Real Estate Section 1031 Exchange QI Conversion

Conversion of Qualified Subchapter S-corporation Subsidiaries (QSSS or QSub) serving as real estate tax-deferred Section 1031 exchange Qualified Intermediary (QI) to C-corporations will not cause the corporations to be treated as new or different Section 1031 QI’s. Therefore, S-Corporation subsidiary conversion to C-Corporation will not cause pending real estate tax Section 1031 exchanges to fail. (PLR 200908005).

Qualified Small Business Stock Gain Exclusion 75%

Under the American Recovery and Reinvestment Act of 2009, signed by President Obama on 2/17/2009, noncorporate taxpayers can exclude 75% (rather than 50% or 60%) of gain on the sale or exchange of Qualified Small Business Stock (QSBS) held for more than 5 years if acquired after Feb. 17, 2009 and before Jan. 1, 2011. Beware that Alternative minimum Tax (AMT) may eliminate some of the benefit. Does not apply to S-Corporation stock, only to regular C-Corporation stock.

California Budget Tax Changes

HIGHER PERSONAL INCOME TAX RATES: personal income tax rates increased by 0.125% to 0.25% for tax years 2009 through 2012. HIGHER SALES TAX RATES: sales tax rates go up by 1%. San Diego’s 7.75% rate becomes 8.75%. AUTOMOBILE REGISTRATION / VEHICLE LICENSE FEE INCREASE: the vehicle license fee portion of automobile registration, which is a “property tax” on the value of the vehicle, increased from 0.65% to 1.15% for registrations beginning May 19, 2009. NEW HOME BUYER TAX CREDIT: purchase of a new home (new construction) March 1, 2009 through February 28, 2010 used as personal residence for two years results in a tax credit of 5% of the purchase price (maximum $10,000); once $100 million of credits have been claimed, no more credits will be issued.

New Motor Vehicle Tax Deduction

The stimulus act signed into law by President Obama, on Feb. 17, called the American Recovery and Reinvestment Act of 2009, allows an itemized deduction for state or local sales or excise taxes on the purchase of a new motor vehicle between 2/17/2009 and 12/31/2009. The deduction is the amount of taxes on up to $49,500 of the purchase price of a passenger automobile, light truck or motorcycle (gross vehicle rating not more than 8,500 pounds), or a motor home. Even taxpayers who claim the standard deduction can use this deduction in addition to the standard deduction. Taxpayers with Modified Adjusted Gross Income (MAGI) over $125,000 ($250,000 married filing jointly) get reduced or no benefit. Unlike other state/local tax deductions, this one is allowed for AMT. However, the deduction is not available to a taxpayer who elects to deduct state and local sales and use taxes in lieu of income taxes as an itemized deduction.

First-Time Homebuyer Tax Credit

The new stimulus law, the American Recovery and Reinvestment Act of 2009, changed the first-time homebuyer tax credit. Gone is the 15-year recapture, which rendered the old credit somewhat useless. Now there is no recapture unless the home ceases to be the taxpayer’s or spouse’s principal residence within 3 years. The credit of 10% of the purchase price (maximum of $8,000) is a dollar-for dollar reduction in federal income taxes. If the credit is larger than the tax liability, the rest simply paid to the first-time homebuyer as a “tax refund”. Either way, the government is essentially giving the first-time homebuyer cash of 10% of the purchase price of the new home. This is a huge benefit, and I highly recommend claiming the credit. The home purchase must close before December 1, 2009. Even better, if you buy the home in 2009, you can claim the tax credit on your 2008 tax return. This way you get the money much sooner

Longer Net Operating Loss Carry-Backs for Business Tax

The new tax law, the American Recovery and Reinvestment Act of 2009, allows small businesses that incur Net Operating Losses (NOL’s) in 2008 and later years to carry the loss back 2, 3, 4, or 5 years. Previously only a 2-year carry-back was allowed. For businesses that paid taxes in any of these years but incurred a loss in 2008, this carry-back can result in an immediate tax refund. The new rules apply to all small business tax returns, including S-Corporation tax returns, C-Corporation tax returns, Limited Liability Company (LLC) tax returns, partnership tax returns, and sole proprietorship / Schedule C tax returns. The rules also apply to losses from rental real estate.

Section 179 Business Equipment Deduction Increased

The new tax act increased 2009 Section 179 limits to $250,000 deduction for businesses buying less than $800,000 of equipment. Section 179 allows a taxpayer, other than an estate, trust, and certain noncorporate lessors, to deduct the cost of equipment as an expense instead of claiming depreciation over a number of years.

Bonus Depreciation on Automobiles

Under the new stimulus law, the American Recovery and Reinvestment Act of 2009, a business can increase the first-year depreciation deduction by $8,000 of bonus depreciation for new passenger automobiles, light trucks, and vans placed in service in 2009 is. Since depreciation of passenger automobiles is severely limited by the tax law, this is a good opportunity to accelerate deductions. Applies to all business tax returns: corporate tax returns, S-corporation tax returns, partnership & Limited Liability Company / LLC tax returns, and sole proprietor tax returns.

Bonus Depreciation Under the New Tax Act

Businesses can deduct 50% of the cost of most types of new property other than buildings. Used property does not qualify. Ordinary depreciation is deducted on the remainder of the cost basis, so total first year depreciation deduction is more than 50%. Alternatively, the Section 179 expense election can be used to deduct the entire cost of the property in the first year, if the taxpayer qualifies.

American Recovery and Reinvestment Act of 2009

The new stimulus law extended to 2009 the 50% bonus depreciation and the Section 179 deduction limit of $250,000 -- big tax savings for business. Tax breaks for individuals include a refundable “making work pay” stimulus credit, enhanced child tax credit and earned income tax credit, an improved homebuyer credit, a new deduction for state sales and excise taxes paid on new vehicles, and a sweetened higher education credit. There's also a one-year AMT patch.

Employee or Independent Contractor?

Treasury Inspector General for Tax Administration (TIGTA) stated in a new audit that “misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.” Treating a worker as an independent contractor typically saves money for both the employer and the worker. The employer avoids payroll taxes, including FICA taxes of up to 15%, and the worker is able to claim more tax deductions as an independent contractor than an employee.

Donating Money to a Charity or Non-Profit Organization

Charitable contributions of money (cash, check, or credit/debit card) are deductible on your income tax return if the right records are kept. Record-keeping rules changed over the past several years for these tax deductions. For contributions of less than $250 each, the taxpayer must keep either a bank record (i.e., cancelled check or credit card receipt) or a written communication from the charity showing the name of the organization, date of contribution, and dollar amount. Contributions of $250 or more require a written acknowledgement from the organization received by the taxpayer before the tax return is filed showing:

• Dollar amount of money contributed.
• Whether or not the organization provided any goods or services in exchange for all or a part of the donation.
• Description and estimation of value of any goods or services that the organization provided.
• Statement that the organization provides intangible religious benefits, if applicable.

Trust Distributions Deduction Late Election

The IRS issued a Private Letter Ruling allowing a trust to make a late election to deduct a charitable contribution in one year on the tax return for the prior year. PLR 200905027.

Estate Tax Discount for S-Corporation Built-In Gains

Estate tax valuation discounts continue to be an effective tool to dramatically lower estate taxes. Recently the tax court ruled in the case of Estate of Marjorie Degreeff Litchfield that estate could claim significant discounts for S-Corporation built-in gains taxes and accepted the amounts calculated by the taxpayer’s expert witness.

Executive Deferred Compensation Donated to Charity is Deductible by Employer

The IRS has privately ruled that a company can claim a tax deduction when an executive donates his deferred compensation to a charity. PLR 200905016.

Computer Programmer was Independent Contractor

Court of appeals determined that a computer programmer was an independent contractor and not an employee. Decision based upon control over the details of work, duration of projects only six to twelve months each, accounting and tax reporting by both parties (1099-MISC form and Form 1040 Schedule C / Sole Proprietorship), beliefs of the parties regarding the relationship, “distinct occupation or business” factor, the “kind of occupation” factor, and the “skill required” factor. Suskovich v. Anthem Health Plans of Virginia, Inc., (CA 7 1/22/2009).