Tax Planning that Literally Can't Wait: Qualified Small Business Stock by Karla Hopkins

One of the provisions of the Small Business Jobs Act is the 100% exclusion from gross income of capital gains from the sale of certain qualified small business stock (QSBS). Generally this provision will allow taxpayers to pay no federal tax on up to $10 million in gain from the sale of certain QSBS. To qualify the stock has to be acquired after September 27, 2010, and before January 1, 2012. Taxpayers in general will be able to exclude up to $10 million in gain from gross income with no preference for AMT purposes. To be eligible for the exclusion, the taxpayer must hold the QSBS for more than five years. Thus, the earliest one can benefit from the 100% exclusion would be 2015.
How does stock qualify for the Exclusion?
For QSBS to qualify for the 100% exclusion, the following provisions must be met:
• The QSBS must be acquired after September 27, 2010, and before January 1, 2012.
• The QSBS must be held for more than five years
• The exclusion applies only to non-corporate taxpayers, including individuals and pass-through entities such as partnerships and S corporations
• The small business must be a domestic C corporation, and the stock purchased must be purchased by the investor upon original issuance from the corporation.
• The small business corporation generally must use 80% of its assets (by value) in a qualifying active business (which excludes certain types of businesses, such as financial institutions, farms, professional service firms, hotels and restaurants, and similar businesses) for substantially all of the investor’s holding period.
• Additional provisions relating to assets and active business activities exist to complicate the applicability of this provision but should be reviewed at the time of a sale of such stock

If the benefits of this provision are not available until 2015, why are we talking about it now? Since there is a specific time frame for when the stock is purchased and how long it is held, 2011 is a key year to purchase shares that would be eligible for this provision. The exclusion is designed for those who bear the entrepreneurial risk of a new company. Individuals or pass-through entities wanting to start up a new company or invest in new companies should consider taking advantage of the new 100% exclusion and acquire newly issued QSBS prior to the end of 2011. Employees or directors holding stock options in qualified small businesses should consider exercising the options before the end of the year as well.

Tax Considerations for Booster Clubs, by Carolyn Flaherty

In my household we are not yet focused on the upcoming holiday seasons. Instead, for us, 'tis the season of Pop Warner football playoffs. Our town is thrilled to see four of its youth teams advancing to the Super bowl this weekend. Here is where I insert a shameless, GO KP CHIEFS!! Last year we had not one, but two Pop Warner football teams advance to nationals in Orlando Florida! An organization to raise funds for the teams was quickly set up and the community came together to raise a commendable amount of money in record time so that all the boys were able to afford the trip.

To the point:
A familiar form of fundraising for athletics, bands and clubs is a booster club. Booster clubs are a great way to raise money and defray the cost of travel and much more. Particularly in a slumped economy, the help of a booster club can do a great deal to keep programs running smoothly. However, good intentions can cause unexpected and unpleasant tax consequences if the booster is not structured carefully.

Proper structuring of a booster club demands that first, the club establish an exempt purpose. To do so, the club must operate exclusively for charitable purpose. Moreover, they must show that they operate for public purpose verse private interest. Generally the IRS will recognize charitable purpose for financial assistance to amateur arts and athletics because it is assumed that the organizations are educational through their instruction and that they reduce juvenile delinquency. Operating for public interest demands that there be no private inurement and relates to how funds collected are disbursed.

What does the prohibition against private inurement mean?
First, a private shareholder or individual who has control of the entity's decisions can not directly benefit financially from the booster club's activities. Second, even unrelated or disinterested for-profit parties must not receive more than an insubstantial benefit. Insubstantial is defined as quantitatively incidental as well as an unintentional but necessary consequence to the booster club's charitable purpose.

In plain English:
If a booster club is set up to sponsor KP Pop Warner Football, and all athletes benefit from the activities of the club regardless of their involvement in said booster club; then the private benefit is incidental because it is a logical result of the organization's purpose. However, if funds are allocated to specific families based on their participation in fundraising; private benefit has been conferred to those members who participate.

Furthermore, if the club is made up of parent members and members are required to fundraise in order to play; the private benefit becomes intentional and not incidental. Under these circumstances, the club is simply a means of cooperative funding for member's children.

What is the tax implication of private inurement?
Not only does the booster club risk losing its exempt status as a result of private inurement; if fundraising activities are credited to specific athlete accounts, they could be treated as income to the athlete. Such income may be subject to payroll taxes or considered self employment income. If credits to the athlete account exceeds $600 in a calendar year, a 1099 Misc may be required.

Another consideration…
Booster clubs should be aware of unrelated business income. Income generated from the sale of advertising is generally unrelated to the club's exempt purpose. Organizations can avoid tax on unrelated business income if substantially all the work to garner said income is performed by uncompensated volunteers. Volunteers may be considered to be indirectly compensated if funds are credited to specific athlete accounts.

As always, it is wise to consult a tax advisor during the start up phase of your organization as well as upon which time you enter into new means of fundraising.

HOW TO RECEIVE A CHARITABLE DEDUCTION FOR GOOD DEEDS by Karla Hopkins

As the end of the year approaches, people tend to think charitably. Likely the charitable attitude is a result of the holiday season and for some a focus towards tax planning. When giving cash or property, you should itemize your donations and obtain a receipt from the organization. However, what about the invaluable gift of your time?

You can't deduct the cost of time and effort you spend on behalf of a charity, but that doesn't mean your good deeds can't create some tax deduction.
Track your out-of-pocket costs. Here are a few ideas.

If you use your car for charity, keep a log of the mileage, parking and tolls. You can deduct 14 cents per mile. Similarly, you can deduct the cost of a plane, train or bus ride for traveling to a charitable event.

You can deduct the full costs of long-distance telephone calls, faxes and cell phone charges made on behalf of a charity.

If you host a fundraiser or board meeting, you can deduct the entire cost of the catering expenses as a charitable deduction, within the limitations for meals.

Normally, you can deduct the cost of attending a fundraising dinner. For amounts exceeding $75 obtain written documentation from the charitable organization.

A deduction is allowed for the cost of uniforms used while performing charitable services as long as the clothing isn't suitable for everyday wear; (for example, Boy Scout or Girl Scout uniforms).

If you host a foreign exchange student in your home, you can deduct up to $50 per month for each month the student attends high school.

Individually these deductions may be small, but collectively they add up. Keep good records of each cost for tax time.

Thank you to our very own John Ratcliffe for the photo used in this blog and for donating his time to the Rodman Ride for Kids. Despite a spill that landed John over his handle bars and into a ditch with his bike, John finished the 50 mile ride for charity!

Create a Tax Deduction! By Karla Hopkins

If your parents own an appreciated home but do not have a mortgage, or do not benefit from the mortgage interest deduction, consider buying your parents' house and then rent it back to them at the going rate.

By doing this, your parents gain instant access to the equity they have built in their home (without moving), and you pick up some tax deductions.

Even if your parents still take a mortgage interest deduction, their tax bracket may be considerably lower than yours. If so, the deduction doesn't provide as much potential tax savings for them as it could for you and the family as a whole.

To avoid gift-tax complications, pay a fair price for the home. Support the price with a qualified, independent appraisal. Then enter a rental agreement at a fair rate. Courts have ruled that the fair market rental value can be reduced by 20% when renting to relatives and still qualify as a valid transaction.

Once you own your parents home, you are entitled to reap the tax benefits of owning rental property. This includes not only the mortgage interest and real estate tax deductions, but also operating expenses such as utilities, maintenance, insurance, repairs and supplies. In addition, you can claim depreciation deductions. These deductions offset the rental income received from your parents.

Eventually, when your parents can no longer live in the house, you can sell it, rent it to another family, or move into it. If you move into it and make it your principal residence for at least 2 years, you can sell it and shelter another $250,000 to $500,000 worth of capital gains, which is a true tax benefit!

More Tax Change? by Carolyn Flaherty

A quick review of the history of the United States income tax from the vantage point of personal income taxes, (not to mention the estate and gift tax, partnership & corporate taxation, etc.), reveals that the mind numbing technological revolution that has brought us from the advent of the personal computer in the 1970's to today's broad use of smart phones, tablets and touch screen technology in a mere 5 decades is occurring along side a less heralded tax revolution.

Many of you would be shocked to know that before 1913 our fine country was financed almost exclusively via tariffs on imported goods. In fact, the legality of federally collected personal income tax was largely questioned until the passing of the Sixteenth Amendment to the Constitution in 1913. The Sixteenth Amendment explicitly grants Congress the right and the power to collect tax on personal income.

Since 1913 the Tax Code has been reformed, and some would say complicated, at a stunningly frequent pace. Indeed in the past 10 years alone it is estimated that the Code has been revised approximately 4000 times. There are currently over 9000 sections to the Code. Furthermore, the instructions for the original Form 1040 were but one page and now total 174 pages!

Imagine: a brief 100 years has taken personal income tax from an almost unheard of concept in the United States to quite possibly the most common political agenda and debate in our country. In 1913 an amendment had to be passed to confirm the legality of the federal government to collect! Yet, less than 100 years later we lament that the only sure things in life are "death and taxes."

As a tax preparer, I indeed consider these rapid changes and the complicated Code to be job security. Moreover, if ever I doubted the necessity of my work, the Tax Code consistently reaffirms my worth to the public as a tax professional. However, when I became a public accountant I veered to the tax consulting side of our practice because I liked the feeling of being able to help clients. Offering tax planning in this environment of instability is increasingly difficult. Due to the uncertainty and the constant call for tax reform along with, for example, provisions that sunset after a decade and then are up for extension annually: we are forced to offer a shorter term verse long term plan for tax savings.

The concepts that will stand the tests of time are sound financial judgment and living within your means. These can be practiced regardless of the state of tax reform and is the advice I offer most often. Contribute the maximum to your 401K, set up flexible medical savings accounts, consider a 529 College savings plan, be charitable AND consult your financial advisor in conjunction with your tax advisor to consider current year end strategies that will maximize your overall tax and financial position.

Just for fun I have bulleted some facts about our United States personal tax history. Below that I have bulleted some of the most recently released changes that may affect you in 2012.

Just for fun:

• 1861: First personal income tax was imposed to finance the Civil War
• 1862: Bureau of Internal Revenue was created (predecessor of the IRS)
• 1872: The income tax was repealed
• 1913: Sixteenth Amendment was ratified to Constitution granting Congress the power to collect tax on personal income
• 1914: First income tax form (The 1040) was released
• 1915: The lowest tax bracket was taxed at a rate of 1% .The top bracket was 7% on income over $500,000
• 1950 : Tax rate for highest bracket peaked at 92% (for those with incomes greater than $400,000)
• 1952: Income tax peaked in the bottom bracket at 22.2%
• 1981: Largest tax cut in US History
• 1986: President Reagan signed into law the Tax Reform Act of 1986 starting an almost annual tradition of new tax acts.

A sampling of what's new in 2012:

• Personal exemptions increased to $3,800
• Standard deduction increased to $11,900 married filing jointly (MFJ), $5,950 Single and $8,700 head of household
• Tax bracket thresholds also increased for each bracket
• Maximum earned income credit increased to $5,891: Qualifying income limit to $50,270
• Foreign earned income deduction increased to $95,100
• Phase out levels for the lifetime learning credit now start at $104,000 MFJ and $52,000 for single filers
• The phase out for the deduction of student loan interest starts at $125,000 MFJ
• Monthly limit for qualified parking expenses provided by an employer is now $240

Meet our Staff: Andrea Hottleman

As a member of the PRR team for the past three years, our motto Professionalism, Respect and Responsibility is used each time I step into our office or a clients. I focus on auditing our not-for profit, 401K, partnership and corporate clients. The reason I gravitated towards this side of public accounting is because it gives you the opportunity to go to the client and explore their books from balance sheet to income statement. While at the client you are able to work with the owners, management and employees to gain insight into their performance throughout the past year. The client relies on our expertise to help solve issues or uncover issues that may not be seen by the owner, employee or manager who is involved in the day to day operations.

Prior to joining PRR, I spent over 11 years at a medium sized public accounting firm in Boston. Throughout my career, I prepared numerous individual, partnership, not-for profit and corporate tax returns. I also managed audits, review and compilations for HUD and MHFA projects, not-for-profits, partnership, 401K’s and corporate clients. For some of our small business clients, I would consult on business accounting software set up as well as prepare their quarterly payroll tax returns and 1099’s at year end.

My education is from Bentley University in Waltham, MA. I received a Bachelor of Science in Accountancy. Three years after graduation, I decided to go back to Bentley at night in order to obtain my Masters of Science in Taxation.

While away from PRR you may find me volunteering at the schools or at the soccer, football, or softball fields or on basketball courts. If you still have not found me, I may be watching a wrestling match, lacrosse or baseball game or working out at the gym.

PRR is the perfect fit for work and family balance.

Launch a Solo 401(K) Plan by Karla Hopkins

Most limits for retirement plans have not increased in years. However, small business owners can take matters into their own hands and create higher tax deferred deductions by setting up a solo 401(K) plan.

With the usual self employed retirement plans (SEP), the maximum deferral is the lesser of $49,000 or 25% of your net compensation. The maximum compensation that can be taken into account however is $245,000.

In contrast, an employee can make elective deferrals within annual limits and the employer may match part of the employee’s contribution. Therefore, a solo 401(K) plan offers even more.

Under a 401(K) plan, you can elect to defer up to $16,500 annually (or $22,000 if you are over 50). The key to the 401(K) plan is that the elective deferrals don't count towards the 25% cap as described above. So you can combine the employer contribution with an employee deferral for greater savings.

Here's an example. Let's say your wages are $125,000. The maximum SEP you can deduct is $31,250 (25% of your wages). If you had a solo 401(K) plan you could defer $16,500 in addition to the employer match of 25% of your salary ($125,000 x .25) or $31,250 for a total contribution of $47,750 (still below the $49,000 overall limit described above).

For a sole proprietor the 25% is reduced to 20% so that in the example above the total contribution allowed would be $41,500 ($16,500 plus $25,000).

A solo 401(K) plan can also be set up to allow loans and hardship withdrawals in the event you have a casualty. You can also roll over funds from other previous employer plans into your own 401(K) plan. Contributions are discretionary so that if you business is having a bad year, you can skip contributing entirely.

While this is a great tax planning tip, it is not a free ride; there are some downsides to a 401(K) plan. If the business has other employees, they may have to be covered by the plan too. There are moderate costs for running the plan that are generally paid to plan administrators. In the large investment companies like Fidelity, a small plan my be charged a one time setup cost of $100 and annual fees ranging from $50 to $250.

Even with the fees, it is a good option for long term retirement savings, especially if you do not have employees.