TIPS AND TOOLS 2006
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In this issue: New Charitable Deduction Rules, New IRS Supplemental Withholding Regs, Domestic Production Activities Deduction (DPAD), Select The Right Employee, Tips For Arizona Employers, Maricopa County & AZ State Sales Tax News.

New Cash Donation to Charity Rules: The IRS is no longer accepting a log of cash donations. You no longer can say, "I dropped $5 in the collection plate every Sunday," and expect to receive the deduction; you must now obtain a receipt with the name of the charity, the date of the donation and amount of contribution, however a cancelled check is an acceptable record. Donations of used clothing and household items are now limited: An item worth of $500 requires an appraisal. Jewelry, paintings, objects of art, antiques and collections are specifically excluded from this definition. The IRS may write regulations prohibiting deductions for low value items such as sock and underwear. As always donations worth more than $250 require a written acknowledgement of the recipient, with a description of the property received, good faith estimate of FMV and state nothing else was given to the donor in return for the donation OR reduces the value of such items from the value of the donation. Back to Top

IRS has issued new supplemental withholding regulations for determining the method and amount of FITW on supplemental wages. The new regulations go into effect on January 1, 2007. Regular wages are for a payroll period at a predetermined amount, and anything else is a supplement wage-wages that vary between pay periods for reasons other than time worked are defined supplemental wages; examples of supplemental wages are: reported tips, OT, expense allowance, bonuses, back pay, third party sick pay, commissions, income recognized on the exercise of non-statutory stock options, non cash fringes, non-qualified deferred compensation. The new regulations do allow reported tips and OT to be treated as regular wages. For employees earning up to $1M, the supplemental wages can be handled two ways: Aggregate or the optional flat rate method. If supplemental wages are paid with regular wages, the supplemental wages must be aggregated with those wages. OR If the employer has withheld FIT from employee's regular wages during the calendar year or preceding calendar year that the supplemental wages are paid AND the supplemental wages are not paid with regular wages or are stated separately in the employers records (BOTH conditions must be met), then the employer can disregard the regular wages and W-4 withholding allowances and use a flat rate 25% (for 2006). If the employee's wages are over $1M then the portion over $1M must be taxed at 35% disregarding W-4 withholding allowances. Back to Top

DOMESTIC ACTIVITIES PRODUCTION DEDUCTION (DPAD)
What is it? This is a tax break pure and simple. It is an incentive to attract manufacturing business to the US. At the same time the extraterritorial income exclusion for exporters is being PHASED OUT (the World Trade Organization objected and this new program is designed to address those objections). It is NOT clear if the DPAD is available for any entity other than the original manufacturer therefore some exporters will likely lose out. Big winners include automobile and truck manufacturers, real estate construction companies, aircraft and ship construction companies, electrical and computer manufacturers, medical and scientific testing and equipment manufacturers, office equipment manufacturers, mining companies, utilities and power producers, farmers and agricultural co-operatives.

Many business activities may qualify for the new deduction. Businesses with qualified production activities (QPA) can take a tax deduction of 3% from net income. QPAs include manufacturing, producing, growing, and extracting tangible personal property, computer software, and sound recordings, and the construction and substantial renovation of real property including infrastructure. The production of certain films is also a qualifying activity as are certain engineering or architectural services. Gross receipts derived from the following activities are NOT qualified domestic production gross receipts:

Activities not attributable to the actual conduct of a trade or business,
The sale of food and beverages you prepare at a retail establishment,
The lease, rental, or license of property between certain persons treated as a single employer,
The lease, rental, license, sale, exchange, or other disposition of land,
The transmission or distribution of electricity, natural gas, or potable water.

Calculation of the production deduction can be very complicated, so this is one that business owners probably should pass off to a qualified professional. The more complicated the business, the more complicated the math for calculating the Domestic Production Activities Deduction. In a nutshell, businesses engaged in manufacturing and other qualified production activities will need to implement cost accounting mechanisms to make sure their tax deduction is accurately calculated. Calculating the deduction may require separating revenues and costs for qualifying business operations from activities that do not qualify for the deduction. QPA Income: the excess of the taxpayer's domestic production gross receipts over the sum of the cost of goods sold (COGS) allocable to those receipts, other deductions, expenses, or losses directly allocable to such receipts, and a ratable portion of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income (in other words the fully-burdened COGS). There is a provision to keep a taxpayer from creating a loss by off-setting DPAD against non-QPA activities. Ungrouping of an affiliated group is not permitted under DPAD, therefore if only 1 of 3 activities is a QPA there is no way to ungroup the qualifying activity from the rest in order to qualify for the deduction. Back to Top

SELECT THE RIGHT EMPLOYEE
As part of good internal controls, the background of any employee who will have access to cash, checks, credit card numbers, inventory or other items is a must; therefore check as many of the following as possible.

AFTER GETTING GOOD LEGAL ADVICE, GET A CANDIDATE'S CONSENT
Consult HR and legal counsel before seeking to give a drug test, perform a background check, etc. to verify the wording of the release and procedures for dealing with rejected candidates if the information obtained was used to make the hiring decision. Numerous laws govern the gather of information for pre-employment purposes-get a signed authorization and release.

Past Employment
Even if the past employer won't reveal anything other than confirming dates of employment their tone of voice can be revealing. Ask if the employee is eligible for rehire, and even more aggressively, "if you were me would you hire this person?"

Criminal Convictions
Nexus and Checkpoint have records for nearly every large county in the US, but records should be available directly from the county courthouse criminal courts division for criminal convictions if such data is otherwise unavailablel.

Drug Screening
Frequent drug users are more prone to theft and fraud. Arizona permits drug testing providing the employer has a written drug/substances program that meets the statutes.

References
Call them. A surprising number of employers skip this step thinking it is a waste of time, but candidates can and do supply important sounding false references thinking that no one will call them.

Degrees, Certificates and Licenses
Always verify-it is not unusual to find some one claiming a license that has been revoked in a disciplinary action. Back to Top

TIPS FOR ARIZONA EMPLOYERS
Arizona is an At-Will and Right-to-Work State. The first doctrine means that if there is no written contract stating otherwise the employer AND the employee have the right to terminate the employment arrangement without cause, notice or liability; an important caveat is that the employer's handbook must clearly state that the handbook itself does not constitute an employment contract-ask a lawyer to review your employee handbook to make sure it does not constitute an employment contract. The second rule is legal principal the results from the Labor-Management Relations Act (Taft-Hartley) and refers to an employees right to work without being a member of a labor union. Thus At-Will and Right-to-Work are completely different legal concepts.

All Arizona employers have to comply with the following laws regardless of the number of employees; unless an organization has consulted with a labor attorney or the agency responsible for administering the law and Arizona employer should assume they have to comply with the law: Employers of 11 or more employees are subject to various other regulations, which are NOT listed below, depending on a threshold number of employees. This list was current as of May 2006.
Personal Responsibility and Work Opportunity Act of 1996: In Arizona employers can submit a completed W-4 with the employers address or a completed Arizona New Hire Form within 20 days of hiring an employee.
Fair Labor Standards Act (FLSA): Establishes Federal Minimum Wage, currently $5.15/hr and overtime rate of 1.5 times the hourly rate for all hours over 40 worked during a work week. In Arizona the federal minimums apply.
Immigration Reform and Control Act: Employees must complete an I9 within 3 days of employment or within 1 day if they will work less 3 days. The employer must keep the I9 the greater of 3 years from hire or 1 year from termination of the employee.
Arizona Workers Compensation: All employees, part-time, full-time or temporary must be covered by AZ Workers Compensation Insurance.
Arizona Wage Law: Establish that employers have to designate 2 or more days a month, no more than 16 days apart as fixed paydays. Terminated employees must be paid by the next payday or 3 days, which ever is sooner. An employer can not withhold any wages due without empowerment by law (refer to Circular E, and Federal Wage Garnishment Law), without the employee's permission, or without good faith dispute: claim of debt, reimbursement, recoupment, or set-off by the employer against the employee.
Arizona Civil Rights Act (ACRA): employers of 1 or more employees should know that even a single employee has protections against sexual harassment.
AZ Child Labor Laws: Lists hours and types of work allowed for employees under age 16, and types of work permitted for employees under age 18.
Employee Polygraph Protection Act: Restricts use of polygraphs and other Honesty Tests, except under very specific conditions, only with consent of employee, certain procedures must be followed and an Employee Polygraph Protection Act Poster must be displayed.
Fair Credit Reporting Act (FRCA): Requires employers to notify employees of their intent to obtain the consumer report and authorize the background check/investigation. The applicant/employee must be supplied with a copy of their rights under FRCA. No employment decision based on the information obtained can be acted upon until the applicant/employee has been given the opportunity to correct information.
Employee Retirement Income Security Act (ERISA): Group Health Insurance, Profit Sharing Plans, 401(k)s, 403(b)s, and other group benefits must meet the requirements of ERISA.
Uniformed Services Employement and Re-employment Rights Act (USERRA): Identifies obligations employers have when they hire members of the Uniformed services, requirement payment of benefits during periods of active duty and re-employment after return from active duty.

All Arizona employers of 1 or more employees are required to have the following notices and posters. Please note, that there are other posting requirements by threshold number of employees starting at 15 or more employees, which are NOT listed. Many of the commercially available multi-posters having more than one act covered are not compliant. Furthermore if an employer posts a multi-poster or any notice that they are not required to because they do not meet the threshold number of employees, they may become subject to the regulation in that poster; for example if an employer of 4 people posted a multi-poster, which contained "Equal Opportunity is the Law", then that employer might become subject to the provisions of the Title VII, and ADA. There are requirements on where to post and how to count employees. The list: Worker's Compensation Laws of AZ, Work Exposure to Bodily Fluids, Occupational Safety and Health Act (OSHA), Unemployment Insurance to All Employees, FLSA, Employee Polygraph Protection Act, USERRA and ACRA. this list is current as of May 2006. Back to Top

Maricopa County and Arizona State Sales Tax News: As of June 17, 2006 the city of Litchfield Park increases the tax on construction from 2% to 4% and requires completion of tax form LP015; it does not affect construction initiated before this date, which should continue to file on the old form LP008. Effective November 1, 2006 Gila Bend repealed two level tax structure on big ticket items deleting option V. Effective November1 2006, Janet Napolitano signed a bill, which eliminates state and county tax on Rental Occupancy class 028, Timbering Severance 020, 021, 022 and Membership Camping 047; some cities will continue taxing these activities. Effective September 21, 2006: TPT returns and payments filed electronically will be considered timely if received by the last business day of the month, employers who make all payments on time get an extra 10 days to file withholding returns, the late penalty for TPT will now be calculated in the full amount of tax due without regard to partial payments paid on time, dishonored electronic payments are now treated the same as a returned check with a $25 fee. Coming changes? House Bill 2820 has clarified several items with regard to the taxation of manufactured homes: a dealer is defined as licensed dealer that sells to the final consumer OR a dealer that is responsible for the final completion of delivery or set up contract, specifies sales for resale do NOT include a lessor of manufactured buildings, clarifies that proceeds from repairs or alterations to a used manufactured home are taxable, clarifies that homes sold and delivered in another state are not taxed, homes sold without a specific delivery site are taxed at the dealership, home sold and set up at a specific Arizona site are taxed at the site, and homes purchased out of state and set up in Arizona are subject to the 65% of sales price use tax along with any tax due under the prime contracting classification. Senate Bill 1506 creates a TPT deduction for restaurants of gross proceeds for prepared food, drink, condiment donated to a 510(c)(3) non profit charity that regularly serves free meals to needy/indigent similarly exempts the use tax for prepared food , drink or condiment donated to the same. Back to Top

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2006 Tips and Tools page of Art and Business Consulting, LLC (ABC LLC). Accounting as Easy as ABC!

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