Prior Tax Tips

"Tax Tips" are published monthly to provide useful tax information. Return to this site for helpful tax-cutting suggestions, tax reminders, and current tax information.

Click on the titles that interest you:

Nonprofit organizations may have tax obligations
Time is running out for effective 2008 tax planning
Back to School: Check out these tax breaks
Your check may be in the mail
Your corporation needs good corporate minutes
Starting a business? Some costs may be tax-deductible
Be aware of a new IRS audit program
Don't neglect estate planning
There are tax breaks when you do charitable work
Return to the current tax tip

 

Nonprofit organizations may have tax obligations

If you're an officer or on the board of a community organization, you may wonder about the tax requirements that apply to your group. Generally an organization will not owe taxes if two things are true:

It has registered as an exempt nonprofit organization with the IRS, and It has no business income from activities unrelated to its exempt purpose.

Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group's existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000 don't even have to register to be considered exempt.

More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization's exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn't pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.

Once it's registered, an exempt organization will have to file an annual information return unless its yearly gross receipts are less than $25,000. Just as with a tax return, there are penalties for filing late or failing to file.

For assistance with any of your tax concerns, contact our office.

 

Tax Tip from September 2008

Time is running out for effective 2008 tax planning

It's September and a great time to put your 2008 tax planning into high gear. With three months left, there's still time to make meaningful changes.

Run the numbers to estimate your 2008 tax liability. It may be lower than expected due to this year's far-reaching tax cuts.

Adjust your withholding if you find you'll be due a big refund. While the security of a refund is comforting, consider putting some of those dollars to immediate use. You may want to adjust your fourth quarter estimated tax payment if you're self-employed.

Factor in the child tax credit if you didn't receive an advance payment check for an eligible child. You'll be able to claim the credit when you file your return, provided you qualify.

Maximize your retirement contributions. You may have more disposable dollars as a result of the tax cuts or if you refinanced your home mortgage. Allowable contributions to 401(k) and SIMPLE plans increased this year. Don't overlook the catch-up contributions if you're age 50 or older.

Review your deductions. The standard deduction for married couples increased to $10,900 this year as part of marriage penalty relief. Some couples won't find it worthwhile to itemize, especially if they also reduced their mortgage interest by refinancing.

Review your investment strategy. This year's tax cuts included a drop in long-term capital gain rates. Try to meet the 12-month holding period to qualify for long-term treatment on any securities you plan to sell. Also factor the reduced tax rates on qualifying dividends into your planning.

Businesses should review capital spending plans to make full use of the new tax incentives. If your business qualifies, don't overlook the generous expensing provision passed this year.

For assistance in identifying the best tax-cutting moves in your situation, contact our office.

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Tax Tip from August 2008

Back to School: Check out these tax breaks

September is back-to-school month. Here's a quick reminder of some education tax benefits that are new or improved in recent years.

Coverdell ESAs

Formerly known as Education IRAs, these savings accounts have two attractive features. First, savings can be used to pay qualified expenses at elementary and secondary schools as well as at college. And the schools can be public, private, or religious. Second, the income eligibility is relatively high - contributions don't start to phase out until income reaches $190,000 for joint filers. You can contribute up to $2,000 annually.

Prepaid tuition plans at private colleges

Beginning on January 1, 2004, distributions from prepaid tuition plans run by private institutions will be nontaxable. Currently, only state plans qualify for this tax benefit. These plans allow you to purchase tuition credits, at today's rates, that your child can redeem tax-free when he or she attends college.

U.S. savings bonds used to pay for higher education expenses

If you redeem a US savings bond and use the proceeds to pay for qualified higher education expenses, the interest is not taxable. There are income limits, and only certain expenses qualify. (Bonds must be purchased after 1989 by someone at least 24 years old.)

Deductions for higher education expenses and student loan interest

You can now take a deduction for up to $3,000 of qualified expenses at accredited colleges or vocational schools. You can also deduct up to $2,500 of interest expense on student loans.

Deduction for classroom supplies

If you're a teacher and you buy classroom supplies out of your own pocket, you can deduct up to $250 of the cost.

Increase in the lifetime learning credit

The lifetime learning credit doubles for 2003, to a maximum of $2,000. The credit is calculated as 20% of the qualified tuition expenses you pay.

Contact our office to learn more about any of these tax breaks.

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Tax Tip from July 2003

Your check may be in the mail

On Friday, July 25, the first of some 25 million checks were mailed to taxpayers by the federal government. The checks are an advance payment of the 2003 increase in the child tax credit provided by this year's new tax law.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the maximum credit amount from $600 to $1,000 per qualifying child under age 17 and directed that taxpayers receive the increase this summer, rather than waiting until they file their 2003 returns.

"As long as we have a good mailing address, taxpayers don't have to do anything to get their checks," says IRS Commissioner Mark W. Everson. Taxpayers should, however, notify the Post Office if they've moved since filing their last return. "The IRS will figure the advance amount based on each taxpayer's 2002 return," he said.

The initial checks are going to those who filed early enough for the IRS to process their returns by early July. The mailing date depends on the last two digits of the taxpayer's social security number.

00-33 July 25 mailing 34-66 August 1 mailing 67-99 August 8 mailing

People who filed after April 15 — for example, those with extensions — will get any advance payment they are entitled to receive after the IRS processes their 2002 return.

Taxpayers who did not claim the child tax credit last year are not eligible for an advance payment, even if they will be able to claim the credit on their 2003 returns. For example, if your only child is born this year, you will not get any advance payment, but you may qualify for the credit when you file your return next year.

The IRS is also sending notices that contain the advance payment figure to eligible taxpayers. Save your notice with your other tax records for 2003. You'll need this information when you file your 2003 tax return.

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Tax Tip from June 2003

Your corporation needs good corporate minutes

Writing up the minutes of board of directors' meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.

Minutes are especially important where any kind of related-party transactions occur, such as payments, loans, or distributions between the company and its owners. For example, the IRS may challenge the amount of compensation paid to a business owner as unreasonable. Corporate minutes that document the factors considered by the board in approving the compensation can be a strong defense against such a challenge.

Another area that receives close scrutiny from the IRS is the amount of earnings that are retained in the business rather than distributed as taxable dividends. A penalty applies to retained earnings over a certain limit unless they can be justified by business needs. Corporate minutes can be a strong piece of supporting evidence if they clearly spell out the reasons that the company needs to retain funds — for example, to purchase assets or for working capital.

If your company has a tax-qualified retirement plan or a stock option plan, the minutes should show decisions by the board adopting or modifying the plan. They should also document annual decisions on the percentage of contribution to profit-sharing plans and any decisions on fringe benefits such as medical reimbursement accounts.

Corporate minutes need not be lengthy, but they should provide a clear record of corporate actions and the business factors that were considered when those actions were taken. You should think of your minutes as a key element of your tax planning strategy.

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Tax Tip from May 2003

Starting a business?

Some costs may be tax-deductible

According to the tax law, you are allowed to take a tax deduction for ordinary and necessary business expenses if you are engaged in a trade or business. What about the expenses involved in investigating the potential for a new business?

The tax law calls these expenses "start-up costs" and says they are not deductible prior to the start of a business. In fact, if your investigation does not lead to actually starting a business, these costs may never be deductible. If your investigation leads to actually starting a business, you may elect to amortize (write off) these startup costs over a period of at least 60 months, beginning with the month the business started.

Startup costs are those expenses that would have been deductible if incurred by an operating business. Typical startup expenses include market research costs, site selection, advertising, consultant's fees, and necessary travel before the business actually started.

Interest, taxes, and research and development costs incurred during a startup period need not be amortized; they may be deducted when incurred or paid.

Startup costs that must be amortized also do not include costs attributable to the acquisition of depreciable property. You may find it advantageous to identify those startup costs connected with the acquisition of specific assets in order to obtain faster write-offs.

To amortize startup costs, you must make an election to do so on the tax return for the year in which the business actually started.

Seek advice prior to incurring any expenses for starting or acquiring a business. Failure to heed the tax rules in this area could be a costly mistake.

For assistance, give us a call.

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Tax Tip from April 2003

Be aware of a new IRS audit program

Be aware of a new IRS audit program called the National Research Program that is now underway. The program is measuring taxpayer compliance and error rates. Results will provide new benchmarks for the computer programs the IRS uses to flag returns for its regular audit activities. The good news is that the audits will be less intrusive than the line-by-line audits of ten years ago, and they should result in fewer unnecessary audits in the future.

The program is examining about 50,000 individual returns in four levels of detail. Around 8,000 returns are being audited without the taxpayers being contacted. The IRS is using data from information returns such as W-2s and 1099s to check against filed tax returns. Another 9,000 taxpayers can expect a letter from the IRS asking for more information on certain items or pointing out discrepancies. If you're in this group, you usually won't need to visit the IRS in person. The IRS intends to audit about 30,000 more taxpayers, focusing on selected areas of their returns. If you're in this group, you'll have to meet with the IRS to go over their questions. The last 2,000 will be "calibration" audits. You'll have to meet with an IRS agent to discuss each line in your return. However, you won't necessarily have to provide support for every item, so these audits may not be as bad as they sound.

If you're contacted by the IRS, call our office before you reply. We can advise you on how best to respond.

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Tax Tip from March 2003

Don't neglect Estate Planning

Since there is no legal requirement to do estate planning, many of us let it slide. It is not like an income tax return that is required by law, so why should we bother?

An estate plan will ensure that your assets are distributed according to your wishes. If you have minor children, your will can provide for the guardian of your choice. In addition to seeing that your property is passed to those you care about and that your minor children are properly cared for, a planned estate is easier to administer. The person left behind to care for all your financial matters is not left with a mess. That in itself should make a little planning worth considering.

Estate taxes range from 37% to 49% of taxable estates. If your net worth is in excess of $1 million (the estate tax exemption amount), you should review your estate plan. There is no single planning strategy to cover all estates. What you own and how you want it treated after your death will govern the terms of your will and trust documents, if any, that may be needed.

The value of your home, your personal property, your collectibles, your investments, including your retirement accounts, and possibly your life insurance can all enter into the estate equation. It doesn't take much any more to find yourself in the taxable estate category.

Changes in your family life, such as a move from one state to another, a marriage or divorce, a change in the number of children or grandchildren, and the value of your investments, make estate planning and review an ongoing project.

Call us; we will gladly help you and your attorney with your estate planning concerns.

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Tax Tip from February 2003

There are tax breaks when you do charitable work

If you do volunteer work for a charitable organization and have not kept track of your out-of-pocket expenses, you might be passing up an excellent opportunity to lower your tax bill. To qualify, your unreimbursed expenses must relate directly to the charity, and you must itemize your deductions on your tax return. Here is a brief rundown of some possible deductions.

Volunteers may deduct the cost of phone calls, postage stamps, supplies, and other out-of-pocket costs incurred in their volunteer work. For volunteers who are required to wear a uniform, the cost of buying and cleaning uniforms is deductible if they are unsuitable for everyday wear. The cost of your time, no matter how valuable it may be, is not deductible. That's true even if you would normally be paid for the type of service you contribute. For instance, accountants who perform free consulting for charities can't deduct what they would normally charge for their services. Using your car in connection with volunteer work can earn you a deduction. The standard mileage rate for volunteers who use their own cars is 14 cents per mile. Alternatively, you may deduct your actual unreimbursed expenses for gas and oil – but not maintenance, depreciation, or insurance. Either way you choose, related parking fees and tolls are deductible as well. If you travel overnight for charitable purposes, your expenses are deductible as long as they are reasonable in amount and not connected with personal activities or any element of recreation. Special rules apply to conventions. Travel and other out-of-pocket expenses related to attendance at a convention for volunteers are deductible only if you have been chosen as a delegate to represent the organization.

Finally, just remember that it is up to you, the volunteer, to substantiate your deductions. If you take these deductions, you should be prepared to show the IRS the connection between the costs claimed and the charitable work performed.

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NOTICE: The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

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