President Trump signed into law the first two phases of the House’s coronavirus economic response package. Meanwhile, the Senate has been developing and negotiating "much bolder" phase three legislation.

President Trump signed into law the first two phases of the House’s coronavirus economic response package. Meanwhile, the Senate has been developing and negotiating "much bolder" phase three legislation.

Families First Coronavirus Response Act
The House had sent its Families First Coronavirus Response bill (HR 6201) and accompanying technical corrections resolution to the Senate on the evening of March 16. "I have decided we are going to vote…on the bill that came over from the House, and send it to the president for his signature," Senate Majority Leader Mitch McConnell, R-Ky., told reporters during a March 17 press briefing. "A number of my members think there are a number of shortcomings in the bill, and I counsel them to gag and vote for it anyway… and address those shortcomings in the next measure."

Senate Democrats were largely pleased with leadership’s decision to pass the House bill without amending it, while moving forward on additional legislation. "We will have other opportunities to legislate," Senate Minority Leader Chuck Schumer, R-N.Y., said from the Senate floor on the morning of March 17.

President Trump signed the Families First Coronavirus Response Act ( P.L. 116-127) into law on the evening of March 18.

Paid Leave Credits
The Families First Coronavirus Response Act increases funding for COVID-19 testing, and extends paid sick leave to employees all over the country affected by the pandemic. Under the new law, employers with fewer than 500 employees and government employers must provide paid sick leave to employees who are forced to stay home due to illness, quarantining, or caring for a family member because of COVID-19, or to care for a son or daughter if the school or place of care is closed due to COVID-19.

The new law compensates non-governmental employers for the required paid leave with refundable credits against the employer’s portion of the Old-Age, Survivors, and Disability Insurance (OASDI) payroll tax or the Railroad Retirement Tax Act (RRTA) Tier 1 payroll tax, as appropriate. It also provides similar credits for paid leave "equivalent amounts" to self-employed individuals affected by COVID-19.

Paid sick leave credit. For an employee who is unable to work because of a COVID-19 quarantine or self-quarantine, or who has COVID-19 symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee's regular rate of pay, up to $511 per day and $5,110 in total, for a total of 10 days. For an employee who is caring for someone with COVID-19, or is caring for a child because the child's school or child care facility is closed, or the child care provider is unavailable, due to the COVID-19, eligible employers may claim a credit for two-thirds of the employee's regular rate of pay, up to $200 per day and $2,000 in total, for up to 10 days.

Paid family care (child care) leave credit. For an employee who is unable to work because of a need to care for a child whose school or child care facility is closed, or whose child care provider is unavailable, due to the COVID-19, eligible employers may receive a refundable family care (child care) leave credit. This credit is equal to two-thirds of the employee's regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit.

Phase Three
"That legislation [the Families First Coronavirus Response Act] was hardly perfect. It imposes new costs and uncertainty on small businesses at precisely the most challenging moment for small businesses in living memory," Senate Majority Leader McConnell said from the Senate floor on March 19. "So the Senate is even more determined that our legislation cannot leave small business behind."

The phase three measure under consideration includes several key components, such as:

• new federally-guaranteed loans for small businesses;
• direct financial help/emergency tax relief;
• targeted lending to industries of national importance; and
• health resources for those working on the front lines of combating COVID-19.

"The small business relief will help. And so will a number of additional tax relief measures, which will be designed to help employers maintain cash flow and keep making payroll," McConnell said. He also highlighted Republicans’ focus of putting "cash in the hands of the American people…from the middle class on down."

To that end, Treasury Secretary Steven Mnuchin reportedly said on March 19 that the forthcoming economic stimulus package would deliver $1,000 to every U.S. adult and $500 for every child. Further a second round of checks in the same amount would go out to individuals six weeks later, Mnuchin added.

"Americans need cash now and the president wants to get cash now. And I mean now, in the next two weeks," Mnuchin said at the White House.

Meanwhile, Senate Minority Leader Schumer has continued discussions with Senate Republicans and the Trump administration. As this Issue went to press, it still remained unclear how quickly Democrats and Republicans will reach consensus on the phase three measure.

"We don’t want bailouts unless they are used for workers, unless the industries keep all their employees, unless they don’t cut salaries of their employees, and unless they are not allowed to buy back their own stocks or raise corporate salaries," Schumer said in a March 19 tweet.

"At President Trump’s direction, we are moving Tax Day from April 15 to July 15," Treasury Secretary Steven Mnuchin said in a March 20 tweet. "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties."

"At President Trump’s direction, we are moving Tax Day from April 15 to July 15," Treasury Secretary Steven Mnuchin said in a March 20 tweet. "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties."

The Treasury and IRS officially announced the extension on March 21 (IR-2020-58; more details can be found in Notice 2020-18).

The move to extend this year’s tax filing deadline to July 15 follows the IRS’s formal announcement that certain 2019 tax year payments could be deferred without interest or penalties (see "Due Date for Federal Income Tax Payments Extended to July 15" in this Issue).

File as Usual if a Refund is Expected
"Working with our members, state societies, and tax professionals everywhere, AICPA scored a victory in the extension of the tax filing deadline to July 15, 2020," the American Institute of CPAs (AICPA) said in a March 20 tweet. However, the AICPA noted that it still encourages taxpayers to file their returns as soon as possible so that refunds can stimulate the economy.

"The AICPA understands the need for economic stimulus and, if possible, those who can file and get refunds should do so now," AICPA president and CEO Barry Melancon said in a statement.

Similarly, Mnuchin also encouraged taxpayers to file their returns, if possible. "While I still encourage taxpayers who expect to get a refund to file their taxes, this deadline extension will give everyone maximum flexibility to do what is best for them."

See Tax Filing and Tax Payment Relief for Coronavirus/COVID-19 Pandemic for a summary of filing and payment delays allowed by the federal and state governments.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

Dollar Limits
The due date for making federal income tax payments otherwise due on April 15, 2020, for any taxpayer is automatically extended until July 15, 2020. The extension is limited to a maximum amount:

• up to $1 million for individuals, regardless of filing status, and other unincorporated entities such as trust and estates; and
• up to $10 million for each C corporation that does not join in filing a consolidated return or for each consolidated group.

Federal Income Tax Payments Only
The relief is available for federal income tax payments, including payments of tax on self-employment income, otherwise due on April 15, 2020. Thus, it applies to the payment of federal income taxes for the 2019 tax year, as well estimated income tax payments for the 2020 tax year that are due on April 15, 2020. The extension is not available for the payment or deposit of any other type of federal tax.

Taxpayers are urged to check with their state tax agencies for details on any delays in filing and payment state taxes.

Penalties and Interest
Any interest, penalty, or addition to tax for failure to pay federal income taxes postponed will not begin to accrue until July 16, 2020. The period from April 15, 2020, to July 15, 2020, will be disregarded but only for interest, penalties, or additions to tax up to maximum dollar amounts ($1 million or $10 million as applicable).

Interest, penalties, and additions to tax will continue to accrue from April 15, 2020, on the amount of any federal income tax in excess of the maximum dollar amounts. Taxpayers subject to penalties or additions to tax that are not suspended may seek reasonable cause under Code Sec. 6651 for failure to pay tax.

Individuals and certain trusts and estates may also seek a waiver to a penalty under Code Sec. 6654 for failure to pay estimated income taxes. Similar relief is not available for estimated tax payments by corporations or tax-exempt organizations for the penalty under Code Sec. 6655.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

HSAs and HDHPs
Eligible individuals can deduct contributions to HSAs. One requirement to qualify as an individual is to be covered under an HDHP and have no disqualifying health coverage. An HDHP is a health plan that satisfies certain requirements, including requirements with respect to minimum deductibles and maximum out-of-pocket expenses.

COVID-19 Relief
A health plan that otherwise satisfies the HDHP requirements will not fail to be an HDHP merely because it provides medical care services and items purchased related to testing for and treatment of COVID-19 prior to satisfaction of the applicable minimum deductible. As a result, the individuals covered by such a plan will not fail to be eligible individuals merely because of the provision of health benefits for testing and treatment of COVID-19.

This relief provides flexibility to HDHPs to provide health benefits for COVID-19 testing and treatment without application of a deductible or cost sharing. Individuals participating in HDHPs or any other type of health plan should consult their particular health plan regarding health benefits for COVID-19 testing and treatment provided by the plan, including the potential application of any deductible or cost sharing.

Caution. The IRS states that this relief applies only to HSA-eligible HDHPs. Employees and other taxpayers in any other type of health plan should contact their plan with specific questions about what their plan covers.

The American Institute of CPAs (AICPA) has requested additional guidance on tax reform’s Code Sec. 199A qualified business income (QBI) deduction.

The American Institute of CPAs (AICPA) has requested additional guidance on tax reform’s Code Sec. 199A qualified business income (QBI) deduction.

199A Deduction Guidance
The IRS issued final and proposed regulations in February 2019 on the Code Sec. 199A QBI deduction enacted in 2017 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Additionally, the IRS later issued Frequently Asked Questions (FAQs) on the computation of QBI and instructions to Form 8995, Qualified Business Income Deduction Simplified Computation, and Form 8995-A, Qualified Business Income Deduction.

However, taxpayers and practitioners need additional related guidance, according to the AICPA. "We urge that you provide additional certainty regarding which deductions are not reductions for QBI," the AICPA wrote in a March 4 letter addressed to David Kautter, Treasury’s assistant secretary for tax policy, and Michael J. Desmond, IRS chief counsel. The letter was released by AICPA on March 6.

In brief, the AICPA recommends that Treasury and the IRS confirm that the deductible portion of self-employment tax under Code Sec. 164(f), the deduction for self-employed health insurance under Code Sec. 162(l), and the deduction for contributions to qualified retirement plans under Code Sec. 404 are not automatically reductions of QBI. Additionally, it recommends that the IRS update form instructions to reflect the same treatment for a charitable deduction under Code Sec. 170.

199A Rules Under Review
Meanwhile, the White House’s Office of Information and Regulatory Affairs (OIRA) is currently reviewing Code Sec. 199A rules as related to guidance on computations for shareholders of real estate investment trusts (REIT). OIRA received the rules from Treasury on March 5, according to its website.

The IRS has issued guidance that:

• exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
• establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.

The IRS has issued guidance that:

• exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
• establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.

The guidance is effective as of the date the revenue procedure is published in the Internal Revenue Bulletin, and applies to all prior open tax years, subject to the limitations under Code Sec. 6511.

Reporting on Foreign Trusts
Code Sec. 6048 generally requires annual information reporting of a U.S. person’s transfers of money or other property to, ownership of, and distributions from, foreign trusts. Reporting is not required, however, for transactions with foreign compensatory trusts described in Code Secs. 402(b), 404(a)(4), or 404A. Further, the IRS is authorized to suspend or modify any Code Sec. 6048 reporting requirement if the United States has no significant tax interest in obtaining the required information.

Reporting Relief
The Treasury and IRS have determined that U.S. individuals should be exempt from the Code Sec. 6048 reporting requirement for certain tax-favored foreign trusts because:

• the trusts are generally subject to written restrictions (e.g., contribution limitations, conditions for withdrawal, and information reporting) by the laws of the country where the trust is established; and
• U.S. individuals with an interest in these trusts may be required by Code Sec. 6038D to separately report information about their interests in accounts held by or through the trusts.

A foreign trust covered by this guidance is a trust established under a foreign jurisdiction’s law to operate exclusively or almost exclusively to provide, or earn income for the provision of, either pension or retirement benefits and ancillary or incidental benefits, or medical, disability, or educational benefits. To be eligible for coverage, the foreign trust must meet other requirements listed in the guidance that have been established by the laws of the trust’s jurisdiction.

An eligible individual:

• must be compliant with all requirements for filing a U.S. federal income tax return for the period he or she was a U.S. citizen or resident; and
• to the extent required by U.S. tax law, must have reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the return or an amended return.

Penalty Relief
Eligible individuals who have been assessed a penalty for failing to comply with Code Sec. 6048 for an applicable tax-favored foreign trust and want relief must complete Form 843, Claim for Refund and Request for Abatement. The individual must write "Relief pursuant to Revenue Procedure 2020-17" on Line 7 of the form, and explain how the individual and the foreign trust meet the requirements in the guidance. The form should be mailed to Internal Revenue Service, Ogden, UT 84201-0027.

Scope
This guidance does not affect:

• any reporting obligations under Code Sec. 6038D or any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR);
• the exception from reporting for distributions from certain foreign compensatory trusts (Section V of Notice 97-34, 1997-1 C.B. 422); or
• the exception from information reporting requirements for certain Canadian retirement plans ( Rev. Proc. 2014-55, I.R.B. 2014-44, 753).

Proposed Regs
The Treasury and IRS intend to issue proposed regulations that would modify the information reporting requirements to exclude eligible individuals’ transactions with, or ownership of, applicable tax-favored foreign trusts. The Treasury and IRS request comments about these and other similar types of foreign trusts that should be considered for an exemption from Code Sec. 6048 reporting.

The Treasury and IRS have adopted as final the 2016 proposed regulations on covered assets acquisitions (CAAs) under Code Sec. 901(m) and Code Sec. 704. Proposed regulations issued under Code Sec. 901(m) are adopted with revisions, and the Code Sec. 704 proposed regulations are adopted without revisions. The Code Sec. 901(m) rules were also issued as temporary regulations. The CAA rules impact taxpayers claiming either direct or deemed-paid foreign tax credits.

The Treasury and IRS have adopted as final the 2016 proposed regulations on covered assets acquisitions (CAAs) under Code Sec. 901(m) and Code Sec. 704. Proposed regulations issued under Code Sec. 901(m) are adopted with revisions, and the Code Sec. 704 proposed regulations are adopted without revisions. The Code Sec. 901(m) rules were also issued as temporary regulations. The CAA rules impact taxpayers claiming either direct or deemed-paid foreign tax credits.

Covered Asset Acquisitions
The CAA rules are designed to address transactions that result in a basis difference for U.S. and foreign income tax purposes. In a CAA, the disqualified portion of any foreign income tax determined with respect to income or gain attributable to relevant foreign assets (RFAs) is not taken into account in determining direct or indirect foreign tax credits. Foreign taxes that are disqualified for foreign tax credit purposes remain eligible to be deducted.

Under Code Sec. 901(m), a CAA includes the following categories of transactions:

• a qualified stock purchase (defined in Code Sec. 338(d)(3) to which Code Sec. 338(a) applies (Code Sec. 338 CAA);
• a transaction treated as the acquisition of assets for U.S. income tax purposes and as an acquisition of stock for foreign income tax purposes;
• any acquisition of an interest in a partnership that has an election in effect under Code Sec. 754 ( Code Sec. 743(b) CAA); and
• any similar transaction determined by the Secretary of the Treasury.

An RFA is any asset, if income, deduction, gain or loss, attributable to the asset is taken into account in determining the foreign income tax.

The disqualified portion of the foreign income tax for the tax year is the ratio of:

• the aggregate base differences (i.e., excess of U.S. basis of RFA after CAA over U.S. basis before CAA) allocable to the tax year with respect to all RFAS, and
• the income on which the foreign income tax is determined.

Exemptions, Other Changes
The proposed regulations added the following three CAA transaction categories which are retained in the final regulations:

• transactions treated as an acquisition of assets for U.S. tax purposes, and as an interest in a fiscally transparent entity for purposes of foreign income tax purposes;
• transactions treated as a partnership distribution of one or more assets, the U.S. basis of which is determined under Code Sec. 732(b), Code Sec. 732(d), or which causes the U.S. basis of the partnership’s remaining assets to be adjusted under Code Sec. 734(b), provided the transaction results in an increase in the U.S. basis of one or more of the assets distributed by the partnership or retained by the partnership without a corresponding increase in the foreign basis of such assets; and
• transactions treated as an acquisition of assets for purposes of both U.S. income tax and a foreign income tax, provided the transaction results in an increase in the U.S. basis without a corresponding increase in the foreign basis of one or more assets.

The final regulations provide an exemption for CAAs if a domestic Code Sec. 901 payor or members of its consolidated group recognized the gains or losses or took into account its distributive share of the gains and losses recognized by a partnership for U.S. tax purposes as part of the original CAA. The term "aggregate base difference" is modified to take into account adjustments based on gain or loss recognized with respect to an RFA as a result of a CAA.

Under the foreign basis election in the proposed regulations, a taxpayer can elect to determine base difference as the U.S. basis in the RFA immediately after the CAA less the foreign basis in the RFA immediately after the CAA. Taxpayers may apply the election retroactively to CAAs that occurred on or after January 1, 2011, provided the remaining rules in the proposed regulations were applied retroactively. The final regulations modify the consistency requirement so that it applies only for tax years that remain open. Under a new requirement, deficiencies must be taken into account that would have resulted from the consistent application of the final regulations for a closed tax year.

The final regulations also extend the scope of the de minimis rule, under which a basis difference is not taken into account if:

• the sum of the basis differences for all RFAs is less than the greater of $10 million or 10 percent of the total U.S. basis or all RFAs after the CAA; or
• the RFA is part of a class of RFAs for which the sum of the basis differences of all RFAs in the class is less than the greater of $2 million or 10 percent of the total U.S. basis of all RFAs in the class immediately after the CAA.

An additional exclusion is added for an individual RFA with a base difference of less than $20,000.

The final regulations add a priority rule to address transactions to which both Code Sec. 901(m) and Code Sec. 909 apply. Under the rule, Code Sec. 901(m) calculations are taken into account before applying Code Sec. 909.

Tax Cut and Jobs Act changes, including the repeal of Code Sec. 902, are also reflected.

Applicability Date
The final regulations apply to CAAs occurring on or after the date the final regulations are published in the Federal Register. A taxpayer may choose to apply the regulations before they would otherwise apply, provided consistency requirements are met, for tax years open for assessment. Returns for tax years ending before the date the final regulations are published must be filed no later than one year after the publication date. For tax years not open for assessment, appropriate adjustments must be made to account for deficiencies that would have resulted from a consistent application of the rules.

It's always nice to have extra cash lying around in your business. Say you've had a good year, but you want to wait awhile before plowing the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

It's always nice to have extra cash lying around in your business. Perhaps you've had a good year, but want to wait awhile before putting the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

The accumulated earnings tax trap

If your business is taxed as a regular "C" corporation and the IRS believes that your corporation has retained cash beyond "the reasonable needs of the business," it can assess an additional tax on the corporation, in addition to normal corporate income taxes. The tax is called the accumulated earnings tax.

For tax years beginning before 2011, the accumulated earnings tax is equal to 15 percent of accumulated taxable income. Accumulated taxable income is taxable income, with adjustments, reduced by dividends paid deduction and earnings accumulated for reasonable business needs or minimum credit amount.

For tax years beginning after 2010, the rate of the accumulated earnings tax, which is imposed on the excess accumulated taxable income, is imposed at the highest rate of tax for single individuals. Currently, the highest tax rate for individuals is 35 percent, but may rise back to 39 percent in 2010 under proposals set forth by the Obama Administration.

If your business is either unincorporated or is taxed as a pass-through entity such as a Subchapter S corporation, it is not subject to the accumulated earnings tax. You get a "free pass" on the accumulated earnings tax because all profits are "passed through" to you as the owner automatically, with usually nothing paid on the corporate or entity level.

Avoiding accumulated earnings tax

What does your corporation need to do to demonstrate to the IRS that its current amount of retained earnings does not exceed the reasonable needs of the business?

IRS rules list the following as acceptable grounds for accumulating income:

(1) Business expansion and plant replacement,

(2) Acquisition of a business through purchase of stock or assets,

(3) Debt retirement,

(4) Working capital, and

(5) Investments or loans to suppliers or customers necessary for the maintenance of the corporation's business.

On the other hand, unacceptable grounds for accumulating income are:

(1) Loans to shareholders and expenditures for their personal benefit,

(2) Loans to relatives and friends of shareholders or to others with no reasonable connection with the business,

(3) Loans to a related corporation (common ownership),

(4) Investments that are not related to the business, and

(5) Accumulations to protect against unrealistic hazards.

Worse yet - the personal holding company tax

If -- due to a large surplus in your business' cash account in any particular year-- the investment income from your corporation becomes its main source of income, watch out! Your business may qualify as a  "personal holding company." A personal holding company tax is imposed on any corporation that meets the definition of a personal holding company even if the corporation was formed for legitimate business reasons. Personal holding companies are subject to an additional tax on any undistributed personal holding company income.

Any and all undistributed earnings of a personal holding company are subject to a 15 percent penalty tax in 2009 and 2010. This tax is imposed on top of the regular corporate income tax. Although the personal holding company tax should usually be avoided at all cost, it nearly always can be avoided with some planning.

If you anticipate holding more of your business profits than usual on the sidelines as cash for a while, please contact this office. We can make certain that you don't fall into a tax-trap situation that might otherwise be overlooked.

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

A. Cooking, cleaning and childcare: domestic concerns - or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it's particularly important that you don't stumble through ignorance in not fulfilling your obligations.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What it costs

In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.

Deciding who is an employee is not easy. Contact us for more guidance.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation?  In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation? In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

A corporation can make a distribution of a "dividend in kind" - which is a property distribution. For such purposes, a distributing corporation's stock and rights for such stock acquisition are not considered to be property. Dividend distributions in these forms are not treated as income that is taxable to the corporation's shareholders, with some important exceptions (e.g., distributions made instead of money; certain distributions made on preferred stock; distributions that are disproportionate; etc.).

A whole host of items can form the basis for your company's next property dividend:

• bonds issued by the government;

• real property;

• the distributing corporation's bonds;

• another corporation's bonds;

• assumption of the indebtedness to a third party of a shareholder;

• transferable vouchers enabling shareholders to receive company products or corporate services discounts;

• promissory notes from customers or other corporate asset purchasers;

• accounts and bills receivable;

• issued transferable vouchers for transportation, by an airline company;

• acquisition options for another corporation's stock; and

• rare coins (e.g., coins having a value that exceed their value as legal tender).

When a corporation distributes property that has increased in value, the corporation will recognize gain, for tax purposes, as if it had sold the property to the shareholder at the property's fair market value. However, the corporation recognizes no loss on distributions of property that have decreased in value. So it you're trying to get rid of property that is not much value to your company anyway, unfortunately, you can't get the added benefit of a loss deduction in planning a property dividend. The distribution amount that is received by a shareholder will be equal to the property's fair market value - decreased by any liabilities that the property is subject to or by any liabilities that the shareholder assumes.

Caution. For shareholders who are not corporations: according to the Tax Court, if a corporation assumes the liability of its shareholder, then at the time of liability assumption the shareholder has a dividend. The shareholder cannot assert a decrease to zero of the dividend due to secondary liability on his or her part. However, the Eighth Circuit has held that when there is a decrease in the shareholder's liability from primary to secondary, there can be no objective assessment of the shareholder's economic benefit so that the shareholder is treated as having no dividend until the corporation pays the debt.

The distribution amount is taxed as a dividend to the extent the corporation has enough earnings and profits in order to cover the distribution. Should the property's value (decreased by any debt) be greater than earnings and profits, the excess does not constitute a dividend. Rather, it is a capital return that is not taxable and is applicable first against the shareholder's basis until there is reduction to zero, at that point representing gain that is subject to taxation.

The shareholder's basis can differ from the corporation's basis in the same property. The shareholder's basis in the property that is distributed is equivalent to the fair market value of the property when it was distributed. Debt does not decrease the value for purposes of basis and the shareholder's basis is a measure of the shareholder's future gain or loss when the property is sold or deductions for depreciation if, in the possession of the shareholder, the property is depreciable.

Property distribution impacts corporate earnings and profits, which increases from gain which a corporation may recognize and decreases by the greater amount of the basis the corporation has in the distributed property or the property's value. The earnings and profits reduction decreases by any debt amount to which the property is subject.

Property dividends may make sense in a variety of circumstances, especially if the property can no longer be put to productive use by your business and only a small amount of taxable gain is at risk of being realized on the distribution. If the property's value is lower than its tax basis, however, a sale followed by a distribution of the cash proceeds may be the better way to go. Please consult the office if you wish to explore the opportunities presented by a possible property dividend in your business situation.

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes.  What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together. 

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes. What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together.

Retirement plan assets are part of taxable estate

When we begin to think about estate planning, one of the first things that we usually do is to take an inventory of what our current assets are and then we project into the future and try to estimate the assets we will have when we die. If you take a moment and think about this right now, aside from your residence, the most valuable asset you currently own (and that you will own at the time of death) is most likely to be your retirement savings (your IRAs, 401(k) accounts, and other employer-sponsored retirement plans). Looking at things from this perspective really drives home the importance of estate planning in connection with saving for retirement.

One of the reasons why we may not think about estate planning in connection with our retirement benefits is that we may have the false notion that these benefits are not part of our "estate" and therefore are not subject to estate tax. This is not true. All of your assets, regardless of the source are part of your estate and subject to estate tax (or, in other words, part of your taxable estate).This means that all of the issues that you may address with a lawyer or accountant or other financial professional regarding planning your estate will also need to be considered when planning for your retirement. When you sit down with a professional to help you plan your estate it is critical that you gather and provide as much information as possible regarding any and all retirement plans in which you participate-all IRAs, 401(k), and other plans sponsored by your employer.

Special issues involved with estate planning for retirement plan assets

Even though the funds that you have in your retirement plans are subject to the same estate planning rules and considerations as any other assets that are part of your estate, there are certain special or unique issues that come into play when you incorporate retirements savings into estate plans. Decisions made with respect to these issues may also have income tax consequences as well as estate tax repercussions. Some of the most important of these issues are:

•  Whether to elect for survivor benefits to be paid to a spouse (sometimes referred to as a joint and survivor annuity);

• Whether you should choose or designate a beneficiary with respect to your interest in an IRA or another retirement plan;

•  The tax differences to beneficiaries who receive benefits on your death but before you have begun to receive pay-out of your benefits and those beneficiaries who begin receiving benefits after retirement payments to you have commenced; and

• Benefits that may be subject to both income tax and estate tax (and are sometimes provided an income tax deduction due to the double taxation)

You must plan carefully to ensure that you get the best possible results regardless of the estate tax rules that are in effect. As you consider becoming more involved in estate and/or retirement planning, please contact the office for additional guidance.

Q:  One of my children received a full scholarship for all expenses to attend college this year.  I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses.  Is this true and what amounts spent on my child's education will be treated as qualified expenses?

Q: One of my children received a full scholarship for all expenses to attend college this year. I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses. Is this true and what amounts spent on my child's education will be treated as qualified expenses?

A: Any amount received as a "qualified scholarship" or fellowship is not required to be reported as income if your child is a candidate for a degree at an educational institution. For the college that your child attends to be treated as an educational organization, it must (1) be an institution that has as its primary function the presentation of formal instruction, (2) normally maintain a regular faculty and curriculum, and (3) have a regularly enrolled body of students in attendance at the place where the educational activities are regularly carried on. Your child has received a qualified scholarship if he or she can establish, that in accordance with the conditions of the scholarship, the funds received were used for qualified tuition and related expenses.

Qualified tuition and related expenses include tuition and fees required for enrollment or attendance at the educational institution, as well as any fees, books, supplies, and equipment required for courses of instruction at the educational institution. To be treated as related expenses, the fees, books supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses, such as expenses for room and board, travel, research, equipment, and other expenses that are not required for either enrollment or attendance at the educational institution are not treated as related expenses. Any amounts that are used for room, board and other incidental expenses are not excluded from income.

Example: Assume this year your son received a scholarship in the amount of $20,000 to pay for expenses at a qualified educational institution. His expenses included $12,000 for tuition; $1,100 for books; $900 for lab supplies and fees; and $6,000 for food, housing, clothing, laundry, and other living expenses.

The $14,000 that your son paid for tuition, books and lab supplies and fees are considered to be qualified educational expenses and therefore would not have to be reported as income. The $6,000 that he spent on housing and the other living expenses is considered to be incidental expenses and would have to be reported in his income.

Note: This tax exclusion for qualified scholarships should not be confused with the Hope Scholarship Tax Credit, which has been temporarily renamed the American Opportunity Tax Credit and enhanced for 2009 and 2010 by the American Recovery and Reinvestment Act of 2009. The American Opportunity Tax Credit can reach as high as $2,500 for 2009 and 2010 for tuition expenses paid by you for yourself, a spouse or a dependent. Scholarship money that is excluded from income cannot be used in computing your costs for the American Opportunity Tax Credit (i.e. Hope Scholarship Tax Credit). "Financial aid" in the form of student loans, however, is not counted as a scholarship and any money applied to pay tuition can qualify for the Hope Scholarship Tax Credit.

There can be all sorts of complicating factors in assessing whether a particular scholarship will be taxed, such as the treatment of work-study scholarships, educational sabbaticals, scholarships paid by an employer, and stipends to cover the tax on the non-tuition portion of attending a university. If you need additional assistance in determining the taxability of scholarships funds, please contact the office.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

Fixed payments to charity

When you set up a charitable lead annuity trust (or CLAT, for short), the intention is for the assets of the trust, and the income they generate, to ultimately one day pass to one or more non-charitable beneficiaries, for example, your children. Before then, however, you may want one or more charities to receive some of the funds. Under a typical CLAT, the charity receives a fixed payout for a pre-determined number of years or, in some cases, for the lives of specified persons. The payments to the charity remain the same regardless of how the trust performs and no minimum payment is required. In most cases, the rules do not allow your beneficiaries to receive anything from the trust until the trust ends.

Individuals who can be used as the measuring lives would be restricted to the donor's life, the life of the donor's spouse, or a lineal ancestor of the beneficiaries. The IRS did this to prevent abuse of CLATs. Some people have tried to artificially inflate the tax benefits of CLATs by using unrelated individuals, such as those who were seriously ill and were expected to die prematurely, as the measuring lives.

Tax benefits

When the trust ends, the assets of the trust and the income earned by the trust pass to your beneficiaries tax-free. That is a potentially huge savings of federal estate and gift taxes. The top federal estate and gift tax rate in 2009 is 45 percent. If the original trust assets were passed directly to your heirs, taxes could reduce significantly your bequest. Placing the assets in a CLAT helps to preserve - and more importantly - grow them. The estate tax is fixed when the CLAT is created and not when the assets pass to your beneficiaries.

Generally, income paid to the charity is subject to tax by the owner of the trust. However, careful planning, such as funding the trust with tax-exempt bonds, can reduce or eliminate any tax liability on the part of the owner.

Timing the creation of a CLAT

CLATS need not be set-up after you die. You can fund a CLAT today and see the benefit of your gift as a charity makes good use of it. However, if you want to create a CLAT during your life, keep in mind that you will not be able to use assets in the trust.

A CLAT -- created either before or after your death -- can continue your legacy of giving to your favorite charities, while yielding overall tax savings for you and your family. Please contact the office if you have any questions on how a CLAT, or another variety of charitable trust, might work for you.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Deductible investment expenses

Investment interest. A significant source of investment-related costs is investment interest expense. Investment interest paid related to the generation of taxable investment income is generally deductible on Schedule A of Form 1040, however certain limitations may reduce the amount deductible. For example, your deduction for investment interest paid may not exceed your net investment income. "Net investment income" is arrived at by subtracting your investment expenses (other than interest expense) from your investment income. Interest paid in excess of that amount determined to be deductible can be carried over and deducted in subsequent years (after application of these rules, of course).

Other investment expenses. Qualified investment expenses (other than interest) can be claimed as miscellaneous itemized deductions on Schedule A of your federal Form 1040 and are generally subject to the 2% threshold imposed on miscellaneous itemized deductions. If you itemize your deductions on your return, to the extent that these and other miscellaneous itemized deductions exceed 2% of your adjusted gross income (AGI), they are deductible from income.

The list of investment expenses approved for inclusion as miscellaneous itemized deductions (by the IRS or the courts) is a long one -- and one worth reviewing by you as a taxpayer, as unexpected ways to reduce your taxable income can be found. Some of the investment expenses that have been determined to be deductible as miscellaneous itemized deductions subject to the 2% floor include:

• Investment counsel or advisory fees, including managers or planners.
• Subscriptions to publications offering investment advice.
• Legal expenses for the maintenance, conservation or management of investment property.
• Legal expenses incurred in recovering investment property or amounts earned by such property.
• Guardian fees and expenses incurred in the production or collection of income of a ward or minor or in the management of the ward or minor's investments.
• Clerical help and office rent connected with the management of investments and/or the collection of the income they generate.
• Accounting fees for keeping investment income records.
• Depreciation of home computers used to manage investments that produce taxable income.
• Costs of premiums and other expenses for indemnity bonds for the replacement of missing securities.
• Dividend reinvestment plan (DRIP) service charges, such as charges for holding the shares acquired through the plan, collecting and reinvesting cash dividends, keeping individual records, and providing detailed statements of accounts.
• Proxy fight expenses if incurred in connection with a legitimate corporate policy dispute
• Investment expenses connected with the purchase, sale or ownership of securities
• Fees paid to a broker, bank, trustee, or other investment-related agent to collect interest or dividends on taxable investments.
• Losses on non-federally insured deposits in an insolvent or bankrupt financial institution, if the loss is treated as an ordinary loss by the taxpayer but is not treated as a casualty loss; and subject to a $20,000 limit on losses from any one institution.
• Allocable investment expenses of privately offered mutual funds.
• Custodial fees.
• Safe deposit box rent so long as the box is used for the storage of (taxable) income-producing stocks, bonds, or papers and documents related to taxable investments^.
• Travel costs incurred in making trips away from home to check on your property or to confer with investment advisors about your income-producing investments. But be careful -- if your investment property is in Vail or Maui, make sure your records establish that your trip was primarily made to check on your investment, not to take a personal vacation.

The expenses generated in connection with the management of investment property are deductible even if the property isn't currently producing income -- so long as the property is held for the production of income. And expenses incurred in reducing additional loss or to prevent anticipated losses with respect to investment property are also deductible.

Nondeductible investment expenses

What kinds of investment-related expenses are not deductible? A nonexclusive list of such expenses includes:

• Fees charged by a broker to acquire securities. These costs are instead added to the basis of the securities. Similarly, fees paid on the sale of securities reduce the selling price.
• Fees for establishing or administering an IRA, unless billed and paid separately and apart from the regular IRA contribution.
• Expenses related to tax-exempt investments.
• Trips to attend seminars or conventions connected with investment or financial planning.
• Trips to stockholder meetings. Although an exception has been made where a taxpayer with significant holdings traveled to a meeting to protest specific practices that were hurting his investment.
• Home office expenses, unless investing is actually the taxpayer's business.

Remember, for purposes of the rules governing investment expenses, rental and royalty income-related properties are not considered. These investments are subject to their own rules and reporting requirements, and are not included in the category of investment expenses limited by the 2% threshold.

While this discussion related to the tax treatment of investment-related expenses may appear comprehensive, other limitations and exceptions exist that may apply to your tax situation. For more information regarding how you can make the most of your investment-related expenditures, please feel free to contact the office for assistance.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The Electronic Federal Tax Payment System (EFTPS) is a simple way for businesses to make their federal tax payments. It is easy to use, fast, convenient, secure and accurate. It also saves business owners time and money in making federal tax payments because there are no last minute trips to the bank, no waiting lines, no envelopes, stamps, couriers, etc. And best of all, tax payments are initiated right from your office!

What is the EFTPS?

EFTPS is an electronic tax payment system through which businesses can make all of their federal tax deposits or payments. The system is available 24 hours a day, seven days a week for businesses to make their tax payments either through the use of their own PC, by telephone, or through a program offered by a financial institution.

What federal tax payments are covered by EFTPS?

Some taxpayers mistakenly assume that EFTPS applies only to the deposit of employment taxes. EFTPS has much broader reach. It can be used to make tax payments electronically for a long list of payment obligations:

• Form 720, Quarterly Federal Excise Tax Return;
• Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return;
• Form 941, Employer's Quarterly Federal Tax Return;
• Form 943, Employer's Annual Tax Return For Agricultural Employees;
• Form 945, Annual Return of Withheld Federal Income Tax;
• Form 990-C, Farmer's Cooperative Association Income Tax Return;
• Form 990-PF, Return of Private Foundation;
• Form 990-T, Exempt Organization Business Income Tax Return Section 4947(a)(1) Charitable Trust Treated as Private Foundation;
• Form 1041, Fiduciary Income Tax Return;
• Form 1042, Annual Withholding Tax Return for U.S. Sources of Income for Foreign Persons;
• Form 1120, U.S. Corporation Income Tax Return; and
• Form CT-1, Employer's Annual Railroad Retirement Tax Return.

How can I get started using EFTPS?

To enroll in EFTPS, the taxpayer must complete IRS Form 9779, Business Enrollment Form, and mailing it to the EFTPS Enrollment Center. To obtain a copy of IRS Form 9779 a taxpayer or practitioner can call EFTPS Customer Service at 1-800-945-8400 or 1-800-555-4477. The enrollment form may also be requested from the IRS Forms Distribution Center at1-800-829-3676.

After you complete and mail the enrollment form, EFTPS processes the enrollment and sends you a Confirmation Packet, which includes a step-by-step Payment Instruction Booklet. You will also receive a PIN under separate cover. Once the Confirmation Packet and the PIN are received, you can begin to make tax payments electronically.

What flexibility is available within the EFTPS for payment options?

There are two primary ways to make payment under EFTPS - directly to EFTPS or through a financial institution. If you wish to make payments directly to EFTPS, the "ACH debit method" should be selected on the enrollment form. Deposits and payments are made using this method by instructing EFTPS to move funds from the business bank account to the Treasury's account on a date you designate. You can instruct EFTPS by either calling a toll-free number, and using the automated telephone system, or by using a PC to initiate the payment.

If you instead elect to make payments through a financial institution, the "ACH credit method" should be chosen on the enrollment form. This method works by using a payment system offered by the financial institution through which you instruct the institution to electronically move funds from your account to a Treasury account.

Although the ACH debit and the ACH credit methods are the primary payment methods for EFTPS, a taxpayer may also choose the Same Day Payment Method. You should contact your financial institution to determine if it can make a same day payment.

If I provide the IRS with access to my bank account, can it access my account for any other purposes?

It is important to note you retain total control of when a payment is made under EFTPS because you initiate the process in all instances. In addition, at no time does the government or any other party have access to your account from which the deposits are made. The only way to authorize deposits or payments from your account is through use of the PIN that is given to you upon enrollment.

Many businesses have recognized the convenience of voluntary participation in the IRS's EFTPS program. If you are interested in discussing whether your business would also benefit from this program, please contact the office for a consultation.

Q. Since our children are grown and now out on their own, my husband and I are considering selling our large home and purchasing a small townhouse. We have owned our home for years and have quite a lot of equity built up. How do we figure out how much our potential capital gain would be? Will we pay more in taxes because we are moving to a less expensive home?

If you are considering selling a home you've owned for years and have a lot of equity in - for example, you would like to move to a smaller place - you will want to figure out how much your potential capital gain will be on the sale. Moreover, perhaps you'd also like to know if you'll pay more taxes because you are moving to a less expensive home.

The homesale exclusion

First, you will not be penalized (in the form of recognizable capital gains) for buying a less expensive home that doesn't require that you reinvest all of your gain. Under Code Sec. 121, $500,000($250,000 for single individuals and married taxpayers filing separately) in gain from the sale of a principal residence is generally excluded from income. Remember, however, that under the Economic Recovery Act of 2008, periods of "nonqualifying use" will reduce the amount of gain you can exclude from income.

Determining basis

In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence. The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

• Attorney's fees,
• Abstract fees,
• Charges for installing utility service,
• Transfer and stamp taxes,
• Title search fees,
• Surveys,
• Owner's title insurance, and
• Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be added to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)

If you are considering selling your home, it pays to know in advance what the tax ramifications may be. If you need assistance determining the basis of your personal residence, please contact the office for more guidance.

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

Although the cost of computers and peripheral equipment has dropped significantly over the past year, a tax deduction for all or part of the expense can still help lower the bottom-line price tag of this major purchase. But despite both the widespread use of computers and the temptation to somehow "write them off" on a tax return, the IRS has remained surprisingly quiet. Rather than release any direct guidance on the issue, the IRS has chosen to rely on old rules that were established before the recent computer revolution. As a result, the business use of your home computer will need to fall within these standard rules if you want to take any related deductions.

In order to claim a deduction for your home computer and any peripheral equipment, you will need to prove that the expense occurred in connection with an active business - just as you would for any other business expense. An active business for purposes of a business expense related to a home computer will usually arise from one of two types of business activities: as a self-employed sole proprietor of an independently-run profit-making business; or as an employee doing work from home. Deductions from both types of activities are handled differently on an individual's income tax return and there are separate conditions that must be met for either scenario.

Self-employed person. In order for you as a self-employed person to deduct computer-related costs on Schedule C - whether for a home-based computer or one in a separate business location - it is required that your expenses relate to a profit-motivated business versus a "hobby". In the eyes of the IRS, a business will be deemed a hobby if there is no profit motive and the "business" is half-heartedly pursued simply to write off items or achieve some other personal purpose. If your Schedule C business shows a net loss year after year, you may be considerably more likely to have the IRS audit your return to inspect whether your purported business is actually legitimate under the tax law.

Employee. A miscellaneous itemized deduction on Schedule A is allowed for computer costs that are directly related to the "job" of being an employee. In order to claim a deduction for computer-related expenses as an employee, you must show a legitimate reason related to your employment for regularly using a computer at home. The availability of a computer in the office, the ability for you to keep your job without the home computer, the lack of telecommuting policy at work, or the lack of proof that your computer is used regularly for office work will make it more difficult to convince the IRS that a legitimate business reason exists for the deduction.

Some taxpayers have succeeded in writing off the expense of a computer as an educational expense related to business. For you to succeed in this deduction, you must carefully document that the education is undertaken to maintain or improve skills required in your current business or employment, or to meet specific educational requirements set by your employer. Computer expenses related to education that qualifies you for a new trade or business is not deductible.

Note to employees: computer-related business expenses taken as a miscellaneous itemized deduction are deductible only to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. For many taxpayers, a good strategy is to "bunch" purchases of computer equipment all in one year so that more of the cost will rise above the 2 percent floor.

Aside from applying the general rules discussed above for a for-profit business and miscellaneous itemized deductions to determine if you are able to deduct business-related computer costs, the IRS is likely to dust off other standard tax principles in evaluating whether your computer expense write off is acceptable:

• Depreciation. Business items that have a useful life beyond the current tax year generally must be written off, or depreciated, over its useful life. As technological equipment, computer equipment is assumed to have a 5-year life. Accelerated depreciation of those 5 years is allowed for all but "listed property" (see, below). An exception to the mandatory 5-year write off involves items that qualify for "Section 179" expensing (see below). Keep in mind that only the cost associated with the business-use portion of your computer can be expensed.

• Section 179 deduction. Section 179 expensing allows you to deduct each year up to $250,000 in 2009 of the cost of otherwise depreciable business equipment, including computers. As with depreciation, keep in mind that only the cost associated with the business-use portion of your computer can be expensed.

• "Listed property" exception. A "listed property" exception will deny Section 179 expensing if a home computer is used only 50% or less for business purposes. If so, you must depreciate the computer evenly over 5 years. For example, if the business-use portion of a $10,000 computer is 80%, then $8,000 of its cost qualifies for direct expensing. If 45% is used for business, no part of the cost may be immediately expensed.

• Recordkeeping. Since most home computers are "listed property", listed property substantiation rules apply. These rules require you to keep a contemporaneous log every time you use your computer to prove the percentage of your business use.

• Internet connectivity. If you use a modem to connect your computer to the Internet, keep in mind that the first phone line to a home office is not deductible, even on a pro-rated basis. A second line, however, may be written off as a business expense. If you connect via DSL or incur other Internet-only access service costs, be aware that the IRS has not taken a position here but some experts predict that the IRS eventually may consider the potential for personal Internet use to compromise such a deduction.

• Computer software. Computer software generally may be amortized using the straight-line method over a 36-month period if the costs are separately stated from the hardware.

• Computer repairs. Repairs that don't upgrade the useful life of the machine may be deducted immediately. However, making significant system enhancements, such as adding additional memory, would generally need to be added to basis and capitalized.

If you have any questions regarding writing off the business-related costs associated with your home computer, please contact the office for a consultation.

The nondiscrimination rules associated with 401(k) plans can make it difficult for key employees to fully reap the benefits of these plans. However, a very useful planning technique may provide greater benefits to highly compensated employees who participate in the company 401(k) plan.

The nondiscrimination rules associated with 401(k) plans can make it difficult for key employees to fully reap the benefits of these plans. However, the IRS recently gave its approval to a very useful planning technique that may provide greater benefits to highly compensated employees who participate in the company 401(k) plan.

A perennial problem for employers sponsoring 401(k) plans is to pass the special nondiscrimination tests each year without the highly compensated employees needing to take previously-made elective deferrals back into income. While there are a number of ways that 401(k) plan sponsors can address this problem, some of these employers also sponsor a nonqualified plan that permits highly compensated employees to defer greater amounts of salary from immediate income than the 401(k) plan permits.

401(k) Wraparound

The "401(k) wraparound" planning technique is an arrangement that has been employed by some tax professionals for their clients who sponsor both a 401(k) plan and a nonqualified plan to provide HCEs with the ability to maximize the benefits offered when these two plans are paired (or coordinated to operate in tandem with respect to the HCEs).

How the Wraparound Works

The arrangement works with a 401(k) and a nonqualified plan that have almost identical provisions. Here's how it works:

• A select group of HCEs that the employer chooses for participation in the nonqualified plan each make an election in Year 1 to defer a certain amount of their Year 2 compensation to the nonqualified plan.

• Early in Year 3, the employer performs the special nondiscrimination tests applicable to 401(k) plans. At that time, a determination is made concerning how much the HCE participating in the nonqualified plan could have deferred to the 401(k) plan for Year 2 and still permit the employer to pass the nondiscrimination tests.

• That amount of the HCE's Year 2 deferral to the nonqualified plan is then transferred from the nonqualified plan to the 401(k) plan as a Year 2 deferral (the HCE also had to have made an election to make this transfer at the same time as his or her other Year 1 deferral election).

• If no amount of the HCE's Year 2 deferral can be transferred to the 401(k) plan, the entire amount deferred for Year 2 remains in the nonqualified plan.

Employers who use this technique can avoid the awkward administrative hassles that accompany the refund of excess contributions to HCEs when the plan does not initially pass the 401(k) nondiscrimination tests. In addition, the arrangement also permits HCEs to defer as much as possible in a safer 401(k) plan rather than in an unfunded nonqualified plan.

It is clear that a 401(k) wraparound arrangement may provide additional benefits to the key employees of certain companies. However, since the tax implications of such an arrangement to both a company and its key employees should be carefully considered before any implementation is initiated, please contact the office for further information or a consultation regarding how this type of arrangement can benefit your company.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

In the ruling, the IRS determined that the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code's new capital gains exclusion on the sale of the house. The exclusion permits those who sell their personal residence anytime after May 6, 1997, to exclude up to $250,000 in capital gains ($500,000 for those filing joint returns). The IRS concluded that the individual's inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.

Family trusts: A common estate planning tool

As part of an estate plan, an individual may place assets, such as a home, into a trust and name an income beneficiary or beneficiaries. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Only the trust's designated trustees have the power to make decisions related to the encumbrance or disposal of the trust's assets. When the asset is a personal residence, this type of trust allows for preferential estate tax treatment while the income beneficiary has the ability to continue living in the home.

IRS: "No Capital Gain Exclusion"

The IRS's stance is that, even though an individual may have enjoyed the use of a house for many years, if the house was in a family trust, ownership of the house would always be vested in the trust. Under the federal tax rules, a beneficiary of a trust may be deemed an owner of the trust if he or she has the power to reach and to take all of the trust's assets for his or her use. When a beneficiary is treated as an owner, a sale by the trust is equivalent to a sale by the beneficiary. However, when an income beneficiary has no control over the fate of the assets of the trust, the IRS has found that the beneficiary is not the owner of the trust and therefore would not qualify for the Tax Code's capital gains exclusion upon the sale of a residence held in such trust.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. Please contact the office for additional guidance in this area.

It can happen to any busy small business owner with inadequate tax assistance - depreciation deductions lost to errors or oversight. While amending and refiling your tax returns can help you recover depreciation lost in recent years, there is another remedy available that will allow a current deduction for depreciation going back to even "closed" tax years.

It can happen to any busy small business owner with inadequate tax assistance - depreciation deductions lost to errors or oversight. While amending and refiling your tax returns can help you recover depreciation lost in recent years, there is another remedy available that will allow a current deduction for depreciation going back to even "closed" tax years.

The tax law says that when you go to sell an asset, you must reduce the basis of the asset by the depreciation "allowed or allowable." For those companies that inadvertently missed out on the full depreciable deduction allowable on its assets, they get hit twice - once by the lost depreciation deduction and then again when they go to sell the asset and the basis is reduced for depreciation "allowable" but never claimed. Fortunately, the IRS does provide some relief. There are two courses of action to choose from to claim that "lost" depreciation:

Amend your returns. If your failure to deduct the full amount of depreciation allowed by law is limited to the prior tax year, your best bet is to simply file an amended tax return for that year. The error in computing depreciation must have resulted from:

• A mathematical error;
• A posting error made in any year, OR;
• No method of accounting was not adopted for certain property

If eligible, the amended return must be filed by the later of 3 years from the date you filed your original return for the year in which you did not deduct the correct amount; or 2 years from the time you paid the tax for that year.

Change your Accounting Method. If your failure to deduct the full amount of depreciation allowed by law extends beyond the prior year, you have in effect adopted a new method of accounting and must apply with the IRS to change your accounting method in order to claim the depreciation not deducted. In order to claim depreciation allowable but never claimed in prior years as a current tax deduction, you will need to get IRS approval for your change in accounting method.

To get IRS approval, you will need to file Form 3115, Application for Change in Accounting Method. Although this form can be quite a task to complete, the IRS does grant automatic approval under certain circumstances as long as you are making a change to an allowable method. Keep in mind that you may not be eligible for automatic approval if you are being audited or had certain recent requests for change in accounting method.

If you are concerned that you may have missed depreciation deductions due to you in the past, please contact the office for a review of your prior years' returns.