Tax & Business Strategies Monthly Newsletter - December 2006

Tax Planning Strategies
Is Your Child Attending College on the Gulf Coast?
New Recordkeeping Rules for Cash Donations
Tax-Free IRA Distributions for Charitable Purposes
Making IRA Contributions With Your Refund
IRS Has Refund for 95,746 Taxpayers – Undeliverable Checks
Securities and Taxes: Ways to Minimize the Impact

Business & Management Practices
IRS Provides Simplified Method for Business Phone Excise Tax Refund
Don’t Overlook This Business Deduction!
Frequently Overlooked Business Deductions
Is that Holiday Turkey Deductible?

General Information
Purchasers of GM Hybrids Still Qualify for Tax Credit
10 Tax Planning Strategies for the Year's End
Car and Truck Expense Deduction Reminders

Briefs
2007 Mileage Rates Announced
Telephone Excise Tax Refund Also Applies to Taxpayers Not Required to File Tax Returns
Lower Your Profits With Year-End Equipment Purchases

TAX PLANNING STRATEGIES

Is Your Child Attending College on the Gulf Coast?

If so, be sure to mention that fact during your tax appointment. As part of the tax legislation, known as the Gulf Opportunity Zone Act, both the Hope Scholarship Credit and the Lifetime Learning Credit were increased as an incentive for students to attend the colleges within the Hurricane Katrina disaster area, including New Orleans and other communities along the Gulf Coast.

The legislation doubled the education credits for qualified students in 2005 and 2006, bringing the Hope Credit up to $3,000 per year and the Lifetime Credit up to $4,000. In addition, where the credit would normally only apply to tuition for those students in the Gulf Opportunity Zone, room and board will count as a qualified expense for 2005 and 2006.

However, the phase-out limits for the credit were not adjusted, so the credit is still reduced or eliminated for taxpayers with higher incomes. The credit phase-out ranges for 2006 are:
o Single individuals - $45,000 to $55,000
o Married filing a joint return - $90,000 to $110,000

If you have questions about the special Gulf Coast provisions, or the education credits in general, please give us a call.

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New Recordkeeping Rules for Cash Donations

Prior to this new law change, for cash contributions less than $250, taxpayers were only required to have a contemporaneous record of the contributions. Under the new tax law taking effect in 2007, and effective for tax years after 2006, for contributions of money, regardless of the amount, applicable recordkeeping requirements are satisfied only if the donor maintains as a record of the contribution a:

• Bank record, or

• Written communication from the donee showing:
o The name of the donee organization,
o The date of the contribution, and
o The amount of the contribution.

The recordkeeping requirements may not be satisfied by maintaining other written records. This means that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Donations by debit or credit card can be substantiated by bank records.


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Tax-Free IRA Distributions for Charitable Purposes

Example: Retired couple (both over 70½) file a joint return. Their income consists primarily of RMD from their IRA accounts totaling $35,500, both of their SS incomes totaling $28,000, and $2,000 of investment income. They are very active with their church and make a $14,000 contribution each year. They have no other income or deductions. Compare the 2006 results with and without a qualified charitable distribution:

IRA (RMD) Distributions	$35,500	<14,000>	$21,500
Taxable SS Incomes ($28,000 Total)	12,375	Qualified charitable distribution	2,750
Investment Income	2,000		2,000
AGI	49,875		26,250
Church Contribution/Std Deduction	<14,000>		<12,300>
Personal Exemptions	<6,600>		<6,600>
Taxable Income	$29,275		$7,350
Tax	$3,636		$ 735

In this example, instead of making a charitable contribution, the taxpayer made a qualified charitable distribution of $14,000, lowering their AGI, reducing their taxable SS and then using the standard deduction. Result: Tax savings of $2,901.

Since this new law benefit was not passed into law until late in 2006, many taxpayers may have already made their contribution directly to their charities. Those individuals, who have already made the 2006 contributions without considering this new benefit, might consider funding their 2007 charity donations in advance using this technique and then making the 2008 charity donations in advance in the latter part of 2007. Of course, you must also consider how this might affect your Required Minimum Distributions for both years.

We want to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income, and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations.

Please call this office before attempting to execute this strategy.


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Making IRA Contributions With Your Refund

IRS Has Refund for 95,746 Taxpayers – Undeliverable Checks

Securities and Taxes: Ways to Minimize the Impact

2006 has been a volatile year for the securities market, making year-end tax strategies more important than ever. Here are some capital gains strategies to consider before the year’s end.

If you have net gains – If you have net gains from the sale of securities (including any capital loss carryovers from the prior year), you may wish to review your portfolio for securities that will produce a loss to offset those gains. A good tax strategy is to sell enough losers to offset the net gains, plus an additional $3,000 loss, which is the maximum net loss that can be used to offset other income in any one year.

If your 2006 income is low – The tax rate on long-term capital gains is based on your tax bracket for the year. If you are in the 15% tax bracket or below, the long-term capital gains rate is only 5% instead of 15%. Thus, it may be an appropriate strategy to take long-term gains up to the threshold of the 15% tax rate.

If you have net losses – If you have net losses from prior sales and carryovers, then you have the opportunity to take some profits from your portfolio that have gained in value up to the amount of the net losses without any tax consequences. To fine-tune this strategy, you may wish to take only enough gains to offset all but $3,000 of the losses, which will provide a $3,000 deductible loss on your 2006 return.

These are just a few of the year-end strategies that can make a substantial impact on your tax for the year. To discuss these and other strategies that can be put in place before the year’s end, please give this office a call.

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BUSINESS & MANAGEMENT PRACTICES

IRS Provides Simplified Method for Business Phone Excise Tax Refund

IRS has announced (IR 2006-179) a formula that will allow businesses and tax-exempt organizations to estimate the amount of refund they are entitled to for federal telephone excise tax paid for long-distance telephone service.


Businesses and tax-exempt organizations can figure their refund amounts by comparing two telephone bills to determine the percentage of their telephone expenses attributable to the long-distance excise tax. The bills they should use are the bills with statement dates in April and September 2006. They must first figure the telephone tax as a percentage of their April 2006 telephone bills (which included the excise tax for both local and long-distance service) and their September 2006 telephone bills (which included only the tax on local service). The difference between these two percentages should then be applied to the quarterly or annual telephone expenses to determine the amount of their refunds. The refund is capped at 2% of the total telephone expenses for businesses and tax-exempt organizations with 250 or fewer employees. The refund is capped at 1% for those with more than 250 employees.

Example: Business X has an Apr. 2006 telephone bill of $1,000, which includes a telephone excise tax of $28. The tax percentage is 2.8% ($28 ÷ $1,000). If the Sept. 2006 bill is $1,100 including a telephone excise tax of $16.50, the tax percentage is 1.5% ($16.50 ÷ $1,100). X's long-distance excise tax percentage is 1.3% (2.8% for Apr. minus 1.5% for Sept.). The business multiplies 1.3 percent by its total phone expenses over the 41-month period to arrive at the amount of its refund. If X had more than 250 employees, its refund is limited to 1% of its total phone expenses for the period. If the business had 250 or fewer employees, the 2% cap would apply and would not limit the amount of the refund.

Alternatively, telephone expenses can be estimated based on the amounts reported as business-related telephone expense on tax returns for tax years 2003 through 2006 (prorating the telephone expense for a particular year if part of the year falls outside the 41-month refund period).

The formula can be used even if the organization or business only operated for part of the 41-month period. However, a refund can only be requested for months for which the telephone tax was paid. If the entity was not in business or operating April through September 2006, the formula cannot be used.

IRS notes that use of the formula is optional. Any business or tax-exempt organization can request a refund based on the actual amount of long-distance excise tax billed during the 41-month period.

We have provided two worksheets for determining the business or tax-exempt entity excise tax refund:

• Business Simplified Method

• Business Actual Method

We highly recommend that the data for either the actual or the simplified method be accumulated prior to your tax appointment so as not to delay or cause a distraction during the appointment. If you have questions, please give this office a call.



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Don’t Overlook This Business Deduction!

During 2006, the IRS issued a barrage of new guidance related to the domestic production activities deduction. This deduction, which was created to encourage manufacturing and production within the U.S., is at times confusing, but it provides a beneficial business deduction equal to 3% of the lesser of net income from qualified production activities or 50% of the W-2 wages paid to employees properly allocated to the domestic production activity.

The deduction percentage increases to 6% for 2007 through 2009 and then jumps to 9% after 2009. Thus, it represents a sizeable business deduction that can have a substantial impact on your tax bottom line.

With the new guidance, the IRS reversed earlier positions, now allowing:

Gross receipts from providing software for a customers' direct use while connected to the Internet to be treated as derived from a qualifying disposition.

Gross receipts derived from materials and supplies consumed in a construction project to be included in domestic production gross receipts from the construction of real property.

Generally, the deduction is allowed to all taxpayers, including individuals, corporations, farm cooperatives, estates and trusts. The deduction is passed through to owners of partnerships, S-corporations and cooperatives, allowing them to deduct it on their own returns.

The following is an example of how this deduction works. Suppose your business manufactures a product which you wholesale to retailers. Your net income from sales of that product for the year is $800,000 and the wages you paid to your employees to manufacture that product totaled $100,000. Your deduction would be the lesser of 3% of the $800,000 in revenue or 50% of the $100,000 wages. Thus, your businesses domestic production activities deduction would be $24,000 (.03 x $800,000).

The IRS guidance also provides simplified methods of determining the deduction. If you need assistance in setting up your accounting to accommodate this deduction, please give this office a call.

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Frequently Overlooked Business Deductions

When rounding up the business deductions for the year, small business owners often will overlook expenses that are partially personal and attributable to business. Here is a brief rundown of such expenses:

Business Vehicle Interest – Generally, consumer interest is not deductible except when associated with the purchase of an asset for business. Most vehicles used by small businesses also are used personally, so some portion of the interest on the purchase of the vehicle is allocable as a business expense.

Business Vehicle Taxes and Licenses – The vehicle license fee and personal property taxes also would be allocated in the same manner as the interest.

Medical Insurance – Self-employed individuals, to the extent of the profits from their business, may deduct the cost of medical insurance premiums above-the-line. Although most taxpayers immediately think of hospital and medical insurance, many overlook dental insurance, Medicare-B and -D premiums, and long-term care insurance.

Tax Preparation and Counseling – If your business income and expenses are reported on Schedule C as part of your overall individual tax return, then some portion of the preparation fee can be allocated as a business deduction. The allocation amount will depend upon the complexity of the Schedule C as related to the personal parts of the return.

Tips – While the tips for waiters and waitresses are generally included in the meal charge, there are a number of tips that are paid out-of-pocket in cash, and if they are paid as a part of a business event or trip, they are deductible. Don’t overlook the skycap, parking attendant, hotel bellman, taxi driver, hotel shuttle bus driver, etc.

Parking, Tolls, Etc. – Like some tips, parking fees and tolls usually are paid in cash out-of-pocket. Don’t overlook them, because they can become substantial throughout the course of the year.

Loss From the Sale of a Business Asset – If, during the year, you dispose of, scrap, or sell a business asset for less than the depreciated basis, that disposition would result in a taxable loss. Generally assets that are used in a small business decline in value quickly, but should the disposition result in a gain, it must be reported.

Hopefully, these examples will help you think of other overlooked business deductions. If you have a question, please give this office a call.


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Is that Holiday Turkey Deductible?

It has become common practice for business people to give their customers and employees gifts during the holiday season. One would think that such gifts would be allowable as a business tax deduction. However, it is a little more complicated than that, and the rules are actually quite different for customers and employees.

For Customers: The tax law allows ordinary and necessary business gifts, but it does impose an annual limit of $25 to any one individual. Seem like a small dollar amount? It is, because that amount has been the limit as far back as most can remember and has not been adjusted for inflation, thus making it difficult to keep reasonable business gifts under the limit. The law does allow an additional gift amount, not to exceed $4, for items of general distribution and on which the giver's name is clearly and permanently imprinted.

For Employees: The tax law specifically denies a deduction for gifts of any kind to employees except what is termed “de minimis fringe benefits” for promoting goodwill. This would include items of general distribution such as hams, turkeys, or other items of nominal value during holiday periods. But if the gifts are cash, gift certificates or similar items of readily convertible cash value, the value of the gifts is additional wages or salary, regardless of the value.

To substantiate business gift expenses (other than employee compensation), records must show: (1) a description of the gift, (2) the taxpayer's cost, (3) when the gift was made, (4) the occupation or other information about the gift’s recipient, including name, title, or other information to establish the business relationship, and (5) the business reason for making the gift or benefit derived or expected.


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GENERAL INFORMATION

Purchasers of GM Hybrids Still Qualify for Tax Credit

The Internal Revenue Service announced that purchasers of General Motors Corp. and American Honda Motor Company qualified vehicles may continue to claim the Alternative Motor Vehicle Credit. The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold.


GMC sold 812 qualifying vehicles to retail dealers in the quarter ending Sept. 30, 2006. This brings the cumulative number of qualified GMC hybrid vehicles sold to 2,200. The credit amount and make and model of qualified vehicles sold are:

• Chevrolet Silverado Hybrid 2WD, Model Years 2006 and 2007 — $250
• Chevrolet Silverado Hybrid 4WD, Model Years 2006 and 2007 — $650
• GMC Sierra Hybrid 2WD, Model Years 2006 and 2007 — $250
• GMC Sierra Hybrid 4WD, Model Years 2006 and 2007 — $650
• Saturn Vue Green Line, Model Year 2007 — $650

Purchasers of GMC’s qualified vehicles may continue to rely on the certifications concerning the vehicles’ qualification for the credit.

Honda sold 9,912 qualifying vehicles to retail dealers during the quarter ending Sept. 30, 2006. The credit amount and make and model of qualified vehicles sold are:
• Honda Accord Hybrid, Model Year 2006* - $1,300
• Honda Accord Hybrid Navi Model Year 2006* - $1,300
• Honda Civic Hybrid Model Year 2006 - $2,100
• Honda Insight Model Year 2006 - $1,450

* 2006 Honda Accord Hybrid and Navi without updated calibration qualify for a credit of $650.

This brings the total number of qualifying Honda hybrid sales, as of Sept. 30, 2006, to 28,408. Purchasers of Honda’s qualified vehicles may continue to rely on the previously issued IRS certifications concerning the vehicles’ qualification for the credit.

Taxpayers may claim the full amount of the credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.

If you have questions, please give this office a call.



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10 Tax Planning Strategies for the Year's End

The following are some of the many possible strategies that can be employed before the year's end that can help achieve tax savings for 2006.

State Estimated Tax Payments – Taxpayers have until January 15th of 2007 to make the 4th quarter 2006 state estimated tax payment, but if that payment is made before the end of December 2006, the payment will count as a tax deduction on their federal Schedule A for 2006.

Property Taxes – Generally, property taxes are billed in installments and that’s how most people pay them. However, the tax can be paid all at once if it provides a greater tax benefit for the current year.


Caution: The preceding two strategies do not benefit taxpayers who are subject to the alternative minimum tax (AMT), since taxes are not deductible for AMT purposes. These taxpayers might consider deferring deductible tax payment to the subsequent year.

Required Minimum Distributions (RMD) – If you are 70 ½ or older, make sure you have withdrawn the minimum distribution amount from your IRA or other qualified plans to avoid the 50% penalty for under-withdrawals.

IRA Withdrawals – If you are retired and taking IRA distributions, make sure you are maximizing your withdrawal with respect to your tax bracket. It may be tax-effective to actually withdraw more than is needed. If you are drawing Social Security, IRA distributions sometimes can be planned to minimize the taxability of the SS income.

Bunch Deductions – If you marginally are able to itemize each year, it may be appropriate to “bunch” deductions in one year, and then claim the standard deduction in the alternate year.



This technique frequently can be applied to tax payments, charitable contributions, some medical expenses, and to certain business expenses.

Roth IRA Conversions – If your taxable income is low or a negative amount for the year, it may be appropriate to convert your taxable traditional IRA to a Roth IRA for little or no tax cost.

Review Estimated Tax Payments – Ensure they are sufficient to meet the “safe-harbor” payment amounts and avoid underpayment penalties. This is especially important for taxpayers with windfall income form bonuses, property sales, etc.

Profits from Stock Sales – If you have net profits from the sale of stocks or other capital assets during the year, you should consider selling holdings that will produce losses to offset those gains and even produce a loss up to $3,000.

Education Credits – If you qualify for one of the higher education tax credits and have not paid enough tuition during the year to achieve the maximum credit, the law allows you to prepay tuition for an academic period beginning within the first three months of the next year and claim the tuition for the current year’s credit.

Business Deductions – Business owners can purchase and place into service before the year’s end equipment needed for the business and utilize the Section 179 expense allowance to write-off the entire cost of the equipment in 2006. There are some limitations.

If you would like to discuss how any of these or other possible tax strategies might apply to you, please call this office.

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Car and Truck Expense Deduction Reminders

The Internal Revenue Service in Fact Sheet (FS-2006-26) reminds taxpayers to become familiar with the tax law related to deducting car- and truck-related business expenses.

Deductible Car and Truck Expenses - Ordinarily, expenses related to the use of a car, van, pickup or panel truck for business can be deducted as transportation expenses. Use of larger vehicles, such as tractor-trailers, is treated differently and is not part of this discussion. In order to claim a deduction for the business use of a car or truck, a taxpayer must have ordinary and necessary costs related to one or more of the following:

• Traveling from one work location to another within the taxpayer’s tax home area. (Generally, the tax home is the entire city or general area where the taxpayer’s main place of business is located, regardless of where he or she resides.)

• Visiting customers.

• Attending a business meeting away from the regular workplace.

• Getting from home to a temporary workplace when the taxpayer has one or more regular places of work. (These temporary workplaces can be either within or outside taxpayer’s tax home area.)

Expenses related to travel away from home overnight are travel expenses. However, if a taxpayer uses a car while traveling away from home overnight on business, the rules for claiming car or truck expenses are the same as stated above.

It is important to note that costs related to travel between a taxpayer’s home and regular place of work are commuting expenses and are not deductible.

Taxpayers can choose to use either the standard mileage rate or actual expenses to compute their allowable business deduction. They may want to figure the deduction using both methods to see which provides a larger deduction.

Standard Mileage Rate Method - The standard mileage rate may be used to figure the deductible costs of a vehicle that is owned or leased. If a taxpayer wishes to use the standard mileage rate for a leased vehicle, it must be used for the entire lease period.


In other words, a taxpayer must use the standard mileage rate for the first year a vehicle is available for business use in order to use the standard mileage rate in subsequent years.

The standard mileage rate is adjusted annually by the IRS to reflect changes in the cost of operating a vehicle. In some situations it is adjusted during the year. The 2006 standard mileage rate is 44.5 cents per mile.

The standard mileage rate is used in place of actual expenses. Taxpayers who choose the standard mileage rate may not deduct actual expenses, such as depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance or vehicle registration fees. Business-related parking fees and tolls may be deducted in addition to the standard mileage rate. Fees for parking at a taxpayer’s main place of business or tolls related to commuting to and from that main place of business are personal expenses which are not deductible.

The standard mileage rate cannot be used if the taxpayer:
• Uses the car for hire (such as a taxi).
• Uses five or more cars at the same time (as in fleet operations).
• Claims depreciation or a Section 179 deduction.
• Is a rural mail carrier who receives a qualified reimbursement.

Actual Expenses Method - Actual car or truck expenses include:
• Depreciation
• Lease payments
• Registration fees
• Licenses
• Gas
• Insurance
• Repairs
• Oil
• Garage rent
• Tires
• Tolls
• Parking fees

These and other expenses are discussed in detail beginning on page 16 of Publication 463. If business use of the vehicle is less than 100 percent, expenses must be allocated between business and personal use. Only the business use percentage of each expense is deductible.

For example, if, based on records maintained by a taxpayer, total actual vehicle expenses for a given year are $2,500 and the vehicle is used 75 percent for business, the allowable deduction using the actual expense method is $1,875 ($2,500 x 75 percent).

Recordkeeping - It is important to keep complete records to substantiate items reported on a tax return. In the case of car and truck expenses, the types of records required depend on whether the taxpayer claims the standard mileage rate or actual expenses.


To claim the standard mileage rate, appropriate records would include documentation identifying the vehicle and proving ownership or a lease and a daily log showing miles traveled, destination and business purpose.

For actual expenses, a mileage log helps establish business use percentage. Taxpayers should also retain receipts, invoices and other documentation to show cost and establish the identity of the vehicle for which the expense was incurred. For depreciation purposes, they need to show the original cost of the vehicle and any improvements, as well as the date it was placed in service.

If you have questions regarding business auto expenses, please call this office.

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BRIEFS

2007 Mileage Rates Announced

On November 1st, in Revenue Procedure 2006-49, the IRS issued standard mileage rates (cents per mile) to begin on January 1, 2007. They are as follows:

o Business Rate - 48.5
o Business Imputed Depreciation Amount - 19.0
o Moving Rate - 20.0
o Medical Rate - 20.0

The rate for charity is set by statute (is not inflation adjusted) and will remain at 14.0 cents per mile without Congressional action.

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Telephone Excise Tax Refund Also Applies to Taxpayers Not Required to File Tax Returns

After numerous court losses, the IRS decided earlier in the year to stop collecting the long-distance portion of the federal telephone excise tax and refund the long-distance portion of the federal telephone excise tax for service billed after February 28, 2003 and before August 1, 2006.

The IRS created a simplified procedure to refund the excise tax from non-business phone bills by allowing standard refund amounts to be claimed on the 2006 tax returns. Thus, most individuals will claim the refund on their 2006 federal income tax returns (Forms 1040, 1040A, 1040NR or 1040EZ).

However, there are taxpayers who are entitled to the refund but are not required to file a tax return for the year. For these individuals, the IRS has developed a special form 1040EZ-T to claim the refund.

The simplified refund amounts start at $30 and rise to $60.

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Lower Your Profits With Year-End Equipment Purchases

A strategy frequently employed by businesses with profits is to acquire additional equipment at the end of the year. This allows them to increase their write-offs and reduce the profits for the year. If you find your business in such a position, there are a few tax quirks you need to be aware of so your strategies will not go astray.

Depreciation – For small to medium-sized businesses, the depreciable life of assets is generally 5 or 7 years. The following are some examples:

• Five-year property: Computers, typewriters, copiers, duplicating equipment, heavy trucks, trailers, cargo containers, autos, light-duty trucks, certain technological and research equipment

• Seven-year property: Office furnishings, fixtures and equipment

Equipment purchased for your business is depreciated under the modified accelerated cost recovery system (MACRS) half-year convention. Thus, the first year it is placed in service, you receive half year’s depreciation at an accelerated rate. However, if more than 40% of the equipment (assets) is purchased in the last quarter of the year, the mid-quarter convention applies and each asset must be depreciated using the mid-quarter rate for the quarter it was originally placed in business service. The table below illustrates the first-year depreciation rates (%) for 5- and 7-year class property.

For example, you purchase a 5-year life property in December 2006 for $40,000, and it represents more than 40% of all MACRS assets placed in service during the year. Because you are required to use mid-quarter rates, your depreciation for the year would only be $2,000 ($40,000 x .05). Had it been purchased mid-year, the depreciation would have been $8,000 ($40,000 x .20).

Expense Deduction – Generally, you may also elect to expense as much as $108,000 of tangible personal property placed in service during the year using the Section 179 expense election. You can expense as much of the asset as you choose and then depreciate the balance. Thus, for the $40,000 property used in our example, you can control the amount of the deduction to offset anywhere between $2,000 and $40,000 of business profits for the year. The $108,000 cap is reduced once the $430,000 investment limit for 2006 is exceeded.

Vehicles – The same standard does not apply universally to all vehicles purchased for business use since those weighing 14,000 pounds or less are generally limited by the luxury auto rules, which provide a maximum of only $2,960 combined depreciation and expense deduction for the year. There are exceptions for certain specially modified vehicles and certain SUVs.

If you would like assistance in planning and maximizing your year-end purchases, please call our office.

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