New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

Final Regulations

The final regulations in T.D. 98xx_1 largely adopt the proposed regulations in NPRM REG-107892-18 (August 16, 2018), but with substantial modifications.

Taxpayers are likely to be disappointed in one thing that did not change: all items treated as capital gain or loss, including Section 1231 gains and losses, are still excluded from qualified business income (QBI). Taxpayers should continue to apply the Section 1231 netting and recapture rules when calculating the Code Sec. 199A deduction.

However, the final regulations drop the rule that treated an incidental non-specified services trade or business (SSTB) as part of an SSTB if the businesses were commonly owned and shared expenses, and the non-SSTB’s gross receipts were no more than five percent of the business’s combined gross receipts.

The final regulations make several adjustments to the proposed regulations for estates and trusts. Most significantly, the final regulations remove the definition of "principal purpose" under the anti-abuse rule that allows the IRS to aggregate multiple trusts. The IRS is taking this issue under advisement. Also, in determining if a trust or estate has taxable income that exceeds the threshold amount, distributions are no longer excluded. Instead, the entity’s taxable income is determined after taking into account any distribution deduction under Code Sec. 651 or Code Sec. 661.

The final regulations retain the presumption that an employee continues to be an employee while doing the same work for the same employer. However, the regulations provide a new three-year look back rule, and allow the worker to rebut the presumption by showing records (such as contracts or partnership agreements) that corroborate the individual’s status as a non-employee.

Other changes of note include:

• Disallowed, limited or suspended losses must be used in order from the oldest to the newest, on a FIFO (first in, first out) basis.
• A relevant passthrough entity (RPE) can aggregate businesses.
• If an RPE fails to report an item, only that item is presumed to be zero; the missing information may be reported on an amended return.
• The S portion and non-S portion of an electing small business trust (ESBT) are treated as a single trust for purposes of determining the threshold amounts.

Proposed Regs for QBI, RICs, Trusts, Estates

Taxpayers may rely on the proposed regulations in NPRM REG-134652-18, which cover three broad topics.

First, in calculating QBI, previously disallowed losses are treated as losses from a separate trade or business. If the losses relate to a publicly traded partnership (PTP), they must be treated as losses from a separate PTP. Attributes of the disallowed loss are determined in the year the loss is incurred.

Second, a RIC that receives qualified REIT dividends may pay Section 199A dividends. The IRS continues to consider permitting conduit treatment for qualified PTP income received by a RIC, and seeks public comment on this issue.

Finally, the proposed regulations also provide rules for charitable remainder unitrusts (and their beneficiaries), split-interest trusts, and separate shares.

Rental Real Estate Enterprise

The proposed revenue procedure set forth in Notice 2019-7 provides a safe harbor for a rental real estate enterprise to be treated as a trade or business for purposes of Section 199A. RPEs can also use the safe harbor.

A rental real estate enterprise must satisfy three conditions to qualify for the safe harbor:

• Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
• At least 250 or more hours of rental services must be performed per year with respect to the rental enterprise. For tax years beginning after December 31, 2022, this test can be satisfied in any three of the five consecutive tax years that end with the tax year.
• The taxpayer must maintain contemporaneous records of relevant items, including time reports, logs, or similar documents. (This requirement does not apply to tax years beginning in 2018.)

Relevant items include hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.

W-2 Wages

Rev. Proc. 2019-11 allows taxpayers to use one of three methods to calculate W-2 wages for the passthrough deduction:

• the unmodified Box method;
• the modified Box 1 method; or
• the tracking wages method.

These methods were proposed in Notice 2018-64, I.R.B. 2018-35, 347. The unmodified Box method is simplest, but the other two methods are more accurate.

Comments Requested

The IRS requests comments on the proposed regulations and the proposed safe harbor. The IRS must receive the comments and any requests for public hearing within 60 days after the proposed regulations are published in the Federal Register.

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

Q&A on Section 4960

The current guidance is contained in a Question-and-Answer format. The interim guidance addresses:

• general application of Code Sec. 4960;
• applicable tax-exempt organizations and related organizations;
• covered employees;
• excess remuneration;
• medical and veterinary services;
• excess parachute payments;
• three-times-base-amount test for parachute payments;
• computation of excess parachute payments;
• reporting liability under Section 4960;
• miscellaneous issues; and
• the effective date.

Reliance

The IRS intends to issue proposed regulations under Code Sec. 4960 which will incorporate the interim guidance. Until future guidance is issued, taxpayers may rely on the rules in the interim guidance from December 22, 2017. Any future guidance will be prospective and will not apply to tax years beginning before the guidance is issued. Until additional guidance is issued, taxpayers may base their positions upon a good faith, reasonable interpretation of the statute and legislative history, where appropriate. Specifically, the positions reflected in the guidance constitute a good faith and reasonable interpretation.

Comments Requested

The IRS and Treasury Department request comments on the topics addressed in the interim guidance and any other issues arising under Code Sec. 4960. Comments should be submitted no later than April 2, 2019.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

Charitable Contributions and SALT Limit

An individual’s itemized deduction of SALT is limited to $10,000 ($5,000 if married filing separately). Some states and local governments have adopted or considered adopting laws that allowed individuals to receive a tax credit for contributions to funds controlled by the state and local government.

Under proposed regulations, however, an individual, estate, and trust generally must reduce the amount of any charitable contribution deduction by the amount of any SALT credit he or she receives or expects to receive for the transfer. A de minimis exception allows a taxpayer to disregard up to 15 percent of the payment or transfer to the charitable organization.

C Corporations

If a C corporation makes the charitable payment in exchange for a state and local tax credit, it may deduct the payment as an ordinary and necessary business expense to the extent of any SALT credit received or expected to receive.

Specified Pass-Through Entity

A specified pass-through entity may also deduct the payment as an ordinary and necessary business expense, but only if the SALT credit applies or is expected to apply to offset a SALT other than an income tax. A specified pass-through entity for this purpose is any business entity other than a C corporation that is regarded as separate from its owner for all federal income tax purposes (i.e., disregarded entity). The entity also must operate a trade or business within the meaning of Code Sec. 162 and be subject to SALT incurred in carrying on that trade or business that is imposed directly on the entity.

Effective Date

The safe harbors apply to any payments made to a charitable organization in exchange for a SALT credit paid on or after January 1, 2018.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The final regulations generally apply beginning the last tax year of the foreign corporation that begins before January 1, 2018, and with respect to a U.S. person, beginning the tax year in or with which such tax year of the foreign corporation ends.

Note: The final regulations were published without a T.D. number. According to the IRS, a T.D. number will be assigned after the IRS resumes normal operations.

Controlled Domestic Partnerships

Certain controlled domestic partnerships may be treated as foreign partnerships for determining the section 958(a) U.S. shareholders of a specified foreign corporation owned by the controlled domestic partnership and the section 958(a) stock owned by the shareholders. The definition of controlled domestic partnership is revised to not be defined only with respect to a U.S. shareholder, so that the controlled foreign partnership is clearly treated as a foreign partnership for all partners if the rule applies.

Pro Rata Share

The definitions of pro rata share and section 958(a) U.S. shareholder inclusion year are modified. The final regulations will require a section 965(a)inclusion by a section 958(a) U.S. shareholder if the specified foreign corporation, whether or not it is a CFC, ceases to be a specified foreign corporation during its inclusion year.

Downward Attribution Rule

A special rule applies when determining downward attribution from a partner to a partnership where the partner has a de minimis interest in the partnership. The threshold for applying the special attribution rule for partnerships is increased from five to 10 percent, and is extended to trusts.

Basis Election Rules

The final regulations allow a taxpayer elect to increase its basis in the stock of its deferred foreign income corporations (DFICs) by the lesser of its section 965(b) previously taxed earnings and profits or the amount it can reduce the stock basis of its E&P deficit foreign corporations without recognizing gain. Within limits, a taxpayer may designate which stock of a DFIC is increased and by how much.

Exception from Anti-Abuse Rules

The final regulations provide an exception from the anti-abuse rules for certain incorporation transactions. The rules will not apply to disregard a transfer of stock of a specified foreign corporation by U.S. shareholder of a domestic corporation, if certain requirements are met. The section 965(a) inclusion amount with respect to the transferred stock of the specified foreign corporation must not be reduced, and the aggregate foreign cash position of both the transferor and the transferee is determined as if each had held the transferred stock of the specified foreign corporation owned by the other on each of the cash measurement dates.

Cash Position

Code Sec. 965 taxes foreign earnings of a domestic corporate U.S. shareholder at a 15.5-percent rate if held in cash, but only an 8-percent rate if held otherwise. Cash includes cash and cash equivalents. The final regulations provide a narrow exception from the definition of cash position for certain commodities held by a specified foreign corporation in the ordinary course of its trade or business, as well as for certain privately negotiated contracts to buy and sell these assets.

Election and Payment Rules

Under the final regulations, the signature requirement on an election statement is satisfied if the unsigned copy is attached to a timely-filed return of the person making the election, provided that the person retains the signed original in the manner specified.

Transition rules for filing transfer agreements have also been updated. If a triggering event or acceleration event occurs on or before December 31, 2018, the transfer agreement must be filed by January 31, 2019. Rules are added to address the death of an S corporation shareholder transferor. The final regulations also include modifications to certain requirements for the terms of a transfer agreement.

The final regulations provide that in the case of an additional liability reported on a return or amended return, any amount that is prorated to an installment, the due date of which has already passed, will be due with the return reporting the additional amount. The rule on deficiencies remains the same, and payment for a deficiency prorated to an installment, the due date of which has already passed, is due on notice and demand.

Total Net Tax Liability

A taxpayer may elect to defer the payment of its total net tax liability under Code Sec. 965(h) and (i). Total net tax liability under Code Sec. 965, which defines the portion of a taxpayer’s income tax eligible for deferral, is equal to the difference between a taxpayer’s net income tax with and without the application of Code Sec. 965. The final regulations will disregard effective repatriations taxed similarly to dividends under Code Sec. 951(a)(1)(B) resulting from investments in U.S. property under Code Sec. 956 when determining net income tax liability without the application of Code Sec. 965.

Consolidated Groups

The consolidated group aggregate foreign cash position is determined under the final regulations as if all members of the consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are a single section 958(a) U.S. shareholder.

Obsolete Guidance

The following previous guidance is obsolete:

• Notice 2018-7, I.R.B. 2018-4, 317;
• Notice 2018-13, I.R.B. 2018-6 341, Secs. 1-4, 6;
• Notice 2018-26, I.R.B. 2018-16, 480, Secs. 1-5, 7; and
• Notice 2018-78, I.R.B. 2018-42, 604, Secs. 1-3, 5.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

Rev. Proc. 2019-1

This procedure explains how the IRS provides advice to taxpayers in the form of letter rulings, closing agreements, determination letters and information letters, and orally on issues under the jurisdiction of the various Associate Chief Counsel offices. It supersedes Rev. Proc. 2018-1, I.R.B. 2018-1, 1. In addition to changes made throughout the guidance, significant changes in the new procedure include:

• Sections 1, 1.01, 3.07, 5.12, 5.14, 5.15, 6.08, 9.23, 10.07, 15.11, Appendix A, Appendix B, Appendix C, Appendix D, and Appendix E have been amended to reflect the name change from "Associate Chief Counsel (Tax Exempt and Government Entities)" to "Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes)."
• Section 5.15(3) has been removed to reflect the transfer of authority to waive excise tax under Code Sec. 4980F to the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements.
• Section 8.02 has been amended to remove the exception for changes in accounting methods or accounting periods from the 21-day notification rule.
  Appendix A (Schedule of User Fees) has been amended with increased user fees to match the increase in costs incurred by the IRS. The new user fee schedule is effective February 2, 2019.
• Appendix E (Church Plan Checklist) has been amended to add a new item 11 to reflect the requirement that an applicant include a representation as to whether an election under Reg. §1.410(d)-1 to apply certain provisions of the Code and the Employee Retirement Income Security Act of 1974 (ERISA) to the plan has ever been made.

Rev. Proc. 2019-2

This procedure explains when and how an Associate Office provides technical advice conveyed in a technical advice memorandum (TAM), as well as a taxpayer’s rights when a field office requests a TAM regarding a tax matter. It supersedes Rev. Proc. 2018-2, I.R.B. 2018-1, 106. Significant changes in the new procedure include:

• All references to Associate Chief Counsel (Tax Exempt and Government Entities) have been revised to read “Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes).” All references to “Appeals Policy” have been revised to read “Appeals Policy Planning Quality & Analysis.”
• Section 3.04 has been amended to delete the mandatory TAM requirement in qualified retirement plan matters in cases concerning proposed adverse letters or proposed revocation letters on collectively bargained plans.
• Section 14.02 has been amended to clarify that requests for relief under Code Sec. 7805(b) on the revocation or modification of determination letters and letter rulings issued by TE/GE are handled under the procedures in sections 23 and 29 of Rev. Proc. 2019-4, and section 12 of Rev. Proc. 2019-5.

Rev. Proc. 2019-3

This procedure provides a revised list of areas under the jurisdiction of certain Associate Chief Counsel offices for which letter rulings or determination letters will not be issued. (Lists of areas of nonissuance under the jurisdiction of the Associate Chief Counsel (International) and the Commissioner, Tax Exempt and Government Entities Division (relating to plans or plan amendments) are presented in separate revenue procedures.) It supersedes Rev. Proc. 2018-3, I.R.B. 2019-1, 130.

The following have been added to the list of issues for which advance rulings will not be issued:

• Gross Income. Whether an amount is not included in a taxpayer’s gross income under Code Sec. 61 because the taxpayer receives the amount subject to an unconditional obligation to repay the amount.
• Trade or Business Expenses. Whether a taxpayer is engaged in a trade or business. This area does not include a request for a ruling that relies on a representation from a taxpayer that the taxpayer is or is not engaged in a trade or business, or a request for a ruling that relies on factual information provided by the taxpayer evidencing the active conduct of a trade or business.
• Losses; Carryovers in Certain Corporate Acquisitions; Regulations. In determining whether a loss for worthless securities is subject to Code Sec. 165(g)(3), (i) whether the source of any gross receipts may be determined by reference to the source of gross receipts of a counter party to an intercompany transaction, as defined in Reg. §1.1502-13(b)(1) (e.g., an intercompany distribution to which Reg. §1.1502-13(f)(2) applies), other than an intercompany transaction to which Code Sec. 381(a) applies, and (ii) in an intercompany transaction to which Code Sec. 381(a) applies, whether the acquiring corporation takes into account historic gross receipts of the distributor or transferor corporation, if the intercompany transaction is part of a plan to claim a deduction for worthless securities under Code Sec. 165(g)(3).
• Treatment of multiple trusts. Whether two or more trusts shall be treated as one trust for purposes of subchapter J of chapter 1.
• Returns Relating to the Cancellation of Indebtedness by Certain Entities. Requests for a ruling that the creditor is not required to report a discharge that include as grounds for the request a dispute regarding the underlying liability.

The following issues have been modified:

• Special Rules for Exchanges Between Related Persons. Except in the case of (i) a transaction involving an exchange of undivided interests in different properties that results in each taxpayer holding either the entire interest in a single property or a larger undivided interest in any of the properties or (ii) a disposition of property in a nonrecognition transaction in which the taxpayer or the related party receives no cash or other property that results in gain recognition, whether a Code Sec. 1031(f) exchange involving related parties, or a subsequent disposition of property involved in the exchange, has as one of its principal purposes the avoidance of federal income tax, or is part of a transaction (or series of transactions) structured to avoid the purposes of Code Sec. 1031(f).

Rev. Proc. 2019-4

This procedure explains how the IRS provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (TE/GE) Employee Plans Rulings and Agreements Office, and details the types of advice available to taxpayers, and the manner in which the advice is requested and provided. The new procedure supersedes Rev. Proc. 2018-4, I.R.B. 2018-1, 146. In addition to minor non-substantive changes, the following changes are made:

• Modifications to reflect Employee Plans Rulings and Agreement’s current practice of considering voluntary requests for closing agreements to resolve certain income or excise tax issues that are ineligible for resolution under the Employee Plans Compliance Resolution System (EPCRS).
• Letter ruling requests may not be submitted via facsimile transmission.
• A new category called "Other Circumstances" for which determination letters can be requested has been added.
• Code Secs. 414(b), (c) and (m) have been added to the list of sections for which a determination is not made when a determination letter is issued in accordance with the revenue procedure.
• For a plan to be reviewed for, and a determination letter relied upon with respect to, whether the terms of the plan satisfy one of the design-based safe harbors, the plan document must provide a definition of compensation that satisfies Reg. §1.414(s)-1(c).
• Employee Plans Rulings and Agreements will consider a request for an extension of time for making an election under Reg. §301.9100-3 to recharacterize annual contributions made to a Roth IRA. Employee Plans Rulings and Agreements will also consider recharacterization requests that relate to a conversion or rollover contribution to a Roth IRA but only if the rollover or conversion was made prior to January 1, 2018.
• SB/SE Exam will be notified if a request for an extension of time for making an election or other application for relief under Reg. §301.9100-3 is submitted when the return is under examination.
• Beginning April 1, 2019, VCP submissions and the applicable user fees must be made using www.pay.gov. Further, the payment of user fees for pre-approved plan submissions and letter ruling requests may not be made using www.pay.gov and such requests must still be accompanied by a check in the amount of the applicable user fee.
• Clarification has been provided regarding which forms must be submitted for VCP submissions made prior to April 1, 2019.
• User fee for Form 5310 will increase from $2,300 to $3,000 for submissions postmarked on or after July 1, 2019.

Rev. Proc. 2019-5

This procedure updates the procedures for organizations applying for, and the issuing of determination letters on, exempt status under Code Secs. 501and 521. These apply to exempt organizations other than those relating to pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans. The procedures also apply to revocation or modification of determination letters. In addition, the procedure provides guidance on the exhaustion of administrative remedies for declaratory judgment under Code Sec. 7428. Finally, new procedure provides guidance on applicable user fees for requesting determination letters. The new procedure supersedes Rev. Proc. 2018-5, I.R.B. 2018-1, 233. Notable changes include:

• "Tax Exempt and Government Entities" was changed to "Employee Benefits, Exempt Organizations, and Employment Taxes" throughout the document to reflect the office’s name change.
• Section 2.02 was amended to add (6), which discusses Rev. Proc. 2018-15, I.R.B. 2018-9, 379.
• Section 2.03(1) was amended to clarify that a Code Sec. 501(c)(4) organization must submit a user fee along with its completed Form 8976.
• Section 3.02(4) was amended to clarify that the section only applies to an organization seeking to qualify under Code Sec. 501(c)(6).
• Sections 4, 15, and 18 were amended to reflect the new Form 1024-A.
• Section 4.09 was amended to clarify that a request for expedited handling of a determination letter will not be forwarded to the appropriate group for action unless the application is complete.
• Section 13 was amended throughout because Rev. Proc. 2018-32, I.R.B. 2018-23, 739, superseded Rev. Proc. 81-7, 1981-1 CB 621.
• Appendix A was amended to reflect the single user fee for non-1023-EZ exemption applications, and to reflect a change in the user fee for submissions postmarked on or after July 1, 2019, for advance approval of Code Sec. 4942(g)(2) set asides, Code Sec. 4945 advance approval of an organization’s grant making procedures, and Code Sec. 4945(f) advance approval of voter registration activities.

Rev. Proc. 2019-7

This procedure provides an updated list of subject areas under the jurisdiction of the Associate Chief Counsel (International) for which it will not issue advance letter rulings or determination letters, or will issue letters only if justified by unique and compelling circumstances. Section 4.01(01) related to Code Sec. 367(a) has been removed as obsolete. There are no other changes except renumbering to reflect the foregoing and updates to cross references and citations. The new procedure supersedes Rev. Proc. 2018-7, I.R.B. 2018-1, 271

The just-released 2011 IRS Data Book provides statistical information on IRS examinations, collections and other activities for the most recent fiscal year ended in 2011. The 2011 Data Book statistics, when compared to the 2010 version, shows, among other things, a notable increase in the odds of being audited within several high-income categories.

Individual audits

Individual taxpayers collectively were audited at a 1.1% rate over the FY 2011 period, based on 1,564,690 audited returns out of the 140,837,499 returns that were filed. While this rate is about the same as in 2010, variations occurred within the income ranges. An uptick was particularly noticeable in the upper brackets (see statistics, below).

Both correspondence and field audits were counted within the statistics. Correspondence audits accounted for 75% of all audits for FY 2011 (down from 77.1% in FY 2010), while audits conducted face-to-face by revenue agents were only 25% of the total, albeit representing an increase from the 21.7% level in FY 2010. Business returns and higher-income individuals are more likely to experience an audit by a revenue agent; while correspondence audits are generally single-issue audits, a revenue agent is likely to explore other issues "while he or she is there."

Examination coverage: individuals

The following audit statistics taken from the FY 2011 Data Book (and contrasted with FY 2010 Data Book stats) show an increase in the audit rate especially in proportion to adjusted gross income (AGI) level:

• No AGI: 3.42% (3.19% in 2010)
• Under $25K: 1.22% (1.18% in 2010)
• $25K-$50K: 0.73% (0.73% in 2010)
• $50K-$75K: 0.83% (0.78% in 2010)
• $75K-$100K: 0.82% (0.64% in 2010)
• $100K-$200K: 1.00% (0.71% in 2010)
• $200K-$500K: 2.66% (1.92% in 2010)
• $500K-$1M: 5.38% (3.37% in 2010)
• $1M-$5M: 11.80% (6.67% in 2010)
• $5M-$10M: 20.75% (11.55% in 2010)
• $10M and over: 29.93% (18.38% in 2010)

Examination coverage: business returns

For individual income tax returns that include business income (other than farm returns), the 2011 audit rate statistics based upon business income (total gross receipts) reveals the IRS's recognition that audits of small business returns yield proportionately higher deficiency amounts:

• Gross receipts under $25K: 1.3% (1.2% in 2010)
• Gross receipts $25K to $100K: 2.9% (2.5% in 2010)
• Gross receipts $100K to $200K: 4.3% (4.7% in 2010)
• Gross receipts over $200K: 3.8% (3.3% in 2010)

The difference in audit rates between returns with and without business income, as measured by total positive income of at least $200K and under $1M provide further evidence of the IRS's tendency toward auditing business returns: 3.6% for returns with business income versus 3.2% without in FY 2011 (2.9% versus 2.5% in FY 2010).

Corporate/other returns

The audit rates for corporations are consistent with the deficiency experience that the IRS has had examining corporations of varying sizes. Some selected audit rates include:

• For small corporations showing total assets of $250K to $1M, the audit rate for FY 2011 was 1.6% (1.4% in 2010); $1M to $5 million, the rate was 1.9% (1.7% in 2010), and for $5M to $10M, the rate was 2.6% (3% in 2010).
• For larger corporations showing total assets of $10M-$50M, the audit rate was 13.3% (13.4% in 2010) in contrast to those at the top end with total assets from $5B to $20B (50.5% (45.3% in 2010)).
• For S corporations and partnerships, the overall audit rate was 0.4% (same as in 2010), in contrast to an overall 1.5% rate for corporations (1.4% in 2010).

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

As the result of being “disregarded,” the SMLLC does not file a separate tax return.  Rather, its income and loss is reported on the tax return filed by the single member.

• If the sole owner is an individual, the SMLLC's income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
• If the owner is a corporation, the SMLLC's income or loss is reported on the corporation's Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.

An SMLLC is not the only entity treated as a disregarded entity. Two corporate forms are also disregarded: a qualified subchapter S subsidiary and a qualified REIT subsidiary. However, SMLLCs are by far the most common disregarded entity currently in use.

For federal tax purposes, the SMLLC does not exist. All its assets and liabilities are treated as owned by the acquiring corporation.

Even though a disregarded entity’s tax status is transparent for federal tax purposes, it is not transparent for state law purposes. For example, an owner of an SMLLC is not personally liable for the debts and obligations of the entity. However, since the entity is disregarded, the owner is generally treated as the employer of disregarded entity employees for employment tax purposes.

For further details on disregarded entities or how this tax strategy may fit into your business operations, please contact our offices. 

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012.  The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012. 

2011 payroll tax holiday

Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share).  These taxes help to fund Social Security.

In 2011, a payroll tax holiday took effect.  The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800.  The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.

Two-month extension

The 2011 payroll tax holiday was originally enacted as a one-year tax break.  It was scheduled to expire after December 31, 2011.

In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012.  The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.

Tough negotiations

In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year.  The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere.  The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.

Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences.  In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it.  They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.

The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate.  President Obama signed the bill on February 22.

2012 payroll tax holiday

The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012.  The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.

According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012.  An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.

No recapture rule

In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension.  The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012.  Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.

Employers and payroll processors

Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities. 

If you have any questions about the 2012 payroll tax holiday, please contact our office.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets.  The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.

Reporting

For now, only specified individuals are required to file Form 8938, but specified U.S. entities will eventually also have to file the form. Taxpayers who do not file a federal income tax return for the year do not have to File Form 8938, even if the value of their foreign assets exceeds the normal reporting threshold.

Individuals who have to file Form 8938 include U.S. citizens, resident aliens for any part of the year, and nonresident aliens living in Puerto Rico or American Samoa.

Reporting applies to specified foreign financial assets. Specified foreign financial assets include:

• A financial account maintained by a foreign financial institution;
• Other foreign financial assets, such as stock or securities issued by a non-U.S. person, or an interest in a foreign entity.

The aggregate value of the individual’s specified foreign financial assets must exceed specified reporting thresholds, as follows:

• Unmarried U.S. taxpayers, and married U.S. taxpayers filing a separate return – more than $50,000 on the last day of the year, or more than $75,000 at any time during the year;
• U.S. married taxpayers filing a joint return – more than $100,000 on the last day of the year, or more than $150,000 at any time during the year; or
• Taxpayers living abroad: if filing a joint return, more than $400,000 on the last day of the year, or more than $600,000 during the year; other taxpayers, more than $200,000 on the last day of the year, or more than $300,000 at any time during the year.

Taxpayers who report assets on other forms, such as Form 3520, do not have to report the asset on Form 8938, but must use Form 8938 to identify other forms on which they report.

Filing

Reporting applies for tax years beginning after March 18, 2010, the date that FATCA was enacted. Most taxpayers, such as those who report their taxes for the calendar year, must start filing Form 8938 with their 2011 income tax return.

If you have any questions about Form 8938, please contact our office.

Claiming a charitable deduction for a cash contribution is straightforward. The taxpayer claims the amount paid, whether by cash, check, credit card or some other method, if the proper records are maintained. For contributions of property, the rules can be more complex.

Contributions of property

A taxpayer that contributes property can deduct the property's fair market value at the time of the contribution. For example, contributions of clothing and household items are not deductible unless the items are in good used condition or better. An exception to this rule allows a deduction for items that are not in at least good used condition, if the taxpayer claims a deduction of more than $500 and includes an appraisal with the taxpayer's income tax return.

Household items include furniture and furnishings, electronics, appliances, linens, and similar items. Household items do not include food, antiques and art, jewelry, and collections (such as coins).

To value used clothing, the IRS suggests using the price that buyers of used items pay in second-hand shops. However, there is no fixed formula or method for determining the value of clothing. Similarly, the value of used household items is usually much lower than the price paid for a new item, the IRS instructs. Formulas (such as a percentage of cost) are not accepted by the IRS.

Vehicles

The rules are different for "qualified vehicles," which are cars, boats and airplanes. If the taxpayer claims a deduction of more than $500, the taxpayer is allowed to deduct the smaller of the vehicle’s fair market value on the date of the contribution, or the proceeds from the sale of the vehicle by the organization.

There are two exceptions to this rule. If the organization uses or improves the vehicle before transferring it, the taxpayer can deduct the vehicle’s fair market value when the contribution was made. If the organization gives the vehicle away, or sells it far well below fair market value, to a needy individual to further the organization’s purpose, the taxpayer can claim a fair market value deduction. This latter exception does not apply to a vehicle sold at auction.

To determine the value of a car, the IRS instructs that "blue book" prices may be used as "clues" for comparison with current sales and offerings. Taxpayers should use the price listed in a used car guide for a private party sale, not the dealer retail value. To use the listed price, the taxpayer’s vehicle must be the same make, model and year and be in the same condition.

Most items of property that a person owns and uses for personal purposes or investment are capital assets. If the value of a capital asset is greater than the basis of the item, the taxpayer generally can deduct the fair market value of the item. The taxpayer must have held the property for longer than one year.

Please contact our office for more information about the tax treatment of charitable contributions.

Taxpayers can request a copy of their federal income tax return and all attachments from the IRS.  In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.

Tax return copy

A copy of your tax return is exactly that: a copy of the return you filed with the IRS. According to the IRS, copies of individual tax returns are generally available for returns filed in the current year and the past six years. The IRS charges a fee of $57 to send taxpayers a copy of their return.

Requests for copies of tax returns should be filed on Form 4506, Request for Copy of Tax Return.  The IRS has advised on its website that taxpayers should allow 60 days to receive a copy of their tax return.

Tax return transcript 

A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax transcript does not show any changes the taxpayer or the IRS made after the return was filed. According to the IRS, a tax return transcript is generally available for the current and past three years.

Taxpayers can request transcripts online at the IRS web site, telephoning the IRS, or filing Form 4506T-EZ, Short Form Request for Individual Tax Return Transcripts. Businesses that need business-related information should file Form 4506-T, Request for Transcript of Tax Return. Taxpayers can request that the IRS send the transcript to their tax representative.  The IRS reported on its website that transcript requests made online or by telephone generally will be processed within five to 10 days; transcript requests made by filing a paper form take longer to process.

Tax account transcript

The IRS also can provide a tax account transcript.   This document shows basic data from the individual’s return and includes any adjustments the taxpayer or the IRS made after the return was filed.  A tax account transcript is generally available for the current and past three years, according to the IRS and is provided at no-cost.

If you have any questions about the types of tax records available from the IRS, please contact our office.

With the stock market fluctuating up and down (but especially down), some investors may decide to cash out investments that they initially planned to hold.  They may have taxable gains or losses they did not expect to realize.  Other investors may look to diversifying their portfolios further, moving a more significant portion into Treasury bills, CDs and other “cash-like” instruments, or even into gold and other precious metals. Here are reminders about some of the tax issues involved in these decisions.

Capital Assets and Dividends

Capital assets. Most items of property are capital assets, unless they are inventory or are used in a trade or business. Stock and securities are capital assets. Gains and losses from a capital asset are short-term if the property is held for one year or less, with gains taxed at ordinary income rates and deductible losses (short- or long-term) limited to $3,000 annually. Long-term gains (from property held more than one year) are generally taxed at a 15 percent rate.

Stock and securities. For stock and securities traded on an established market, the holding period begins the day after the trade (purchase) date and ends on the trade (sale) date. The settlement date, which is a few days later, is not relevant to the holding period determination.

Precious metals. The maximum capital gains rate on collectibles is 28 percent, rather than 15 percent. Collectibles include gems, coins, and precious metals, such as gold, silver or platinum bullion. If the taxpayer’s regular tax rate is lower than the maximum capital gain rate, the regular tax rate applies. Collectibles gain includes gain from the sale of an interest in a partnership, S corp or trust from unrealized collectibles’ appreciation, but does not include investments in a non-passthrough entity like holding shares in a mining company operating as a C corporation. Since gold is considered investment property in whatever form held, however, capital loss from a sale of gold (if a loss can be imagined) would be deductible.

Dividends. If a dividend is declared before the stock is sold but paid after the sale, the payee or owner of record when the dividend was declared is taxable on the dividend. Dividends are qualified (and taxed at the lower 15 percent rate) if the stock is held for at least 61 days during the 121-day period that begins 60 days before the “ex-dividend” date (the first date on which the buyer is not entitled to the next dividend payment). Again, the holding period includes the day the stock is disposed of but does not include the purchase date.

Wash sale rules. Taxpayers cannot deduct losses from a wash sale. A wash sale is a sale of stock or securities preceded or followed by a purchase of identical stock or securities within 30 days of the sale. A purchase includes a purchase by the taxpayer’s IRA. Thus, taxpayers cannot cash in a loss while, in effect, retaining the investment. The holding period for a wash sale begins when the old stock or securities were acquired. The loss that is disallowed is added to the basis of the stock or securities purchased.

Interest Income

Treasury securities. T-bills are sold at a discount for terms up to one year. The difference between the discounted price and the face value received at maturity is interest. Most U.S. Treasury bonds or notes pay interest every six months. The interest is taxable when paid. Certain issues of U.S. Treasury bonds can be exchanged tax-free for other Treasury bonds.

Corporate bonds. If a taxpayer sells a corporate bond between payment dates, part of the price represents accrued interest and must be reported as interest. 

Certificates of deposit.  For short-term CDs (one year or less), interest may be payable in one payment at maturity. Interest is generally taxable when paid or when not subject to a substantial penalty. If interest can only be withdrawn by paying a penalty, the interest may not be taxable as it accrues. A taxpayer that decides to cash out the CD must report the full amount of interest paid, but the penalty is separately deductible and can be deducted in full even if it exceeds the interest.

Savings bonds. A cash-basis taxpayer does not report the interest (or the increase in redemption price) until the proceeds are received, the bond is disposed of, or the bond matures. However, a cash-basis taxpayer can elect to report the increase in redemption price each year as current income.

Switching investments.  An exchange of mutual funds within the same family is still taxable -- a sale of one fund and a purchase of another. However, investments held in a tax-free account, such as a 401(k) plans or an IRA, can be switched tax-free, unless the owner takes a distribution.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Exempt organizations

Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status.  The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.

Contributions

Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.

The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.  Similar information is available on an IRS Business Master File (BMF) extract.

In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract.  Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.

Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.

Churches

As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.

Foreign charities

Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada.  Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.

The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

• Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
• Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
• Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
• Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
• Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
• Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
• Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
• Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
• Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
• Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
• Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

• Proof of medical and dental expenses;
• Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
• Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
• Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
• Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
• Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Basic rules

The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:

Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:

• 100 percent of the tax shown on the corporation's current year's tax return (or of the actual tax, if no return is filed); or
• 100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.

A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.

Individuals. For individuals (including sole proprietors, partners, self-employeds, and/or S corporation shareholders who expect to owe tax of more than $1,000), quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:

• 90 percent of the tax ultimately shown on your return for the 2015 tax year, or 90 percent of the tax due for the year if no return is filed;
• 100 percent of the tax shown on your return for the preceding (2014) tax year if that year was not for a short period of less than 12 months; or
• The annualized income installment.

For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2014 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2015), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Adjusting estimated tax payments

If you expect an uneven income stream for 2015, your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.

For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.

Refiguring tax payments due

There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.

If you would like further information about changing your estimated tax payments, please contact our office.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

What your return says is key

If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS's interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven't complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.

President Obama unveiled his fiscal year (FY) 2012 federal budget recommendations in February, proposing to increase taxes on higher-income individuals, repeal some business tax preferences, reform international taxation, and make a host of other changes to the nation's tax laws. The president's FY 2012 budget touches almost every taxpayer in what it proposes, and in some cases, what is left out.

Roadmap

Every federal budget proposal is just that: a proposal, or a list of recommendations from the White House to Congress. Ultimately, it is for Congress to decide whether to fund a particular government program and at what level. The same is true for tax cuts and tax increases. The final budget for FY 2012 will be a compromise. Nonetheless, President Obama's FY 2012 budget is a helpful tool to predict in what direction federal tax policy may move.

Individuals

In his FY 2012 budget, President Obama repeats his call for Congress to end the Bush-era tax cuts for higher-income individuals (which the president generally defines as single individuals with incomes over $200,000 and married couples with incomes over $250,000). The top individual income tax rates would increase to 36 percent and 39.6 percent, respectively, after 2012. For 2011 and 2012, the top two individual income tax rates are 33 percent and 35 percent, respectively. The president also proposes to limit the deductions of higher income individuals.

Additionally, the president wants Congress to extend the reduced tax rates on capital gains and dividends, but not for higher-income individuals. Single individuals with incomes above $200,000 and married couples with incomes above $250,000 would pay capital gains and dividend taxes at 20 percent rather than at 15 percent after 2012.

The president's FY 2012 budget, among other things, also proposes:

• An AMT patch (higher exemption amounts and other targeted relief) after 2011;
• A permanent American Opportunity Tax Credit (enhanced Hope education tax credit) after 2012;
• A permanent enhanced earned income credit;
• A new exclusion from income for certain higher education student loan forgiveness;
• One-time payments of $250 to Social Security beneficiaries, disabled veterans and others with a corresponding tax credit for retirees who do not receive Social Security; and
• A temporary extension of certain tax incentives, such as the state and local sales tax deduction and the higher education tuition deduction, for one year.

Some of the proposals in the president's FY 2012 budget impact how individuals interact with the IRS. Many taxpayers complain that when they call the IRS, the wait times to speak to an IRS representative are so long they hang up. The president proposes to increase the IRS's budget to hire more customer service representatives. The president also proposes to allow the IRS to accept debit and credit card payments directly, thereby enabling taxpayers to avoid third party processing fees.

Businesses

The tax incentives for businesses in the president's FY 2012 budget are generally targeted to specific industries. One popular but temporary business tax incentive would be made permanent. President Obama proposes to extend permanently the research tax credit. The president also proposes to permanently abolish capital gains tax on investments in certain small businesses.

Other business proposals include:

1. Employer tax credits for creating jobs in newly designated Growth Zones;
2. Additional tax breaks for investments in energy-efficient property;
3. More funds for grants in lieu of tax credits for specified energy property;
4. One-year extensions of some temporary business tax incentives, such as the Indian employment credit and environmental remediation expensing;
5. Modifying Form 1099 business information reporting; and
6. Extending and reforming Build America Bonds.

The president's FY 2012 budget does not include a cut in the U.S. corporate tax rate. Any reduction in the U.S. corporate tax rate is likely to come outside the budget process. The president has spoken often in recent weeks about reducing the U.S. corporate tax rate but he wants any reduction to be revenue neutral; that is, the cost of cutting the U.S. corporate tax rate must be paid for. President Obama has discussed closing some unspecific tax loopholes.

IRS operations

President Obama proposes a significant increase in funding for the IRS. Most of the money would go to hiring new revenue officers and boosting enforcement activities. The White House predicts that investing $13 billion in the IRS over the next 10 years will generate an additional $56 billion in additional tax revenue over the same time period.

Estate tax

Late last year, the White House and the GOP agreed on a maximum federal estate tax rate of 35 percent with a $5 million exclusion for 2010, 2011 and 2012. In his FY 2012 budget, the president proposes to return the federal estate tax to its 2009 levels after 2012 (a maximum tax rate of 45 percent and a $3.5 million exclusion). President Obama also proposes to limit the duration of the generation skipping transfer (GST) tax exemption and to make other estate-tax related changes.

Revenue raisers

The White House and Congress are both looking at ways to cut the federal budget deficit. Taxes are one way. The president's FY 2012 budget proposes a number of revenue raisers, especially in the area of international taxation and in fossil fuel production.

International taxation. The president's budget proposes to reduce tax incentives for U.S.-based multinational companies. One goal of this strategy is to encourage multinational companies to invest in job creation in the U.S. The president's FY 2012 budget calls for, among other things, to limit earnings stripping by expatriated entities, to limit income shifting through intangible property transfers, and to make more reforms to the foreign tax credit rules. If enacted, all of the proposed international taxation reforms would raise an estimated $129 billion in additional revenue over 10 years.

LIFO. President Obama proposes to repeal the last-in, first-out (LIFO) inventory accounting method for federal income tax purposes. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its first-in, first-out (FIFO) value in the first tax year beginning after December 31, 2012. This proposal would raise an estimated $52.8 billion over 10 years.

Fossil fuel tax preferences. The Tax Code includes a number of tax incentives for oil, gas and coal producers. President Obama proposes to repeal nearly all of these tax breaks for oil, gas and coal companies. These proposals would raise an estimated $46.1 billion over 10 years.

Financial institutions. President Obama proposes to impose a financial crisis responsibility fee on large U.S. financial institutions. The fee, if enacted, would raise an estimated $30 billion in additional revenue over 10 years.

Carried interest. The president's FY 2012 budget proposes to tax carried interest as ordinary income. This proposal would raise an estimated $14.8 billion in additional revenue over 10 years.

Insurance company reforms. Insurance companies are subject to specific and very technical tax rules. President Obama proposes to overhaul the tax rules for insurance companies. If enacted, these reforms would raise an estimated $14 billion over 10 years.

These are just some of the revenue raisers in the president's FY 2012 budget. All of them will be extensively debated in Congress in the coming months. Our office will keep you posted on developments. If you have any questions about the president's FY 2012 budget proposals, please contact our office.

Although individual income tax returns don't have to be filed until April 15, taxpayers who file early get their refunds a lot sooner. The IRS begins accepting returns in January but does not start processing returns until February. Determining whether to file early depends on various personal and financial considerations. Filing early to somehow fly under the IRS's audit radar, however, has been ruled out long ago by experts as a viable strategy.

Although individual income tax returns don't have to be filed until April 15, taxpayers who file early get their refunds a lot sooner. The IRS begins accepting returns in January but does not start processing returns until February. Determining whether to file early depends on various personal and financial considerations. Filing early to somehow fly under the IRS's audit radar, however, has been ruled out long ago by experts as a viable strategy.

Required documents

Filing a return early may not make sense for many taxpayers because they do not yet have enough information to accurately fill out their return. If you have not received information returns, like Forms 1099, or other information you need to complete your return and/or accompanying forms, or if you are missing documents or other information you need to attach to your return, it may be difficult, if not impossible, to accurately complete your tax return. For example, employers do not have to provide wage statements to their employees until January 31 (although an employer can provide Form W-2 sooner if an employee terminates employment). The IRS requires this statement to be attached to your return (either in paper form or electronically when filing online).

Information returns do not have to be furnished until January 31. These include, among others, the 1099 forms for dividends, interest income, royalty income (Form 1099-MISC), stock sales (Form 1099-B), real estate sales (Form 1099-S), state tax refunds (Form 1099-G), and mortgage interest paid (Form 1098), and distributions from pension plans (Form 1099-R). Waiting until you receive all the information and forms necessary to complete your return accurately also lessens your chances of making mistakes, which can call attention to your return by the IRS. The IRS will not process your return until it is accurate.

Last year's return

You'll also want to take a look at your 2013 tax return. Did your circumstances change in 2014? Changes such as starting a new job, retiring, getting married, having a child, and so on, have important tax consequences. Congress extended, enhanced and created new tax incentives in 2014 that could generate a larger refund. Another important consideration is the current economic downturn, which has generated significant losses in many investment portfolios, IRAs, 401(k)s, and similar arrangements.

Refunds

If you have all the information you need to completely and accurately fill out your tax return, and are owed a refund, filing early is attractive. The sooner you file, the sooner you'll see your refund check from the IRS. If you file your return electronically and choose to have your refund direct deposited into your bank account, the IRS typically will issue your refund in as few as 10 days.

If you owe money, however, you may want to wait until April 15 to file or file early online and date your tax payment to be released on April 15. If you have the funds to pay what you owe and you pay early, you could lose out on keeping the money invested and earning interest on it until April 15.

The IRS expects to receive more than 150 million individual income tax returns during the 2015 filing season. Remember that the IRS does not start processing returns until February. Also, no matter how early you file your return before April 15, the three year statute of limitations during which the IRS can question your return and assess more tax doesn't start to run until April 15.

Please contact our office if you have any questions about filing early.

With the end of the 2010 tax year rapidly approaching, there is only a limited amount of time for individuals to take advantage of certain tax savings techniques. This article highlights some last-minute tax planning tips before the end of the year.

Make a charitable contribution by cash or credit card. Charitable contributions can be made at any time, in cash or in property. Taxpayers may also want to accelerate dues and fees for church or synagogue memberships. While a pledge is not deductible, an actual payment will qualify when the payment is made, not when it is received. Thus, putting a check in the mail qualifies as a payment when the payer gives up control of the check (assuming there are sufficient funds and the check is eventually honored), not when the check is received, deposited, or honored.

Charging a contribution is another means of accelerating payment. Payment by credit card is in effect a loan to the payer and is deductible when the charge is made, not when the bill is paid or the charge is honored. Thus, if you make the charge in 2010 but it is not honored until 2011, you can still take the charitable deduction on your 2010 return. Payment by debit card again is a payment when the transaction occurs, even if the amount is not debited until the following day.

Note: special rules may apply to contributions of property, especially motor vehicles.

Adjust withholding. State and local income taxes are deductible when withheld, paid as estimated taxes or paid with a return. If you anticipate owing taxes for 2010, you can increase withholding or make an additional payment to cover the expected liability. The payment must be made in good faith and be based on a reasonable estimate of your tax liability. Taxpayers paying estimated taxes can make the final payment before the end of 2010.

Itemized deductions. In past years, there have been limits on itemized deductions taken by higher-income taxpayers. These limits do not apply in 2010, so taxpayers should not feel constrained to limit their payments and contributions. For higher-income taxpayers, this is especially beneficial.

Deduction for health insurance costs. If you are self-employed, you can take a deduction for your health insurance costs when computing self-employment tax and the self-employment tax deduction.

Small business stock. If you sell qualified small business stock before January 1, 2011, and are eligible for the increased exclusion from income, you may be able to exclude 100 percent of the gains from the sale of stock. Speak with your tax professional before selling such stock, however, since the rules on eligibility and holding periods can be complex. For a majority of taxpayers, the traditional rules for accelerating/deferring income and/or maximizing or deferring deductions to lower your tax bill may still apply in 2010, despite the threat of higher income tax rates next year still possible. Depending on your situation, you may want to:

- Accelerate income if possible, including bonuses, into 2010;
- Defer selling capital assets at a loss until 2011 and later years;
- Sell capital assets that have appreciated in 2010 to take advantage of the lower capital gains rates (the maximum capital gains rate is 15 percent for 2010);
- Move some assets into tax-free instruments, like municipal bonds, that are not subject to federal tax;
- Accelerate billings and/or provide incentives for clients or customers to make payments in 2010 (if you are a self-employed and/or cash-basis taxpayer);
- Take taxable retirement plan distributions before 2011 (for taxpayers over age 59 1/2); and
- Bunch itemized or business deductions into the 2011 tax year.

Maximize "above-the-line" deductions. Above-the-line deductions are especially valuable because they reduce your adjusted gross income (AGI). Many tax benefits may be limited for taxpayers whose AGI is too high. Common above-the-line deductions include contributions to traditional Individual Retirement Account (IRA) and Health Savings Account (HSA), moving expenses, self-employed health insurance costs, and alimony payments.

Claim "green" credits. You may be able to claim tax credits for purchasing particular property. Certain hybrid cars, such as the Nissan Altima, qualify for an energy credit under Code Sec. 30B. It may be necessary to consult with an auto dealer or check IRS rulings to see what credits are in effect, because the credit for a qualifying "green" vehicle phases out over time and eventually is reduced to zero.

Another credit available for "green" taxpayers is the residential energy credit. The credit is 30 percent, up to a total of $1,500, of certain energy-efficient improvements made by a homeowner to his or her principal residence during 2009 and 2010. For example, the credit can be claimed by installing energy efficient windows and doors.

Make a tax-free gift. You can gift, tax-free, up to $13,000 per donee in 2010. A married couple can apply a combined exclusion of $26,000 to a gift of property for one person. Further amounts to any one taxpayer will be offset by the donor's lifetime exclusion before gift tax is owed. The exclusion applies per year. If it is not used, it is lost; it does not carry over to the succeeding year.

Use an installment sale. If you may be selling property at a gain, you can avoid recognizing the entire gain by using an installment sale. An installment sale has at least one payment after the year of sale. The payment is taxed when it is made, not at the time of the sale. Thus, income can be postponed. The installment method is not available for stocks and bonds, however.

There can be competing considerations, however. Tax rates may increase in 2011 and future years, although perhaps only for the highest-income taxpayers. Still, the amount of gain included in a future payment could be taxed at a higher rate. The 3.8 percent Medicare tax imposed on certain income starting in 2013 also is a factor.

Take your required minimum distributions (RMDs). RMDs have returned for 2010. Although Congress temporarily suspended the RMD requirements for distributions from IRAs and other retirement accounts in 2009, it did not extend this benefit into 2010. Therefore, taxpayers who are age 70 or older must take their RMD from a traditional IRA (Roth IRAs are not subject to the RMD rules), 401(k) or other retirement accounts by December 31. Failure to do so will subject you to a stiff penalty of 50 percent of the amount you were required to withdraw but failed to. However, for taxpayers who turned age 70 in 2010, you have until April 1, 2011 to take your first RMD.

These are just a few last-minute tax planning strategies you may want to consider as year-end approaches. As always, please contact our office if you have any questions.

Only 50 percent of the cost of meals is generally deductible. A meal deduction is customarily allowed when the meal is business related and incurred in one of two instances:

(1) while traveling away from home (a circumstance in which business duties require you to be away from the general area of your tax home for longer than an ordinary day's work); and

(2) while entertaining during which a discussion directly related to business takes place.

Entertainment expenses generally do not meet the "directly related test" when the taxpayer is not present at the activity or event. Both your meal and the meal provided to your business guest(s)' is restricted to 50 percent of the cost.

Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. It doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses. "Supper money" paid when an employee works late similarly may be tax free to the employee but only one-half may be deducted by the employer. The same principle applies to meals provided at an employees-only business luncheon, dinner, etc.

A special exception to the 50 percent rule applies to workers who are away from home while working under Department of Transportation regulations. For these workers, meals are 75 percent deductible in 2006 and 2007.

When a per diem allowance is paid for lodging, meal, and incidental expenses, the entire amount of the federal meals and incidental expense (M&IE) rate is treated as an expense for food or beverages subject to the percentage limitation on deducting meal and entertainment expenses. When a per diem allowance for lodging, meal, and incidental expenses for a full day of travel is less than the federal per diem rate for the locality of travel, the payer may treat 40 percent of the per diem allowance as the federal M&IE rate.

"Lavish" meals out of proportion to customary business practice are generally not deductible to the extent they are lavish. Generally, meals taken alone whentraveling generally have a lower threshold for lavishness than meals considered an entertainment expense for which a client or other business contact is "wined and dined."

As parents, we all know that preparing a reasonable budget and sticking to it is a basic principle of good financial planning. By assisting college-bound students in developing and maintaining their own budget, parents can help students make ends meet during their college years while helping them develop good money management skills they'll use for the rest of their lives.

As parents, we all know that preparing a reasonable budget and sticking to it is a basic principle of good financial planning. By assisting college-bound students in developing and maintaining their own budget, parents can help students make ends meet during their college years while helping them develop good money management skills they'll use for the rest of their lives.

Preparing a budget

• Estimate all sources of funds. The first step in preparing a budget is to identify all sources of funds. Possible sources of funds include student loans, savings, scholarships, work-study grants, student employment earnings, and family support.
• Estimate expenses. Once you've identified all available funds, potential expenses that may arise during the school year must be considered. These expenses will fall into one of two categories: fixed and variable.

Making ends meet

Once the sources of funds and potential expenses have been identified and an initial budget has been developed, it may be obvious that making the budget work will take some effort and smart choices on your student's part. To make sure funds last through spring, here are a few money-saving tips to pass on to your college-bound student:

Live where you learn. Living on campus in a dormitory is usually cheaper then getting an apartment off-campus and will save on transportation expenses.

Roommates are key. If your heart is set on living off campus, you can really stretch your housing dollars by sharing an apartment with one or more other college students. If you and your roommates pool your funds to buy groceries, small kitchen appliances and furniture, the savings can be even greater.

Make Mom and Dad your roommates. Living at home while you are attending a local college can save your thousands of dollars in food and rent costs.

Skip the crowded, expensive on-campus eateries. Packing a lunch or snacks from home can save you lots of time and money.

Forgo the morning java at the coffeehouse. A small regular coffee at a fancy coffeehouse costs about $1.35 while a home-brewed cup of coffee costs about 7 cents.

Plan your meals. If your fridge and freezer are stocked with delicious foods that you made ahead of time, you are less likely to grab pricey convenience foods on the run.

Grocery shop like a pro. Clipping coupons, buying store generic brands, avoiding convenience foods, and shopping from a list are ways that millions of smart shoppers take a big bite out of their grocery costs every month. Shopping at stores with double coupons and "buy one, get one free" deals can get you even more bang for your shopping buck.

Develop a food co-op. Pooling coupons, buying in bulk quantities and then splitting the costs among a group of friends or other students is a great way to end up with more disposable income.

Consider school-provided meal plans. Many schools have meal plans that allow you to pay for meals in advance. This can save money while converting a variable expense into a fixed expense, further simplifying the budgeting process.

Carpool with friends. Since you and your friends are all going to the same place anyway, why not have some fun driving to school while saving money in gas. Also, check to see if your school has a "ride board" or an organized carpool program.

Buy a bus pass. If you take the bus to school more than a couple of times each week, consider getting a monthly bus pass to save time and money.

Dust off your bike or skates. Considering riding a bike, using inline skates or walking to places instead of driving or using public transportation.

Plan air travel well in advance. If you're away at school and plan to visit home regularly, make any plane reservations months in advance to receive the best price on tickets. Make sure to take advantage of frequent flier miles and travel specials on the Internet.

Make long-distance calls at night or on weekends. Rates can be as much as 65% less than peak period rates.

Use prepaid phone cards. Buy a month's worth of phone cards in advance and limit yourself each month to the amount on the phone cards.

Shop for a good long-distance plan. Deregulation of the phone companies has resulted in a lot of choices for phone plans. Since many of these plans can involve confusing restrictions and conditions, do your homework before committing to a plan.

Call your parents collect. This can obviously save you a bundle but remember to get the okay from Mom and Dad first.

Get on the Internet. If you have Internet access, you have access to email, either paid or free. Instead of picking up the phone, email your friends and family for a cheap and easy form of communication.

Maintaining the budget

Once you have a budget you and your student can live with, you're almost finished. As with any good financial plan, maintenance is critical. It's important that your student keep an accurate record of actual expenses to compare periodically with the budgeted amounts. Actual expenses can be recorded in a small notebook or on a computer spreadsheet using detailed categories for easy comparison. This process will help you and your student determine exactly where the money goes at all times.

For the college-bound student, developing and maintaining a budget may seem like just one more headache, but it will ultimately result in a greater sense of control over their money. If you need assistance in getting started with the budgeting process, please contact the office.

The United States is currently experiencing the largest influx of inpatriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an inpatriate may have concerning his/her U.S. tax liability and filing requirements.

The United States is currently experiencing the largest influx of inpatriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an inpatriate may have concerning his/her U.S. tax liability and filing requirements.

I am a foreign national working in the United States and am paid by my foreign employer. Do I need to file a tax return and pay income taxes?

The general rule is that all wages earned while working in the United States, regardless of who pays for it or the locations of the employer, is taxable in the United States. This is true whether you are treated as a U.S. resident or not.

What is the difference in taxation of a resident alien versus a nonresident alien?

The difference in being taxed as a resident versus a nonresident is as follows: a resident alien is taxable in the U.S. on all worldwide income, regardless of what country it is earned or located in. A nonresident alien is generally taxable only on what is referred to as "effectively connected income". This is normally wages earned while in the U.S., along with earnings on property located in the United States. Certain deductions, exemptions, and filing statuses are not available to nonresidents.

I am not a resident for immigration purposes as I am here on a temporary visa. Can I still be a resident for U.S. tax purposes?

The determination of residency for tax purposes does not bear any relationship to your legal or immigration status. It is quite common for a foreign national to be a nonresident for legal or immigration purposes and yet be a resident for tax purposes. In addition, being a resident for income tax purposes can be different than being a resident for estate tax or even social security tax purposes. In some cases, it is actually more beneficial to be treated as a resident than as a nonresident. As a result, it is important to have all of the information we request in order to make the best decision for you.

How do you determine whether you are a resident or nonresident for U.S. income tax purposes?

As a foreign national working in the U.S., you must first determine if you are a "resident" for U.S. income tax purposes. There are two tests to determine whether you are a U.S. tax resident. These two tests are:

• The lawful permanent residence test
• The substantial presence test.

If you meet the requirements of either of these two tests, you will be treated as a U.S. tax resident (unless a treaty overrides this).

Lawful Permanent Resident Test - In its simplest form, this is when you have been issued a green card or alien registration card allowing for permanent residency.

Substantial Presence Test - This is a more complicated test that looks at the number of days of physical presence in the U.S. over a three-year period of time. If the number of days of U.S. presence exceeds 183 days in the current year, or 183 equivalent days during a three-year period, you are a resident for U.S. tax purposes. An "equivalent day" is defined as:

• In the current year, each partial day counts as one full equivalent day
• In the first preceding year, each day counts as 1/3 of an equivalent day
• In the second preceding year, each day counts as 1/6 of an equivalent day.

There are exceptions to the counting of days, but in general, any part of a day counts as a full day.

31 Day Exception - If you are present in the States for less than 31 days in the current year, the substantial presence test is not applied.

Closer Connections Exception - If you are present in the U.S. for fewer than 183 days in the current year AND you maintain a "tax home" in another country during the entire year AND you maintain a closer connection to the foreign country in which you have a tax home, then this test will not apply.

J-1 Visa - Subject to some limitations, you do not count days in the U.S., for calculating the substantial presence test, while you are here on a J-1 visa (generally for up to two years). This does not exempt the earnings, but just allows you to be treated as a nonresident alien, not a resident alien.

Treaty - Some countries have treaties with the U.S. which, in some cases, will override either the U.S. Internal Revenue Code or the income tax law of the foreign country.

If I become a U.S. taxable resident during the year, when does my residency begin?

In general, residency begins on the first physically present day in the U.S. during the year you meet the substantial presence test. There are exceptions for "nominal" days along with the closer connection exception, which can apply here. Remember that residency determines from what point you are taxable on your worldwide income, not when you are taxable.

Likewise, your residency is deemed to end on the last day that you are present in the U.S. within the year that you move from the United States. Problems can arise if you return back to the U.S. within a short period of time.

First Year Election - Sometimes it can be better to be treated as a resident than as a nonresident. There is an election available that allows a foreign national to be taxed as a resident in the initial year of a U.S. assignment even if one of the residency tests is not met for the year. To qualify, you would have to satisfy the following:

• Must have been a U.S. nonresident in the year immediately preceding the initial year.
• You must satisfy the substantial presence test in the year following the initial year.
• You must be present in the U.S. for at least 31 consecutive days in the initial year.
• During the initial year, you must be present in the U.S. for at least 75% of the days from the start of your 31 consecutive day period through the end of that year.

What if my home country considers me as a taxable resident at the same time the U.S. treats me as a taxable resident? Am I double taxed?

The general rules discussed above are based on the IRS Code. The United States has entered into numerous tax treaties with other countries. The purpose of these treaties is to prevent double taxation issues that may arise due to differences in the tax laws of the two countries. It is possible to be considered a resident, subject to tax in both countries. The treaties usually provide for 'tiebreaker' rules to override the IRS Code or the foreign home country tax laws. Most treaty provisions require the filing of certain documents, though, in order to take benefit of them.

I am on a short-term assignment from my home country and my employer pays for my rent and meals while I am working here in the U.S. Is any of this taxable?

The first thing you need to do is determine whether your assignment is considered "short-term" within the definition of U.S. law. An individual is treated as being on a short-term assignment in the U.S. if their tax home has not changed from their foreign location. If the intent of the assignment is to return to the original work location within one year, the assignment is considered a temporary assignment. This does not determine whether you are a resident or not. It just determines which types of payments are taxable.

The advantage of a temporary assignment is that the employer-provided benefits such as lodging, meals travel and certain other expenses are not considered taxable wages in the U.S. In this case, a resident or nonresident would not be taxed on these payments. On a long-term assignment (more than 12 months), these are typically taxed in addition to the wages.

What happens if I am a nonresident for part of the year and a resident for another part of the year?

It is possible to be taxed in one year as both a resident and a nonresident. If this is the case, a special filing is made on a single tax return, with certain forms required. During the residency period, you would be taxed on worldwide income. During the nonresidency period, you would be taxed only on effectively connected income (usually wages earned in the U.S., as noted earlier).

Can I be exempt or excluded from tax from the U.S. federal government but still be taxed by one of the States?

Yes. Please note quite a few of the 50 states of the U.S. do not follow some, or all, of the U.S. federal tax codes or recognize the Treaties between the U.S. and other countries. So, it is possible, and highly probable, you could be taxable for State purposes but may be exempt for federal. In addition, other tax filing requirements, including estate and gift taxes, social security taxes, along with other filing forms, may be required regardless of your income tax residency determination.