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Below are articles with useful tax tips, just click on any line to view the article.

• Pension Protection Act of 2006 (December 2006) (Adobe Reader required)
• Personal Use of Company Cars (October 2006)
• Is Your Current Withholding Enough? (April 2006)
• Chances are Slim for an I.R.S. Audit (January 2006)
• Form 1099-MISC and the "Common" Reportable Items (November 2005)
• Deduction for Clean-Fuel Vehicles (October 2005)
• Domestic Production Activities Deduction (June 2005)
• Give Travelers a Per Diem
• Increase Deductibles
• How Much Should You Save Each Year for Retirement?
• Exceptions to the Business Meals Deduction Limit
• When Travel Expenses Can Be Deducted
• Avoid Unexpected Tax on Loans to Your Corporation
• What Papers Will You Need if a Family Member Dies
• When S Corporation Owners Go Too Far In Saving Payroll Tax
• Charitable Donations Can Bring Tax Savings
• Sales Tax Resale Exemption Certificates

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by Robert W. Westdorp

October 2006

Have you been thinking about having your company purchase a vehicle for yourself or an employee to use both personally and for business?  When considering such a purchase, business owners often consider the effect on cash flow and on other costs to the company.  The goal of this article is to remind employers and employees of the individual tax consequences and requirements of using a company vehicle for personal use.

Generally, if a company vehicle is used entirely for business, there are no tax consequences to the employee, and the business is allowed a deduction for 100% of the vehicle expenses.  However, when the employee uses the vehicle for personal use, including commuting to and from work, they receive a non-cash benefit which must be valued and taxed. 

To determine the amount of benefit received by the employee you need to understand what is considered “personal use” and what is “business use.”  Use is considered for business when the vehicle is used to perform some aspect of your job, such as making deliveries or traveling.  Personal use is anything that is not business related, including commuting.  Employees who drive a company vehicle for business and personal use are required to keep a log of all trips taken in the vehicle.  At the end of the year you need to determine the amount of mileage used personally and for business use.

After determining the personal use of the vehicle, a value must be placed on the personal use miles. The IRS requires a fair market equal to what it would cost to lease a similar vehicle from a third party.  This is known as the annual lease value. To make this calculation easy, the IRS provides an annual lease value for vehicles based on the vehicle’s fair market value.

Once you have determined the personal usage percentage and the annual lease value, the two items are multiplied together to determine the taxable value of the benefit.  Added to this amount is the value of the fuel consumed, which is calculated by multiplying the number of personal miles by $0.055.  The sum of the annual lease value and the value of the fuel should be shown on the employee or business owner’s W-2 at the end of the year.

Keeping good records and being aware of the tax consequences will help to avoid understating or overstating your tax liability.  If you have any questions regarding the calculation of income from the personal use of a company vehicle, feel free to give us a call.

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Is Your Current Withholding Enough?

April 2006

Our current tax system requires taxpayers to make payments of their tax liability as they earn or receive income during the year.  This is simply known as the “pay-as-you-go” system.  If you underpay your liability during the year, you may be charged a penalty.  There are two ways to “pay-as-you-go”:

1. Withholding

2. Estimated tax payments

If you are an employee, your employer should regularly be withholding tax from your earnings.  Tax may also be withheld on various other income sources including pension and IRA distributions, bonuses, commissions, and gambling winnings, to name a few.  In each instance, the tax withheld is submitted in your name to the IRS.

If your withholdings are not sufficient to cover your tax, you may have to pay estimated tax payments.  Self-employed persons generally pay their tax liability in this way.  Estimated tax payments may also have to be paid on income received from capital gains, rents, royalties, dividends, alimony and partnership income.

Now is a good time to review your withholding situation and project your tax liability for this current tax year.  You may need to complete a new Form W-4 and submit it to your employer to adjust your payroll withholding.  The IRS has a withholding calculator available on its website at www.irs.gov.  The calculator requires information from your most recent pay stub and income tax returns.  The summary screen provides information to enable you to complete a new Form W-4. 

Or better yet, give our office a call!  We would be happy to assist you with an income tax projection and determine safe withholding or estimated tax payment amounts.  It’s better to be safe, than sorry!

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Chances are Slim for an I.R.S. Audit

by Steven D. Struck, CPA

Do you break out in a cold sweat when you hear Internal Revenue Service?  Do you lie awake at night wondering whether the I.R.S. will select your return to be AUDITED?  WE HOPE NOT!  If for some reason you do, the following may ease your mind.

The I.R.S. recently issued its annual data book, which provides data on its recent activities.  One particular item of interest is the number of audits or exams performed by the I.R.S. in the 2004 fiscal year.

Here’s the good news: 1,007,874 individual income tax returns were audited out of a total of 130.1 million individual returns filed for calendar year 2003.  This translates into an audit rate of .77% of all individual returns filed.  This is up slightly from the prior year in which the audit rate was .65%. Therefore, one out of approximately 130 individual returns is audited by the I.R.S.  

What if you are a shareholder in a C corporation?  The answer depends on whether you are a shareholder of a small corporation (assets less than $10,000,000) or a large corporation (assets greater than $10,000,000).  For small corporations, only .32% of corporations were audited, which is down from .58% in 2003.  For large corporations, 16.74% were audited, which is up from 12.08% in 2003.  It appears that the I.R.S. is turning its focus on bigger corporations. 

How about S corporations and partnerships?  The audit rates of these entities are very low.  In 2004, .19% of all S corporations and .26% of all partnerships were audited; this is down from .30% and .35% respectively, in the prior year.  Be aware that recently the I.R.S. has begun targeting more S corporations and partnership returns.  Therefore, these percentages are bound to increase.

Overall, these statistics prove that the I.R.S. examines a very small percentage of total returns filed.  Therefore, your chances are slim, but there is always a chance.  If you happen to be one that is chosen for audit, we can help you defend and support the positions taken on your return.

Please call us with any questions or concerns you may have.

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Form 1099-MISC and the "Common" Reportable Items

Written by: Karen J. Barnes, November 2005

Reading and comprehending the tax instructions for Form 1099-MISC can be a daunting task for most business owners so we thought we’d help simplify it for you by concentrating on the most common items that need to be reported.  Form 1099-MISC is basically an "information" form the IRS requires businesses to file to report miscellaneous income paid to other businesses/individuals during a calendar year.  Failure to file correct information returns by the due dates can result in penalties and every person (corporate or otherwise) with some exceptions, engaged in a trade or business who, in the course of that business, makes payments totaling $600 or more to another person or business in a calendar year must file an information return, Form 1099-MISC.  Let’s start with those exceptions.     

Exceptions.  Some payments are not required to be reported on Form 1099-MISC, even though they may be taxable to the recipient.  Payments for which a Form 1099-MISC is not required include: 

   Generally, payments to a corporation.  They say “generally” because payments for attorney’s fees whether incorporated or not must be reported in box 7 of Form 1099-MISC.  A simple way to eliminate vendors from your 1099-MISC list is to  look for “Inc”, “Incorporated”, “Corporation”, or “PC” (Professional Corporation) in the vendor’s name on their invoice.  You’ll eliminate a majority of your vendors.  For example, Adamy & Company, P.C. is a professional corporation; therefore, you’re not required to send us a 1099-MISC.  (We just throw them away when you send them to us ;-)

   Payments for merchandise, telegrams, telephone, freight, storage, and similar items.  This is a big exception.  Merchandise.  No reporting for vendors who sell you office supplies, inventory items, etc.  Cool!  No telephone companies.  Great!

   Payments of rent to real estate agents, but there are separate regulations here so you should talk to us if you make these kinds of payments.

   Wages paid to employees.   These payments should be reported on Form W-2.

   Business travel allowances paid to employees.  Although, these payments may need to be reported on Form W-2.

   Cost of current life insurance protection.  This may need to be reported on Form W-2 or Form 1099-R.

   Payments to a tax-exempt organization, the United States, a state, the District of Columbia, a U.S. possession, or a foreign government.

   Certain payment card transactions if a payment card organization has assigned a merchant/payee a Merchant Category Code (MCC) indicating that reporting is not required.  This is a new one for 2005 and there is a whole Revenue Procedure (2004-43) written on this one.  If you think you fall under this exception but would like to be certain, contact us. 

So now that you know which of your vendors don’t need a 1099-MISC, let’s look at who does.  Again, we want to keep this simple so we’ll concentrate on the most commonly used boxes on Form 1099-MISC.  Those are Box 1 for Rent, Box 3 for Other Income and Box 7 for Nonemployee Compensation.  You can download a copy of Form 1099-MISC at http://www.irs.gov/pub/irs-pdf/f1099msc.pdf and its instructions at http://www.irs.gov/pub/irs-pdf/i1099msc.pdf.

Box 1, Rent.  Report amounts greater than $600 in Box 1 for all types of rents such as real estate rentals paid for office space or buildings (unless paid to a real estate agent), machine rentals or land rentals.  The only exception would be if the lessee is a corporation.  If the lessee is an individual or partnership, you are required to report the rent.  It is a very common practice for the owner of a business to own the building or land personally and have the business pay rent to him or herself.  In this situation, the business is still required to report the rents paid to the owner of the building or land even though they are basically one in the same. 

Box 3, Other Income.  Report amounts of $600 or more required to be reported on Form 1099-MISC that is not reportable in one of the other boxes on the form.  Again, the exception is payments to corporations.  This box is not commonly used.  I only mention this box because it is commonly misused.  Very often, nonemployee compensation is erroneously reported here.  This box is generally used to report punitive damages, any damages for nonphysical injuries or sickness, and any other taxable damages.  

Box 7, Nonemployee Compensation. This is the “most” commonly used box.  Enter nonemployee compensation of $600 or more here.  Include fees, commissions, prizes and awards for services performed as a nonemployee, and more commonly, other forms of compensation for services performed for your trade or business by an individual who is not your employee.  This is where legal services are reported, whether incorporated or not.  Nope, you don’t report legal services in Box 14, Gross proceeds paid to an attorney.  This is another common mistake.   Box 7 is used to report services performed by an independent contractors, individuals that are not your employees.  Services performed for your business by a business (partnership, sole proprietor) that is not a corporation are reported here also.  For more information on determining whether a person is an employee vs. an independent contractor download this document http://www.irs.gov/pub/irs-pdf/p15a.pdf and start reading “Employee or Independent Contractor?” on page 6 (or call us ;-).  

Okay, hopefully we answered your most common questions.  One last thing, dues dates.  The IRS’ copy of Forms 1099-MISC with Form 1096 is due on February 28.  But remember, the recipient’s copy must be postmarked by January 31.  You don’t want to wait until January to start working on Form 1099-MISC.  We recommend you get started now in determining which of your vendors need Form 1099-MISC and get those Taxpayer Identification Numbers (or social security numbers) now by sending them Form W-9, Request for Taxpayer Identification Number and Certification (http://www.irs.gov/pub/irs-pdf/fw9.pdf).  Tip:  Make the determination whether a vendor requires a 1099-MISC as you add new vendors to your accounting system throughout the year.  Can you imagine how much smoother the process would be in January if you did this?! 

As always, if you have any questions, please contact us at 616-485-1835 or adamy@adamyco.com

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Deduction for Clean-Fuel Vehicles

Written by: Melissa Seguin, October 2005 

If you buy a certain hybrid vehicle, you will not only save on gas prices, but you will also get a tax deduction! The Internal Revenue Service allows individuals to claim a deduction for the incremental cost of buying a motor vehicle that is propelled by a clean-burning fuel. The 2004 Working Families Relief Act allows a deduction for clean-burning fuel vehicles first placed in service in 2005 & 2006. 

The one-time deduction must take place in the first year the vehicle is used by the original owner.  The vehicle must not be obtained for resale purposes.  If the vehicle is placed in service in 2005, then you can deduct up to $2,000. If the vehicle will be placed in service in 2006, then you will be able to deduct up to $500.  There is no deduction available for vehicles placed in service after 2006.  This deduction is an “above the line” deduction meaning that you do not have to itemize in order to receive the deduction.

The vehicles that are approved by the Internal Revenue Service for this deduction are listed below:

• 2006 Toyota Highlander Hybrid

• 2006 Lexus RX 400h

• 2005 Ford Escape Hybrid

• 2001 through 2005 Toyota Prius

• 2000 through 2005 Honda Insight

• 2003 & 2005 Honda Civic Hybrid

• 2005 Honda Accord Hybrid

In order to receive the full benefit of this deduction, you must own the vehicle for at least three years. If the hybrid vehicle is sold within three years after the date you placed it in service, then you will have to recapture some of the deduction you received when you first placed the vehicle in service. The deduction will also have to be recaptured if the vehicle is modified such that it can no longer be propelled by a clean-burning fuel or it ceases to be a qualified clean-fuel property (for example, by failing to meet emissions standards). If you sell the vehicle or if it fails to qualify for the deduction in the second year, then you will have to report income in that year of 66 2/3% of the deduction. If this occurs in the third year, you will have to report income equaling 33 1/3% of the deduction.

If you purchased an approved Hybrid vehicle before 2005 and you did not report the deduction, then you can file an amended tax return.  You have three years from the date you filed your return to file an amended return to claim a refund. 

Therefore, if you are in the market for a new car, consider purchasing a hybrid vehicle. You will help the environment and you will generate a tax deduction at the same time. 

If you have any questions regarding this deduction please call us at 616-458-1835.

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DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

June 2005

The new IRC Section 199 deduction was enacted as part of the American Jobs Creation Act of 2004 and is a deduction related to income attributable to domestic production activities.   Notice 2005-14 provides taxpayers with the rules and definitions needed to compute the deduction and may be relied upon until Treasury and the IRS issue regulations under Section 199.  The deduction is effective for taxable years beginning after December 31, 2004.

Generally, the deduction is equal to a percentage of the lesser of qualified production activities income or taxable income without the Sec 199 deduction and is limited to 50% of W-2 wages paid during the same year.  The percentage is phased in and currently is 3% for years beginning in 2005 and 2006, 6% for years beginning in 2007, 2008 and 2009, and 9% thereafter.  It also should be noted that the deduction cannot be used to increase a net operating loss incurred during the same tax year.   

Notice 2005-14 defines qualified production activities income (QPAI) and the rules for determining domestic production gross receipts, allocating cost of goods sold and direct expenses as well as determining a ratable portion of other expenses and deductions not directly allocable.  The Notice further explains that the QPAI is determined on an item-by-item basis and not division-by-division or product-line by product-line.  The QPAI is the overall sum of each item and each item may have a positive or negative QPAI.  Two simplified methods are made available to smaller taxpayers with average annual gross receipts of under $25 million and under $5 million, respectively.

The deduction is available to all domestic producers including c-corporations, s-corporation, partnerships and individuals.  In the case of pass-through entities, the deduction is determined at the shareholder or partner level. The Notice provides direction as to how each owner may compute their respective deduction by taking into account their distributive share of the items allocable to the pass-through entity’s activities.  The Service and Treasury are to provide rules relating to the necessary information reporting by the pass-through entities to their owners.

Overall, the computation of Sec 199 deduction will require taxpayers to invest valuable time and resources that were not previously required in order to gather and analyze necessary information to properly compute the allowed deduction.  Taxpayers will want to identify the maximum amount of receipts attributable to qualifying production activities as well as their deductions related to non-qualifying production activities.  Analyzing these areas will maximize the amount of their qualified production activity income and will result in the most favorable deduction.

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Give Travelers a Per Diem

The company should set a fixed per diem amount for meals and lodging. When travelers are given a fixed amount, they will generally find ways of saving money because they can keep the difference. The company can save money by setting the per diem lower than average food and lodging expenditures for a city. Currently, the IRS requires no justification other than a diary if per diems do not exceed those used for federal government travel.

03/09/2004

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Increase Deductibles

Premium costs vary dramatically as the amount of the deductible increases. Small businesses can often save money by raising automobile collision, comprehensive, and property damage liability deductibles. In one case, raising the deductible from $250 to $500 decreased the collision premium 30%, and raising the deductible to $1,000 decreased the collision premium 40%. (Raising bodily injury liability deductibles, however, may not be allowed by the insurer or be justified by the premium savings.)

We recommend that the company ask for quotes with deductibles starting at $500 for autos and pickups and at $1,000 for larger vehicles. The company's agent can then compute the expected premium savings. Before deciding to increase the deductible, however, the company and its agent should discuss how the increased deductible level would impact the business if a catastrophic loss occurred. The company might want to purchase additional coverage limiting the aggregate total deductible it could pay.

03/09/2004

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How Much Should You Save Each Year for Retirement?

Are you on the track to a comfortable retirement? The amount you should save each year depends on how far you are from retirement and how aggressively you invest.

Find out how much you need to save each year to accumulate a nest egg of the size you want by retirement age.

Use the table below to estimate your needed yearly savings amount. The steps below will show you how to use it.

The table assumes an after-tax return of 5% per year - an extremely conservative assumption. If you are a more aggressive investor, you will need to save less.

Step One

Suppose you have determined that you need a lump sum of $375,000 to fund your desired annual retirement income. You are 40 years old, and want to retire at age 65.

To find out how much you must save each year to have that $375,000 nest egg by the time you’re 65, multiply $350,000 by the 25-year savings multiplier (2.1%). You will need to save $7,875 a year for 25 years (2.1% times $350,000 = $7,875).

If you are expecting a lump sum at retirement, subtract that amount from the nest egg amount.

Step Two

Now suppose you already have $75,000 in a 401(k) plan or IRA. To find out what that amount will grow to in 25 years, multiply it by the growth multiplier for 25 years (3.39). Your $75,000 will have grown to $254,250 by the time you retire (3.39 x $75,000 = $254,250). Subtract the $254,250 from $375,000. This amount ($120,750) is the amount you must accumulate by the age of 65. Multiply the $120,750 by the 25 year savings multiplier (2.1%), and you see that you must save $2,535.75 per year to accumulate the $120,750.

Monitoring Your Retirement

It’s important to look at your portfolio every year, since returns and inflation may not match your forecasts. Monitor your results to make sure you’re on target.

Catching Up

What if you have too little currently saved? To catch up, boost your annual savings rate. If you are 20 or more years from retirement, the boost won’t be that high. Or increase your retirement nest egg by delaying retirement.

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Exceptions to the Business Meals Deduction Limit

You’re already aware of the tax rule that disallows 50% of your otherwise allowable deductions for business meals. This provision normally applies regardless of the reason for the meal—from taking clients out to dinner to paying for your meals while traveling away from home. What is not nearly as widely known is that there are several exceptions to this 50% disallowance rule. When one of these exceptions applies, you generally get a 100% deduction for the business meal expenses—which might just make even a good meal taste that much better.

Here’s a quick run down of the major exceptions to the disallowance rule.

• The Office Coffee Bar. Employers who provide their employees with free coffee, soft drinks, bottled water, juices, donuts, or similar snacks or beverages to be consumed on the business premises can claim a deduction for 100% of the expense.
• Employee Parties. The 50% disallowance rule doesn’t apply to the costs of providing food and beverages at recreational, social, or entertainment gatherings primarily for the benefit of rank and file employees (as opposed to highly compensated employees). Examples include company outings (such as a summer picnic) and banquets or other gatherings (such as an annual holiday party) for employees and their guests.
• Meals Served on the Employer’s Premises. In the right circumstances (which can be fairly difficult to meet), an employer may provide employees with meals at work and claim a full deduction for the costs (without the employees having to report the value of the meals in their income). The key is the meals have to be provided (a) for a valid business reason, (b) on or near your businesses premises, and (c) primarily for the convenience of the employer (rather than merely as an added fringe benefit for employees).
• Items Available to the Public. Expenses incurred for meals made available to the general public are 100% deductible. Examples include free food and beverages at concerts hosted by a shopping mall, free dinners for potential restaurant customers, free hot dogs at a car dealership or hardware store promotion, a free wine and food tasting exhibition sponsored by a liquor dealer, and free hors d’oeuvres furnished by a realtor for a client’s open house.
• Amounts Billed to Clients. When services are provided as an independent contractor, the service provider can deduct 100% of job-related meal expenses by billing the client separately for these costs. (Obviously this isn’t always practical.) The client is then stuck with the 50% disallowance rule. If separate billing doesn’t occur, the 50% disallowance rule applies to the service provider.
• Charity Sporting Event. The allowable deduction for the cost of a ticket to a qualifying charity sporting event isn’t reduced by the 50% meal disallowance rule even when meals are included. The ticket package must include admission to the event, but it can also include meals and refreshments. To qualify for this exception, the charitable event must give 100% of its net proceeds to a charity and use volunteers to do almost all the work in the event itself. The classic example is a charity golf tournament with a meal included in the deal.
• Hours of Service Limitations. In lieu of the regular 50% disallowance, individuals whose work is subject to the hours of service limitations of the Department of Transportation (e.g., interstate truck and bus drivers) can deduct 65% of their business food and beverage expenses in 2002. The deductible percentage will increase five percentage points every two years beginning in 2004, until it reaches 80% in 2008.

As you can see, there are enough exceptions to the 50% disallowance rule that most businesses can meet at least one, if not more of them. To the extent your business qualifies for any of them, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.

If you have any questions regarding the types of business meal expenses that may qualify for a full deduction or how to properly isolate and account for them in your records, please call us so we can help you get to the right answers.

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When Travel Expenses Can Be Deducted: A Quick Review

To maximize the deduction for travel expenses, keep in mind the expenses that generally can be deducted while traveling away from home:

• Transportation fares or the actual costs (or a per mile rate) of using your own vehicle (including transportation costs of getting around in your work area, e.g., to and from hotels, restaurants, offices, terminals, etc.)
• Lodging
• Baggage handling
• Meals (subject to a 50% limit)
• Expenses of entertaining business contacts (subject to a 50% limit)

Gratuities related to the above expenditures are also deductible (subject to the 50% limit for gratuities connected with meals and entertainment).

• Phone and fax charges
• Laundry

On the other hand, the following expenses cannot be deducted:

• Costs of commuting between your residence and a work site.

These costs may be deductible if your residence is also your business headquarters.

• Travel as education
• Job hunting in a new field or looking for a new business site

The T&E provisions are, of course, more complex, but the above discussion will serve as a basic review of the rules.

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Avoid Unexpected Tax on Loans to Your Corporation

You already know you can be taxed on money you take out of your corporation. But not every corporate owner knows he or she can be can be taxed on money put into his or her corporation if it's a loan.

Stockholders who lend to their corporations are expected to charge interest on the loan at the market rate. Those who charge less, or nothing, can be taxed as if they charged at a rate periodically determined by IRS under a federal law. Specifically, the difference between that rate and the lesser (or zero) rate actually charged by the stockholder is taxable to the stockholder as interest income -- and the corporation is allowed a corresponding deduction. This "below market loan" rule is triggered once the total loan balance goes over $10,000. Paying your corporation's bills, without getting reimbursement, also counts as a loan.

IRS agents are alerted to such loans by the corporation's tax return, which asks about "Loans from stockholders."

TIP: Review any loans or expense advances to your corporation. Consider whether the outstanding balance should be reduced to $10,000 or less.

TIP: You may want to convert all or part of the loan to a capital contribution or purchase of stock. Consider seeking professional advice on how your business should be capitalized.

TIP: You might decide to regularize the transaction by fixing an interest rate and payment schedule. Your tax advisor can suggest an acceptable interest rate that will stop IRS from taxing you at a higher rate later should interest rates rise while the debt is outstanding.

Loans to unincorporated businesses normally aren't subject to this below-market-loan rule.

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What Papers Will You Need if a Family Member Dies

In the event of the death of a family member, you’ll be faced with an array of legal and financial requirements that can be psychologically overwhelming at this delicate time. To meet these requirements, you will have to provide certain documents. Among them might be:

• Certified copies of the death certificate (at least 10). Where to get them: From the funeral director or directly from the county Health Department (or similar title).
• Copies of all insurance policies. These may be in the deceased's safe deposit box or among his or her personal belongings. Where to get them: From the deceased’s insurance broker or agent or directly from each insurance company
• Social Security numbers of the deceased, his or her spouse, and any dependent children.
• Military discharge (if the deceased was a veteran). Where to get it: From the Department of Defense, National Personnel Record Center, 9700 Page Boulevard, St. Louis, MO 63132.
• Marriage certificate (if the spouse of the deceased will be applying for any benefits). Where to get it: From the Office of the County Clerk where the marriage license was issued.
• Birth certificates of dependent children. Where to get them: From either the State or the County Public Health offices where the child was born.
• Will. Where to get it: From the deceased’s lawyer, safe deposit box or personal belongings. Wills are also sometimes filed with the local probate court before the deceased’s death.
• Complete list of all assets property — including real estate, stocks, bonds, savings accounts, pensions, 401(k)s, annuities, stock options and other employee benefits, and personal property of the deceased.

TIP: If the death is expected, you should try to gather these papers in advance (other than the death certificate, of course) to lessen the strain at the time of death. Even where death seems in the distant future, it may be a good idea to have these documents on hand anyway. A good document locator system will help you better organize your affairs.

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Sophisticated Techniques For Charitable Donations

Can Bring Big Tax Savings

You may have been approached by a number of charitable organizations suggesting ways you can save tax dollars through the use of planned or deferred giving techniques. Indeed, much of the revenue of many charities comes from the use of such techniques (which is why they promote them so heavily). However, not all charities have the resources to be able to offer the more sophisticated arrangements. Even those that do might tailor the arrangement more to their needs than to yours in the absence of professional guidance.

A planned or deferred gift is a present commitment to make a gift in the future, either during your lifetime or pursuant to your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it certain tax benefits.

Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but also might offer a current income tax deduction.

If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale - all the while helping a charity.

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When S Corporation Owners Go Too Far In Saving Payroll Tax

Some owner-employees of S Corporations believe they have a way to beat the payroll tax. Their idea is to pay themselves little or nothing as salary. The S Corporation’s profit—higher since not reduced by their salary—is taxable to them (as of course salary would be). But there’s only an income tax, with no employment tax due from them or their S Corporation on pay not taken. Or so they believe.

IRS will attack this scheme, which it can often detect just by looking at the S Corporation’s return. One tip-off is a low or zero number for "Compensation of officers." Another is the entry for "Loans to shareholders"—since funds owner-employees withdraw to live on are sometimes called "loans."

IRS typically then says that the amount owner-employees withdraw (as profits or loans), or the amounts on the books as S Corporation profits, are salary subject to employment tax (as well as income tax). And penalties may be added, for negligence or failure to collect and pay over employment tax.

Such a fate befell a lawyer in a recent case, who had borrowed from his S Corporation law firm instead of drawing a salary. IRS and the courts said the loans were wages subject to employment tax, and slapped on a tax penalty for failure to collect and pay over employment tax.

IRS went a bit easier on an S Corporation owner-employee in another recent case. This time it looked at statistics on pay in comparable businesses in the area and used an amount so determined as the pay subject to employment tax. This was less than the S Corporation’s earnings; the difference escaped employment tax. The court went along with this approach.

Tax advisors who are consulted in advance will advise owner-employees to take some salary, at the low end of what’s reasonable, to pre-empt an IRS claim that the S Corporation profit is really salary too. In this case, the IRS used its own definition of reasonableness, after the fact, a definition gentler on the S Corporation than IRS often is.

Could be that a salary figure in this case, arrived at beforehand with a tax advisor’s guidance on what IRS examining agents will let stand as reasonable, would have gone unquestioned.

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Don’t Delay: Make Sales Tax Resale Exemption Certificates a Priority

It’s no secret that one of the most common problems companies experience during sales and use tax audits results from lack of adequate proofs of exemption on items purchased for resale.

Common Pitfalls

Many companies simply don’t make resale exemption certificates a priority. When they fail to obtain proofs of resale exemption, there is a greater likelihood that they never will obtain them.

The problem is even further compounded when companies have sold items for resale to companies that have gone out of business. In this situation, the resulting liabilities are difficult to avoid.

Another pitfall results when companies do not carefully track their resale purchases against inventories. When property purchased tax-free is pulled off the shelves, the company owes use tax on it. Whether the property is used in promotions, giveaways or research and development, failure to accrue and pay taxes can lead to hefty penalties.

Turn auditing problems around

When your company is notified that it is going to be audited, the smartest thing to do is to conduct a pre-audit. By doing so, your company knows where its problems are, and in many cases will have sufficient time to go back and obtain letters of usage and other forms of verification on resale items.

We also recommend companies appoint a tax expert, rather than an accounts payable or accounts receivable clerk, to answer auditors’ resale exemption questions. Having a tax expert ensures a greater likelihood that these types of problems can be resolved without an assessment.

If you have any questions in the Sales and Use tax area, please contact us.

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