In a separate post, which most of you have received, I have published a brief summary of the recently enacted American Recovery and Reinvestment Tax Act of 2009 (also known as the Stimulus Act) as it applies to individuals. This post will summarize the provisions of the Act applicable to businesses. I will follow this with others going into somewhat more detail for each of these provisions.

• The favorable 50% bonus depreciation deduction now applies for property acquired after December 31, 2007 and placed in service during 2009 (and 2010 in the case of certain longer-lived and transportation property). Taxpayers having unused AMT or research credits may elect to accelerate these credits in lieu of taking bonus depreciation.
• The “Section 197” election for a business taxpayer to expense property purchases was due to be reduced to $125,000 for 2009. The $250,000 amount available for 2008 has now been extended and covers equipment purchased in tax years beginning in 2009. The other limitations to use of the maximum section 179 deductions are basically unchanged.
• The Internal Revenue Code has for years contained a provision that allowed a current year net operating loss (NOL) of a business to be carried back to the two immediately preceding tax years in order to effect an immediate tax refund for taxes paid in those years. Any remaining NOL did not disappear, but could be carried forward for an additional 20 years following the loss year. Certain extended carryback provisions applied to certain disaster areas and industries. The Act has modified the NOL carryback provisions by adding additional, elective, carryback periods for small businesses. A small business is defined as one have a three-year average of less than $15,000,000 in gross receipts. Electing small businesses may now elect to carry a 2008 or 2009 loss back as far as five years. However, if more beneficial, the taxpayer may also elect to carryback only as far as the fourth or third years preceding 2008. Careful, this is a one-time election and may require significant planning to produce the maximum tax refund (that is, you can only make the longer carryback election for losses incurred in 2008 or 2009, but not both 2008 and 2009). Note that this provision may be applicable to 2008 tax returns currently being prepared.
• Here’s a change that is applicable to “qualified” individuals, estates, and trusts making estimated tax payments in 2009 and having business income from “small” sole proprietorships, S corporations, and partnerships in 2008. Under present law, the required annual estimated payment was to have been the lesser of 90 percent of the actual tax on their 2009 return or 100 percent (110 percent for 2008 AGI of more than $150,000) of the tax shown on their 2008 return. This 100 or 110 percent amount has been reduced to 90 percent. A “qualified” person is one whose AGI in 2008 did not exceed $500,000 ($250,000 if married and filing separately) and who certifies that more than 50 percent of their 2008 gross income came from a “small business.” The Service will issue regulations as to how a taxpayer makes this certification. For this purpose, a “small business” means a trade or business having an average of less than 500 employees in 2008.
• The law currently contains a “work opportunity tax credit” for up to 40 percent of “qualified first-year wages” (generally providing a credit not exceeding $2,400 per new employee) paid to members of certain targeted groups. The classes of targeted groups have been expanded to include “unemployed veterans” and “disconnected youth” hired in 2009 or 2010. I’ll expand this explanation, including definitions, in a future post.
• Regular “C” corporations, or any person involved with a trade or business, who “reacquires” outstanding business debt for less than the remaining balance of that debt is required to recognize “discharge of indebtedness” income. In other words, you must take into income the amount you no longer have to repay. One reacquires outstanding debt by paying it off, renegotiating the note with the lender, or issuing new debt in place of the old. Typically, this income is recognized in the year of cancellation. Under the Act, a taxpayer may elect to recognize income resulting from forgiveness of business debt in 2009 or 2010 ratably over five years beginning in 2014. This spreads the income hit equally over tax years 2014 – 2018. Note: this applies to business debt only, not personal mortgage indebtedness. That may be the subject of separate legislation.
• Under present law, non-corporate taxpayers may exclude from income 50 percent of any gain resulting from the sale or exchange of “qualified small business” stock held for five years. In the case of such stock acquired after February 17, 2009 and before January 1, 2011, the Act raises the amount excludable to 75 percent. The bad news is that the five-year holding period still applies. Taxpayers will not realize any benefit from this provision for sales of such stock before February 17, 2014. A “qualified small business” is a C corporation with assets of less than $50 million.
• S corporations that once were regular C corporations are subject to a special “built-in gains tax” for 10 years on any realized gain (including goodwill) that arose in their C corporation tax years. This produces “double tax” (once to the corporation, again to the shareholders) for that gain. For tax years beginning in 2009 and 2010, this 10-year period is reduced to 7 years. If it makes good business sense, S corporation with appreciated assets from C corp years more than 7 years ago may want to dump those assets in 2009 or 2010 and be taxed only once (at the shareholder level) on such gains.

These are the only provisions applicable to most businesses. There are other provisions applicable to particular industries, tax-exempt bonds, and energy incentives. I’ll flesh out later the provisions I have summarized above. In the meantime, if you have any questions, please email or call me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

It has been hard to write about the recently enacted American Recovery and Reinvestment Act of 2009 (the Stimulus Bill), because it is so terribly disappointing. I didn’t like it when I first read it, neither the market nor the public liked it, and the more I read it, the more disappointed I am. Any stimulus to the economy is likely going to be first realized by money the Act gives to the states to keep them afloat and to spend on infrastructure repair and replacement. I trust this will create new employment before the end of the year.

So much for venting (for now). There’s a lots to not like, but let me quickly summarize the tax provisions - which do little - applicable to individuals. I will supplement this summary with additional information over the next few days concerning specific parts of the tax legislation. I will have different posts for individuals and businesses. I will also do a business summary similar to this one. First, understand that the Stimulus Act is in two parts (Parts A and B). Within the Act’s 1,071 pages (my copy, which is the hand-marked up, margin-annotated version of the conference committee bill) are numerous titles and subsections that carry their own names, leading one to believe they were separate pieces of legislation (they probably were once, and have been lying around the House for years). The tax title, in Part B, is known as the American Recovery and Reinvestment Tax Act of 2009. Here’s the brief summary applicable to individuals in this section of the Act:

• You’ve heard about the much-touted Making Work Pay Credit, which is to give each individual a maximum $400 ($800 for joint filers) tax reduction in 2009 and again in 2010. You’ll get this through reduced income tax withholding ($400/52 equals about $8 per week) beginning sometime later this year. If your adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers), you’ll have to pay some or all of it back when you file your 2009 tax return.
• The Earned Income Tax Credit is increased for 2009 and 2010, particularly for taxpayers with three or more children. Those taxpayers may now claim a maximum credit of about $5,656. The credit phases out for all taxpayers above a certain earned income level regardless of the number of children and is completely phased out at $35,463 of earnings ($40,463 if married filing jointly).
• Current law provides that individuals with children below the age of 17 (24 for students) may be entitled to a Child Tax Credit of $1,000 per child. The credit is phased out above AGIs of $110,000 (married filing jointly), $75,000 (unmarried individuals) and $55,000 (married filing separately). If the credit exceeds the taxpayer’s tax liability, a portion of the credit may be refunded. The new Act increased the refundable amount.
• The Hope Scholarship Credit has been modified (by adding a new American Opportunity Tax Credit) for 2009 and 2010. The maximum credit is now $2,500 of college tuition and related expenses. Related expenses now include course materials. The credit is now available during the student’s first four (up from two) years of college. The modified credit is phased out for taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The modified credit may be claimed against a taxpayer’s alternative minimum tax liability. A portion of the credit may be refundable if it exceeds the taxpayer’s tax liability.
• Computer equipment, Internet access and related services (not games) may now be funded from a section 529 qualified tuition account if the technology, equipment, or services are to be used by the beneficiary and family while the beneficiary is enrolled at an eligible educational institution.
• The Act extends the existing refundable “first-time” homebuyer tax credit for qualifying home purchases completed before December 1, 2009, increases the maximum credit amount to $8,000 ($4,000 for a married individual filing separately), and waives recapture of the credit for qualifying home purchases after December 31, 2008 and before December 1, 2009. A first-time homebuyer is an individual (and spouse) who had no ownership interest in a principal residence in the United States during the three-year period prior to the purchase of the new home. The credit phases out for individual taxpayers with AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.
• Under the Act, the first $2,400 of unemployment compensation received in 2009 is not taxable.
• Taxpayers who do not elect to deduct general state sales taxes instead of state income taxes may now be able to deduct sales taxes on certain automobiles, motorcycles, and motor homes with a sales price not to exceed $49,500. This will be of little to no benefit in Texas, for example, since we do not have a state income tax and can already deduct sales taxes. The difference will be that non-itemizers may also claim the deduction. This deduction begins to phase out at AGI of $125,000 ($250,000 in the case of a joint return), and is completely phased out at AGI of $135,000 ($260,000).
• The alternative minimum tax is patched for 2009, so we don’t have to wait until November or December to face that. At some point, Congress is going to have to address the whole AMT tax system.

That’s about it for individual tax changes. I will next post a summary of business provisions, and then expand on both individual- and business-specific provisions. In the meanwhile, call or email me if you have questions.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

As this is being written, the House and Senate are considering compromise economic stimulus legislation. The result may be available later this week. While I have been monitoring the separate bills as they have progressed through Congress, I have not cluttered your inbox with the proposals. As soon as a compromise bill is sent to the president, I will begin reporting its significant tax provisions and tax planning opportunities to you.

In the meantime, the Internal Revenue Service recently called attention to the Treasury’s recently updated Report of Foreign Bank and Financial Accounts (FBAR). I wanted to share this with you, because failure to file this report can have serious consequences.

All of the major tax returns (individual, corporation, partnership, trust and estate) or their attached schedules ask, “At any time during the year, did you (or the corporation, partnership, trust or estate) have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” Many taxpayers simply check “Yes” and answer a question reporting the country or countries in which the accounts are held. The reporting requirement, however, does not end there. If the answer is yes, the taxpayer is required to separately file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). The FBAR is not attached to the tax return and is typically not prepared as part of the regular tax return preparation process.

Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, is required to file if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

A FBAR is filed by June 30 of the year following the year that the account holder meets the $10,000 threshold with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, MI 48232-0621. An extension of time to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing this form. A FBAR must be filed whether or not the foreign account generates any income.

Penalties for failure to file may be severe. A “non-willful” failure to file may result in a civil penalty up to $10,000 for each negligent violation. An additional civil penalty of up to $50,000 for each negligent violation may be assessed if there is a pattern of negligent activity. Willful failure to file FBARs or to retain records of the accounts may result in a civil penalty of the greater of $100,000 or 50 percent of the value of the account, and criminal penalties of $250,000, a 5-year prison term, or both. OUCH!

If you learn you were required to file FBARs for earlier years, you should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. The Service will assess no penalty if it determines that the late filings were due to reasonable cause.

As with any other aspect of tax law, definition of terms is important. I haven’t attempted to define terms in this short communication, but if you have any questions concerning FBARs, contact me at 214.957.3366 or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

Among the tax disappointments of 2008, one bright gem occurred late in the year. This change affects those parents, grandparents, aunts, uncles, friends, beneficiaries, and others who have established or plan to benefit from Qualified Tuition Programs (also known as Section 529 Plans). These programs offer a number of tax and financial benefits for families or friends helping to fund the cost of a student’s higher education costs.

Contributions to these plans are not deductible for federal income tax purposes, but earnings accumulate tax-free and distributions are tax-free to the extent used to pay for qualified higher education expenses (tuition, books, supplies, equipment required to enroll, and room and board for students attending college at least half-time). There is no limit to the amount that may be contributed to a 529 plan on behalf of any designated beneficiary (the student), but those contributions are considered to be gifts to the beneficiary. As a result, any amount contributed in excess of $12,000 per year ($24,000 for husband and wife) for the benefit of any one beneficiary may be subject to gift tax. A special provision, however, allows contributions for five years ($60,000 per individual; $120,000 for a married couple) for any one beneficiary to be aggregated into one year without gift tax consequences. There is no limit to the number of beneficiaries for which an individual may establish section 520 plans. This can be an excellent estate planning vehicle allowing an older generation to move considerable wealth from their estates and at the same time, provide education assistance to younger family members.

Plan contributions must be made in cash. Therefore, it is not possible to contribute securities that have lost value in the recent market decline and enjoy tax-free appreciation in a section 529 plan when the values recover.

Section 529 plans are appropriate for children, grandchildren, and other family members who will not be attending school for some time. The time factor allows the investments to grow. An individual wishing to provide education support for one who is already in school should make payments directly to the institution rather than reimbursing the individual for school costs. Payments made directly to the institution are not subject to gift tax.

One (of several) limitation to qualified tuition plans is that neither the contributor nor the designated beneficiary may control, either directly or indirectly, the investment of the contributions or the earnings thereon. Contributors are initially offered a choice of several, generally very conservative, investment portfolios. The Internal Revenue Service, does however, permit a change in the investment strategy for these plans once per calendar year, and upon a change in the designated beneficiary of the account.

The favorable development last year allows a change in the investment strategy twice in 2009, as well as upon a change in designated beneficiary. This will help section 529 investors change the investment portfolio early this year to mitigate continued losses in the current portfolio, and make another change later in the year as market conditions warrant.

This is only a brief synopsis of the somewhat complex rules related to qualified tuition programs. If you have questions concerning financial planning for education of your family or friends, call me at 214.957.3366 or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

Well, the holidays are over, decorations are down, 2008 has been put to bed (thankfully; hope it stays down) and life begins to return to normal with high expectations for the new year. The 111th Congress goes to work this week (or at least convenes; no telling when it will actually do any work) and we’re off to the races. This will be an interesting legislative year!

While I normally don’t get too excited about new tax legislation until it passes both houses of Congress and is sent to Joint Committee, I will begin tracking 2009 tax bills as soon as they are introduced in either house of Congress. Some changes that have already been passed and signed into law may affect your financial and tax planning for the new year. One significant development involves 2009 “required minimum distributions” (RMDs) from retirement plans.

First, a little background. Participants in qualified retirement plans [such as 401(k)s], annuities, certain governmental plans, or regular individual retirement accounts (but not Roth IRAs) are generally required to take annual “required minimum distributions” from these plans once the participant has reached age 70-1/2. Since tax-deductible contributions are generally used to fund these retirement plans, the purpose of the RMDs is to trigger the deferred income tax on amounts in these plans during the participant’s lifetime. The amount of the annual distribution is determined by tables issued by the Internal Revenue Service, generally based on uniform life expectancy. The distribution increases as a percentage of the account balance each year. A participant must take his or her first RMD by April 1 of the year following the year in which the participant reached age 70-1/2. Otherwise, participants are required to take their RMD by December 31 of the year for which the distribution is applicable. The penalty for failure to take RMDs is a fifty percent excise tax on the amount not taken.

Probably all retirement plans with stock market and mutual fund investments suffered significant losses in 2008. Retirement plan participants who depended on distributions from their retirement accounts as a significant source of their income were hit particularly hard; they were taking necessary, if not required, distributions from rapidly depreciating assets. Plan participants over 70-1/2 were required to take distributions whether they needed them or not. Frequently, this meant realizing real losses within the plan simply to get cash with which to make the RMD.

There was some support late in the year for suspending the required minimum distribution requirement for 2008. This would have permitted individuals to forego the RMD if they did not need the distribution, leave the funds in the market, and potentially recover a portion of the unrealized losses as the market improves (as it will) over the next few years. I suggested that Congress even go so far as to permit tax-free recontribution of unneeded RMDs by individuals who had already taken them. The bottom line is that nothing happened with respect to calendar year 2008. There is relief for 2009 however.

Required minimum distributions are waived with respect to calendar year 2009. A participant’s first required distribution that he or she elected to take by April 1 of 2009 with respect to 2008 is still required, however. The next required minimum distribution will be for calendar year 2010.

Older individuals who can forego their 2009 distribution benefit the most from this change. Those for whom account distributions are necessary, even if not required, benefit the least. If you are in a position to forego some or all of your otherwise required 2009 distributions, you should notify the custodian of your plan. This is particularly important if you are receiving regular, monthly distributions. You may want to stop them immediately.

I wish the very best for you in this New Year! If you have questions concerning retirement planning or required minimum distributions, call me at 214.957.3366 or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

My very best wishes to you and your family for a Merry Christmas and a wonderful holiday season. I pray that your 2009 will be blessed and every day filled with love.

Ronnie

The Internal Revenue Service recently offered tips for year-end charitable contributions. You may want to review these in order to get the expected tax benefit from your donations.

• An IRA owner, age 70-½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible. To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity. Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
• To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which you claim a deduction of over $500 does not have to be in good used condition or better if you include a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
• To deduct any charitable donation of money, regardless of amount, you must have a bank record, credit card statement, or a written communication from the charity showing the name of the charity and the date and amount of the contribution. These records should show the name of the charity, the date, and the amount paid. These requirements for monetary donations do not change or alter the long-standing requirement that you obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
• Contributions are deductible in the year made. Donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Checks count for 2008 as long as they are mailed this year.
• Check that the organization is qualified. To check, go to IRS.gov and click “Search for Charities.” Churches, synagogues, temples, mosques, and government agencies are eligible to receive deductible donations, even though they often are not listed.
• For individuals, you can only claim charitable contributions if you itemize deductions. You will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If your deduction for all noncash contributions is over $500, a properly completed Form 8283 must be submitted with the tax return.

If you need help in planning your year-end charitable contributions, email me or call me at 214.957.3366.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA

The Internal Revenue Service recently issued a fact sheet regarding shareholder-employee compensation from an S corporation. Tax advisors commonly advise S corporation shareholder-employees to pay themselves minimum compensation in the form of “wages” subject to Social Security and Medicare taxes, and take the rest of their compensation as “distributions” not subject to federal employment taxes. Remember, too, that the term “wages” includes all remuneration for employment, such as the cash value of all benefits. The fact sheet cautions that, “S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.” This is an area of serious contention between the Service and S corporation shareholders and their attorneys.

Generally, shareholder is an employee of a corporation if he or she performs more than nominal services for the corporation. The Treasury Regulations provide an exception for an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an individual would not be considered an employee.

Instructions to the Form 1120S (U.S. Income Tax Return for an S Corporation), state, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are ‘reasonable compensation’ for services rendered to the corporation.” The obvious issue is, “What is reasonable compensation for a shareholder-employee?” Neither the Internal Revenue Code nor the Treasury regulations define the term. Various courts have defined “reasonable compensation” based on the facts and circumstances of each case, based on some of the facts below:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

Under current law, wages of less than $106,800 coupled with high distributions will certainly raise “reasonable comp” questions with the Service. That amount is the FICA limit in 2009 subject to the 12.4 social security tax; amounts above that are only subject to the 2.9 percent health insurance tax. This amount should not be considered a “safe harbor,” however.

The fact sheet also addressed treatment of medical insurance premiums paid on behalf of (or reimbursed to) shareholder/employees. It states that “The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security, Medicare, or Unemployment taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2. Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2.”

All of this may change, however. There is some thought of making S corporation “distributions” subject to self-employment taxes in the same manner as a partnership. While that may cure the problem, the barrier to such legislation is the fact that corporations (including S corporations) are legal entities separate from their owners. I’ll be watching for developments in this area as tax legislation emerges from a new Congress.

If you have questions concerning tax treatment of compensation to owners of S corporations, partnerships, or LLCs, call me at 214.957.3366 or email me.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA

As President-Elect Obama continues to name the members of his economic team, there seems to be a degree of optimism budding in the country that experienced leadership is coming to Washington. Our challenges are not over; these taxing times will continue for months to come. Year-end planning in a down market remains prudent. Last week I shared some preliminary year-end tax planning thoughts with you. As a result of recent conversations I have had with investment firms and tax attorneys, two additional thoughts come to mind.

The first is conversion from a traditional IRA to a Roth IRA. Even though contributions to Roth IRAs are not tax-deductible, Roths provide significant tax benefits. Roth IRAs provide:

• tax-free growth,
• tax-free income distributions in retirement (provided you are over age 59-1/2 and you have held your Roth IRA for five or more years),
• you may continue to make Roth IRA contributions after your reach age 70-1/2, and
• after you reach age 70-1/2 you do not have to take required minimum distributions each year.

For 2008, your Roth conversion limitation is reduced (phased out) as follows:

For married taxpayers filing joint returns (or a qualifying widow or widower), the phase-out begins with modified adjusted gross income of $159,000. You cannot make a Roth conversion if your modified adjusted gross income is $169,000 or more.

If your tax filing status is single, head of household, or married filing separately (and you did not live with your spouse at any time in 2008), the phase-out begins with modified adjusted gross income of $101,000. You cannot make a Roth conversion if your modified adjusted gross income is $116,000 or more.

• If your tax filing status is married filing separately and you lived with your spouse at any time during the year you cannot make a Roth IRA conversion if your modified adjusted gross income is $10,000 or more.
• The maximum amount that you may convert (or otherwise contribute) to a Roth IRA is the lesser of $5,000 or your taxable compensation for the year if you are 49 years of age or younger at the end of 2008. If you are age 50 or older before 2009, your maximum contribution is the lesser of $6,000 or your taxable compensation for the year.
• You must roll over into the Roth IRA the same property you received from the traditional IRA. I recommend a trustee-to-trustee transfer. If your Roth will be with the same investment firm that holds your traditional IRA, simply have them re-designate the traditional account as a Roth, rather than opening a new account or issuing a new contract. Conversions from other qualified retirement plans to a Roth are also possible, but may be subject to additional rules.

So, what’s the downside to converting a traditional IRA to a Roth? The amount converted is subject to regular income taxation in the year of the conversion. However, with the decline in the value of investments held in traditional IRAs and the prospect of higher individual income tax rates after 2008, this might be a good year to make a conversion.

My second thought for the day involves dividends. Currently, “qualified dividends” are subject to the same 15% maximum tax rate as long-term capital gains. This rate is expected to increase to 20 or 25% in 2009.  However, the provision in the law that permits dividends to be taxed at this very favorable tax rate was originally scheduled to expire after 2008. It was subsequently extended through 2010. There is a strong possibility that this extension will be repealed and the dividend rate will revert to regular income tax rates after 2008. With an expected maximum individual tax rate of 39.6% in 2009, this represents a potential tax increase of 164% on dividends received after 2008. Planning suggestions; take all dividends possible in 2008; corporations contemplating a dividend should pay them this year for the benefit of your shareholders.

I will continue to share year-end tax planning thoughts with you as they come to mind. If you have any questions concerning your year-end tax strategies, email me or call me at 214-957-3366.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD CPA

On November 10, Douglas Shulman, the Commissioner of Internal Revenue, spoke to the Annual Meeting of Independent Sector, a leadership forum for charities, foundations, and corporate giving programs committed to advancing the common good in America and around the world. The IRS released a transcript of his remarks today. I thought you would be interested in what he had to say as it relates to the non-profit community. I have not reprinted all of his address because, while important and very useful, his full comments were too long for this forum. However, what appears below are his verbatim comments. The dots indicate where I have deleted some of his comments.
. . . . .

“Tens of thousands of charitable groups large and small and the foundations and corporate programs that help support them represent the finest American traditions of giving and volunteering… traditions that help define who we are as people and a nation. Today, 89 percent of households give and almost 84 million American adults volunteer.

“. . . . ., your advocacy of the highest ethical standards and principles are essential to maintaining the public’s trust during these times of economic duress when so many more people will come to depend on your services. Integrity and trust are two sides of the same coin and we cannot allow this valuable currency to be debased. That is already one of my priorities as IRS Commissioner.
. . . . .

“. . . . ., as you know, we work very closely with the non-profit community — whether it’s processing over 70,000 determination applications per year or applying oversight or audits when we detect a problem.
. . . . .

“. . . . .  in case you don’t know it, the non-profit territory is familiar stomping grounds for me. I started my career in consulting, but then became what I refer to as a social entrepreneur. I was privileged to be one of the handful of people who co-founded Teach for America, which helps place teachers in urban and rural schools across the country.

“I have also been a private equity investor, a securities industry regulator and now IRS Commissioner. In one of those odd twists and turns in life, I’m back to leading a big organization without a profit mission — and thrilled about it — as I am also working closely again with the tax-exempt sector.

“I admire the tax-exempt sector: its diversity, its creativity and its risk-taking. Americans create more than 100 new exempt organizations each day — 365 days a year. This diversity means many points of view are expressed, many problems are attacked in many ways, many solutions are found, and many benefits are created for the nation.

“I firmly believe that the IRS must recognize and allow for this diversity — and not become a barrier to it. We shouldn’t supplant the business judgment of organizational leaders, and certainly shouldn’t determine how a nonprofit fulfills its individual mission. That’s not our role.

“Like the frontier of the 19th century, I think the tax-exempt sector has become a space into which American ingenuity and spirit can expand in the 21st century. Like all frontiers, the tax-exempt sector is attracting the attention and idealism of young people in our society. For many, creating or working for a non-profit, a charity, or an NGO is a mark of special distinction. The sense of mission and purpose that characterizes the tax-exempt sector inspires and motivates the best and the brightest of our times. This is a self-renewing treasure of our society, and one we all want to foster.

“Before coming to the IRS I believed, and now have witnessed, that the tax-exempt sector tends to be guided by a high-minded, rule-abiding culture. This culture manifests itself in a determination to understand and respect the parameters of tax-exemption that Congress has laid down, to comply with the Internal Revenue Code and work with the IRS, and to do the right thing. At a time when the consequences of abandoned and debilitated standards lie in disarray all around, I respect the tax-exempt sector’s adherence to fundamental principles.

“Of course, I know that this sector has had its encounters with abuse and misuse. The combination of tax-exemption and the over $3 trillion of assets held by nonprofits seems too compelling a prize to resist for some. The IRS has fought hard to protect the sector against corruption, and the diversion of tax-exemption’s public purposes to mere private benefit. We will continue to insist that the sector be squeaky-clean, and that the high ideal of public benefit that underlies tax-exemption is honored.

“I clearly see our role as working with you and others to promote good governance, beginning with the proposition that an active, engaged and independent board of directors helps assure that an organization is carrying out a tax-exempt purpose and acts as its best defense against abuse. And even though you don’t make a profit, that’s just good business.

“Indeed, as a fellow leader, I believe all of us must follow best practices in organizational leadership and management. There must be clearly articulated values, mission, goals and accountability.
. . . . .

“Let me give you one example. After the collapse of Enron and World Com, Congress passed Sarbanes-Oxley — also known by the shorthand SOX — which fundamentally altered the governance landscape and brought a new, strong, vibrant meaning to the word ‘fiduciary.’ And while legally the law only applied to public companies, I would submit to you that the world of governance for all organizations changed.

“At NASD and later the Financial Industry Regulatory Authority, where I was a leader before I came to the IRS, even though we were a not-for-profit organization we adhered to the rigorous SOX 404 standards which requires management and the external auditor to report on the adequacy of the company’s internal controls. We did so at the request of our audit committee, who felt that while not legally required for a non-public company, this was the gold standard in financial controls. And even very small non-profit boards had a wake-up call from SOX, and began to focus much more on finances, management accountability and governance. And lest we forget, tax compliance is a big part of the accountability formula.

“So what is the IRS doing that’s new to keep individual taxpayers, businesses and non-profit organizations compliant? That’s where innovation and getting ahead of potential problems comes in.

“For example, we’re experimenting with what we call the automated soft notice. These are sent to taxpayers and allow them to correct underreporting issues without having to correspond extensively with the IRS, or place them in a formal audit.

“We’re also taking other proactive action like starting to check up on young exempt organizations to ensure that after a few years in operation they are in fact fulfilling an exempt purpose.

“We will be on the lookout for innovative methods to ensure compliance… and for collaboration with all taxpayer groups, including the tax-exempt sector. And I can think of no better recent example of collaboration than the Form 990 redesign. Working with Independent Sector and other organizations, the redesign is a marked improvement over the old form in terms of organization, information collected and its usefulness to the public, the tax exempt sector and the IRS. I hope you will agree with me that this was a win-win for all involved.

“We’ve also begun conducting studies of several of the largest taxpayer segments within the tax-exempt community by sending out comprehensive questionnaires that focus on an area of interest and then analyzing the responses. If necessary, we can follow up with an examination.

“In fact, we’re about to release the hospital study report. Stay tuned, but I can say this much. I’m confident that the new hospital schedule for the Form 990 — the Schedule H — is the right tool to allow nonprofit hospitals, of all types and sizes, to report how they promote the health of their communities and to justify their tax exemption. And the Schedule H will give the IRS and the public better transparency into these important institutions.

“We also recently launched a study of colleges and universities. In the spirit of collaboration and the recognition that we must be in dialogue with sectors with whom we engage, we did advance work with colleges and universities on the questionnaire. We wanted to understand how they talk about themselves, what kind of measures they use, and so forth. When we have agreement about what data means, we eliminate a lot of friction. I want to apply this lesson throughout the IRS, not just in Exempt Organizations.

“Now that I’ve touched on some of our philosophy regarding tax administration and tax exempt organizations, let me shift to the future. What lies ahead for the sector? What risks await? And how will the IRS respond?

“Let me begin with the current economy that creates uncertainty for everyone. How will a nervous economy affect the tax-exempt sector? I’m concerned it will lead to declining contributions and revenue. But will that prompt some entities to inch across permissible lines to make up budget shortfalls? Will these organizations be tempted by invitations to engage in improper transactions that might generate a fee, or to engage in questionable fundraising practices?

“I don’t know. I certainly hope not. But I do know that now is the time for both of us to be vigilant and to make sure the tax-exempt sector keeps walking away from deals that just don’t feel and smell right.

“We also face a tax code that grows more complex — even for tax exempt-organizations. We’ve seen the rise of new giving techniques and legislation intended to reign in abuses. This creeping complexity affects both of our organizations as we struggle to understand and administer the law.

“Given these challenges, what should the IRS do? I count myself lucky because I think we’re already on the right path. The promotion of transparency — the introduction of sunshine into the tax-exempt sector — is an essential first step to any progress in this area. And we’re also looking to the future.

“We’re in the process of putting the final touches on a new IRS strategic plan. Continued focused oversight of the tax-exempt sector is a key part of it. First, we are committed to providing outreach and guidance to ensure widespread adherence to the requirements for tax-exempt status. Second, we will proactively address misuse of tax-exempt organizations and tax-exempt status. And third, we will maintain a focus on universities, hospitals and other major segments of the tax-exempt community.

“We want to arm you with information and guidance you need to help you comply. We want to pay especially close attention to the largest segments of the exempt sector. And lastly, we want to protect the tax-exempt sector and the public by identifying and stopping those bad actors who misuse tax-exempt organizations or the privilege of tax-exempt status.  

“Let me end by saying that the contributions that the tax-exempt sector makes to the spirit, well-being and advancement of our society cannot be overstated. I will be there with you, step-by-step, as you work toward your goals. But, I will also be committed to root out misuse or abuse of tax exempt status by any bad actors who potentially tarnish the reputation of this wonderful sector.”

I trust that this information is useful to you. If you have questions concerning your organization’s continued tax-exempt status and compliance, please contact me at 214.957.3366.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA