Tax & Business Strategies Monthly Newsletter - July 2007

Tax Planning Strategies
Congress Changes the Kiddie Tax Again!
What's Best...Tax-Free or Taxable Interest Income?
Sec. 179 Expensing Election Amount Increased
New Tax Law Expands and Extends the Work Opportunity Tax Credit

Business & Management Practices
Employee Incentive Awards are Taxable Fringes
Big SUV Write-Offs May Soon End!

General Information
Settlement with Stockbroker Yielded Capital Gain
CA Early Distribution Penalty Deductible as a Tax
2004 Tax Statistics Show Why Congress has Curtailed Charitable Contributions
Spouses May Elect Out of Partnership Rules

Briefs
IRS Fee for Bad Check or Money Orders
Find Lost Money

TAX PLANNING STRATEGIES

Congress Changes the Kiddie Tax Again!

In the past couple of years, Congress has been tinkering with the Kiddie Tax rules. Beginning in 2006, they raised the age of children who are subject to the Kiddie Tax from under the age of 14 to under the age of 18. Now, another law change raises the age again, beginning with tax year 2008. The effect of these recent changes will be increased taxes for many middle-income and wealthy families who thought they were planning prudently for financing their children’s college education.

The purpose of the Kiddie Tax is to keep parents from placing investments in a child’s name to take advantage of the child’s lower tax rates. Thus, under the Kiddie Tax rules, a child’s investment (unearned) income in excess of an inflation-adjusted amount is taxed at the parent’s top tax rate, while the child’s earned income, such as wages, is taxed at the child’s own marginal tax rate.

To avoid the negative effects of the Kiddie Tax, it has been a popular higher-education funding tax strategy for parents to transfer appreciated capital assets, such as stock, to a child to be sold after the child was out from under the Kiddie Tax rules – initially age 14, then age 18 after the 2006 rules change. This strategy looked to be especially attractive for years 2008 through 2010 when the tax rate for long-term capital gains (and qualified dividends) drops to zero for taxpayers in the 15% or lower marginal rate. Parents of unmarried children, age 18 to 23, who are full-time students, expected that the children would also be able to enjoy the lower capital gains rates.

However, Congress has essentially closed this loophole by subjecting children through age 18 and full-time students, age 19 to 23, to the Kiddie Tax rules, beginning in 2008. Another change to the rules may prevent some of these older children from falling into the Kiddie Tax trap; if the child’s earned income exceeds one-half of the child’s support, the Kiddie Tax rules won’t apply. Support includes items such as clothing, education (but not scholarships), food, transportation and lodging. Because of these impending changes, a parent may want to reconsider any planned transfers of income-generating stocks, bonds, and other investments to children age 18, or those age 19-23 who are full-time students. However, placing or moving a child's funds into investments that produce little or no current taxable income can help avoid the Kiddie Tax, at least in the years until the investments need to be sold or redeemed to pay for the education expenses. These investments include:

• U.S savings bonds – Interest can be deferred until the bonds are cashed.

• Tax -deferred annuities - Interest can be deferred until the annuity is surrendered.

• Municipal bonds – Generally produce tax-free interest income (may be taxable to the state).
• Growth stocks - Stocks that focus more on capital appreciation than current income.

• Unimproved real estate – That provides appreciation without current income.

If the family has a business, that family business could employ the child. The child’s earned income is not subject to the Kiddie Tax and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child’s earned income can offset the standard deduction for a dependent and the excess income will be taxed at the child’s rate (not the parent’s). In addition, the child would also qualify for an IRA, which provides additional income shelter.

Please call us if you would like to learn more about possible strategies that would help you avoid the expanded Kiddie Tax.

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What's Best...Tax-Free or Taxable Interest Income?

A frequent taxpayer question is whether it is better to invest for tax-free or taxable interest. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. Therefore, the question is really which provides the greater "after-tax" return. Generally, interest derived from “municipal bonds” is tax-free for federal purposes and also tax-free for a particular state if the bonds are issued by that state or its local governments. In addition, interest from U.S. Government Bonds cannot be taxed by any state.

The following are issues related to making a decision on taxable or tax free income:

• Municipal Bond Interest – Interest earned from general purpose obligations of states and local governments, which are issued to finance their operations, are generally tax-exempt for Federal purposes. However, the various states usually only exempt interest from bonds issued from the state itself and local governments within the state. Hence, there are two categories of municipal bonds, namely the tax-free Federal and state and the tax-free Federal only. Individuals can invest in municipal bonds by directly purchasing a bond or through funds that invest in municipal bonds. Some mutual funds invest in bonds issued in a particular state only, providing residents of that state with income that is excludible on their state’s return.

In general, tax-free bonds are likely to be more attractive for taxpayers in higher brackets, since they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, on the other hand, the tax benefit from excluding interest from income may not be enough to make up for the lower interest rate generally paid on this type of bond.

Even though municipal bond interest isn't taxable, it must be shown on the return. This is because tax-exempt interest is taken into account when determining the amount of social security benefits that's taxable, and may affect the alternative minimum tax computation, as well as the earned income credit, investment interest deduction and sales tax deduction.

• Tax-Deferred Retirement Accounts - It generally doesn't make sense to buy and hold municipal bonds in your regular IRA, Keogh, or 401(k) plan account. The income in these accounts isn't taxed currently, but once you start making withdrawals, the entire amount withdrawn is likely to be taxed. Thus, if you want to invest your retirement funds in fixed income obligations, it is advisable to invest in higher-yielding taxable securities.

• Alternative Minimum Tax Consequences - Even though interest on municipal bonds is generally excluded from income for purposes of the regular federal income tax, interest on certain “private activity bonds” is included in income for purposes of the alternative minimum tax. Your broker can tell you whether the particular bond you are considering is a private activity bond subject to this rule.
The alternative minimum tax is a separate tax system that applies if the tax determined under that system exceeds your regular income tax. Whether or not the alternative minimum tax applies will depend on your overall tax picture; however, in general, the effect of the alternative minimum tax would be to prevent you from achieving too low an effective tax rate by means of tax-favored techniques, such as investing in municipal bonds. We can help you determine how the alternative minimum tax would apply to your situation, and how it would affect the after-tax yield if you were to invest in municipal bonds.

• Effect of Exempt Interest on Taxation of Social Security Benefits - In general, a portion of social security benefits is taxable if your adjusted gross income, subject to certain modifications, exceeds specified amounts. For this purpose, the modifications to adjusted gross income include adding in tax-exempt interest. The effect of this rule is that, if you receive social security benefits, investing in municipal bonds could increase the amount of tax you have to pay with respect to the social security benefit. While technically the municipal bond interest remains exempt from tax, the effect is the same as though a portion of that interest were taxable. One technique to solve this problem is to invest in tax-deferred, rather than tax-free, investments. For instance, income earned by an annuity is not taxable until the annuity is cashed in and thus would not impact the social security taxation except in the year cashed in.

• Effect of Exempt Interest on Earned Income Credit - If you are otherwise eligible to take an earned income credit, you will lose the credit completely for 2007 if you have more than $2,900 of “disqualified income” (generally, interest, dividend, non-business rental, passive, and capital gain net income). Disqualified income includes tax-exempt income. Thus, municipal bond income could cause loss of the credit. However, in most cases, an individual who is eligible for the earned income credit will be in a low tax bracket, thus making municipal bonds an unattractive investment in view of their lower yield. Disqualifying income can be avoided by using tax-deferred investments, as discussed under Social Security Benefits above.

• No Deduction for Interest on Obligations Incurred in Connection with Tax-Exempt Investments - If you borrow money for the purpose of investing in municipal bonds, you can't deduct the interest expense with respect to that borrowing. Moreover, even if the proceeds of borrowing aren't directly traceable to tax-exempt investments, interest deductions could be disallowed if the IRS could establish that you continued the borrowing in effect (that is, you didn't pay it off) for the purpose of acquiring or carrying the municipal bonds. If you have otherwise deductible interest and invest in municipal bonds, the result of this rule, by denying a deduction for interest paid, could be effectively to tax the municipal bond interest.

• No Deduction for Investment Expenses Related to Tax-Exempt Investments - If you itemize your deductions, you may deduct the costs of investment advisory, custodial or agency fees, if your total miscellaneous deductions exceed 2% of your income. However, if the investment management services you paid for are connected to the account from which you receive tax-exempt income from municipal bonds or mutual funds, the related expenses are not deductible.

• Sale, Call or Redemption of Bond - Normally, the sale, call before maturity, or redemption of a municipal bond is treated the same as a taxable bond. If you held the bond long enough, any gain is taxed at favorable rates. Capital losses can be used to offset other capital gains. Up to $3,000 of any remaining losses can generally be applied against other income, with a carryover of any excess to later years.

• U.S. Government Bond Interest – By Federal law, the interest income of direct obligations of the U.S. Government cannot be taxed by the states (but it is federally-taxed). This includes interest from U.S. Savings Bonds, U.S. Treasury bills, notes, bonds, or other obligations of the United States. Interest earned from the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage (FHLMC) Corporations are not direct obligations of the U.S. Government, and therefore, are not excludable from state taxation unless specifically allowed by state law (generally not the case). If you reside in a state with no state income tax, U.S. Government Bond Interest provides no tax benefit.

• Itemized Deductions - If you do have a state tax and the investment is tax-free in your state, then it also makes a difference whether or not you itemize your deductions on your Federal return. When you do itemize deductions, the state income tax you pay is included as a deduction on your Federal return. Since having state tax-free income reduces your state tax, the reduced state tax lowers your itemized deductions and increases your Federal tax.

• Municipal Bond Funds - If you are looking for diversity and professional management for your municipal bond holdings, you may want to consider buying shares of a fund that invests in tax-exempt municipal bonds. These funds may be broadly based or targeted to the bonds of a particular state. Some “high yield” (junk-bond) municipal bond funds are also available. These dividends are treated essentially the same as municipal bond interest. To preclude a potential tax loophole, if an investor buys mutual fund shares, receives an exempt-interest dividend, and then sells the shares at a loss within six months after the purchase, the loss is disallowed to the extent of the exempt-interest dividend.

Use the worksheet below to determine the tax-exempt interest equivalents for your particular tax bracket, state tax (if applicable), and type of tax-exempt in investment. Enter all rates in decimal format. For example, 5.75% would be entered as .0575. Carry all calculated values to at least 4 places after the decimal.

Please call this office if you would to like assistance deciding whether to make a taxable or tax-free investment. Making the right decision for your particular circumstances can have a significant effect over a long period of time.

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Sec. 179 Expensing Election Amount Increased

Generally, the cost of a business asset that is expected to last more than one year cannot be expensed in the year purchased. Instead, the business asset’s cost must be written off (depreciated) over its useful life. However, the tax code allows a certain amount of newly-purchased personal tangible assets to be written off annually without having to depreciate them over their useful lives. This deduction is commonly termed the Sec. 179 Deduction, which refers to the tax code section that enables it. Generally, personal tangible assets refer to machinery and equipment as opposed to real property. Vehicles used a majority of the time for business are eligible for the Sec. 179 deduction, but special caps apply and are not discussed in this article.

As part of the Small Business and Work Opportunity Act of 2007 signed into law by the President on May 25th, the annual Section 179 Expensing was increased to $125,000, beginning in 2007. If investment in qualifying Sec. 179 property exceeds an annual limit, the deduction is reduced. In the new law, the deduction phase-out threshold was increased to investments totaling $500,000, beginning in 2007. Both of the limits will be adjusted for inflation for years 2008 through 2010. After 2010, the amounts will revert to prior limits: $25,000 annual deduction and $200,000 annual investment, barring any legislation to extend the higher limits.

As part of the same legislation, the right to revoke or change the Section 179 Expensing election and any specification contained in the election was extended for one more year. This benefit had been scheduled to expire after the end of 2009 and has been extended through 2010. In addition, the inclusion of off-the-shelf computer software in the definition of items qualifying for the Sec. 179 expense deduction was also extended through 2010.

Taxpayers who are subject to the Alternative Minimum tax (AMT) are limited to using the 150% depreciation method in computing the AMT, while the 200% rate can be used for the regular tax computation. Thus, taxpayers who are subject to the AMT will have the difference between the depreciation computed using the 200% rate and the 150% rate added back to their AMT income. Strategies to avoid this AMT adjustment include:

• Using the 150% depreciation for regular tax, or

• Utilizing the Sec. 179 deduction to write-off part or all of an asset in the current year, since the Sec. 179 deduction is the same for both the regular tax and AMT computation and produces no AMT income.

There are some ancillary effects of utilizing the Sec. 179 deduction: (1) if the asset is used partially for business and personal use, such as a computer, any decrease in business use during the subsequent depreciable life of the asset will trigger recapture of some of the Sec. 179 deduction, and if the business use drops below 50%, then all of the Sec. 179 deduction in excess of the normal depreciation for the asset will be recaptured. If the deduction was originally claimed as an expense by a self-employed taxpayer, the recaptured amount is added back to self-employment income subject to self-employment tax. (2) Utilizing the Sec. 179 deduction can create a significant decrease in income for the year, thus reducing the-self employment tax and possibly reducing the amount that can be contributed to a self-employment retirement plan.

Bottom line, the decision to utilize the Sec. 179 deduction can have both positive and negative tax effects and many times requires multi-year planning. In addition, if your state has a state income tax, the maximum deduction for the state may be different. For example, California only allows a maximum deduction of $25,000 for Sec. 179 each year. We strongly urge clients to consider all the potential effects both in the current and subsequent years. Please call for assistance in planning your Sec. 179 expense deductions.

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New Tax Law Expands and Extends the Work Opportunity Tax Credit

Employers can qualify for a tax credit known as the work opportunity tax credit (WOTC) that is worth as much as $2,400 for each eligible employee (higher amounts for certain veterans and other special categories). The credit is available on an elective basis for employers hiring individuals from one or more of nine targeted groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer.

The recent passage of the Small Business and Work Opportunity Tax Act made some significant changes to the provisions of the WOTC:

• AMT - The WOTC will offset the Alternative Minimum Tax (AMT).

• Extended by 44 Months - The WOTC is extended by 44 months to Aug. 31, 2011 for most targeted groups. Historically, this credit has been renewed by Congress on a temporary or year-by-year basis, and had been scheduled to expire at the end of 2007. More employers may now take advantage of the credit, because they will have more time to include the targeted hirees in their strategic planning. It is effective for individuals who begin work for the employer after May 25, 2007.

• High-Risk Youth WOTC - The WOTC requirements are eased for so-called “high-risk youths” who begin work for the employer after May 25, 2007. These changes should especially benefit employers in “rural renewal counties,” which are counties outside of metropolitan areas that had a net population loss in the 1990s.

(1) Substitutes “designated community residents” for “high-risk youths” as a “targeted group,”

(2) Substitutes a definition of a designated community resident for the definition of a high-risk youth by providing that a “designated community resident” is an individual who is certified by the designated local agency as having attained age 18 but not age 40 on the hiring date, and as having his principal place of abode within an empowerment zone, enterprise zone, renewal community or rural renewal county and

(3) For a designated community resident, wages that qualify for the WOTC don't include wages paid or incurred for services performed while the individual's principal place of abode is outside an empowerment zone, enterprise community, renewal community or rural renewal county.

• Expanded “Ticket to Work” - A provision expanding the WOTC to cover “Ticket to Work” plan participants is effective for individuals who begin work for the employer after May 25, 2007. The Act adds, as a third qualifying format, an individual work plan developed and implemented by an employment network with respect to which the requirements of Social Security Act are met.

• Disabled Veterans - The WOTC is enhanced for employing certain disabled veterans who begin work for the employer after May 25, 2007. The Act provides that a “qualified veteran” is an individual who is a veteran and is certified by the designated local agency as:

(1) Meeting the Food Stamp requirement, or

(2) Entitled to compensation for a service-connected disability, and

o Having a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or

o Having aggregate periods of unemployment during the one-year period ending on the hiring date that equal or exceed six months (the compensation-for-disability requirement).

If you think you qualify for this credit, or would like to discuss how taking advantage of it might benefit your business, please give us a call.

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BUSINESS & MANAGEMENT PRACTICES

Employee Incentive Awards are Taxable Fringes

If you, as an employer, provide incentives as a way to award top-performing employees for extraordinary accomplishments, you need to keep in mind that they are considered taxable fringe benefits. Thus, awards such as merchandise or a vacation trip are non-cash fringe benefits that are taxable to the employee and deductible by you, the employer, as compensation. The fair market value of the award should be shown as wages on the employee's W-2.

Since these awards are treated as supplemental wages, employers must, under the general rules, withhold income, Social Security and Medicare taxes and deposit the withheld taxes, along with employer-matching amounts, in the same deposit period they were treated as paid. Note: If you, as the employer, pay the withholding taxes on the incentive award for the employee, then those amounts are also considered compensation.

Under the optional flat-rate procedure, for federal purposes, employers withhold on supplemental wages at the third lowest tax rate for single filers, which is currently 25%. However, if a supplemental wage payment, when added to all other supplemental wage payments previously made by the employer to the employee during the calendar year exceeds $1 million, the excess is subject to mandatory withholding at the highest income tax rate in effect for that year. The highest rate is currently 35%. Withholding of state income taxes generally will also be required.

Employers may treat taxable non-cash fringe benefits as paid by the pay period, by the quarter, or on any other basis as long as they are treated as paid at least once a year. However, this rule does not apply to:

(1) The transfer of tangible or intangible personal property of a kind normally held for investment; or

(2) The transfer of real property.

In these situations, the actual property transfer date is used in determining when the benefit was “paid.”

Non-Cash De Minimis Fringes - The incentive award rules don't apply to non-cash employee achievement awards of tangible personal property made for length of service or safety. Such awards are deductible by the employer, and excludible by the employee, within certain limits. Additionally, non-cash de minimis fringes, such as traditional birthday or holiday gifts of property with a low fair market value, or occasionally gifts of theater or sporting event tickets, are deductible by the employer and tax-free to the employee.

If you have any questions about employee incentive awards or non-cash de minimis fringes, please call our office.


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Big SUV Write-Offs May Soon End!

If you have been thinking about purchasing an SUV for business to take advantage of the large tax break currently available, you better hurry. One of the provisions of the energy legislation currently under consideration by Congress would bring this big break to a screeching halt, by applying the same luxury auto rules to SUVs that apply to other passenger vehicles.

The Senate and House currently are considering energy legislation that contains a tax provision dealing with SUVs. If the SUV provision in the House version of this legislation becomes part of the final legislation, taxpayers who buy heavy sport utility vehicles (SUVs) after 2007 and use them for business will lose the generous Section 179 expensing and depreciation deductions that are available under current law.

Currently, heavy SUVs (those with a gross vehicle weight rating of more than 6,000 pounds) are exempt from the luxury auto deduction limits, because they fall outside of the definition of a passenger auto and thus were allowed to use the full Section 179 deduction without restriction. This provided taxpayers, in some cases, the ability to write-off the entire cost of the business portion of the SUV in the year purchased. In an earlier effort to curtail the tax breaks for SUVs, Congress had limited the Section 179 deduction for SUVs (rated at 14,000 pounds GVW or less) to $25,000, beginning with purchases after October 22, 2004. However, this still provided a substantial deduction - one way in excess of that allowed for a regular passenger vehicle. The current maximum first year deduction for passenger vehicles is $3,060.

Congress has previously been reluctant to further curtail the SUV write-off for fear of harming the ailing U.S. auto industry.

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GENERAL INFORMATION

Settlement with Stockbroker Yielded Capital Gain

In a letter ruling, the IRS has privately ruled that an amount taxpayers received under a settlement agreement with their stockbroker, after they accused him of mishandling their account, was properly reportable as capital gain rather than as ordinary income.

The taxpayers had established three accounts with a stockbroker and the firms at which the stockbroker worked while he managed their accounts. Two of the three accounts were IRAs. The remaining account was a taxable investment account held jointly by the taxpayers.

The taxpayers sustained a loss with respect to the termination of the joint account, and they claimed a long-term capital loss on their Year 1 return. This loss, combined with the carryover of prior capital losses from the same account, less the amounts they deducted in years before Year 3, generated a capital loss carryover to Year 3. (Note that private letter rulings never specify amounts, so the actual amount of the loss carryover is not known).

The taxpayers believed the stockbroker mishandled their accounts and caused the losses. In the ensuing dispute, the stockbroker paid an unspecified amount to the taxpayers to end the dispute. The settlement amount, which was received in Year 3, was allocated between the two IRA accounts and their personal account.

The IRS ruling specifies the loss recovery takes on the same character as the original losses, and therefore is treated as a long-term capital gain on Schedule D for Year 3 rather than ordinary income. Thus, the taxpayers were able to use the long-term loss carryovers from the original losses to offset the recovery income.

The IRA accounts were not part of the ruling; however, in situations of this nature, the amount paid to the IRA may be considered a restorative payment and not an ordinary contribution that could exceed annual limits on contributions. If the taxpayer intends to place the settlement amount into a different IRA, he may even be able to get a ruling from the IRS allowing a “late” rollover after the expiration of the normal 60-day period for completing an IRA rollover.

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CA Early Distribution Penalty Deductible as a Tax

In a recent memorandum, the IRS’ Chief Counsel has concluded that the 2-½ % early distribution penalty, imposed by California on taxable distributions for IRAs and pension accounts taken before age 59-½, is deductible as an itemized state tax deduction for Federal tax purposes on Schedule A.

Even though it is referred to as a penalty in the California Revenue and Taxation Code, the IRS has reasoned that it is apparent from the structure of the California code that it is an additional tax, since it is not included with other items normally considered to be penalties such as late filing, accuracy, etc.

Presumably, this same conclusion will apply to other states which impose additional amounts for early withdrawal penalties, such as Maine.

If you are a California taxpayer who took an early distribution from an IRA or other qualified pension plan in 2004, 2005 or 2006, and depending upon the amount of the distribution, it may be worth your while to file an amended Federal return for the year in question.

Please call this office for additional information or the preparation of an amended return.

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2004 Tax Statistics Show Why Congress has Curtailed Charitable Contributions

The Internal Revenue Service recently released some statistics of income for the 2004 tax year in their Statistics of Income Bulletin. That bulletin included some interesting statistics related to the itemized deduction for non-cash charitable deductions:

• 25.30 million individuals claimed non-cash contributions.

• Those taxpayers claimed contributions totaling $43.4 billion.

• Of those, 6.6 million claimed non-cash contributions in excess of $500.

• Those contributions in excess of $500 totaled $37.2 billion and accounted for over 85% of the total non-cash contributions for 2005.

It is easy to see why Congress and the IRS are working to curtail these deductions. 2004 was the last year taxpayers could deduct the FMV of most vehicles, boats and planes contributed to charity. These deductions were subject to significant abuse through overstated values, while the receiving charities were selling the vehicles for a fraction of the claimed value to scrap dealers. This led to Congress passing new laws generally limiting the deduction of donated used vehicles to the amount the charity received for the vehicle when they sold it. This tough new vehicle contribution law took effect after 2004, so we can expect to see a significant decline in 2005’s statistics when they are released next year.

Then, beginning August 17, 2006, Congress added more stringent rules for contributions of clothing and household items by generally limiting the deduction to items in good used condition or better and denying deductions for items of minimal monetary value, such as used socks and undergarments. In addition, the IRS was charged with the responsibility to consult with affected charities and exercise the authority to disallow deductions of low value, consistent with the goals of improving tax administration and ensure that donated clothing and household items are of meaningful use to charitable organizations. Therefore, if you see your charity becoming a little more selective, you can understand why.

Now, for 2007, Congress has modified the rules for cash contributions by requiring a receipt or bank record for all contributions. Previously, contributions of $250 or less could be claimed based on contemporaneous records maintained by the taxpayers themselves. This change will allow the IRS to request contribution verification in correspondence audits and summarily disallow all charitable deductions without receipts or bank record substantiation.

If you have any questions related to charitable contributions and the related recordkeeping requirements, please call our office.


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Spouses May Elect Out of Partnership Rules

Included in the Small Business and Work Opportunity Act of 2007 is a provision that allows a husband and wife who file a joint return to elect out of the partnership rules. Thus, a joint venture between them is not treated as a partnership for tax purposes. This new rule takes effect for 2007.

All items of income, gain, loss, deduction and credit are divided between the spouses according to their respective interests in the venture, and each spouse takes into account his or her respective share of these items as if they were attributable to a trade or business conducted by the spouse as a sole proprietor. Thus, each electing spouse will report his or her shares on the appropriate form, such as Schedule C.

A qualified joint venture means any joint venture involving the conduct of a trade or business if:

(1) The only members of the joint venture are a husband and wife,

(2) Both spouses materially participate (1) in the trade or business, and

(3) Both spouses elect the application of this rule.

(1) The definition of material participation provides for whereby a taxpayer can qualify. However, generally, to qualify, 500 hours of participation are required during the year, or if participation is less than 500 hours, the taxpayers must provide substantially all of the participation.

Notwithstanding other self-employment rules, each spouse's share of income or loss from a qualified joint venture is taken into account under the above rules in determining the spouse's net earnings from self-employment.

Similarly, each spouse's share of income or loss from a qualified joint venture is taken into account under the above rules in determining the spouse's net earnings from self-employment for purposes of the Social Security benefits rules. Thus, each spouse will receive credit for his or her self-employment tax contributions for purposes of receiving Social Security benefits. However, this rule is not intended to prevent allocations or reallocations, to the extent permitted under pre-2007 Small Business Act law, by courts or by the Social Security Administration of net earnings from self-employment for purposes of determining Social Security benefits of an individual.

If you would like to discuss how this new legislation might fit your current or planned business model, please give us a call.


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BRIEFS

IRS Fee for Bad Check or Money Orders

A recent tax law change increased the minimum penalty for bad checks and money orders of less than $1,250, received after May 25, 2007, to the lesser of $25 or the amount of the check. Checks and money orders in amounts of $1,250 or more are generally subject to a penalty of 2% of the amount of the check or money order.

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Find Lost Money

Many times your forgotten utility deposits, insurance rebates, bank accounts, stock dividends, stock splits, inheritances, etc., are turned over to the state’s unclaimed property department. It happens when people relocate, when they don’t open all their mail, or when one spouse passes away and the surviving spouse has been kept unaware of family finances. Most states provide Internet search capabilities, so individuals can search by name for missing assets.

However, the administrators of the various state unclaimed property departments have an association, National Association of Unclaimed Property Administrators, which provides links to the various state search sites. In addition, the association has a link to a site that provides search capabilities for 35 states. So, the next time you go online, check to see if you have any unclaimed assets waiting to be claimed. You might be able to claim some part of the 38 plus billions of dollars of unclaimed property. Good luck!

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