Tax & Business Strategies Monthly Newsletter - October 2006

Tax Planning Strategies
Tax-Free Direct IRA Distributions for Charity
Recapture of Tax Benefits – Contribution of Appreciated Tangible Property
Retirement Savings Options for the Self-Employed

Business & Management Practices
Can Word-of-Mouth Advertising Work for You?
Are Employee Background Checks Right for You?

General Information
New Proposed Child Care Regulations
New Rules for the Domestic Production Deduction
Congress Tightens Up On Non-Cash Contributions
Heroes Get Rewarded
Some New Pension Provisions

Briefs
Employer Group Term Life May Not Be An After-Tax Bargain
Should You Itemize or Take the Standard Deduction?
Notify IRS of Your Address Change
Drawing the Line Between Rental Improvements & Repairs

TAX PLANNING STRATEGIES

Tax-Free Direct IRA Distributions for Charity

Recent legislation introduced a new and interesting tax twist for the 2006 and 2007 tax years by allowing taxpayers age 70½ or over to make IRA distributions directly to a qualified charity. Any amount not exceeding $100,000 can be directly distributed to the charity.

The keys to benefiting from this provision lie in the fact that the distribution:

(1) Is not included in the taxpayer’s income for the year,
(2) Counts toward the taxpayer’s minimum required distribution for the year, and
(3) Does count as a charitable contribution for the year.

Here is how taxpayers can benefit from this new provision:

By making a contribution directly from the IRA, taxpayers are able to exclude the amount they contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.

This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc. allowing them greater benefits from the AGI limited deductions.

For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus excluding the portion of the IRA distribution directly distributed to the charity can reduce the taxable portion of the SS.

Taxpayers who wish to make vary large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Example: Retired couple (both over 70½) filing 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.

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 used the standard deduction. Result: Tax savings of $2,901.

We want to stress that a qualified charitable IRA contribution must be directly distributed 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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Recapture of Tax Benefits – Contribution of Appreciated Tangible Property

Background – Generally, when a taxpayer makes a contribution, the deduction is limited to the lesser of the taxpayer’s basis (generally cost) or the fair market value (FMV) of the items at the time of the contribution. However, when the donated property is personal tangible property, which is used by the charity in a related function, the FMV of the item is used as the amount of the deduction. There have been abuses of this tax benefit, so Congress has moved to limit those abuses with new rules.

Under the provision, if a donee organization disposes of applicable property within three years of the contribution of the property, the donor is subject to an adjustment of the tax benefit.

• Disposition in year of donation - If the disposition occurs in the tax year of the donor in which the contribution is made, the donor’s deduction generally is basis and not fair market value.
  
  
• Disposition in a subsequent year - If the disposition occurs in a subsequent year, the donor must include as ordinary income for its taxable year in which the disposition occurs an amount equal to the excess (if any) of:
  (i) The amount of the deduction previously claimed by the donor as a charitable contribution with respect to such property, over
  (ii) The donor’s basis in such property at the time of the contribution.

There is no adjustment of the tax benefit if the donee organization makes a certification to the Secretary, by written statement signed under penalties of perjury by an officer of the organization. The statement must either:


(1) Certify that the use of the property by the donee was related to the purpose or function constituting the basis for the donee’s exemption, and describe how the property was used and how such use furthered such purpose or function; or

(2) State the intended use of the property by the donee at the time of the contribution and certify that such use became impossible or infeasible to implement. The organization must furnish a copy of the certification to the donor (for example, as part of the Form 8282, a copy of which is supplied to the donor).

Penalty - A penalty of $10,000 applies to a person that identifies applicable property as having a use that is related to a purpose or function constituting the basis for the donee’s exemption knowing that it is not intended for such a use.

Reporting Provisions - The provision modifies the present-law information return requirements that apply upon the disposition of contributed property by a charitable organization (Form 8282, Sec. 6050L). The return requirement is extended to dispositions made within three years after receipt (from two years). The donee organization also must provide, in addition to the information already required to be provided on the return, a description of the donee’s use of the property, a statement of whether use of the property was related to the purpose or function constituting the basis for the donee’s exemption, and, if applicable, a certification of any such use (described above).

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Retirement Savings Options for the Self-Employed

Simplified Employee Pension Plan (SEP) – A SEP plan is actually an IRA, but the contribution amount allowed is the same as for Keogh plans, generally making SEP plans a better alternative. A self-employed individual can contribute up to 25% of the business profits figured before deducting the contribution itself. This mathematically boils down to about 20% of the net profit from the business, with a maximum contribution of $44,000 for 2006. Keogh plans require filing annual returns, but SEP plans have no such requirement. In addition, Keogh plans must be set up before the year’s end, while SEP plans can be established after the close of the year. The combined SEP and Keogh plan contributions are subject to the same contribution limits. SEP contributions are discretionary.

Keogh Plan – These plans have the same limits as the SEP plans, but with some other complications indicated above. Taxpayers with Keogh plans should investigate terminating them and rolling them into a SEP plan.

401(k) Plan – Self-employed individuals can have a 401(k) plan which, for this purpose, treats proprietors like employees, and allows discretionary contributions up to $15,000 for 2006 ($20,000 age 50 and over). These plans can be combined with a SEP plan to provide a larger contribution. The SEP plan contributions are figured and then the 401(k) contribution is applied to the balance of the profits.

Traditional or Roth IRA – A self-employed individual can contribute to an IRA under the same restrictions as any other individual. This may be a better option for self-employed individuals with employees who wish to avoid the complication of including employees in the retirement plans. For 2006, the contribution limits are $4,000 ($5,000 age 50 and over). Contributions can be made to both the IRA and other qualified plans established by the self-employed individual. However, when there is also participation in another plan, the deductibility on the traditional IRA contribution phases out at higher incomes: $50,000 - $60,000 for single individuals and $75,000 - $85,000 for married taxpayers filing jointly. Roth contributions don’t provide a current tax benefit, and the ability to contribute to a Roth IRA phases out for incomes $150,000 - $160,000 for married individuals filing jointly and $95,000 - $110,000 for most others.

Defined Benefit Plans – These are special plans that are custom-designed for each taxpayer and require the services of an actuary. Basically, these plans allow contributions of a size that will produce a specific retirement benefit beginning at a specific age and payable over the taxpayer’s lifetime. There are no contribution limits, since the contributions are based on the actuary’s funding calculations.

If you need assistance in determining which plan or combination of plans will best suit your needs, please call for an appointment.


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BUSINESS & MANAGEMENT PRACTICES

Can Word-of-Mouth Advertising Work for You?

What others have to say about your products or company is a key influence on what they buy. A recommendation from a friend or colleague is something people trust, not to mention that research shows it is much more effective than traditional advertising.

So what are you doing to promote word-of-mouth in your marketing plan? Word-of-mouth marketing is defined as, “Giving people a reason to talk about your products and services, and making it easier for that conversation to take place.”

Word-of-mouth can be fostered and integrated into your everyday business operations. An effective word-of-mouth campaign starts with any interaction with your customer. Do you truly listen to your customers, asking for and listening to their feedback? Is it easy for customers to tell their friends about you and your products? Do influential people know about you and speak positively about your services?

An effective word-of-mouth campaign starts with empowering your customers to share their experiences. It is this voice that can either strengthen or doom your brand. Don’t forget that a dissatisfied customer can be just as powerful as a happy one.

Word-of-mouth marketing techniques start with a dialogue with your customers. The basic elements are:
• Educating people about your products and services.
• Identifying people who are most likely to share their opinions.
• Providing tools that make it easier to share information.
• Studying how, where, and when opinions are being shared.
• Listening and responding to supporters and detractors.

Is word-of-mouth advertising right for you? In reality, it is already happening, and you may not even know about its effects. Making it part of your marketing strategy is an inexpensive way to concentrate and listen to your customers while making them your greatest ally.

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Are Employee Background Checks Right for You?

In a world where 30% of applicants give false or misleading information about their backgrounds, adding employee background checks to the hiring process is the employer’s first line of defense in hiring good people, and possibly avoiding negligent hiring lawsuits.

Background checks supplement the interviewing process, confirm information provided by applicants, and uncover inaccurate information. Background checks do not rely on getting references from former employers who may be fearful of being sued.

Though the information from background checks varies, this information can identify some of the following problems:

• A given residential address that is commercial, including a bar, mail forwarding service, or homeless shelter.
• A residential address that may have been used in suspected fraudulent activity.
• Failure to appear for court appearance.
• Differences between the legal name and the name on the application.
• Variations in the legal name.
• Criminal records located under an alias.
• Applicant with multiple aliases, an incorrect Social Security number, or multiple numbers.
• Use of Social Security number in a death benefit claim.
• Use of Social Security number in fraud-related (credit card) activities.
• Convictions:
  a. Assault/battery
  b. Forgery
  c. Theft
  d. Probation violation
  e. Possession of firearms/carrying concealed firearms
  f. Possession of a controlled substance
  g. Under the influence of a controlled substance
  h. Operating a motor vehicle on a suspended license
  i. Infliction of injury on spouse or child
  j. Burglary
  k. Credit card fraud
  l. Driving under the influence (multiple offender)
  m. Disorderly conduct
  n. Resisting arrest
  o. Indecent exposure
  p. Tampering with government records
  q. Grand theft auto

Background checks serve as an insurance policy and may identify potential issues that may not have been uncovered during the hiring process. If you are running a high-risk or turnover business, it might make sense to add background checks to your hiring procedures.


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GENERAL INFORMATION

New Proposed Child Care Regulations

The IRS has issued proposed regulations regarding the Code Sec. 21 credit for expenses for household and dependent care services necessary for gainful employment. The following are highlights of the proposed regulations:

Taxable Year of Credit
The proposed regulations restate this rule in plain language and provide that the credit is allowable only in the taxable year in which the services are provided or the taxable year in which the expenses are paid, whichever is later, regardless of the taxpayer’s method of accounting.

Special Rule for Children of Separated or Divorced Parents
The proposed regulations define “custodial parent” consistently with Section 152(e)(3)(A) as the parent with whom the child shares the same principal place of abode for the greater portion of the calendar year.

Expenses for Nursery School and Kindergarten
The proposed regulations provide the rule that the expenses of preschool or similar programs below the kindergarten level are for care and may be employment-related expenses, if otherwise qualified, although education may be a significant part of these programs.

The proposed regulations also clarify the existing rule that expenses for programs at the level of kindergarten and above, however, are primarily for education and, therefore, are not employment-related expenses.

Specialty Day Camps
To provide certainty for taxpayers and enhance administrability, the proposed regulations provide that the full amount paid for a day camp or similar program may be for the care of a qualifying individual although the camp specializes in a particular activity.

Transportation Expenses
The proposed regulations provide that the cost of transportation (such as transportation to a day camp or to an after-school program not on school premises) furnished by a dependent care provider may be an employment-related expense if all other applicable requirements are satisfied.

Other Expenses for Care
The proposed regulations incorporate the existing rules allowing employment taxes if the related wages are employment-related expenses and the additional costs for a care provider’s room and board as employment-related expenses. Additionally, the proposed regulations clarify that indirect expenses, such as application and agency fees, may be employment-related expenses if the taxpayer is required to pay the expenses to obtain the care.

Expenses to Enable the Taxpayer to be Gainfully Employed
The proposed regulations clarify the rule for temporary absences from work and part-time employment. The proposed regulations provide that, in general, dependent care expenses for a period in which the taxpayer is absent from work (whether paid or unpaid) are not employment-related expenses. However, for administrative convenience, short, temporary absences from work, such as for minor illness or vacation, are disregarded for taxpayers who must pay for dependent care expenses on a weekly or longer basis. Whether an absence is short and temporary depends on the facts and circumstances.

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New Rules for the Domestic Production Deduction

The purpose of the domestic production deduction is to encourage domestic (i.e., within the U.S.) manufacturing and other production activities. The tax incentive is in the form of a tax deduction equal to 3% of the net income from eligible activities. The deduction percentage increases to 6% for 2007 through 2009 and then jumps to 9% after 2009.

As with all tax incentives, it comes with a number of complicated limitations and qualifications. In an effort to simplify this deduction, Congress included new provisions in a recent tax law change, and the IRS issued final regulations and procedures for the deduction.

What is a qualified production activity? This is the most complicated part. The following are some common eligible activities: (1) the sale or rental of tangible personal property, including computer software, manufactured, produced or grown in the U.S., (2) the construction of real property in the U.S., and (3) the performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

Qualified production activities do not include purely sales activities or purely service activities except for construction, engineering and architectural services.

Deduction limitations – The deduction cannot exceed 50% of the “W-2” wages paid to employees during the year, and it cannot exceed the taxpayer’s taxable income for the year. An individual’s deduction is limited to modified adjusted gross income rather than taxable income. In a recently-passed tax law change, the “W-2” wages for purposes of this limitation are limited to wages properly allocated to the qualified production activity.

Who receives this deduction? 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. Prior law included a special limitation for a partnership or S-corporation owner that was removed by recent new tax law.

Example of how the deduction is determined – ABC, Inc. produces widgets in the U.S. that it wholesales to other retailers. The company’s revenue from the sale of the widgets is $2 million with a manufacturing cost of $750,000. ABC, Inc. also has $1 million of income from widget repair services. The total “W-2” wages for the year were $400,000 of which $150,000 is properly allocated to the widget manufacturing costs and the balance used to provide the repair services. The deduction would be determined as follows:

Of course, the deduction on ABC Inc.’s tax return will be limited to the company’s taxable income. This example is rather a simplistic illustration of how the deduction is determined. In actual practice, inventory, cost of goods, determination of qualified production wages, etc., all have rules, procedures and complications of their own. However, the deduction can be very beneficial and well worth the added accounting. In fact, most taxpayers who qualify for the deduction are required to claim it, even if the administrative costs of applying the law and regulations outweigh the benefit of claiming the deduction.

If you have questions regarding this deduction or need assistance in setting up your accounting to facilitate the deduction, please call this office.



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Congress Tightens Up On Non-Cash Contributions

Part of new legislation recently signed into law and effective August 17, 2006, is a provision pertaining to non-cash charitable contributions that is designed to rein in this very popular tax deduction.

Background - The President’s Advisory Panel on Federal Tax Reform and the staff of the Joint Committee on Taxation both have concluded that the fair market value-based deduction for contributions of clothing and household items present difficult tax administration issues, as determining the correct value of an item is a fact-intensive and, thus also, a resource-intensive matter.

As recently reported by the IRS, the amount claimed as deductions in tax year 2003 for clothing and household items was more than $9 billion.

New Law - The new law provides that no deduction is allowed for a charitable contribution of clothing or household items unless the clothing or household item is in:
o Good used condition, or
o Better.

In addition, the IRS may deny a deduction for any item with minimal monetary value, such as used socks or undergarments.

The Secretary of the Treasury, in consultation with affected charities, will exercise assiduously the authority to disallow a deduction for some items of low value, consistent with the goals of improving tax administration and ensure that donated clothing and households items are of meaningful use to charitable organizations.

Items not in good or better condition – A deduction may still be allowed for a charitable contribution of an item of clothing or a household item not in good used condition or better if the amount claimed for the item is:
o More than $500, and
o The taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property.

Household items - include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the provision.

Large Donations – There are other rules that apply to certain types of non-cash contributions including limitations, appraisal requirements, deduction recapture, etc. Therefore, when contemplating an unusual or substantial non-cash contribution, it is appropriate to consult with this office.

Record of Non-Cash Donations:

Keep a list of the donated items and include a description of the property, its cost and FMV, how you determined the FMV, and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser’s report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address.

If the value of donated items is $250 or more, in addition to the information noted above, a written acknowledgment from the organization must state whether the charity provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided. You must have this written acknowledgment by the date you file your return or the extended due date of the return, whichever date is earlier.


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Heroes Get Rewarded

In legislation recently passed by Congress, excludable (tax-free) combat pay is treated as compensation for purposes of making an IRA contribution. This change is retroactive to 2004 and provides some interesting possibilities.


For taxpayers who received excludable combat pay in 2004 and 2005, the new law provides a three-year window to make an IRA contribution for either or both tax years, provided they otherwise meet the normal IRA contribution qualifications. This includes spousal contributions. The three-year period began on May 29, 2006.

This new law gives rise to some interesting tax strategies:

Taxpayers with little or no taxable income might consider making a nondeductible contribution to a Roth IRA, which provides a tax-free benefit in the future.

Taxpayers who are qualified to make a deductible IRA contribution can make the contribution retroactively and then amend their returns for a refund.

Taxpayers who are limited in making a deductible contribution or a Roth contribution might consider making a nondeductible traditional IRA contribution and then converting the nondeductible traditional IRA to a Roth IRA in 2010, with only tax on the earnings before the conversion when the Roth conversion AGI limits have been removed.

Because of the three-year window for making up prior year contributions, the amount of contributions that could be made after the statute of limitations for refunds has expired for the tax year.

However, the new law does allow a refund if the claim is filed before the close of the one-year period beginning on the date that the contribution is actually made.


Please contact this office to determine how you can take advantage of these new tax provisions.

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Some New Pension Provisions

The following is a brief rundown on some of the more predominant new IRA and pension laws taking effect as a result of recent legislation. Some only apply to small groups of taxpayers while others apply to virtually everyone.

Pension & IRA Provisions Made Permanent - Many of the current higher IRA, SEP, 401(k) and other qualified pension plan contribution limits and catch-up contribution limits were only temporarily increased under prior law. The new legislation makes these higher contribution limits permanent. Maximum contributions for 2006 are:

• IRA: $4,000 ($5,000 age 50 and over)
• 401(k): $15,000 ($20,000 age 50 and over)
• Tax-Sheltered Annuities:$15,000 ($20,000 age 50 and over)
• Self-Employed Plans – Keogh, SEP Plans: $44,000

IRA Income Limits Indexed After 2006 – Contributions to both Roth IRAs and deductible Traditional IRAs for employees with employer plans are limited by a taxpayer’s income. For years after 2006, these limits will be inflation-adjusted.

Qualified Reservist Distributions – Many reservists who were called to active duty after the terrorist attacks on September 11th took distributions from their IRA accounts to meet financial obligations while serving on active duty. These distributions were both taxable and generally subject to the 10% premature distribution penalty. Under the new law, the penalty is retroactively waived for reservists called to active duty for a period of more than 179 days after September 11, 2001 and before December 31, 2007. In addition, the new law permits qualifying reservists to retroactively pay back the distributed amounts to the IRA if the funds are returned before August 17, 2008. Thus previously-paid penalties and tax on paid-back distributions may be refunded by amending the previous tax returns.

Low-Income Saver’s Credit – Current tax law includes a provision where a low income taxpayer’s contributions to an IRA or other qualified plan are supplemented by the “Saver’s” credit. This credit is available to any taxpayer age 18 and older that is not a full-time student or a dependent of another taxpayer. The credit is 50, 20 or 10 percent of the first $2,000 of retirement plan contributions, and phased out after $50,000 of income for joint filers, $37,500 for those filing head of household and $25,000 for all others. The AGI income limitation will be indexed after 2007.

Public Safety Employee – Current law generally imposes a 10% premature distribution penalty on distributions from qualified pension plans made before the plan participant is age 59½. For distributions from governmental defined benefit pension plans to qualified public safety employees who separate from service after age 50 and after August 17, 2006, the 10% penalty will no longer apply. A qualified public safety employee is an employee of a state or political subdivision who provides police protection, firefighting services or emergency medical services.

Qualified Rollovers for Non-Spouse Beneficiaries – When a spouse inherits an IRA or qualified plan, he or she has the option to roll it into their own IRA, thus avoiding any required minimum distributions that apply to beneficiaries.


After the rollover the surviving spouse is then subject to the normal IRA distribution rules as if he or she had funded the IRA. Thus, if under 59½, the surviving spouse would be subject to the 10% premature distribution penalty and subject to the normal mandatory distribution requirement when reaching age 70½.

For distributions after 2006, the law now permits non-spouse beneficiaries to make similar rollovers with one big catch! The inherited amounts must be kept segregated from other amounts and the minimum distributions that apply to beneficiaries still apply. Thus, the spousal rollover benefits do not apply to other beneficiaries. However, this does allow the beneficiary to make their own investment and beneficiary choices.

Victimized Employees – Employees who were victims of an Enron-type bankruptcy can elect to make additional IRA contributions up to $3,000 in each of the years 2007, 2008 and 2009. To qualify, the employee must have been a participant in a 401(k) plan under which the employer matched at least 50% of the employee’s contribution with employer stock, the employer was a debtor in a bankruptcy case, and the employer or any other person was indicted or convicted due to a business activity related to the bankruptcy.

The additional contributions are subject to the usual income phase-out rules, and individuals cannot combine the age 50 additional catch-up contribution with victimized employee additional contribution.

Please call if you would like additional information in regards to any of these provisions or to discuss what steps, if any, are needed for you to take advantage of them.


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BRIEFS

Employer Group Term Life May Not Be An After-Tax Bargain

The first $50,000 of group term life insurance coverage provided by an employer to an employee is a tax-free fringe benefit that does not add anything to the employee’s overall tax bill. But the cost of employer-paid group term coverage in excess of $50,000 is not a tax-free fringe benefit. Therefore, the cost of that insurance is treated as taxable income and added to the employee’s W-2.

What’s worse is that the cost of the insurance coverage added to the W-2 is based on an IRS table that is frequently higher than what your employer is actually paying for the insurance, which creates phantom income.

For older employees, the after-tax cost of the additional coverage frequently exceeds the cost of an individual term policy, and it may be appropriate to purchase the extra coverage (in excess of the $50,000) from a source other than the employer.


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Should You Itemize or Take the Standard Deduction?

Generally, the decision to itemize your deductions or take the standard deduction is a no-brainer. You would take the higher of the two! However, if you are taxed by the Alternative Minimum Tax (AMT), making that decision becomes a little more complicated. That is because when you take the standard deduction for regular tax purposes, you cannot itemize for AMT purposes, and the standard deduction is not allowed in the AMT computation. Thus, if you take the standard deduction for regular tax purposes, you would get no deductions at all for AMT purposes. This creates sort of a dilemma for those who don’t have enough to itemize for regular tax purposes, but have substantial itemized deductions that can be used to offset the AMT. Note: Some itemized deductions allowed for regular tax purposes are not allowed for the AMT, which further complicates the issue.

Fortunately, taxpayers can elect to itemize even if the deductions are less than the standard deduction. Schedule A has a specific box to check if this election is being made. However, by forcing itemized deductions, the regular tax will be increased and the AMT tax will be reduced at the same time. This presents a complicated moving target to optimize the deductions. Ideally, the itemized deductions should be an amount that brings the AMT add-on tax down to “zero.”

Bottom line - Utilizing this strategy may possibly save a considerable amount of money for taxpayers who are subject to the AMT, but whose itemized deductions are somewhat less than the standard allowance.

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Notify IRS of Your Address Change

The IRS may not be on your holiday card list, but it is important to make sure they have your correct address so that if you are sent a notice, you can act on it and avoid penalties. Not receiving a letter, request, or refund does not relieve you of the responsibility of responding timely. Failing to respond to a notice only make matters worse and adds to the penalties, if any.

The IRS does obtain address change updates weekly from the U.S. Postal Service and will adjust your address when you file a tax return. However, the IRS does have an address change form (8822) that can be used to update your current address. Please call this office and we can complete the form for you.


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Drawing the Line Between Rental Improvements & Repairs

The replacement of a roof, rain gutters, windows, and a furnace on a residential rental property are examples of capital improvements to the structure, because they materially add to the value of the property or substantially prolong its life. Thus, the cost of the improvement must be depreciated over its useful life, generally the specified life of the property to which the improvements are attached. For example, if the property is a residential rental property, the items are generally depreciated over a recovery period of 27.5 years using the straight-line method of depreciation and a mid-month convention.

Repairs, such as repainting the residential rental property, are currently deductible expenses. A repair keeps the property in good operating condition, but it does not materially add to the value of the property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. If repairs are made as part of an extensive remodeling or restoration of the property, the whole job is an improvement. In that case, you should capitalize and depreciate the repair costs as the same class of property that you have restored or remodeled (as discussed above).

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