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No Relief at the Pump? Evaluate Your Options

Effective July 1, 2008, the IRS raised the standard business mileage rate to 58.5 cents. With gas prices hitting all-time highs, businesses should evaluate whether this sufficiently reimburses travelers, or whether a switch to the actual expense method of computing vehicle expense deductions makes more sense.

Two methods available:

There are two basic methods that business taxpayers may choose to compute their deduction for the business use of automobiles: the IRS’s standard mileage rate (SMR) and the actual expense method.

Standard mileage rate. The fixed and operating costs of the vehicle are generally calculated by multiplying the number of business miles traveled by the business standard mileage rate. Although a business using the SMR method cannot deduct any of the actual expenses incurred for operating or maintaining the car, the IRS does allow additional deductions for business-related parking costs and tolls, as well as interest paid on vehicle loans and any state or local personal property tax paid on the vehicle.
Actual expense method. Under the actual expense method, taxpayers can deduct the operating and maintenance costs incurred for the car during the current year, which include:
• Gas and oil (whether premium or regular grade);
• License and registration fees;
• Insurance;
• Garage rent;
• Tires;
• Minor and major repairs;
• Maintenance items such as oil changes and tire rotations;
• Interest paid on a car or truck loan; and
• Car washes and detailing
If the business use of the vehicle is less than 100 percent, expenses need to be allocated between business and personal use.

Contact HLBGC for further details, limitations and an evaluation of the most cost effective method for your business.

Small Business and Work Opportunity Tax Act of 2007

At the end of May 2007 new tax legislation was signed into law. The following are some of the highlights (and lowlights) of the new legislation:

Small Business Expensing. The new law extends and expands the Code Sec. 179 enhanced expensing provisions through 2010. It provides for an immediate 2007 increase in the expensing limit from $112,000 to $125,000, with the phase-out level increasing from $450,000 to $500,000. The amount is also indexed for inflation for tax years beginning after 2007 and before 2011.

Work Opportunity Tax Credit (WOTC). The new law extends the WOTC for 3 1/2 years through August 31, 2011. It also expands the WOTC to allow the credit to employers who hire disabled veterans and individuals in rural counties that have suffered population declines.
GO Zone Businesses. The new law extends special 179 expensing for Go Zone businesses
(those devastated by Katrina) through 2008.

Family Business Tax Simplification. Under the new law, a married couple who operates a joint venture and who files a joint return can elect not to be treated as a partnership for federal tax purposes. This treatment is available for tax years beginning after December 31, 2006. Each spouse would take into account his or her share of income, gain, loss, and other items as a sole proprietor. They would not have to file a partnership return (Form 1065) and report two Schedule K-1s. Instead, the couple would each report their share of income on Form 1040, Schedule C.

Age for kiddie tax applicability increased. Effective for tax years beginning with 2008, the kiddie tax is expanded to apply to any child who is 18 years old or is a full time student over the age of 18, but under age 24. If a child is over the age of 17 (or 18 if a student), the kiddie tax will not apply if the child provides more than half of his or her own support through earned income (such as wages). Thus, beginning in the 2008 calendar year, the net investment income of a child will be subject to the kiddie tax under the following circumstances, respectively, assuming that he or she has a living parent and does not file a joint return:

  • 17-year-old or younger —will continue to be subject to the kiddie tax regardless of the amount of his or her own support provided with earned income;
  • 18-year-old —subject to the kiddie tax unless the child provides more than half of his or her own support with earned income;
  • 19- to 23-year-old student —subject to kiddie tax unless the child provides more than half of his or her own support with earned income.

New Penalty Applies for Filing Erroneous Refund or Credit Claims. A 20 percent penalty applies to erroneous income tax refund or credit claims made for an “excessive amount” that are filed without any reasonable basis. The penalty is applied to the excessive amount of the claim, which is the amount by which the claim exceeds the amount allowable.

Estate Tax Reform

Estate tax laws are often considered to be some of the most complicated in our tax code & keeping up with the reforms can be challenging. Taxpayers want to avoid leaving an inheritance to heirs and then having a significant amount turned right over to Uncle Sam courtesy of estate taxes.

For the short-term, the outlook is good. Congress has approved a schedule that increases the amount that an individual can leave to heirs tax-free. The estate tax exemption for 2008 is $2 million, and for 2009 it is $3.5 million. For the year 2010, estate tax is supposed to be repealed altogether (barring a likely change in legislation). However, by 2011 it is quite possible that not only will the estate tax be back in effect, but it will be costing taxpayers even more – possibly reverting back to what it was in 2001: only a $1 million estate and gift tax exemption and a 55% maximum rate.

So what does all this mean? As usual, planning and preparation is the key to minimizing taxes. Even with the above-mentioned exemptions, it can be easier than one would think to become subject to the estate tax. What’s more, estate taxes can be a huge hit to the pocketbook—-for every dollar left behind that exceeds the exempt amount, Uncle Sam gets 45 cents. Further, a lot of what happens down the road will depend on what happens in this election year. Even though the estate tax is supposed to go away completely in 2010, that is still a few years away and more reforms are likely. Until this repeal comes to fruition, estate tax planning is still a critical element of your financial strategy.

Some simple planning strategies can go a long way toward preserving your wealth for yourself and for your loved ones. Now would be an excellent time to evaluate your estate plan and make sure you aren’t making costly mistakes that will diminish your estate and end up paying large amounts to the government. Contact your HLBGC representative to schedule a review of your estate plan and develop an estate tax strategy that will help you achieve your goals.

Repayment of S Corp Affected by IRS Regulations

Many small and mid-size businesses operate as “S corporations” for income tax purposes. As an S corporation, the business does not compute a tax liability on its operations, but instead shareholders report their shares of the corporation’s income or loss on their individual income tax returns. In the current economic environment, many such businesses will be passing through losses to shareholders.

Under the Subchapter S rules, the shareholders can deduct losses only to the extent that they have basis in their S corporation stock or in loans that they have made directly to the corporation. The shareholders’ basis in loans is reduced by the amount of any losses supported by such loans after reducing stock basis to zero. Repayment by the corporation of such reduced basis loans would result in gain to the shareholder. Often, shareholders have arranged their loan repayments and subsequent advances so that they could (1) take losses supported by the loans at year end, (2) repay the loans early in the following tax year, and then (3) advance loans back to the corporation late in the following tax year in order to continue to support those prior losses.

This procedure of “netting” advances and repayments on “open account indebtedness” during the year was upheld several years ago by a Tax Court case. The Treasury Department and IRS concluded that this case provided for a result not intended by Congress or by the IRS Regulations in effect at the time, and they have now amended those regulations.

The new regulations adopt a $25,000 per shareholder limit on “open account indebtedness,” determined as of the close of the tax year. If the $25,000 limit is exceeded by aggregate indebtedness to a shareholder, the entire amount is considered a debt associated with a separate written instrument, the repayment of which will generate gain to the shareholder if the basis has been reduced by previous pass-through of losses. The determination of basis is made without regard to subsequent advances by the shareholder during the year because repayments and advances will not be netted.

These new regulations apply to any shareholder advances to the S corporation made on or after October 20, 2008, and to any repayments by the S corporation on those advances. Certain aspects of these regulations are too complex for this article. If you or your corporation has shareholder loans, please contact your HLB Gross Collins P.C. tax advisor for assistance in determining their impact on the tax liabilities of the shareholders.

Gifting Appreciated Property – Benefits and Savings of Donating Stock

With the end of a tax year just around the corner, the time is right to review opportunities to deduct charitable contributions. Consider the benefits of gifts of appreciated property. Generally, a gift of appreciated property (such as stock) to a qualified charitable organization is deductible to the extent of the fair market value of the property at the time of the gift. The appreciation in the property escapes tax.
Assume you wish to make a significant gift and you own stock that was acquired many years ago at a cost of $10,000, which is now worth $50,000. You could sell the stock and write a check to the organization for the amount of the after-tax proceeds, or you could make a gift of the stock itself. By selling the stock, you will have to pay 20% tax on the $40,000 capital gain which would equal $8000. Therefore, after paying the taxes you have $42,000 to give the charity and you will get a tax savings of $16,800 (40% of $42,000).

However, if you donate the stock at FMV of $50,000 the charity ends up with the full $50,000 and you get a tax saving of $20,000 (40% of $50,000). The net result is that the charity gets $8000 more, and you get the greater tax savings.

A bargain sale of appreciated property can also provide a tax benefit. The charitable deduction is determined as the difference between the selling price and the fair market value of the property. The taxable gain is determined by prorating the basis in the property between the portion “sold” and the portion “gifted.”
The deduction for contributions of appreciated property by an individual is limited to 30% of adjusted gross income for the year. Certain exceptions apply to the ability to deduct the fair market value of property. For example, a contribution of tangible personal property is deductible only to the extent of the taxpayer’s basis in the property unless the recipient uses the property in furtherance of its exempt purpose.
Deducting appreciated property can be a win-win and should be considered as a valuable tax-saving opportunity.

Accrual by C corporation. Accrual basis Subchapter C corporations may accelerate the deduction for contributions made after year-end. The board of directors must authorize the contribution during the tax year, and the payment must be made by March 15 of the following year for calendar year corporations. The tax return must include a declaration signed by a principal officer and a copy of the board resolution.

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