The Tax Strategist

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Strategist Trusted tax and marketing tactics to grow your practice

August 2009

TaxNews

5 ways to invade retirement funds

Protect homebuyer refunds.

ormally, you would not advise clients to begin taking early withdrawals (before age 591/2) from qualified retirement plans and IRAs. Not only does this erode the nest egg they’ve diligently built for retirement, they also will be slapped with a 10% penalty tax on top of the regular income tax they owe.

But some clients may face a cash crunch in this recession with no other alternative.

Strategy: Minimize the tax damage. If a client qualifies under one of several special tax-law exceptions, he or she doesn’t have to pay the usual 10% early withdrawal penalty—even if retirement age is nowhere in sight. (Regular income tax still applies whether or not the 10% penalty tax does.)

The rules differ slightly for distributions from qualified plans and IRAs. Here are five ways to access cash earmarked for retirement without triggering the 10% penalty.

A first-time homebuyer is entitled to a maximum credit of $8,000 for purchasing a principal residence before Dec. 1 ($7,500 for 2008 purchases). The credit for a 2009 purchase can be claimed on an amended 2008 return. Due to abuses, the IRS says it’s examining refund claims carefully. To avoid delays, attach a copy of the HUD-1 form with the amended return.

Don’t act suspicious. The United States and Switzerland have agreed in principle on a new informationsharing treaty. Significantly, the IRS will have access to information on funds held in Swiss bank accounts if tax fraud is “suspected.” Previously, access was limited to instances involving tax evasion.

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1. Take “separate but equal” payments.

No penalty will be assessed if you arrange for a client to receive “substantially equal periodic payments” (SEPPs) from a qualified plan or IRA based on life expectancy (or joint life expectancy with a designated beneficiary). The payments must last for five years or until the participant reaches age 591/2 (whichever is later). He or she must receive at least one SEPP a year and payments generally can’t be modified (see box, page 2).

Continued on page 2

Memo to Clients How can you inform clients about penaltyfree withdrawals from IRAs and qualified plans? Send them the free client memo available at www.TaxStrategist.net.

Tax potholes revealed. A new report by the Government Accountability Office (GAO) points out a problem relating to property tax deductions. (GAO-09-521, May 2009) The GAO notes that many tax filers incorrectly add municipal charges —such as charges for water use and garbage removal—to the property taxes they deduct on their returns. The IRS hopes to encourage more towns to set the record straight.

Inside This Issue Tax bargains in ‘clunker’ law . . . . .3 Is cell phone ‘crackdown’ coming? .3 IRS updates COBRA subsidy rules . .4 Avoid depreciation trap in down year .5 Beat new deadline for WOTC . . . . . .6 Home office: Rent to company . . . .8 www.TaxStrategist.net

(800) 543-2055

IRS aims for tax preparer reforms T he IRS is embarking on a groundbreaking new program that will affect tax return preparers of all stripes.

Alert: On June 4, IRS Commissioner Doug Shulman announced he would propose a comprehensive new set of recommendations with the goals of higher ethical conduct among tax preparers and improved compliance by taxpayers. The proposals, which will be formally submitted to the president before the end of the year, will follow an extensive review of the tax preparer community. (IRS News Release IR2009-57) “Tax return preparers help Americans with one of their biggest financial transactions each year,” Shulman said. “We must ensure that all preparers are ethical, provide good service and are qualified. At the

end of the day, tax preparers and the associated industry must be part of our overall game plan to strengthen the integrity of the tax system.”

In particular, Shulman expects to focus on unenrolled return preparers. Regulation of this group is a distinct possibility.

According to IRS data, approximately 80% of filers use a paid preparer or tax software to prepare their returns. Shulman notes that a relatively large number of the preparers lack the proper education or training for this task. Furthermore, there are no minimum education, skill or ethical standards for tax return preparers in 48 states.

(California and Oregon are the exceptions.)

The IRS review will examine the issues surrounding new regulation of tax preparers.

Continued on page 2

National Institute of Business Management

Retirement funds (Cont. from page 1)

There are three permissible methods for computing the required payments under the IRS life expectancy tables: • Required minimum distribution (RMD) method: The annual payment is determined by dividing the account balance by the number from the applicable life expectancy table.

• Fixed amortization method: The annual payment is determined by amortization of the account balance over a period of years using the applicable life expectancy table and assumed interest rate.

• Fixed annuitization method: The annual payment is determined by dividing the account balance by an annuity factor derived from a mortality table with an assumed interest rate.

Use the best method for the particular situation.

2. Find the cure for medical woes. If someone has been hit with medical bills, withdrawals are exempt from the 10% penalty to the extent that the costs qualify for the medical expense deduction (i.e., unreimbursed medical expenses exceeding 7.5% of adjusted gross income).

For example, say that Liz Newman has an annual AGI of $100,000 and she

Tax preparer reforms (Cont. from page 1)

“New rules could require education and training as well as licensing for people who get paid to prepare returns,” Shulman said. “Everything is on the table.”

In its fact-finding stage, the IRS will compile information gathered from a diverse group, starting with individuals licensed by the states and federal government, such as enrolled agents, attorneys and CPAs. It also will seek input from unlicensed tax preparers, software vendors, consumer groups and taxpayers themselves.

In addition to issues involving a new model of regulation, the IRS will look at: • Options and methods for service and outreach to tax return preparers 2

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August 2009

Double up on penalty-free withdrawals Can a taxpayer qualify for more than one exception at a time? Yes! That’s what happened in a new Tax Court case.

Facts: Beginning in 2002, a parent had arranged to receive substantially equal periodic payments (SEPPs) from her IRA based on the IRS life expectancy table. The annual payment exceeded $100,000. In 2004, the parent received additional IRA distributions of $22,500 to pay for her son’s college expenses.

The IRS said that this was an impermissible modification of the SEPPs. But the Tax Court disagreed. It allowed all the distributions to be received without the 10% penalty.

(Benz, 132 TC No. 15)

incurs $10,000 in medical expenses for a surgery that isn’t covered by health insurance. Liz can withdraw up to $2,500 from her IRA ($10,000 less 7.5% of AGI) without incurring the 10% early withdrawal penalty.

3. Answer when opportunity knocks.

The tax law includes a special tax break for first-time homebuyers. They don’t have to pay the penalty on pre-age-591/2 withdrawals if they use IRA funds to buy or build a qualified home.

Similarly, a client might use the money to help a child buy a home. The exception also applies to a client’s offspring as long as the home is the child’s primary residence and he or she hasn’t owned a home within two years. Caution: There’s a lifetime dollar cap of $10,000 on this particular exception.

4. Get a passing tax grade. Does a client need to raid an IRA to help pay for a child’s college expenses? If so, don’t worry about the 10% penalty tax.

Distributions made before age 591/2 won’t trigger the penalty if the funds are used to pay for qualified education expenses.

This includes tuition, books, supplies, etc.—even room and board if the child is a full-time student.

Furthermore, this tax break isn’t limited to a client’s children. It’s also available for expenses paid on behalf of the parent, spouse or any grandchildren.

5. Keep health insurance intact. If an employee is laid off or fired from the job, he or she may extend health insurance coverage under COBRA. If IRA funds are used to pay for coverage, early withdrawals are exempt from the 10% penalty. But suppose your client is selfemployed.

In a new field advice memo, the IRS says self-employeds are exempt, too, if they can show they would have received unemployment benefits for 12 weeks if they were an employee. (IRS Chief Counsel Advice 200920052)

• Approaches for enforcement of ethical standards • Enforcement related to return preparer misconduct.

Currently, no federal regulations govern unenrolled tax return preparers.

Other tax professionals who practice and represent taxpayers before the IRS— such as enrolled agents, enrolled actuaries, attorneys and CPAs—are subject to strict standards of practice and ethics under Circular 230 and applicable professional guidelines. But preparing a return is not considered “practice before the IRS.” Therefore, a disciplinary action against a preparer under Circular 230 doesn’t affect the preparer’s right to prepare returns—even if he or she is suspended or disbarred as a result. But the opposite is not true: Misconduct as a preparer can lead to a disciplinary action

under Circular 230 causing removal of the preparer’s authority to practice before the IRS. Recently proposed legislation in Congress would have required the Treasury Department to administer an initial examination for unenrolled return preparers.

Another proposal would have required the Treasury to register unenrolled preparers and provide refresher courses. But neither of those proposals was enacted into law.

It is expected that similar legislation will be introduced in the next session of Congress. We will keep you posted on any significant developments.

Advisory: More information about the new program, including schedules and agendas for public meetings, will be posted on the “Tax Professionals” page of the IRS web site at www.irs.gov. www.TaxStrategist.net

Individual

Find tax bargains in new ‘cash for clunkers’ law

f a client is thinking about buying a new vehicle, Uncle Sam has a deal that’s hard to pass up.

Strategy: Tell the client to trade in a gas-guzzler for a fuel-efficient model.

Under the new “cash for clunkers” law, the client can rake in a tax-free discount of thousands of dollars on the trade-in.

This new program, the Car Allowance Rebate System (CARS), went into effect July 1, but dealers weren’t ready to pull the trigger on deals until now.

If a trade-in makes sense, caution clients to move fast. Currently, tax-free discounts are only available before Nov. 1.

Background information: Certain requirements must be met to qualify for the new break. For starters, the “clunker” can’t be more than 25 years old. Also, the client must be the owner and have insured and registered the vehicle for at least one year before the trade-in. You can’t benefit from the new law if you buy an old clunker and then try to flip it for a new model.

Furthermore, the manufacturersuggested sticker price for the new vehicle can’t exceed $45,000.

Vehicles are divided into various categories under CARS. The amount of the tax-free discount is either $3,500 or

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Fringe benefits

Is ‘crackdown’ on cell phone use coming?

fter providing little guidance for years, the IRS is finally poised to impose new tax rules concerning the personal use by employees of employer-owned cell phones.

Alert: Technically, employers are required to account for use of cell phones by employees. However, few do because of the logistics. New IRS proposals simplify the process, but could result in taxable income for many employees. (IRS Notice 2009-46) The problem stems from the tax treatment of “listed property” acquired for business use but also used personally.

Listed property includes automobiles, computers and entertainment or recreationrelated items. In 1989, cell phones were added to this category.

Basic rules: If an employer-owned cell phone is used exclusively for business, the

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model or older. (See chart, below.) $4,500 depending on the difference in The government has established a spefuel economy between the vehicle being cial web site at www.cars.gov to provide traded in and the replacement. additional information.

• If a passenger vehicle with a rating Advisory: A client may also qualify of 18 miles per gallon (mpg) or less is under CARS if he or she leases a qualibeing traded for one with a rating of 22 fied vehicle for a period of at least five mpg or more, the discount is $3,500, years. increasing to $4,500 for a difference of 10 mpg or more.

Summary of tax-free discounts • If an SUV, light truck (e.g., pickup truck) or van Minimum with a rating of 16 mpg fuel or less is being traded for Type of economy for $3,500 $4,500 vehicle new vehicle discount discount one with a rating of 18 mpg or more, the discount Passenger 22 mpg * Mileage Mileage is $3,500, increasing to cars improvement of improvement of $4,500 for a difference at least 4 mpg at least 10 mpg of 5 mpg or more.

Light-duty 18 mpg * Mileage Mileage • If a large light-duty trucks ** improvement of improvement of truck with a rating of at least 2 mpg at least 5 mpg 14 mpg or less is being 15 mpg * Mileage Mileage traded for one with a rat- Large light-duty improvement of improvement of ing of 15 mpg or more, trucks *** at least 1 mpg at least 2 mpg the discount is $3,500, or trade-in of a increasing to $4,500 for work truck a difference of 2 mpg or more.

Commercial Trade-in must • If a commercial truck trucks **** be pre-2002 is being traded, the dis* EPA combined mpg/** under 6,000 lbs./***6,000 to 8,500 lbs./**** count is $3,500 discount 8,500 to 10,000 lbs. if the truck is a 2001

entire use is excluded from taxable income as a working-condition fringe benefit. Otherwise, the amount representing personal use must be included in the employee’s wages. This includes costs attributable to personal calls as well as a pro rata share of monthly service charges.

At a minimum, employees should keep a record of each call and its purpose. If calls are itemized on a monthly statement, they should be identified as personal or business calls. Employees should also retain any supporting evidence of business calls. This information must be submitted to the employer.

If business use is not established through those records, the entire value of the cell phone use is taxable to the employee. In the new Notice, the IRS proposed these three new methods for

dealing with personal use.

1. Minimal personal use method: The entire amount of an employee’s use of an employer-provided cell phone is treated as business use if the employee can establish he or she uses a private cell phone for personal reasons during the employee’s work hours. Alternatively, minimal personal use would be disregarded.

2. Safe-harbor method: The employer treats 75% of each employee’s use of an employer-provided cell phone as business use. The remaining 25% is considered personal use.

3. Statistical sampling method: Employers use statistical sampling techniques to measure an employee’s personal use of an employer-provided cell phone.

Advisory: The IRS is still weighing its options. Expect it to make the call soon.

August 2009

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Business

IRS updates guidance on COBRA subsidies

any tax practitioners have questions about the new COBRA subsidies for workers who lose their jobs. The subsidies required to be paid by employers —which were authorized by the new economic stimulus law—can be offset by a special payroll tax credit or reduced withholding.

Alert: The IRS gives more answers on its web site. This update clarifies and expands the guidance previously provided in Notice 2009-27 (see TS, May 2009).

In response to numerous inquiries, the IRS also reiterated that employers are not required to report COBRA subsidies on Form W-2 or Form 1099.

Background information: Under COBRA (short for the Consolidated Omnibus Budget Reconciliation Act) an employee who is laid off or fired generally may elect to continue health insurance coverage for up to 18 months. The employee usually pays premiums equal to the employer’s cost plus a 2% administrative fee.

The new law provides a discount for employees “involuntarily terminated” from the job between Sept. 1, 2008, and

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Dec. 31. 2009. Those workers pay only 35% of the required premiums for a ninemonth period while the employer antes up the 65% balance. This relief phases out for taxpayers with an AGI exceeding $125,000 ($250,000 for joint filers).

If an employer subsidizes COBRA payments for former employees under these rules, it may claim the new COBRA premium assistance credit. Alternatively, the employer can reduce its regular employment tax deposits.

Here are some of the issues updated by the IRS: Involuntary termination: The IRS defines involuntary termination as severance from employment due to the employer’s unilateral authority to terminate the employment. Now the IRS says it will accept an employer’s determination if it is consistent with a reasonable interpretation of the statutory language, and the employer provides adequate supporting documentation.

Seasonal workers: If a seasonal worker is willing and able to continue employment but the employer no longer requires his or her services, ending the employment may

be treated as an involuntary termination.

Group health plans: A group health plan may cover employees of two or more unrelated employers. The entity entitled to take the payroll tax credit is the former employer of the employee on which the employee’s eligibility for the COBRA subsidy is based. The total amount of the premium subsidy provided to all eligible individuals under the plan would be allocated among the former employers on this basis. The same result would generally occur for a group health plan covering employees of different employers that are members of a single controlled group.

Multi-employer plans: Under some multi-employer plans, an individual’s eligibility for health coverage is based on a minimum number of hours of employment.

The IRS will consider an employee to be involuntarily terminated if a reduction in his or her total hours of covered employment causes the loss of regular coverage and triggers eligibility for COBRA coverage.

Advisory: For more detailed information, read the article at www.irs.gov/ newsroom/article/0,id=205364,00.html.

Tax Pro

Q&A

Showing faith in tax-free fringe benefit plan Q. A church is offering a group health insurance plan where employees will pay 50% of the premiums. Is the church contribution a taxable benefit to the employees? L.F., via e-mail A. No. As with for-profit business entities, the cost of the employer-provided health insurance generally is tax-free to the employees. The employees are taxed on wages contributed to the health insurance payments. They may include these contributions in the computation of the medical expense deduction on their individual tax returns.

Tip: If the church sets up a flexible spending arrangement (FSA), an employee can allocate funds on a pre-tax basis to accounts used for health care expenses, thereby saving tax.

Don’t get caught in a gift tax crossfire Q. My client and his brother both want to reduce their taxable estates. Can they give gifts to each other’s kids without paying gift tax? M.S., Pennsylvania A. No. The IRS has consistently voided cross-gift arrangements in the vein of “you scratch my back and I’ll scratch yours.” Gifts between family members that are all form and no substance won’t qualify for the annual gift-tax exclusion ($13,000 for 2009). Nevertheless, if your client is married, his spouse can 4

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August 2009

jointly give tax-free gifts to their own children. For example, they can give each child up to $26,000 free of gift tax this year and for several succeeding years.

Tip: Similarly, the client won’t qualify for the gift-tax exclusion if he gives a family member stock or cash with the understanding that it will be re-gifted back. (Estate of Bies, TC Memo 2000-338)

Can you conceal ‘innocent spouse’ requests?

Q. I’m filing for innocent spouse relief for a client. Can we hide her request from her husband? I.R.B., Michigan A. No. By law, the IRS must inform your client’s spouse that Form 8857, Request for Innocent Spouse Relief, has been filed to avoid tax liability on a jointly filed income tax return. There are no exceptions, not even for victims of abuse or domestic violence. The IRS must also notify the other party of its preliminary and final determinations on the issue. However, to protect your client’s privacy, the IRS will not disclose her personal information such as current employment or income or assets.

Tip: If the Tax Court is petitioned to review the request (e.g., relief is denied), personal information may be revealed.

Send your Tax Pro questions to: TSeditor@NIBM.net. www.TaxStrategist.net

Business

Avoid depreciation tax trap in down year

he enhanced Sec. 179 deduction is a tax bonanza for small business owners.

It allows the business to write off up to $250,000 of new business assets placed in service this year (tax years beginning in 2009).

But remember that the Sec. 179 deduction is limited to the amount of annual taxable income from the business. If your client’s company is having an off year, like many other small businesses, the Sec. 179 deduction may be miniscule or nonexistent. That means costs must be recovered under the regular depreciation rules (or via bonus depreciation when available).

Strategy: Advise clients to buy new assets soon and place them in service before Oct. 1 (assuming they use a calendar tax year). Otherwise, they can fall into a tax trap that will result in a reduced depreciation deduction.

On the other hand, if the business owner beats the Oct. 1 deadline, he or she can benefit from the equivalent of a half-year’s worth of depreciation—regardless of the amount of the taxable income.

In any event, business clients may still qualify for the 50% “bonus depreciation” deduction for certain assets placed in service in calendar year 2009. This includes new property with a cost recovery period of 20 years or less.

Background information: Under the Modified Accelerated Cost Recovery System (MACRS), business assets placed in service anytime during the year generally are treated as if they had been placed in service on July 1 for purposes of computing depreciation deductions. It doesn’t matter when the assets are actually placed in service. This is called the “half-year convention.”

However, a special tax rule is triggered if the cost of business assets placed in service during the last quarter of 2009— Oct. 1 through Dec. 31 for a calendaryear taxpayer—exceeds 40% of the cost of all assets placed in service during the year. (Note: Real estate is not counted for this purpose.) Depreciation deductions for all assets placed in service during the year are figured under the “midquarter convention.”

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New tax breakthrough for LLCs In a new Tax Court case, owners of several limited liability companies (LLCs) and limited liability partnerships (LLPs) were able to use their losses to offset other highly taxed income. The writeoffs weren’t limited by the “passive activity loss” (PAL) rules. (Garnett, 132 TC No. 19) The IRS has long contended that the PAL rules automatically apply to those taxpayers. But now the Tax Court has disagreed with the IRS. It said that the taxpayers could write off losses currently if they met one of the “material participation” tests established under regulations.

Sudden impact: This significant new case could open up tax planning opportunities for your clients. We will have more details in the next issue of The Tax Strategist.

How it works: The depreciation deduction for the equipment is based on the equivalent of one-half of the quarterly period the property is placed in service (plus a full amount for any subsequent quarters).

For instance, a business that places equipment in service during the last three months of the year is entitled to only 11/2 months of depreciation.

Conversely, equipment purchased earlier in the first quarter of the year may be entitled to 101/2 months of depreciation (11/2 months for the first quarter and nine months for the next three quarters).

If a business client has been putting off purchasing assets due to slow cash flow, it may be time to get in gear.

Example: Bart Reiger, the owner of a printing company that uses the calendar tax year, buys a new machine costing $50,000 on Oct. 15. This is the only equipment he purchases in 2009. Because the company has no taxable income for the year, it does not qualify for a Sec. 179 deduction.

First, Bart can write off 50% of the cost as bonus depreciation, or $25,000.

Using the MACRS depreciation tables, the remaining $25,000 cost is depreciated

over a seven-year period. Normally, the first-year deduction would be $3,572 (14.29% of $25,000), based on the halfyear convention, for a total of $28,572 ($25,000 plus $3,572). But the company falls into the depreciation tax trap.

Reason: More than 40% of the cost of the annual cost of business assets placed in service in 2009—actually, 100% in this case—is placed in service in the last quarter.

Thus, the depreciation deduction must be computed using the midquarter rule.

Result: The deduction is reduced to only $892 (3.57% of $25,000) for a total of $25,892, or $2,680 less ($28,572 – $25,892).

Just a few days can make a big tax difference. For instance, if Bart buys the machine and starts operating it by Sept.

30, he can preserve the bigger deduction for 2009.

If the necessary funds aren’t available and Bart doesn’t want to finance the purchase, he might decide to wait until next year.

Advisory: If a client claims the Sec. 179 deduction, the cost of those assets is removed from the last-quarter calculation. This might bail out someone from the last-quarter tax trap (see box, below).

Sec. 179 can save the day Suppose Joan Granville’s business, which uses the calendar tax year, expects to show taxable income of $100,000 for 2009. Joan needs to buy new business equipment for $50,000, but she’s in a tight cash bind. Plus, she doesn’t want to fall into the depreciation tax trap.

Strategy: Joan can wait until later in the year. The assets deducted under Sec. 179 don’t count in the last-quarter calculation.

For instance, if the new equipment is the only asset placed in service this year, the deduction would normally be reduced to $25,892 for an October purchase. But Sec. 179 allows Joan to write off the entire $50,000 cost.

Advisory: The Sec. 179 deduction can be claimed for assets placed in service as late as Dec. 31.

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Business

Beat new tax deadline for worker credits: IRS extends cutoff

he new economic stimulus law enacted earlier this year—the American Recovery and Reinvestment Act of 2009—expanded the Work Opportunity Tax Credit (WOTC) to include more workers. Now employers can claim the credit for certain unemployed veterans and “disconnected youths.”

Strategy: Make sure clients request certification of those workers by Aug. 17.

In a new Notice, the IRS has established this as an extended cutoff date for making requests to the appropriate state workforce agency. (IRS Notice 2009-28) Employers are instructed to use newly revised Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. Find it at www.irs. gov/pub/irs-pdf/f8850.pdf.

Background information: Under prior law, an employer could claim the WOTC by hiring a worker from one of 10 special “target” groups (see box, right). The new law adds the two new categories of unemployed veterans and disconnected youths for 2009 and 2010.

For this purpose, an “unemployed veteran” is defined as someone who has been discharged or released from the military during the five years preceding the hiring

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Memo to Clients It’s important for business clients to meet certification deadlines. Go to www.TaxStrategist.net to find the client memo on this topic.

date and who has received unemployment benefits for at least four weeks during the one-year period ending on the hiring date. A “disconnected youth” is a person who is between the ages of 16 and 24 on the hiring date and has not been regularly employed or is attending school and meets other requirements.

How much is the WOTC? It’s generally equal to 40% of the first $6,000 of the worker’s first-year wages, assuming the worker completes a minimum of 400 hours of service. Thus, the maximum credit per targeted worker is $2,400. For qualified summer youth employees, only the first $3,000 of wages counts.

The WOTC is reduced to 25% of qualified wages for workers who complete less than 400 hours of service, for a maximum credit of $1,500 per worker.

Multiplier effect: Remember that the WOTC is available for each worker in a targeted group.

Certification requirements apply to workers in all other groups except employees who were Hurricane Katrina victims. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. However, under a special rule, a business has until Aug. 17, 2009, to file the form for unemployed veterans and disconnected youths who begin work after Dec. 31, 2008, and before July 17, 2009.

Advisory: If the WOTC is claimed by a business, it must reduce the regular deduction for wages paid to these workers.

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August 2009

Checklist of target groups The other targeted groups eligible for the WOTC are: • Qualified recipients of Temporary Assistance to Needy Families (TANF)* • Qualified veterans receiving food stamps or qualified veterans with a service-connected disability • Ex-felons hired no later than one year after conviction or release from prison • Designated community residents between ages 18 and 40 • Vocational rehabilitation referrals • Qualified summer youths age 16 or 17 who reside in an Empowerment Zone, Enterprise Community or Renewal Community • Qualified food stamp recipients between ages 18 and 40 • Qualified recipients of Supplemental Security Income (SSI) • Long-term family assistance recipients • Qualified Hurricane Katrina employees hired after Aug. 27, 2005, and before Aug. 28, 2009. * Any individual who is a member of a family receiving TANF (or a successor program) for any nine months during the last 18 months ending on the hiring date Advisory: For a state-by-state directory, visit www.doleta.gov/business/ incentives/opptax/Directory_of_State _05_31.pdf.

STAFF Publisher: Phillip Ash, CPA Associate Publishers: A. Paul Ash, CPA, Adam Goldstein Editor: Ken Berry, TSeditor@NIBM.net Editorial Director: Patrick DiDomenico Senior Editor: Carolyn Frazier Customer Service: (800) 543-2055, customer@NIBM.net

Advisors: Patrick J. Browne Jr., Jones Day, Washington, D.C. Albert J. Isacks, CPA, MBA, CSEP, Malin, Bergquist & Co., Erie, Pa. Michael Lipstein, CPA, Wasser Brettler Klar & Lipstein LLP, Certified Public Accountants, New York, N.Y. Ursula Forberger, Alpha Professional Tax Services, Brookfield, Conn.

Printed in the United States.

Volume 4, Number 8 The Tax Strategist (ISSN 1559-5307) is published monthly by the National Institute of Business Management LLC, 7600A Leesburg Pike, West Building, Suite 300, Falls Church, VA 22043-2004, (800) 543-2055, www.TaxStrategist.net. Annual subscription price: $299. © 2009, National Institute of Business Management. All rights reserved. Duplication in any form, including photocopying or electronic reproduction, without permission is strictly prohibited and is subject to legal action.

For permission to photocopy or use material electronically from The Tax Strategist, please visit www.copyright.com or contact the Copyright Clearance Center Inc., 222 Rosewood Dr., Danvers, MA 01923, (978) 750-8400. Fax: (978) 646-8600.

This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal or financial services. If you require such advice, please seek the services of an attorney or a financial professional.

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Growing

Your Firm

by Judy Kirkland

For search engine visibility: Tag, you’re it!

U ntil now, newspaper ads, mailings and referrals may have kept your business growing. But lately, many potential clients have stopped reading newspapers. Some people aren’t even getting mail. No kidding! One manager for a telecommunications company says mail isn’t delivered anymore. Why? “So many of us telework. When we do come in, we’re often sharing offices. If we’re expecting mail, we have to physically go to the mail room to see if it’s come in.”

Search marketing reconnects you with those ‘lost’ prospects Trend-trackers at the Kelsey Group report that local search is booming. Every day, 61 million local searches are conducted online. Clearly, if your tax prep and planning business isn’t visible in search results, you’re losing out to competitors who are visible.

There are many ways to make your tax business search friendly, including: • Listing yourself on local search engines • Search-engine optimizing your entire web site • Buying pay-per-click services AdWords or AdSense But one of the quickest, easiest and free ways to boost your search visibility is by making smart use of “tags.”

What ‘tags’ are and how they work Tags—also called meta tags—are words you use to tell search engines what type of content is in the material you post online. Each page of your web site can have a tag (or title) that tells search engines what’s on that specific page. You can also add tags to blogs, photos, videos or even press releases. Use the right tags, and search engines will pull up those links for any prospect searching for tax prep and planning services in your area.

Sound simple? It is! The only secret is using the right tags and using them everywhere. Here are some examples: www.TaxStrategist.net

1. Do not tag your home page “home.”

Why not? Because not a single one of your prospects will search for your services using the word “home.” What they will search for are words like tax preparation, tax planning, retirement planning, etc. That’s why those same words should be used as the meta tags and titles for each page of your web site.

Think tags don’t make a difference?

A web guru friend of mine wanted to see whether he could make a business selling his family recipe hot sauce. He set up a five-page web site and tagged each of the pages with keywords. Before he even posted his marketing copy and photos, his site ranked No. 1 in local searches for gourmet foods, hot sauce and barbeque sauce. Obviously, you’re not selling hot sauce, but the same smart web page tagging could make your tax services hot stuff!

2. Use heading tags, too. Use heading tags to create headlines and subheads in your text. Since these bold, larger phrases stand out, search engines weigh the words they contain very heavily. Make sure your headings contain keywords prospects may use to search for tax services in your area.

3. Tag all types of content. Example: If you post a press release on a service such as PRWeb.com, you can choose from a variety of tags to flag interest in tax services as well as audience-specific tags such as small businesses, retirement, money-savings, etc. Not only does this help on local searches, many journalists and bloggers also set up “watch services” so they receive automatic notification of any news that matches the tags they’ve identified as relevant. One tax pro says that thanks to tags, his online press release about energy-related tax deductions got picked up by at least a dozen local blogs, bringing him more than 20 new clients.

Bottom line: if you want your business to be “it” in local searches, play a smart game of tag!

The 1-Minute

Marketer Why even serious CPAs need a Facebook page. Google your name.

If you don’t come up, who does? One business owner discovered that while she didn’t come up in search results, a person having her exact name and roughly the same age did—along with a Facebook page filled with photos from a rowdy evening at a local bar. Even if “evil twins” aren’t an issue, having zero online presence is a disadvantage in a world where every potential client and business partner wants to check you out online. Best advice: Get a profile on LinkedIn and Facebook and post your bio on your web site, too.

Biggest change in marketing.

According to the latest MarketingSherpa B2B Marketing Benchmark Survey, the web site no longer is just a spoke in the marketing mix wheel. Instead, it has become “the hub of marketing strategy … the primary point of contact with prospects and customers.” To make good sites great sites, survey participants said they: use web analytics and data; make sure messaging is clear and compelling; use microsites for different marketing initiatives; keep up with search engine optimization; and integrate the site with a CRM system so leads flow into databases.

Is a question the answer? Having trouble coming up with one succinct statement that sums up the scope and value of the tax services you offer? Maybe a statement isn’t the answer! Instead, come up with two or three short questions that sum up your prospects’ pain points. That may be all you need for a great home page or brochure cover. Add a call to action (call me, click here) and you’ve got a great response-oriented ad, too!

Judy Kirkland is an award-winning marketing communication specialist. Her print, direct-mail, public relations and online campaigns help clients boost sales, retain customers and launch new products. Contact her at jkirkland@ EchoPointGroup.com.

August 2009

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The Tax Strategist

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Home office expenses

Rent out a home office to the company

he rules for home office deductions are particularly tough for corporate employees. Even if an employee legitimately uses a home office for business purposes, he or she may not be entitled to a deduction. It doesn’t matter if the employee is the owner of the company.

Strategy: Have the business owner rent the office to the company. In this case, the company can deduct the rent payments as a business expense. Although the owner must pay income tax on the rent payments, no employment taxes are owed.

C corporations may use this tax strategy because they aren’t subject to the usual home office deduction rules. But it won’t work for an S corporation (see box, right).

Background information: To qualify for home office deductions, a client must use a separate area of his or her home regularly and exclusively as his or her principal place of business or as a place to meet or deal with customers, clients or patients in the normal course of business.

T

If the taxpayer is an employee, the home office has to be used for the convenience of the employer.

Frequently, taxpayers are tripped up by one of those requirements. But taxes can still be saved by renting space at home to the company.

Example: Jack Hayward, owner of a physical therapy center, uses a room at home to finish up work. But he doesn’t qualify for deductions because his main office is downtown.

In lieu of a $10,000 salary increase, Jack rents his home office to his firm for $10,000 a year. His company deducts the rent on its annual return. Jack pays income tax on the $10,000, but neither he nor the company has to pay employment tax. This can save both Jack and the company as much as $765 (7.65% of $10,000).

Total tax savings: $1,530.

Make sure the company pays a reasonable amount of rent to the business owner.

It should be the same rate that would be charged to a third party. Otherwise, the

IRS might recharacterize the rent payments as nondeductible dividends.

Advisory: There must be a legitimate business need for the rental arrangement.

4 steps for S corps As a pass-through entity, an S corporation can’t deduct rent paid to an owner for a home office. Consider this fourstep approach: 1. Arrange for the S corp to require the owner to provide office space as a condition of employment.

2. Establish an accounting reimbursement plan to reimburse the owner for costs incurred in performing work.

3. Have the owner submit adequate documentation of those costs.

4. Have the S corp reimburse the costs.

Result: The S corp may include the reimbursement as a business expense flowing through to the owner. There is no additional tax reporting.

FYI ...

Adding tax insult to injury

Stay within plan loan boundaries

If an individual receives a damages award or settlement compensating him or her for physical injuries, the amount received is exempt from income tax. But other payments, including amounts attributable to emotional distress, are generally taxable. New case: The 9th Circuit Court upheld the Tax Court’s ruling that a settlement was taxable. First, the 9th Circuit looked to the express language of the agreement to determine whether it specified the nature of the compensation. Then it examined the intent of the payer. Both the Tax Court and the 9th Circuit interpreted the agreement as representing compensation for emotional distress. (Seidel, CA-9, 4/28/09)

Instead of taking a withdrawal from a qualified retirement plan (see page 1), a plan participant may borrow the funds. Generally, such loans are tax-free as long as the total doesn’t exceed the lesser of $50,000 or 50% of the vested account balance.

Caution: Advise clients to be careful about refinancing a plan loan that extends the repayment period. In a new case, the Tax Court said the two loans must be added together to determine if the total exceeds the tax law threshold. As a result, the plan participant was assessed tax on the loans. (Marquez, TC Summary Opinion 2009-80)

Tax hikes for health care looming?

The “Cohan rule” may allow deductions for estimated expenses when detailed records aren’t provided. It has often salvaged deductions for business travel expenses. Now the Cohan rule has been extended to research expenses. Facts: A chemical engineer who owns three companies claimed the research credit for increased activities. The IRS challenged the credit, in part, because the taxpayer did not properly substantiate the expenses. But the 5th Circuit Court said the trial court erred in denying the claim. It should look to testimony and other evidence, including institutional knowledge of employees, to arrive at a fair estimate of qualified expenses. (McFerrin, CA-5, 6/10/09)

As the battle over health care reform in Congress continues, the likelihood that a tax hike will be used to pay for part of the package is growing stronger. Under a plan unveiled by the House Ways & Means Chairman—Rep. Charles Rangel (D-N.Y.)— single filers with an AGI between $280,000 and $400,000 and joint filers with an AGI between $350,000 and $500,000 would be hit with a 1% surtax. The surtax, which would not kick in until 2011, would increase for those with higher incomes (up to 5.4% for joint filers with an AGI above $1 million). Note: A top tax rate of 39.6% is already in store for 2011 if the current rate of 35% is allowed to expire.

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The Tax Strategist

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August 2009

New case allows research credit estimate

www.TaxStrategist.net