Additional Year-End Tax Planning Thoughts

Posted on November 26, 2008 by Ronnie McClure

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

Posted in Business, Charitable Giving, Individual | Leave a comment

IRS Commissioner Speaks to Independent Sector

Posted on November 17, 2008 by Ronnie McClure

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

Posted in Exempt Organizations, Individual | Leave a comment

Preliminary Year-End Tax Planning Thoughts

Posted on November 13, 2008 by Ronnie McClure

The votes are in; the Democrats will control the White House and both Houses of Congress. Federal taxes will increase. In my opinion, federal taxes would have increased no matter which party won the presidential election; the issues are now; “How much?” and “Whose ox will be gored?” If the new Administration and Congress are going to demonstrate any degree of fiscal responsibility, they must address the massive deficit in which this nation finds itself and the ability to pay for the new programs we have been promised.

From a tax perspective, I believe everything is on the table; income, transfer, employment, and excise taxes. Notwithstanding the campaign rhetoric, I believe that every income tax bracket is at risk with the highest rate probably being 39.6 percent, the long-term capital gain rate at least 20 percent and possibly twenty-five, the highest estate, gift, and generation-skipping transfer tax rates will not be below 45 percent, and the estate tax exemption will not exceed $3.5 million per person. Corporate tax rates will not go down. Count on a tax bill passing by mid-2009 with an effective date retroactive to January 1. There is little we can do to avoid the employment and excise tax increases, some of which are already on the books, so what can we do in the remaining two months to mitigate the coming income tax increase?

While all year-end tax planning must have at least a two-year focus, it is reasonable to assume that for most of us, tax rates in 2009 will be higher than those we enjoy now. Therefore, I believe it will be prudent to accelerate income into 2008 to the extent possible and postpone deductions until 2009. The higher your income tax bracket, the more important this becomes. I believe that the rate change is particularly important for capital gains.

Keep in mind that a change in the capital gains tax rate from 15% to 20% is not a five-percent increase, but an increase of 33-1/3 percent. Likewise, an increase from 15% to 25% would be an increase of 66-2/3 percent. An increase in the highest ordinary income tax rate from 35% to 39.6% is an increase of more than 13%, not the nominal 4.9%.

The rule of thumb would be to defer taxes until a later year because of the time value of money. Assume you could trigger a $10,000 capital gain in either 2008 or 2009 and the capital gins tax rate was not increasing from 15%. It would be better to defer the $1,500 tax until next year, invest that amount at a 5% return, cash in the investment a year from now, pay $1,500 tax at that time, and keep the $76 interest income. If you assume a long-term capital gains tax increase from 15% to 20%, however, the economics change.  You would have to invest about $1,900 today to pay a $2,000 tax a year from now on the same $10,000 gain. Alternatively, you could recognize the gain this year, pay the $1,500 tax now and be better off by $400. If you assume a tax increase from 15% to 25%, the numbers change even more dramatically. You would have to invest about $2,380 today to pay a $2,500 tax a year from now. Alternatively, you recognize the gain this year, pay the $1,500 now and be better off by $880.

It seems to me that appropriate year-end tax planning would involve accelerating all income and gains this year and deferring losses and tax deductions until next year, unless you know you’re going to be in a much lower tax bracket in 2009. So how do you do that?

  • Recognize capital gains and qualified dividends this year, and defer losses until next year. I don’t believe there’s a significant chance the losses will go away between now and January.
  • If you already have net capital losses this year, no harm no foul; they will carry over to future years and offset higher taxed gains in future years. (If you choose to trigger capital losses during the remainder of the year, wait at least 31 days before re-investing in the same securities).
  • Cash-basis businesses should bill customers and clients early and push for collections in 2008. Keep in mind, however, that your cash-basis customers and clients will likely want to wait and pay you in 2009.
  • To the extent possible, take commissions and bonuses in 2008.
  • Defer tax-deductible items (property taxes, mortgage interest) until next year.
  • Charitable contributions are a special consideration. If you are gifting cash, do so January 2, 2009 rather than December 31 of this year (don’t harm your charitable beneficiaries by waiting longer; they need the gifts more now than ever before). If you are giving appreciated property, do so in January. If you are going to sell securities that have declined in value, wait until January, sell the stock, recognize the loss, and gift the cash.
  • If you are age 70-1/2 or older, own IRAs, and want to make a charitable contribution from your IRA, have the IRA trustee make the gift this year and have the distribution made payable directly to the charity, not to you.
  • If you plan to make energy saving improvements to your home, postpone them until 2009. A $500 tax credit may be available.
  • Business deductions for equipment purchases may be more beneficial if taken in 2008, not 2009. In 2008, you may elect to expense up to $250,000 in new equipment purchases. This amount is currently scheduled to drop to $133,000 in 2009. Don’t hold me to that, however; another tax stimulus package could extend the $250,000 deduction beyond 2008.

This is the best advice I can give at this time. My “recreational reading” in 2009 will be the proposed tax law changes. I have done so since 1976, beginning with proposed legislation when it is first introduced and following it through to final legislation. I will keep you appropriately informed.

If you need help with your year-end tax planning, contact me.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA

Posted in Business, Individual | Leave a comment

Important Reminders for Tuesday, November 4

Posted on November 3, 2008 by Ronnie McClure

Two important reminders for you this evening. Tomorrow, Tuesday, November 4 is election day, at long last. Your vote is extremely important, no matter which candidates you choose. Just please participate in the cornerstone of our democracy and VOTE!

The second reminder is the IRS’s live, free, webcast program “preparing for the New Form 990.” That’s the annual report each charitable organization must file with the Internal Revenue Service. The one-hour program begins at 2:00 pm EST (1:00 CST). Program details are below:

CPE Program Level: Overview
1 CPE Credit Recommended; NO prerequisites or advance preparation CTEC Course #: 3022-CE-0059 ELMS Course #: 22891

Program Content:
It’s been 30 years since the IRS made major changes to Form 990 and when many tax-exempt organizations file their 2008 tax year returns, they will confront a radically redesigned form. Because the revised Form 990 is so different from previous years’, IRS and tax-exempt sector experts will discuss the redesigned 990; make sure you know what parts of the forms to complete and answer your questions to help you become familiar with and prepare for the changes now.

Learning Objectives:
The primary learning objective is to maintain or increase competency of tax practitioners through expert discussion, explanation and interactive questioning. The programs are designed for learners (tax professionals) to exercise a practical understanding of new and current tax policies, as well as the latest changes, in a complex and continually changing industry. a complex and continually changing industry.

Form 990 has changed significantly for calendar year 2008. Make sure you know how it will impact your organization.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA

Posted in Business, Individual | Leave a comment

Gift Opportunity for Depressed Securities

Posted on October 16, 2008 by Ronnie McClure

With the meltdown and continued volatility in the financial markets comes a potentially favorable wealth transfer tax strategy. Lifetime gifts of stock and securities at depressed market values can transfer future appreciation out of your estate and to lower generations as the securities recover their value.

For 2008, an individual may transfer $12,000 transfer and generation-skipping tax-free to an unlimited number of individuals. A married couple may transfer $24,000 without regard to which spouse’s name is on the securities. For example, a couple with four children and six grandchildren may transfer $240,000 at current market values to their family. Doing so moves all future appreciation, including a market recovery in this value, to future generations. These transfers will be free of any transfer tax and will not require filing a gift tax return.

For 2009, the amounts increase to $13,000 per individual and $26,000 for a couple.  Therefore, the same family may transfer an additional $260,000 of depressed securities to lower generation family members in January. The couple will then have moved $500,000 at current market value, and all future appreciation, out of their estates in a period of just over 45 days with no tax consequences.

Keep in mind that the income on these securities, interest or dividends for example, earned by a child who has not attained age 18 by the end of the tax year will generally be taxed at the child’s parents highest marginal tax rate. This does not include capital gains, however, when the securities are sold.

These gifts are not a slam-dunk decision, however. It is necessary to consider how capital gains will be taxed when the securities appreciate and are subsequently sold. 

Generally, a donor’s tax basis in gifted property carries over to the donee. Under this general rule, for example, if a couple transfers’ securities having a market value of $125,000 and a tax basis of $100,000 to a child, the child’s tax basis in those securities is also $100,000.  A subsequent sale of the securities at $125,000 results in a $25,000 capital gain that is taxed to the child. If the parents have held the stock for at least one year, the gain will be long-term capital gain to the child, even if sold immediately. In other words, the parents’ holding period of the securities "tacks" to the holding period of the child. That’s the general rule for appreciated property; special "dual basis" rules apply to gifts of property when the fair market value is less than the donor’s basis. This “dual basis” should give some pause in planning gifts of depreciated property.

Under the dual basis rule, the donee’s basis for determining loss in depreciated property is the lesser of the donor’s basis or fair market value on the date of the gift if the property is subsequently sold at a value less than the donor’s basis on the date of sale. Assume that a couple transfers securities having a market value of $90,000 and a tax basis of $100,000 to a child. The child subsequently sells the securities at their $90,000 fair market value. In this case, the child recognizes no gain or loss; the child’s basis is $90,000, and $10,000 of the parents’ basis has fallen through the cracks. In a like manner, assume the value of the securities continues to decline and are sold for $50,000. The child has a capital loss of $40,000 ($50,000 sales price less $90,000 basis) and, again, $10,000 of the parent’s basis has disappeared.

Assume, however, that the value of the securities fully recovers and continues to appreciate to a value of $150,000 at the time the child sells them. Here, the value is greater than the parents’ basis resulting in real gain. Now the child’s basis for determining taxable gain is the same $100,000 as it was in the hands of her parents and the child recognizes a gain of only $50,000.

The bottom line is that there are several considerations in gifting depreciated property. If you expect that the property will fully recover its value and continue to appreciate over the long-term, a gift now of securities at depressed value makes a lot of sense from the standpoint of estate tax planning. If you believe that the securities will recover some value before being sold, but not up to the level of the donor’s basis, you may need to consider the loss in basis that might occur. It may be more appropriate to sell the securities yourself, recognize the full loss, gift the cash proceeds to the child, and have the child reinvest the cash. I recommend the child postpone reinvestment in the same or substantially similar securities for 30 days to avoid possible application of the "wash sale" rule and the parents’ loss disallowed.

If you have specific questions concerning estate planning, please contact me at response@phdcpa.com or call me at 214.957.3366.

Ronnie

© 2008 Ronnie C. McClure, PhD, CPA

Posted in Charitable Giving, Individual | Leave a comment

Main Street Tax Provisions in Financial Markets Bill

Posted on October 3, 2008 by Ronnie McClure

The House of Representatives passed the “rescue” legislation this afternoon. The president immediately stated that he would sign the bill as soon as it reaches his desk. My copy of the bill submitted to the House for consideration is 451 pages. The following is a very brief highlight of the tax provisions affecting Main Street individuals, businesses, and charitable organizations contained in the bill.

PROVISIONS AFFECTING INDIVIDUALS:

  • Extension for tax year 2008 and increase in AMT exemption amount from $66,250 to $69,950 for married joint returns and surviving spouses; $33,125 to $34,975 for married filing separately; $44,350 to $46,200 for single taxpayers.
  • Increase in the amount of AMT tax carryovers from certain prior years that can be applied to reduce regular income tax.
  • Abatement of penalty and interest on underpayment of AMT related to Incentive Stock Options for all prior years.
  • Deduction for state and local sales taxes extended through 2010.
  • Deduction for tuition and related expenses extended through 2009.
  • Deduction for certain expenses of elementary and secondary school teachers extended through 2009.
  • Extension of additional itemized deduction for real property taxes of non-itemizer taxpayers extended through 2009.
  • Eight-thousand five-hundred income threshold used to calculate refundable portion of child tax credit (reduction from $10,000).

PROVISIONS AFFECTING BUSINESSES:

  • Research tax credit extended and increased through 2009.
  • Extension of 15-year straight-line cost recovery for qualified leasehold improvements extended through 2010.
  • Fifteen-year straight-line cost recovery for new construction of qualified restaurant improvements placed in service in 2009.
  • Fifteen-year straight-line cost recovery for certain improvements to retail space placed in service in 2009.
  • Seven-year cost recovery period for motorsports racing track facility through 2009.
  • Certain farming business machinery and equipment treated as 5-year property placed in service before 2010

PROVISIONS AFFECTING CHARITABLE ORGANIZATIONS:

  • Tax-free distributions from individual retirement plans for charitable purposes extended through 2009.
  • Favorable tax treatment of certain payments to controlling exempt organizations extended through 2009.
  • Decrease in basis adjustment to stock of S corporations making charitable contributions of property extended through 2009.
  • Enhanced deduction for qualified computer contributions extended through 2009.
  • Enhanced charitable deductions for contributions of food inventory extended through 2009.
  • Enhanced charitable deduction for contributions of book inventory extended through 2009.

SPECIAL PROVISIONS

There are provisions, not necessarily affecting Main Street, dealing with:

  • Compensation of executives of firms that participate in the rescue program.
  • The coal industry and carbon mitigation (study ordered of the Internal Revenue Code on provisions related to carbon mitigation).
  • Transportation and renewable fuels (including provision to permit non-taxable fringe benefits to bicycle commuters).
  • Increase and extension for one year of the tax credit for biodiesel and renewable diesel fuels for all taxpayers.
  • A new credit for owners of plug-in electric cars ($2,500 plus an amount for excess battery storage capacity) with higher amounts for vehicles of greater weight.
  • Federally designated disaster areas impacted by Midwest flooding and Hurricane Ike.

This is only a brief summary of the tax provisions of the bill. If you have specific questions concerning this new and important legislation and how they will affect you, please contact me at response@phdcpa.com or call me at 214.957.3366.

Ronnie

© 2008 Ronnie C. McClure, PhD, CPA

Posted in Business, Individual | Leave a comment

Rescue the Rescue

Posted on October 1, 2008 by Ronnie McClure

Several of my clients and friends have asked my opinion on the “bailout.” I have held my comments because, even though I have a degree in Economics, I am not an economist; I am a CPA, but I don’t regard myself as an accountant; I am an investment advisor and licensed to sell financial products, but I am not a expert on Wall Street investments. The only thing that I claim to be anything of an expert in is federal tax law (and certainly not all areas of that), which comes from the PhD and thirty plus years of practice.

My opinion on the financial crisis (I regret that this situation was ever called a bailout) was perfectly expressed yesterday by Thomas L. Friedman in an Op-Ed piece in the New York Times. In case you missed it, I have reproduced it below. My own comments are in brackets. I have read four of his five books and I’m reading the fifth one now. I don’t always agree with him, but I truly respect his opinion.

“Rescue the Rescue
By THOMAS L. FRIEDMAN
Published: September 30, 2008
[The New York Times; Retrieved from the online edition.]

“I was channel surfing on Monday, following the stock market’s nearly 800-point collapse, when a commentator on CNBC caught my attention. He was being asked to give advice to viewers as to what were the best positions to be in to ride out the market storm. Without missing a beat, he answered: ‘Cash and fetal.’

“I’m in both — because I know an unprecedented moment when I see one. I’ve been frightened for my country only a few times in my life: In 1962, when, even as a boy of 9, I followed the tension of the Cuban missile crisis; in 1963, with the assassination of J.F.K.; on Sept. 11, 2001; and on Monday, when the House Republicans brought down the bipartisan rescue package.

“But this moment is the scariest of all for me because the previous three were all driven by real or potential attacks on the U.S. system by outsiders. This time, we are doing it to ourselves. This time, it’s our own failure to regulate our own financial system and to legislate the proper remedy that is doing us in.

“I’ve always believed that America’s government was a unique political system — one designed by geniuses so that it could be run by idiots. I was wrong. No system can be smart enough to survive this level of incompetence and recklessness by the people charged to run it.

“This is dangerous. We have House members, many of whom I suspect can’t balance their own checkbooks, rejecting a complex rescue package because some voters, whom I fear also don’t understand, swamped them with phone calls. I appreciate the popular anger against Wall Street, but you can’t deal with this crisis this way.

“This is a credit crisis. It’s all about confidence. What you can’t see is how bank A will no longer lend to good company B or mortgage company C. Because no one is sure the other guy’s assets and collateral are worth anything, which is why the government needs to come in and put a floor under them. Otherwise, the system will be choked of credit, like a body being choked of oxygen and turning blue.

“Well, you say, ‘I don’t own any stocks — let those greedy monsters on Wall Street suffer.’ You may not own any stocks, but your pension fund owned some Lehman Brothers commercial paper and your regional bank held subprime mortgage bonds, which is why you were able refinance your house two years ago. And your local airport was insured by A.I.G., and your local municipality sold municipal bonds on Wall Street to finance your street’s new sewer system, and your local car company depended on the credit markets to finance your auto loan — and now that the credit market has dried up, Wachovia bank went bust and your neighbor lost her secretarial job there.

“We’re all connected.” [We all form a system. Actually, lots of systems that combine in many various ways, but that discussion is for another time and forum.] “As others have pointed out, you can’t save Main Street and punish Wall Street anymore than you can be in a rowboat with someone you hate and think that the leak in the bottom of the boat at his end is not going to sink you, too. The world really is flat. We’re all connected. “Decoupling” is pure fantasy.”

“I totally understand the resentment against Wall Street titans bringing home $60 million bonuses. But when the credit system is imperiled, as it is now, you have to focus on saving the system, even if it means bailing out people who don’t deserve it. Otherwise, you’re saying: I’m going to hold my breath until that Wall Street fat cat turns blue. But he’s not going to turn blue; you are, or we all are. We have to get this right.

“My rabbi told this story at Rosh Hashana services on Tuesday: A frail 80-year-old mother is celebrating her birthday and her three sons each give her a present. Harry gives her a new house. Harvey gives her a new car and driver. And Bernie gives her a huge parrot that can recite the entire Torah. A week later, she calls her three sons together and says: ‘Harry, thanks for the nice house, but I only live in one room. Harvey, thanks for the nice car, but I can’t stand the driver. Bernie, thanks for giving your mother something she could really enjoy. That chicken was delicious.’

“Message to Congress: Don’t get cute. Don’t give us something we don’t need. Don’t give us something designed to solve your political problems. Yes, Hank Paulson and Ben Bernanke need to accept strict oversights and the taxpayer must be guaranteed a share in the upside profits from all rescued banks. But other than that, give them the capital and the flexibility to put out this fire.

“I always said to myself: Our government is so broken that it can only work in response to a huge crisis. But now we’ve had a huge crisis, and the system still doesn’t seem to work. Our leaders, Republicans and Democrats, have gotten so out of practice of working together that even in the face of this system-threatening meltdown they could not agree on a rescue package, as if they lived on Mars and were just visiting us for the week, with no stake in the outcome.

“The story cannot end here. If it does, assume the fetal position.” [I couldn’t have said it better myself. Thanks, Tom.]

Ronnie

Posted in Business, Individual | Leave a comment

New Purchased Equipment Expense Deduction

Posted on September 27, 2008 by Ronnie McClure

I don’t recommend buying equipment solely for the tax benefits. If you need new equipment for your trade or business, buy it and tax whatever tax savings are available. Generally, you receive, at most, an approximately 35 percent tax savings from fully expensing business asset purchases. The Stimulus Act of 2008, however, provides an expensing tax benefit of which you should be aware.

Thanks to this Act, most small businesses, and even moderate-sized businesses that don’t have huge capital equipment needs may be able to fully expense the cost of machinery, equipment, and certain vehicles purchased during all of tax years beginning in 2008. The full expensing deduction may be claimed regardless of when during the year the assets are placed in service. For example, property placed in service on the last day of the 2008 tax year may be eligible for the full expensing deduction. In addition, the Act increased the amount of the expensing deduction for 2008 to $250,000 and this amount is reduced only when $800,000 of expensing-eligible property is placed in service during the year. These two amounts decline to $133,000 and $530,000 for tax years beginning in 2009 unless the law is changed to further stimulate the economy. Be aware that this deduction is further limited to the trade or business income of the business entity computed before the deduction. In other words, the deduction cannot produce a net operating loss for the business enterprise. This provision does not apply to estates and trusts.

The expensing election is found under section 179 of the Internal Revenue Code. It permits full expensing of qualified purchases up to the stated limits rather than requiring depreciation of those purchases over several years. For unincorporated taxpayers, or taxpayers operating through pass through entities (such as S corporations, partnerships, or limited liability companies taxed as partnerships) there are other benefits. By using the expensing election to lower adjusted gross income, these taxpayers may be able to benefit from itemized deductions or personal exemptions (and other tax benefits) that would otherwise be limited or phased-out because of higher levels of AGI.

The expensing limitations apply at both the entity level and at the taxpayer level. That means, for example, if the sole shareholder of an S corporation receives a $250,000 expensing deduction pass-through from the corporation and he or she also has a $100,000 expensing deduction pass-through deduction from a partnership, he or she may only claim the maximum $250,000 deduction on his or her individual tax return. Any amount of the expensing deduction unused in a given year carries over to future years, subject to the limitations in effect during the carryover year. For these purposes, a husband and wife are treated as one taxpayer.

This favorable provision in the Code is a timing benefit; whether expensed or depreciated, in this year or future years, the full purchase price will result in tax savings. From the standpoint of the time value of money, however, a tax savings generated from qualifying purchases during the remainder of 2008 has more value than tax savings a year or more from now. Therefore, if you are contemplating purchasing business equipment or machinery in the foreseeable future, you may want to determine the benefit of making the acquisition this year, rather than next.

If you have questions concerning the section 179 expensing election, talk to your tax professional or call me at 214.957.3366.

Ronnie

© 2008 Ronnie C. McClure, PhD, CPA

Posted in Business, Individual | Leave a comment

Preparing the New Form 990 for Tax Year 2008

Posted on September 27, 2008 by Ronnie McClure

As you are probably aware, the Internal Revenue Service announced last year implementation of an extensively revised Form 990 (Return of Organization Exempt from Income Tax) for returns filed in 2009 for the 2008 tax year. The Service has made less substantial changes to Form 990-EZ (Short Form Return of Organization Exempt from Income Tax), but completing it will require more work than in prior years. The bottom line of these changes is that you must budget substantially more time and cost to complete either return. The common “same as last year” answer to many questions on the forms simply will not work any longer.

Let’s briefly review the Short Form changes before moving on to Form 990 itself. The good news is that organizations with gross receipts of less than $1 million and total assets are less than $2.5 million in 2008 may file the Short Form. This is only a phase-in for small organizations, however, because these numbers drop to $500,000 in gross receipts and $1.25 million in total assets in 2009, and $200,000 gross receipts and $500,000 total assets in 2010. For tax year 2007, the Form 990-EZ was simple return with a required Schedule A for public charities totaling 10 pages. Schedule B was used to report donor names for gifts in excess of $5,000. The number of pages required depended on the number and type of gifts required to be reported. For tax year 2008, I estimate that the simple return will now require 15 pages, plus the detail of contributions greater than $5,000. One more thing; the instructions specifically related to the 2007 Short Form required 12 of 68 pages in the instruction booklet for the Form 990. The 2008 Short Form instructions require 93 pages in a book of their own, plus 68 pages of instructions for the separate schedules likely to be required. That makes the total instructions pages jump to 141. These are indeed taxing times for small charitable organizations.

Now let’s turn to the Form 990. For tax year 2007, the basic Form 990 and the required Schedule A for public charities totaled 16 pages. Schedule B was used to report donor names for gifts in excess of $5,000 as with the Short Form. The number of pages required depended on the number and type of gifts. Many question on the basic Form 990 required statements to be attached to the return. A relatively simple return, therefore, may have totaled 20 – 25 pages. I estimate that for tax year 2008 the minimum return will require approximately 38 pages. I also estimate that the number of pages of instructions to complete a simple return has increased to approximately 225. Quite an increase! Plan accordingly.

The new forms are not yet available from the “Forms and Publications” section on the IRS website. The instructions for both the regular Form 990 and the Short Form 990-EZ have been released in final form. The forms themselves are still in draft form. You may download the instructions and draft forms from the main IRS website, www.irs.gov and clicking on the “Charities and Non-Profits” tab and follow the link to the forms themselves. I recommend that you do that to become familiar with the information you will be required to provide.

Whether you prepare your own return or have it prepared by a tax return preparer, someone signs the return under penalties of perjury, and declare that they have examined the return, including accompanying schedules and statements, and to the best of their knowledge and belief, it is true, correct, and complete. That means that the signer is required to know what is in the return. To that end, you may want to register for a free webcast to be broadcast by the IRS on November 4, 2008 from 2 until 3pm EST entitled “Preparing the New Form 990.” To attend, simply go to www.taxtalktoday.tv and register for the program. I recommend that you register now so that on the day of the program you simply logon and watch. I’ll see you there!

Ronnie

© Ronnie C. McClure, PhD, CPA

Posted in Exempt Organizations | Leave a comment

IRS Announces Hurricane Ike Relief

Posted on September 18, 2008 by Ronnie McClure

On September 12, the Internal Revenue Service announced that taxpayers “directly affected” by Hurricane Ike would receive an additional 7 days to file corporate tax returns and third-quarter estimated taxes otherwise due on Monday, September 15, 2008. It was not clear from that announcement which taxpayers would be considered “directly affected.” The Service cleared up that announcement today and, as expected, granted those taxpayers even more time to file.

Following the hurricane’s landfall on Saturday, September 13, the federal government declared the following Texas counties a presidential disaster area qualifying for individual assistance: Angelina, Austin, Brazoria, Chambers, Cherokee, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jasper, Jefferson, Liberty, Madison, Matagorda, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Trinity, Tyler, Walker, Waller and Washington. The Commissioner of the Internal Revenue Service said today that, “We are giving taxpayers in these hard-hit areas until early next year to file their returns and make payments.”

Specifically, today’s relief postpones until January 5, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts due on or after September 7, 2008, and before January 5, 2009, including individual estimated tax returns and corporate tax returns that were due September 15, and extended individual returns due October 15, 2008.

IRS computer systems will automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, from September 7, 2008, to January 5, 2009.

If you have any questions as to whether you are an “affected taxpayer,” please email me at response@phdcpa.com or call me at 214.957.3366.

Ronnie

© 2008 Ronnie C. McClure

Posted in Individual | Leave a comment