Tax & Business Strategies Monthly Newsletter - October 2007

Tax Planning Strategies
Credit & Debt Management
This May Be the Best Time to Purchase Your 2nd Home
Saver’s Credit for Retirement Savings Contributions

Business & Management Practices
Business Computer Software and Taxes
Writing Off Your Start-Up Expenses
Planning Your Business Asset Acquisitions

General Information
Mixing Business with Pleasure
Procrastination and Negligence Can Be Costly

Briefs
Keeping Good Tax Records
Most Hybrids Still Qualify for the Full Tax Credit

TAX PLANNING STRATEGIES

Credit & Debt Management

Maintaining good credit allows individuals to take advantage of lower interest rates and have rapid access to funds when an appropriate need arises. On the other hand, having a less than excellent credit rating means higher rates and difficulty in obtaining new credit. This can be damaging to those looking to buy a home or starting a business.

Generally, your credit rating is damaged due to missing payments or carrying high balances. A damaged credit rating may be due to circumstances beyond your control, such as identity theft, fraud, inexperience, illness or unemployment. Regardless of the reasons, the information below is provided to assist in safeguarding and improving your credit.

GUARD AGAINST IDENTITY THEFT - Identity theft is becoming more frequent and can create a financial nightmare for victims. Avoid becoming a victim of identity theft by minimizing the information a thief can steal. The following are some guidelines to help avoid becoming a victim of identity fraud.

o Don't carry a Social Security Card, extra credit cards or a passport unless the documents are needed.

o Memorize your Social Security Number, any personal identification numbers and passwords. If you write them down, do not record them on anything in your wallet or purse. When creating a password or PIN, do not use digits from your Social Security number, telephone number or date of birth.

o Sign New Credit Cards Upon Receipt. Save all credit card receipts and match them against your monthly bills. Never throw them away intact in a public trash container.

o Never Loan Out Your Credit Card. Report lost or stolen credit cards immediately.

o Never Give Out Personal Identity Information, especially Social Security or credit card numbers over the phone, unless you know the person or business and initiated the phone call.

o Beware of Phone or Mail Solicitations disguised as promotions offering prizes or bargains designed solely to obtain your Social Security or credit card numbers.

o Don't Leave Mail Out for Pick Up and have a locked mailbox. Promptly remove mail from your mailbox after delivery.

o Shred All Mail, Bills, Receipts and Financial Documents with your name or identification numbers on them, especially pre-approved offers of credit. Thieves have been known to fish identities out of trash bins.

o Look Over Monthly Credit Card and Bank Statements Carefully. Follow up if any charges or withdrawals appear suspicious.

o Order Credit Reports at Least Once a Year from the three major credit bureaus. It may make sense to do it more often if you have been a victim. Check every line of information in your file for fraudulent activity and other discrepancies.

o Pay Bills Electronically When Possible. Follow up with creditors if you do not receive a bill on time, because it could mean an identity thief has taken over your account and has changed the billing address.

o Remove Your Name from the Marketing Lists of the three major credit reporting bureaus to limit the pre-approved offers of credit you receive.

o Keep the Number of Credit Cards to a Bare Minimum. Cancel all unused credit card accounts.

UNDERSTAND YOUR CREDIT RATING - Knowing what your credit score means will help you understand how it affects you when you apply for credit. The FICO® score, developed by Fair, Isaac (the pioneer in credit scoring), is a number between 300 and 850 that lenders use to determine your credit rating. A FICO® score is a snapshot of your credit rating at a particular point in time. The higher your credit score, the more likely you are to be approved for loans and receive favorable rates.

More than 70% of the 100 largest financial institutions use FICO® scores to make billions of credit decisions each year, including more than 75 percent of mortgage loan originations. Generally, the scores equate to the following (keep in mind each lender will have their own criteria that may differ somewhat from the values shown):

o 500-619 is considered a sub-prime score
o 620-699 is considered a medium score
o 700 and above is considered a good to excellent score

The five areas considered in the calculation of an individual’s credit score listed from most important to least important are:

o Payment history,
o Amount owed,
o Length of credit history,
o New credit and
o Types of credit in use.

How can your score be improved? Generally, people with high scores consistently:

o Pay bills on time,
o Keep balances low on credit cards and other revolving credit products and
o Apply for and open new credit accounts only as needed.

HOW IS YOUR CREDIT RATING DOING? Whether you are certain that your credit rating is strong, or have had credit problems in the past and want to double check that your credit rating has improved, it's a good idea to review your credit report every few years and check it for accuracy. Below are the names of the three major sources of credit information. It's important to check your credit before making a major purchase like a car or a home, so that when you need to sail through the loan process with your good credit, you'll avoid any surprises. Generally, if you order a credit report via the Web, you'll pay a minimal fee and get the results within a day or two.

Many of the credit rating companies offer special programs for periodic credit reports, fraud and ID theft protection. For additional information about the specific programs available from the credit rating companies, refer to their individual websites (see list below). The three major companies used by most lenders or creditors checking on your credit are:

• Equifax - http://www.equifax.com/home/
• Experian - http://www.experian.com/
• Trans Union Corp. - http://www.transunion.com/

TIPS ON REDUCING YOUR DEBTS - Generally, it is sound financial advice for you to get out of debt. But that may be easier said than done, especially if the debt is sizeable compared to your ability to repay. When locked into a long cycle of debt repayment, the drudgery can become a significant burden. The payoff of a particular balance can seem far into the future and you will have to maintain your discipline to eventually get out from under the burden.

The following are some tips and strategies that may help you reach your goal sooner.

• Considering a Major Purchase? One way to reduce your debt is to save in advance for planned purchases and eliminate all together the need to borrow and pay the finance charges.

• Plan Your Debt Retirement! Being able to see the light at the end of the tunnel makes the sacrifices needed to clear up your debt easier to live with. That's why you should have a plan in place to retire your debts.

• Establish an Emergency Fund. Unless you are very lucky, you will incur unexpected expenditures over a long period of time. Typically, when that happens and you have no cash available, the emergency expenditure ends up on your charge card and the cycle of new charges and repayments continue. A better solution is to allocate some contingency dollars to an emergency savings account while paying back your credit cards as quickly as you can. This allows you to divert more to paying off existing debts when the emergency fund becomes large and significant to cover unexpected expenditures. Your goal should be to avoid any new charges while watching your balances decrease at a planned rate.

CONSIDERING RESTRUCTURING YOUR DEBTS? Sometimes there are valid reasons for restructuring your existing debts such as lowering payments, lowering interest rates, financing a business venture or eliminating home mortgage PMI payments. Typically, taxpayers look to the equity in their home as a source for needed cash. When considering such a move, remember there are costs associated with refinancing and any decision to refinance will depend upon whether the overall financial benefits warrant the expense to refinance. Things to consider include:

• How long will you own the property? If you plan to sell in the near future, you may not save enough from refinancing to warrant the cost.

• Will the interest from the new loan be fully deductible? There are deduction limitations on mortgage interest, and you might find that a portion of the interest you pay on the new mortgage may not be deductible.

• It is not wise to tap your home equity for frivolous needs. You will want to have your home paid off by the time you reach retirement and having a house payment can severely limit your retirement options. Continually tapping your home equity can lead to financial difficulties in the future.

Is refinancing the right thing for you? Let us help you determine if the expense of refinancing is justified, or if there are other options that might be more practical. Taking the proper course of action now can have a profound impact on the future.

NEED PROFESSIONAL CREDIT COUNSELING? If you are in need of credit counseling, you can contact an independent Consumer Credit Corporation office in your area. You can find the nearest office from the website of the National Foundation for Credit Counseling (http://www.nfcc.org/). Their services are offered as an alternative to filing bankruptcy, but it may not be your best financial option.

back to top

This May Be the Best Time to Purchase Your 2nd Home

If you have been considering acquiring a second or vacation home, this soft real estate market may be the right time. With real estate prices in a down turn, it has become a buyer’s market and this may be the best opportunity to make that purchase.

Vacation home rental tax rules include some interesting twists that should be considered when purchasing a vacation home. Although some individuals prefer never to rent out their home, others find it is a way help cover the cost of the home.

If you decide not to rent it out at all, and it’s your designated second home, you will be able to write-off the property taxes and the home mortgage interest as part of your itemized deductions. However, the interest is deductible only as long as the acquisition debt on your first and second homes does not exceed $1,000,000. In addition, the interest on up to $100,000 of equity debt can be deducted. If you are unfortunate enough to be subject to the alternative minimum tax (AMT), then to the extent you are taxed by the AMT, the property taxes and equity debt interest will not be deductible.

If you intend to rent the home part of the time, then there are three rules to consider, based on how many days the property is rented out.

Rent Less Than 15 Days – If the property is rented out less than 15 days, the money can be pocketed tax-free. You can also continue to deduct the interest and taxes as if you had chosen not to rent it out at all. In this situation, any other directly-related rental expenses, such as the agent fee, utilities, post-rental cleaning, etc., are not deductible. This rule has led to some significant tax-free income for individuals who own a home or second home that is suitable as a filming location.

Personal Use is Less than the Greater of 15 Days or 10% of the Rental Days – In this scenario, the home use would be allocated into two separate activities, a rental and a second home. For example, if the home was 5% for personal use, then 5% of the interest and taxes would be treated as home interest and taxes what can be deducted as an itemized deduction. The other 95% of the interest and taxes would be rental expenses, combined with 95% of the insurance, utilities, allowable depreciation and 100% of the direct rental expenses. The result can be a deductible tax loss, which would be combined with all other rental activities and limited to $25,000 loss per year for taxpayers with an income (AGI) of $100,000 or less. This loss allowance is ratably phased out between $100,000 and $150,000 of income (AGI). Thus, if your income exceeds $150,000, the loss cannot be deducted. It is carried forward until the home is sold or you have gains from other activities that can be used to offset the loss.

Personal Use Exceeds the Greater of 14 Days or 10% of the Rental Days – In this scenario, no rental tax loss is allowed. Let’s assume the home was used 20% by you and 80% as a rental. The rental income is first reduced by 80% of the taxes and interest. If, after deducting the interest and taxes, there is still a profit, you can deduct the direct rental expenses, such as the rental portion of the utilities, insurance and any other direct rental expenses, but not more than will offset the remaining income. If there is still a profit, you can take depreciation, but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The other personal 20% of the interest and taxes is deducted as an itemized deduction, subject to the interest and AMT limitations discussed earlier. Should the rental income be less than the business portion of the interest and taxes, the balance of the interest and taxes is still deductible as home mortgage interest and taxes.

Sale of the Vacation Home – When you are ready to sell the home, and the sale results in a loss, you may or may not be able to deduct the loss. If the property is being treated partly as personal-use property and as a rental (as discussed above in the example where the personal use was 5%), then the loss would be divided between a nondeductible personal-use portion and the deductible rental portion. In all of the other scenarios, the loss would not be deductible at all. Unlike your primary home, the second home does not qualify for the home gain exclusion, so any gain would be taxable unless you occupy the rental as your primary residence for two of the five years preceding the sale. By doing so, the rental is converted for the personal use of the taxpayer, and any gain deferred until the property is ultimately sold. This option may be ideal for someone who wants to buy a home while prices are down, rent it out for awhile, and eventually occupy the home full-time as a retirement residence. It presents an interesting opportunity. If the rental is residential and the taxpayer occupies it for at least two years after the conversion and otherwise meets the requirements, the rental would qualify for the home sale gain exclusion. Thus, the gain, in excess of the depreciation previously claimed on the home, could be offset by the home gain exclusion. The home gain exclusion is $250,000 ($500,000 for a married couple filing jointly where the spouse also qualifies). Although there are some timing issues, taxpayers can generally use this exclusion repeatedly, as long as they qualify and only use the exclusion every two years. Note: The gain exclusion does not apply to the portion of gain representing previously deducted depreciation.

As with all tax rules, there are certain exceptions, so we urge you to contact us before making your purchase.


back to top

Saver’s Credit for Retirement Savings Contributions

One way for low- and moderate-income Americans to save on taxes is by saving for retirement. If you make voluntary contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be able to take a tax credit. To qualify for this credit, the taxpayer:

• Must be at least 18 years of age,
• Cannot be a full-time student, and
• Cannot be claimed as a dependent of another.

In addition, a taxpayer’s income cannot exceed certain limits based on filing status:

• Married couples filing jointly with incomes up to $50,000
• Taxpayers filing as head of household with incomes up to $37,500
• Other individual taxpayers with incomes up to $25,000

When determining the credit, only the first $2,000 of a taxpayer’s retirement contributions can be taken into account. The actual credit is determined by multiplying the retirement contribution by the applicable percentage based on the taxpayer’s filing status and income. See the table below.

Example – Eric and Heather are married and filing a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $28,000. The credit is computed as follows:

Eric’s 401(k) contribution was $3,000, but only the first $2,000 can be used… $2,000
Heather’s IRA contribution was $500, so it can all be used…………………………………… 500
Total qualifying contributions………………………………………………………………………………… $2,500
Credit percentage for a Jt AGI of $28,000 from the table…………………………………… X .50
Saver’s credit……………………………………………………………………………………………………………$1,250

When figuring this credit, subtract the amount of distributions received from your retirement plans from the contributions made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return. This rule prevents taxpayers from taking distributions from a retirement plan and then recontributing the funds to qualify for the credit.

The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a 401(k) plan are not subject to income tax until withdrawn from the plan.

If Eric in our previous example had only contributed $2,000 (the maximum he can use for the credit computation) instead of the $3,000, the credit would still be $1,250. Assuming Eric and Heather are in the 15% tax bracket, they saved $375 (15% x $2,500) in taxes. Combine this with the $1,250 credit and they end up with $1,625 in tax savings. Another way to look at it is that they put $2,500 away for their future retirement, and it only cost them $875.

If we can help you determine how this credit might affect your unique tax circumstances, please give our office a call.


back to top

BUSINESS & MANAGEMENT PRACTICES

Business Computer Software and Taxes

Tax law is sometimes complicated as it relates to a buyer’s treatment of business computer software. Generally, the treatment depends on how the software is billed to the taxpayer.

o Software Cost Included In Computer Cost - If a charge for computer software is included in the purchase price of the computer hardware, without a separate identification of the charge for the software, then the buyer capitalizes and depreciates the cost as part of the cost of the hardware. In lieu of depreciating the cost of the computer, part or all of the expense generally may be claimed as a Sec. 179 deduction (explained below).

o Software Costs that Are Separately Stated - If the charge for the software is stated separately, then it can be amortized over 36 months using the straight-line method. However, see the special rules for off-the-shelf and intangible software below.

o Off-the-Shelf Software – Off-the-shelf software purchased and placed in service before the year 2011 can be expensed under the Sec. 179 expensing rules, which allow up to $125,000 worth of equipment and off-the-shelf software to be expensed in 2007. For years after 2007, the $125,000 is inflation adjusted. If the amount of the total cost of equipment and off-the-shelf software placed in service during the year exceeds $500,000, then the $125,000 expense allowance is reduced one dollar for each dollar the $500,000 is exceeded. The Sec. 179 deduction is further limited by the net profit for the year from the business, but any excess carries over to future years.

o Licensed Software - The cost of software licensed for a specific period of time (unless properly chargeable to capital account) is generally deducted over the term of the license agreement.

o Developed Software – The costs of developing computer software, other than software falling under the intangible rules, can be either:

(1) Consistently expensed currently or

(2) Consistently treated as capital expenditures recoverable through deductions for ratable amortization over a period of:
o 60 months from the date of completion of the development, or
o 36 months from the date the software is placed in service.

Costs of developing software for internal use may also qualify as research and experimental expenditures. The cost of software that is for sale to the general public, which is not subject to a non-exclusive lease and has not been substantially modified, would generally be included in inventory.

o Software Acquired In Connection With the Acquisition of a Business – Generally, software acquired in this manner is treated as an intangible, the same as goodwill, going concern value, operating systems, etc., and is amortized over a period of 15 years.

As always, when dealing with taxes, there are complications. If you have questions regarding your specific business circumstances or are planning a software acquisition, please give us a call.


back to top

Writing Off Your Start-Up Expenses

Business owners, especially those operating small businesses, may find relief from a tax provision allowing them to deduct up to $5,000 of the start-up expenses in the first year of the business’ operation. This is in lieu of amortizing the expenses over 180 months (15 years).

Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

As with most tax benefits, there is always a catch. Congress put a cap on the amount of the start-up expenses that can be claimed as a deduction under this special election. Here’s how to use this deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar start-up expenses exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 - $50,000)).

The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.

Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest or research and experimental costs. Examples of qualified start-up costs include:

• Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
• Wages paid to employees and their instructors while they are being trained;
• Advertisements related to opening the business;
• Fees and salaries paid to consultants or others for professional services; and
• Travel and other related costs to secure prospective customers, distributors and suppliers.

For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are considered qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

back to top

Planning Your Business Asset Acquisitions

Small- to medium-sized businesses can significantly alter their profits for the year by timing asset acquisitions and taking advantage of depreciation and liberal expensing provisions. Understanding these provisions will help you plan your acquisitions so as to maximize the tax benefit and reduce your taxes.

Preserve your deductions for years when your taxable income is high. Don’t jump the gun and take a big write-off in a year when the taxable income is low. The tax code now allows taxpayers to expense rather than depreciate significant capital purchases, and it is tempting to save tax dollars immediately rather than consider the long-range effects of that decision. Therefore, we urge you to consider this carefully when choosing a particular course of action.

Equipment Depreciation - Generally, tangible business assets must be written off (depreciated) over a period of years. The tax code includes specific recovery periods (number of write-off years) for different types of business assets. For most businesses, these recovery periods fall into three categories: 3-year, 5-year and 7-year life property. The following are examples of each.

• 3-Year Property – This category includes tractor units for over-the-road use, racehorses over two years old when placed in service and other horses over twelve years old when placed in service.

• 5-Year Property – Examples in this category include computers, typewriters, copiers, duplicating equipment, heavy trucks, trailers, cargo containers, autos, light-duty trucks, certain technological and research equipment.

• 7-Year Property – Includes office furnishings, fixtures and equipment.

Generally, these assets are depreciated under what is referred to as the half-year convention, which means the depreciation deduction for the first year is one-half of a year’s depreciation regardless of when during the year the business asset is placed into service (see one exception below). In addition, the depreciation method used is what is referred to as the 200% Declining Balance (200% DB) method which front-loads the deduction. By combining the half-year convention with the 200% DB method, the largest depreciation deduction occurs in the second year, not the first year. Should a taxpayer wish to spread the deduction more evenly, they can elect to depreciate using different methods. The table below illustrates the annual deduction for 3-, 5-, and 7-year properties using the 200% DB method or the straight-line method (SL), which applies the deduction evenly over the depreciable life of the asset.

Half-Year Exception – If the total basis of personal property placed in service during the last three months of a tax year exceeds 40 percent of the total basis of personal property placed in service during the entire year, then a mid-quarter convention must be used instead of the half-year convention for all personal property placed in service during the tax year. The IRS mid-quarter convention tables are too extensive to reproduce in this article.

As you can see, the second year provides the largest write-off for assets being depreciated with the 200% DB method. Thus, if you expect to buy property in 2008, consider accelerating the purchase into 2007 if you wish to maximize the regular depreciation deduction in 2008.

Asset Expense Election (Sec. 179 Deduction) - Generally, if you purchase depreciable tangible personal property (including off-the-shelf computer software), you may choose, using the Sec. 179 election, to treat up to $125,000 as a deduction for property placed in service in the taxable year, beginning in 2007. However, the benefits of this election begin to phase out if more than $500,000 of qualifying property is placed in service. (The maximum amount that can be expensed ($125,000) is reduced “dollar for dollar” for eligible property placed in service in excess of $500,000). The Section 179 asset expense election is increased to $160,000 for qualifying property placed in service by a qualifying “enterprise zone business.” This election is only allowed in the first year the property is placed in service and is generally limited to the taxable income from the trade or business. However, if more than can be claimed is taken in the first year, the excess can be carried over to subsequent years, providing a way to benefit from this deduction in more than one year.

If you were thinking of applying the Section 179 expense deduction, you should be aware of certain limitations. Generally, vehicles with a gross unladen weight of 6,000 pounds or less are subject to rules, which for the first year placed in service limits the vehicle’s depreciation to $3,060 ($3,260 for light trucks) in 2007. The limit amount includes both regular depreciation and Section 179 deductions. However, for SUV vehicles with a gross unladen weight of more than 6,000 and not exceeding 14,000 pounds, taxpayers are allowed a Section 179 deduction of up to $25,000 and any excess is depreciated in the normal manner. For example, an SUV purchased in March 2007, costing $50,000 and used 70% for business, could generate a deduction of $27,000 figured as follows: (1) the business basis is $35,000 ($50,000 x .7), (2) the Section 179 deduction is $25,000 (the lesser of basis or $25,000), and (3) the regular depreciation is $2,000 (($35,000 - $25,000) x 20%).

AMT Depreciation - The alternative minimum tax (AMT) is imposed on corporations and individuals and is added to the regular tax if and to the extent the tentative AMT exceeds the regular tax. AMT is based on alternative minimum taxable income (AMTI), which consists of a taxpayer's regular taxable income increased by various adjustments for certain tax preferences and items of deferral, such as depreciation. “Small” corporations with average gross receipts of less than $7.5 million for the prior three taxable years (less than $5 million if the corporation had only one prior year), are exempt from AMT. For purposes of depreciation, the AMT adjustment is the difference between the 200% and 150% declining balance methods of depreciation. Thus, taxpayers who elect to use the 150% or straight-line methods will not have an AMT depreciation adjustment. Planning Tip - For planning purposes, there is no AMT adjustment for deduction of payments for leased property or the Section 179 expense deduction.

Example – Let’s say you own either a machine shop and need a new lathe or a bakery and need a new oven. These are both 7-year property from the table above. The new piece of equipment is going to cost you $20,000. What are your options? Well, you could apply the Sec. 179 expense deduction and write-off the entire purchase in the first year and have no deduction in a subsequent year. Or, you could apply the Sec. 179 deduction to a portion of the cost; let’s say expense the first $10,000 and depreciate the balance over 7 years. That would give you a first-year deduction of $11,429 ($10,000 plus 14.29% of the remaining $10,000) and a $2,949 deduction (29.49% of $10,000) the second year. Another option would be to depreciate the entire cost, which would give you a $2,858 (14.29% of $20,000) write-off the first year and $5,898 (29.49% of $20,000) the second year. You could even opt for straight-line deprecation, which would provide a $1,428 deduction the first year and $2,858 the second. As you can see, mixing the Section 179 expense deduction in varying amounts with different deprecation methods provides almost endless choices.

Leasehold Improvements – Generally, any leasehold improvements made during 2007 can be deducted over a 15-year period. However, without Congressional intervention, beginning in 2008, that period will revert to 39 years (as it was prior to the temporary change made a few years back). So, if you are planning any significant leasehold improvements, you may wish to complete them in 2007. Caution: Leasehold improvements do not include improvements to enlarge the building, those attributable to internal structural framework or improvements placed in service three years or sooner after the building was first placed in service.

Real Property – The depreciation deduction for residential rental property is stretched out over 27.5 years and 39 years for nonresidential property, both using straight-line methods and mid-month conventions. Real property is not eligible for the Section 179 deduction. So, in terms of the depreciation method and recovery period, there are generally no planning opportunities for real estate property depreciation.

Consult with us in advance if you are in the market to purchase equipment in the near future. We can assist you in planning the purchase to maximize your tax benefits.


back to top

GENERAL INFORMATION

Mixing Business with Pleasure

It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that a convention’s timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Business and Personal Travel

A taxpayer can deduct all travel expenses while away from home if the primary purpose of the trip was business-related. Expenses such as transportation, meals, lodging and incidentals are deductible, provided that they are not lavish or extravagant. If the taxpayer engages in both business and personal activities while away traveling, he can deduct the transportation expenses in their entirety if the primary purpose of the trip is business-related. Lodging costs and 50% of meal expenses are also deductible.

Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible lodging expense is based upon the single occupancy rate. The following examples illustrate which expenses are deductible under different circumstances:

Example #1: Susan owns a gift shop in Virginia City, Nevada and annually travels to Denver, Colorado for a gift show where she purchases merchandise for her store. Susan’s husband, Joe, decides to accompany her. Susan and Joe’s combined airfare is $950. The hotel in Denver is $480 for double occupancy. It would have been $440 for single occupancy. Susan’s meals during the trip were $186 and Joe’s were $163. The taxi between the airport and the hotel was $45 each way. Susan’s deductible business expenses for the trip are determined as follows:

Airfare – Since the airfare for both was $950, only half is attributable to Susan………………$ 475
Hotel – Since Susan would have incurred the single occupancy rate whether her husband was with her or not, she can deduct the single occupancy rate for the hotel…………………………$ 440
Taxi – Since the cost of the taxi was the same with or without her husband, Susan can deduct the entire cost of the taxi fares… $ 90
Meals – Susan can only deduct her own meal costs and, as with all business meals, only 50% are allowed ($186 x .50)………… $ 93
Susan’s Total Deductible Expenses……………………………… $1,098

Example #2: Ed is a self-employed manufacturer’s representative who works out of his home in Chicago. He attends a sales conference in New Orleans. The conference is on Thursday, Friday and Monday. On his way home after the conference, he stops off for two days in Memphis to visit some old high school buddies and play a round of golf. Since the conference overlapped the weekend and it would be more expensive to return home than to stay over in New Orleans, the cost of the weekend can be included in Ed’s deductible expenses. However, Ed will need to reduce his expenses by the additional costs he incurred for the Memphis stopover.

Cruise Ships

Occasionally, conventions will be held on cruise ships. There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer's trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions.

In addition, the taxpayer needs to fulfill stringent reporting requirements, including a written statement providing specific information by both the attendee and an officer of the sponsoring organization. Also, the taxpayer is limited to an annual deduction of $2,000, regardless of how many cruises are involved.

Foreign Conventions

In order to deduct a foreign convention (held outside of North America), the costs need to be directly-related to the active conduct of the taxpayer's trade or business, and it must be just as reasonable to hold the convention or seminar outside the U.S. as it is inside the North American area.

Please note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting's purpose, the sponsor's purpose and activities, the residence of the organization's members and the locations of past and future seminars.

The possible travel scenarios that a taxpayer can incur are endless. If you have a particular question involving travel and the deductibility of the expenses, please give this office a call so we can assist you.


back to top

Procrastination and Negligence Can Be Costly

The IRS has been increasing their enforcement efforts, and with that increased enforcement, comes the potential for penalties. Taxpayers who accurately and timely address their tax issues are far less likely to get assessed with a penalty. The following are some of the more commonly encountered penalties:

• Bad Checks & Money Orders – The penalty is the greater of $25 or 2% of the amount of the check or money order.

• Filing an Erroneous Refund Claim – The penalty is 20% of the overstated claimed amount, except if the erroneous claim was due to the earned income credit (EIC) which has its own compliance penalties.

• Underpayment of Estimated Taxes – This penalty is similar to paying interest on the underpayment. The rates are based on federal short-term rates plus 3%. Generally, for 2007, the rates have been around 8%.

• Missing ID Number - $50 each.

• Accuracy Related (Negligence) – 20% of the underpayment.

• Late Filing – 4.5% per month with a maximum of 22.5% and a minimum that is the lesser of $100 of 100% of the tax due on the return.

• Late Payment – Generally 0.5% per month, 25% maximum.

• Failure to Report Tips – 50% of the Social Security tax on the tips.

• Fraud – 75% of the unpaid tax due to fraud.

Should you receive a notice from the IRS or your state tax agency (if your state has a state tax), please contact this office immediately so we may correspond promptly. These notices are not always correct, and even when they are, prompt responses and a request for penalty abatements can minimize the penalties.


back to top

BRIEFS

Keeping Good Tax Records

Are you prepared to handle a tax emergency? Well–organized records not only help you prepare your tax return, they also help you answer questions if your return is selected for an examination or if you are billed for additional tax and need to prepare a response.

Fortunately, you don’t have to keep all tax records around forever. There are laws known as statutes of limitations that impact how long you must keep receipts, canceled checks, and other documents that support an item of income or a deduction on your return.

Generally, for questioning the amount of tax you reported or making an assessment of additional tax, the IRS has 3 years from the date the return was filed. For filing a claim for a credit or refund, you generally have 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later. For either purpose, returns filed before the due date are treated as filed on the due date. There is no statute of limitations when a return is fraudulent or when no return is filed.

You should keep some records indefinitely, such as property records. You may need them to prove the amount of gain or loss if the property is sold.

Generally, income tax returns should be kept for 3 years from the date the return was filed. They could help you prepare future tax returns or amend a return.

If you are an employer, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

If you are in business, there is no particular method of bookkeeping you must use. However, you must clearly and accurately show your gross income and expenses. The records should substantiate both your income and expenses.

Please call this office if you need assistance setting up your accounting system or organizing your records.


back to top

Most Hybrids Still Qualify for the Full Tax Credit

Original purchasers of IRS certified hybrid vehicles may claim the full amount of the credit certified for the particular vehicle 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.

Toyota, the most popular hybrid brand (which includes Lexus vehicles), reached the 60,000th vehicle in 2006. As a result, hybrids manufactured by Toyota no longer qualify for the credit after September 2007. However, none of the following manufacturers (Ford Motor Company, American Honda, General Motors, Nissan Motors and Mazda) had reached the 60,000 vehicle limit by the end of the second quarter of 2007. This guarantees that they will qualify for 100% of the credit amount assigned to those vehicles based upon their fuel efficiency.

If the vehicle is used partially for business, the credit is divided between a general business credit for the business portion of the vehicle and a nonrefundable personal credit for the personal-use portion. A nonrefundable personal credit is one that can only offset your tax liability, and the excess is not refundable and does not carryover to another year. In addition, to the extent a taxpayer is taxed by the alternative minimum tax (AMT), the credit provides no benefit. On the other hand, any part of the business portion of the credit that cannot be used in the current year is first carried back to the first preceding year and then any balance carried forward for twenty years. The business portion of the credit offsets the AMT.

Since these limitations are based on your particular tax situation, a car salesperson will be unable to provide you with any guarantee that you can benefit from all or a portion of the tax credit. The salesperson will only be able to provide you with the dollar amount of the credit available. Therefore, if your purchase is predicated on the amount of credit you will receive, we strongly urge you to call this office to estimate the amount of credit you can benefit from.


back to top