides them a set dollar value that each employee can take either as additional salary or choose to spend on a variety of benefits, e.g., health insurance, dental coverage, dependent care, or retirement plan contributions. With this type of plan, all benefits other than additional salary are not taxable to the employee. This type of plan can provide desirable flexibility to your employees, but will also cost more to establish and administer.

As you make the determination regarding what type of benefit program you would like to offer your employees, there are many other options that should be taken into consideration. If you require additional guidance, please contact the office for a consultation.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

In the ruling, the IRS determined that the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code's new capital gains exclusion on the sale of the house. The exclusion permits those who sell their personal residence anytime after May 6, 1997, to exclude up to $250,000 in capital gains ($500,000 for those filing joint returns). The IRS concluded that the individual's inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.

Family trusts: A common estate planning tool

As part of an estate plan, an individual may place assets, such as a home, into a trust and name an income beneficiary or beneficiaries. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Only the trust's designated trustees have the power to make decisions related to the encumbrance or disposal of the trust's assets. When the asset is a personal residence, this type of trust allows for preferential estate tax treatment while the income beneficiary has the ability to continue living in the home.

IRS: "No Capital Gain Exclusion"

The IRS's stance is that, even though an individual may have enjoyed the use of a house for many years, if the house was in a family trust, ownership of the house would always be vested in the trust. Under the federal tax rules, a beneficiary of a trust may be deemed an owner of the trust if he or she has the power to reach and to take all of the trust's assets for his or her use. When a beneficiary is treated as an owner, a sale by the trust is equivalent to a sale by the beneficiary. However, when an income beneficiary has no control over the fate of the assets of the trust, the IRS has found that the beneficiary is not the owner of the trust and therefore would not qualify for the Tax Code's capital gains exclusion upon the sale of a residence held in such trust.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. Please contact the office for additional guidance in this area.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

• You do not itemize your deductions;
• Your adjusted gross income (AGI) is over a certain amount;
• Part of your home is not a "qualified home"
• Your home is secured by a mortgage that was acquired (and/or subsequently refinanced) prior to October 14, 1987
• You used any part of the loan proceeds to invest in tax-exempt securities.

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

Q. My wife and I are both retired and are what you might call "social gamblers". We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

Q. My wife and I are both retired and are what you might call "social gamblers." We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

A. The technical answers to your questions are "yes" and "maybe," respectively. However, does it make much practical sense to report your $50 jackpot from the Sunday afternoon bingo game at the church? Probably not. In most circumstances, the taxpayer's cumulative gambling losses far exceed any winnings he may have had.

Here are the technical rules regarding reporting gambling winnings and losses:

Gambling winnings are taxable income and should be reported on your income tax return. In addition to cash winnings, you are required to report the fair market value (FMV) of all non-cash prizes you receive. For the most part, you are on the honor system when it comes to reporting small winnings to the IRS. Large payouts, on the other hand, will most likely be accompanied by IRS Form W-2G and a substantial amount will be deducted for withholding. Gambling winnings should be reported as "Other income" on the front page of Form 1040.

Gambling losses may only be included on your tax return if you itemize your deductions and then they are only deductible up to the amount of your gambling winnings. If you do itemize, those losses would be included as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income (AGI) limit on Form 1040, Schedule A. However, keep in mind that if your AGI exceeds a certain amount, your total itemized deductions may be limited, reducing the likelihood of a direct offset of gambling income and losses.

Once you've tallied up your winnings and losses and reported them on your tax return, how do you substantiate your gambling income and deductions to the IRS? Here are some guidelines offered by the IRS that will help you in the event that your gambling claims are ever questioned:

Keep a log or a journal. The IRS suggests entering all of your gambling activities in a small diary or journal - you may want to consider one that can be carried with you when you frequent gambling establishments. Here is the information you should keep track of:

• Date and type of specific wager or wagering activity;
• Name of gambling establishment;
• Address or location of gambling establishment;
• Name(s) of other person(s) present with you at gambling establishment; and,
• Amount(s) won or lost.

Retain documentation. As with any item of income or deduction claimed on your return, the IRS requires adequate documentation be kept to substantiate the amount claimed. Acceptable documentation to substantiate gambling winnings and losses can come in many different forms, depending on what type of activity you are engaging in. Examples include lottery tickets, canceled checks, wagering tickets, credit records, bank withdrawals and statements of actual winnings or payment slips provided by the gaming establishment.

Although it may seem difficult to keep track of your gambling activity at the time, it is obvious that keeping good records can benefit you if you ever "hit the jackpot". If you have any further questions on this matter, please contact the office for assistance.

In today's tight job market, small business owners are finding it increasingly difficult to keep good employees on board and content. A much overlooked employee benefit - employee achievement awards - can allow you to reward your best employees with tax-free income.

In today's tight job market, small business owners are finding it increasingly difficult to keep good employees on board and content. A much overlooked employee benefit - employee achievement awards - can allow you to reward your best employees with tax-free income.

What is an employee achievement award? As an employer, you may give your employees cash or other tangible personal property to reward them for achieving certain standards or milestones within the workplace. In order to qualify as an employee achievement award in the eyes of the IRS, an award must meet the following criteria:

• Amount limit: not to exceed $400 per employee for awards that are not "qualified plan awards," with the total for all awards not to exceed $1,600 (whether qualified or not). A qualified plan award is one that is awarded as part of an established plan that does not take into consideration compensation as to eligibility or benefits.
• Form of award: the award must be tangible personal property that is:
• Based upon length of service or safety achievement;
• Is given in a meaningful presentation; and
• Is not merely "disguised pay."

 Who can receive these awards?

Length-of-service award. In order to be eligible to receive an award based upon length of service with the employer, an employee must:

• Have worked for the employer for more than 5 years, or;
• Have not received a length-of-service award during the year of the award or in any of the prior 4 years.

Safety achievement award. In order to be eligible to receive an award based upon safety in the workplace, an employee must not be a manager, administrator, clerical or other professional employee. Also, if more than 10% of the employees are given the award, it will not qualify under this provision.

How much can I deduct? As an employer, you are entitled to deduct an amount given for employee achievement awards up to the amount limits specified above. This amount would be included on the "Other deductions" line of your company's tax return.

How much is taxable to the employee? As long as the award given does not exceed the amount limits specified above, the award will not be includible as wages to the employee. Any awards given on excess of the limits would be includible in the employee's wages.

While definitely not on the same level as stock options in a pre-IPO company as an employee retention tool, employee achievement awards are a nice way to reward your best employees with tax-free income. If you need more info regarding these types of awards, please feel free to contact the office.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.

In addition to decisions that affect the day to day operations of the company, the new business owner will also be faced with accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be considered carefully.

In addition to decisions that affect the day to day operations of the company, the new business owner will also be faced with accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be considered carefully.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. You choose your method of accounting when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

• If the business has inventory.

• If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please do not hesitate to call.

When you experience a change in employment, probably the last thing on your mind is your 401(k)-plan distribution. Since mishandling this transaction can have detrimental tax effects, make sure that you understand all aspects of the distribution options available to you and act accordingly before you walk out the door.

When you experience a change in employment, probably the last thing on your mind is your 401(k)-plan distribution. Since mishandling this transaction can have detrimental tax effects, make sure that you understand all aspects of the distribution options available to you and act accordingly before you walk out the door.

There are generally four options available to you for taking a distribution from your 401(k) plan:

Take the cash. Although leaving your job with a nice roll of cash in your pocket sounds tempting (especially if you don't have another job lined up and are short on cash), be aware that this decision may come at a high price. On top of the required 20% withholding that your current employer must take for federal taxes, additional federal and state taxes and penalties imposed on your distribution could eat up over half of your distribution.

Roll your funds over into an IRA. An IRA rollover is probably the most popular option for handling a distribution upon a change of employment due to the high level of flexibility and control that the taxpayer has over the funds. With an IRA rollover, you have the ability to take your time to consider the other options such as taking the distribution in cash or investing the funds in your new employer's qualified plan. You also have a great amount of flexibility as to how the funds are invested.

Keep in mind, however, that only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for rollover into an IRA. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the IRA.

Important note: the transfer of funds between your former employer's plan and your IRA rollover account must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20% withholding requirement. When you receive the distribution check (it will be in the name of the IRA trustee), you have 60 days to deposit it into your IRA account to qualify for rollover treatment.

Invest in your new employer's plan. Your new employer may allow you to invest your 401(k) distribution in the new company's qualified retirement plan. However, only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for this type of rollover. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the new plan.

Important note: the transfer of funds between your former employer and your new employer must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20% withholding requirement. When you receive the distribution check (it will be in the name of the new employer's plan trustee), your new employer must deposit it into the new company's plan within 60 days to qualify for rollover treatment.

Keep your funds in your current plan. If you have been satisfied with your company's plan performance in the past, have significant after-tax moneys in the fund, and/or you just don't want to make a decision on your distribution at this time, you may want to just leave your 401(k) funds where they are. Keep in mind that this option is not a given and is at the discretion of your former employer.

One important thing to consider here though is whether keeping your funds with your former employer will limit distribution or access options since you are no longer an employee of the company. Contact your company's benefits department to determine if there are any restrictions that you should know about.

Note: Whichever distribution option you choose, be aware that, upon departure from your current job, you must repay any previous loans you took from your 401(k) plan. Any unpaid loans will be treated as a distribution, will be subject to taxation as ordinary income and, if you are under age 59 1/2, will be subject to early distribution penalties.

Since the distribution of funds from any retirement account can have serious tax consequences, when faced with a change of employment that may result in a distribution of any such funds, please contact the office for additional advice and guidance before you choose a distribution option.

Q. I've seen a lot of advertisements lately that tout the benefits of donating your car to charity. I have an old car that is sitting in my driveway and I haven't had time to try to sell it. Would I just be better off contributing it and getting a big write-off on my tax return?

Q. I've seen a lot of advertisements lately that tout the benefits of donating your car to charity. I have an old car that is sitting in my driveway and I haven't had time to try to sell it. Would I just be better off contributing it and getting a big write-off on my tax return?

A. No. From a financial standpoint, you will never be better off donating your car than you would if you sold it on your own. In fact, if your income is too low and/or you don't itemize your deductions on your return, it could be a real money loser.

Here's an example:

You have an old Toyota Camry with 120,000 miles on it. High Kelly Blue Book is $3,000 and low is $2,000. If you are in the 15% tax bracket and already itemize, your tax savings could be as much as $450. However, if you don't itemize, you may get no tax benefit at all since charitable contributions cannot be taken by taxpayers who take the standard deduction.

Of course, convenience is one of the prime selling points used by charities to get people to donate their cars but that convenience may come at a very high cost, to both you and the charitable organization. Once the dealers that pick up, repair and then resell the donated vehicles get their piece, the charity can end up with as little as $100 per car.

The amount of the actual tax deduction itself can raise more issues. How do you value your car for tax purposes? The tax law states that you cannot take a deduction for a noncash contribution in excess of its fair market value (FMV) but how is that FMV determined? Auto valuation publications such as Kelly Blue Book are a good place to start but give a range of values depending on certain factors (mileage, condition, etc.). In the example above, you may be tempted to take the $3,000 deduction but, based upon the high mileage, you would probably be safer taking an amount closer to $2,000. However you value your car, make sure that you document your contribution with photos and price guide quotes such as Kelly's.

Moreover, general substantiation requirements apply to all deductions for charitable contributions of property. And additional requirements apply to contributions of $250 or more and deductions of $500 or more. In order to claim a deduction for the donation of a qualified vehicle that has a FMV exceeding $500, you must obtain a contemporaneous written acknowledgement of the donation from the charity and include this with your tax return.

Donor beware

Some charitable organizations claim that you can donate your old car for full "blue book" value no matter what condition the car is in - running or not. Under these programs, donors are advised to take a very high value even if their car is in terrible shape. Often, these programs are operated not by the charity but by a used-car dealer under a licensing agreement with the charity. IRS officials have called these schemes abusive.

The IRS has identified some suspect vehicle donation programs. The typical profile for these programs involves a charity that permits, for a flat fee or royalty type arrangement, third party for-profit companies to use the charity's name to solicit contributions of cars, to receive the cars, to transfer title, and to sell them at auction or to scrap yards. According to the IRS, these types of transactions result in a transfer not to the charitable organization, but to the for-profit company. As such, the person making the donation cannot claim a charitable donation.

In these suspect donation programs, all the participants may have violated federal tax laws. The used car dealer may be guilty of promoting and aiding a fraudulent tax shelter while the charity may jeopardize its tax-exempt status and the donor may be a liable for tax penalties as a knowing participant in an "abusive tax shelter."

Document, document, document...

When donating a car, or a boat or computer, documentation is key to protect yourself from being an unwilling participant in one of these schemes. The tax law states that you cannot take a deduction for a noncash contribution in excess of its fair market value (FMV) but how is that FMV determined? Auto valuation publications such as Kelly Blue Book are a good place to start but give a range of values depending on certain factors (mileage, condition, etc.). Make sure that you are realistic about the condition of your car and its resulting value. However you value your car, make sure that you document your contribution with photos and price guide quotes such as Kelly's.

Repair bills and even tentative written offers from auto dealers should be kept. All charitable contributions of $250 or more must be substantiated by a written acknowledgement from the charity. While an acknowledgement need not value the property, it must describe the property.

Your best bet? Sell the car on your own and contribute the proceeds from the sale. That way you will be sure that the charity gets 100% of your contribution and you won't have to deal with potential valuation problems with the IRS down the road.

Talking about money with your aging parents can be awkward but is a necessary step to make sure that their needs will be met during their lifetime. Taking a few minutes to talk with your parents about their finances can give all of you more peace of mind.

Talking about money with your aging parents can be awkward but is a necessary step to make sure that their needs will be met during their lifetime. Taking a few minutes to talk with your parents about their finances can give all of you more peace of mind.

Have they prepared a will and other necessary documents? No one would knowingly choose Uncle Sam as the executor of their estate, but for those who die without a will, that's exactly what they've done. Make sure that your parents have valid, updated wills in place as well as other important estate planning tools such as trusts, living wills and durable powers of attorney (for health care), if applicable. It's also important that they provide you with the physical location of such documents.

Do they have a list of their important documents and their whereabouts? Helping your parents organize their financial documents now can save a lot a headaches upon their death or incapacitation. Consider compiling a simple checklist that they can go through that specifies details (including physical location) about bank accounts, safe deposit boxes, life/health/homeowners insurance, real estate holdings, pension plans, securities, debts, and other assets and debts. Provide copies of the checklist to several trusted family members.

Have they provided adequately for retirement? Advances in the field of medicine are making us live longer, a fact that must be considered when determining how much money your parents will need to support themselves during their lifetime. While gifting your estate to your family members can be a valuable estate planning tool, it can be disastrous if not combined with a good retirement plan that takes into consideration an extended life span.

Have they made their last wishes known? Because older people sometimes fear talking about death, many of their last wishes go unfulfilled. Try to get them to discuss such preferences as cremation vs. burial, and share their thoughts on topics such as assisted care facilities and what measures should be taken to extend life in a terminal situation. These topics can be brought up directly or indirectly in a typical conversation.

Because the details of a person's estate plan are so personal, it may be difficult to ascertain how to broach the subject with your parents. Here are some gentle ways to open a dialog on the subject:

Discuss your own estate planning efforts. It's possible that your parents may not associate estate planning directly with death if they see a relatively young person taking action to ensure the smooth transfer of his assets upon death. This may also give you the opportunity to refer them to your financial advisor if they have not yet developed a plan.

Have an unrelated party bring the subject up. Invite a friend or associate over that is well-versed in financial matters. Listening to this person talk about the benefits of estate planning may be just the push your parents need to move into action on their own estate plan.

Test the waters. If it appears that your concern for your parents' financial well being is being misconstrued as an unusual level of interest in their assets, you may need to back off and approach the subject at a later date. But don't put the deed off indefinitely - you may find that once you get around to it again, it may be too late.

Q. I've just started my own business and am having a hard time deciding whether I should buy or lease the equipment I need before I open my doors. What are some of the things I should consider when making this decision?

Q. I've just started my own business and am having a hard time deciding whether I should buy or lease the equipment I need before I open my doors. What are some of the things I should consider when making this decision?

A. Deciding whether to buy or lease business property is just one of the many tough decisions facing the small business owner. Unfortunately, there's not a quick answer and, since every business has different fact patterns, each business owner will need to assess every type of business property separately and consider many different factors to make a decision that is right for his or her particular circumstances.

While there are advantages and disadvantages to both buying and leasing business property, the business owner should carefully consider the following questions before making a final decision either way:

How's your cash flow? If you are just starting a business, cash may be tight and a hefty down payment on a piece of equipment may bust your budget. In that case, since equipment leases rarely require down payments, leasing may be a good choice for you. One of the biggest advantages of leasing is that you generally gain the use of the asset with a much smaller initial cash expenditure than would be required if you purchased it.

How's your credit? Loans to new small businesses are hard to come by so if you're a fairly new business, leasing may be your only option outside of getting a personal loan. As a new business, you will definitely have an easier time getting a company to lease equipment to you than finding someone to extend you credit to make the purchase. However, if you have time to search for credit well in advance of needing the equipment, you may want to purchase the equipment to begin establishing a credit history for your company.

How long will you use it? A general rule of thumb is that leasing is very cost-effective for items like autos, computers and other equipment that decrease in value over time and will be used for about five years or less. On the other hand, if you are considering business property that you intend to use more than five years or that will appreciate over time, the overall cost of leasing will usually exceed the cost of buying it outright in the first place.

What's your tax situation? Don't forget that your tax return will be affected by your decision to lease or buy. If you purchase an asset, it is depreciated over its useful life. If you lease an asset, the tax treatment will depend on what type of lease is involved. There are two basic types of leases: finance and true. Finance leases are handled similarly to a purchase and work best for companies that intend to keep the property at the end of the lease. Payments on true leases, on the other hand, are deductible in full in the year paid.

The answers to each question above need to be considered not individually, but as a group, since many factors must be weighed before a decision is made. Buying or leasing equipment can have a significant effect on your tax situation and the rules related to accounting for leases are very technical. Please contact our office before you make any decisions regarding your business equipment.

Ask someone whether they've created a long-term financial plan and they are likely to answer, "Not me...I'm not rich enough, old enough, etc..." While most people realize the importance of financial planning, there still exist several misconceptions about who it can benefit and how to get the most out of it.

Ask someone whether they've created a long-term financial plan and they are likely to answer, "Not me...I'm not rich enough, old enough, etc..." While most people realize the importance of financial planning, there still exist several misconceptions about who it can benefit and how to get the most out of it.

Myth #1: Only wealthy people should develop financial plans. Financial planning is for anyone who wants to achieve either short-term or long-term financial goals, such as retiring, attending college, buying a home or leasing a car.

Myth #2: Financial planning is just about investing. While investing your money as you strive to reach your financial goals makes good sense, keep in mind that financial planning also involves the proper handling of your taxes, insurance, retirement, budgeting, estate planning, and life goals. A comprehensive financial plan should coordinate often competing financial aspects of your life while developing strategies and objectives that enable these aspects to work together effectively to meet your goals.

Myth #3: Financial planning is for older people. If you want to meet your financial goals, you need to start now, no matter what your age. Waiting until you are older limits your financial opportunities and your ability to bear some risk. For example, every ten years you wait to save towards retirement, you must save three times as much per month in order to reach the same size retirement account. If you wait too long, many financial strategies will become useless or less effective for you.

Myth #4: You only need to create a financial plan once. While implementing a financial plan is important, just as important is the maintenance of your plan. Financial planning is a life long process. Every time your financial situation changes, such as getting married, moving or having children, you must review and update your financial plan. Changing markets and personal needs may dictate an adjustment of your financial plan. Changing tax laws may also require additional adjustments.

A little planning now for your financial goals will save a lot of grief and panic in the future. If you are interested in finding out more about how you can benefit from financial planning, please contact our office.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

Soon after you start making money and the world realizes that they cannot live without your goods or service, you will probably need to hire employees. Although necessary for your growing company, hiring employees increases your risk of loss through errors, oversights and theft.

Implementing internal controls to help you monitor your business can decrease the need for constant supervision of your employees. Internal controls are checks and balances to prevent fraud, limit financial losses and reduce errors or oversights by employees. For example, the most basic internal control concept requires that certain tasks be handled by different people. This process, called "separation of duties", can greatly decrease the probability of loss.

The following basic internal control checklist includes suggestions that, once implemented, can help you and your employees avoid concerns about fraud or theft in the workplace:

• Have one person open the mail and list all the checks on the deposit slip while another enters cash receipts in your financial records.

• Make sure someone who does not handle the checkbook or purchasing is in charge of payments to suppliers and vendors.

• Have your bank reconciliation done by someone who does not have access to daily checkbook transactions.

• Make sure that you approve all vendors and that you count all goods received. Check all orders to make sure they are correct and of the quality you intended. Sign each check and review the invoice, delivery receipt and purchase order.

As your company grows, you may want to become less and less involved with the day-to-day operations of the business. The internal controls you put into place now will help keep the profits up, the losses down, and help you sleep better at night. If you need any assistance with setting up internal controls for you business, please feel free to contact our office.

For some taxpayers, investing in a small start-up business may be a lucrative place to put your money. But, as with any other investment, there are risks. Fortunately, the Internal Revenue Code also provides some relief from the inherent risk of investing in a small business. If executed properly, investors in small businesses can deduct losses from Section 1244 stock far in excess of the $3,000 per year limit on capital losses.

For some taxpayers, investing in a small start-up business may be a lucrative place to put your money. But, as with any other investment, there are risks. Fortunately, the Internal Revenue Code also provides some relief from the inherent risk of investing in a small business. If executed properly, investors in small businesses can deduct losses from Section 1244 stock far in excess of the $3,000 per year limit on capital losses. They can also pay less capital gains tax when the business becomes successful.

Losses. Under Section 1244 of the Internal Revenue Code, taxpayers are allowed to write off a loss of $50,000 ($100,000 if married filing joint return) on qualifying small business stock in any one year. The loss is allowed in the year the business fails or when the taxpayer sells his stock. This provision applies to both C corporations and S corporations, whether the taxpayer is active in the business or not.

Without Section 1244, a taxpayer realizing a loss from the disposition of the stock of a small corporation would only be able to use the loss to offset capital gains from other investments or ordinary income up to $3,000 per year. In addition to the $50,000 ($100,000 for joint filers) first year loss allowed, any excess losses from Section 1244 stock (over the $50,000/$100,000) can be carried forward and claimed in future years (although in future years, the $3,000 per year limit will apply).

"Qualifying small business stock" defined. In order for losses from the disposition of small business stock to qualify under Section 1244, the following requirements must be met:

• Total original capitalization less than $1 million. When the corporation was formed, the total money or property it received for stock must have been less than $1 million in order for the stock to be Section 1244 stock.

• Business must be active business. The business must be "largely an operating company" with greater than 50% of its gross receipts in the previous five years coming from nonpassive sources.

• Must be original issue stock. Only the original purchaser of the stock is eligible to take advantage of the provisions under Section 1244. The stock must be purchased from the company on original issue to qualify.

• Stock must be issued for money or property only. The stock must be issued in exchange for money or property (other than stock or securities) only. Stock received in exchange for services to the business will not qualify as Section 1244 stock. Also, contributing a note to the corporation in exchange for stock will not qualify.

• Stock must actually be issued. The corporation must actually physically issue stock certificates for the money or property contributed. It is not required that this be done when the corporation is initially capitalized; a corporation can issue additional stock at a later date.

Example: Bob and Mark incorporated ABC Inc. Both of them contributed $100,000 and were issued 10,000 shares of stock. During the year, both of them need to make an additional capital contribution of $50,000 to cover operating expenses. Although the additional capital contribution hasn't changed their respective ownership percentages in the corporation, the corporation must issue additional shares in order for any potential loss related to the contribution to qualify as Section 1244 stock. Without the actual issuance of stock certificates, the $50,000 would just be an additional capital contribution to the corporation and will not qualify as Section 1244 stock.

Gains. Under the American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act), investors may exclude up to 75 percent of the gain from the sale of certain small business stock acquired and held for more than 5 years. The increased exclusion applies only to stock acquired after February 17, 2009 and before January 1, 2011. For purposes of the temporary incentive, a "small business" in this case can have assets up to $50 million and must conduct an "active trade or business."

Reporting requirements. In the year of a loss, a statement must be included with your individual tax return stating that you are taking a loss pursuant to Section 1244. If audited in subsequent years, be prepared to provide additional information about the corporation that issued the stock such as physical address, # of shares outstanding, etc...; how the stock was acquired and what consideration was paid; and, the fair market value (FMV) of any property and your basis in the property at that time, if the stock was acquired for property instead of cash.

It's crucial that the requirements for deducting a loss pursuant to Section 1244 be met before a loss is claimed. Failure to meet the requirements of Section 1244 may result in a loss being reclassified as a regular capital loss, limiting your loss against ordinary income to the $3,000 capital loss annual limit. A disallowed loss claim discovered in a subsequent year could result in a very large tax bill.

If you are contemplating an investment in a small business and think that Section 1244 may apply to you, please feel free to contact our office for assistance.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

An LLC is a legal entity existing separately from its owners that has certain characteristics of both a corporation (limited liability) and a partnership (pass-through taxation). An LLC is created when articles of organization (or the equivalent under each state rules) are filed with the proper state authority, and all fees are paid. An operating agreement detailing the terms agreed to by the members usually accompanies the articles of organization.

Choosing the LLC as a Business Entity

Choosing the form of business entity for a new company is one of the first decisions that a new business owner will have to make. Here's how LLCs compare to other forms of entities:

C Corporation: Both C corporations and LLCs share the favorable limited liability feature and lack of restrictions on number of shareholders. Unlike LLCs, C corporations are subject to double taxation for federal tax purposes - once at the corporate level and the again at the shareholder level. C corporations do not have the ability to make special allocations amongst the shareholders like LLCs.

S Corporation: Both S corporations and LLCs permit pass-through taxation. However, unlike an S corporation, an LLC is not limited to the number or kind of members it can have, potentially giving it greater access to capital. LLCs are also not restricted to a single class of stock, resulting in greater flexibility in the allocation of gains, losses, deductions and credits. And for estate planning purposes, LLCs are a much more flexible tool than S corporations

Partnership: Partnerships, like LLCs, are "pass-through" entities that avoid double taxation. The greatest difference between a partnership and an LLC is that members of LLCs can participate in management without being subject to personal liability, unlike general partners in a partnership.

Sole Proprietorship: Companies that operate as sole proprietors report their income and expenses on Schedule C of Form 1040. Unlike LLCs, sole proprietors' personal liability is unlimited and ownership is limited to one owner. And while generally all of the earnings of a sole proprietorship are subject to self-employment taxes, some LLC members may avoid self-employment taxes under certain circumstances

Tax Consequences of Conversion to an LLC

In most cases, changing your company's form of business to an LLC will be a tax-free transaction. However, there are a few cases where careful consideration of the tax consequences should be analyzed prior to conversion. Here are some general guidelines regarding the tax effects of converting an existing entity to an LLC:

C Corporation to an LLC: Unfortunately, this transaction most likely will be considered a liquidation of the corporation and the formation of a new LLC for federal tax purposes. This type of conversion can result in major tax consequences for the corporation as well as the shareholders and should be considered very carefully.

S Corporation to an LLC: If the corporation was never a C corporation, or wasn't a C corporation within the last 10 years, in most cases, this conversion should be tax-free at the corporate level. However, the tax consequences of such a conversion may be different for the S corporation's shareholders. Since the S corporation is a flow-through entity, and has only one level of tax at the shareholder level, any gain incurred at the corporate level passes through to the shareholders. If, at the time of conversion, the fair market value of the S corporation's assets exceeds their tax basis, the corporation's shareholders may be liable for individual income taxes. Thus, any gain incurred at the corporate level from the appreciation of assets passes through to the S corporation's shareholders when the S corporation transfers assets to the LLC.

Partnership to LLC: This conversion should be tax-free and the new LLC would be treated as a continuation of the partnership.

Sole proprietorship to an LLC: This conversion is another example of a tax-free conversion to an LLC.

While considering the potential tax consequences of conversion is important, keep in mind how your change in entity will also affect the non-tax elements of your business operations. How will a conversion to an LLC effect existing agreements with suppliers, creditors, and financial institutions?

Taxation of LLCs and "Check-the-Box" Regulations

Before federal "check-the-box" regulations were enacted at the end of 1996, it wasn't easy for LLCs to be classified as a partnership for tax purposes. However, the "check-the-box" regulations eliminated many of the difficulties of obtaining partnership tax treatment for an LLC. Under the check-the-box rules, most LLCs with two or more members would receive partnership status, thus avoiding taxation at the entity level as an "association taxed as a corporation."

If an LLC has more than 2 members, it will automatically be classified as a partnership for federal tax purposes. If the LLC has only one member, it will automatically be classified as a sole proprietor and would report all income and expenses on Form 1040, Schedule C. LLCs wishing to change the automatic classification must file Form 8832, Entity Classification Election.

Keep in mind that state tax laws related to LLCs may differ from federal tax laws and should be addressed when considering the LLC as the form of business entity for your business.

Since the information provided is general in nature and may not apply to your specific circumstances, please contact the office for more information or further clarification.

Do you know where your 401(k) plan funds are? Errors can and do occur, sometimes with devastating results. By taking an active role in the management of your account, you can quickly uncover any errors, make good investment choices, and ascertain a secure, comfortable retirement. Here are some guidelines to help you get the most out of your 401(k) plan.

Do you know where your 401(k) plan funds are? Errors can and do occur, sometimes with devastating results. By taking an active role in the management of your account, you can quickly uncover any errors, make good investment choices, and ascertain a more secure retirement. Here are some guidelines to help you get the most out of your 401(k) plan, which - in light of current economic times - is more important now then ever.

Watch out for errors. Your company is required to provide an annual statement that shows the amounts that were contributed to your plan throughout the year. Compare amounts withheld from your paychecks to the employee contributions recorded on your 401(k) statement. If your employer has a matching program, verify that employer contributions are being correctly allocated to your account. Make sure the plan's vesting schedule is being correctly applied to you.

Do your homework. In addition to offering the company stock, most companies also offer a wide range of investment options. By gathering information for the different investment choices offered, you have a better opportunity to make an intelligent, informed decision. If your company does not provide a fund prospectus or performance history for the mutual fund or stock choices offered, you can contact the fund or company directly to obtain this pertinent information.

Make smart investment choices. Many employees make the mistake of investing too conservatively. Since a 401(k) plan is usually comprised of a variety of diversified securities, including stock, you can take advantage of the fact that over the long term, stocks generally outperform all other investments. Diversification has its place in any portfolio, so bonds and T-bills should also be considered.

Keep an eye on your plan's performance. While the annual statement provided by your employer will give you detail as to how your investments have performed over the past year, it's a good idea to monitor your fund's investments more frequently. While a good overall return for the year may make you think that your investment mix is right on target, very strong earnings in the first part of the year may hide the fact that some of your investments have taken a turn for the worse. To monitor the individual funds and stocks that comprise your 401(k) plan, check the business section of your newspaper on a regular basis, and just go online if you're invested with one of the major funds. Remember, too, that you pay no tax on your 401(k) investments until you retire and start to withdraw from it. As a result, funds geared to the situation in which short and long-term selling are treated the same for tax purposes ought to play into your investment strategy.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
• You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
• Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

Medical Expenses

Medical expenses that you pay during the tax year for yourself, your spouse, and your dependents are deductible to the extent the total exceeds 7.5% of your adjusted gross income. This limitation can be hard to reach if you claim only medical insurance premiums and the co-pay on your kid's doctors' visits. Keep these potential deductions in mind as you tally up this year's medical expenses:

• For your home: capital expenditures for home improvements and additions (such as swimming pools, saunas, Jacuzzis, elevators) that are added primarily for medical care qualify for the medical expense deduction to the extent that the cost exceeds any increase in the value of your property due to the improvement.

• For your children: orthodontia; remedial reading and language training classes; lead paint removal.

• For you and your spouse: Lamaze or other childbirth preparation classes (mother only); contacts and eyeglasses; prescription contraceptives & permanent sterilization; health club dues (if prescribed by a physician for medical purposes); massages (if prescribed by a physician); mileage for trips to medical appointments.

• For your aging parents: If your or your spouse has a parent that qualifies as a dependent, you can deduct: hearing aids; domestic aid (provided by a nurse); prepaid lifetime medical care paid to a retirement home; special mattresses (prescribed by a physician); certain nursing home costs.

To maximize your deduction, try to bunch your medical expenses into one year to exceed the 7.5% limit. For example, schedule costly elective medical and dental treatments to be performed and billed in the same tax year.

Taxes Paid

Many of the taxes that you pay such as real estate taxes for your home, state and local taxes, and auto registration fees are deductible as itemized deductions on your return. Don't forget these:

• Property taxes paid on boats, motor homes, trailers, and other personal property.

• Real estate taxes paid on investment property and vacation homes.
• Real estate taxes paid through escrow in association with the purchase or sale of your residence or investment property.
• Employee contributions to a state disability fund.
• Foreign income taxes paid not taken as a credit.

Interest Expense

Although in recent years Congress has made the tax laws regarding interest deductions more strict, much of the interest that you pay during the year is still deductible. For interest paid to be deductible, you must be legally responsible for the underlying debt and the debt must result from a valid debtor-creditor relationship. While gathering your home mortgage interest numbers, dig a little deeper to get this inf

• Interest paid on margin loans.
• Prepayment penalties and late fees related to your mortgage.
• "Points" (prepaid interest) on home purchases and refinances.
• Seller-paid points on the purchase of a home.

Since personal interest paid on credit cards and other unsecured loans is not deductible, it may be wise to make that interest deductible by paying off that debt with a home-equity loan. Interest on home-equity loans of up to $100,000 is generally deductible on your return.

Miscellaneous Expenses

Miscellaneous itemized deductions such as unreimbursed employee business expenses and tax preparation fees are deductible to the extent that the total of all of these expenses is more than 2% of your adjusted gross income. Here's a few more to add to the list:

• Education expenses: You may be able to deduct expenses that you paid in connection with getting an education. These expenses are generally deductible to the extent required by law or your employer or needed to maintain or improve your skills. Examples of deductible education expenses are tuition; books; lab fees; supplies; and dues paid to professional societies. Certain travel & transportation costs may also be deductible.

• Job-hunting costs: You can deduct certain expenses you incur while looking for a new job in your present occupation, even if you do not get a new job. Consider some of these job-hunting expenses: resumes, phone calls, travel & transportation costs, lunches with others regarding possible job referrals; office supplies; and employment and outplacement agency fees.

• Investment expenses: Investment expenses are any expenses that you incur as you manage your investments. These expenses include professional fees paid related to investment activities; subscriptions to investment-oriented publications; fees paid to your Internet service provider related to tracking your investments; and IRA custodian fees (if billed separately).

• Protective clothing used on the job.

• Appraisal fees for certain charitable contributions & casualty losses.
• Safe deposit box fees.

Take the time this year to evaluate all of your expenditures made last year; you may be pleasantly surprised by what you find.

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

BENEFITS

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

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

DRAWBACKS

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

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