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Art and Business Consulting LLC (ABC)
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Jake Beckman Accountant MS EA PB PTP We spEAk tax!
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TIPS AND TOOLS 2008  
Although ABC has made every effort to insure the accuracy of Tips and Tools, misinformation, disinformation, changes, mistakes and typos happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.

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In this issue: Final rules on children of Divorce parents and who claims the exemption, Some General HR Information for AZ Employers, Emergency Stabilization Act of 2008, S-Corp & Partnership Owners Beware, Time off to Vote - State by State rules, Contemporaneous substantiation for charity, Payroll Service Company's Problems Could be yours,  e-Verify, Quick AZ Employment Facts, Employment Tax Crackdown, Adventures in E-Verify, Rules for S-Corp 2%+ shareholder medical premiums, Mortgage Debt Relief, Alternative fuel credit for large vehicles, Random Payroll Tidbits, Loaning money to your kids to start a business?, How long should I keep it?, Frequent Flyer Miles tax Q&A, Staying dry when executing wash sales, FLMA changes signed into law, The economic stimulus package of 2008, 0% tax rate on long-term capital gains and qualified dividends, Home mortgage meltdown

REMEMBER: deposits of $100,000 or more must be made within one banking day following the day the tax liability occurred.  For the 2008 Federal Tax Calendar, which contains a wealth of information on all kinds of due dates such as excise taxes, etc. consult IRS Publication 509 Tax Calendars for 2008. Please note link goes to IRS website; ABC LLC is not responsible for their content and you should refer to their privacy policies.  Back to Top

Final Rules on Children of Divorced parents and who claims the exemption:  Big Change: A divorce decree CANNOT serve as a written declaration for Release of Claim to Exemption for Child of Divorced or Separated Parents starting with tax year beginning after July 2, 2008. 

If a taxpayer is in a situation where the exemption is in dispute it is advisable to keep a calendar of their actually custody nights.   Back to Top

Emergency Stabilization Act of 2008: New and extended small business tax breaks were included.  Several items of deduction and credit extended through 2008.

S-Corp and Partnership owners beware: If the S-Corporation or Partnership operates on a fiscal year with calendar year shareholders or partners, the owners may not get the full Section 179 deduction allowed in 2008.  Although the maximum Section 179 deduction allowed in 2008 is $250,000, the amount of the adjustment allowed ultimately depends on Section 179 allowed in the owner's tax year. The S-corporation or partnership for the tax-year beginning in 2007 and ending in 2008 has $125,000 Section 179 ceiling; for the tax-year beginning in 2008 and ending in 2009, the ceiling is $250,000.  The possible bad news is if the pass through happens in 2009, the owner's maximum Section 179 will be limited to $125,000 plus whatever inflation adjustment occurs for 2009, even if the business passes through more; the owners may not get the full benefit of Section 179 allowed to the S-Corporation or Partnership for 2008.    Back to Top

The Contemporaneous Substantiation for charitable contributions $250 or more is being strictly interpreted by the IRS and the tax courts.  A couple had contributed $6500 to their church over the year.  They retained their cancelled checks, and they had a letter from the church dated January 22, 2008, that gave the usual recitation of the amount of the donation and there being nothing of value received in return.  The tax court held the letter was not contemporaneous with the claimed deduction and, thus, did not satisfy the substantiation requirements.  Only $420 of the couple contributions were allowed as those checks were written for amounts under $250.  A written acknowledgment is contemporaneous only if it is obtained by the taxpayer on or before the earlier of: (1) the date on which the taxpayer files a return for the tax year in which the contribution is made or (2) the due date (including extensions) for filing such return. The acknowledgment must include both the amount contributed and whether the charity provided any goods or services in consideration for the contribution (and, if so, a good faith estimate of their value).  Lesson to take away? Cancelled checks are not enough to substantiate a charitable deduction of $250 or more - a contemporaneous written acknowledgement of gifts to charity must be received and kept with tax records. 

"Payroll Service Company's Problems Could Be Yours - The taxpayer was a corporation that contracted with an Indiana company to provide payroll services, including withholding appropriate amounts from employee paychecks and depositing withheld taxes with the IRS. The taxpayer transferred funds to the service company before paychecks were issued. The service company delivered checks to the taxpayer to be distributed to employees.

"The payroll service company owed taxes to the IRS, and the IRS levied on all funds held in accounts of the company. The president of the service company authorized the bank to release all funds in its accounts to the IRS, including money deposited by the taxpayer to cover its salaries and withholding. The taxpayer chose to transfer additional money to another payroll service company to pay employees who were unpaid because of the levy.

"The taxpayer filed a claim with the IRS seeking return of the levied money claiming that it owned the money and it was wrongfully levied. The IRS denied the claim.

"Held: For the IRS. The money transferred to the payroll service's bank belonged to the taxpayer only if it was being held in trust for it by the service company. The court found no expressed or implied trust arrangement. The service company was the only owner of the account in which the funds were deposited and had unfettered legal access to the account. The taxpayer's only remedy is to sue the service company for breach of contract. [DT Floormasters Inc v. United States. No. 4:07-cv-00112, S.D. Ind.]" - Source The General Ledger September 2008

It might be a good time to review your company's arrangements with your payroll service and see if funds are held in trust or if your company could be left holding the bag if the payroll service goes under. Back to Top

Reminder: E-verify lets you electronically verify new hires' eligibility.  Once you register you company, enter I-9 data and the program will run it against the Social Security Administration's database.  This process is mandatory in the state of Arizona.  You can begin here; please note link goes to DHS website and ABC LLC is not responsible for their content.  The process of registration takes only a few minutes, but you do need to have an email account to receive your username and password.  In addition to the business name, physical address, mailing address, phone number, email address, tax identification number and names of individuals you will have administering your e-verify program, you will need to know the first three digits or your NAICS code, but the website provides a method of determining it as you register.  Back to Top

Quick Arizona Employment Facts: With the new minimum wage rate of $6.90 per hour going into effect for the state of Arizona effective January 1, 2008. Tipped employees can receive a wage of no less than $3.90 per hour provided the employer can establish by its records that for each week when adding tips received to wages paid the employee must receive the minimum wage for all hours worked.

Arizona is also requiring employers to comply with the Arizona Workers Act which requires employers to use E-Verify to verify the employment eligibility of employees. This will be required after December 31, 2007. Arizona follows the federal FMLA model, granting up to 12 weeks of unpaid, job-protected leave to workers. Arizona’s youth employment laws restrict employment for those under 16 to 3 hours on school days, and 18 hours per week during the school term. Youths under 16 cannot work past 11 pm, or 9:30 pm on a school night. Back to Top

"Brace for a crackdown on employment taxes: Both the IRS and the individual states figure they have a better chance of catching employment tax scofflaws by working together.  Warning: the IRS has announced it is teaming up with more than half of the states to crack down on employment tax violations - IRS News Release IR-2007-184. These information sharing agreements included under the IRS' Questionable Employment Practice (QTEP) initiative are intended to provide a central and unified means of improving compliance.  State agencies, the US Labor Department, the National Association of State Workforce Agencies, the Federal Tax Administrators and the IRS all worked together on various aspects of the agreements.  29 States have agreed to participate: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin-other states may soon join.  A big focus of this effort is distinguishing between which workers should be treated as independent contractors and which should be classified as employees.   Businesses must be on their toes.   When an employer is in doubt, they should ask the IRS to make a determination by complete a form SS-8."-Source Tax Strategist January 2008 Please note SS-8 link goes to IRS website; ABC LLC is not responsible for their content and you should refer to their privacy policies. 

Furthermore the IRS figured out a much faster more efficient way to cast its net for employers who classify employees as independent contractors (IC): form 8919.  It is an easy checkbox way for workers to file complaints.  They can file a complaint if they meet only meet one standard of employee status while performing services from the following: They must have

The workers have incentive to file a complaint, namely to save on FICA taxes, instead of paying double the amount as self-employment tax.  If a worker files a 8919 and the IRS finds for them, not only is the firm subject to back taxes, but the IRS has an incentive to review the status of all of the firms workers. The bottom line is that it is simply not worth the risk.  Back to Top

New Rules for S-Corp 2%+ shareholder medical premiums are retroactive indefinitely.  When premiums are paid or reimbursed by an S-Corporation for services, they should be included in a 2%-or-more-shareholder's gross income for income tax purposes but the premiums are NOT subject to FICA.  The premiums may be deducted by the shareholder to the extent that the deduction does not exceed the earned income from the business provided the shareholder is not eligible to participate in any subsidized health plan maintained by an employer of the shareholder or their spouse.   The medical plan must be established by the S-Corp.  Back to Top

Mortgage Forgiveness Debt Relief Act of 2007 currently allows for up to $1 Million of Mortgage debt forgiveness on a primary residence during 2007, 2008, or 2009 to be exempt from federal gross income.  Usually cancellation of debt results in taxable income. If the discharge is not directly related to a decline in value of the property or the tax financial condition then this exclusion does not apply.  It also does not apply to individual currently in Chapter 11. Back to Top

Alternative Fuel Credit is available for certain large trucks, buses and other heavy vehicles; an alternative fuel credit for up to $32K or a hybrid credit for up to $12K is available.  To qualify for the Alternative Fuel Credit it must be solely powered by compressed or liquid natural gas, liquefied petroleum, hydrogen or any liquid that is at least 85% methanol.  Combined fuel vehicles may qualify for a reduced credit.  New vehicles with special equipment or converted to alternative power may qualify-go to IRS.gov and type QAFMV in their search box to find a list of qualified vehicles.  Back to Top.

Random Payroll tidbits

Loaning money to your kids to start a business?  Have them issue you section 1244 stock - if the company fails you can deduct you entire loan as an ordinary loss in the year the company goes under.  If they succeed they can gradually buy the stock back from you and the profits are taxed as capital gains.  If you just loan your kids the money the IRS could treat it as a gift and you would get no write off for the loss.  Alternatively the IRS might not challenge the nature of the loan, but then a loss would just be bad debt, which could only be written off to the extent of gains in a given year plus $3000 - the rest would have to be carried forward.   Section 1244 is the smart way to go - however to qualify for the section 1244 treatment: the corporation must issue the stock directly to the investors - it cannot come from another shareholder, the stock has to be issued for cash or property (NOT services), the corporation must have invested capital of less than $1 million, and it must actually be an operating company with less than 50% of its income coming from rents, royalties, dividends and other investments over the last 5 years or the time it has been in existence if it is less than 5 years.  Back to Top.

How long should I keep it?  The IRS has 3 years from the due date or filing date (if later) of a tax return to audit returns, but it can go back 6 years if the suspect income has been under-reported by 25% and there is NO statute of limitation on fraud or failure or file.   So how long should you keep your records?  Some things you should keep forever: tax return copies, tax/legal correspondence, audit reports, contracts and leases, real-estate records, corporate minutes and stock records.  Some things you should keep at least 6 years:  Bank statements, general ledger and journals, sales records and journals, personal investment records for 6 years after a sale, IRA records for 6 years after a withdrawal.  Some things that should be kept at least 3 years: employee expense records, cancelled checks, paid vendor invoices, employee payroll records, for 3 years post lifetime of the asset-depreciation schedules.  Remember that these timelines start from the due date of the return or when it was filed if later.  Therefore income tax records for tax-year 2007 should be kept at least through April 15, 2011 assuming a timely and legal filing. Back to Top.

Frequent Flyer Miles tax Q&A:  You can't claim a deduction for Frequent Flyer Miles that have lost value or expired because you have no Basis in the mileage-in reality it is merely a discount offered by the airlines.  On the upside you realize no taxable income when you are granted the Frequent Flier Miles.  Back to Top.

Staying dry when executing wash sales: The market drops and the 100 shares that you purchased for $50 are now valued at $40 per share.  If you sell these shares, you can not take the $1000 loss against other gains if you purchase substantially identical stock within 30 days of the sale.  Strategy 1: Wait 31 days before buying the stock back - no wash rule applies.  Strategy 2: You can purchase more stock at the lower price then wait 31 days to sell the old stock (if the stock goes up you lock in the gain in the second block of shares and if the price continues to drop you preserve your loss on the sale).  Strategy 3:  Go ahead and re-purchase in the wash period - you can't take a deductible loss, BUT the "loss" does increase your basis in the repurchased stock by $1000 when you sell for a profit later on.  Strategy 4: If you have purchased multiple blocks of shares over time, First In First Out rule usually governs sales-however if you can "identify" shares with a lower basis, instead of realizing a loss have a small gain-then no wash rule applies. Note: wash sale rules apply to securities purchased 30 days before a sale too-basically the rule applies effectively to 61 days, 30 days before and after plus the date of the sale itself. UPDATE: a new IRS ruling prohibits selling a security from a taxable account and then buying it back with a tax-exempt account within 30 days-a taxable account and a tax-exempt account are not considered separate taxpayers.   Back to Top.

FLMA changes have been signed into law: The FMLA has been amended to allow two new types of leave, both associated with military duty. 1. Active-duty leave allows an employee who is a spouse, child or parent of an active-duty (or soon-to-be active-duty) service member to take up to 12 weeks of leave due to a "qualifying exigency." The leave may be taken all at once or intermittently, may run concurrently with vacation or paid time off and may be unpaid. The U.S. Labor Department is currently in the process of defining what constitutes a "qualifying exigency." 2. Caregiver leave covers an eligible employee who requires time off to care for a spouse, child, parent, or next of kin "nearest blood relative" who is a covered service member injured in the line of duty. The employee is entitled to take leave of up to 26 weeks within a single (i.e., nonrecurring) 12-month period. The caregiver leave portion of the FMLA will be enforced immediately by the Labor Department. Therefore, companies that are covered by the FMLA must be prepared immediately to grant such leave to their employees. Conversely, key provisions of the active-duty leave amendments require the Labor Department to issue defining regulations. It’s important for the company to update its FMLA policy to include the new rights available to employees and to post the amended policy as quickly as possible. Employers will be expected to inform their workers of the changes to the FMLA in such a way to put them on notice of what their rights now are under the act. Failure to move quickly and decisively on this issue will subject an employer to liability that otherwise is easily avoidable.  SEE Update. Back to Top.

The Economic Stimulus Package of 2008:  If you are planning on buying capital equipment this may be a good year to do it.  Prior to this bill section 179 was $125K eligible for folks earning up to $410K-now it is $250K with eligibility up to $800K.  In addition AFTER taking 179 all companies can take up to 50% bonus depreciation on computer software not covered under section 197, on qualified leasehold improvement property as well any property covered by MACRS with a recovery period of 20 years or less.  How it works?  You take any 179 you want.  Then you take your bonus depreciation.  Then you take your normal 1st year depreciation on the adjusted basis after 179 and bonus depreciation.  The first year limit on autos is increased by $8000. (SEE: note about partnerships and S-corps with fiscal years above). Of course individuals are getting a $300 rebate if they file their 2007 taxes and earned at least $3000 or paid at least $1 on their 1040, Joint filers are getting $600 back, plus $300 per child; there is income phase out $75K single/$150K joint and 5% single AGI for children.   Back to Top.

For some its a good year to sell off appreciated securities:  A 0% tax rate is available to the lowest 2 tax brackets on qualified dividends and long-term capital gains; Single tax payers with up to $32550 taxable income and married filers with up to $65100 taxable income qualify for the 0% rate.  Even some taxpayers with income above these thresholds may qualify to have some of their capital gains and qualified dividends treated to the 0% tax rate. Tax-exempt interest is not including in the threshold income.  e.g.  A couple earns $75K and decides to sell off $150K worth of appreciated securities - after deductions, exemptions and phase outs they wind up with $175K in taxable income-their "ordinary income" for this calculation is $25K: $175K less the $150K capital gains, therefore $65.1K less $25K "ordinary income" is $40.1K of the capital gains that is eligible for the 0% rate.  Alternatively it could be a good year to gift up to $12000 of appreciated securities to lower income parents and adult children (just make sure you don't run afoul the Kiddie Tax).  Back to Top.

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The content supplied herein is for evaluation only; there is no contract, guarantee or warrantee, implied or otherwise. Links may go to other websites which are not under the control of ABC LLC; ABC LLC is not responsible for their content-please review the terms and conditions of these other websites for more information.

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