New President, New Promises, New Tax Laws

America has made its choice for president, and we continue to see our news anchors and politicians report on the probability of tax law changes and their effects on both individuals and business owners.

I call this the month of “IFs”. Everyone is asking, “If Obama does what he says he is going to do as President, how will this affect us?” In this newsletter, I will discuss some of the topics from the presidential election and try to explain how these plans affect us.

THE “IFs”

The First “IF”
If Obama sticks with his plans, there is a promise of raising the top rate to 39.6% for married couples with incomes over $250,000 and singles over $200,000 (welcome back marriage penalty).  Congress will most likely agree with this change and pass it into tax law for 2009.

The tax planning strategy would consist of “bunching” deductions for those that are close to these limits, electing to put many of the itemized deductions (mortgage interest, medical expenses, and charitable gifts) into 2009 by paying them in 2009 instead of 2010.  In addition, consideration must be placed on not only the standard deduction, but the additional deduction for property taxes paid in 2008 – $1000 additional for married couples and $500 for single individuals.

It may be beneficial for you to accelerate income into 2008 to take advantage of the lower tax bracket structure.

If you are close to these limits, please call and schedule an appointment so we can discuss this strategy with you further.

The Second “IF”
If you are making energy savings improvements, do you take these deductions in 2008 or wait to make the improvements until 2009?  Well, you may want to wait…Congress has reinstated the tax credit for energy efficient improvements, but at the same rates as were approved in the initial bill a few years back.  With all the energy discussions during this year’s elections, it is expected there will be additional tax credits available in 2009 as well as repealing the ceilings on some of the current credits.

Also, during the second week of November, North Carolina is offering a sales tax exemption for some Energy Star® appliance purchased during the month.  South Carolina plans to start the same exemption during the month of October 2009.

The Third “IF”
If you are 70 ½ years old and have to take mandatory payouts from your IRAs and other retirement plans, consider waiting a while longer to make these required minimum distributions.  Congress understands and is concerned that requiring these payouts during 2008 will force retirees to sell securities in their plans at a large loss, further depleting their retirement savings.  There is discussion on repealing the stated required minimum distribution rules for 2008 only.

Be careful here.  IF Obama’s plan passes and you are in the higher tax brackets mentioned earlier, you may increase your tax bill for 2009 since your 2008 distributions will be taken in 2009 with your regular distributions.  Also, taxes withheld could fall short in 2009 causing estimated tax underpayment penalties.

The Fourth “IF”
If you divorced in 2008, we need to discuss who will claim the kids.  The IRS has changed tax laws, which require “nightovers” to rule who receives the deduction.  This is a very cumbersome law change, but basically the IRS doesn’t accept the court ruling which states who can claim the child on the return.  Support or not, the person who has the most “nightovers” wins.  There is no longer a race to see who files first with the kids on the return; additional forms are required to be filed should one side file first without adequate documentation.  The IRS is also working hard to close the dependency loophole where brother claims sister as his dependent.

The Fifth “IF”
Now that Obama is president, will AMT be repealed?  We believe a repeal of AMT will be unlikely.  It is estimated that the current cost of living will increase by 2014 and AMT will contribute more to the federal budget than regular income tax.  This will make finding an alternative for this revenue stream very unlikely as well.

Increased Emphasis…

Health Savings Accounts
Health Savings Accounts are undergoing increased reporting requirements for 2008.  If you are currently using a Health Savings Account product, please ensure you discuss this with your payroll company, as the contributions must be placed in your W2 using a different method for 2008.

IRA Requirements
Some of my clients have asked about the IRA direct transfer requirements to charities.  The rules for 2007 have been reinstated for 2008.

Charities
Speaking of charity, the IRS has recently ruled that there is no deduction for donating underwear or socks to charity.  In addition, all charity receipts must be itemized by the individual items donated.  Please do this prior to coming in for a tax appointment this year.  The method of just placing $250 or $500 on a receipt without an itemized list could trigger an audit.

Schedule E – “Rental Properties”
The IRS is going to place increased emphasis on the filers of Schedule E – “Rental Properties”.  They are concerned that taxpayers either understate income or overstate expenses and believe these issues led to $13 billion in unpaid taxes.  They can’t require additional reporting from third parties to police this activity, but instead they are sending 31,000 reminder notices to taxpayers on record stating the proper methods for accounting for income and expenses.  These reminder notices also inform the taxpayer they will be on the IRS’s radar for a possible audit in the future.

Colleges/Universities
In addition, the IRS is going to audit additional colleges and universities in the upcoming year.

Prior Tax Returns
The money maker – the IRS has increased the rate for copying/retrieving prior year tax returns to $57.

Interest Expense
While we continue to see interest deductions rise on the Schedule A as itemized deductions, the IRS began a process of monitoring these deductions year after year on the tax return.  They are reviewing methods of reporting to ensure that homeowners are only taking deductions for interest on their primary residences. They also want to ensure that interest payments, not principal payments, for mortgages are properly reported.  Additional information may be requested through a computerized audit of the taxpayer’s return to ensure that rentals and second homes are not being deducted as primary residences.

Upcoming Tax Deadlines

• November 15th - Payroll taxes due for monthly filers.
• December 15th – Final estimate tax payments will be due.

Important Info for S-Corporations

Attention S-Corp Business Owners

There’s Not Much Time Left!

It is hard to believe, but the holidays are among us and it is time to prepare for tax season. This has certainly been a year full of surprises and struggles. With the end of 2008 approaching quickly, there are some important questions you may want to ask yourself before the new year.

1. Is your payroll service protecting you from IRS and state fines and penalties?
2. Did you know as an S-Corp owner you are required to take at least one payroll per year?
3. Did you know you could only get a deduction on your personal tax return if you have the total amount of health insurance you have paid, for you and your family, shown in box 14 of your form W2?

If you do not know the answer to some of these questions, or need clarification, give us a call at 803.547.7676. We would be happy to evaluate your situation and help file your 2008 tax returns.

We wish you all a Merry Christmas and Happy New Year, from our family to yours.

What can Robert Palmer and Associates,CPA, do for you?

Robert Palmer and Associates, CPA, simplifies business operations with a comprehensive offering of financial services. We save you valuable time and money with small business consulting, retirement preparation and planning, financial management, bookkeeping and payroll services, and personal and business tax preparation. Contact us today for details on how we can help your company grow.

Call us at 803-547-7676
to schedule an appointment.

Plan ahead for your 2009 tax deadlines

It’s that time of year again to start preparing for 2008 tax return filing. By the end of December, you should receive your tax organizer from Robert Palmer and Associates to help you begin this process. In many of my prior newsletters, I discussed tax savings strategies and new law changes. Should you have missed an issue or wish to review these newsletters, please see our newsletter archive on our website. We thank each of you for your business during this officially named “recession economy.” We will continue to work along side you to ensure all appropriate deductions are taken at the time of your return preparation and will request additional information, should we feel a deduction is being missed. Schedule your tax appointment today to review your 2008 return organizer and related documents by calling our office at 803.547.7676.

In this newsletter, we have listed important forms you may need to submit with your return, and what changes to expect for the New Year.

Year after year, we are consistently following up with our clients to ensure they do not miss out on deductions and include all necessary forms in their return. The following items need to be accurately addressed when filling out your return.

• Home Sales
  Form 1099S
  Because a 1099S is required to be issued for most home sales, the IRS receives documentation showing the actual sale price, but no cost information.  This information has to be reported in your return even if there is no gain generated or you will receive a notice of unreported 1099 income during the following year.
  

• Property Tax Receipts
  Usually forgotten during the initial visit by many taxpayers, these can be obtained in York County by printing the form the www.yorkcounty.gov website.  Even if you are not itemizing during 2008, you will be allowed to deduct these taxes partially or in full in the return.

• Mortgage Interest Deductions
  Form 1098
  These forms are traditionally mailed, but in 2007 we found many of our clients received these forms by email and if your email address is incorrect or not up to date, these mortgage interest statements may be lost.  It should also be made clear to the preparer as to which property the interest corresponds.

• Contract Labor
  Form 1099 Misc.
  These forms show income from sources where our clients are not the employees, but may have been contracted to do certain work.  Typically these forms correspond to income reported in Schedule C.  Please note here, expenses should be presented with the corresponding income.  Please have these expenses detailed and ready for us – we will assist in determining what is deductible and what is not.

• Mileage
  Business mileage logs should provide us with information regarding the make and model of the vehicle (a separate log for each vehicle is required) along with the odometer reading on the vehicle beginning Jan 1, 2008 and ending December 31, 2008. The number of business miles driven on the vehicle must be separated into two periods – January 1st through June 30, 2008 and then July 1st through December 31, 2008.  This segregation is reflective of the change in the standard mileage rate, which was made effective in July of 2008.

• Charitable Contributions
  Value out your Goodwill donations and be sure to provide details as to what was given and when it was given to Goodwill.  We are required to put these details in the 2008 return. Include your donation receipts when preparing – an even $500 receipt may draw a red flag due to the number of taxpayers presenting this amount. There is additional audit focus for 2008 in this area. Please provide in detail what you have donated when filling out your organizer.

• Dependent Care
  The IRS cross references dependent care providers’ tax returns with the personal tax return filings to ensure income is reported correctly on the providers’ returns.  In this case, we are required to report the provider’s Federal ID or Social Security number along with the legal company or personal name and address.  Many times this information is provided on the receipt for the care, but sometimes it is not. A great time to ask for a receipt for the services with this detail is at the end of the year, right before you write that last check.

• Last Names
  It is important to review all forms and make sure the last names we are reporting on the tax return are the same as is reported for Social Security purposes.  We had several 2007 returns that were rejected using electronic filing because the last names did not match social security records – where a wife didn’t change her name with social security upon getting married or divorced or where foster children’s last names did not match social security records.  Now is the time to make these adjustments with social security to ensure compliance, before the end of the year.  Please also check our organizer for address and name changes.

• Birth Dates
  Many calculations in the returns are based on your age – please ensure we have your correct birth date shown in the information section of the organizer as well as your dependent’s correct birth dates.

• Business Profit or Loss
  Schedule C
  We will see increased audit focus on these schedules for 2008 filings, so please ensure all documentation for expenses is available and kept in an organized method in case of an IRS inquiry.  The IRS could challenge anyone who continues to deduct losses year after year.  Hobby loss rules could prevail if material participation cannot be established.  We will assist you in determining the applicability of these regulations.

• Contact Information
  South Carolina returns must be electronically filed this year as a mandate by the state of South Carolina.  We are assured if W2 names and addresses do not match those provided, the return submissions will be sent back.  Please update any new address or name change information with your employer prior to January 1, 2009.It’s Not Too Late!

It’s Not Too Late!

Here are some things you can do now, before the end of the year, to supplement your tax return for 2008.

By creating a personal residence trust you may transfer ownership of your home, which will allow you to use it during the trust period (10 to 20 years). The home’s estate tax value is frozen when the trust is started, so any subsequent appreciation is exempt from estate tax taking advantage of the current housing slump. If you outlive the trust, the home’s value is out of your estate.

Giving stocks that have declined in value to your children or grandchildren saves estate tax because future appreciation after the stock rebounds is out of your estate.

Donating stock, which has lost value to a charity, does not help your tax liability. Instead, you should sell the stock yourself and gift the cash to charity enabling you to take the loss on your personal return as well as the charitable deduction.

Be on the Lookout!

It is important to stay up to date with new laws and regulations. Here are a few things to pay close attention to because they could change before the end of the year.

Keep your eyes open for new banking regulations regarding the rise in FDIC insurance. Remember – under new regulations, CDs are not necessarily protected if the value exceeds $100,000. You should meet with your bank professional to discuss all accounts with balances over the old minimum insured value to ensure they are covered under new limits.

Please watch for new legislation, which we still expect to happen in the next few weeks, regarding required payouts from IRAs. Lawmakers have considered not requiring taxpayers who are at least 70 ½ to take payouts for 2008, forcing them to sell investments at record low levels. New legislation may be established in December waiving required minimum distributions for 2008. If the treasury does not act, please be sure you take enough from your accounts; otherwise, the IRS will penalize you equal to 50% of the shortfall.

There may soon be tax relief for the middle income bracket – a moderate break in taxes could be approved, which will immediately effect withholding in 2009 putting more money in employees paychecks.

High-income bracket taxpayers should expect an increase by 2010 (high brackets may be restored to the old 36% and 39.6% rates on adjusted gross incomes over $200,000 for singles and $250,000 for married taxpayers.)

Capital gains rates will most likely increase from 15% to 20%.

It is likely that another AMT patch will occur to keep AMT in effect for future years. It is also probable that cutbacks in itemized deductions and personal exemptions will take place.

There will be an increased audit focus on non-profits that were formed in 2008. The IRS is planning to examine each non-profit within four years of forming to ensure it is being operated according with their tax-exempt purposes.

There will also be increased focus on tax professionals to the extent of cross checking names and social security numbers to make sure preparers are filing their own personal returns. Any mismatch will force an audit. It is even more important to have a licensed preparer signing your return with either a CPA or an Enrolled Agent certification.

New for 2009

Please make note of the following items that will definitely be changing after the New Year.

The standard mileage rate for business driving will drop on January 1, 2009 to 55 cents per mile. Moving and medical standard rates will drop to 24 cents per mile. The charitable mileage rate will remain at 14 cents per mile.

Watch out for errors in the IRS instructions for forms 1099, 1098 and W-2. These forms must be provided to taxpayers by February 17th, 2009 not March 2nd as the instructions state.

Future Deadlines

• December 15th – payroll taxes due for monthly depositors
• December 31st – final cutoff for S-Corp owners to ensure Health Insurance is included in their 2008 W2 to allow for deduction
• January 15th – final estimated tax payment for 2008
• January 15th – payroll taxes due for monthly depositors
• January 31st – Final year end payroll tax returns due along with W2 issuance for employers
• January 31st – 1099 Misc. issuance for any contract service providers as well as attorneys

I wish you all a Merry Christmas and Happy New Year and look forward to meeting with you in 2009!

News You Can Use and More…

While I could continue to discuss the low points of the current market conditions, gas shortages, and the overall economy, I will choose to discuss some details regarding recent legislation and improvements heading our way.

If you have any questions, please feel free to give me a call.

News You Can Use

New Bill Passed
The US Senate has passed the Baucus-Grassley Clean Energy (etc.) bill. This means the fix for the AMT (Alternative Minimum Tax) has been passed in the Senate (saves approximately $2000 in taxes for almost 61 Million taxpayers). This bill extends the tax benefits for middle-income taxpayers such as the teachers’ out-of-pocket expense deduction, sales tax deduction, and deductions for college tuition. They have tossed a lot of other items into this bill, which have been approved at this point, including an excise tax on “children’s wooden arrow shafts” and deductions for “training a mine rescue team.” We will hold our conclusions and summaries on this bill until it is signed into law.

Stimulus Payment Deadline Nears
Please note – in order to receive the stimulus payment in 2008, you must file your personal return by the time of the extension due date should you have extended your return.

 

Personal Use of SUV
Make sure your personal use of a business SUV does not fall below the 50% floor within the 5 year period starting with the period the vehicle is put in use. Recapture rules require the write-offs claimed for depreciation to be taxed as income should this happen.

Payroll
Be careful if you use a payroll service firm to pay your payroll taxes. If the firm fails to pay these taxes to the appropriate agency on your behalf, you will be on the hook for paying the taxes out of company and possibly personal bank accounts. So, if your payroll service is taking your tax payments when running a payroll and holding them for a period of time prior to remitting them,
you may want to consider switching firms to limit your liability. RPA does not use this process.
Payroll taxes are paid directly from your bank account to the state and federal agencies without
delay. Some local and national payroll firms are using these funds to earn interest on the float
unknowingly by the taxpayer. If you would like to learn more about RPA’s process, give us a call today at 803.547.7676.


Business Deductions for Travel
Airlines continue to offer discounts in airfare for a Saturday night stay over. Remember, the extra day can be deductible should the total cost of the trip decrease as a result of this strategy.

Personal Deduction Sometimes Missed
Year after year I see a small deduction missing from some of our filers – dependent care credit for those that use flex spending accounts. Some employers offer flexible spending accounts which allow you to defer only $5000 of dependent care expenses, but the dependent care credit allows for up to $6000 of expenses as a deduction. The taxpayer must claim the additional $1000 in expenses on form 2441 in order to take the remaining credit amount. In this case, the taxpayer loses $1000 of deductions, which
could lead to approximately $200 in tax savings.

Social Security
One question I am often asked by clients is “when should I begin taking social security payments?” Typically the age of 78 is the breakeven age. If you are planning to retire soon, please consult social security administration staff as well as your financial planner to determine your personal strategy.

Forward Thinking

While I don’t want to dwell on the current situation of the economy too much, it’s always wise to think ahead. Below are some possible outcomes of the current credit crunch and mortgage crisis:

* More government regulation of financial markets
* Increased difficulty to secure mortgage/equity loans or lines
* Higher income taxes
* Continued bank consolidation leading to a reduction of competition

Upcoming Tax Deadlines

October 15th: Payment of payroll taxes accrued for September for monthly payers

October 15th: Extended personal returns due

October 31st: Employers’ payroll tax returns due (state and federal)

Hot of the IRS Press

In this month’s newsletter, we’ve got plenty of news updates and important due dates to be aware of. I want to remind everyone to please support your local charities, but don’t forget keep the receipts including the name and FULL address of the charity you supported. For any donation over $50, you should receive a receipt from the charity. A cancelled check may not suffice with the IRS. Please also note, charity auctions are very popular this time of year. Please remember you must reduce your donation claimed by the approximate value of the item or services received. (So if you bid $50 for a $100 gift certificate there is no deduction as the value is greater than the donation. If under the same circumstance you bid $200 — $100 would be the charitable donation.)

Also remember property taxes are tax deductible in the year paid, not the year billed. As the year end approaches, you will want to make sure they are paid prior to year end to take the deduction on the year paid tax return. If you are not itemizing, you may want to use a strategy we call bunching with some of your schedule A deductions. Bunching them in every other year to reach the itemization limits every year in between. If you have any questions, please feel free to give me a call.
In the News

Social Security Retirement Benefits
The Commissioner of Social Security has released a new online calculator that will provide immediate and personalized benefit estimates to help people plan for their retirement. The Retirement Estimator is tied to a person’s actual Social Security earnings record and eliminates the need to manually key in years of earnings information.

Click here for more information.

Housing and Economic Recovery Act of 2008
A new legislature was signed into law, the Housing and Economic Recovery Act of 2008. The government is allowing up to $7500 in first time homebuyer credit filing for married individuals. This is not a normal credit, as it must be repaid in equal installments over the next 15 years, essentially making it an interest free loan from the government. The only issue I see with this legislature is keeping track of who takes the credit, as well as when and where they take it. Our new clients will need to make sure they tell us about the reclaim if they took the credit in a prior year where RPA did not complete the return; otherwise they could be faced with a 15% penalty charge plus interest.  That could get dicey with some clients paying penalties plus interest of over $1000 if the reclaim is missed.

There are $15.1 billion in tax incentives that will offset the Housing and Economic Recovery Act of 2008.  The offsets are collected from a variety of different sources, which are mentioned below.

• Property Tax Deduction for Non-Itemizers

Currently, only individuals who itemize deductions may deduct real property taxes imposed by state and local governments. The new law gives those who do not itemize a limited deduction for state and local real property taxes by increasing their standard deduction by the lesser of (1) the amount of real property taxes paid during the year (2) $500 ($1000 married filing jointly).

Who is most likely to benefit? Taxpayers who have paid off their mortgage and no longer itemize interest payments and lower income homeowners. In South Carolina we pay property taxes on automobiles so there will be benefits for those who do not itemize, but pay vehicle property taxes.

• Low-Income Housing Tax Credit

  The housing act increases and simpli¬fies the low-income housing tax credit (LIHTC). The LIHTC program gives state and local housing agencies authority to issue tax credits for the acquisition, rehabilitation or construction of lower-income rental housing. Credits are awarded to developers of qualified projects, who in turn sell these credits to investors to raise capital or equity for their projects, which reduces the amount that the developer would otherwise have to borrow. Certain expenses incurred in rehabilitating or purchasing an existing building can also qualify for the credit. The credit is claimed over a 10-year period. The changes to the LIHTC are estimated to cost $1 billion over 10 years and will take effect this year.

• Tax-Exempt Housing Bonds

  This new law simplifies the rules for tax-exempt housing bonds and, in many cases, aligns the rules to the ones governing the LIHTC. The new law also clarifies the tenant-income and rent-restriction tests as well as the rules for student housing and single-room occupancy units. The estimated cost of the changes to tax-exempt housing bonds is roughly $519 million over a period of 10 years.

• Mortgage Revenue Bonds

  This new law temporarily expands the mortgage revenue bond program to permit the refinancing of existing subprime loans. The new law also authorizes states to issue an additional $11 billion in mortgage revenue bonds for 2008 with a limited carry forward. The estimated cost of the changes to mortgage revenue bonds is $1.475 billion over 10 years.

• REIT Reforms

  The new law includes a package of real estate investment trust (REIT) reforms. A REIT is a corporation or trust created under state law that elects to be taxed as a REIT. A REIT holds passive investments in real property and mortgages. An entity electing to be a REIT must satisfy complex organizational, distribution and record-keeping requirements, along with source of income and asset holding tests. The REIT reforms are estimated to cost $359 million over 10 years.

• AMT/R&D Credits

  The new law allows corporations to use accumulated alternative minimum tax (AMT) and research and development (R&D) credits by electing not to claim the special 50-percent bonus depreciation allowed under the Economic Stimulus Act of 2008 (P.L. 110-185). The amount of unused credits that may be claimed are limited to 20 percent of the difference between depreciation allowed if the bonus deduction is claimed and depreciation without the bonus deduction. The increased credits are refundable. The amount claimed is limited to the lesser of $30 million or six percent of the total credits accumulated from 2005 and earlier years. The bonus depreciation must be based on property that is originally used, purchased, and placed in service after March 31, 2008, and before January 1, 2009 (January 1, 2010 for certain longer-lived and trans¬portation property).

• Credit Card Information Reporting

  Under the new law, banks and other processors of merchant card transactions (both debit and credit cards) will be required to report a merchants annual gross payment card receipts to the IRS and to the merchant. The IRS plans to compare the merchants overall credit card sales in relation to the expenses claimed and cash transactions reported. The IRS has also added an interesting carrot here where if the provider is not able to report under a taxpayer identification number, they must withhold 28% before sending payments to the merchants. No rush to the bank on this one, it goes into effect in 2011.

• Reduced Home Sale Exclusion

  Changes were made to reduce the exclusion available to those who use a home for partial investment and partial personal use.

• Worldwide Interest Allocation

  The House passed a housing relief bill, which will add a two-year delay in the Worldwide Interest Allocation Election.  Under this bill, the worldwide interest allocation election would be effective for taxable years beginning after December 31, 2010.  (The election, which was enacted as part of the American Jobs Creation Act of 2004, had been scheduled to go into effect for taxable years beginning after December 31, 2008.)  The election would be subject to a 70 percent limitation in the first taxable year for which it is available.  The provision is estimated to raise just over $7.6 billion over 10 years, according to the Joint Committee on Taxation staff.

• Corporate Estimated Tax Payments

  C-Corps have a new payment schedule (only over $1 Billion is assets)

More legislation is yet to come because these reforms did nothing to the “extenders bill”. This is a package of popular tax incentives, state and local sales tax deduction, teacher’s classroom expense deduction, etc.

Also, there is no AMT patch yet. We await changes in AMT tax legislation and right now the candidates are split on this subject.

**While I will not put any political views into this articles, one of the candidates plans to raise the highest bracket up by at least 6%. This in effect means a tax increase of 6% to most small business owners as LLC & S-Corp earnings are taxed at personal tax rates.**

See us for details if any of these tax breaks apply to you.

A Planning Incentive

SC Residents take note: South Carolina Future Scholar 529 College Savings Plan Strategy

Please note, South Carolina allows a deduction from state taxable income for deposits to the account only in the year of the deposit. Many residents are under the misconception the only advantage is putting money into the account years before planned college attendance. This is not true. The deduction is allowed without regard to the age of the beneficiary. The deduction is a credit to your state income tax paid up to 7% of the eligible college costs paid out of pocket in the year you deposit funds into the account. In other words, put the money into the account this year even if you withdraw it this year for college expenses to get the state deduction.

See your financial planner for additional information on these plans.

Upcoming Tax Deadlines

September 15th: Payroll Taxes are Due for Monthly Depositors

September 15th: Estimated Tax Payments for 3rd Quarter Due to IRS and State Agencies (mail the coupons included in your return)

October 1st: Deadline for Setting Up Retirement Plans for Your Company (Be sure to check with your financial advisor to ensure your plans are set up prior to October 1st)

Don’t Forget!! Sales Tax Holiday This Weekend!!

Please note, the sales tax holidays for South Carolina and North Carolina retailers are scheduled for August 1 through August 3rd (Friday through Sunday). During this time, the 6% state sales and use tax, and any applicable local sales and use tax, will not be imposed on the following items:

• clothing

• clothing accessories including, but not limited to, hats, scarves, hosiery, and handbags

• footwear

• school supplies including, but not limited to, pens, pencils, paper, binders, notebooks, books, bookbags, lunchboxes, and calculators

• computers, printers and printer supplies, and computer software;

• bath wash clothes, blankets, bed spreads, bed linens, sheet sets, comforter sets, bath towels, shower curtains, bath rugs and mats, pillows, and pillow cases

The tax exemption does not apply to:

• sales of jewelry, cosmetics, eyewear, wallets, watches;

• sales of furniture;

• a sale of an item placed on layaway or similar deferred payment and delivery plan however described; rental of clothing or footwear;

• a sale or lease of an item for use in a trade or business.

Small Business News: The Good, The Bad and The Ugly

Although tax season is over, now is the best time to get organized for the next one. From tax breaks, to tax returns, Robert Palmer and Associates is here to help you make the most of your personal and small business financial growth.

In this month’s newsletter, I’m serving up a virtual “Spaghetti Western” of advice for Small Businesses. Read on for The Good, the Bad and The Ugly.

Small Business News

The Good: Big Tax Write-offs if you Purchase an SUV in 2008* Purchasers of new SUVs are going to have a great tax break this year: Special 50% bonus depreciation. Note, this applies to new Sports Utility Vehicles that are over 6000 lbs. See the example below:

Buy a NEW $50,000 SUV with loaded weight over 6,000 lbs and place it into service in 2008. Your business gets to expense $25,000 in Section 179 depreciation, $12,500 in bonus depreciation, and $7,500 in regular depreciation all in the first year. This gives a total tax deduction of $40,000 on a $50,000 vehicle assuming 100% business use. Tax savings to pay for gas – our American car manufacturer PACs have been busy. Some dealers are even offering to cap your gas cost on these vehicles.
*Important Note: Don’t delay your purchase! There is currently a house bill that would limit the total first year write off to only $11,260. Be sure to ask your car dealer which vehicles qualify. The vehicle must be new and must be an SUV weighing 6,000 lbs. or more. 

 The Bad: 1099 Employers Beware

The IRS is on the warpath looking for employers who are exempting themselves from FICA taxes by claiming their workers as contract employees. They have already formed agreements with most states for data sharing regarding state payroll exams. This has resulted in thousands more audit leads. In addition, new technology allows data searches from 1099 records for payments to contract employees of $25,000 or more. Any company with five or more is begging for an audit.

The Ugly: Form 8919 Gives Contractors a Cause for Claims

In addition to revved up procedures for selection of audits, the IRS has now constructed Form 8919, which allows a contractor to place claim back on employers for not withholding taxes. By filing this form, these contractors can easily eliminate FICA taxes from their tax return. We expect to hear about a flood of these forms once word gets out…especially from contract employees who may not be happy with their employer!

The Finale: There’s a Hero in Every Story

Robert Palmer and Associates can help you take advantage of The Good, be wary of The Bad, and avoid The Ugly. We are Certified Professional Accountants who specialize in small business tax advice and planning. We keep you from getting tangled up in a tax mess! 

Special Update on 2007 Tax Returns

There may be an internal problem at the IRS that results in an extra step this year. We are beginning to see a new wave of notices simply requesting a copy of W2 documents from personal return preparation clients for 2007, and believe it to be a matter of the employer tax people not communicating with the individual tax processing programs. This has clearly never happened before, but if you receive a notice, please forward it to us; we will take care of sending it to the appropriate department within the IRS. Not to worry, we have all of your W2 information scanned into our internal document storage.

2006 Audit Notice?

We have also started to see the results of electronic audits for 2006 tax returns. Notices began showing up on April 16th. While we have yet to see one of our preparation clients (returns prepared internally by RPA) receive an audit notice, we have learned of several audit notices going out to self-preparers. If your co-workers, employees, or other friends and family receive such notices, please let them know we are able to assist in quick resolution. Usually taxpayers spend several hours on the telephone trying to resolve such notices, but Robert Palmer and Associates, CPA will make corrections and ensure proper notice is sent to the IRS to resolve the issue the first time around.

 

 

Be Prepared: Personal & Business Areas of Concern for 2008

Thank you for utilizing our services for your tax preparation needs this year. We hope to have provided a stress-free and pleasant experience for your family. As the tax season is behind us, we stumbled upon a few areas of concern. Below you can read about these areas to help prepare you for next year. Additionally, we provided information regarding tax relief for 2008.

All of us at Robert Palmer and Associates thank you for your business and support. Please let us know if there is any way we can assist you in your personal or business finances.

Post-Tax Season Business and Personal Areas of Concern

Business Owners Area of Concern:

• Expense verification for those who file Schedule C - self employment.

The IRS has audited one out of five personal returns with a Schedule C attached. The auditors are not allowing any expenses during these audits, except those that can be justified with a receipt or mileage log. This has resulted in billions of dollars in reclaimed tax refunds, additional taxes, penalties and interest.

Please ensure you are keeping proper documentation for all expenses including receipts for at least three years prior to the current year of filing. Receipts should be totaled and tied to each individual Schedule C line item.

Personal Areas of Concern:

• Child Dependency

 

In order to claim the dependency exemption for a child or parent in 2008, your dependent must have less than $3500 in income and you must provide more than one-half of the person’s support. In many instances this rule does not allow for the most advantageous tax strategy for the parents of children.

Please make necessary adjustments in W2 exemptions to cover the decreased dependent deduction should you fall in this category. 

• Reducing Taxable Income for Family Members

Investment goals need to be reviewed during the year to ensure the best strategy is being used to reduce taxable income for all family members. With the new “kiddie tax” legislation, it may not be worth having segregated investments for children depending on the fee basis of your investments.

I encourage a review of after tax retirement strategies with your personal financial planner and not only reliance on the minimal contribution limits of Roth IRAs. Financial planners should be reviewing your entire portfolio including the insurance components as well as developing an estate planning strategy. 

Attention Small Business Owners:

Are you hiring independent contractors or employees?

The IRS has discovered and implemented new ways to catch business owners taking advantage of issuing 1099s as a way of avoiding payroll taxes. With these new preventative measures, it is important business owners understand the regulations in order to steer clear of unintentional misclassifications.

WHAT THE IRS IS DOING DIFFERENTLY AND HOW IT AFFECTS YOU.

Due to the many different tax laws applied to each state, the Federal has teamed up with the state by installing a program where the IRS has full access to the state’s documentation. This electronic matching system will allow for the IRS to immediately spot employers paying over $25,000 to those who aren’t working for other employers and contracted with a 1099.

Additionally, those hired under a 1099 thinking they were wrongly classified as a contractor and should have had taxes withheld, can file a 8919 form. This is a complaint to the IRS placing blame on employers and allowing the contracted taxpayer to avoid paying self-employment taxes. 

SHOULD YOU BE WORRIED?

If you do receive an audit notice from the IRS, no need to panic initially. As long as you can prove legitimate reasoning in classifying workers as  contractors or even if you confirm unintentional misclassification, the IRS will reduce or even eliminate penalties.

To avoid audits and mistakes, make sure those you hire as independent contractors meet the following criteria:

• Are self-employed
• Does not work within your company’s offices or use company equipment for production full time
• Are contracted by other companies; do not work for your company only.
• Sign a contract stating they agree to receive a 1099.

Considering these precautions will protect you from being flagged by the IRS.

Tax Relief for 2008

It looks as though some additional tax relief is on the way for 2008. Additional provisions are being included in a variety of different tax bills this year.

Likely to pass:

• A break for taxpayers who are nonitemizers for real estate taxes paid in 2008. Looks to be limited to around $1000 for married taxpayers.
   
• A credit for purchasers of foreclosed properties – Estimated at $7000 or more, but buyers must use the home as their principal residence, not investment property.
   
• Increased penalties for tax preparers who take a position in the return, which is less than 50 percent substantiated.
   
• New mandated basis reporting for the sellers of securities.
• Extensions to deductions included in 2008 returns – including tuition, sales tax, and teacher’s expenses. 

 

Economic Stimulus Payment Information and More

The Economic Stimulus Act of 2008 was signed into law by President Bush on February 13. Intended to strengthen the economy and eliminate concerns of a recession, the bill is providing tax benefits for many individuals, families and businesses.

In the last newsletter, I listed the probable incentives for families and individuals, which came to pass. Other advantages will be seen by business owners for 2008.

* Increased Amounts of Depreciation as Tax Exemptions
A bonus first-year depreciation deduction of 50% allowed for qualified property acquired and placed in service after December 31, 2007, and before January 1, 2009.

The types of property eligible under bonus depreciation are: tangible property including a recovery period that doesn’t exceed 20 years, water utility property, computer software purchased and qualified leasehold improvement property.

* Incentives for Buying New Equipment

Companies buying less than $800,000 ($290,000 increase) in new equipment can write-off up to $250,000 ($122,000 increase) as tax exemptions.

When to Expect Tax Rebates?

On Friday, February 22, 2008, the Internal Revenue Service (IRS) Acting Commissioner Linda Stiff announced the tax rebates will be distributed by direct deposit on May 1 or 2, and by mail the following week, continuing throughout the summer.

The order of distribution will be revealed during the week of March 3 through March 8. Stiff also said the rebate will more than likely be distributed based on location and digits of Social Security numbers.

In order to receive your rebate sooner, you are highly encouraged to request direct deposit when filing your 2007 tax returns.  

Phasing-Out Credits for Honda Hybrids

Driving a Honda Hybrid or planning on purchasing one?

After 2007 review of sales, the IRS has declared a phasing-out of the Honda Hybrids starting January 1, 2008. Carefully review the following information showing the full amount of credit taxpayers can claim within the listed dates during this process.

Tax Rebates, Business Incentives and More!

As our news organizations continue to report, tax cuts are coming in the next month or so to try to stimulate our stagnant economy. We are depending on leaders of both parties to agree on the details, and both seem to agree fast action is needed to get money back into consumers’ hands.

I would contend we should look for the following after all the dust settles:

Tax rebates:

• $1200 for married filing jointly (phased out at $150,000 in adjusted gross income)
• $600 for singles (phased out at $75,000 in adjusted gross income)
• Extra rebate of $300 per child dependent under the age of 17

Rebates will be based on your 2007 adjusted gross income, so proper and on time personal tax return preparation is a necessity this year. Checks will not come quickly as they will probably be delayed until the current filing season winds down on April 15th. Filers who file their tax returns and request direct deposit of their refunds will likely receive their rebate checks faster through direct deposit as well.

Business Incentives

Also, certain business incentives will be included in this tax cut and will be effective for 2008. While we don’t know which incentives will make it through Congress, we feel there will be higher limits on accelerated section 179 depreciation up to $250,000 instead of the $125,000 we are seeing today.

Large Equipment

If you are looking into making a major investment in equipment, 2008 will be a great year to make this purchase.The SUV write off was not suspended as originally drafted in the bill passed in December. You may still expense up to $25,000 of the cost of SUVs weighing between 6,000 and 14,000 pounds in 2008. Also scrapped was the part of the bill expanding expensing to heavy pickup trucks with five-foot beds. For 2008, the six-foot or longer bed provision is still in place. 

Payroll Taxes…Are You Prepared?

The IRS will begin their process of computerized testing on all payroll tax returns on February 1. Should you receive a notice, please follow up to make sure it is resolved in a timely manner and as always, we are here to assist you. 

S Corporations: Pay Attention, Audit Selection Process Fine Tuned

The IRS has published the results of their audit selection process including a record amount of revenue brought in through 2007 audits. Their new techniques brought forth $23.5 billion in fiscal 2007 up from $17.2 billion in 2006. There is much more published case work concerning S Corp audits showing the IRS continues to focus efforts on S Corporations where the owners are not reporting payroll taxes on themselves and errors in Health Insurance reporting methods. S Corporation owners are not allowed to take a deduction for health insurance and these premiums must be included in their W2 wages; not simply deducted as expense in the corporation books. (Owners are allowed a deduction on their personal returns for all or part of these premiums.)