WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* OOPS! Sorry I missed Kay Bell’s T3 (Tax Twitter Tuesday) in Wednesday’s BUZZ. Anyway, here it is now – “Tax Twitter Tuesday 11.17.2009”.

* This page on “How to Pay Less Taxes” at EFILE.COM is chock-a-block with good tax planning and preparation tips and advice, many of which I have talked about here and elsewhere for years. It is nice to have all this information in one place.

* An email from the Treasury Inspector General for Tax Administration (TIGTA) announced the release of a new report titled “Improvements Are Needed in the Administration of Education Credits and Reporting Requirements for Educational Institutions”.

It seems that –

“TIGTA's review looked at taxpayers who claimed the credit in 2006 and 2007 and found that, in 2006, approximately 203,000 taxpayers erroneously claimed a total of over $300 million in Hope Credits. In 2007, over 169,000 taxpayers erroneously claimed a total of over $232 million in Hope Credits.”

Another reason why such benefits should not be administered via the Tax Code (as I have been saying now for some time)!

I was especially interested to read the following item from the email (highlight is mine) –

“TIGTA also performed a computer analysis of all Forms 1098-T, a tuition statement provided by educational institutions to students, from 2005 through 2007. The form includes a box in which the educational institution may show the amount of tuition paid by the student, which is the figure that taxpayers and the IRS use in order to determine the amount of the credit. However, educational institutions are given the option of showing the amount billed for qualified tuition and related expenses rather than the amount paid. TIGTA found that the box in which the amount of tuition paid may be shown was blank on 80 percent of the Forms 1098-T it reviewed. Educational institutions expend approximately 5.1 million hours each year to complete Forms 1098-T and an estimated $3.8 million to mail the forms to students. Although a few government agencies use some of the information on the form, the IRS does not use the form to match or confirm the amount of the claim.”

This just goes to emphasize my comment that the Form 1098-T as currently issued by most colleges is like “tits on a bull”. For the most part the Form 1098-Ts that I get from clients are totally useless. Who cares how much was “billed” - I need to know how much was paid! And if the IRS is not going to match 1098-T information to the tax return what is the purpose of having it at all?

TIGTA made legislative recommendations to “enact legislation to either revise the reporting requirements for Form 1098-T so that the IRS and taxpayers are able to use it to calculate the amount of the claim or else relieve educational institutions of the burden of producing the form”. I hope there is some follow through on this.

* MISSOURI TAX GUY Bruce continues on the subject of the dreaded Alternative Minimum Tax (AMT) with the follow up post “How Do I Know if I Have to Worry About the AMT?”

* Chad Bordeaux has a good post on “What is a Qualified Charitable Organization?” over at BEANCOUNTER RAMBLINGS.

Chad tells us that, “Many times, people will think that donations can be deducted when they can not”. He provides a good example –

“An example that I usually bring up to explain this is related to a local homeowner’s association in the area. At least once a year, they send out a flyer that promotes a neighborhood get together (aka “party”). In the flyer they specifically state that they need donations for the keg fund and to remember that “these are tax deductible.” I hate to burst their bubble, but they are not tax deductible for a host of reasons. Primarily because the donations are not made to a qualified charity. The homeowner’s association is a tax-exempt organization (aka “non-profit”), but it does not have a charitable purpose.”

Just because an organization is “tax exempt” does not automatically mean that payments made to it are deductible as a charitable contribution.

If I may add a caveat to the subject – if you are putting your donations of old clothes in a “drop-off box” be sure that the box actually belongs to a charity. Here is some advice I gave in a July 2007 edition of the BUZZ (highlight has been added) -

“While I have, in the past, found errors in and disagreed with items discussed in Sandra Block’s weekly YOUR MONEY column in USA TODAY, I do recommend last Tuesday’s installment ‘Your Money: Donated Clothes May Not Help Charities’. When donating used clothes and household items to charity you should go with the ‘old reliables’ like Goodwill Industries, the Salvation Army, Vietnam Veterans of America or your local church – this way you are sure to be giving your items to a legitimate charity. In many cases the charity will come to you to pick up your donations. And if you are putting your donations in a “drop-off box” make sure the name of the charity is clearly indicated on the box. While these boxes may be convenient it is “more better” to drop off your donation at a local Goodwill or Salvation Army store or donation center, where you can get a signed receipt.”

* Kay Bell goes into detail on the tax provisions of the Senate health care “reform” bill in her post “2,074 pages + $849 billion = Senate Health Care Bill” at DON’T MESS WITH TAXES.

Joe Kristan also deals with one of the tax provisions in “Harry Reid's Funky New Medicare Surtax” at the ROTH AND COMPANY TAX UPDATE BLOG.

I found this nice listing of “the 17 tax increases in the Senate health care bill, which are estimated to raise $370.2 billion in revenues over ten years” as published by the Joint Committee on Taxation in the post “The Number 17 May Mean Something This Year” at the SACRAMENTO TAX BLOG, which is written by Owen S. Arnoff, EA.

I don’t quite know what “Conform definition of medical expenses” means in this context. And I, at this point, would certainly oppose “Raise 7.5% AGI floor on medical expenses deduction to 10%”.

* An article by Ryan J. Donmoyer at BLOOMBERG.COM reports that “Rangel Says House Democrats Will Seek to Renew US Tax Breaks”.

According to the article –

“New York Representative Charles Rangel said House Democrats will move next month to renew dozens of tax breaks before they expire at year’s end” and “the panel will send a measure containing most of the extensions directly to the House floor for consideration, bypassing a committee debate.”

Apparently there are 73 tax laws that are schedule to expire on December 31, 2009, as per a report by the Joint Committee on Taxation.

The expiring items include the normal tax deductions and the AMT “fix” that have come to be identified as the “extenders” because the idiots in Congress can’t make up their mind whether or not the deductions should be part of the permanent Tax Code or that the dreaded AMT should be fixed or, more better, destroyed and end up passing a 1 or 2 year extension. In the past the fools in Washington have often sat on their hands for most of the year and waited till the last minute to pass the extenders. At least now, when the bill passes, we will begin 2010 knowing that these deductions and the AMT fix is in place for the year.

* Along the lines of extending tax breaks, Joe Kristan has a post on this topic – “Theory, Meet Practice” – at the ROTH AND COMPANY TAX UPDATE BLOG.

Joe tells us that -

“George Yin, former Chief of Staff of the Congressional Joint Committee on Taxation, thinks temporary legislation -- such as the perpetually-expiring AMT patch and research credit -- is a good thing.”

Ridiculous - the constant extending of expiring tax breaks is a bad thing!

* Back to Kay Bell at DON’T MESS WITH TAXES. She gives us “A Look at Who's Paying How Much Taxes” with references to several recent studies on the topic by differing organizations.

Kay ends the post with some questions for her readers –

“What do you think? Are you being overtaxed? Are the rich disproportionately bearing the U.S. tax burden? Or are middle-class and poorer taxpayers really paying more relatively speaking than the wealthy? Should Congress let the income tax rates go back up in 2011?

Regardless of which position you take, how would change the tax system?”

I look forward to reading the comments.

* TAX GIRL Kelly Phillips Erb apparently also writes for “The Legal Intelligencer”. Over there she gives some advice on “Holiday Parties: Keeping Expenses Low and Deductibility High”.

* It will soon be time for sending out Christmas cards. I usually get my first one just after Thanksgiving, although I do not mail my own out till mid-December.

FYI, I order my cards from American Humane.

Here is a suggestion for inclusion on your Christmas Card list – passed along to me via a tweet from, once again, taxtweet Kay Bell – Holiday Mail for Heroes.

And finally another option passed along by a tweet – click here.

TTFN

DO IT YOURSELF!

Earlier this week I pointed out that telling all Schedule C filers to incorporate, and telling a one-person business to incorporate solely for the purpose of reducing his/her audit profile, is truly bad advice (click here for post).

But I did add that there are times when it may indeed be cost effective for a closely-held business to incorporate.

If, after careful consideration of all the facts and circumstances and a detailed cost benefit analysis, and after consulting with a competent tax professional, you decide that it would be appropriate to incorporate your one-person business you certainly do not need a lawyer to do so.

While I am not familiar with all the states procedures, I expect that you can incorporate easily online via the website of your State. Last year I formed a NJ corporation online in about half an hour.

FYI, registering your business as an LLC is equally as easy and can generally be done online.

You can also very easily get an Employer Identification Number from the IRS at the Service’s website.

You also do not need a “Black Beauty” or other such corporate package with by-laws, corporate seal and personalized stock certificates, which lawyers are fond of selling at a nice mark-up, or pay an inflated fee for a lawyer to prepare corporate bylaws.

You can download free blank stock certificates and corporate by-laws and purchase an inexpensive corporate seal from a variety of online sources. I expect you can also find free pro-forma corporate resolutions online. Just do a “Google” or other search.

What do you think a lawyer will do when preparing your by-laws? He/she will have a secretary or paralegal clerk go to the firm’s work processing inventory, pull down pro-forma by-laws, and type in your name and information. And when a lawyer forms a basic corporation the same secretary or paralegal goes online and files the appropriate forms. Even when there was paper filing the secretary or clerk would do all the work. You can do this just as easily yourself for free.

Here are a few online resources (FYI I have no personal experience with or connection to these resources):

PRINTABLE STOCK CERTIFICATES

CORPORATE BY-LAWS

CORPORATE BY-LAWS

CORPORATE SEAL

Where you may need the assistance of a lawyer, experienced in tax matters, is if you are forming a partnership, to help with the writing of the Partnership Agreement. And, of course, you also may need to consult a lawyer when forming a more complex corporation, with multiple shareholders of differing inter-relationships.

You certainly should sit down with a competent tax professional, experienced in business taxes, and go over all of your options in detail, and perform the requisite cost benefit analyses, before making any moves.

TTFN

DOGGIE DEDUCTIONS

An email from a former co-worker (who I recently ran into coincidentally after not seeing each other for about 20 years) brought up an interesting tax issue.

Here is the pertinent portion of the email -

“My wife is raising a puppy for The Seeing Eye in Morristown, NJ. The puppy is delivered at about 6 weeks and stays with the host family until the puppy reaches 12-15 months of age, at which time it is returned to The Seeing Eye for the appropriate training to become a Guide Dog. The host family is responsible for introducing the dog to the public - independently along with group excursions. Fees paid to a veterinarian are reimbursed by the Seeing Eye. However, dog food, toys and travel are not reimbursed in full. Someone in the club was wondering if these unreimbursed expenditures could be claimed as a charitable deduction. My gut feeling was that since these expenditures are made through a grocery or pet store it would be difficult to substantiate these expenditures for inclusion on the Form 1040 Schedule A. The travel, however, to attend meetings and outings may be something that could be utilized on the Form 1040 Schedule A.”

According to IRS Pub 526 (Charitable Contributions) –

“Although you cannot deduct the value of your services given to a qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be:

• Unreimbursed,
• Directly connected with the services,
• Expenses you had only because of the services you gave, and
• Not personal, living, or family expenses.”

I found this advice being given at the “Frequently Asked Questions About Puppy Raising” Page of the Guide Dogs for the Blind website –

“Q: Are the costs of raising a Guide Dog puppy tax deductible?

A: Yes. Guide Dogs for the Blind is a nonprofit charitable organization, and all expenses incurred by the raiser as they relate to raising the puppy (dog food, veterinary bills, gas mileage, etc.) are considered a donation to Guide Dogs. Guide Dogs suggests all puppy raisers consult with a tax advisor to receive the proper IRS requirements for documentation.”

I tend to agree with the advice provided by Guide Dogs for the Blind.

The Seeing Eye in Morristown, NJ is a qualified charity. The purpose of the organization is to raise and train Seeing Eye dogs for use by a blind person. The dog is placed in the volunteer taxpayer’s home by The Seeing Eye as a puppy to be raised. The volunteer taxpayer begins the dog’s training by “introducing the dog to the public - independently along with group excursions”. When the dog is old enough to begin actual guide dog training it is returned to the organization.

The email indicates that the expenses incurred by the family, other than veterinarian bills, are “not reimbursed in full”. According to the organization’s website, it “provides a stipend to help defray the cost of food”, but this does not cover the total cost of the food. And no reimbursement is given for travel costs.

The website says – “Your Area Coordinator will give you an initial eight-pound bag of puppy food. We suggest you purchase the same brand in 40-pound bags at local feed stores.” So The Seeing Eye tells the volunteer taxpayer what type of food it should buy.

There is an actual “out of pocket” for food as well as for dog toys and travel to the vet and “to attend meetings and outings”.

Let’s apply the guidelines in the IRS pub.

1. A portion of the expenses are unreimbursed. There is a true “out of pocket”. Only the "out of pocket" portion is deductible.

2. The expenses are directly connected with the service of raising the puppy provided by the volunteer taxpayer.

3. The expenses are incurred only because of the service of raising the puppy provided by the volunteer taxpayer. And

4. These are not “personal, living, or family expenses”. The volunteer taxpayer is not taking in the dog to be the family pet – but as a true volunteer service to the organization. The taxpayer is required to begin the puppy’s socialization training and to return the dog when it is old enough for more specialized training.

As for substantiation – a travel diary (notes made in a regular pocket date book) would document the miles driven to meetings and organization sponsored outings. The deduction in this case would be 14 cents per mile (the standard mileage allowance for charity). The fact that the cost of the dog food and toys are on bills from pet stores and groceries should not matter. One would just circle the applicable items and make a note on the individual receipts and save them in a separate envelope. At the end of the year the amounts would be added up and the stipend received would be deducted to determine the amount of the tax deduction.

If the puppy placed by The Seeing Eye is the only dog in the household substantiating the cost of food, etc. is easy. If there is one or more other family dogs in the picture one would have to allocate the food purchases among the dogs, unless a special brand or type of food is purchased for the future guide dog that is different from the food purchased for the family dog(s). In the case of multiple dogs the cost of “toys” may be questionable, unless the volunteer taxpayer is told by The Seeing Eye what specific toys or other aides are to be purchased to assist in the puppy’s specialized socialization training.

Of course, as the email suggest, these volunteer expenses are only deductible if you can itemize on Schedule A.
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FYI, according to the IRS publication on Medical and Dental Expenses (Pub 502) -

“You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually-impaired or hearing-impaired person, or a person with other physical disabilities.”

So when the guide dog is placed with a blind person, that person can deduct in full, as a medical expense (subject to the 7 1/2% of AGI exclusion) all the costs associated with the dog (i.e food, vet bills, etc).

The guidelines used to determine if the dog-raising expenses of my friend and his wife are deductible can be applied to other types of volunteer work.

For example, if you are a regular “docent” at a museum, or if you are a Board or commitee member of a charity, or if you drive members of your church’s youth organization to group events you can deduct your round trip mileage to the museum, to attend meetings, and to the events. And if you are a scoutmaster you can deduct the cost to purchase and clean your uniform. IRS Pub 526 discusses such deductible expenses in more detail.

So, Jack, I hope that I have answered your question.

Do any of my fellow tax professionals have anything to add?

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ – WEDNESDAY EDITION

The BUZZ is “chock-a-block” today! Perhaps the biggest BUZZ yet.

* Let’s start with a great story that has nothing to do with taxes from Stacie Clifford Kitts of STACIE’S MORE TAX TIPS, “A Small Town and A Diabolical Marketing Strategy that Sucked Me In”, which provides a great warning for travelers driving through small towns.

* TAX CPA Marilyn Lawver’s post “Maybe Next Year” - which observes, “It looks like we won't see any significant reform in the near future. No end in sight to massive AMT, endless credits, and a brand new Schedule L, too! Oh goody” – brought me back to her earlier post “How Does That Work”, which included some excellent comments on our current tax system -

“As often happens, I find myself comparing this situation to medicine (which just might have something to do with being married to a doctor). If we only change a code section here, or a regulation there, we're just treating symptoms and not the disease.

Just like when we keep adding new credits and deductions, we keep trying to cure our economic ailments with more and more medication. And from the stories I hear, more medication is not always the best answer! It often makes things worse.”

* TAX PROF Paul Caron tells us about a court case in which “Tax Court Applies Cohan Rule to Allow Deduction for Portion of Unsubstantiated Charitable Contributions”.

The Cohan rule (for, yes, George M Cohan, the “Yankee Doodle Dandy”) is generally applied to employee business expenses, specifically travel expenses. It is interesting to see it applied to charitable contributions, although there apparently is precedent. However, this ruling applies to a 2005 tax return, before Congress enacted strict documentation rules for charitable contributions.

What is the Cohan rule? Check out my post “In the Courts” for a basic description. Perhaps I will write a post on it next week.

{OOPS! It seems I got ahead of myself and published the post on GMC yesterday (Tuesday)! I hope you didn’t pull your hair out trying to find the reference to the Cohan Rule in last Saturday’s BUZZ.}

* Paul also brings out attention to the report “Judging Tax Expenditures: Spending Programs Buried within the Nation’s Tax Code Need to be Reviewed” by Citizens for Tax Justice in his post “CTJ: Judging Tax Expenditures”.

The report’s summary tells us (highlights are mine) –

“Special tax breaks, known as tax expenditures, are generally enacted with goals unrelated to ensuring that the tax system collects revenue efficiently and fairly. Instead, these programs are designed to encourage particular activities or reward specific groups of taxpayers. Because they lack tax policy justification, tax expenditures are often described as spending programs “hidden” within the tax code.

Tax expenditures are exceedingly popular among lawmakers, but not for reasons of good policy. Rather, political attitudes and loose procedural rules are responsible for the excitement surrounding these provisions. This undeserved popularity can and should be reined in, at least in part, by implementing a tax expenditure performance review system. Such a system would impartially judge whether these provisions are fulfilling their stated objectives.”

I have been saying basically the same thing for some time now.

* The NY TIMES has a good article by Ron Leber on “Financial Decisions to Make as You Divorce”.

Ron correctly points out that it is important to consider tax consequences when dividing assets -

“In general, it’s crucial to consider the after-tax value of everything, from retirement accounts to deferred compensation when splitting up assets. Annette Brown, a divorce specialist in San Francisco, also noted that judges sometimes failed to consider which spouse could best benefit when awarding the right to future tax deductions and credits relating to the couple’s children.”

It is important to get a tax professional involved in drafting the divorce document, or at least let one review the document before you sign. A lawyer may be extremely competent and experienced in divorce law but may not know his arse from a hole in the ground when it comes to taxes.

I recently went through a long and tedious situation with the IRS, which I eventually “won”, because a divorce agreement was not properly worded.

Check out my 4-part series on “Till Divorce Does Us Part” – Part I, Part II, Part III, Part IV.

* I like Ron Teuber’s “Friday's Tax Quote - November 13, 2009” at the TAX LAW FORUM blog –

"A fine is a tax for doing something wrong. A tax is a fine for doing something right."
- Anonymous.

That Anonymous guy really said a lot of good stuff!

* Kay Bell discusses a truly unique tax subject that has been getting some press lately in “Dissecting Taxation of Human Body Parts” at DON’T MESS WITH TAXES.

Kay quotes from an item by Lisa Milot of the University of Georgia Law School –

"Transfers of human body materials are ubiquitous. From surrogacy arrangements, to sales of eggs, sperm and plasma to clinics, to black markets for kidneys, to pleas for donations of body materials, these transfers are covered and debated daily in popular and academic discourse.

There are no statutory provisions directly on point, Internal Revenue Service guidance is outdated and conflicting, and the small number of judicial decisions in this area are narrowly written to resolve only the tax liability of the particular taxpayer before the court"

Kay’s bottom line – “Well, it turns out that a pound of flesh (although usually much less) might one day literally be considered when it comes to taxation.”

My special report on DEDUCTING MEDICAL EXPENSES ON YOUR 2009 FORM 1040 (available for $2.00 sent as a pdf email attachment) tells us that, while the value of the donated egg or embryo are not taken into consideration, you can deduct -

“The cost of fertilizing and transferring a donated egg or embryo, as well as expenses to obtain an egg donor that are directly related to and in preparation for receiving the donated eggs or embryo. This includes agency fees, donor fees, the donor’s medical and psychological testing fees, insurance premiums paid for post-procedure assistance, and legal fees for preparing the donor contract.”

* Another Kay Bell item - this time it is not from DON’T MESS WITH TAXES but Kay’s other blog EYE ON THE IRS at Bankrate.com. I offer the post “'Accidental' Mortgage Interest Deduction”. This post discusses the history of the mortgage interest deduction – which Kay has gone from "accident to birthright."

Kay tells us that -

“Many economists believe, however, that the effort to increase homeownership, typically through tax breaks, has played a major role in our current economic crisis.”

And, Kay, thanks for the post on my George M Cohan item!

* Bruce, the MISSOURI TAX GUY, has lots of interesting “stuff” in his weekly “Reads from Last Week” entry. I thank Bruce for the reference to, and thoughts on, my post on a National Sales Tax.

Bruce is always finding new interesting blogs. I especially liked the post he referred to from the OUTBREAK blog, a blog which is also new to me. And, as usual, Bruce links to some good advice from personal finance blogs.

As for “Snoopy music”, I like “Supper Time” from the musical YOU’RE A GOOD MAN, CHARLIE BROWN. And, of course, the tales of Snoopy’s battles with the Red Baron from the 60s.

*Bruce also begins what looks like a series of posts on the dreaded Alternative Minimum Tax with “A Brief Overview of the Alternative Minimum Tax (AMT)”, which details the background and history of the damned thing.

* FYI, JOE TAXPAYER also has a weekly BUZZ-like review of personal finance blog posts which he titles “This Week’s PF Blogger Roundup”. I especially liked the post “5 Dumb Mistakes That Smart People Make” that JT references.

* The OUTBREAK blog that I discovered on Bruce’s post led me to a good “State By State Sales Tax Summary” from Wray Rives, CPA’s self-titled blog. The 9/1/09 post provides details and links for each state that has a sales tax. It is a good post to “favorite” for future reference.

* TIGTA (the Treasury Inspector General for Tax Administration) has issued a report titled “Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the Making Work Pay Credit” (now there is a mouthful – say that 5 times fast!). The report discusses a disturbing, but not unexpected, result of the new tax withholding tables instituted to allow taxpayers to take advantage of the MWP credit.

According to the press release (highlights are mine) -

“TIGTA found that the implementation of the MWPC creates the possibility that more than 15.4 million taxpayers may be advanced more of the credit (through reduced withholding) than they are entitled to receive. When filing their tax returns for 2009 and 2010, such taxpayers may ultimately owe additional taxes. Some also may be subject to estimated tax penalties.”

Back when the new withholding tables were instituted I, and just about every other tax blogger, warned about the unintended consequences. As TIGTA explains -

“The MWPC was implemented using new income tax withholding tables. However, the changes to the withholding tables did not take into consideration: dependents who receive wages; single taxpayers with more than one job; and joint filers where one or both spouses have more than one job or both spouses work. Other groups potentially affected include: individuals who file a return with an Individual Taxpayer Identification Number; those who receive pension payments; and Social Security recipients who receive wages.”

* Russ Fox makes a very astute observation in his post “Senator Reid Looking at Increasing Social Security, Medicare Taxes for the Wealthy” at TAXABLE TALK –

“Frankly, the current Administration and the current Congressional leadership has little clue about economic development.”

If any!

* Annette Nellen, CPA/Esq discusses the “Need for Penalty Reform at Federal Level” at 21st CENTURY TAXATION. She tells us that “There are about 130 civil penalties in the Internal Revenue Code”.

The post takes you to a very extensive article on the subject by Annette at another “location”.

* Trish McIntire gave us two good posts at OUR TAXING TIMES on Sunday.

The first, “Buyer Education VII”, continues her excellent series with a discussion of “Advice From Non-Preparers”.

Trish correctly says –

“I would suggest calling your tax professional if you are tempted to follow tax advice given by your:

• Barber/Hairdresser
• Real Estate Agent
• Car Sales Person
• Home Improvement Guy or Gal
• The Loudmouth at Work
• The Know-it-All Relative
• The Golf Cart Sales Person
• The Fund-raiser
• Anyone who will make money or benefit from you making the tax decision they are suggesting.

I am sure most of these people are good people. Some of them have heard the info they are sharing and are passing it on. The problem is that they may not understand it well enough to share, or didn't get all the restrictions, or they're wrong. Or, they are trying to sell you something and using tax savings/credit to get you interested or push the sale.”

Hey, I have said for years now that the best tax advice I can give someone is to not accept tax advice from anyone other than a competent tax professional.

Trish then goes on to talk about “Locking the Barn Door”. She tells us –

“My concern is with the tax planning that isn't getting done, now or at any time of the year. These are the major, life changing events and it is surprising how many taxpayers don't think of them until it is too late. A few examples:

• Retirement
• Child leaving home (not just to school) or turning 17
• Starting Social Security (with or without retirement)
• Unemployment
• Starting a business
• Divorce
• Marriage

All these life events can cause a change in your taxes and generally not for the good. But, they can be planned for and adjustments made to withholding and estimates.”

Hey, I have been saying, “Once the ball drops on One Time Square and the New Year is rung in there is little you can do to reduce your tax liability” for decades.

* Over at the INTUIT (Hey, man, I’m not into it) website Terry Myers and Dee DeScherer tell us that “2009 has also seen a number of important new rulings from the IRS and the courts” and that “These new rulings may have a significant impact on the returns of certain clients” in a “Tax Article” titled “New Rulings Impact 2009 Form 1040”, and provides a detailed discussion of some of these rulings.

A tip of the hat to Kerry M. Kerstetter, the TAX GURU.

* Andy talks about “Taxes and Gains I Can Exclude When Selling My Home” in a comprehensive post on the subject at SAVING TO INVE$T.

* The BRAIN DEAD SIMPLE! FINANCIAL ORGANIZING blog has a good post titled “A Tool for Comparing Roth vs Traditional IRAs”.

“This subject has been covered extensively by other personal finance bloggers and authors; the purpose of this post is to provide links to articles covering the basic concepts, and a simple tool for comparing taxable, tax-free Roth and tax-deferred traditional IRA and 401 (k) accounts.”

* The TAXES OBSERVED blog, a new one to me, has been running a series on FAQs regarding the new First Time Home Buyer’s Tax Credit.

* Let me end by wishing myself a happy 56th birthday.

TTFN

BEWARE OF BAD BLANKET ADVICE

There is very little, if anything, about tax law that is a “no-brainer” – especially when it comes to business taxes. That is why tax professionals exist.

I do agree that all small businesses, regardless of the number of owners, that would not benefit financially by incorporating should register their activity as an LLC to get the liability protection. It is relatively inexpensive to do so, and it can probably be done online by the business owner himself/herself without having to pay a lawyer. But I also believe that a one-person LLC should elect the “default” entity and file a Schedule C. It is my opinion that if you want to file as a corporation you should incorporate.

I believe it is bad advice to tell ALL taxpayers who have a Schedule C business to incorporate. There is no tax advice that applies to all businesses in all situations (except don’t cheat). The decision to incorporate a business requires careful review of all the specific facts and circumstances of the individual situation. And taxes are not the only consideration. In a majority of cases it is not financially beneficial, either in the short or long term, to incorporate.

The advice that one should incorporate solely for the purpose of avoiding an audit seems to me to be saying, “If you want to cheat on your taxes you can incorporate and the IRS will not audit you”. It is not good tax or financial advice.

I have said time and again that an IRS audit is not something that should be avoided at all costs. Tax returns should be prepared, and decisions about choosing a business entity should be made, in such a manner as to generate the absolute least amount of federal, state and local taxes (income and payroll) within the parameters of federal and state laws. If you will pay less taxes (income and payroll), fees and other costs by filing a Schedule C you should do so, honestly and ethically, and not worry about being audited.

If your return is prepared correctly, and you document all items of income and deduction properly upfront, then an audit is nothing more than an inconvenience.

It is very true that one consideration out of many in determining whether or not to incorporate is the fact that the audit profile of the business will be reduced, and more so in coming years. But it is only one – and a minor one at that. At most it is merely “icing on the cake”. Unless, of course, you are a crook.

If you are told that there is a substantially greater chance of being audited if you deduct your $10,000 gift to a qualified charity, which you did properly and have all requisite documentation, it would be bad advice to tell you not to deduct the $10,000. The deduction is genuine and you can prove it. Who cares if the IRS asks you to prove it?

I do agree that there are indeed times when it is “more better” financially to incorporate a one-person business, especially when excessive health insurance costs are involved. But certainly not in all cases.

The decision to incorporate is by no means a “no-brainer”. It involves a lot of brain work!

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Fellow tax professionals - what do you think?

I'M A YANKEE DOODLE TAX PRO!

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As promised in last Saturday’s BUZZ here is the story on the famous “Cohan Rule”.

George M Cohan was a playwright, composer, lyricist, actor, singer, dancer and producer who started out Vaudeville with the family act known as “The Four Cohans”. According to Wikepedia he was "Known as 'the man who owned Broadway' in the decade before World War I, he is considered the father of American musical comedy”.

Appropriately his life was made into the Broadway musical GEORGE M!, which was Joel Grey’s follow-up to CABARET. GEORGE M! also starred a young Bernadette Peters as Cohan’s sister.

His life story had previously been brought to the big screen in the classic YANKEE DOODLE DANDY with James Cagney. This movie is usually shown each year on July 4th on TCM or elsewhere. BTW, Cagney reprised the role of GMC for a guest appearance in THE 7 LITTLE FOYS, with Bob Hope as Eddie Foy. And, correct me if I am wrong, but I do believe that Eddie Foy himself appeared briefly as himself in YANKEE DOODLE DANDY.

GMC was famous for the line “My mother thanks you. My father thanks you. My sister thanks you. And I thank you”, which was addressed to the audience at the end of the family’s Vaudeville act.

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Among the many songs written by GMC are "Give My Regards to Broadway", “The Yankee Doodle Boy” (“I’m A Yankee Doodle Dandy”), “You're a Grand Old Flag", "Forty-five Minutes from Broadway", "Mary Is a Grand Old Name" and “Over There". He also taught us how to spell H-A-RR-I-G-A-N.

George M is still represented on Broadway in the form of a statue in the middle of Times Square.

FYI, while he always said he was “born on the 4th of July”, according to his Wikepedia profile a baptismal certificate indicates that he was actually born on July 3, 1878.

The “Cohan Rule” refers to the decision in the federal court case Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930). This case resulted from one of the first IRS audits. The IRS disallowed Cohan’s deductions for business travel citing Internal Revenue Code Section 162. Under IRC 162 a taxpayer must establish that an expense was (1) paid or incurred for (2) business or profit-oriented purposes and (3) the amount spent.

Fred W. Daily explains the situation in his copyrighted article “Getting Audited? Can't Find All Of Your Records? No Problem”.

“The IRS took the position with Mr. Cohan that even if he could convince an auditor that the business expense qualified for a deduction (satisfy number 1 and 2), that he also must be able to fully document the amount spent (number 3). George replied that he was always on the run, and had little time to document many of his expenses. George challenged the IRS stringent record keeping requirements in court. His lawyers argued that the IRS was wrong because even though records were missing, George had presented other credible evidence of the amount of the expenses on which approximations of the true amounts could be made.

George had explained the necessity of the (undocumented) expenses and offered his recollections and approximations of the amounts incurred. The items ran from cab rides and tips to large hotel and restaurant expenses for George and his entourage. The Federal Appeals Court, in an opinion by the aptly named Judge Learned Hand, held that the sums were allowable business expenses. It was unreasonable of the IRS not to allow, at least some of his earnings, not to be based on Cohan's approximations.”

Another FYI – Judge Learned Hand is the author of the famous quote –

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

What the Cohan ruling says is that since GMC travelled the country to produce and appear in theatrical productions, which was public knowledge via programs and newspaper accounts, it is reasonable and appropriate to assume that he must have incurred certain deductible expenses.

Under the Cohan rule if there is no documentation, but other evidence clearly indicates that some deduction should be allowed, the court may come up with its own estimate. As the Fifth Circuit held, “if a qualified expense occurred, . . . the court should estimate the expenses associated with those activities”.

Over the years Congress has, by statute, required more detailed documentation for certain types of expenses in order for a deduction to be allowed – such as business travel and entertainment, business gifts, listed property (autos, computers, cell phones, and certain entertainment property), and, most recently, charitable contributions.

Is the Cohan Rule still a credible “defense” today? It appears so, as per the item from last Saturday’s BUZZ where it was applied not to business expenses but to charitable contributions.

In an August 2008 blog post from RUBIN ON TAX titled “Is There Life Left In the Cohan Rule” author Charles Rubin refers to the article “Cohen Rule Still Secures Some Deductions Despite Statutory Limits” by Paul G. Schloemer from Practical Tax Strategies. Schloemer conducted a survey of tax cases where the Cohan Rule was invoked to see if the rule still had viability. Rubin tells us, “Happily, he reports that the rule is alive and well”.

Rubin pointed out that –

“Mr. Schloemer notes that there are two key variables that courts will look for in allowing a taxpayer to rely on the Cohan Rule. The first is that SOME documentation will be needed - oral testimony alone probably will not cut it. The second variable is the veracity of the taxpayer's testimony, since the court will need to have some level of trust in the taxpayer's assertions before it will allow deductions under the rule.”

Despite the fact that this “out” exists, you should not use it as an excuse not to keep good contemporaneous records and maintain detailed documentation of all your business expenses.

TTFN

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OOPS! THE REFERENCE TO THE COHAN RULE APPEARS IN TOMORROW'S (WEDNESDAY EDITION) BUZZ - IT WAS NOT IN SATURDAY'S BUZZ EDITION. MY BAD

THE WHABAA

President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548) into law on November 6, 2009. It had passed the Senate 98 to 0 and the House 403 to 12. So its passage was almost unanimous.

The Act extends unemployment benefits for 14 more weeks in all 50 states and up to 20 more weeks in states with a 3-month average unemployment rate of at least 8.5%. The temporary exclusion of the first $2,400 of unemployment benefits was not extended into 2010. The additional unemployment benefits is paid for by extending the 0.2 percent Federal Unemployment Tax Act (FUTA) surtax through June 30, 2011.

But since this is a blog about 1040 taxes I want to talk about the provisions that affect the 1040.

As we all know by now the centerpiece of this bill iss the extension and expansion of the First Time Homebuyer Credit, which was set to expire on November 30, 2009. The $8,000 refundable credit is extended for purchases made through April 30, 2010. It will also apply to purchases that close between May 1 and June 30, 2010, providing the taxpayer entered into a written binding contract to close before May 1, 2010.

The phase range out for purchases made after November 6, 2009 is now “modified” Adjusted Gross Income between $125,000 and $145,000 for single (and head of household and separate) filers and $225,000 and $245,000 for joint filers.

The Act also allows “existing homeowners” to claim a credit of up to $6,500 ($3,250 if married filing separate) on purchases made after November 6, 2009, if they owned and lived in, as a primary residence, the same home for any five (5) consecutive years during the eight (8) year period that ends on the date of purchase of the new home.

Qualified purchasers who close in 2009 can continue to elect to treat the purchase as being made in 2008 and file an amended 2008 return to claim the credit and a check. And qualified purchases made in calendar year 2010 can be treated as being made in 2009, with the credit claimed on the 2009 Form 1040.

So if you purchase a home, and qualify for the credit, in early 2010 be sure to give the Settlement/Closing Statement to your tax professional with your 2009 tax “stuff”. If you plan to purchase by the April 30 (or June 30) deadline but have not done so at the time you give your tax pro your “stuff” be sure to tell him/her of your intentions.

For purchases made after November 6, 2009, the purchase price cannot exceed $800,000. If you close on a home today, and you otherwise qualify for the credit, you will not be eligible for the credit if the purchase price of the home is more than $800,000. Previously there had been no limit.

I, and others, had criticized the previous credit for being too easy to get. All you had to do was ask for it. No documentation or declaration was required. As a result there were many fraudulent claims filed and tons of money was sent to individuals who did not qualify for the credit. To “fix” this Congress added additional requirements and conditions for the credit.

For purchases made after November 6, 2009, you must be at least age 18 in order to qualify for the credit, and you cannot be claimed as a dependent on another taxpayer’s return. And the definition of a “related party” now includes relatives of a taxpayer’s spouse. You cannot purchase the home from an “in-law” (parents, grandparents, children of a spouse) and qualify for the credit.

And, most important, you now must attach a “properly executed” copy of the Settlement or Closing Statement to your tax return. This applies to all qualified purchases made during calendar year 2009 through the 2010 expiration dates where the credit is requested on a 2009 (or 2010) tax return. The National Association of Tax Professionals’ analysis of the Act states that “it does not appear that closing statements need to be attached to amended 2008 returns”. Why Congress did not require this for all claims submitted after November 6, 2009, whether on a 2008 or 2009 return, is beyond me.

Unlike the initial $7,500 credit, none of the $8,000 or $6,500 credit needs to be repaid, unless the new home ceases to be the taxpayer’s principal residence within 36 months of the date of closing, except, or course, for death.

Special rules apply for members of the uniformed armed services, members of the Foreign Service, and employees of the “intelligence” community. The credit is available until April 30, 2011 (or June 30, 2011 if there is a written binding contract in place before 5/1/11) for those qualifying personnel stationed outside the United States for at least 90 days.

And the 36-month recapture provision is waived for qualified personnel who claimed the credit and either sold the home or stopped using it as a principal residence after December 31, 2008, due to government orders received for qualified official extended duty service.

FYI, while I will be thrilled if some of my clients can get a piece of this “pie”, I share the opinions of many of my fellow tax bloggers concerning this credit. If I were a Senator the vote would not have been unanimous.

The other provision of the Act that could affect 1040s is allowing taxpayers to elect to “carry back” a 2009 “net operating loss” (NOL) for five (5) instead of two (2) years. Certain small businesses were previously permitted to carry back a 2008 NOL for five (5) years. For 2009 NOLs the 5-year carryback period is eligible for almost all business operations, not just “small” businesses.

The amount that is carried back to the 5th preceding year may be limited to 50% of the taxpayer’s taxable income, without regard to the NOL, for that 5th year.

The NOL carryback issue is truly a complicated one, whether 2 or 5 years, as I recently discovered. Anyone who may be involved in a NOL situation should most definitely consult a tax professional who is experienced in NOL filings.

Of special interest to me, as a tax professional, is the provision of the Act that requires any tax return preparer who prepares more than 10 individual income tax returns during a calendar year (this includes returns for estates and trusts) to electronically file the returns.

This requirement is effective for tax returns filed after December 31, 2010. So it does not apply to the upcoming tax filing season, but will take effect in 2011 for the filing of 2010 returns.

While it was a common belief among tax professionals that such a requirement was coming, it was not expected to come so soon. We all thought that this mandate would be included in the eventual legislation that would require the IRS regulation of all paid tax preparers.

NATP recently told its members in its weekly email newsletter -

“As it is stated, this is all the new law provides {i.e. e-filing required – rdf}. At this time, there is no guidance on how clients can "opt out" or otherwise file their returns on paper. It appears that a return that is "filed" by the taxpayer does not have to be electronically filed. The way in which the law is written is unclear on this point.”

Many states already have such e-file mandates. NJ requires paid tax preparers, who prepared 50 or more returns in the prior year, to file state income tax returns electronically – but this can be done free of charge, and without using tax preparation software, via the internet and clients can elect to “opt out” and elect to have their state return filed “the old fashioned way”.

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* Venerable TAX PROF Paul Caron tells us that the Heritage Foundation has published "Seven Reasons Why Congress Should Repeal, Not Fix, the Death Tax" by William W. Beach in his as usual appropriately titled post “Seven Reasons Why Congress Should Repeal, Not Fix, the Estate Tax”.

The 7 reasons are –

1. Death taxes discourage savings and investment
2. Death taxes undermine job creation
3. Death taxes suppress productivity and wage growth
4. Death taxes contradict the central promise of American life: wealth creation
5. Death taxes hurt those who have tied their savings up in land
6. Death taxes hurt African-American business owners
7. Death taxes hurt women business owners

I don’t want to be “politically incorrect” – well actually I do not want to be “politically correct” – but it matters not whether death taxes hurt African-American business owners or women business owners. It matters only that death taxes hurt business owners - period. To be honest Mr Beach does not properly explain how death taxes hurt African-American and women business owners more than other business owners.

It seems to me that beneath any such statements as these lay some kind of prejudice. It is as if they are saying that African-American and/or women business persons are not as competent or savvy as other business persons and therefore need special protection or advantages.

FYI one of the most successful and savvy business persons I know is a woman!

* EA John Sheeley reminds small business owners of the rules concerning the Form 1099-MISC in his post “Year End Planning: Filing Form 1099-MISC” as his self-titled blog.

John suggests that -

“NOW is the perfect time to review your files and determine to which of the people and companies you did business with during 2009 you must issue a Form 1099-MISC. Well ahead of the end of the year, you should send IRS Form W-9 to the affected payees for completion.”

If I might add a word of caution to small business owners and freelancers – just because you do not receive a Form 1099 does not mean that you do not have to report the income. There are those who will only report as income the amounts identified on the Form 1099-MISCs that they receive. Taxable income is taxable income. Besides – just because you have not received a 1099 does not mean that one was not issued and is in the IRS system. It may have contained an incorrect or outdated address and therefore not delivered, or just plain lost by the Post Office.

On the other hand do not accept a 1099 as gospel without checking the amount reported on the form against your records. If you find a discrepancy contact the issuer immediately.

And be sure to verify that the Social Security or Employer Identification Number on the form is correct.

* TAX GEEK Dana Andrews (no, he was not in LAURA) takes the words out of my mouth with his rant “Arrghhh!!!!! I Hate It When People Give Tax Advice Who Should Not Be Giving Tax Advice”.

On this case Dana is talking about charities telling you “Your payment is tax deductible” –

“This is a huge misconception people have about charities. Let me make this clear, Your Girl Scout cookies are NOT tax deductions. You give them 4 bucks, they give you cookies. A purchase, not a tax deduction. If you were to give the girl a $5 bill, and tell her to keep the change for the troop, that $1 becomes a deduction. (Only if you get here to sign a receipt).”

* To celebrate Friday the 13th, the third one this year, Kay Bell provided links to posts that deal with tax and financial fears in her post “Overcoming Tax Terrors” at DON’T MESS WITH TAXES.

* And, while Kay Bell tells us “Don’t mess with taxes”, Jean Murray suggests “Don't Mess with the IRS - Cases in Point” at JEAN’S BUSINESS LAW/TAXES: US BLOG.

What’s the post about? Jean says, “In honor of Friday the 13th, I am acknowledging some unlucky taxpayers who figured they could get away with cheating the IRS. Silly fools!”

* SMT Associates, the CPA firm behind the BETTER BUSINESS BLOG, has a free “Year-End 2009 Business Guide” to help businesses understand the various year-end reporting requirements. It also includes information about important deadlines between Jan 1 and Apr 15 and tips on year-end closings and good accounting practices to help you stay compliant with IRS regulations and make bookkeeping less stressful.

Click here to download the guide.

* Bruce, the MISSOURI TAX GUY, discusses the tax filing responsibilities you will be faced with if you find yourself named as executor when a loved one dies in his post “A Death In My Family”.

Condolences to Bruce on the passing of his grandmother.

TTFN