2009 TIPS & TOOLS

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. 

As of September 12, 2009 only the tax calendar part of Tips & Tools page will be updated regularly. ABC LLC has started a Blog, which will now contain the information formerly reported here.  We hope it will provide a more focused and timely experience. 

In this issue: Keep an eye on what is happening to tax rates, Are your employment posters up-to-date?, What is legal work product? ruling, Depreciation: straight-line or accelerated?, Planning improvements?, Business Hardship & Employer 401(k) contributions, Taxable Business Cell Phone Use, No Revenue, No Deductions, When leasehold improvements can be currently deducted, Gay Marriages are not recognized for Federal Income Tax purposes, Start setting aside for internet sales taxes everywhere, mileage logs must be contemporaneous, Honor levies on independent contractors too, AZ withholding update, Are you withholding enough from your pension?, Home Buyer Credit Even Sweeter Now, Private letter ruling for surviving spouses of farmers, Making Work Pay Stimulus Bill, New Form W-4, IRS Announces 2009 Mileage rates, New Deadline for 1041, 1065, & 8804, Minimum Wage increases in Arizona, New casualty loss rules in 2009, Home Mortgage Meltdown Advice, Some General HR Information for AZ Employers,

Keep an eye on what is happening to tax rates if you are a high income individual.  At the moment the top tax rate for individuals and corporations is 35%, but if the Bush tax rate cuts lapse in 2010, the top rate for individuals would return to 39.6%.  It could go even higher if the Democrat's surtax happens.  Assuming the tax rates of corporations remains the same, there could be an incentive to change business structure from a pass-through entity to a C-corporation even with the "double taxation." If these changes do come to pass, a business owner should consult their tax adviser to see if there is any advantage in changing their business' entity classification.  Back to Top

Are your employment posters up-to-date?  ABC recommends that you download your poster directly from the agencies governing the various employment laws rather than using a "space saver" all-in-one poster as these posters can make a small employer subject for laws they might not other wise be subject to.  Employment laws usually have a "minimum number of employees" threshold, therefore an employer with 50 employees is subject to more labor laws than an employer with 7 employees.  FLSA was revised 7/24/09 to increase federal minimum wage to $7.25/hour; FLSA applies to all AZ employers.  The EEO was revised August 2008; certain elements apply to employers of 15 or more employees-EEO-1 reporting applies to employers of 100 or more employees.   USERRA was revised November 2008; USERRA applies to all AZ employers. US Arizona recently mandated an additional workman's compensation poster regarding employees who risk exposure to MRSA, TB and Spinal Meningitis. All employers should have a plan to regularly check for changes in labor law so that they stay compliant.  Back to Top

New ruling on What is legal work product: In US V Textron, Textron refused to produce its tax accrual work papers on the basis that they were protected by attorney-client privilege, tax practitioner–client privilege, and work product privilege. The District Court denied the IRS petition for the work papers; it reasoned there would have been no need to create a reserve in the first place if Textron had not anticipated a dispute with the IRS that was likely to result in litigation or another adversarial proceeding. The District Court found that Textron had waived the attorney-client privilege and the tax practitioner–client privilege when it provided the work papers to its independent auditors. Nevertheless, the court found that Textron did not waive the work product privilege, because the independent auditors had confidentially agreed not to disclose the information in the work papers. The Appeals Court however ruled "The work product privilege is aimed at protecting work done for litigation, not in preparing financial statements. Textron's work papers were prepared to support financial filings and gain auditor approval." The Appeals Court vacated the lower court's ruling, it reasoned that work product privilege applies to work done for litigation NOT in anticipation of litigation.  Back to Top

Depreciation, Straight-line or accelerated? By now you have heard of the 50% Special Depreciation Allowance allowed in 2008, Section 179, and of course the standard accelerated depreciation used by IRS.  It seems like every tax preparer is advocating the use of accelerated depreciation when it comes to tax time. Sure these accelerated depreciation methods do offset more income, but is it necessarily the right thing to do for your business in the long run? When a business is just starting out, they may need the cash flow and that would be an argument for using accelerated depreciation. But what if they don't? Isn't better to have steady flow of deductions as the business income increases year over year, instead of a declining one? And if the business doesn't make it, as they dispose of the assets they will be subject to recapture the accelerated portion of depreciation as ordinary income instead of capital gains anyway.  If an ongoing concern doesn't need the deductions right now, they too, will likely benefit more from a steady stream of depreciation.  If an business does not think they will retain their asset throughout its recovery then there will also be a definite downside when they dispose of the asset.  In the normal course of successful business, income usually goes up year over year; having that extra bit of recaptured accelerated depreciation added to ordinary income may hurt.  Although accelerated depreciations, special depreciation allowances and section 179 can be beneficial in the short-term, and evaluation of the long-term prospects of a business should also be considered before deciding whether or not to use accelerated depreciation.  Back to Top

Planning improvements to a building?  If you are planning improvements as well as repairs and maintenance to a business property you may benefit from holding off on doing the repairs until after the improvements are done.  Repairs and maintenance that are with a renovation, construction or other activity that increases the value, adapts the property to a different use or significantly extends the life of that property, is considered part of the improvement.  Repairs & maintenance done at the same time as the improvements must be capitalized with them instead of being expensed in the year of the work; it may be beneficial to hold off on repairs for a couple months after the renovation is completed, so that the distinction between the two activities is clear.  The opposite strategy applies to homeowners, since they cannot deduct maintenance activities they would want to conduct them with a significant remodeling, renovation or other improvement activity so that they will be included in the basis of their home when it comes time to sell. Back to Top 

Business Hardship & Employer 401(k) contributions, In a effort to keep cash-strapped employers from terminating 401(k) plans to avoid contributing to them, Employers with "safe harbor" 401(k) plans can suspend the 3% or greater contribution under plans that meet the non discrimination tests for the entire year.  To qualify for a reduction or elimination of contribution, the employer must have a substantial business hardship: Operating at a loss, Substantial unemployment in their industry, and Depressed industry sales for example. The employer must notify their employees so they can adjust their contributions if they choose to do so.

This break does NOT apply to employers with SIMPLE plans; those with SIMPLE plans cannot renege on the matching pay-in, nor can they shut the plan down until the end of the year, which means they will have to deposit by extended due date of the firm's business return.    Back to Top

Taxable Business Cell Phone Use.  Cell Phones are listed property and require extensive documentation to prove, business verses personal/tax employee fringe benefit use.   Employees must keep logs or records which show business verses personal use.  However the IRS proposes 3 possible alternatives to determine the taxable portion of employer-provided cell phones.

1. Minimal personal use method - when the employee provides the employer with proof that they have used the cell phone minimally OR that they have a personal cell phone for personal use - the employer may consider all of the business cell phone's usage as business-related.  Of course the employer using this method must back up their claims by having a reasonable method of determining minimal use, and have a written policy prohibiting business cell phone use for personal purposes. 
2. Safe Harbor substantiation method - The employer can treat a flat percentage of the cell phone use as business related, and the remainder as a taxable fringe benefit to include in the employee's income.  The IRS suggests 75% business/25% personal use split.
3. Statistical Sampling method - the employer measure a sample of the employee's personal/business usage using an approved IRS sampling method and base the taxable portion on that sample.  For example, an employer has 500 employees with business cell phones, therefore monitoring all 500 might prove unnecessarily burdensome for the employer, so the employer statistically samples 50 employees to generate the business/taxable fringe split and then applies it to all other similar employees. Please note statistical samples are random samples; the employer cannot cherry pick employees for the representative sample.  For further guidance on applying statistical sampling, please see Revenue Procedure 2004-29's appendices; the actual sampling procedures are beyond the scope of this note.  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

No Revenue, No Deductions A taxpayer began making offers on real properties for most of one year, but only made his first purchase at year's end.  The purchased property did not have a tenant, nor did the taxpayer offer the property for rent or resale in that year.  The taxpayer had a number of expenses relating to the pursuit of properties and deducted them on his Schedule C, but had no gross receipts.  The IRS denied the deduction as for the expenses to be deductible the business had to be a Going Concern.  Expenses incurred before a business is a Going Concern are Start Up expenses, which must be capitalize or amortized.  All expenses before the purchase of the first property were characterized as Start Up expenses [Woody v Commissioner TC Memo 2009-93] Back to Top

When leasehold improvements can be currently deducted. Improvements by the lessee are deductible when incurred if their cost is a substitute for rent.  It is not unusual for a lessee to negotiate a reduction in rent for leasehold improvements. If the intent of the parties is for the cost of improvements to be in lieu of rent, then the lessee may deduct the cost of improvements when incurred.  Otherwise the leasehold improvements must be capitalized or amortized.   Back to Top

Gay Marriages are not recognized for Federal Income Tax purposes, Why care?  In some states gay marriages are legally recognized unions.  Therefore tax circumstances might arise as a result of the marriage, or its dissolution, that would receive very different treatment under state tax law and federal tax law. By way of example, in the case of a married man and woman, distribution of property incident divorce or separation is not normally tax a taxable event; however this would not be the case for a gay spouse receiving, say, a house incident divorce; the house would trigger capital gains taxes, however the one spouse might qualify for the $250,000 home sale gain exclusion. Back to Top

Start setting aside state sales tax for internet sales anywhere - In Dell Marketing V Taxation and Revenue Department of the State of New Mexico, No 26,843 NM CT App 2008, the Supreme Court has backed a state sales tax on internet sales.  New Mexico imposed its own gross receipts tax on Dell Computers internet sales in the state even though Dell had no physical presence in the state other than its third party service techs.  The State courts found for the State; the Supreme Court refused to hear the case.  Sales taxes on web sales face more challenges, but the tax should not be ignored. 

Update: Massachusetts has entered the fray and the Supreme Court has decline to hear either case letting stand the decisions.  In one case a credit card issuer had no presence in the state, but the Massachusetts court ruled that providing financial services was enough to impose an excise tax.  In the other case a Delaware company licensed trademarks to a national retailer with locations in Massachusetts and the Massachusetts courts ruled that licensing trademarks was enough to impose an excise tax.  As states become more an more desperate to close deficits, they are expanding the definition of nexus and contacts (i.e. your company's presence) in the state.  Examine activities in other states to see if funds should be set aside to handle potential tax liabilities. Back to Top

Mileage logs must be contemporaneous - Fuentes V Commissioner TC Summ op 2009-39, Fuentes a soccer coach often drove to other states using his own car and truck, deducting the expenses for both based on the number of miles driven for business.  He submitted a spreadsheet of all the miles driven, specifying mileage related to coaching and the schedules of the team's games, practices and tournaments.  He admitted the log was not recorded at the time he had driven but was instead reconstructed sometime later.  The regulations require adequate records substantiating the expenses be made at or near the time of expenditure or use.  The reconstructed spreadsheet did not meet this requirement and the court did not accept the coaches estimated expenses.    Back to Top

Honor Levies on Independent Contractors too - Mission Primary Care Clinic PLLC V Director, IRS No 5:07-cvc-00162 SD Miss. ruling the court held that levy law broadly defines wages and salaries to include commissions and other independent contractor payments as wages and salaries. The IRS demanded payments from the company while the company continued to pay an independently contracted doctor commissions without levying any of the payments it made to the doctor.  The court concluded that although part of the doctor's commissions were exempted from the levy, not all were-the company wound up having to pay all the non-exempted amounts, plus interest.   Back to Top

Are you withholding enough from your pension? The IRS revised tax tables to reflect the new payroll tax credit of up to $800 for workers, but their may be a problem for retirees who have elected to have just enough tax withheld from their pensions to avoid penalties and interest, as their withholding will be lower, but they are not eligible for the tax credit (unless they also have earned income).  Make sure your withholding is sufficient; if the withholding is not enough file a new W-4P with the payer of your pension to increase your withholding. Social Security Recipients who are still on the job will get the $250 stimulus payment, but will have to pay it back next year by reducing the amount of the payroll tax credit they receive next spring - there will be NO DOUBLE DIPPING.

Arizona Withholding Update: Starting May 1, Arizona has increased its withholding rate schedules in response to the reduction in federal withholding provided in the current stimulus package.

• 10% changes to 11.5%
• 19% changes to 21.9%
• 23% changes to 26.5%
• 25% changes to 28.8%
• 31% changes to 35.7%
• 37% changes to 42.6%

If an employee does not submit a new Form A-4 or A-4V electing one of the new Income Tax Withholding rates, you will need to select a new Income Tax Withholding rate that corresponds with the employee's Income Tax Withholding rate elected on the last Form A-4 or A-4V submitted. In other words if an employee elected 19% on the last A4 then you will need to withhold at 21.9% through years' end.
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The Home Buyer Credit first enacted in 2008 for homes purchased after April 8, 2008 and before July 1, 2009 was a $7,500 (or 10% of the purchase price if less than $7,5000).  It really amounted to an interest free loan as the "first-time" homebuyer has to pay the credit back over 15 years in $500 installments.  However, Congress recently sweetened the deal.  First they increased the credit to $8,000 and second, they removed the pay-back provision if the first-time homebuyer uses the home as a principal residence for 3 years following the purchase.  Homes purchased after Dec 31, 2008 and before Dec 1 2009 qualify for the new improved tax credit.  Furthermore the homebuyer can take the credit against 2008 taxes for a purchase in 2009 - if the taxpayer has already filed, they can file an amended tax return.  There is an AGI phase out of the tax credit for single taxpayers make more than $75,000 ($150,000 for Married Filing Joint).  A first-time homebuyer is defined as one who has not owned a principal residence for 3 years prior to the purchase.  Given the housing market slump, low low interest rates and a credit market that is finally loosening up, there has never been a better time to buy if you meet the qualifications for the tax credit and can swing the financing.

NOTE: If you are planning on getting married to a person who has a home, but you do not, and you plan on buying a new home for the both of you to move into, buy the home first THEN get married.  If you wait until after you get married you will NOT be eligible for the First Time Homebuyer Credit. However you may still qualify for the credit if you marry after buying the house, even if the house is both names.

NOTE: If you are filing an amended 08 return in order to claim the First Time Home Buyer Credit, be sure to enclose the HUD-1 form with your amended return in order to avoid a refund delay; the IRS has noted many fraudulent refund claims and has stepped up scrutiny of all such claims. Back to Top

In a private letter ruling, the IRS has granted relief for the surviving spouses of farmers from passive loss rules:  The surviving spouse need not operate the farm to deduct farm losses as long as the late spouse materially participated in the farm for 5 out of 8 years before the late spouse's retirement - the surviving spouse is treated as a material participant after the death of their spouse and can deduction farm losses.  Back to Top

Making Work Pay / 2009 Stimulus Bill:

• Be prepared to calculate the tax credit on wages for the pay period and to reduce each employee's Federal Income Tax Withholding by the credit amount up to the annual amount $400 ($800 for families).   Notify employees they will be able to claim any portion of the credit they did not receive on their paychecks on their 1040.  
• There is also a temporary increase in EITC therefore be prepared to implement new tax tables for this too; some employees may want to revise their 2009 W-5. 
• Changes may also be required for the AMT patch and refundable first time home buyer credits, which may change withholding calculations.
• There is a hidden trap in the 65% COBRA premium subsidy:  Because the employer only recovers 35% instead of 102% of the premium cost from COBRA participants employers must recover the federally funded 65% by reducing their federal employment tax deposit therefore Monthly and Quarterly depositors must advance 65% of the COBRA premium cost for as long as it takes to offset their tax deposits the amount due to them - when subsidies as up to more than your company's tax deposit the company must request reimbursement from the US Treasury - at this point their is no way to know how long the company will have to wait for that reimbursement. 
• New SUI provisions: the federally funded SUI for extended emergency benefits will not affect employers BUT
  • 1/3 of federal incentive funding (through fiscal year-end 2011)  is available to states that use or agree to use the Alternative Base Period (ABP) instead of the Standard Base Period (SBP) to determine SUI eligibility benefits.  If (or when) your state adopts ABP your company's SUI account could be charged for more SUI payments and its SUI rate could rise in response to these additional charges.  Furthermore the state will need the last quarter's wage reports much sooner to determine a claimant's eligibility, so expect state to ask you for data on specific employees possibly before you file - depending on how many folks you lay off this could be a major administrative burden. 
  • The other 2/3 of the federal incentives go to states adopting 2 of the following costly provisions as well: Coverage for unemployeds seeking part-time work, Coverage for Voluntary termination for compelling family reasons, training for dislocated workers, dependent allowances.  The more of these provisions your state adopts the more former employees will be eligible for for SUI and/or higher benefits potentially increasing both charges against your company's SUI account and its rate.
• This bill also contains funding to for states to enforce child medical support orders so expect a lot more of this kind of paperwork too. 
• The American Recovery and Reinvestment Act of 2009 also
  • extends the 50% bonus depreciation through 2009
  • extends enhanced small business expensing (Section 179) through 2009
  • equalizes parking and transit monthly benefits at $230
  • NOL carryback is extended from 2 to 5 years for tax year 2008 ONLY, for businesses with gross receipts of $15 Million or less.
  • Some small businesses (for individual's who AGI for the preceding tax year is less than $500,000 and whose income is derived by more than 50% from the small business, which has less than 500 employees and which is not a C-corporation) can pay 90% of the preceding tax year's liability instead of the usual 100% saving on estimated tax payments. 
  • Unemployed veterans (released from service during the last 5 years who has received at least 4 weeks of unemployment in the last year before being hired) and disconnected youth (16-25 who has not been regularly employed or in school for the 6 months before they are hired) are now eligible for the Work Opportunity Tax Credit. 

IRS has issued new W-4s:  Employers and employees should begin using the new forms immediately. The new W-4 Employee Withholding Allowance Certificate forms can be downloaded in pdf format directly from IRS.gov. Please note link goes to IRS website; ABC LLC is not responsible for their content and you should refer to their privacy policies. Pdfs can be opened, viewed and printed using Adobe Acrobat Reader, which can be downloaded fro free from http://get.adobe.com/reader/.  Please note link goes to Adobe website; ABC LLC is not responsible for their content and you should refer to their privacy policies.  Back to Top

IRS Announces 2009 Mileage rates: "The Internal Revenue Service issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

• 55 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008. The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half." - Source IR-2008-131   Back to Top

Starting in 2009 New Deadline for Filing with Extensions Changes for Partnerships, Trusts and Estates: In the past it has been difficult for some K-1 recipients to complete their tax returns by the extension deadline. Income, Deductions & Credits from Partnerships, Trusts and Estates are passed through to the partners or beneficiaries on Schedule K-1, however the deadlines for these K-1 distributors was the same as the recipients, often giving the recipient little or no time to complete their tax returns. Beginning in 2009 Partnerships, Estates and Trusts will be required to file their tax returns with extension a month earlier. The extension of time to file Form 1065, Form 1041 and Form 8804 is reduce from 6 months to 5; for calendar year entities that means the tax returns and k-1s must be filed by September 15, 2009. This change is to give individual taxpayers a chance to complete their tax returns filed with an extension on time. Remember an extension of time to file is not an extension of time to pay; the taxes are still due April 15. Back to Top

Minimum Wage increases in Arizona to $7.25 ($4.25 for cash/tipped employees) effective January 1, 2009. Federal Minimum Wage is still $6.55/hr ($2.13 for cash/tipped employees), but in states where minimum wage is higher the employee is entitled to the greater benefit. Under federal law and Arizona state law if a tipped employees wages & tips do not add up to the minimum wage the employer must make up the difference, therefore in Arizona if a tipped employee's wages and tips do not add up to at least $7.25 per hour, the employer must make up the difference. 

The Arizona Minimum Wage Act applies to all Arizona employers except the state of Arizona, the United States, and small businesses exempt from the Fair Labor Standards Act (FLSA) - nearly all employers are subject to FLSA since virtually all businesses use the phone and the mail, and under FLSA virtually all will be considered to be in commerce, and even if the employer does not meet the dollar test their individual employees still qualify under FLSA by virtue of the commerce test alone.  Back to Top

New Casualty Loss Rules in 2009:  The emergency stabilization act of 2009 extended several expiring tax breaks and it provides a tax break to disaster area victims BUT reduces the deductions for other casualty theft losses.  The Federal tax law has been tweaked to provide a consistent definition of disaster area. For tax years after 2007 and before 2010 the 10% of AGI floor is disregarded for qualified disaster area losses, however the $100 floor for each personal casualty or loss, whether it occurs in a disaster area or not is increased to $500 from $100. Consider a tax payer whose AGI is $75,000 and who suffers a disaster area loss of $5500, a car accident costing $700 and a $2,000 theft of cash.   Under the old rules after deducting $100 from each loss yields $7900 in losses subject to the 10% of AGI floor of $7500 - this taxpayer would have an allowable deduction of $400. However under the new rules each casualty must have $500 subtracted from it, but only the car and theft are subject to the AGI floor - $5000 of the disaster casualty is deductible.  Federal disaster areas are listed at www.fema.gov/disasters.

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