Source: https://www.acctaxsolutions.net/2009/11/
Timestamp: 2019-04-21 20:48:52+00:00

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flooded us with significant tax developments. The White House has also warned of imminent tax increases, particularly for higher income taxpayers. Collectively, these changes make year-end tax planning for 2009 more important than for any year in recent history! Most recently, Congress passed the American Recovery and Reinvestment Tax Act of 2009, which includes the following individual tax benefits: an increased refundable first-time home buyer’s credit of up to $8,000 (which expires after November 30, 2009, unless extended by Congress); estimated tax payment relief for certain individuals owning small businesses; a deduction for sales tax on the purchase of new vehicles; an increased and partially refundable tuition tax credit (up to $2,500); a refundable income tax credit to offset payroll taxes of low and middle income individuals; a significant expansion of various credits for energy-efficient home improvements; and alternative minimum tax (AMT) relief. As expected, many taxpayers have been scrambling to keep up with all of these important, and often temporary, tax changes.
to individuals under these new provisions. We also want to remind you of the traditional year-end tax planning strategies that 1) help ensure your income is taxed at the lowest possible rate, and 2) will postpone taxes by deferring your taxable income and accelerating your deductions. Caution! Several of the most significant new tax breaks expire in 2009 (and others in 2010), therefore, it is extremely important that you be proactive and act timely to obtain maximum benefits! Tax Tip. Even though the recent recession has caused many individuals to experience a significant drop in income for 2009, this drop in income may actually produce additional tax benefits. If your income is down for 2009, you may be eligible for deductions and credits that you did not get in previous years because your income exceeded the phase-out thresholds. So, you should pay close attention to the income thresholds for the various deductions and credits discussed in this letter. With informed year-end planning, you may now qualify for tax breaks that were not available in the past because of your higher income.
“2009 Act”) providing approximately $275 billion of temporary tax breaks and incentives. Also, late last year, Congress passed a law that temporarily waives required minimum distributions from employer retirement plans and IRAs. Together, these two tax bills will impact virtually every individual taxpayer. The following are selected provisions from this tax legislation that we believe will have the greatest impact on your 2009 year-end planning. Planning Alert! As you read the following highlights, please keep in mind that there are several tax breaks available only in 2009, and others expire after 2010! Due to mounting concerns about expanding budget deficits, it appears increasingly likely that Congress may not extend several of these temporary tax benefits. Consequently, pay careful attention to the effective date and expiration date (if applicable) for each new provision which we highlight prominently in each segment. Furthermore, you will notice that the 2009 Act provides for several “refundable” tax credits. This generally means that to the extent the “refundable” credit exceeds the taxes that you would otherwise owe (without the credit), the IRS will actually send you a check for the excess. Tax Tip. Many of these temporary tax breaks phase out as your 2009 income exceeds certain threshold levels. These phase-out thresholds are generally linked to your 2009 “adjusted gross income” (AGI) or “modified adjusted gross income” (MAGI). Pay careful attention to the income thresholds for each new provision, which we also highlight prominently in each segment. Please call us if you believe that you may qualify for a 2009 tax break but your income is approaching the income threshold for that benefit. We will help you evaluate year-end strategies that could reduce your AGI or MAGI below the phase-out threshold.
the home’s purchase price), 2) eliminating the 15-year payback requirement, and 3) requiring recapture of the credit upon the sale of the residence or failure to use the residence as a principal residence only where the sale or change of use occurs within 36 months of the date of purchase. The credit is phased out as your modified adjusted gross income (MAGI) increases from $75,000 to $95,000 if you are single, or from $150,000 to $170,000 if you are married filing jointly. Planning Alert! As we complete this letter, there are proposals in Congress to extend this credit beyond its current November 30, 2009 deadline. Tax Tip. This is a refundable credit that offsets both alternative minimum tax (AMT) and regular tax liabilities, so you will actually get a refund to the extent the credit exceeds your tax liability. Who Is A Qualified First-Time Home Buyer? You are a “first-time home buyer” if neither you nor your spouse has owned an interest in a principal residence in the U.S. during the 3-year period ending on the date you purchase the current residence. A principal residence could include a condominium, houseboat, or mobile home. IRS says that a mobile home will qualify even if you place it on a lot you are leasing. Planning Alert! The “purchase date” is generally the date you close on the house, so you should make sure that you actually close on the house before December 1, 2009.
was $150,000 or less, one way you can avoid 2009 underestimated tax penalties is to make your timely 2009 estimated tax payments based on 100% of your 2008 tax liability. If your 2008 AGI was over $150,000, you can avoid penalties by basing your 2009 estimated tax payments on 110% of your 2008 tax liability. The 2009 Act potentially offers you one more way to avoid underestimated tax penalties for 2009 only! If you qualify, you can eliminate 2009 underestimated tax penalties by basing your 2009 estimated tax payments on 90% (rather than 100% or 110%) of your 2008 tax liability. To qualify: 1) you must have had adjusted gross income below $500,000 ($250,000 if married and filing separate returns) for 2008, and 2) you must certify that more than 50% of the gross income on your 2008 return came from a “qualifying small business.” For this purpose, a “qualifying small business” is generally a business that employed on average less than 500 employees during calendar-year 2008. Planning Alert! Please call us as soon as possible if you think that your current tax withholdings or estimated tax payments may not meet one of these safe harbors. If so, we may be able to eliminate the penalty by having you withhold additional taxes from your 2009 year-end bonus (or from a distribution from your IRA, etc.).
purchases from February 17, 2009 through December 31, 2009, you may claim a deduction for sales or excise taxes you pay on the purchase of a “qualified motor vehicle.” If you itemize deductions, you may deduct the qualified sales or excise taxes as “taxes.” If you do not itemize deductions, you may deduct the qualified sales or excise taxes as an “additional standard deduction.” A qualified motor vehicle is a new passenger automobile with a gross vehicle weight (GVW) of 8,500 lbs or less, a new motorcycle with a GVW of 8,500 Ibs or less, or a new motor home. This additional deduction for sales or excise taxes is limited to the sales tax on the first $49,500 of the vehicle’s purchase price, and phases out ratably as your modified adjusted gross income (MAGI) increases from $250,000 to $260,000 on a joint return ($125,000 to $135,000 on a single return). Tax Tip. The IRS says that you can get this sales tax deduction for more than one qualifying purchase.
Expanded But Temporary “American Opportunity Education Tax Credit.” Before 2009, individuals were allowed a HOPE tuition tax credit (HOPE Credit) for qualifying tuition costs generally for the first two years of a student’s college (e.g., freshman and sophomore years). For 2009 and 2010, the 2009 Act changes the name of the HOPE credit to the “American Opportunity Tax Credit’ and makes five significant changes: 1) Amount of Credit – the maximum credit is increased from $1,800 to $2,500 (100% of the 1st $2,000 of qualifying education expenses plus 25% of the next $2,000 of qualifying expenses); 2) Number of Years Credit Allowed – the total number of years that a student may qualify for the American Opportunity Credit is increased from two years to four years (i.e., generally, freshman through senior years); 3) AGI Phase-Out Limits – the credit is phased out as your modified adjusted gross income increases from $160,000 to $180,000 for those filing joint returns ($80,000 to $90,000 for single filers); 4) Partially Refundable – 40% of the credit is refundable unless the person claiming the credit is subject to the so-called kiddie tax rules (i.e., all students under age 18 and most full-time students under age 24); and 5) Qualifying Education Expenses – course materials are added to the expenses qualifying for the credit (therefore, for 2009 and 2010, expenses qualifying for the credit include tuition, fees, and required course materials). Tax Tip. To get the full $2,500 credit for 2009, you must pay qualifying expenses of at least $4,000 for the student by December 31, 2009. For example, if you paid tuition and books of $2,500 for the fall, 2009 semester for a college freshman, you would need to pay tuition of at least $1,500 for the spring, 2010 semester by December 31, 2009, to get the full credit of $2,500 for 2009.
“Making Work Pay” Tax Credit. For 2009 and 2010, if you have earned income, you may qualify for a new refundable Making Work Pay tax credit up to $800 for joint filers and $400 for single filers. However, the credit is phased out as your modified adjusted gross income (MAGI) increases from $150,000 to $190,000 ($75,000 to $95,000 on a single return). Instead of receiving a rebate check as you did with last year’s economic stimulus payment, the IRS has reduced the federal income tax withholding by the amount of the credit. So, most individuals receive the benefit of the credit by having their 2009 take-home pay increased by the amount of the credit. However, if you qualify for this credit for 2009 but you do not have sufficient withholding to utilize all of the credit, you will be entitled to any unpaid portion as a refundable credit when you file your 2009 tax return. Planning Alert! Since the credit is built into the withholding tables, this may result in the amount of Federal income tax withholding for 2009 being less than your actual 2009 taxes. This becomes increasingly likely if both you and your spouse are employed forcing your combined income above the phase-out levels, or you have two jobs and both employers are reducing your withheld taxes by the credit. Please call our firm if you think that you may be in this situation, and we will help you determine whether you need to increase your 2009 year-end withholdings to avoid a penalty.
Don’t Overlook Expanded Tax Credits For Making Energy-Efficient Improvements To Your Home. Starting in 2005, Congress gave us several nonrefundable credits for making certain energy-efficient improvements to our homes, and for installing qualified solar panels and solar water heaters. Starting in 2009, the 2009 Act dramatically enhanced these credits. Tax Tip. Unlike many other tax benefits, these credits are not reduced or eliminated as your AGI increases, and they offset the AMT. Therefore, you may qualify regardless of your income level. For example, the 2009 Act now allows you a 30% credit for “qualified energy-efficient home improvements” to your principal residence located in the U.S. and placed in service in 2009 and 2010, with a $1,500 maximum cumulative credit for the 2009 and 2010 tax years (previously, there was a lifetime credit limit of $500). Qualified improvements can include properly certified energy efficient roofs, insulation, exterior windows (including skylights), exterior doors, heat pumps, hot water boilers and air conditioners. In addition, the 2009 Act allows a 30% credit for “qualified residential solar water heaters, geothermal heat pumps, wind energy property, and solar electric generating property” installed in your residence. The residence need not be your “principal residence,” so installations in your second residence or vacation home may qualify. Also, the credit will now offset the alternative minimum tax as well as regular tax. Planning Alert! Expenditures related to swimming pools or hot tubs (e.g., solar equipment to heat water or run electrical pumps) generally do not qualify. Also, to take the credit for 2009, the property must actually be installed no later than December 31, 2009.
taxable income below the income thresholds necessary to take advantage of other 2009 tax breaks discussed in this letter. Planning Alert! The IRS also reminded us in its recent announcement that only one rollover from one IRA to another may be made within a 12-month period. Please call us if you wish to rollover to an IRA a 2009 RMD that has been distributed, so we can assist you with the transaction.
temporary tax breaks that expire after a certain date. Some of the more popular tax benefits that are currently scheduled to expire at the end of 2009 include the: 1) School Teachers’ Deduction (up to $250) for Certain School Supplies; 2) Deduction for State and Local Sales Tax; 3) Deduction (up to $4,000) for Qualified Higher Education Expenses; 4) Real Property Tax Standard Deduction For Non Itemizers, 5) Qualifying Tax-Free Transfers from IRAs to Charities for Those at Least 70½; 6) Higher Alternative Minimum Tax (AMT) Exemption Thresholds; and 7) Increased Charitable Deduction Limits for Qualifying Conservation Easements. Planning Alert! In the past, these tax breaks have generally been extended before they actually terminated. However, given the current political environment of rising deficits, there is uncertainty as to which provisions Congress will extend beyond 2009.
joint or single, you are not allowed to convert (rollover) your traditional IRA into a Roth IRA unless your modified adjusted gross income is $100,000 or less. In addition, if you are married, you must file a joint return with your spouse. Tax Tip. If the recession has caused your income to decline, you may be a good candidate for converting all or a portion of your regular IRA to a Roth, if your 2009 modified adjusted gross income does not exceed $100,000. This is particularly true if: 1) you believe that the value of your IRA is currently at or near an all time low, 2) you expect it to appreciate in the relatively near future, and 3) you have funds outside the IRA to pay the income taxes caused by the conversion. Planning Alert! If you want the conversion to be effective for 2009, you must transfer the amount from the regular IRA to the Roth IRA no later than December 31, 2009 (you do not have until the due date of your 2009 tax return). Also, when you convert a traditional IRA to a Roth IRA, you generally must pay tax on the amount converted as if you withdrew the funds from the traditional IRA. Major Change Coming Next Year. Effective for tax years beginning after 2009, you will be able to convert your regular IRA to a Roth IRA, without regard to your income or your filing status. If you convert in 2010, unless you elect out otherwise, you will report the income triggered by the conversion pro rata in 2011 and 2012. Caution! Don’t attempt a Roth conversion or implement a Roth conversion strategy without calling us first. There is a host of factors you should evaluate before deciding to convert your traditional IRA to a Roth.
of the zero % capital gains rate for 2009. If you are experiencing any of these situations, please call our firm and we will help you determine if there is a strategy for you to take advantage of these low capital gains rates. Please note that traditional year-end planning for capital gains and losses is discussed below.
being equal, you should sell the short-term gain (held 12 months or less) securities first. This will allow your net capital loss (in excess of $3,000) to absorb your short-term capital gain, while preserving your favorable long-term capital gain treatment for later years. Tax Tip. If you are considering selling “loss” investments held 12 months or less, and you also have short-term capital gains and investment interest expense, please call our office. We will help you determine which strategy will maximize your tax savings.
environment, some are even predicting that Congress could increase tax rates on regular income, dividend income, and/or capital gains as early as 2010. Tax Tip. If you believe that deferring taxable income into 2010 will save you taxes, and you are a cash-method, self-employed taxpayer, consider delaying year-end billings to defer income until 2010. Planning Alert! If you have already received the check in 2009, deferring the deposit does not defer the income. Also, you may not want to defer billing if you believe this will increase your risk of not getting paid.
deduction into 2009 by “paying” it in 2009. Accelerating an “above-the-line” deduction, such as the IRA or Health Savings Account (HSA) deduction, qualified student loan interest and tuition deductions, qualified moving expenses, and deductible alimony into 2009 may allow you to reduce your “adjusted gross income” below the thresholds needed to qualify for many other tax benefits. Caution! Itemized deductions do not reduce your “adjusted gross income” and, therefore, will not affect your 2009 deductions and credits that are reduced as your income increases. Itemized deductions include charitable contributions, state and local taxes, medical expenses, unreimbursed employee travel expenses, and home mortgage interest. Tax Tip.
“Payment” typically occurs in 2009 if a check is delivered to the post office, if your electronic payment is debited to your account, or if an item is charged on a third-party credit card (e.g., Visa, Discovery, American Express) in 2009. Be careful, if you post-date the check to 2010 or if your check is rejected, no payment has been made in 2009. Planning Alert! The IRS says that prepayments of expenses applicable to periods beyond 12 months after the payment will not be deductible in 2009.
“Bunching” Itemized Deductions. If your itemized deductions fail to exceed your standard deduction in most years, you are not receiving maximum benefit for your itemized deductions. You could possibly reduce your taxes over the long term by bunching the payment of your itemized deductions in alternate tax years. This may produce tax savings by allowing you to itemize deductions in the years when your expenses are bunched, and use the standard deduction in other years. Tax Tip. The easiest deductions to shift between tax years are charitable contributions, state and local taxes, and your January home mortgage interest payment. For 2009, the standard deduction is $11,400 on a joint return and $5,700 for single individuals. If you are blind or age 65, you get an additional standard deduction of $1,100 if you’re married ($1,400 if single).
Charitable Contributions. A charitable contribution deduction is allowed for 2009 if the check is mailed on or before December 31, 2009, or the contribution is made by a credit card charge in 2009. However, if you give a note or a pledge to a charity, no deduction is allowed until you pay off the note or pledge. Tax-Free IRA Payments To Charities. If you have reached age 70½, you may have your IRA trustee contribute up to $100,000 from your IRA directly to a qualified charity and exclude the distribution from your income (you do not get a charitable contribution deduction). To qualify: 1) you must have reached age 70½ before the date of the transfer, and 2) the IRA check must be made out directly to the charity (not to you), although you may deliver the check to the charity. Tax Tip. This provision is particularly beneficial if you do not plan to itemize your deductions (i.e., you plan to use the standard deduction), or you expect your itemized deductions to be reduced because your income exceeds certain thresholds. Planning Alert! This provision is scheduled to expire after 2009, so this may be the last year you can use it.
Maximizing Home Mortgage Interest Deduction. If you are looking to maximize your 2009 deductions, you can increase your home mortgage interest deduction by paying your January, 2010 payment on or before December 31, 2009. Typically, the January mortgage payment includes interest that was accrued in December and, therefore, is deductible if paid in December. Planning Alert! Make sure that you send in your January, 2010 mortgage payment early enough in December for your lender to actually receive it before year-end. That way, your lender will be sure to reflect that last payment on your 2009 Form 1098, and we can avoid a matching problem for your 2009 return.
Time Payment Of State And Local Taxes To Your Benefit. If you anticipate deducting your state and local income taxes, consider paying them (fourth quarter estimate and balance due for 2009) and any property taxes for 2009 prior to January 1, 2010 if your tax rate for 2009 is higher than or the same as your projected 2010 tax rate. This will allow a deduction for 2009 (a year early) and possibly against income taxed at a higher rate. Planning Alert! State and local income and property taxes are not deductible for AMT purposes. Consequently, you should not employ this tactic without carefully calculating the alternative minimum tax impact. Also, “overpayment” of your 2009 state and local income taxes is generally not advisable particularly if a refund in 2010 from a 2009 overpayment will be taxed at a higher rate than the 2009 deduction rate. Please consult us before you overpay state or local income taxes!
Sales Tax Deduction. You may “elect” to deduct “either” state and local income taxes or state and local sales taxes, as itemized deductions. Tax Tip. This election may be particularly beneficial if: 1) you are a resident of a state with little or no state income taxes, 2) you reside in a state where the state income tax rate is generally lower than the sales tax rate, 3) you are a senior citizen who has modest taxable income and you are living largely on lifetime savings, or 4) your state income tax liability has been significantly reduced because of state credits, etc. Taking the sales tax deduction rather than the state income tax deduction may also avoid including a state income tax refund in federal taxable income in a subsequent year. Planning Alert! If you plan to deduct sales taxes for 2009, consider purchasing your big ticket items such as a motor vehicle, boat, mobile home, or home building materials by December 31, 2009.
retirement plan contributions generally become more valuable to you. Also, making your deductible contribution to the plan as early as possible generally increases your retirement benefits. IRA Contributions. If you are married, even if your spouse has no earnings, you can generally deduct in the aggregate up to $10,000 ($12,000 if you’re both at least age 50 by the end of the year) for contributions to your and your spouse’s traditional lRAs. You and your spouse must have combined earned income at least equal to the total contributions. However, no more than $5,000 ($6,000 if you’re at least age 50) may be contributed to either your or your spouse’s separate IRA for 2009. If you are an active participant in your employer’s retirement plan during 2009, your IRA deduction is phased out ratably as your adjusted gross income increases from $89,000 to $109,000 on a joint return ($55,000 to $65,000 on a single return). However, if your spouse is an active participant in his or her employer’s plan and you are not an active participant in a plan, your ability to contribute the full amount to an IRA phases out only as the adjusted gross income on your joint return goes from $166,000 to $176,000. Planning Alert! Every dollar you contribute to a deductible IRA reduces your allowable contribution to a nondeductible Roth IRA. For 2009, your ability to contribute to a Roth IRA is phased out ratably as your adjusted gross income increases from $166,000 to $176,000 on a joint return or from $105,000 to $120,000 if you are single. Consider Contributing To Your Company’s §401(k) Plan. If you are covered by your company’s §401 (k) plan, you should consider putting as much of your compensation into the plan as allowable. The maximum contribution you may make (employee portion) for 2009 is $16,500 ($22,000 if you’re at least age 50 by the end of 2009). This is particularly appealing if your employer offers to match your contributions.
new legislation, cases, regulations, and IRS rulings. Our firm closely monitors these changes and we will gladly discuss any current tax developments and planning ideas with you. Please note that the information contained in this material represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.
to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
As the end of 2009 approaches, it’s time to evaluate year-end tax planning for corporations and other businesses. Over the past year, Congress, the IRS, and the courts have flooded us with significant tax developments. These changes make year-end tax planning for 2009 exceedingly important! Most recently, Congress passed the American Recovery and Reinvestment Tax Act of 2009, which includes corporate and business tax benefits that: provide a longer carryback period for 2008 net operating losses; expand the Work Opportunity Tax Credit for hiring certain disadvantaged employees; extend through 2009 accelerated business asset write-offs including the higher $250,000 §179 deduction, the 50% bonus depreciation, and a 15-year (instead of 39-year) write-off of certain leasehold improvements, restaurant properties, and retail properties; often a new income deferral election for businesses that experience cancellation of debt income; and temporarily shorten the time (from 10 years to 7 years) that an “S” corporation which used to be a regular C corporation is exposed to the corporate built-in gains tax.
corporate and non-corporate businesses. Caution! Several of the most significant new tax breaks expire in 2009 (and others in 2010). Therefore, it is extremely important that you be proactive and act timely to obtain maximum benefits! This letter also contains traditional year-end tax planning strategies 1) to help ensure that your business income is taxed at the lowest possible rate, and 2) to postpone taxes by deferring taxable income and accelerating deductions.
planning strategy without calculating the overall tax liability (including the alternative minimum tax) with and without the strategy. In addition, this letter contains ideas for Federal income tax planning only. You should also consider any state income tax consequences of a particular planning strategy. We recommend that you call our firm before implementing any tax planning technique discussed in this letter, or if you need more information.
“2009 Act”) providing approximately $275 billion of temporary tax breaks and incentives impacting virtually every business taxpayer. The following are selected provisions from this tax legislation that we believe will have the greatest impact on 2009 year-end planning for corporations and businesses. Planning Alert! As you read the following highlights, please keep in mind that there are several tax breaks available only in 2009, and others expire after 2010! Due to mounting concerns about expanding budget deficits, it is unclear whether Congress will extend these temporary business tax benefits. Consequently, pay careful attention to the effective date and expiration date (if applicable) for each new provision, which we highlight prominently in each segment. Tax Tip. The recent legislation contains a host of accelerated depreciation write-offs for qualifying equipment, vehicles, buildings, software, and capital improvements “placed in service” generally no later than December 31, 2009. If your business plans to take advantage of any of these increased write-offs for 2009, make sure that you order, purchase, acquire, or construct the property early enough so that your business can actually place it in service no later than December 31, 2009!
Operating Losses. If a taxpayer has a net operating loss (NOL) for a tax year, the NOL may generally be carried back and offset taxable income reported in the 2 tax years before the year of the loss (the “carry back period”). Any remaining unused NOL can then be carried forward to each of the following 20 years until the NOL is used up. Under the 2009 Act, for NOLs generated in a tax year ending in 2008 by an “eligible small business” (a business with average gross receipts of no more than $15 million), taxpayers may “elect” an extended NOL carry back period from 2 years to up to 5 years. Planning Alert! The latest date that an election to utilize this extended carryback period for a 2008 calendar-year taxpayer has expired. Tax Tip. Fiscal-year taxpayers may still elect the extended carryback period of up to 5 years for the tax year beginning in 2008 if the extended carryback period was not elected for the tax year ending in 2008. If you own a fiscal-year “eligible small business” that has a net operating loss for the tax year beginning in 2008 that still qualifies for this election (typically a fiscal year, regular C corporation having average gross receipts not exceeding $15 million), please call our office. We will help you determine whether or not you should consider electing an extended carryback period. Please Note! As we complete this letter, there are proposals in Congress to extend this expanded NOL carryback period to certain NOLs generated after 2008.
Increased $250,000 Section 179 Deduction Extended Through 2009. Last year, Congress increased the maximum §179 deduction for the cost of qualifying new or used depreciable business property (e.g., machinery and equipment) from $128,000 to $250,000 for property placed-in-service in tax years beginning in 2008. The 2009 Act has now extended this $250,000 cap for an additional year, to property placed-in-service in tax years beginning in 2009. However, the $250,000 deduction is reduced by the amount by which the cost of qualifying §179 property placed-in-service during the 2009 tax year exceeds $800,000. Tax Tip. If your business is a calendar-year taxpayer, the increased §179 deduction will be available for qualified property “placed-in-service” by December 31, 2009. To be safe, your qualified property should be set up and tested before 2010. Planning Alert! If your business purchases more than 40% of its machinery, equipment, etc. in the last 3 months of its tax year, it may only take 1½ months of depreciation (instead of 6 months of depreciation) for the property acquired in the last 3 months. This is commonly referred to as the “mid-quarter convention.” If you elect the §179 deduction for property purchased in the last three months of the tax year, that portion of the cost of the property will be excluded from the 40% test. This may allow you to avoid the mid-quarter depreciation convention and use the half-year convention instead. Caution! For tax years beginning after 2009, the §179 deduction is scheduled to drop back to $134,000. If you are considering a significant equipment or business vehicle purchase, please call our office. We will help you develop a purchase strategy that gives you maximum depreciation deductions.
Pass-Through Entities. If you have a pass-through business entity (e.g., S Corporation, LLC, Partnership), you must apply the $250,000/$800,000 limitations twice-once at the entity level and again to the owners (i.e., to the S Corporation Shareholders, LLC Members, and Partners). In certain situations with fiscal-year pass-through entities, the $250,000/$800,000 limitations may be reduced. The rules for applying the $250,000 §179 limit to fiscal-year, pass-through entities are tricky. Please call us if you need more information.
Don’t Forget “Taxable Income” Limitation. The §179 deduction generally is not allowed to exceed the taxpayer’s business taxable income (as determined without the §179 deduction). Thus, the §179 deduction generally cannot create a taxable loss (or NOL). For pass-through entities, this so-called taxable income limitation is applied at both the entity level, and again at the owner level. However, if wages are paid to S Corporation shareholders or “guaranteed payments” are paid to owners of a partnership, the S Corporation’s or Partnership’s §179 deduction can actually exceed the pass-through entity’s taxable income, and create a pass-through loss. If you own an interest in a pass-through entity and plan to take advantage of these temporary increases in the §179 deduction limitations, please call our firm. We will help you maximize your section 179 deduction.
bonus depreciation deduction for calendar-year 2008 property acquisitions. The 2009 Act extends the 50% bonus depreciation for one more year. Therefore, the 50% bonus depreciation deduction is available for new “qualifying property” acquired and placed-in-service during calendar years 2008 and 2009. Generally, qualifying property includes property that has a depreciable life for tax purposes of 20 years or less (e.g., machinery and equipment, furniture and fixtures, cars and light general purpose trucks, sidewalks, roads, landscaping, depreciable computer software, farm buildings, qualified leasehold improvements, and qualified motor fuels facilities). Caution! Whether your business uses a fiscal or calendar tax year, the 50% bonus depreciation is allowed only if “qualified property” is “acquired” and “placed-in-service” during calendar years 2008 or 2009. To meet the placed-in-service requirement for 2009, property must be ready and available for use by December 31, 2009. Passenger Automobiles. The maximum first-year depreciation deduction (including the maximum §179 deduction) for most business automobiles is generally capped at $2,960 for 2009 ($3,060 for trucks and vans not weighing over 6,000 Ibs). However, the 2009 Act increased the first-year depreciation cap by $8,000 for autos qualifying for the 50% bonus depreciation in 2009. Planning Alert! The dollar limits must be reduced proportionately if your business use of a vehicle is less than 100%. For example, assume you are self-employed and you buy a new $30,000 passenger vehicle which you use 60% for business and 40% for personal driving in the first year. Your first year depreciation dollar limit for 2009 would be $6,576 ($10,960 x 60%). Tax Tip. If you wait until early 2010 to purchase the same vehicle and the first year cap is the same for 2010 as for 2009, your first year limit would be only $1,776 ($2,960 x 60%). If you purchase the passenger vehicle late in 2009, be sure to use it as much as possible for business through December 31, 2009, and keep your personal use to a minimum. This will maximize your business percentage for 2009, and could dramatically increase your 2009 depreciation deduction. Caution! If you take an additional $8,000 first year depreciation deduction on your passenger vehicle purchased in 2009, and your business use percentage later drops to 50% or below, you may be required to bring into income a significant portion of the depreciation taken. Therefore, it is imperative that the business use of the vehicle exceeds 50% for subsequent years. Trucks And SUVs Over 6,000 Lbs. Trucks and SUVs with loaded vehicle weights over 6,000 Ibs are generally exempt from the passenger auto annual depreciation caps discussed above. However, the §179 deduction for an SUV is limited to $25,000 (instead of $250,000). On the other hand, pickup trucks with loaded vehicle weights over 6,000 Ibs are not subject to the $25,000 limit imposed on SUVs, if the truck bed is at least six feet long.
New Incentives To Hire “Unemployed Veterans” And “Disconnected Youth.” If your businesses employs workers who are members of certain targeted groups (e.g., certain low income employees, welfare recipients, ex-felons, summer youth employees), you may qualify for the Work Opportunity Tax Credit (WOTC). The credit is 40% of the first $6,000 of qualifying wages (up to $2,400 per employee). For employees who begin work in 2009 or 2010, the 2009 Act created two new categories of individuals qualifying an employer for the 40% WOTC: 1) unemployed veterans, and 2) disconnected youth. Planning Alert! A business must properly certify the employee in order to qualify for the WOTC. You can generally satisfy this certification requirement by having the employee complete a pre-screening notice (IRS Form 8850) before the employee begins working. Also, no later than 28 days after the employee begins working, you must submit the properly executed notice to the appropriate state employment security agency for certification. Tax Tip. Be sure to use the most recent Form 8850 and the related instructions which contain information on the two new categories of qualifying employees (unemployed veterans and disconnected youth) as well as the other targeted groups qualifying for the WOTC. Form 8850 and the related instructions are available at www.IRS.gov.
Deferral Of Income Recognition From Cancellation Of Business Debt in 2009 Or 2010. Generally, a business has cancellation of debt (COD) income where the debt of the business is cancelled or where the business reacquires its debt for an amount less than its face amount. However, under the 2009 Act, a business may elect to defer its COD income resulting from the cancellation or the reacquisition of a debt instrument that was issued by the business if the forgiveness or reacquisition takes place in 2009 or 2010. If the election is made, qualified COD income that would otherwise be recognized in 2009 or 2010 will be deferred until 2014, and then included ratably in income over the next 5 tax years (i.e., from 2014 through 2018). Tax Tip. The IRS has recently released detailed guidance on the technical application of these rules, and the procedures for making the election. These rules are quite detailed, please call our firm if you need additional information.
temporary business tax breaks that expire after a certain date. Some of the more popular tax benefits that are currently scheduled to expire at the end of 2009 include the: 1) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Leasehold Improvements;” 2) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Restaurant Improvement Property;” 3) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Retail Improvement Property;” 4) 5-Year (instead of 7 year) Depreciation Period for Certain Farming Business Machinery and Equipment; 5) Research and Development Credit; 6) Employer Differential Wage Credit for Payments to Military Personnel; 7) Various Tax Incentives for Investing in the District of Columbia; 8) Favorable S Corporation Charitable Contribution Provisions; 9) Enhanced Charitable Contribution Rules for Qualifying Business Entities Contributing Computer Equipment, and Book and Food Inventory; and 10) Extension of Increased Rehabilitation Credit for Structures in the Gulf Opportunity Zone. Planning Alert! In the past, many of these tax breaks have been extended before they actually terminated. However, given the current political environment of rising deficits, there is uncertainty as to which provisions Congress will extend beyond 2009. Therefore, if you wish to take advantage of these tax benefits, the property should be placed in service, or the expenditures should be made before the provision expires.
Temporary 15-Year Write-Off For Improvements To Qualifying Buildings (2009 Only). Last year, Congress enacted a temporary 15-year depreciation recovery period (instead of 39 years) for the following two new categories of depreciable realty placed in service after 2008, and before 2010: 1) “qualified retail improvement property,” and 2) “qualified restaurant property.” Qualified Retail Improvement Property generally includes improvements made to the interior portion of a commercial building (i.e., nonresidential real property), that are placed in service more than 3 years after the building was first placed in service, and that are made to a building, the interior portion of which is open to the general public for the sale of tangible personal property. The following capital expenditures will not qualify: improvements that enlarge the building; any elevator or escalator; any structural component benefitting a common area; and any cost relating to the internal structural framework of the building. Qualified Restaurant Property generally includes any building or improvement to a building, if more than 50% of the building’s square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. Tax Tip. If a newly-constructed or newly acquired qualifying restaurant building is placed into service in 2009, the entire cost of the building will qualify for the 15-year write off. Planning Alert! If you are currently making capital improvements that might constitute qualified “retail improvement property” or “restaurant property,” or you are purchasing a restaurant building, and you want to use the 15-year write-off, you must place the building in service by December 31, 2009! This will allow you to write off these capital improvements over 15 years (rather than 39 years). A certificate of occupancy will generally constitute “placing the building in service.” Caution! The rules dealing with improvements to leased commercial buildings, buildings used for retail, and buildings used as restaurants are extremely tricky and time sensitive. Furthermore, the depreciation rules become even more complicated if you are planning to do a cost segregation study where you break out nonstructural components of a building for depreciation purposes. Please call our firm if you are incurring capital expenditures for buildings (including acquiring or constructing a building), and we will help you devise a strategy that will provide for optimum depreciation.
corporation can generally deduct a bonus, and cannot deduct a dividend, the advisability of paying a shareholder/employee a dividend in lieu of a year-end bonus is based largely on the tax brackets of both the corporation and the shareholder. If your corporation is feeling the effects of the recession and would receive little or no tax benefit from a bonus deduction (e.g., it is incurring current losses and/or has net operating loss carryovers to the current year), then a dividend taxed at a maximum rate of 15% will generally save taxes. On the other hand, if your corporation has significant income and is currently in a high tax bracket, then a bonus would likely save taxes. Planning Alert! If your corporation pays compensation to a shareholder/employee that is considered unreasonably high, the IRS may attempt to re-classify the payment as a dividend payment. Therefore, the corporation should document the reasonableness of compensation paid to shareholder/employees. Caution! Paying dividends to shareholders of Personal Service Regular “C” Corporations (in lieu of compensation) will generally not save you taxes. Personal Service Corporations generally are required to pay a flat 35% corporate tax rate on all taxable income (as discussed below).
Year-End Planning For Personal Service Corporations. If you own a “C” corporation that is a personal service corporation (PSC), all income retained in that corporation is taxed at a flat rate of 35%. Your C corporation is a PSC jf its business is primarily in the areas of health, law, accounting, engineering, actuarial sciences, performing arts, or consulting. Furthermore, in order to be classified as a PSC, substantially all of your corporation’s stock must be held by employees who are performing those services. Tax Tip. Generally, it is preferable from a tax standpoint to leave as little taxable income in a PSC as possible. This may be accomplished by paying reasonable salaries and compensation tothe stockholders/employees by year-end.
Be Wary Of Passive Loss Trap When Leasing Property To Your Closely-Held Corporation. Owners of a closely-held C corporation frequently own the business’s office building, warehouse, etc. individually (or through a partnership or LLC), and lease the facility to their corporation. However, a recent Tax Court case reminds us that this leasing arrangement can also create a “passive loss” trap. In this case, the Tax Court concluded that any rental loss generated from the shareholders’ leasing property to their controlled C corporation, will generally be classified as a “passive loss.” Therefore, the shareholders must “suspend” the loss, and will not be able to deduct the rental loss on their current returns unless they have other passive income. Tax Tip. To avoid this trap, the shareholders should set the lease payments at a level (assuming the lease amount is reasonable) so that the rental property does not generate a tax loss.
year, you should contact us as soon as possible. These losses will not be deductible on your personal return unless you have adequate “basis” in your S corporation. You will have basis to the extent of the amounts paid for your stock (adjusted for net pass-through items and distributions) plus any amounts you have personally loaned to your S corporation. If you do not have sufficient stock basis for the pass-through loss, a mere guarantee of a third-party loan made to your S corporation will not give you basis. Tax Tip. It may be possible to restructure an outside loan to your corporation in a way that will give you adequate basis. However, this restructuring must occur before the end of the tax year. Planning Alert! The rules for restructuring loans to an S corporation are complicated. Please do not attempt to restructure your loans without contacting us first.
Pay Careful Attention To Payments On S Corporation Shareholder Loans. If a shareholder has loaned funds to an S corporation, and all or a portion of the loan is paid back after the loan’s basis has been reduced by previous pass-through losses, the shareholder will recognize a gain on the repayment. The amount, character, and timing of the gain is dependent on several factors. Planning Alert! The IRS has recently issued exhaustive final regulations establishing detailed rules for the tax treatment of payments on S shareholder loans that have a tax basis less than the face amount of the debt. The regulations create several tax traps as well as planning opportunities. Tax Tip. Please consult with us before you make any payments on your shareholder loans. We will help you structure the loans and any loan repayments to your maximum tax advantage.
Self-Employed Business Income. If you are self-employed and use the cash method of accounting, consider delaying year-end billings to defer income until 2010. Planning Alert! If you have already received the check in 2009, deferring the deposit does not defer the income. Also, you may not want to defer billing if you believe this will increase your risk of not getting paid. Caution! If your 2010 tax rates are higher than your 2009 tax rates, deferring income may not be a good option.
Accruals To “Related Parties.” Year-end accruals to certain cash-basis recipients must satisfy various time-sensitive rules in order for an accrual-basis business to deduct the accruals. Regular C Corporations. If your regular C corporation accrues an expense (e.g., compensation, interest, etc.) to a cash basis stockholder owning more than 50% (directly or indirectly) of the company’s stock, the accrual is not deductible by the corporation until the “day” it is includable in the stockholder’s income. Tax Tip. If the corporation’s tax rate for 2009 is significantly greater than the more-than-50% stockholder’s individual rate for 2009, the accrued amount should be paid by the end of 2009. S Corporations And Personal Service Corporations. If your S corporation or personal service C corporation accrues an expense to any shareholder (regardless of the amount of stock owned), the accrual is not deductible until the day it is includable in the shareholder’s income.
Partnerships, LLCs, LLPs. If your business is taxed as a partnership, its accrual of an expense to any owner will not be deductible until the day it is includable in the owner’s income. Other Related Entities. Generally, an expense accrued by one related partnership or corporation to another cash-basis related partnership or corporation is not deductible until the day it is includable in the cash-basis entity’s income.
retirement plan for 2009 (e.g. profit-sharing, 401(k), or defined benefit plan) generally must adopt the plan no later than December 31, 2009. However, an SEP may be established by the due date of the tax return (including extensions), and a SIMPLE plan must be established no later than October 1, 2009.
Recent Tax Law Changes Further Encourage Hiring Children By Family Businesses! There has long been a tax incentive for high-income owners of a family business to hire their children to work in the business. Generally, the parents could deduct their child’s wages against their business income (which could be taxed as high as 35%), while the child would be taxed at rates as low as 10% (to the extent of child’s unused standard deduction, the child’s wages may avoid federal income taxes completely). Furthermore, if a child is under age 18 and working for a parent’s sole proprietorship or a partnership where the only partners are the parents, the child’s wages will be exempt from FICA tax while, at the same time, reducing the parents’ self-employment (SECA) tax. Recent tax law changes have added additional incentives to hire children. Expanded Refundable Credits. Let’s say your child is an unemployed single parent. Paying your child W-2 wages for working in your business could enable your child to receive recently-expanded refundable credits. For example, assume that your single child has a daughter who is her “qualifying child” for tax purposes. For 2009, your single child would only need: 1) earned income of at least $9,667 to get the full $1,000 refundable child credit, 2) earned income of at least $6,452 to get the full $400 refundable making work pay credit; and 3) earned income of at least $8,950 to get the full refundable $3,043 earned income credit. Planning Alert! Thus, assuming your child meets the other requirements for these credits and does not have any other income, paying the child $10,000 of salary in 2009 could result in the child receiving $4,443 of refundable credits from the IRS. Caution! If you employ your children, be sure to 1) carefully document that the wages are reasonable for the work actually performed, 2) pay the wages as part of the regular payroll, 3) make sure the payroll checks are timely cashed and placed in the child’s account, and 4) comply with all laws relating to the employment of children.
Please call us if you are interested in a tax topic that we did not address in this letter. Tax law constantly changes due to new legislation, cases, regulations, and IRS rulings. Our firm closely monitors these changes and we will be glad to discuss any current tax developments and planning ideas with you. We urge you to call us before implementing any planning ideas addressed in this letter, or if you need more information.
Note: The information contained in this material represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.

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