Posts Tagged ‘year-end tax planning’

2013 Winter Solstice Tax Tip: S corporation basis

Saturday, December 21st, 2013 by Joe Kristan

20091210-1.JPGJust because today is the shortest day of the year doesn’t mean you can’t do some year-end tax planning.  Today is a good day for S corporation owners with losses to ponder whether they can use those losses on their 2013 return.

An S corporation owner needs to jump three hurdles to deduct losses passing through on the K-1.

There needs to be basis.

The basis needs to be “at-risk.”

The losses either need to be “non-passive,” or you need other “passive income” to enable you to deduct a passive loss.

We’ll just talk about basis today.

A taxpayer’s initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses and expenses.

Your basis is determined on the last day of the tax year, so if you are short right now, a capital contribution made by December 31 can get you where you need to be.  So look at your S corporation income, losses and distributions for this year so far, and see if you need to put some more cash in the company before year-end.  If you own all of the company, that can be just a matter of writing a check.  Don’t try to be cute and take the money back out on January 1, either.

If you have other owners, it gets more complicated.  In that case, a loan to the S corporation might be the way to get you the basis you need.  We’ll talk about that tomorrow.

Check the Tax Update for a new year-end tip daily through December 31!

 

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Tax Roundup, 12/18/2013: Have you made your College Savings Iowa gift? And: la loi, c’est IRS!

Wednesday, December 18th, 2013 by Joe Kristan


csi logo
Year-end is sneaking up on us.
 So it doesn’t catch us completely unawares, the Tax Update will provide a year-end idea each day through December 31.  Today we pass on a reminder that Iowans can deduct contributions to College Savings Iowa, the state’s Section 529 college savings plan, on their Iowa 1040s — but only if they fund their contributions before year-end.  From the State Treasurer:

Contributions to College Savings Iowa must be made by the end of the year to qualify for the 2013 Iowa state tax deduction. Account holders can deduct up to $3,045 for each open account and can contribute online at www.collegesavingsiowa.com.* Contributions sent by mail must postmark checks by December 31, 2013.

College Savings Iowa lets anyone – parents, grandparents, friends and relatives – invest for college on behalf of a child.  Investors do not need to be a state resident and can withdraw their investments tax-free to pay for qualified higher education expenses including tuition, books, supplies and room and board at any eligible college, university, community college or accredited technical training school in the United Sates or abroad.

It’s a great way to help your kids start out in life without a big student loan.

William Perez is doing yeoman’s work on year-end planning at his place; today he has Donating Cash to Charity at Year-End.  

Kay Bell offers Donating appreciated assets to your favorite charity

 

45R credit chartLa Loi, C’est IRS.  It’s not surprising that the IRS would disregard mere vendor rules when it believes it can pass out tax credits to taxpayers who clearly don’t qualify.  That’s exactly what they did yesterday when they announced that it will allow the (ridiculously complex) Sec. 45R small employer health insurance credit in Washington and Wisconsin in 2014, even though those states won’t have the required “Small Business Health Options Program” exchange in place.

The Code clearly requires allows the credit only to employers buying through the exchange starting in 2014, but the IRS has granted “transition relief” waiving that requirement.  Heck, why not just grant the credit to anybody who just has “health” next year.  You know, as a transition rule.

 

No.  Is Obamacare Really an Improvement on the Status Quo?  (Megan McArdle).  ”Bob Laszewski, an insurance industry expert who has become the go-to guy for the news media on the rollout of the Patient Protection and Affordable Care Act (because the insurance industry is extremely reluctant to talk), tells the Weekly Standard that he thinks come Jan. 1, more people will have lost private insurance than gained it…”

 

William McBride, Economists Find Eliminating the Corporate Tax Would Raise Welfare (Tax Policy Blog).  That’s why the Tax Update’s Quick and Dirty Iowa Tax Reform Plan does just that.

 

 

TIGTALeft hand, meet right hand.   The Treasury Inspector General for Tax Administration reports “IRS Vendors Owe Hundreds Of Millions Of Dollars In Federal Tax Debt“:

Federal law generally prohibits agencies from contracting with businesses that have unpaid Federal tax liabilities.

TIGTA reviewed the IRS’s controls over the integrity and validity of vendors receiving payments from the IRS, including the vendor’s tax compliance and suspension and debarment status. TIGTA also reviewed controls over the IRS’s Vendor Master File (VMF), which contains information about vendors that enables them to do business with the IRS.

The vast majority of vendors that conduct business with the IRS meet their Federal tax obligations. However, TIGTA found that 1,168 IRS vendors (7 percent) had a combined $589 million of Federal tax debt as of July 2012, the most recent data for which information was available at the time TIGTA conducted the review. Few of the vendors had a current tax payment plan.

That means the IRS breaks its own rules in dealing with about one out of 15 of its vendors — another instance where the IRS breaks the rules with no consequence.  A “Sauce for the Gander” rule, one that would penalize IRS personnel who break rules just like they do for taxpayers, might help here.

 

Sometimes the IRS gets it right.  IRS Provided Some Good Tips this Morning (Russ Fox)

 

Tony Nitti, Tax Geek Tuesday: Profits Interests, Capital Interests, And Restricted Property:

 

In Crescent Holdings v. Commissioner 141 T.C. 15 (2013), the Tax Court doled out three lessons every tax advisor con learn from:

 

  1. How to differentiate between a profits interest and a capital interest in a partnership.

  2. Section 83 applies to the grant of a capital interest,

  3. If a capital interested in a partnership has not yet vested under the meaning of Section 83, the recipient should not be allocated any undistributed income from the partnership.

  4. The income allocable to an unvested capital interest granted by a partnership must be allocated to the remaining partners of the partnership.

Good stuff.

 

TaxProf, Billionaires’ Use of Zeroed-Out GRATs Blows $100 Billion Hole in Estate Tax.  Paul Caron quotes a Forbes article.

Jack Townsend, Raoul Weil Has First U.S. Court Appearance

TaxGrrrl, 12 Days Of Charitable Giving 2013: Sow Much Good

 

 

Robert D. FlachWOULDN’T IT BE NICE.  He discusses the new IRS Commissioner nominee and asks,  ”Wouldn’t it be great to have a person who had actually prepared tax returns for a living in the position?”  What, and have somebody who actually knows something?

20131211-1Robert has a thing about the Tea Party, but I suspect even he would Follow the Tea Party on Stadium Financing Issues (David Brunori, Tax Analysts Blog):

The Atlanta Braves are planning to move their stadium to the suburbs. The Braves blackmailed, threatened, and coerced the backboneless politicians in Cobb County, Ga., to pay for the stadium… As far as I can tell, the only organization to have put up any fight against this insane corporate welfare is the Atlanta Tea Party.”

When the Tea Party movement sticks to the fight for smaller government, there’s a lot to like there.

 

 

Tax Justice Blog, Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness

Joseph Thorndike, When Is a “Fee” Actually a Tax? When Politicians Say It Isn’t (Tax Analysts Blog)

Peter Reilly,  How To Tax Kody Brown And The Sister Wives And Other Polygamous Families?  He quotes my Twitter feed.  If Peter follows @joebwan, maybe you should too!

 

News From the Profession.  There’s a Hidden Deloitte Auditor in the Airport Cell Phone Crasher Video Making the Rounds (Going Concern)

 

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Tax Roundup, 12/28/2012: Last tax planning weekend of 2012. Also: the crisis of unreported pretend income!

Friday, December 28th, 2012 by Joe Kristan

20121228-2There’s not much time.  There are 366 days in 2012, but only four left.  It’s asking a lot of the last four days of the tax year to fix the tax problems of the other 362, but there are a few things you can still do.  You can still make charitable contributions that count this year.  You can get your last mortgage payment paid this year, making the interest on it deductible.  You can pay cash-basis business expenses.  You can even start a qualified pension plan, technically (good luck getting it drafted and in place by Monday, though).

Some last-minute rules to keep in mind:

Timely-mailed is timely-paid.  If you make a deductible payment by check, the postmark date is the date for deduction.  If the check is big enough to matter, take it down to the post office and send it Certified Mail, Return Receipt Requested.

Electronic payments count.  The nice thing about an electronic payment is that there is no dispute about when it happened, and it won’t get lost in the mail.

Credit card payments count.  If you make a payment – say, a charitable contribution – by credit card before the ball drops Monday night, it counts as a 2012 deduction, even though you won’t pay your credit card bill until next year.

Gifts of stock have to be completed by the end of business Monday.  If you want to make a gift of appreciated stock, it needs to be nestled in the recipient charity’s account by the end of the day Monday.  That might require some quick action by both your broker and your charity.

Many related parties are on cash basis for deductions, even for accrual taxpayers.  If you owe your nephew money out of your S corporation, you need to get him paid by Monday to get the deduction this year.

Capital gains and losses count on the trade dateExcept for short sales, which count on the settlement date.

Remember, this year is a bit crazy with the tax increases coming down next year, and with the Fiscal Cliff uncertainty.  Income tax rates are rising for higher-income folks, so the usual year-end deferral of income might not be a great idea.  With higher rates next year, business deductions might well be worth more then, so the usual frenzy of paying cash-basis business expenses may not be your best bet.

With itemized deductions, it’s very hard to tell.  While higher tax rates usually would mean deduction will be worth more next year than this year, plans have been floated to either cap the total amount of itemized deductions — $25,000 and $50,000 have been thrown out — or to cap the tax benefit at, say, 28%, regardless of the top rate.  Some taxpayers with big charitable pledges have moved them up to this year to hedge against a deduction cap.

 

The House of Representatives reconvenes Sunday.  Is a Fiscal Cliff deal going to happen before this year closes?  Don’t hold your breath, if this story from Tax Notes is any guide ($link):

     As President Obama and senators returned to Washington December 27, aides to House Majority Leader Eric Cantor, R-Va., announced that the lower chamber will not return for legislative business until December 30 and that the House may be in session through January 2.

     The House schedule suggests that a fiscal cliff deal, if there is one, will not come until sometime between 6:30 p.m. December 30, when first House votes are expected, and late January 2. The 113th Congress is scheduled to convene January 3 at 12 p.m.

The best we can hope for is that they pass something with an AMT patch so that the upcoming tax season isn’t thrown into chaos.  There’s no hope that they’ll actually address the incontinent spending that is leading the government to fiscal catastrophe.

Fiscal Cliff Notes

TaxProf,  CNBC: Will ‘Fiscal Cliff’ Accelerate Millionaire Deaths?

Kay Bell, Fiscal cliff is important, but don’t forget some 2012 tax laws need attention ASAP

Kevin Drawbaugh, Factbox: Corporate tax breaks in play at “cliff” and beyond

Trish McIntire, Tax’s Perfect Storm:

Congress only has 4 days to do something about taxes (if they’re willing to work the weekend). And the situation has gotten more complicated with Treasury Secretary Geithner’s announcement that the US will reach our debt ceiling on December 31st.  4 days to do what they refused to do earlier in the year and haven’t been able to do in the last few weeks. I’m not hopeful.

William McBride, The Fiscal Cliff in History (Tax Policy Blog):

As the chart below shows, it will result in the highest tax rate on individual income (39.6 percent) since 2000, the highest tax rate on capital gains (23.8 percent) since 1997, and the highest tax rate on dividends (43.4 percent) since 1986.

20121228-1

 

 

David Brunori, Michael Moore and Film Tax Credits (Tax.com)

Paul Neiffer,  Farm Income Not Cash Rent!

Russ Fox, Is It Time to Take a Casualty Loss on Absolute Poker/Ultimate Bet?

TaxGrrrl, 12 Days of Charitable Giving 2012: ShelterBox

Robert D. Flach, 2012 – THE YEAR IN TAXES

Robert Goulder, Gérard Depardieu: Tax Exile (Tax.com)

Oh, Goody: 2013 May Be the Year of Perpetual Fiscal Crisis (Howard Gleckman, TaxVox).

 

Let’s make people file lots of extra forms because I think they’re getting away with something.  The TaxProf links to an odd piece in the Washington Post by a Ray D. Madoff. who seems to think the rich are up to something.  He’s not sure what, though, so we should have everybody file a bunch of extra tax forms so he can figure it out.

He says sure, the income tax code is progressive:      

 The IRS recently released its analysis of 2010 tax returns,  which shows the allocation of taxes over different income groups. This information is both informative and misleading. According to these latest figures, in 2010 the top 1 percent of earners (those with adjusted gross incomes of at least $369,691) paid about 37 percent of all income taxes but reported just less than 19 percent of all income. Based on these data, the U.S. income tax system looks truly progressive.  This lends credence to the view that the wealthy are paying even more than their fair share.

Ah, but what are they hiding?

But statistics can be only as good as the information on which they are based, and here the data are fundamentally misleading. People pay income  tax only on amounts that Congress counts as income. This excludes the sources of revenue most commonly enjoyed by the richest Americans: gifts, inheritances, distributions from trusts and proceeds of life insurance.

So what does he propose to do?

It is time for Congress to shine a light on the types of income most enjoyed by the wealthy. Individuals should be required to report all sources of income, including gifts, inheritances, life insurance and distributions from trusts so that we can begin to assess the impact of these exclusions.

First, to point out an obvious error: most distributions from taxable trusts are already reported on two income tax returns.  Trust income follows trust distributions.  Trusts get a deduction when they make a distribution, so they have to file a K-1 with their 1041 to report the distribution and the allocation of distributed income.  The beneficiary reports the K-1 amounts on Form 1040.  Income from revocable trusts is reported directly on the grantor’s return, so distributions are irrelevant.

Second, the big inheritances and gifts are already reported — just not on income tax returns.  Gifts over the annual exclusion amount are already reported on Form 709, and large estates file Form 706.  Does he really want everybody to have to keep track of their birthday presents and gifts from Grandpa for 1040 reporting?

Finally, this stuff isn’t income.  A gift is a distribution of wealth; it reduces the donor’s wealth as much as it increases the recipients.  It’s a wash, a nothing.  Same thing for trust distributions — they are funded by reducing the grantor’s wealth, and the distributions are either income distributions or delayed transfers from the donor.  Life insurance proceeds are arguably income, but they are already normally reported on 1099-R.

So what is his point?

Everyone agrees that fairness matters when it comes to income taxes. But we cannot have an honest discussion about tax fairness when we are kept in the dark about how much income people actually receive. Only when full reporting is required can we have an accurate picture of people’s true income. Then we can begin to fashion a tax plan that is fair for all Americans.

It’s nice that he wants to have an “honest” discussion.  He could start by honestly saying that he really just wants to raise income taxes on “the rich”, but is hampered by statistics inconveniently showing that they are already paying a lot of taxes.  He wants to try to drag in a lot of things that aren’t actually income into the mix to make it look like the rich should be paying more.  Sorry: the rich guy isn’t buying.

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Two months to rule them all

Wednesday, November 2nd, 2011 by Joe Kristan

You have two months left to control your 2011 tax destiny: my new post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

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Tax Moves for the last day of 2009

Thursday, December 31st, 2009 by Joe Kristan

There are only a few hours left in 2009. Still, it’s enough for a few year-end tax planning moves, if you hurry!
Capital losses: If you sell stock at a loss today, you can take the loss. You can deduct capital losses to the extent of capital gains, plus (if you are an individual) $3,000. This doesn’t work for short sales, which are considered closed on the settlement date, rather than the trade date; also, beware the “wash-sale” rules.
Live another day. If you survive today, but not tomorrow, you may avoid estate tax altogether, assuming you have enough assets to worry about the estate tax.
Or don’t. If your estate is under $3.5 million, maybe this is a good day to check out. Your estate will be too small to pay estate tax, but your heirs will benefit from a step-up in the basis of your assets to their date-of-death value.
Remember, the official position of the Tax Update is that there’s no good day for dying.
You also have time to make some charitable contributions, either by getting the check in the mail today or by using your credit card. If you are feeling charitable, but you don’t know what to do, here are some charities that I like:
Salvation Army
Iowa Donor Network, the Iowa organization that gathers and allocates donor organs.
Cornell College
Southern Illinois University
The Tax Foundation
Reason Foundation
Alzheimers Association
Sertoma Foundation
And don’t forget that TaxGrrrl is running in the Komen Race for the Cure. Sponsor her, or make a donation.
Update from the comments:

International Development Enterprises. All money donated to them goes towards developing techonology suitable for poorer countries, which is then sold in the free market. Water pumps, water purifiers and so on. Free market and by design self sustaining, as people have to choose to buy it.

Also, the Center for Agricultural Law and Taxation does a wonderful job. Unfortunately, they don’t have an online credit card donation page (ahem, Roger!).
If you want some more ideas, Kay Bell has a roundup of year-end tax moves.
This is the last of our 2009 year-end tax planning tips. See you next year!

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Year-end deductions: beware related parties

Wednesday, December 30th, 2009 by Joe Kristan

As the tax year winds up, businesses are busy accruing year-end expenses to get the deduction into this year. They need to be careful: if you owe money to a cash-basis “related party,” it’s not enough to accrue the expense this year. You need to pay it to deduct it.
Code Section 267 only allows a deduction to a related party “as of the day as of which such amount is includible in the gross income of the person to whom the payment is made.” That’s no problem if the “related party” is on the accrual method, because they will be accruing the income at the same time you accrue the expense. But if the related party is a cash-basis taxpayer, you have to pay.
Who is “related?” It’s a pretty wide net, but most problems arise with closely-held accrual-method businesses and their cash basis owners. If you have a C corporation, only owners of more than 50% of the stock, and their families (siblings, spouses, ancestors and descendants) are related. For pass-through entities — partnerships and S corporations — any owner is a related party, along with members of owners families and anybody related to the family members.
The broad definition of related parties for pass-throughs means that if a calendar year accrual-method S corporation accrues a bonus for a 2009 shareholder’s nephew payable in January 2010, the deduction gets deferred until 2010. The same thing applies to interest expense, rental expense, or any other expense owed to a cash-basis related party.
The year is almost over. Time to review the Tax Update’s 2009 year-end planning tips!

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Year-end planning and the Iowa School Tuition Organization Credit

Monday, December 28th, 2009 by Joe Kristan

There isn’t much time left in your 2009 year-end planning, but there is still time to save some real money this year. If you feel charitable towards private elementary schools, the Iowa School Tuition Organization Tax Credit makes makes certain donations to fund private elementary schools nearly free, after tax.
The STO credit is a 65 percent state tax credit. While there is no Iowa charitable deduction for STO donations, the federal deduction is unaffected. Here’s how it works for a hypothetical top-bracket non-AMT Iowa taxpayer (ignoring phaseouts) in dollars and cents for a $100 gift — a net cost after tax of $10.73:
20091228-1.JPG
There is a catch: Iowa limits the annual amount of gifts eligible for this credit. If the credit is oversubscribed, you may not get a full credit. Your STO may be able to give you some guidance on whether there is still room for the full credit this year. Here are some to choose from:
Iowa Lutheran School Tuition Organization
SouthEast Iowa Tuition Organization
Heart of Iowa STO
Catholic Tuition Organization
While these credits may be less than ideal from a policy standpoint (the Tax Update is more of a voucher fan), you go to war with the tax law you have. If this is where your charitable inclinations lie, the Iowa STO credit makes contributions to student tuition organizations a tax-efficient way to go.
As the decade winds down, wind down with the Tax Update’s 2009 year-end tax tips!

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Playing the $13,000 Santa

Thursday, December 24th, 2009 by Joe Kristan

20091224-1.JPGIn this season of frantic giving, don’t forget the $13,000 per-donor, per-donee gift tax exclusion. Unless you have great confidence that you will die next year AND that Congress won’t restore the estate tax retroactive to January 1, 2009, anybody who is a candidate for the estate tax should consider using the gift tax annual exclusion to get money out of the estate. A couple with four kids maximizing annual giving can reduce thier taxable estates by $520,000 over five years, not even counting appreciation of the gift.
If it’s worth doing, it’s worth doing right. To get the gift to count in 2009, here are some tips:
- If you’re writing a check, march the lucky recipient down to the bank to cash it by December 31. Checks not cashed by year-end normally won’t count as 2009 gifts.
- If you are donating private company stock, make sure the corporate secretary records the transfer on the company’s books by year end. Also make sure the tax returns reflect the gift – if you make a December 25 gift of S corporation stock, make sure the donee gets a K-1 showing income for the 12/25 through 12/31 period.
- If you are donating public company stock, make sure it’s in the donee’s brokerage account before the end of the day December 31.
- If you are giving a disused sports facility, see your attorney; you can afford one.
Remember, if you miss the 2009 annual gifting exclusion, it’s gone forever. 2009 isn’t coming back.
Our 2009 year-end tax planning series concludes next week. See you then!

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The Newlywed Game, year-end tax planning edition!

Wednesday, December 23rd, 2009 by Joe Kristan

20091223-1.jpgLove is a many-splendored thing, but love is even better when it saves taxes. Your marital status at year-end is your filing status for the entire year, so maybe you want to run down to the courthouse and tie the knot before the ball drops before midnight January 1, local time. Sure, call me a hopeless romantic. The Tax Update just rolls that way.
A quick trip to the preacher may be in order in the following circumstances:
- One prospective spouse has a big capital gain, and the other has capital losses that would otherwise go unused.
- One of you has passive income, the other has passive losses. If you are married on the last day of the year, the losses can offset the income on a joint return.
- One of you has substantial income in 2009, and the other doesn’t. If you have only one income between the two of you, you’ll save taxes on a joint return because of the wider tax brackets on a joint filing.
- If you are Iowans, and one of you has pension income, marriage will enable you to exclude up to $12,000 from your Iowa income tax return. A single filer can only exclude $6,000.
There are a wide variety of other special circumstances that could lead you to tie the knot. A good tax marriage results whenever one partner has tax attributes, like capital losses, that can be used on a joint return but would not be useful on a single return. Other such items could include tax credit carryforwards and investment interest carryforwards, among others
Of course these things apply to couples pondering divorce, too, but that’s too sad to dwell on this time of year. Oops, I just did. And some couples, particularly those where both have good incomes, are better off postponing marriage, or (shudder) accelerating divorce.
Anyway, you should marry for the right reasons. But if you can both be in love and cut your taxes, why not let IRS help pay for your honeymoon?
This may be the most romantic of our 2009 year-end planning tips. But we’re not done yet!

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Making sure you get that year-end deduction

Tuesday, December 22nd, 2009 by Joe Kristan

When you're spending money to get a tax deduction for your business by the end of the year, you might as well make sure the deduction will hold up when your friendly neighborhood IRS agent comes calling. 

If you're a cash-basis taxpayer – if you aren't sure, check your business tax return or your 1040 schedule C or schedule F – you will need to show that you spent the money to claim the expense this year.  Some things to remember:

  • A credit card is as good as cash.  Better, even, because if you incur a business expense before the end of the year, you have your credit card statement to prove it.
  • If you mail a check for a business expense, the check needs to be in the mail and postmarked in 2009 to be a deductible 2009 expense.  If it's a big check, maybe you should spend a few bucks extra to send it Certified Mail so you can document the postmark.
  •  If you receive a check in the mail, it's taxable the day you receive it, even if you don't deposit it.
  • There is no "close is good enough" rule for cash basis taxpayers.  Just because you could have paid a bill doesn't get you a deduction if you didn't pay it before year-end.
  • Don't overdo it.  If you prepay expenses more than a year out, you don't get the deduction until the year to which the payment applies.

If you are an accrual-basis taxpayer, your big year-end issues come from related-party payments.   For example, a C corporation can only deduct payments to an over-50 percent owner if the payment is made before year-end.  If you and a family member both own stock, you combine your ownership to see if you own over 50 percent. For C corporation personal service corporations — doctors, lawyers, consultants, and accountants — that pay all of their earnings out as salary, this is a critical issue; any earnings left at year-end get taxed at a flat 35 percent federal rate.  S corporations and partnerships are related to all of their owners for purposes of taking deductions.  They are also related to anybody in the owner's family up to kissing cousins, more or less, including ancestors, lineal descendants, spouse and siblings.

If you are looking for a deduction from buying equipment or fixed assets — say, a Section 179 deduction or a bonus depreciation deduction — make sure that your asset isn't just purchased, but placed in service too, before year-end.  It doesn't count if it's sitting on the dock in the packing cases

This post, which originally appeared at IowaBiz.com, is part of our year-end tax tips series.

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Buy that car right now!

Friday, December 18th, 2009 by Joe Kristan

Because the above-the-line deduction for new car sales and excise taxes expires December 31.

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Should you start a qualified retirement plan before year-end?

Wednesday, December 16th, 2009 by Joe Kristan

The tax law has a menu of tax-favored retirement plans for entrepreneurs. The simplest ones, SEPs and IRAs, can be set up for 2009 as late as the tax return deadline — in the case of SEPs, the extended tax return deadline. But the most potentially lucrative plans — qualified pension or profit-sharing plans — have to be in place by year-end for contributions to be deducted on 2009 returns.
For a profitable entrepreneur with no employees, the “Solo-401(k)” may be the most lucrative retirement plan option. If you are profitable enough, you can make a deductible 2009 contribution to such a plan of the first $16,500 of your earnings, plus 20% of your earnings, if you are a Schedule C entrepreneur. The $16,500 piece makes for bigger contributions than would be available from SEPs or other plans for those with earnings under $245,000. That’s a nice deduction for just taking money from one pocket and putting it in your other pocket.
If the plan is fully executed in 2009, it can be funded as late as the extended due date of your 2009 return.
There are downsides to such plans. They are much more expensive to maintain than a SEP, and the benefits either have to be foregone or shared if you add employees. You don’t want to just jump into a qualified plan, but if you want to look into one for this year, you need to act quickly.
This is another installment in the 2009 Tax Update year-end tax tip series.

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Should you prepay your taxes due next year?

Tuesday, December 15th, 2009 by Joe Kristan

One of the most common tax planning tricks is to pay in December taxes that are otherwise due in January and April. For income taxes, this is usually done by sending the taxes in as additional estimated payments. For property taxes, you just send the check in early.
Does this make sense? Maybe, if you meet some conditions:
- If you are prepaying state and local taxes, you need to itemize. Many folks, especially those over 65, have a big enough standard deduction that they don’t need to itemize.
- If you are subject to alternative minimum tax in 2009, a deduction for state and local taxes probably does you no good (though in some cases, taxpayers with capital gain income can get a benefit even if they are in AMT).
- If you are prepaying federal taxes, you have to live in Iowa or another state that allows a deduction for federal taxes paid.
- Of course, you have to expect to owe some taxes.
Assuming you meet these conditions, you still have to take into account that by prepaying taxes you are giving up interest you could otherwise earn on the money. The chart below measures whether getting the deduction sooner is worthwhile at different tax brackets, assuming that you can take the deduction in either year; a green number means prepayment is good.
prepaychart.JPG
As you can see, prepaying your 4th quarter taxes always pays if the deduction counts in either year. The value of prepaying declines as the ultimate due date of the return goes further out, and it never makes sense to prepay a tax due next September, like your second 2010 Iowa property tax payment.
Of course, the chart doesn’t tell the whole story. You have to apply some common sense. For example, if you know you will be in AMT next year, you may want to pay a bunch of state taxes this year because the value of the deduction next year is probably zero. Unless, of course, that triggers AMT this year.
This is another installment of our exciting 2009 Year-end tax tips series!

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Don’t buy somebody else’s mutual fund tax liability

Monday, December 14th, 2009 by Joe Kristan

The end of the year is a tricky time to buy mutual fund shares in a taxable account. The tax law forces mutual funds to distribute their recognized capital gains annually, and they often do so through a big December distribution. This means you can buy an entire year’s worth of tax liabilty for a mutual fund share in a single day.
Fortunately, many funds, including the Vanguard family of funds, let you know when they plan to drop the capital gain bomb. It’s worth a few minutes to check these figures before invest that check from Grandma.
This is another installment in our 2009 Year-end planning series. Accept no substitutes!

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A college savings deduction just for Iowans

Friday, December 11th, 2009 by Joe Kristan

20091211-1.gifMutual fund investors know all about high “loads” for investing in popular funds. It would be nice to have a fund vehicle where you receive a load, rather than pay one.
Actually, there is one vehicle that works that way: Iowa’s “College Savings Iowa” Section 529 plan. Iowa law provides an “above the line” deduction for contributions up to $2,800 per donor, per donee. That means a married couple can deduct CSI contributions for each child of $5,600 on their Iowa return (there is no such deduction on the Federal 1040). For a top-bracket Iowan, the resulting tax savings are like getting a 6+% negative “load” on your investment.
The funds can be withdrawn free of Federal and Iowa tax for qualified higher education expenses, while accumulating income tax-free in the meantime.
Iowa invests through Vanguard “life-cycle” funds, which move to safer investmets as college age approaches — a feature I learned to appreciate this year as my son began college. His CSI accounts were unscathed by the 2008 market collapse.
If you want to get a 2009 CSI deduction, you need to get the funds paid before December 31. If you don’t have an account, you get the paperwork going at the CSI website.
This is another installment in our 2009 year-end tax planning series.

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S corporation basis: is it time for an S corporation holding company?

Thursday, December 10th, 2009 by Joe Kristan

Entrepreneurs are restless. It’s not unusual for them to have a lot of things going on, with a different S corporation for each business. When one business has losses, the entrepreneur takes funds out of the successful businesses to finance them. But when the entrepreneur runs low on basis in the money-losing S corporation, this can lead to problems. You can only deduct S corporation losses if you have basis in S corporation stock or debt.
20091210-1.JPGThe man who started the successful Dart Transportation business had this problem a few years back. He borrowed money from his S Corporation A and then loaned it to S Corporation B to get basis to deduct the losses. S Corporation B then loaned the funds back to S Corporation A, and the money was all back where it started.
The IRS didn’t like this, and after a long court battle, the IRS won. The courts said, in effect, that because the cash ended up where it started, the intervening steps — the loans — didn’t count.
Even if the loans do count, an S corporation owner can get surprised with taxable income if the corporation repays shareholder loans before the corporation has had enough profit to restore basis used to take losses.
An S corporation holding company can avoid these problems. S corporations can own other S corporations if they own 100% of the stock and make a Qualified Subchapter S Subsidiary (QSUB) election. The QSUBS retain their identity under state law, but they are “disregarded entities” for computing taxes. This structure allows you to put all of your S corporation stock basis in one place, eliminating the need to throw money around at year end to deduct losses. Your corporations remain separate legal entities, protecting them from each other’s problems. But if you want to do this by year-end, get together with your lawyer and tax pro right away, because time is short this year.
This is another installment in our 2009 year-end tax planning tips series. Don’t miss a one!

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Year-end planning: Make sure you have enough basis to deduct your S corporation losses.

Wednesday, December 9th, 2009 by Joe Kristan

S corporations are popular for many good reasons.  One of them is the ability to deduct corporate losses on the owners' 1040s.  It's been a rough year for a lot of folks and many taxpayers are looking forward to a nice tax refund from their 2009 business losses.  If you are one of them, make sure you don't lose your loss deduction for lack of basis in your S corporation; shareholders can only deduct losses to the extent of their basis.

A taxpayer's initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses.

A shareholder can also deduct losses of an S corporation to the extent
of loans to the S corporation. The loans have to be loans made by the taxpayer; guarantees of debt do not work.

EXAMPLE: Wally starts an S corporation. He contributes $10,000 to
the corporation in exchange for 100% of its stock. The corporation
borrows $5,000 from Wally and $50,000 from the bank, guaranteed by
Wally. The S corporation loses $20,000 in its first year. Wally can
deduct $15,000 of losses this year, based on his $10,000 cash
contribution and his $5,000 personal loan. The guarantee from the bank
does nothing to enable Wally to deduct losses.

LESSON: Wally could have borrowed the bank loan personally and
loaned it to the company; this "back-to-back" loan would have given him
enough basis to deduct the remaining $5,000 S corporation loss.

Taxpayers need to be careful in dealing with S corporation basis. A few points to keep in mind:

  • The basis is determined on the last day of the S corporation's tax
    year
    . This means that the taxpayer needs to project taxable income
    before year end to determine whether additional loans or capital
    contributions to the corporation are called for.
  • Taxpayers also need to pay careful attention to how year-end basis contributions are structured. If a shareholder borrows money from one S corporation and loans it to the money-losing corporation to get basis, the money-losing corporation shouldn't send the money right back where it came from; the IRS will disregard all of the transfers.
  • If you loan money to your S corporation to enable you to deduct losses, you may trigger taxable income if you repay the loan before the corporation earns back the losses you deducted — even if you renew the loan before the end of the year.
  • Basis is only one hurdle S corporation shareholders need to clear before they can deduct losses.  Taxpayers also need to be "at-risk" for their basis and the losses can't be "passive" under the "passive activity" rules.  It's time to project your year end income and visit your tax pro to make sure you can deduct those 2009 tax losses.

    This post originally appeared at IowaBiz.com. It is part of the Tax Update’s series of 2009 year-end planning tax tips.

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    The Mid-Quarter trap

    Tuesday, December 8th, 2009 by Joe Kristan

    While year-end asset purchases can be a great way to reduce taxes, sometimes they can backfire.
    The tax law normally computes depreciation for fixed assets (other than buildings) as if they were placed in service at the mid-point of the tax year. But if more than 40% of fixed assets are placed in service in the last three months of the tax year, the assets are all treated as placed in service in the middle of the quarter in which they were purchased.
    Say Joe, Inc., a calendar-year taxpayer, bought $2.4 million of new computers in July 2009 and 1,599,000 in October 2009. His depreciation for these assets for the year would be $2,399,400: $1,999,500 in “bonus” depreciation and $399,900 in regular depreciation.
    But now Joe buys and installs another $2,000 computer in December. Suddenly his purchases in the last 3 months of the year are 40.0149% of fixed asset purchases for the year, and the mid-quarter convention applies. Joe’s depreciation is now $2,230,525 for his 2009 additions:
    - $2,000,500 in bonus depreciation
    - $180,000 non-bonus depreciation for property placed in service in the third quarter, and
    - $ 50,025 non-bonus depreciation for property placed in service in the fourth quarter.
    The $2,000 December addition reduced depreciation expense by $168,875 for the year.
    The moral: be careful in your year-end fixed asset purchases. Sometimes a little more assets can mean a lot less deductions.
    20091208-2.jpg
    Follow all of the Tax Update’s 2009 year-end planning tips!
    Photo Credit: Image courtesy Redjar’s Flickr Photostream,


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    Fixed assets and year-end planning

    Monday, December 7th, 2009 by Joe Kristan

    For many businesses, a new piece of equipment can be more just a good investment; it is often the easiest way to knock down an income tax liability. Changes in the tax rules that take effect after this year make fixed-asset planning especially important this year.
    20091207-3.jpgBonus Depreciation: “Stimulus” legislation allows taxpayers who buy new property to get “bonus” depreciation equal to half of the cost of the property in the year it is placed in service, with the balance depreciated over the regular life of the property. For five-year property, this lets taxpayers recover 60% of the cost in the property’s initial year. For most property (aircraft is a limited exception), this rule expires for property placed in service after December 31.
    Section 179 allows taxpayers to deduct currently property that would otherwise be capitalized and depreciated. Under the “stimulus” legislation, taxpayers can elect Section 179 treatment for up to $250,000 of property for year. Unless Congress acts — which isn’t imminent — this number goes down to $134,000 in 2010.
    These provisions give taxpayers some flexibility to manage their 2010 taxable income, but they need to keep some things in mind:
    - Bonus depreciation only applies to new property; Section 179 applies to both new and used equipment.
    - Bonus depreciation can create or increase a net operation loss, enabling taxpayers to recover taxes paid in prior years; Section 179 is limited to active business income.
    - While Section 179 starts to phase out dollar-for-dollar as property placed in service in the year exceeds $800,000, there is no such limit for bonus depreciation property additions.
    - Neither Section 179 nor bonus depreciation are allowed for buildings.
    - “Placed in service” isn’t the same as “bought” or “ordered.” It’s probably not enough to have the equipment sitting in shipping containers on your loading dock at year-end. It needs to be put together and ready to go.
    - Iowa does not recognize bonus depreciation or the $250,000 Section 179 limits; the Iowa Section 179 limit for 2009 is $133,000.
    Remeber that there is a potential trap for some taxpayers who rush property into service before year-end: the “mid-quarter convention” rules. We’ll disuss them tomorrow.
    This is part of the Tax Update’s series of 2009 year-end tax tips. Collect them all!
    Flickr image by infraredhorsebite,


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