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!