TAX PLANNING AFTER THE ELECTION: NOW WHAT?



Eddie Quigg, CPA, JD



No different, more of the same, status quo—Romney’s defeat, and an unchanged Congress—these are terms being used to describe our post-election tax and political landscape, which almost guarantees that a permanent solution to the so-called “Fiscal Cliff” will not be in place before the end of the year. Let’s call it “Gridlock—the Sequel”. We all know how the original ended---the can was kicked down the road, and here we are again, still staring at that can. Both sides are talking bipartisanship, but neither is retreating from their original positions—the Republicans in control of the House are against raising taxes-- and the Democrats in control of the Senate, following Obama’s lead, insist on raising taxes on the so-called rich.  Because of the dire consequences of inaction for the economy, some kind of temporary agreement before year-end or soon after is likely-- an extension of the current tax rates, and an agreement to raise the debt ceiling, until a permanent solution is passed sometime in 2013 or early 2014.

WHAT IS THE FISCAL CLIFF?

The short answer is that the Fiscal Cliff is what will happen on January 1, 2013—the higher taxes that kick in after the expiration of the Bush-era tax rates, and the date of implementation of the automatic spending cuts for defense and other government programs, if Congress fails to act before year-end, or early in 2013. Most importantly, there are the consequences to the economy of falling off the cliff-- a really noisy comic book type “Splat!”, only the consequences are real, and very unfunny. Hence the temporary agreement that is likely to be reached, mentioned above. We can be thankful that the noise of the election has largely died down, unfortunately the Fiscal Cliff noise is just beginning.

MAJOR 2013 TAX INCREASES

There are tax increases that are certain to take effect in 2013, notably those in the Patient Protection and Affordable Care Act, a/k/a “Obamacare”. The major increases include an additional tax of 3.8% on the lesser of your investment income or your “excess” modified adjusted gross income (MAGI) over $250,000 or more for those married filing jointly, and over $200,000 for single taxpayers. The types of income subject to the tax are dividends, interest, capital gains, rental income, income  from S corporations, partnership income, and income from annuities. There are important exceptions for retirement pay and “active” trade or business income. The details of what constitutes “active” income are unknown at this time.

The other major increase is an additional 0.9% Medicare hospital insurance tax (HI tax) that will apply to wages or self-employment income of individuals with MAGI over the above thresholds.

TAX PLANNING SUGGESTIONS FOR 2013

For taxpayers likely to be subject to additional taxes in 2013, the following tax planning ideas should be considered:

·         Taxpayers may want to sell long-term capital gain assets in 2012 rather than 2013 in anticipation of an increase in the rate, or the effect of the 3.8% surtax. This applies to stocks, bonds, appreciated real estate, and other capital gain assets.

·         Additional acceleration strategies include electing out of the installment method for qualifying assets sold in 2012, foregoing like-kind exchange  treatment, exercising non-qualified stock options, and accelerating the payment of year-end bonuses into 2012.

·         For owners of C corporations and S corporations with earnings and profits (E&P) from prior C years, they may want to pay dividends in 2012. There are various options available to S corporations to pay these dividends.

·         Conversely, it may be more tax advantageous to defer deductions to 2013 for those who anticipate being in a higher tax bracket, such as retirement plan contributions, health plan contributions, employee bonuses, not electing 50% bonus depreciation or section 179 expensing  for the purchase of business assets . Making certain accounting method elections or changes may also achieve these results.

·         For S corporation shareholders and  partners in non passive businesses, and potential real estate professionals, it is important to analyze your participation in the business to determine your “active” or “passive” status for 2013 in anticipation of the 3.8% surtax. Making changes in 2012 in this regard could be beneficial for 2013.

·         Before implementing the above ideas and strategies, it is important to factor in the effect of the alternative minimum tax.

For additional information or assistance please call or contact us at your convenience.

Here We Grow!

Megan Madden, CPA

If you have not heard the good news, Megan Madden, CPA has accepted a position as a Senior Associate in our Business Services Division.  Megan is an expert in Pension Plan and Not-For-Profit auditing.  Here at Purk she will be working primarily with our pension plan clients.  See the announcement in the St. Louis Business Journal here.

Preparing Your Business for Sale: Tips for Achieving a Happy Ending

Eddie Quigg, CPA/JD

Preparing a business for sale is more of a process than a task, and more importantly, it is usually only done once. One and done. That alone inspires deep dread for most owners, who have spent a lifetime refining and improving a single product or service—the business and its future. Let’s face it, no one likes to deal with their own mortality, and selling a business requires us to do just that. Accordingly, to stress its importance, this list begins with the soft stuff—the psychology of selling a business, and ends with a few practical suggestions—the harder stuff that most owners find is easier to implement.

The Head Game(s)

1.       To make it to the end, start early.  Selling your business is a process that can take months, even years. It starts with answering the following questions—Do I really want to retire and leave this business, am I really done, is the end in sight?  Do I want to sell to my employees, or try and keep the business in the family—are they, or will they be ready to take over when I’m ready to let go and move on?  The earlier these questions are asked, the sooner they can be acted upon.

2.       Be Objective.  Set your post-retirement goals and aspirations, and then crunch the numbers to see if they are a match, not the other way around. Many owners have unrealistic visions of buying  that beach house in Hawaii, as well as maintaining the condo close to the grandkids, which can lead to equally unrealistic expectations of what the business is really worth.  Making sure the retirement dream will work depends on your willingness to get an honest appraisal of the value of the business. The opposite also applies, some owners set the price of their business too low, which can often lead to seller’s remorse, and a busted deal, which will unnecessarily prolong the process. You may think you know what your business is worth, but getting a professional appraisal is a necessary step, for both the seller and the buyer.

Practical Tips

1.       Get your Financial House in Order.  Ask yourself how your business will look to a prospective buyer, and act accordingly. Trim unnecessary expenses, especially those personal expenses such as club dues, excessive meals and entertainment—and control your expenses in general to make the bottom line look better. Plan early to divest the business of “other assets” like investment portfolios, land , and real estate used in the business. The buyers’  focus is on the revenue producing assets and liabilities of the business, the extras are a distraction that sends the buyer the wrong message, like a cluttered desk indicates a cluttered mind. This extends to the office, the plant, even the landscaping and signage.

2.       Documention   and Transparency.  Make it easy for a prospective buyer to see how your business works. Document key processes and procedures, including the duties that key employees that are responsible for and how all these systems contribute to the success of the business. Include key documents such as leases, supplier contracts, employee contracts and manuals. Be prepared to answer the buyer’s questions, the same questions that you would ask if you were buyer.

3.       Get Help!  Selling the business is a team effort, and requires an experienced team to get you successfully to the finish line. Make sure your CPA and attorney are qualified to handle the sale, and if you employ a business broker, thoroughly investigate them before committing to a contract of representation.

Conclusion

The final step in the life of your business requires the same level and degree of commitment and preparation that you had when you started it, don’t let the end of the dream become a nightmare—prepare yourself!

Lease Accounting Changes Coming Down the Pipeline

Joe Boruff

The proposed change in accounting for leases will apply to all entities, including privately held companies and nonprofit organizations, who prepare their financial statements in accordance with US generally accepted accounting principles (“GAAP”). Entities with a significant amount of leasing activity could see dramatic changes to their balance sheet.

Overview:

Simply put, the goal of a recent exposure draft jointly published by the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) is to eliminate operating leases and get virtually all leasing transactions on the balance sheet for all entities. Generally speaking, all leases will have to be capitalized on the balance sheet once this proposed requirement is adopted. It will supersede the guidance in Topic 840 (FASB Accounting Standard Codification) on leases and IAS 17, Leases, in IFRSs (International Financial Reporting Standards).

Under current US GAAP, leases are treated as either capital leases or operating leases. These models have been criticized because they do not provide the user of the financial statements with an accurate representation of leasing transactions as they may not necessarily reflect the underlying economic reality. Current lease accounting allows for off-balance-sheet treatment of leases.

The exposure draft proposes that lessees and lessors should apply a right-of-use model in accounting for all leases. This means that the lessee recognizes an asset representing its right to use the leased property and a liability for the obligation to make future lease payments. The lessor recognizes an asset representing its right to receive lease payments and then must consider one of two approaches: the performance obligation or derecognition approach.

In light of the overall issues discussed in the IFRS convergence and its differences from GAAP, this is one area that will be pervasive for all entities ranging from the smaller privately-held companies to publicly traded companies, whether they are domestic or international.

Summary:

-          All leases for all entities must be reflected in the balance sheets of lessors and lessees.

-          There is no distinction between a “capital” lease and “operating” lease.

-          Smaller companies will be able to treat the change prospectively, upon adoption

-          Larger companies will treat the change retroactively (affecting each year presented in the current year financials), upon adoption

-          Lease terms of 12 months or less would not be capitalized by either the lessee or lessor.

-          Changes will increase debt and may affect loan covenant ratios. Changes will also likely increase EBITDA as leases currently recognized as “operating” will now have “amortization” expense and payments will reduce liability obligations under the new framework.

-          As this will apply to all entities preparing financial statements according to GAAP, some entities may opt to prepare their financial statements in accordance with an Other Comprehensive Basis of Accounting (“OCBOA”), for example, income tax basis, for third party use where OCBOA basis presentation is accepted.

Important Dates:

August 17, 2010 - The initial exposure draft for the proposed accounting standards update was issued.

June 13, 2012 - a joint press release was issued noting all decisions reached to that date were preliminary and a revised joint exposure draft would be issued in the fourth quarter of 2012. The revised exposure draft will address both the balance sheet and income statement treatment of leases to be adopted for lessees and lessors.

The FASB and IASB anticipate completing this important convergence project during 2013.

Let me know how I can be an asset to you and make this convergence one of the lease(t) of your worries!

Please follow this link to the actual FASB/IASB Exposure Draft for further details:

Are you compliant with new 401(k) Fee Disclosure Rules?

Jennah Purk, CPA, MST

You may have noticed that new rules regarding fee disclosures for retirement plans from the Department of Labor have been in the news recently.  Note that these are not new fees, but the fee disclosure requirement is new.  Two of the new requirements include:

1.       Retirement plan vendors were required to provide plan sponsors with required fee disclosures by July 31, 2012.  This is referred to as the 408(b)2 disclosure.

2.       Plan sponsors are required to provide plan participants required fee disclosure information by August 31, 2012.  This is the 404(a)5 disclosure.

The new rules also impose a requirement that plan sponsors not only fulfill the disclosure requirements but that they now examine the disclosures to ensure they are adequate and determine that the fees charged are reasonable and fair.  Many plan sponsors may not be aware of these additional duties.

Be aware that these new fee disclosure rules are different from fiduciary standards for plan sponsors.  The DOL has prepared a fact sheet on these new requirements you may view here.

Slower refunds next year???

Scott Pinkowski, CPA

According to IRS officials, due to the rapidly increasing problem of identity theft, refunds this coming year will be slower due to additional work required to verify the return has not been fraudulently filed.  Identity thieves are using stolen social security numbers to file unauthorized returns early in the season and the victims are not aware their identity has been stolen until they file their return to find it rejected.

A few reminders about identity theft…

·         The IRS does not initiate contact requesting personal info via e-mail.

·         When unsure about who is contacting you, contact the IRS with a known phone number from their website and explain the situation.  This goes for other companies too. 

·         Use a reputable return preparer.

·         And, as always, be aware of what companies and what individuals you are allowing access to you personal information including bank account numbers and Social Security numbers.

·         For more information on identity theft and the IRS click here.

New ERISA Fee Disclosure Deadline is Looming

Rachel Smith, CPA

Do you know those packages that you get from your company's retirement plan service provider?  The ones that are sitting unopened in a pile on your desk or on the floor?   Well, you will want to open those soon since they likely contain information that you as your company's plan sponsor will need to pass on to your employees as soon as possible.  The DOL finally issued the final regulations relating to ERISA fee disclosure requirements earlier  this year.  Many people have been uncertain what these new rules mean, but not taking the time to figure it out could disqualify your company's retirement plan.  The DOL now considers it part of the Plan Sponsors job to not only pass the fee information on, but also to evaluate the quality of the services that the plan participants are receiving for the price that they pay.  A summary of the due dates and requirements are below.

Effective July 1, 2012 – Service Providers must provide fee disclosures to the Plan Sponsors.

Effective August 30, 2012 – Plan Sponsors must provide fee disclosures to Plan Participants.  An example of the fee disclosure form may be found at http://www.dol.gov/ebsa/pdf/401kfefm.pdf

November 14, 2012, quarterly expense statements are required to be provided to Plan Participants starting with the quarter ending September 30, 2012.  Going forward, participants must receive the expense statement within 45 days of the end of the quarter.

If your service provider failed to provide the information by July 1, it is the plan fiduciary's responsibility to request it and pass the information on to the participants by the end of August.  If you have made reasonable attempts to obtain this information and the service provider still refuses, you can report them to the DOL by filing a notice online at www.dol.gov/ebsa/regs/feedisclosurefailurenotice.html.

What can you do to prepare?

1.       Determine who is your company's responsible plan fiduciary.

2.       Determine which of your covered service providers are included in the regulations.

3.       Contact those covered service providers and ask when they will provide the required disclosure, if they haven't already.

4.       Determine if the disclosure provided complies with the new regulations.

5.       Document your review of fee reasonableness and retain all documentation.  Reasonableness may be determined by comparing the fees paid by your plan to other plans by requesting bids from other service providers.

6.       Pass the information on to your plan participants.

Sounds easy, right?  For more information regarding the DOL regulations go to http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html.

Good luck!

Missouri Back-to-School Sales Tax Holiday

Taylor Souder, CPA



It's that time of year again...summer is winding down, kids will be heading back to school, and parents will be doing back-to-school shopping. 

This marks the ninth year of Missouri's back-to-school sales tax holiday where consumers can take advantage of the lifted 4.225% state sales tax on certain clothing, school supplies, and select other items.  The sales tax holiday begins Friday, August 3^rd at 12:01am and continues through Sunday at Midnight.

However, not all local jurisdictions will be participating in the sales tax holiday and consumers will still have to pay local sales tax which varies for each locality.  Some of the cities not participating this year include Ballwin, Brentwood, Bridgeton, Clayton, Des Peres, Ellisville, Fenton, Ferguson, Kirkwood, Ladue, Maplewood, Overland, Richmond Heights, St. Ann, St. Peters, University City, and Webster Groves.  In addition, Illinois will not be participating in the back-to-school sales tax holiday this year as they have in prior years, but Illinois residents can visit Missouri retailers in order to take part in the sales-tax holiday. 

There are some things that both consumers and vendors need to keep in mind about the sales-tax-holiday.

Consumer Guidelines

Items qualifying for the sales tax exemption include:

- Clothing of $100 or less- School supplies up to $50 per purchase

- Personal computers and related devices less than $3,500

- Computer software of $350 or less

Layaway items are eligible as long as the final payment occurs during the holiday.

If an item is out of stock, any rain checks issued will qualify as long as the item is ordered and paid for during the holiday period.

If an item purchased during the holiday is later exchanged for another eligible item of equal or lesser value, no sales tax will be due.

Vendor Guidelines

If the business is located in a jurisdiction not participating in the sales tax holiday, they will receive a long form Sales Tax Return (Form 53-1).  This return will replace the normal filing method for this period only.  All sales not qualifying and taxed at the full tax rate must be indicated on one line, and all sales that would qualify for the reduced rate will be treated as an item tax on a separate line.

If the business is located in a jurisdiction participating in the sales tax holiday, the will use their normal filing method for this period by using the total gross sales receipts for all sales made and entering the holiday sales as a negative adjustment on the return.

The sales tax holiday may not apply to any retailer when less than two percent of the retailer's merchandise offered for sale qualifies for the sales tax holiday. However, the retailer must provide the taxpayer a refund of the sales tax paid if the customer requests one.

All businesses that do not sell qualifying items may continue to use the normal filing method or voucher filing for this period.

For more information regarding the Missouri sales tax holiday refer to http://dor.mo.gov/business/sales/taxholiday/school/ or contact us.

Missouri Unemployment Loan: It's Time to Pay the Piper

Sandy Piper, CPA

In February of 2009 Missouri began borrowing money from the federal government in order to meet its unemployment payment obligations.  As of July 23, 2012, Missouri owed a total of 568,819,264.71 to the Federal Unemployment Account, according to the U.S. Department of Labor.  For Missouri employers, who are required to repay the loan with interest, there is a two part whammy.

Part I

Interest charges on the loan, which had previously been delayed for two years by the 2009 federal economic stimulus legislation, must now be paid.  Beginning in 2011, the Missouri Division of Employment Security will notify each employer of its share of the interest payment beginning with the second quarter 2012 Contribution and Wage Reports.

The interest assessed which may not, due to federal law, come out of normal unemployment fund money, is based on the employer's taxable payroll during the previous calendar year and will be printed on line 8, Interest Assessment Due to Federal Advances.  Interest charges will continue for the foreseeable future, with interest payments being due with the 2^nd quarter MODES return.

Part II

Since Missouri is in a long term borrowing situation, federal law mandates an increase in the effective rate of federal unemployment tax (FUTA).  This is separate from the interest charges. 

Currently FUTA is 6.0% of the first $7,000 paid to each covered employee.  Since Missouri has what is termed an approved unemployment insurance law, employer's receive a credit of 5.4% which normally makes the effective federal rate 0.6%.

At the end of 2011, employers were subject to a credit reduction of 0.3% which was payable by the end of January 2012, making the 2011 FUTA rate 0.9%.  This year the credit reduction will be 0.6%, essentially doubling what employers were paying for FUTA two years ago.  The money attributable to this current 0.6% reduction will be payable in January of 2013. 

As an example, if an employer paid total FUTA in the amount of $5,000 for 2012, they will have to pay an additional $5,000 by January 2013 as part of their 2012 obligation. 

When will it end?

While the amounts yielded from these reductions are being used to pay down the loan, there have been additional borrowings and, in fact, the loan balance increased from June to July.  According to the Missouri Unemployment Office, the state does not currently have an available projection indicating when full repayment may be expected.  This is due to the continued volatility of unemployment payment requirements in the state.

At one point, says a state employee, it was thought that the loan might be repaid by 2017.  However, the state no longer believes the loan will be repaid by that time and, at present, does not have a published projection for retirement of the loan.  For the foreseeable future, paying the "piper" will be more expensive, not less, as credit reductions will increase 0.3% per year until the loan is repaid. 

For information about how this may affect your overall tax picture, consult your tax professional.  If you are in need of a tax professional, please contact us.

Healthcare Rebate: What do you do with that check?

Holly Breuer, CPA

Because some health insurance providers were deemed to have "overspent" on their 2011 overhead expenses by the Patient Protection and Affordable Care Act (Obamacare), some health insurance policyholders have received rebates of a portion of the premiums they paid or they will be getting that rebate soon.  Getting a check in the mail is always nice, but then the question comes up:  what do you do with it once it arrives?  Well, if you're a business owner, that will depend on several things:   

·         How much of the premium did you, as the employer, pay for your employees?

·         How many of your employees were part of your plan in 2011?

·         Were the original premium payments paid pre-tax or post-tax?

If you as the  employer paid all of the health insurance premiums as part of your benefit package for employees, then really nothing needs to be done except to cash the check.  If, though, as is generally the case, the employees pay for some part or percentage of their monthly premiums, then you have the responsibility to make sure that the employees’ share of the rebate is allocated to them in a fair manner and then paid either through a direct refund or through reduction  of their share of future premium costs. 

Example:  You paid 50% of the health insurance premiums for your ten employees and they paid the other 50%.  If you receive a rebate check for $5,000, then the business will keep $2,500 of the rebate and the remaining $2,500 is allocated to the employees.  Assuming there has been no employee turnover, it should not be burdensome to either refund the amount using a formula relative to what each employee paid in premiums; or use the total to reduce their future premiums.

What if the amounts allocable to each employee are negligible or what if they had paid for their insurance premiums on a pre-tax basis and the rebate would be a taxable item to them?  You could decide to forgo the refund route and  instead use that rebate money to lower your current employees' future health insurance premiums.  This is also a good option for a business with a high turnover of employees since you will not be required to find employees that paid premiums in 2011 who may no longer be with your company.

If you want more information, the IRS has an FAQ sheet regarding these rebates, called "Medical Loss Ratio" rebates.  You will find that information here: http://www.irs.gov/newsroom/article/0,,id=256167,00.html

Of course, you can also call me if you have any questions.

Review Your Social Security Claiming Options Early

Jennah Purk, CPA, CHBC

The decision on how and when to claim social security benefits is one of the most important financial decisions many of us will make.  If you are married, the options and complexity increase significantly. Accordingly, a good retirement plan will include a review of the social security options long before the actual implementation date.

Maybe you know some of the basics:

·        You need 40 quarters of employment to collect benefits.

·        There is up to a 25% penalty for claiming benefits early.

·        You can increase your “full retirement age” benefits up to 32% by waiting until age 70.

Many people have a “take it while I can get it” approach, starting their benefits at age 62.  If there are health issues or lack of family longevity, this may be fine.

Many articles suggest that for a couple, the lower earning spouse claim benefits at age 62 based on their earnings record, and the higher earning spouse wait until age 70.

While we can’t even scratch the surface of this issue here, make sure you understand all your options well in advance so you can choose the optimal course when the time comes.

For more information, refer to the Social Security Administration or contact us.



Taxpayer wins late filing penalty case despite apparent bad facts



Eddie Quigg, CPA, JD

 A recently decided Tax Court case won by the taxpayer shows the wisdom of  the old adage of "you never know until you try." Presented with the facts cited in the case of Ensyc Technologies v. IRS, I wouldn't have given the taxpayer much of a chance at winning this case, but that's why horse races are run and cases are tried. The facts are as follows:

• The taxpayer is an S corporation that manufactures radio frequency identification equipment; operated entirely by its president, who works from his home in Meridian, Idaho;  
• The corporation's tax returns are prepared by an outside accountant and mailed to the taxpayer for signing and mailing to the IRS, with addtional copies provided to the taxpayer for their files--a typical scenario;
• The 2008 return with copies was duly mailed to the president, including copies of Schedules K-1 for the president to distribute to the shareholders;
• The president's files contained a copy of a 2008 Form 1120S with his signature and dated March 16, 2009;
• The IRS has no record of receiving a Form 1120S around that time;
• The IRS did receive a Form 1120S from Ensyc six months later, in an envelope postmarked 9/8/09 but the form itself was dated 2/24/09. The taxpayer contended that the form was intended to be an amended return prepared to reflect the value of Encys's assets, which the bank required before it would make a loan to the taxpayer;
• Believing that the return it received in September was the only return filed for 2008, the IRS assessed a late-filing penalty against the taxpayer of $6,408, which was upheld by IRS Office of Appeals;
• The taxpayer's only argument was that it was not liable for the penalty because it had filed its return timely on its due date of March 16, 2009

In deciding for the taxpayer, the Court first resolved the dispute about whether the president timely mailed the return before its due date in March, 2009, and found that the return was not mailed to the IRS at that time.
The Court then had to decide whether the taxpayer had reasonable cause for not timely filing the return, using the following standard: "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause."
In finding in the taxpayer's favor, the Court stated that the president "usually mailed Ensyc's tax returns on time", and further, that the president had timely signed the return; that he had retained a copy in his files, erroneously thinking he had mailed the original. The Court surmised he had timely mailed the shareholder's K-1s because an Ensyc shareholder had reported the K-1 on his return filed before April 15, 2009.
The Court rejected the IRS argument that the president's testimony was incredilble because he wrote the date February 24, 2009 on the return the IRS received in September. The Court found that the president's explanation for filing the September return was credible, saying that the misdating of the form was not a deliberate attempt to mislead the IRS because "it does not seem likely that [the president] thought that mailing a return in September with a February date would fool the IRS into thinking that he actually mailed the return in February. Although [the president] misdated the September Form 1120S, we believe his testimony that he thought he had mailed the March Form 1120S on March 16,2009."

Senator shines spotlight on IRS Whistleblower Program

Eddie Quigg, CPA, JD

Expressing his "extreme disappointment in the management of the program", Senator Charles Grassley is considering delaying the approval of the nominations of two senior Treasury appointees pending obtaining satisfactory responses to his repeated requests for information made to the IRS/Treasury concerning the program.
"The IRS does not have a problem attracting whistleblowers, " Grassley said. "The IRS has a problem processing whistleblower information and compensating whistleblowers in a timely manner. I'm hearing frustration from whistleblowers, and my worst fears are coming true. The lack of progress is demoralizing whistleblowers, and they might stop coming forward. That would be a bad outcome for the taxpayers."
Replacing "taxpayers" with "whistleblowers" the Senator's comments can be applied to the administration of the tax system as a whole. While I think the Whistleblower program should be properly administered to achieve its stated goal of curtailing tax cheaters, the same zeal and oversight should be applied to the administration of the entire tax system, which would provide a good outcome for a great deal more taxpayers.
Click here for the full text of the Senator's comments, and more links.

Memorial Day

Memorial Day is a time for remembrance, a reminder of the price so many men and women have paid for our precious freedom. It is also a time to admire the bravery and dedication of those who serve our country, and to be grateful for their selfless contribution as they protect our national security.

This meaningful day has resonance for many of us. Like you, I recognize the effort that our service members give every day – and the families that support them while they are at home and abroad.

I will be thinking of the men and women who serve our country on this Memorial Day.

               

Sincerely,

Jennah Purk

President

Purk & Associates, P.C.

Improper substantiation equals zero deduction

Recent Tax Court case illustrates importance of strict compliance with charitable deduction substantiation rules

Religious teachings often include illustrations of the dire consequences that befall those who fail to follow certain rules. A recent Tax Court case illustrates the harsh tax price a taxpayer paid for a minor rule infraction for contributions they made to a church.

The facts are simple. The taxpayer claimed a deduction for $25,171 for donations made by various checks, all but $317 were for amounts of $250 or more. In accordance with standard procedure, the church provided the taxpayer with a letter shortly after the year of the donations, acknowledging the donations and the amount, but the letter did not include a statement that the church did not provide any goods or services to the taxpayer in exchange for the donations. The taxpayer was audited by the IRS. They produced the cancelled checks and the acknowledgment letter. The IRS examiner disallowed all but $317 of the donations, citing the Internal Revenue Code section that requires the statement noted above to be in the acknowledgment letter for donations of money of $250 or more. The taxpayer then provided a second letter from the church which included the statement. The IRS still disallowed the deduction, citing the Code and pertinent Regulations which require that the statement must be furnished by the donee before the taxpayer files their tax return, or before the extended due date of the return, whichever is earlier.
Thus, for lack of a simple sentence the taxpayer lost $25,000 of the contributions they made to a church. They lost at the IRS exam level, they lost at the Appeals level, and now they have lost at the Tax Court level. And that's where the tax story will almost certainly end, the only consolation being that the taxpayer only had to undergo three levels, unlike the nine in Dante's Inferno.
The following link provides the applicable rules. http://tinyurl.com/y65oc8 

SIGN OF THE TIMES

Eddie Quigg

A recent Tax Court case could be a poster child for a sign of these tough economic times. Essentially the facts involved a couple that sold their apartment house and bought a single family residence they intended to rent out. They continued to own and live in a separate residence. On their tax return they reported the sale of the apartment house and the purchase of the single family residence as a transaction that qualified as a section 1031 exchange, deferring the gain on the sale of the apartment house, claiming that the apartment house and the rental residence were qualifying like-kind properties.
The problem arose when they were unable to rent the residence despite documented attempts to do so, and eight months later, due to economic exigencies, they sold their primary residence and moved into the rental residence. The IRS nixed the deferral of gain on the apartment house, claiming that the unrented residence was not qualifying property due to its ultimate use as the taxpayer's personal residence.
Luckily for the taxpayers, the Tax Court sided with them, holding that the couple's efforts to rent the property, and its conversion to personal use only as a last resort, did not disqualify the residence as like-kind property. Of course the payment of legal fees to defend their position probably lessened the taxpayer's joy of their victory over the IRS.

Welcome to our blog

Hi and welcome to the Purk & Associates, P.C. Blog

First, a little information about the firm and the bloggers, which can be found at this link.

Why you should read this blog, a numbered list, because as accountants we are required to use numbered lists:

1. We provide information about current business and tax topics gleaned from our experience and from our search of the world-wide web--this saves you time and money.
2. To provide a forum to acquaint you with the people at our firm on a professional and personal level through these blog posts.
3. Perhaps most important, to communicate with our clients.