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The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down.

The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down. President Biden signed the infrastructure bill into law on November 15 after Congress came back from a week-long recess.

The $1.2 trillion Infrastructure Investment and Jobs Act ( P.L. No. 117-58), includes a few tax provisions mixed in with the spending on to repair and rebuild the nation’s bridges, climate issues and other items. It passed the Senate with a 69-30 vote in August.

Cryptocurrency Reporting And Other Tax Provisions
Among the tax provisions in the bill is an expansion of the reporting requirements available to cryptocurrency, which is one of the revenue generators to help offset the new spending in the bill. It is believed that a significant amount of cryptocurrency gains escape taxation due to underreporting.

The bill also includes a few other tax changes meant to spur private infrastructure investment, raise revenue, and expand the scope and applicability of disaster declarations, in addition to typical extension of highway funding provisions. These other changes include

• An extension of highway taxes to 2028 and highway trust fund expenditure authority to 2026;
• Inclusion of qualified broadband projects and carbon dioxide capture facilities among the other types of projects for which private activity bonds can be issued;
• A return of the exception for water and sewage disposal utilities from the rule requiring a corporation to recognize contributions in aid of construction (removed by the Tax Cuts and Jobs Act of 2017);
• A return of Superfund excise taxes on certain chemicals, last effective in the mid-1990s;
• Termination of the employee retention credit for employers closed due to COVID-19 after September 30, 2021; and
• Changes to the extension of tax deadlines due to declared disasters and service in a combat area, as well as expansion of extension authority to taxpayers impacted by wildfires.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2022 Income Tax Brackets
For 2022, the highest income tax bracket of 37 percent applies when taxable income hits:

• $647,850 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals and heads of households,
• $323,925 for married individuals filing separately, and
• $13,450 for estates and trusts.

2022 Standard Deduction
The standard deduction for 2022 is:

• $25,900 for married individuals filing jointly and surviving spouses,
• $19,400 for heads of households, and
• $12,950 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,150 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,400 for married taxpayers and surviving spouses, or
• $1,750 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2022
The AMT exemption for 2022 is:

• $118,100 for married individuals filing jointly and surviving spouses,
• $75,900 for single individuals and heads of households,
• $59,050 for married individuals filing separately, and
• $26,500 for estates and trusts.

The exemption amounts phase out in 2022 when AMTI exceeds:

• $1,079,800 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals, heads of households, and married individuals filing separately, and
• $88,300 for estates and trusts.

Expensing Code Sec. 179 Property in 2022
For tax years beginning in 2022, taxpayers can expense up to $1,080,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $2,700,000.

Estate and Gift Tax Adjustments for 2022
The following inflation adjustments apply to federal estate and gift taxes in 2022:

• the gift tax exclusion is $16,000 per donee, or $164,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,060,000; and
• the maximum reduction for real property under the special valuation method is $1,230,000.

2022 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2022 is $112,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2022 Adjustments
These inflation adjustments generally apply to tax years beginning in 2022, so they affect most returns that will be filed in 2023. However, some specified figures apply to transactions or events in calendar year 2022.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2022 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2022
The contribution limit has increased from $19,500 to $20,500 for employees who take part in:

• 401(k),
• 403(b),
• most 457 plans, and
• the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees aged 50 and over in the plans above remains $6,500.

The annual limit on contributions to an IRA remains unchanged at $6,000. The $1,000 IRA catch-up contribution amount is not subject to inflation adjustments.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver's Credit.

Phase-Out Ranges
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• Single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 and $78,000, increased from between $66,000 and $76,000.
• Joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $109,000 and $129,000, increased from between $105,000 and $125,000.
• An IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $204,000 and $214,000, increased from between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace plan, the phase-out range remains $0 to $10,000.
• The phase-out ranges for Roth IRA contributions are:
• $129,000 to $144,000, for singles and heads of household,
• $204,000 to $214,000, for joint filers, and
• $0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• $68,000 for joint filers,
• $51,000 for heads of household, and
• $34,000 for singles and married filing separately.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance. The guidance addresses (1) timing issues; (2) partner and consolidated group member basis adjustments; and (3) filing of amended partnership returns and information statements.

Timing of Tax-exempt Income
A taxpayer that received a PPP loan may treat tax-exempt income resulting from the partial or complete forgiveness of the PPP loan as received or accrued as follows:

• As the taxpayer pays or incurs eligible expenses. Under the safe harbor that allows certain taxpayers who relied on prior guidance and did not deduct certain PPP-related expenses on a tax return filed before the COVID Tax Relief Act was enacted, to deduct the expenses in the next tax year. A taxpayer that has elected to use the safe harbor will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent tax year following the taxpayer’s 2020 tax year in which the expenses were actually paid or incurred, as described in Rev. Proc. 2021-20;
• When the taxpayer files an application for forgiveness of the PPP loan; or;
• When the PPP loan forgiveness is granted.

The timing treatment also applies to the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP loan is treated as gross receipts under a federal tax provision.

If a taxpayer received PPP loan forgiveness of less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must file an amended return, information return, or administrative adjustment request as applicable.

Partnership Allocations and Basis Adjustments
If covered partnerships meet certain requirements, the IRS will treat the covered taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions as determined in accordance with Code Sec. 704(b). A partner's basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions. If certain conditions are met, the treatment generally applies in connection with:

• deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP loan;
• deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act; and
• the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant.

Consolidated Group Members
For consolidated group members, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of Reg. §1.1502-32(b)(2)(ii) investment adjustments. For the treatment to apply, the consolidated group must attach a signed statement to its consolidated tax return.

Amended Returns
Eligible partnerships subject to the centralized partnership audit regime (BBA partnerships) that filed a Form 1065 and furnished all required Schedules K-1 for tax years ending after March 27, 2020 and before Rev. Proc. 2021-50 was issued may file amended partnership returns and furnish amended Schedules K-1 on or before December 31, 2021. The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships may make any additional changes on their amended returns.

The amended return applies to any partnership tax year ending after March 27, 2020 and before the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write "FILED PURSUANT TO REV PROC 2021-50" at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation.

Special rules apply to pass-through partners. A partnership under examination that wishes to use this amended return procedure must notify the revenue agent coordinating the partnership’s examination.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022.

Application of Per Diem Rules
Under Rev. Proc. 2019-48, taxpayers using the per diem rules to substantiate deductible food and beverage expenses must still apply the 50-percent limitation. According to the IRS guidance, taxpayers that follow Rev. Proc. 2019-48 may treat the entire meal portion of a the per diem or allowance as being attributable to food or beverages provided by a restaurant.

Effective Date
This IRS guidance is effective for the meal portion of per diem allowances for lodging and M&IE, or for M&IE only that are paid or incurred by an employer after December 31, 2020, and before January 1, 2023.

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF).

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF). The fund was established under section 3206 of the American Rescue Plan Act of 2021, P.L. No. 117-2, in response to the coronavirus disease (COVID-19) pandemic. This guidance is effective on November 8, 2021, and would apply to qualified expenses paid after January 21, 2020.

Disaster Relief Payments
The IRS guidance provides that any HAF payment made to or on behalf of a homeowner is qualified disaster relief payment within the meaning of Code Sec. 139(b)(4) since COVID-19 is a qualified disaster. As a result, such payments are not included in the homeowner’s gross income. However, a homeowner that receives a HAF payment, or on whose behalf a HAF payment is made, for qualified expenses cannot take a deduction or credit with respect to such expenses. Qualified expenses under the HAF program include assistance payments for mortgage payments, utilities, and insurance.

Safe Harbor for Tax Deductions
For tax years beginning in 2021 through 2025, a homeowner may deduct as qualified mortgage interest expenses or qualified real property tax expenses on the homeowner’s federal income tax return for the lesser of:

• the sum of all payments the homeowner actually makes from the homeowner’s own sources during the taxable year to the mortgage servicer; or
• the sum of amounts shown on Form 1098, for qualified housing payment expenses.

A homeowner may first allocate the HAF payments to qualified expenses that are not qualified housing payment expenses before allocating the remaining portion of the HAF payments to qualified housing payment expenses. A qualified housing payment a payment for a mortgage or taxes that would be eligible to be deducted on the taxpayer’s return.

Eligible Homeowners
A homeowner is eligible to claim relief under the IRS guidance if:

• the homeowner receives a payment from, or a payment is made on the homeowner’s behalf by, a State;
• the payment is made with funds from the HAF;
• the payment is used to pay qualified expenses of the homeowner, and at least one of the expenses is a qualified housing payment expense;
• the homeowner has also paid a portion of the qualified housing payment expense from their own sources;
• the homeowner itemizes deductions on their federal income tax return;
• the homeowner would meet the requirements of Code Sec. 163(h)(3) to deduct qualified mortgage interest expenses, if they paid the qualified mortgage interest expenses from the homeowner’s own sources; and
• the homeowner would meet the requirements of Code Sec. 164(a)(1) to deduct qualified real property tax expenses if the homeowner paid the qualified real property tax expenses from the Homeowner’s own sources.

Reporting Requirements
Since HAF payments made to or on behalf of homeowners are excluded from the gross income of the homeowners, they are not fixed or determinable income under Code Sec. 6041 and information reporting for such payments is not required. HAF payments that are made directly to third parties on behalf of homeowners, such as payments made to insurance companies and homeowners associations, are generally reportable to those third parties if they constitute fixed or determinable income to the third party and the aggregate payments meet the $600 reporting threshold. Moreover, the interest received from a governmental unit or an agency or instrumentality of a governmental unit is not interest received on a mortgage. Lenders who receive a homeowner’s mortgage payments directly from a State should not report the interest received from the State on Form 1098 as interest received on the homeowner’s mortgage.

If a lender files and furnishes a Form 1098 that includes mortgage interest received directly from the State, thereby reporting an incorrect amount of interest on the information return, the lender will not be subject to penalties under Code Secs. 6721 and 6722 so long as the lender notifies the homeowner that the amounts reported on the Form 1098 are overstated because they include payments from a governmental unit or an agency or instrumentality of a governmental unit, and sets forth the amount of the overstatement. Such notification to the homeowner should be made at the time the Form 1098 is furnished or within 30 days thereafter, and can be provided in a separate statement (written or electronic), or included on Form 1098 in Box 10 labeled "Other".

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

Organized tax records
Taxpayers can easily prepare complete and accurate tax returns with the help of organized tax records. Organized tax records also help avoid errors that lead to processing and refund delays. Taxpayers must have all tax information available before filing their tax returns. Taxpayers must inform the IRS of any address changes and the Social Security Administration of a legal name change.

Recordkeeping for individuals includes the following:

• Forms W-2 from employer(s),
• Forms 1099 from banks, issuing agencies and other payers, including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan,
• Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy,
• Form 1099-INT for interest received, and
• other income documents and records of virtual currency transactions.

Individuals can determine if they are eligible for deductions or credits with the help of income documents. Further, taxpayers will need their related 2021 information to reconcile their advance payments of the Child Tax Credit and Premium Tax Credit. People will also need their stimulus payment and plus-up amounts to figure and claim the 2021 Recovery Rebate Credit if they received third Economic Impact Payments and think they qualify for an additional amount.

Further, taxpayers must secure the end of year documents, including the following:

• Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
• Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit, and
• Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage.

Online Account
Taxpayers can securely gain entry to the Child Tax Credit Update Portal to see their payment dates and amounts through their Online Account. This information will be required to reconcile taxpayers’ advance Child Tax Credit payments with the Child Tax Credit they can claim when filing their 2021 tax returns.

Eligible individuals claiming a 2021 Recovery Rebate Credit can view their Economic Impact Payment amounts in their online account to accurately claim the credit when they file.

Those who have an Online Account may:

• see the amounts of their Economic Impact Payments,
• access Child Tax Credit Update Portal for information regarding their advance Child Tax Credit payments,
• approve or reject authorization requests from their tax professional, and
• update their email address and opt-out/in for selected paper notice preferences.

Tax Withholding
The IRS has informed that individuals may want to consider adjusting their withholding if they owed taxes or received a large refund the previous year. Individuals can help avoid a tax bill or let individuals keep more money every payday by changing withholding. Some reasons for adjusting withholding might be marriage or divorce, childbirth or taking on a second job. Taxpayers may complete a new Form W-4, Employee’s Withholding Certificate, every year and when personal or financial situations change.

Further, individuals should make quarterly estimated tax payments if they receive a substantial amount of non-wage income like self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income. The due date for 2021 is January 18, 2022.

ITINs
An Individual Taxpayer Identification Number (ITIN) will expire on December 31, 2021 if it was not included on a U.S. federal tax return at least once for tax years 2018, 2019 and 2020. The IRS has reminded taxpayers that ITINs with middle digits 70 through 88 have expired. Further, ITINs with middle digits 90 through 99, IF assigned before 2013, have expired. Individuals are not required to renew again if they previously submitted a renewal application that was approved.

Direct Deposit
Individuals can access their refund faster than a paper check with the help of direct deposit. Taxpayers without a bank account can learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool. Veterans can visit the Veterans Benefits Banking Program to access financial services at participating banks.

IRS Certified Volunteers
The IRS has encouraged people to join the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs to prepare a free tax return for eligible taxpayers.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

The agreement comes on the heels of an international agreement in October among 136 of the 140 Organization for Economic Cooperation and Development (OECD) members, that featured two pillars. Under Pillar One, taxing rights will be reallocated to market jurisdictions to ensure that market economies receive tax revenue even in locations where large multinational enterprises (MNEs) lack a physical presence. MNEs with global sales above 20 billion euro and profitability above 10 percent will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions.

Pillar Two introduces the global minimum corporate tax rate set at 15 percent, which applies to companies with revenue above 750 million euro.

Each country will need to ratify the tax within its own governing structure.
"The final political agreement as set out in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on October 8, is a historic achievement through which we will establish a more stable and fairer international tax system," the final Rome Declaration states. "We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023."

Tax To Generate $60 Billion Annually for U.S.
A White House spokesperson said October 29 ahead of the formal G20 endorsement that the 15 percent global corporate minimum tax would generate at least $60 billion annually. The tax has been proposed as part of the current version of the Build Back Better Act ( H.R. 5376) as a key revenue generator that will help offset the $1.75 trillion in new spending that is included in the legislation. The House Rules Committee is in the process of reviewing that legislation as the last stop before the bill advances to the lower chamber of Congress for consideration, something that could happen as early as the week of November 1.

Treasury Secretary Janet Yellen said at a November 1 press conference that while the agreed upon global corporate minimum tax rate was set at 15 percent, it could conceivably go higher, although she does not expect it to.

Individual countries "may choose themselves to establish a higher tax, but I expect many countries to adopt a 15 percent tax," Yellen said, adding that there is nothing that makes 15 percent represents a fixed percentage, a minimum or even a ceiling. " I don't think that there's broad agreement on that. It works for many countries, and I don't think that that's something that is going to be reconsidered as a as a global minimum."

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death.

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death. The informant filed a claim for an award with the IRS Whistleblower Office (WBO) for naming multiple target taxpayers. The WBO denied the claim and the informant appealed the determination to the Tax Court under Code Sec. 7623(b)(4). The informant died after filing the petition, but before the trial. Moreover, the informant's claim with respect to two of the target taxpayers was pending before the Tax Court prior to the petitioner’s death.

Litigation Post-Death of Informant
The counsel for the informant filed a motion to substitute the informant's estate in order to continue to prosecute the informant's claim after his death. At trial, the Tax Court stated that its jurisdiction over a petition filed under Code Sec. 7623(b)(4) was not extinguished by the death of the informant because the WBO reached a final determination and a petition was filed. Further, the informant's claim survived his death and his estate had standing to be substituted as the petitioner.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership. The taxpayer had formed the partnership, with a renowned family, where the taxpayer contributed the major league baseball team and related assets and the family contributed cash. Subsequently, the partnership then distributed cash to the taxpayer (the transaction) which represented a "disguised sale" which was taxable under Code Sec. 707. Further, the IRS had issued a notice of deficiency to the taxpayer and a notice of final partnership administrative adjustment (FPAA) as to the partnership for the tax year at issue. The IRS claimed that since the debt funded by the family was not bona fide debt, it was supposed to be disregarded for purposes of the debt-financed distribution rule. The taxpayer argued that the transaction was a disguised sale but that the distribution to the taxpayer was not taxable because it was a debt-financed distribution. Moreover, the taxpayer contended that it should be allocated to the debt because it bore the economic risk of loss on account of its guaranties. However, the IRS contended that the possibility of the taxpayer being called on to fulfill the guaranties was so remote it they should be disregarded.

Whether the Sub Debt was Bona Fide Debt or Equity
The parties disputed whether the amount of sub debt which the partnership borrowed from a finance company was bona fide debt and therefore a partnership liability. The factors which determined the same (the Dixie Dairies factors), such as: 1) presence or absence of a fixed maturity date; (2) names given to the certificates evidencing the indebtedness; (3) source of payments; (4) right to enforce payments; (5) participation rights; (6) status of the advances in relation to regular corporate creditors; (7) intent of the parties weighs strongly toward equity; (8) identity of interest between creditor and stockholder; (9) ‘thinness’ of capital structure in relation to debt; (10) ability of the corporation to obtain credit from outside sources; (11) use to which the advances were put; (12) failure of the debtor to repay; and (13) risk, all strongly favored that the sub-debt was equity. Because the sub debt was equity, it was not allowed to be allocated to the taxpayer as recourse debt.

Allocation of Partnership Liabilities
The economic substance of the transaction was a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations. Moreover, under the constructive liquidation test, the taxpayer bore the risk of economic loss for the senior debt. According to the terms of the taxpayer’s guaranty of the senior debt, the taxpayer was obligated to pay when the partnership failed to make a payment and the debt was accelerated, the creditors had exhausted their remedies, and the creditors had failed to collect the full amount of the debt. Therefore, the senior debt guaranty was a nontaxable debt-financed distribution. Finally, the amount of expenses, in the form of legal expenses, paid by the taxpayer to a group of potential buyers, was required to be capitalized.

Q: When it comes to investing, I've always played pretty "mainstream" - investing in mutual funds and governments bonds. However, I've heard people talking about tax-sheltered annuities. Is this something I should consider to round out my investments while saving some additional taxes?

Q: When it comes to investing, I've always played pretty "mainstream" - investing in mutual funds and governments bonds. However, I've heard people talking about tax-sheltered annuities. Is this something I should consider to round out my investments while saving some additional taxes?

A: A "tax-sheltered annuity" can mean different things to different people. As used by tax professionals, a tax-sheltered annuity (TSA) is a specific type of qualified retirement plan available only to employees of certain tax-exempt charitable, religious and educational organizations, and to self-employed ministers. Under these TSA plans, a tax isn't imposed when the annuity is purchased, but is deferred until payments are received after retirement. Contribution limits, coverage and nondiscrimination restrictions and required distribution rules generally follow those imposed on regular qualified retirement plans.

Annuities in general

Annuities that are not used within the context of a tax-qualified retirement plan can nevertheless provide a useful investment vehicle with tax advantages. Annuities for these tax purposes include all periodic payments resulting from the systematic liquidation of a principal sum, including amounts received pursuant to an annuity contract, as well as amounts received from a life insurance policy if received during the life of the insured.

The portion of an annuity payment that is excludable from gross income is based on an exclusion ratio, which is determined by dividing the investment in the contract by the expected return. The annuity payment is multiplied by the exclusion ratio to determine the portion excluded from gross income. The excess is included in gross income. The excluded amount is limited to the investment in the contract.

Private annuities

Private annuities involving the transfer of property to either a charitable institution, a family member, or a corporation or business controlled by the annuitant or his family are taxable as annuities, but under slightly different rules. If the value of the property transferred exceeds the present value of the annuity, the excess is treated as an immediate gift. The excess of the present value of the annuity over the basis of the property is considered capital gain, realized as payments are received. The excess of the expected return from the annuity over the present value is the interest element, taxable as ordinary income ratably over the term of the annuity.

Charitable gift annuities

A charitable gift annuity is an annuity that a charitable organization agrees to pay in exchange for a contribution of property. If property is contributed to a charitable organization in exchange for an annuity, the excess of the property's fair market value over the present value of the annuity is a charitable contribution. No deduction is allowed if the present value of the annuity exceeds the amount contributed in exchange for the annuity

Legitimate charitable gift annuities should be distinguished from potentially abusive arrangements under which the donor transfers funds to the charity for the purpose of having the charity pay premiums on a life insurance policy or annuity which will primarily provide benefits for the donor's family. These types of transactions (also called "personal benefit contracts" have been specifically disapproved under the Code and IRS guidelines)

There are many, many ways to invest your savings (including tax-sheltered annuities), all with potentially very different tax ramifications. Before you make substantial changes to your investment portfolio, please contact the office for additional assistance with determining the possible tax effects.

Although the old adage warns against doing business with friends or relatives, many of us do, especially where personal or real property is involved. While the IRS generally takes a very discerning look at most financial transactions between family members, you can avoid some of the common tax traps if you play by a few simple rules.

Although the old adage warns against doing business with friends or relatives, many of us do, especially where personal or real property is involved. While the IRS generally takes a very discerning look at most financial transactions between family members, you can avoid some of the common tax traps if you play by a few simple rules.

Of course, because there are so many types of potential transactions, there are few hard and fast rules that apply across the board. If you're thinking of selling property to a family member, or buying from a family member, you must evaluate the potential negative tax consequences before agreeing to enter into a transaction. In a worst case scenario, the IRS could set aside the transaction as if it never took place and whatever gain, or loss, you have, would evaporate.

"Arms-length" transactions

The IRS is on alert for transactions between family members because often they are not "arms-length" transactions. Conducting a transaction at "arms-length" means that pricing is established as if the seller and buyer were independent parties. To be considered an "arm's length" transaction, the seller must genuinely wants to sell his or her property at a fair market price and the buyer must offer a fair price. The transaction cannot be motivated primarily by tax avoidance. Transactions between unrelated parties, for example when you buy your new car from an automobile dealer, are "arms length" transactions. The seller is in the business of selling and the buyer is an independent third party.

Transactions between family members - say, the transfer of real estate or other property -- frequently may look, at first glance, to be not quite at arms length. Did the buyer make a fair offer? Did the seller accept a fair price? Was the sale really a gift? The rules allow the IRS to set aside abusive transactions as shams and impose penalties.

Dealing with your children

Tax problems frequently arise in transactions between parents and children. Let's say that you agree to sell your vacation home to your daughter. If your daughter pays the first and only price you gave, some warning bells may sound. Did your selling price reflect the fair market value of the property? Did the buyer investigate, or seek an appraisal, of the value of the property. Did comparable properties sell at similar prices?

If you want to claim a loss from the sale, don't count on it. The tax rules specifically disallow in most situations a loss from the sale - or exchange - of property when the sale or exchange is between members of a family -whether or not you can prove that the price is fair. The IRS's definition of family is pretty broad for this purpose. It includes brothers and sisters (whether by the whole or half blood), spouses, ancestors, and lineal descendants. Ancestors include parents and grandparents, and lineal descendants includes children and grandchildren. Thus, nieces and nephews, aunts and uncles and in-laws are excluded. Stepparents, stepchildren and stepgrandchildren are excluded, but adopted children are treated the same as natural children in all respects

If you claim a gain on the sale, expect some questions from the IRS if your return is audited. The IRS can claim that you recognized too little gain, hoping to tax the rest as a taxable gift. In selling property to a family member, you should build a file of comparable prices in order to be ready for the IRS on an audit of your return.

Divorcing couples also under scrutiny

Divorce spawns many tax consequences. Often, a court will direct one spouse to transfer property to the other spouse. Generally, no gain or loss is recognized when property is transferred incident to the divorce. Problems develop over the last three words, "incident to the divorce." If the transaction is not "incident to the divorce" and one spouse claims large losses, the IRS will examine carefully whether the transaction was genuine.

Gain or loss also is not recognized when a transfer takes place between spouses who are still married, even if they don't file a joint return, and whether or not their relationship is amicable or hostile.

Be proactive to avoid future inquiries

Selling to, or buying from, a family member shouldn't be avoided just because the rules are complex. First, recognize that your transaction may be subject to special scrutiny by the IRS. If it is, you can't go on this road alone without professional backup but you can be proactive by anticipating potential challenges and by taking some simple, common sense steps:

Be prepared. Because documentation is very important to the IRS and plays a very big part in whether a claim will be allowed, it is important that you document your related party transaction every step of the way. All agreements should be in written format and corroborating evidence (such as comparable price lists) should be retained.

Invest in an independent appraisal. Unless you are a professional in selling your particular property, let an expert place a value on it. Having this sort of independent third party verify the reasonableness of the transaction price is exactly the type of documentation the IRS likes to see.

Weigh alternatives to relinquishing total control over the property. Consider "gifting" the property to a family member instead of selling it - the positive tax consequences of gifting are often overlooked.

As illustrated above, there is absolutely nothing wrong with engaging in financial transactions with related persons - as long as all parties involved are aware of the added scrutiny the transaction may bring and properly prepare for such an event. If you are contemplating such a transaction, please feel free to contact the office for additional guidance.

You have just been notified that your tax return is going to be audited ... what now? While the best defense is always a good offense (translation: take steps to avoid an audit in the first place), in the event the IRS does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.

You have just been notified that your tax return is going to be audited ... what now? While the best defense is always a good offense (translation: take steps to avoid an audit in the first place), in the event the IRS does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.

Relax. It is a normal reaction upon receiving notice of an audit to panic and feel particularly singled out, however, as in most situations, panic can be counterproductive. A better course of action is to contact an experienced professional to get additional guidance as to how best to proceed to prepare for the audit as well as to get reassurance that everything will be fine.

Be professional. In the event that you have any type of communication with the IRS prior to your audit -- written or verbal, it's important that you act in a professional, business-like manner. Verbally abusing the auditor or becoming defensive is not a good way to start off your relationship with him or her.

Organization is very important. Before the audit, take the time to gather all of your documents together and consider how they will be presented. While throwing them all into a box in a haphazard fashion is certainly one way to present your documents to your auditor, this method will also be sure to raise at least one eyebrow ... and encourage him or her to dig deeper.

As you gather your data, you may need to re-create records if no longer available. This may involve calls to charities, medical offices, the DMV, etc., to obtain the written documentation required for verification of deductions claimed. Once you are confident that you have all of the necessary documentation, organize it in a binder, separated by category as shown on your return. This will allow quick and easy access to these records during the actual audit, something that the auditor will appreciate and will give him/her the impression that you are organized and thorough.

Leave the face to face to a professional. Make sure that you retain the services of a tax professional, most likely the person who prepared your return. Having a tax professional appear on your behalf for your audit is beneficial in a number of ways.

• A tax professional is emotionally detached from the return and less likely to become angry or defensive if questioned.
• A tax professional can serve as a "buffer" between you and the IRS -- indicating that he/she will need to get back to the auditor on certain issues, can buy you extra time to prepare for an issue raised you didn't consider.
• A tax professional can keep an auditor on track, making sure all inquiries are relevant to the return areas being audited.

If you disagree, appeal. If you disagree with the outcome of the audit, you still have the right to send your case to the IRS Appeals division for review. Appeals officers are usually more experienced than auditors and are more likely to negotiate with you, if necessary.

As for the "best defense is a good offense" comment? In this case, this old adage applies to how you approach the tax return preparation process throughout the year, year-in and year-out.

• Good recordkeeping is key. Maintaining complete and accurate records throughout the year reduces the chance that you will forget to provide important information to your tax preparer, which can increase your chances of audit. Good recordkeeping will also result in a more relaxed reaction to notification of an audit as most of your upfront audit work will be complete -- this is especially true if you audit pertains to a tax year several years in the past! Tax records should be retained for at least 3 years after the filing date.
• Provide ALL relevant information to your tax preparer. When your tax preparer is fully informed of all tax-related events that occurring during the year, the chances for errors or omissions on your return dramatically decrease.
• Keep a low profile. Error-free, complete tax returns that are filed in a timely manner don't have the tendency to raise any of those infamous "red flags" with the IRS. During the year, if the IRS does send you correspondence, it should be responded to immediately and fully. Don't hesitate to retain professional assistance to help you "fly under the radar".

While the odds of your tax return being audited remain very low, it does happen to even the most diligent taxpayers. If you are contacted about an examination by the IRS, take a deep breath, relax and contact the office as soon as possible for additional assistance and guidance.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Deductible investment expenses

Investment interest. A significant source of investment-related costs is investment interest expense. Investment interest paid related to the generation of taxable investment income is generally deductible on Schedule A of Form 1040, however certain limitations may reduce the amount deductible. For example, your deduction for investment interest paid may not exceed your net investment income. "Net investment income" is arrived at by subtracting your investment expenses (other than interest expense) from your investment income. Interest paid in excess of that amount determined to be deductible can be carried over and deducted in subsequent years (after application of these rules, of course).

Other investment expenses. Qualified investment expenses (other than interest) can be claimed as miscellaneous itemized deductions on Schedule A of your federal Form 1040 and are generally subject to the 2% threshold imposed on miscellaneous itemized deductions. If you itemize your deductions on your return, to the extent that these and other miscellaneous itemized deductions exceed 2% of your adjusted gross income (AGI), they are deductible from income.

The list of investment expenses approved for inclusion as miscellaneous itemized deductions (by the IRS or the courts) is a long one -- and one worth reviewing by you as a taxpayer, as unexpected ways to reduce your taxable income can be found. Some of the investment expenses that have been determined to be deductible as miscellaneous itemized deductions subject to the 2% floor include:

• Investment counsel or advisory fees, including managers or planners.
• Subscriptions to publications offering investment advice.
• Legal expenses for the maintenance, conservation or management of investment property.
• Legal expenses incurred in recovering investment property or amounts earned by such property.
• Guardian fees and expenses incurred in the production or collection of income of a ward or minor or in the management of the ward or minor's investments.
• Clerical help and office rent connected with the management of investments and/or the collection of the income they generate.
• Accounting fees for keeping investment income records.
• Depreciation of home computers used to manage investments that produce taxable income.
• Costs of premiums and other expenses for indemnity bonds for the replacement of missing securities.
• Dividend reinvestment plan (DRIP) service charges, such as charges for holding the shares acquired through the plan, collecting and reinvesting cash dividends, keeping individual records, and providing detailed statements of accounts.
• Proxy fight expenses if incurred in connection with a legitimate corporate policy dispute
• Investment expenses connected with the purchase, sale or ownership of securities
• Fees paid to a broker, bank, trustee, or other investment-related agent to collect interest or dividends on taxable investments.
• Losses on non-federally insured deposits in an insolvent or bankrupt financial institution, if the loss is treated as an ordinary loss by the taxpayer but is not treated as a casualty loss; and subject to a $20,000 limit on losses from any one institution.
• Allocable investment expenses of privately offered mutual funds.
• Custodial fees.
• Safe deposit box rent so long as the box is used for the storage of (taxable) income-producing stocks, bonds, or papers and documents related to taxable investments^.
• Travel costs incurred in making trips away from home to check on your property or to confer with investment advisors about your income-producing investments. But be careful -- if your investment property is in Vail or Maui, make sure your records establish that your trip was primarily made to check on your investment, not to take a personal vacation.

The expenses generated in connection with the management of investment property are deductible even if the property isn't currently producing income -- so long as the property is held for the production of income. And expenses incurred in reducing additional loss or to prevent anticipated losses with respect to investment property are also deductible.

Nondeductible investment expenses

What kinds of investment-related expenses are not deductible? A nonexclusive list of such expenses includes:

• Fees charged by a broker to acquire securities. These costs are instead added to the basis of the securities. Similarly, fees paid on the sale of securities reduce the selling price.
• Fees for establishing or administering an IRA, unless billed and paid separately and apart from the regular IRA contribution.
• Expenses related to tax-exempt investments.
• Trips to attend seminars or conventions connected with investment or financial planning.
• Trips to stockholder meetings. Although an exception has been made where a taxpayer with significant holdings traveled to a meeting to protest specific practices that were hurting his investment.
• Home office expenses, unless investing is actually the taxpayer's business.

Remember, for purposes of the rules governing investment expenses, rental and royalty income-related properties are not considered. These investments are subject to their own rules and reporting requirements, and are not included in the category of investment expenses limited by the 2% threshold.

While this discussion related to the tax treatment of investment-related expenses may appear comprehensive, other limitations and exceptions exist that may apply to your tax situation. For more information regarding how you can make the most of your investment-related expenditures, please feel free to contact the office for assistance.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employer's responsibility regarding employment taxes

Employment taxes such as federal income tax, social security (FICA) tax, unemployment (FUTA) tax and various state taxes (note that state issues are not addressed in this article) are all required to be withheld from an employee's wages. Wages are defined in the Code and the accompanying IRS regulations as all remuneration for services performed by an employee for an employer, including the value of remuneration, such as benefits, paid in any form other than cash. The employer is responsible for depositing withheld taxes (along with related employer taxes) with the IRS in a timely manner.

100% penalty for non-compliance

Although the employer entity is required by law to withhold and pay over employment taxes, the penalty provisions of the Code are enforceable against any responsible person who willfully fails to withhold, account for, or pay over withholding tax to the government. The trust fund recovery penalty -- equal to 100% of the tax not withheld and/or paid over -- is a collection device that is normally assessed only if the tax can't be collected from the employer entity itself. Once assessed, however, this steep penalty becomes a personal liability of the responsible person(s) that can wreak havoc on their personal financial situation -- even personal bankruptcy is not an "out" as this penalty is not dischargeable in bankruptcy.

A corporation, partnership, limited liability or other form of doing business won't insulate a "responsible person" from this obligation. But who is a responsible person for purposes of withholding and paying over employment taxes, and ultimately the possible resulting penalty for noncompliance? Also, what constitutes "willful failure to pay and/or withhold"? To give you a better understanding of your potential liability as an employer or employee, these questions are addressed below.

Who are "responsible persons"?

Typically, the types of individuals who are deemed "responsible persons" for purposes of the employment tax withholding and payment are corporate officers or employees whose job description includes managing and paying employment taxes on behalf of the employer entity.

However, the type of responsibility targeted by the Code and regulations includes familiarity with and/or control over functions that are involved in the collection and deposit of employment taxes. Unfortunately for potential targets, Internal Revenue Code Section 6672 doesn't define the term, and the courts and the IRS have not formulated a specific rule that can be applied to determine who is or is not a "responsible person." Recent cases have found the courts ruling both ways, with the IRS generally applying a broad, comprehensive standard.

A Texas district court, for example, looked at the duties performed by an executive -- and rejected her argument that responsibility should only be assigned to the person with the greatest control over the taxes. Responsibility was not limited to the person with the most authority -- it could be assigned to any number of people so long as they all had sufficient knowledge and capability.

The Fifth Circuit Court of Appeals has delineated six nonexclusive factors to determine responsibility for purposes of the penalty: whether the person: (1) is an officer or member of the board of directors; (2) owns a substantial amount of stock in the company; (3) manages the day-to-day operations of the business; (4) has the authority to hire or fire employees; (5) makes decisions as to the disbursement of funds and payment of creditors; and (6) possesses the authority to sign company checks. No one factor is dispositive, according to the court, but it is clear that the court looks to the individual's authority; what he or she could do, not what he or she actually did -- or knew.

The Ninth Circuit recently cited similar factors, holding that whether an individual had knowledge that the taxes were unpaid was irrelevant; instead, said the court, responsibility is a matter of status, duty, and authority, not knowledge. Agreeing with the Texas district court, above, the court held that the penalty provision of Code section 6672 doesn't confine liability for unpaid taxes to the single officer with the greatest control or authority over corporate affairs.

Suffice it to say that, under the various courts' interpretations -- or that of the IRS -- many corporate managers and officers who are neither assigned nor assume any actual responsibility for the regular withholding, collection or deposit of federal employment taxes would be surprised to find that they could be responsible for taxes that should have been paid over by the employer entity but weren't.

What constitutes "willful failure" to comply?

Once it has been established that an individual qualifies as a responsible person, he must also be found to have acted willfully in failing to withhold and pay the taxes. Although it may be easier to establish the ingredients for "responsibility," some courts have focused on the requirement that the individual's failure be willful, relying on various means to divine his or her intent.

An Arizona district court, for example, found that a retired company owner who had turned over the operation of his business to his children while maintaining only consultant status was indeed a responsible person -- but concluded that his past actions indicated that he did not willfully cause the nonpayment of the company's employment taxes. Since he had loaned money to the company in the past when necessary, his inaction with respect to the taxes suggested that he believed the company was meeting its obligations and the taxes were being paid.

A Texas district court found willfulness where an officer of a bankrupt company knew that the taxes were due but paid other creditors instead.

The Fifth Circuit has determined that the willfulness inquiry is the critical factor in most penalty cases, and that it requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. "A responsible person acts willfully if [s]he knows the taxes are due but uses corporate funds to pay other creditors, or if [s]he recklessly disregards the risk that the taxes may not be remitted to the government, or if, learning of the underpayment of taxes fails to use later-acquired available funds to pay the obligation.

Planning ahead

Is there any way for those with access to the inner workings of an employer's finances or tax responsibilities -- but without actual responsibility or knowledge of employment tax matters -- to protect themselves from the "responsible person" penalty? It may depend on which jurisdiction you're in -- although a survey of the courts suggests most are more willing than not to find liability. Otherwise, the wisest course may be to enter into an employment contract that carefully delineates and separates the duties and responsibilities -- and the expected scope of knowledge -- of an individual who might find himself with the dubious distinction of being responsible for a distinctly unexpected and undesirable drain on his finances.

The laws and requirements related to employment taxes can be complex and confusing with steep penalties for non-compliance. For additional assistance with your employment related tax issues, please contact the office for additional guidance.

How quickly could you convert your assets to cash if necessary? Do you have a quantitative way to evaluate management's effectiveness? Knowing your business' key financial ratios can provide valuable insight into the effectiveness of your operations and your ability to meet your financial obligations as well as help you chart your company's future.

How quickly could you convert your assets to cash if necessary? Do you have a quantitative way to evaluate management's effectiveness? Knowing your business' key financial ratios can provide valuable insight into the effectiveness of your operations and your ability to meet your financial obligations as well as help you chart your company's future.

Step 1: Calculate your ratios.

Acid Test: determines your company's ability to convert assets to cash to pay current obligations.

Cash & near cash

Current liabilities

Current Ratio measures your company's liquidity and ability to pay short-term debts.

Current assets

Current liabilities

Debt to Assets Ratio determines the extent to which your company is financed by debt.

Total debt

Total assets

Gross Profit Margin Rate: measures how much of each sales dollar can go for operating expenses and profit.

Gross Profit

Net Sales

Return on Assets (ROA): measures how much income is generated from your company's assets.

Net profit

Total assets

Step 2: Evaluate results.

Once you have calculated the ratios, you will need to be able to translate the numbers into results that relate to your business. Below are some examples of how you can use these ratios in your business:

Acid Test: A result of 2:0:1 means you have a two dollars' worth of easily convertible assets for each dollar of current liabilities.

Current Ratio A ratio of 2.0:1 means that the value of your current assets are twice that of what your current obligations are, a good indicator to a potential lender that your company is in sound financial condition.

Debt to Assets Ratio This ratio shows how many cents per dollar of assets are financed. An 82% ratio would indicate that your company's assets are heavily financed and may be a troubling sign to a potential lender.

Gross Profit Margin Ratio A ratio of .45:1 indicates that for every dollar of sales, your company has 45 cents to cover operating expenses and profit. This information can be used when setting pricing for your company's products and services.

Return on Assets Ratio (ROA): A ratio of .08:1 would mean that the company is bringing in 8 cents for every dollar of assets. These results can be used to determine the effectiveness of management's efforts to utilize assets.

Step 3: Compare to previous periods' results.

Take the results from the current period (e.g., this month) and deduct from the results of the previous period (e.g., last month). The result will be the net change in the ratio from one period to another. Because increases from period to period are good for one ratio (e.g., acid test) but maybe not so good for another (e.g., debt to assets ratio) it's important to analyze each ratio separately.

While changes in ratios don't always mean your company is getting off track, analyzing the cause of the changes can help uncover potential problem areas that need your attention.

There are many applications for key financial ratios to help you and your management team identify your company's strengths and weaknesses. If you would like any additional assistance with the calculation or analysis of your company's ratios, please contact the office.

Raising a family in today's economy can be difficult and many people will agree that breaks are few -- more people mean more expenditures. However, in recent years, the IRS has passed legislation that borders on "family-friendly", with tax credits and other breaks benefiting families with children. Recent legislation also addresses the growing trend towards giving families a break.

Raising a family in today's economy can be difficult and many people will agree that breaks are few -- more people mean more expenditures. However, Congress has passed legislation that continues to provide tax credits and other breaks benefiting families with children.

Child tax credit

The child tax credit provides individuals with dependent children under the age of 17 at the end of the calendar year a $1,000 per child credit. The American Reinvestment and Recovery Act of 2009 (2009 Recovery Act) increases the refundable portion of the child tax credit for 2009 and 2010 by setting the income threshold at $3,000. The credit begins to phase out for individuals with modified adjusted gross income exceeding $75,000 and $110,000 for married joint filers.

This particular social legislation comes virtually string-free -- essentially, all you need to do is show up in order to be eligible for a credit for each qualifying child. For purposes of this credit, a qualifying child is defined as a child, descendant, stepchild, or eligible foster child who is a U.S. citizen, for whom a dependency exemption can be claimed and whom is under the age of 17.

Dependent care credit

If you need to have someone care for your child in order for you to work, a dependent care credit (aka child and dependent care credit) is available to you. In order to qualify for the credit, you must maintain as your principal home a household for a child under the age of 13 whom you can claim as a dependent. Note: Other individuals can also qualify you for the credit, such as a spouse or other member of your household who is incapable of providing his or her own care, but this article will address only child care.

Credit limits. The dependent care credit is limited dollar-wise in two ways: first, the amount of expenses that count toward the credit are capped -- at $3,000 in 2008, for example -- for one dependent, and $6,000 for two or more -- regardless of how much your actual expenses are. In addition, the credit you are allowed is a percentage of the allowable expenses up to 35%, depending on income.

Earned income. The dependent care credit is only available for services you obtained in order to be "gainfully employed", i.e. to work at a paying job. If you are married, both parents must work at least part time unless one is a full-time student or is incapable of caring for him- or herself. If one spouse earns less than the $3,000 or $6,000 expense allowance, the credit calculation will be based on the lower income.

Qualifying expenses

In your home. The cost of providing care for your child in your home qualifies for the credit. If you pay FICA or FUTA taxes to the caregiver, you may include those as wages when calculating your expenses. The IRS will not try to dictate your choice of employees; you may choose higher-priced service even if lower priced service is available. The cost of domestic services that contribute to the care of the child, such as cooking and housecleaning, may also qualify -- at least to the extent those services are used by the child. Payments to a relative for child care can qualify for the credit; you may not, however, claim a credit for amounts you pay for child care to any person you could claim as your dependent.

Outside of your home. The cost of care for your eligible child qualifies for the credit if that care is provided in the home of a babysitter, in a day-care center, in a day camp or in some other facility so long as the costs are incurred so that you can work, and your child regularly spends at least eight hours a day at home. You may not claim the tuition costs for your school-age children, however; their purpose in attending school is not to enable you to work. You may, however, claim the cost of after-school care for your child under 13 whose school day ends before your workday does. Overnight camp has also been nixed as an allowable expense, despite the fact that a reasonable argument could be made that the parents of a child who would have required care during the day regardless of whether he or she was at camp should be entitled to claim at least a pro rata portion of camp fees as a child care expense.

Reduction for employer reimbursements

Some employers have established programs to reimburse employees for child care required to continue their employment. Your $3,000/$6,000 expense limits are reduced by any nontaxable benefits you receive under a qualified employer-provided dependent care program.

Divorced or separated parents

Although the dependent care credit is generally available to joint filers, a divorced or separated parent may claim the credit if certain conditions are met:

• a home was maintained that was the principal residence of a qualifying child for more than half the year;
• your spouse did not live there for at least the last six months of the year, and;
• you provided more than half the annual cost of running the household.

Assuming all of these requirements are satisfied, you can ignore the other spouse's employment data and claim the credit on a separate return. You may even be eligible to take the credit if you are not entitled to claim your child on your tax return, provided you are legally divorced or separated or lived apart from your spouse for the last six months of the year, you are the custodial parent, and you (or you and the other parent) had custody of the child for more than half the year and provided more than half of his or her (or their) support.

 Earned Income Tax Credit

The 2009 Recovery Act temporarily increases the earned income tax credit (EITC) for 2009 and 2010. Prior to the change, the credit percentage for the EITC, for a taxpayer with two or more qualifying children - was 40 percent of the first $12,570 of earned income. The 2009 Recovery Act raises the percentage to 45 percent of the first $12,570 of earned income for taxpayers with three or more children. The EITC phase-out range is also adjusted up by $1,880 for joint filers.

As indicated above, there are a number of family-friendly tax credits available to reduce your family's tax bill. If you think you may be able to claim these credits and would like more information, please feel free to contact the office.

For partnerships and entities taxed like partnerships (e.g., limited liability companies), each partner must compute the basis of his/her partnership interest separately from the basis of each asset owned by the partnership. Because the basis of this interest is critical to determining the tax consequences resulting from any number of transactions (e.g., distributions, sale of your interest, etc..), if your business is taxed as a partnership, it is important that you understand the concept of tax basis as well as how to keep track of that basis for tax purposes.

For partnerships and entities taxed like partnerships (e.g., limited liability companies), each partner must compute the basis of his/her partnership interest separately from the basis of each asset owned by the partnership. Because the basis of this interest is critical to determining the tax consequences resulting from any number of transactions (e.g., distributions, sale of your interest, etc..), if your business is taxed as a partnership, it is important that you understand the concept of tax basis as well as how to keep track of that basis for tax purposes.

Note: The term "partnership interest" generally refers to an interest in any type of entity taxed as a partnership. The term "partnership" usually means any entity that is taxed as a partnership, and the term "partner" refers to any owner of an entity taxed as a partnership.

Determining your initial basis

The initial basis in your partnership interest depends on how you acquired your interest. The basis of a partnership interest that you obtained in exchange for a contribution of cash or property to the partnership is equal to the amount of money you invested plus the adjusted basis of any property that you contributed. If you purchased your partnership interest, your initial basis will be the amount of cash you paid plus the fair market value of any property that you provided as part of the purchase price.

Generally, if you receive your partnership interest as a gift, your basis will be the same basis that the donor had in the partnership interest before he or she gave it to you. On the other hand, if you inherit your partnership interest, your initial basis in the partnership interest generally will be the fair market value of the partnership interest on the date of the partner's death.

Adjustments to initial basis

Each year, various adjustments must be made to the tax basis in your partnership interest to reflect certain partnership transactions that have occurred during the year. The basis in your partnership interest is increased to reflect your proportional share of partnership income (both taxable and tax-exempt income). This increase protects you as a partner from being taxed again when (1) the partnership distributes cash to you or (2) when you dispose of your partnership interest. The basis in your partnership interest also increases if you make additional contributions of cash or other property to the partnership.

The basis in your partnership interest is likewise decreased each year to reflect your share as a partner of any partnership losses and your share of any nondeductible expenses. This adjustment is made to prevent you from obtaining a tax benefit when the partnership makes a distribution to you or when you dispose of your partnership interest. Your basis in the partnership also must be decreased by any actual or deemed distributions you received from the partnership. However, the basis in your partnership interest may never be reduced below zero.

Adjustments to a partner's basis also must be made to reflect any increases or decreases in a partner's share of the partnership's liabilities

Recordkeeping

It is important that a partnership keep proper records of all transactions that occur during the year and take the time to make the basis adjustments using these basis computation rules as close in time to the occurrence of the transaction as possible.

The general guidelines detailed above will give you a good foundation of knowledge for computing the basis of your partnership interest. For more information about how to track your basis in your partnership interest, please contact the office.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Keeping it all in the family

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

"Reasonable compensation"

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

Imagine you had a camera that could take a snapshot of your financial transactions over the course of a year. This snapshot would give you a chance to see the results of financial decisions you made during the course of the year -- good and bad. By using your recently filed Form 1040 as a "snapshot" of your past spending and investment habits, you can use this information to make better financial decisions in the current year.

Imagine you had a camera that could take a snapshot of your financial transactions over the course of a year. This snapshot would give you a chance to see the results of financial decisions you made during the course of the year -- good and bad. By using your recently filed Form 1040 as a "snapshot" of your past spending and investment habits, you can use this information to make better financial decisions in the current year.

Evaluate your investment strategies. Reviewing Schedule D, Capital Gains and Losses, of Form 1040 for the past few years can be an eye-opener for many people. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Looking at your tax return will help you decide whether the investments you now have are the right ones for you.

Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. If you are in a high tax bracket and need to diversify away from common stocks, for example, looking into tax-exempt bonds might help, especially if you have state income taxes to worry about, too. You may want to put that knowledge to work in your investment strategy.

Identify borrowing patterns. A look at the interest deductions you claimed on Schedule A, Itemized Deductions, of your Form 1040 can also pinpoint ways for you to let Uncle Sam help pay off some of your loans with tax deductions. Should you have more home-equity interest rather than credit card debt? Are you maximizing -- or overusing -- the advantages of borrowing on margin? Consumer debt is a necessary way of life these days for many taxpayers, but smart borrowing on an after-tax basis can help "tame that tiger."

Revisit medical costs. Should you be taking advantage of the medical expense deduction? Many people assume that with the 7.5 percent adjusted gross income floor on medical expenses that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for long-term care insurance now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction is theirs for the taking.

Maximize retirement planning efforts. A look at your Form W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income, should tell you a lot. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans, facing a large amount of tax each year after you retire?

Remember, too, that a defined amount of retirement income will only be available for a definite amount of time after you retire. If you are spending down your retirement savings with a five percent return at ten percent per year, those savings will be exhausted in a finite number of years. Do the analysis and try to save enough so that, between Social Security and your savings, you can keep your annual withdrawals to under five percent per year and still meet living expenses.

Extrapolate into the future. Review your Form 1040 like you would reconcile your checkbook except, instead of balancing your monthly budget in your check register, balance your annual budget in your life's registry. You may already use your checkbook to extrapolate one, three or five months into the future to ensure that your income will cover the bills. So why not use your tax return to extrapolate one, three or five years into the future to develop a plan that will cover your life?

Consider "The Big Picture". Many people ask "How long should I keep my tax returns?" It depends on how much of your own financial history you want to see documented. The tax code requires retention of tax returns for a minimum of three years but the more history you have of your financial progress - or regress - over the years, the more information you will have for your analysis for the future.

When you are reviewing your tax return and learning how you have spent your money during the last year, it may help to review some of what you've learned with the person who prepared the return. In fact, taking this step is very important to enable you to work together to better plan your financial future. Please contact the office if you need additional assistance or have any questions as you review your recently filed return.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

Manage your cash before it manages you

Why do you need to manage your cash flow? Is it needed to help manage the day-to-day operations, obtain financing for a new project, or to acquire new equipment? Do you plan on presenting it to your banker to secure better financing terms or provide for future solvency? Are you seeking additional investors to help you expand into new markets? While all of these can be valid reasons for keeping on top of your cash flow situation, one of the main reasons to manage it is so it does not manage you. You should know when your business would be cash poor so you can better plan for short term operating loans. Similarly, when it has excess cash, it can be invested temporarily to maximize your return. If you do not do this, your cash flow situation will dictate when you can afford to advertise, when you can expand your business, when you can take on more sales, etc. as opposed to you making those timing decisions.

Once you have determined why cash flow management is important to your business, the next step is to get into action. In order to effectively manage your cash flow situation, you need to forecast your cash flows and once done, develop and implement a cash flow plan.

Step 1: Forecast Your Cash Flows

Forecasting your cash flow is the first step in the process of effectively managing your cash flow. How often you will need to prepare cash flow projections and what intervals to use (i.e. annually with monthly intervals or monthly with daily intervals) will depend on the nature of your business.

Be realistic. A realistic approach to forecasting your cash flows will produce more dependable and effective results. Analyze your operations to know your historical results as well as your projected assumptions. All cash flow from operations, investing activities and financing activities should be considered.

Consider your cash inflows and outflows. Your business' cash inflows would include such items as accounts receivable collection, along with unusual and nonrecurring items such as tax refunds, proceeds from a sale of equipment, etc.… Normal cash outflows include recurring items such as purchasing and accounts payable, payroll, loan payments, etc. along with nonrecurring items such as estimated tax payments, bonuses, equipment purchases and others.

Project your cash flow. Once you have determined the appropriate interval for your business (let's assume monthly), you would take the cash at the beginning of the month, add the cash inflows and subtract the cash outflows. This will give you a projected end of month cash balance. Now repeat this for the next 11 months (if your forecast was based on an annual cycle). You now have a cash flow forecast. When you study this, you may notice some months with large cash balances and other months with little, or even negative, cash balances.

Step 2: Develop a Cash Flow Plan

The goal here is to alter the forecasted cash flows into planned cash flows. By doing this, you can smooth out the peaks and valleys and turn your forecast into a manageable plan.

Invest excess cash. For those months with excess cash, you should have automatic investment alternatives set up with your financial institution. Depending on the length of time you have an excess cash situation, you can have a nightly sweep whereby your funds are invested in government bonds or repurchase agreements. Longer periods of excess cash will require more sophisticated alternatives, such as certificates of deposit. The size of the business, along with its cycle, will determine the investment alternatives to choose.

Plan for cash shortages. For the months with little or negative cash, you can first try to adjust these shortages by reviewing your collection policies to find ways to accelerate cash inflows. You can also look at your vendors' terms to consider possible ways to defer your payables. You should always err on the side of conservatism when making these changes. After this exercise, if you are still in a cash poor situation, determine sources of additional financing. You will appear more organized to lending institutions if this can be arranged before the problem arises.

By first forecasting, and then planning your cash flows, you can take advantage of many unique business opportunities, and avoid the pitfalls of unplanned cash shortages. Taking a step towards controlling your cash flow will keep you from having your cash flow take control of you.

If you have any questions about how you can better manage your business' cash flow, please contact the office for a consultation.

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

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

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

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

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

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

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

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

Other considerations

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

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

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

Although the cost of computers and peripheral equipment has dropped significantly over the past year, a tax deduction for all or part of the expense can still help lower the bottom-line price tag of this major purchase. But despite both the widespread use of computers and the temptation to somehow "write them off" on a tax return, the IRS has remained surprisingly quiet. Rather than release any direct guidance on the issue, the IRS has chosen to rely on old rules that were established before the recent computer revolution. As a result, the business use of your home computer will need to fall within these standard rules if you want to take any related deductions.

Business reason must be present

In order to claim a deduction for your home computer and any peripheral equipment, you will need to prove that the expense occurred in connection with an active business - just as you would for any other business expense. An active business for purposes of a business expense related to a home computer will usually arise from one of two types of business activities: as a self-employed sole proprietor of an independently-run profit-making business; or as an employee doing work from home. Deductions from both types of activities are handled differently on an individual's income tax return and there are separate conditions that must be met for either scenario.

Self-employed person. In order for you as a self-employed person to deduct computer-related costs on Schedule C - whether for a home-based computer or one in a separate business location - it is required that your expenses relate to a profit-motivated business versus a "hobby". In the eyes of the IRS, a business will be deemed a hobby if there is no profit motive and the "business" is half-heartedly pursued simply to write off items or achieve some other personal purpose. If your Schedule C business shows a net loss year after year, you may be considerably more likely to have the IRS audit your return to inspect whether your purported business is actually legitimate under the tax law.

Employee. A miscellaneous itemized deduction on Schedule A is allowed for computer costs that are directly related to the "job" of being an employee. In order to claim a deduction for computer-related expenses as an employee, you must show a legitimate reason related to your employment for regularly using a computer at home. The availability of a computer in the office, the ability for you to keep your job without the home computer, the lack of telecommuting policy at work, or the lack of proof that your computer is used regularly for office work will make it more difficult to convince the IRS that a legitimate business reason exists for the deduction.

Some taxpayers have succeeded in writing off the expense of a computer as an educational expense related to business. For you to succeed in this deduction, you must carefully document that the education is undertaken to maintain or improve skills required in your current business or employment, or to meet specific educational requirements set by your employer. Computer expenses related to education that qualifies you for a new trade or business is not deductible.

Note to employees: computer-related business expenses taken as a miscellaneous itemized deduction are deductible only to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. For many taxpayers, a good strategy is to "bunch" purchases of computer equipment all in one year so that more of the cost will rise above the 2 percent floor.

Other IRS considerations

Aside from applying the general rules discussed above for a for-profit business and miscellaneous itemized deductions to determine if you are able to deduct business-related computer costs, the IRS is likely to dust off other standard tax principles in evaluating whether your computer expense write off is acceptable:

If you have any questions regarding writing off the business-related costs associated with your home computer, please contact the office for a consultation.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

Starting a new business can be an exciting, although expensive, event that finds you, the small business owner, with a constantly open wallet. In most cases, all costs that you incur on behalf of your new company before you open the doors are capital expenses that increase the basis of your business. However, some of these pre-opening expenditures may be amortizable over a period of time if you choose. Pre-opening expenditures that are eligible for amortization will fall into one of two categories: start-up costs or organizational costs.

Start-up Costs

Start-up costs are certain costs associated with creating an active trade or business, investigating the creation or acquisition of an active trade or business, or purchasing an existing trade or business. If, before your business commences, you incur any cost that would normally be deductible as a business expense during the normal course of business, this would qualify as a start-up cost. Examples of typical start-up costs include attorney's fees, pre-opening advertising, fees paid for consultants, and travel costs. However, deductible interest taxes, and research and development (R&D) expenses are treated differently.

Start-up costs are amortized as a group on the business' tax return (or your own return on Schedule C, if you are a sole proprietor) over a period of no less than 60 months. The amortization period would begin in the month that your business began operations. In order to be able to claim the deduction for amortization related to start-up costs, a statement must be filed with the return for the first tax year you are in business by the due date for that return (plus extensions). However, both early (pre-opening) and late (not more than 6 months) submissions of the statement will be accepted by the IRS.

Organizational Costs

Organizational costs are those costs incurred associated with the organization of a corporation or partnership. If a cost is incurred before the commencement of business that is related to the creation of the entity, is chargeable to a capital account, and could be amortized over the life of the entity (if the entity had a fixed life), it would qualify as an organizational cost. Examples of organizational costs include attorney's fees, state incorporation fees, and accounting fees.

Organizational costs are amortized using the same method as start-up costs (see above), although it is not necessary to use the same amortization period for both. A similar statement must be completed and filed with the company's business tax return for the business' first tax year.

Before you decide which, if any, pre-opening expenditures related to your new business you'd like to treat as start-up or organizational costs, please contact our office for additional guidance.

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

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

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

Buying

Advantages.

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

Disadvantages.

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

Leasing

Advantages.

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

Disadvantages.

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

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

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

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

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

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

Q. My business is currently having some cash flow problems. I have a business that usually carries a fairly large accounts receivable balance and I was wondering if there was a way I could tap into them without getting another loan. I've heard of "factoring" - could this be a good option for my business?

Q. My business is currently having some cash flow problems. I have a business that usually carries a fairly large accounts receivable balance and I was wondering if there was a way I could tap into them without getting another loan. I've heard of "factoring" - could this be a good option for my business?

A. Depending on your company's situation, factoring could be a good fit. Since factoring is actually selling your accounts receivable, it can allow you greater control over your cash flow without incurring additional debt. But keep in mind that factoring is not cheap and can be difficult to obtain if you have a relatively low balance of accounts receivable.

Here's how it works: a factor buys your company's accounts receivable and gives you 50-80% of their face value upfront (the "advance rate"). The factor then collects your receivables, deducts their fee and gives you the remainder. Factoring fees typically run from 1% to over 5% of each transaction (the "discount rate") based upon a number of factors including total dollar amount and the number of days from receipt of invoices until payment on invoices.

Here are some of the pros and cons of factoring your receivables:

Pros

Immediate access to cash. Unlike getting a business loan, factoring allows you quick access to cash, usually 24 hours from submission of invoices once you have an account established. In addition, the account set up period typically takes no more than a week and does not require extensive paperwork as with a business loan.

No additional debt incurred. Your business' relationship with the factoring company is not as debtor/creditor since you are actually selling your receivables. There are no loan documents to complete or additional backup documentation such as tax returns, financial statements, business plans, or projections to provide.

Reduction of bad debt & elimination of collection process. With a nonrecourse agreement, once the factoring company purchases your business' invoices, it assumes all liability and expense as to collection of the invoiced amounts. Since they are buying all of your receivables - the good and the bad - your company's bad debt write-off should be greatly reduced.

Cons

High cost. Factoring is not cheap. Although paying 1%-5% of each invoice to have someone else take over the collection process seems a small price to pay, when you look at that amount amortized over a year, it is obviously much more expensive than traditional financing. In addition, when negotiating an agreement, make sure that all fees are disclosed upfront.

Potential damage to your business' reputation. Because you have put the collection process in the hands of another company, you lose a lot of control over how your customers are treated during the collection process. To reduce the chance that your company's reputation may be harmed by the actions of the factoring company, make sure that you do an extensive check into the background of the company and ask for referrals from existing clients.

The bottomline? Factoring can be a good, although costly, option for those businesses that need additional flexibility when it comes to their cash flow and/or do not want to (or cannot) incur additional debt.

Before you decide to try your hand at factoring your receivables, it's important that you carefully weigh the advantages and disadvantages as they relate to you and your business. For more information and guidance on factoring, please contact our office.

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

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

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

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

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

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

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

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

Medical Expenses

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

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

Taxes Paid

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

Interest Expense

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

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

Miscellaneous Expenses

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

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

The decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.

The decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.

Sole proprietorships. By far the simplest and least expensive business form to set up, a sole proprietorship can be maintained with few formalities. However, this type of entity offers no personal liability protection and doesn't allow you to take advantage of many of the tax benefits that are available to corporate employees. Income and expenses from the business are reported on Schedule C of the owner's individual income tax return. Net income is subject to both social security and income taxes.

Partnerships. Similar to a sole proprietorship, a partnership is owned and operated by more than one person. A partnership can resolve the personal liability issue to a certain extent by operating as a limited partnership, but partners whose liability is limited cannot be involved in actively managing the business. In addition, the passive activity loss rules may apply and can reduce the amount of loss deductible from these partnerships. Partners receive a Schedule K-1 with their share of the partnership's income or loss, which is then reported on the partner's individual income tax return.

S corporations. This type of legal entity is somewhat of a hybrid between a partnership and a C corporation. Owners of an S corporation have the same liability protection that is available from a C corporation but business income and expenses are passed through to the owner's (as with a partnership). Like partners and sole proprietors, however, more-than 2% S corporation shareholders are ineligible for tax-favored fringe benefits. Another disadvantage of S corporations is the limitations on the number and kind of permissible shareholders, which can limit an S corporation's growth potential and access to capital. As with a partnership, shareholders receive a Schedule K-1 with their share of the S corporation's income or loss, which is then reported on the shareholder's individual income tax return.

C corporations. Although they do not have the shareholder restrictions that apply to S corporations, the biggest disadvantage of a C corporation is double taxation. Double taxation means that the profits are subject to income tax at the corporate level, and are also taxed to the shareholders when distributed as dividends. This negative tax effect can be minimized, however, by investing the profits back into the business to support the company's growth. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life.

Limited liability company. A relatively new form of legal entity, a limited liability company can be set up to be taxed as a partnership, avoiding the corporate income tax, while limiting the personal liability of the managing members to their investment in the company. A LLC is not subject to tax at the corporate level. However, some states may impose a fee. Like a partnership, the business income and expenses flow through to the owners for inclusion on their individual returns.

Limited liability partnership. An LLP is similar to an LLC, except that an LLP does not offer all of the liability limitations that are available in an LLC structure. Generally, partners are liable for their own actions; however, individual partners are not completely liable for the actions of other partners.

There are more detailed differences and reasons for your choice of an entity, however, these discussions are beyond the scope of this article. Please contact the office for more information.

Please contact the office for more information on this subject and how it pertains to your specific tax or financial situation.