Bonus Depreciation and Section 179 Depreciation 
by John Ratcliffe

If you are considering investing in business property in the next few months you may want to consider making the investment before the end of 2011. Depending upon whether the asset is new or used you could benefit from either the bonus depreciation rules or Section 179. If you are buying a new asset you should look to see if bonus depreciation is more beneficial than section 179 depreciation. If the asset you are purchasing is used then you can only benefit from the section 179 rule as bonus depreciation does not apply to used business property purchases. Regardless of the depreciation method you use the asset must be “placed in service” before you can depreciate it. This means that if the asset requires any installation or construction you cannot depreciate the asset until it is functional for use.

There is a 100% write-off in the placed-in-service year for the cost of property eligible for bonus depreciation under Code Sec. 168(k). This applies for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012. There is a 50% bonus first-year depreciation allowance under Code Sec. 169(k) for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013.

The Small Business Jobs Act of 2010 and Section 179 Deduction
A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.

The Small Business Jobs Act increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years.

Under Small Business Jobs Act, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011. Without the Small Business Jobs Act, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011.

The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000.

The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.

Depreciation limits on business vehicles:
The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) that you use in your business and first placed in service in 2010 is increased to $3,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $3,160. (Note: with bonus depreciation for a new vehicle, the dollar cap becomes $11,060 for autos and $11,160 for trucks or vans). A word of caution: These limits are reduced if the business use of the vehicle is less than 100%.

In conclusion if you are considering a purchase of business property please seek advice from your tax advisor on how you could benefit by accelerating your depreciation deduction.

Tax Planning with Like Kind Exchanges by Karla Hopkins

A like-kind exchange provides a tax advantaged alternative to selling property. The sale of property may cause you to recognize a gain, which in turn may require the payment of taxes. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you dispose of the property you receive. The IRS allows this tax-deferred transaction because it recognizes that just because you have exchanged one property for another, you should not have to incur taxable gains. Moreover, the deferral encourages re-investment and acknowledges that if you have re-invested your proceeds you may lack actual funds to pay tax on the sale of the original property. You will, however, have to recognize gain on any money or unlike property that you receive in the exchange.

Only qualifying property may receive like-kind treatment. To qualify, both the property you give up and the property you receive must be held by you for investment or for use in your trade or business. Buildings, rental houses, land, trucks, and machinery are examples of property that may qualify.

Like-kind exchanges provide a valuable tax planning opportunity if:

• You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;
• You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties;
• You wish to participate in a very useful estate planning technique, or
• You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed.

The like-kind exchanges rules are very specific and very complex in terms of timing for identifying the property, completing the transaction and the handling of the proceeds for the transaction. Using a professional that is familiar with the like-kind exchange rules is important to ensure that the transaction is not disqualified and you are surprised by a tax consequence that you were not anticipating.

Education Tax Credits Available in 2011 by Karla Hopkins

The Federal form 1098-T is used to provide college students and their parents with information for claiming education benefits on their tax return. The form may include the amount of payments received OR the amount billed to the student. Remember though, the education credits are only for the amounts PAID during the year not the amount that was billed to you and remains unpaid at the end of the year. Your financial records such as canceled checks or credit card receipts are the official supporting documentation for calculating your education credit.

There are currently two education credits. The first is called the American Opportunity Tax Credit. The value of the credit is the first $2,000 plus 25% of the next $2,000 (maximum value $2,500) paid for each student for qualified expenses. To claim this credit the student must be in the first four years of post secondary eligible institution. They must be at least a half time student, and be enrolled in a program that leads to a degree or certificate. Qualified expenses include tuition, course materials, supplies and equipment. Qualified expenses DO NOT include room and board or athletic fees.

The second credit is called the Lifetime Learning Credit. The maximum lifetime learning credit is $2,000. Unlike the American Opportunity Tax Credit, this credit is available to students enrolled in one or more courses leading to an undergraduate, graduate or certification credential or if the course is to acquire or improve job skills.

In both cases, tuition and education expenses paid for with education or other types of loans are eligible for the tax credit.

One area of the educating tax credit laws that often reduces or eliminates the benefit of the education credit is when a divorced or separated couple shares the dependency deduction of the student on a year by year basis. One of the requirements for the credit is that it is allowed for a taxpayer, spouse or a DEPENDENT claimed on a tax return. Many times, a divorce decree controls the dependency deduction between couples without considering the implications to the benefit of education credits. Generally, the tax credit is most beneficial to the individual in the highest income tax rate. When a couple is electing to file a "married filing separate" return, NO credit is available on either return. Given the high costs of education today, it is important to consider the education tax credits in your tax planning and tax filing elections.

Documenting Loans from Corporations to their Shareholders by Karla Hopkins

In a recent tax court decision, the courts again ruled that a loan made to a shareholder by a corporation was a taxable distribution to the shareholder and not a loan. We are thus reminded that it is always important for proper documentation to support all transactions between corporations and their shareholders.

In this case, the shareholder was an employee and the sole shareholder. He was also the president and director. While there was a loan agreement, it was not signed until six months after its creation. Moreover, even though the note provided for a market rate of interest, interest was not actually charged at the market rate. In addition, the taxpayer did not make any principle payments on the note.

The Court considered the following factors in reviewing the validity of the loan transaction:

• Is the promise to repay evidenced in the note?
• Is interest charged?
• Is a fixed repayment schedule established?
• Is there any collateral?
• Were repayments made?
• Does the borrower have a reasonable prospect of repaying the loan?
• Did both parties conduct themselves as if the transaction was a loan?

This case points out the importance of the details in a loan transaction especially when it involves related parties. In the case of a loan between a corporation and a shareholder, failure to follow the terms and provisions of the loan will likely result in the loan being treated as a taxable distribution. This is even more likely to be true when there is no written agreement or evidence of a transaction at all. It may not be enough to just have a loan document, following the provisions of the document are key to the transactions too.

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!