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The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.

The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.

The IRS determined that taxpayer had a tax liability for 2010 and began a levy procedure. The taxpayer appealed the levy in a collection due process hearing, and then appealed that adverse result in the Tax Court. The taxpayer asserted that she did not have an underpayment in 2010 because her then-husband had made $50,000 of estimated tax payments for 2010 with instructions that the amounts be applied to the taxpayer’s separate 2010 return. The IRS instead applied the payments to the husband’s separate account. While the agency and Tax Court proceedings were pending, the taxpayer filed several tax returns reflecting overpayments, which she wanted refunded to her. The IRS instead applied the taxpayer’s 2013-2016 and 2019 tax overpayments to her 2010 tax debt.

When the IRS had applied enough of the taxpayer’s later overpayments to extinguish her 2010 liability, the IRS moved to dismiss the Tax Court proceeding as moot, asserting that the Tax Court lacked jurisdiction because the IRS no longer had a basis to levy. The Tax Court agreed. The taxpayer appealed to the Third Circuit, which held for the taxpayer that the IRS’s abandonment of the levy did not moot the Tax Court proceedings. The IRS appealed to the Supreme Court, which reversed the Third Circuit.

The Court, in an opinion written by Justice Barrett in which seven other justices joined, held that the Tax Court, as a court of limited jurisdiction, only has jurisdiction under Code Sec. 6330(d)(1) to review a determination of an appeals officer in a collection due process hearing when the IRS is pursuing a levy. Once the IRS applied later overpayments to zero out the taxpayer’s liability and abandoned the levy process, the Tax Court no longer had jurisdiction over the case. Justice Gorsuch dissented, pointing out that the Court’s decision leaves the taxpayer without any resolution of the merits of her 2010 tax liability, and “hands the IRS a powerful new tool to avoid accountability for its mistakes in future cases like this one.”

Zuch, SCt

The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024. It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year.

The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024.

It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year. It was an increase over the $4.7 trillion collected in the previous fiscal year.

Individual tax, employment taxes, and real estate and trust income taxes accounted for $4.4 trillion of the fiscal 2024 gross collections, with the balance of $565 billion coming from businesses. The agency issued $120.1 billion in refunds, including $117.6 billion in individual income tax refunds and $428.4 billion in refunds to businesses.

The 2024 Data Book broke out statistics from the pilot year of the Direct File program, noting that 423,450 taxpayers logged into Direct File, with 140,803 using the program, which allows users to prepare and file their tax returns through the IRS website, to have their tax returns filed and accepted by the agency. Of the returns filed, 72 percent received a refund, with approximately $90 million in refunds issued to Direct File users. The IRS had gross collections of nearly $35.3 million (24 percent of filers using Direct File). The rest had a return with a $0 balance due.

Among the data highlighted in this year’s publication were service level improvements.

"The past two filing seasons saw continued improvement in IRS levels of service—one the phone, in person, and online—thanks to the efforts of our workforce and our use of long-term resources provided by Congress," IRS Acting Commissioner Michael Faulkender wrote. "In FY 2024, our customer service representatives answered approximately 20 million live phone calls. At our Taxpayer Assistance Centers around the country, we had more than 2 million contacts, increasing the in-person help we provided to taxpayers nearly 26 percent compared to FY 2023."

On the compliance side, the IRS reported in the 2024 Data Book that for all returns filed for Tax Years 2014 through 2022, the agency "has examined 0.40 percent of individual returns filed and 0.66 percent of corporation returns filed, as of the end of fiscal year 2024."

This includes examination of 7.9 percent of taxpayers filing individual returns reporting total positive incomes of $10 million or more. The IRS collected $29.0 billion from the 505,514 audits that were closed in FY 2024.

By Gregory Twachtman, Washington News Editor

IR-2025-63

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.

Significant changes to the list of automatic changes made by this revenue procedure to Rev. Proc. 2024-23 include:

• (1) Section 6.22, relating to late elections under § 168(j)(8), § 168(l)(3)(D), and § 181(a)(1), is removed because the section is obsolete;
• (2) The following paragraphs, relating to the § 481(a) adjustment, are clarified by adding the phrase “for any taxable year in which the election was made” to the second sentence: (a) Paragraph (2) of section 3.07, relating to wireline network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-27; (b) Paragraph (2) of section 3.08, relating to wireless network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-28; and (c) Paragraph (3)(a) of section 3.11, relating to cable network asset capitalization methods of accounting under Rev. Proc. 2015-12;
• (3) Section 6.04, relating to a change in general asset account treatment due to a change in the use of MACRS property, is modified to remove section 6.04(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
• (4) Section 6.05, relating to changes in method of accounting for depreciation due to a change in the use of MACRS property, is modified to remove section 6.05(2) (b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
• (5) Section 6.13, relating to the disposition of a building or structural component (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.13(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.13;
• (6) Section 6.14, relating to dispositions of tangible depreciable assets (other than a building or its structural components) (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.14(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.14; June 9, 2025 1594 Bulletin No. 2025–24;
• (7) Section 7.01, relating to changes in method of accounting for SRE expenditures, is modified as follows. First, to remove section 7.01(3)(a), relating to changes in method of accounting for SRE expenditures for a year of change that is the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete. Second, newly redesignated section 7.01(3)(a) (formerly section 7.01(3)(b)) is modified to remove the references to a year of change later than the first taxable year beginning after December 31, 2021, because the language is obsolete;
• (8) Section 12.14, relating to interest capitalization, is modified to provide under section 12.14(1)(b) that the change under section 12.14 does not apply to a taxpayer that wants to change its method of accounting for interest to apply either: (1) current §§ 1.263A-11(e)(1)(ii) and (iii); or (2) proposed §§ 1.263A-8(d)(3) and 1.263A-11(e) and (f) (REG-133850-13), as published on May 15, 2024 (89 FR 42404) and corrected on July 24, 2024 (89 FR 59864);
• (9) Section 15.01, relating to a change in overall method to an accrual method from the cash method or from an accrual method with regard to purchases and sales of inventories and the cash method for all other items, is modified by removing the first sentence of section 15.01(5), disregarding any prior overall accounting method change to the cash method implemented using the provisions of Rev. Proc. 2001-10, as modified by Rev. Proc. 2011- 14, or Rev. Proc. 2002-28, as modified by Rev. Proc. 2011-14, for purposes of the eligibility rule in section 5.01(e) of Rev. Proc. 2015-13, because the language is obsolete;
• (10) Section 15.08, relating to changes from the cash method to an accrual method for specific items, is modified to add new section 15.08(1)(b)(ix) to provide that the change under section 15.08 does not apply to a change in the method of accounting for any foreign income tax as defined in § 1.901-2(a);
• (11) Section 15.12, relating to farmers changing to the cash method, is clarified to provide that the change under section 15.12 is only applicable to a taxpayer’s trade or business of farming and not applicable to a non-farming trade or business the taxpayer might be engaged in;
• (11) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified as follows. First, to provide that section 12.01 applies to a taxpayer that uses a historic absorption ratio election with the simplified production method, the modified simplified production method, or the simplified resale method and wants to change to a different method for determining the additional Code Sec. 263A costs that must be capitalized to ending inventories or other eligible property on hand at the end of the taxable year (that is, to a different simplified method or a facts-and-circumstances method). Second, to remove the transition rule in section 12.01(1)(b)(ii)(B) because this language is obsolete;
• (12) Section 15.13, relating to nonshareholder contributions to capital under § 118, is modified to require changes under section 15.13(1)(a)(ii), relating to a regulated public utility under § 118(c) (as in effect on the day before the date of enactment of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017)) (“former § 118(c)”) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), to be requested under the non-automatic change procedures provided in Rev. Proc. 2015- 13. Specifically, section 15.13(1)(a)(i), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to include in gross income payments received from customers as connection fees that are not contributions to the capital of the taxpayer under former § 118(c), is removed. Section 15.13(1)(a)(ii), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), is removed. Section 15.13(2), relating to the inapplicability of the change under section 15.13(1) (a)(ii), is removed. Section 15.13(1)(b), relating to a taxpayer that wants to change its method of accounting to include in gross income payments or the fair market value of property received that do not constitute contributions to the capital of the taxpayer within the meaning of § 118 and the regulations thereunder, is modified by removing “(other than the payments received by a public utility described in former § 118(c) that are addressed in section 15.13(1)(a)(i) of this revenue procedure)” because a change under section 15.13(1)(a)(i) may now be made under newly redesignated section 15.13(1) of this revenue procedure;
• (13) Section 16.08, relating to changes in the timing of income recognition under § 451(b) and (c), is modified as follows. First, section 16.08 is modified to remove section 16.08(5)(a), relating to the temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes under section 16.08, because the provision is obsolete. Second, section 16.08 is modified to remove section 16.08(4)(a)(iv), relating to special § 481(a) adjustment rules when the temporary eligibility waiver applies, because the provision is obsolete. Third, section 16.08 is modified to remove sections 16.08(4)(a) (v)(C) and 16.08(4)(a)(v)(D), providing examples to illustrate the special § 481(a) adjustment rules under section 16.08(4)(a) (iv), because the examples are obsolete;
• (14) Section 19.01, relating to changes in method of accounting for certain exempt long-term construction contracts from the percentage-of-completion method of accounting to an exempt contract method described in § 1.460-4(c), or to stop capitalizing costs under § 263A for certain home construction contracts, is modified by removing the references to “proposed § 1.460-3(b)(1)(ii)” in section 19.01(1), relating to the inapplicability of the change under section 19.01, because the references are obsolete;
• (15) Section 19.02, relating to changes in method of accounting under § 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, 2023-39 I.R.B. 919, is modified to remove section 19.02(3)(a), relating to a change in the treatment of SRE expenditures under § 460 for the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete;
• (16) Section 20.07, relating to changes in method of accounting for liabilities for rebates and allowances to the recurring item exception under § 461(h)(3), is clarified by adding new section 20.07(1)(b) (ii), providing that a change under section 20.07 does not apply to liabilities arising from reward programs;
• (17) The following sections, relating to the inapplicability of the relevant change, are modified to remove the reference to “proposed § 1.471-1(b)” because this reference is obsolete: (a) Section 22.01(2), relating to cash discounts; (b) Section 22.02(2), relating to estimating inventory “shrinkage”; (c) Section 22.03(2), relating to qualifying volume-related trade discounts; (d) Section 22.04(1)(b)(iii), relating to impermissible methods of identification and valuation of inventories; (e) Section 22.05(1)(b)(ii), relating to the core alternative valuation method; Bulletin No. 2025–24 1595 June 9, 2025 (f) Section 22.06(2), relating to replacement cost for automobile dealers’ parts inventory; (g) Section 22.07(2), relating to replacement cost for heavy equipment dealers’ parts inventory; (h) Section 22.08(2), relating to rotable spare parts; (i) Section 22.09(3), relating to the advanced trade discount method; (j) Section 22.10(1)(b)(iii), relating to permissible methods of identification and valuation of inventories; (k) Section 22.11(2), relating to a change in the official used vehicle guide utilized in valuing used vehicles; (l) Section 22.12(2), relating to invoiced advertising association costs for new vehicle retail dealerships; (m) Section 22.13(2), relating to the rolling-average method of accounting for inventories; (n) Section 22.14(2), relating to sales-based vendor chargebacks; (o) Section 22.15(2), relating to certain changes to the cost complement of the retail inventory method; (p) Section 22.16(2), relating to certain changes within the retail inventory method; and (q) Section 22.17(1)(b)(iii), relating to changes from currently deducting inventories to permissible methods of identification and valuation of inventories; and
• (18) Section 22.10, relating to permissible methods of identification and valuation of inventories, is modified to remove section 22.10(1)(d).

Subject to a transition rule, this revenue procedure is effective for a Form 3115 filed on or after June 9, 2025, for a year of change ending on or after October 31, 2024, that is filed under the automatic change procedures of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by Rev. Proc. 2021-34, 2021-35 I.R.B. 337, Rev. Proc. 2021-26, 2021-22 I.R.B. 1163, Rev. Proc. 2017-59, 2017-48 I.R.B. 543, and section 17.02(b) and (c) of Rev. Proc. 2016-1, 2016-1 I.R.B. 1 .

Rev. Proc. 2025-23

The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.

The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.

Reporting Requirements and Transitional Relief

In 2024, final regulations were issued requiring brokers to report digital asset sale and exchange transactions on Form 1099-DA, furnish payee statements, and backup withhold on certain transactions beginning January 1, 2025. Notice 2024-56 provided general transitional relief, including limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs.

Additional Transition Relief from Backup Withholding, Customers Not Previously Classified as U.S. Persons

Under Notice 2025-33, transition relief from backup withholding tax liability and associated penalties is extended for any broker that fails to withhold and pay the backup withholding tax for any digital asset sale or exchange transaction effected during calendar year 2026.

Brokers will not be required to backup withhold for any digital asset sale or exchange transactions effected in 2027 when they verify customer information through the IRS Tax Information Number (TIN) Matching Program. To qualify, brokers must submit a customer's name and tax identification number to the matching service and receive confirmation that the information corresponds with IRS records.

Additionally, penalties that apply to brokers that fail to withhold and pay the full backup withholding due are limited with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of a customer’s received digital assets.

Finally, the notice also provides additional transition relief for brokers for sales of digital assets effected during calendar year 2027 for certain preexisting customers. This relief applies when brokers have not previously classified these customers as U.S. persons and the customer files contain only non-U.S. residence addresses.

Notice 2025-33

IR-2025-67

The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.

The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.

The taxpayer filed a petition to seek re-determination of a deficiency for the tax year at issue. The IRS moved to dismiss the petition under Code Sec. 6213(a), contending that it was untimely and that Code Sec. 7502’s "timely mailed, timely filed" rule did not apply. However, the Court determined that the notice of deficiency had not been properly addressed to the individual’s last known address.

Although the individual attached a copy of the notice to the petition, the Court found that the significant 400-day delay in filing did not demonstrate timely, actual receipt sufficient to cure the defect. Because the IRS could not establish that a valid notice was issued, the Court concluded that the 90-day deadline under Code Sec. 6213(a) was never triggered, and Code Sec. 7502 was inapplicable.

L.C.I. Cano, TC Memo. 2025-65, Dec. 62,679(M)

A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”

A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”

Furthermore, the Court concluded that the limited partners’ roles were indistinguishable from those of active general partners. Accordingly, their distributive shares were includible in net earnings from self-employment under Code Sec. 1402(a) and subject to tax under Code Sec. 1401. The taxpayer’s argument that the partners’ actions were authorized solely through the general partner was found unpersuasive. The Court emphasized substance over form and found that the partners’ conduct and economic relationship with the firm were determinative.

Additionally, the Court held that the taxpayer failed to meet the requirements under Code Sec. 7491(a) to shift the burden of proof because it did not establish compliance with substantiation and net worth requirements. Lastly, the Tax Court also upheld the IRS’s designation of the general partner LLC as the proper tax matters partner under Code Sec. 6231(a)(7)(B), finding that the attempted designation of a limited partner was invalid because an eligible general partner existed and had the legal authority to serve.

Soroban Capital Partners LP, TC Memo. 2025-52, Dec. 62,665(M)

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

Rising healthcare costs affect small businesses

If you are like most employers today, you have been dealing with the sting of rising prices for health benefits for some time. As a matter of economic survival, many small businesses have had to pass on at least some of the cost of providing health, dental and prescription benefits to their employees. As the prices continue to rise to fund these benefits, employees have been required to pay an increasing share of these costs. Establishing a cafeteria plan can be a way to make this problem more palatable for your employees at relatively little cost to your business.

Cafeteria plans defined

Technically, a cafeteria plan is a program through which you can offer your employees a choice between two or more "qualified benefits" and cash. The plan must be set forth in a written document and it can only be offered to employees. Depending on what you want to accomplish through a cafeteria plan, the plan can vary from being extremely simple (e.g., premium conversion plans) to being somewhat more complex as more features are added (e.g. flexible spending accounts).

Premium conversion plans: Popular and simple

A very simple type of cafeteria plan that is very popular among small to mid-size employers is sometimes referred to as a "premium conversion" plan. Establishment of a premium conversion plan would not require you to provide any significant additional funding for benefits other than what you are currently spending.

Here's how it works: through the structure of a cafeteria plan, you can offer your employees the ability to use pre-tax dollars to pay the portion of premiums you require them to contribute for their health, dental, and prescription benefits (including the cost of dependent benefits). Using pre-tax dollars to pay for their portion of health care premiums saves your employees money and will result in more net dollars in their paychecks. It may seem surprising, but your employees will appreciate even this small dollar-saving benefit.

With a premium conversion plan, the only costs to you as an employer is the expense of hiring an attorney or other benefits professional to draft a cafeteria plan document for you and the expense of making the small adjustment to your system of payroll deductions so that the employees' portion of the health benefit premiums is deducted from their gross pay rather than their after-tax pay.

Flexible spending accounts

Another benefit that can be made available under a cafeteria plan is a flexible spending account option. These accounts permit employees to have a specific amount withheld from each paycheck and set aside to be used for reimbursement of medical expenses not covered by the group health insurance plan or to be used to cover dependent care expenses. Keep in mind, however, that if you want to establish flexible spending accounts through a cafeteria plan, it will involve more ongoing administrative expense on your part than a simple premium conversion cafeteria plan.

Additional options

You also may want to offer your employees a cafeteria plan which provides them a set dollar value that each employee can take either as additional salary or choose to spend on a variety of benefits, e.g., health insurance, dental coverage, dependent care, or retirement plan contributions. With this type of plan, all benefits other than additional salary are not taxable to the employee. This type of plan can provide desirable flexibility to your employees, but will also cost more to establish and administer.

As you make the determination regarding what type of benefit program you would like to offer your employees, there are many other options that should be taken into consideration. If you require additional guidance, please contact the office for a consultation.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

Manage your cash before it manages you

Why do you need to manage your cash flow? Is it needed to help manage the day-to-day operations, obtain financing for a new project, or to acquire new equipment? Do you plan on presenting it to your banker to secure better financing terms or provide for future solvency? Are you seeking additional investors to help you expand into new markets? While all of these can be valid reasons for keeping on top of your cash flow situation, one of the main reasons to manage it is so it does not manage you. You should know when your business would be cash poor so you can better plan for short term operating loans. Similarly, when it has excess cash, it can be invested temporarily to maximize your return. If you do not do this, your cash flow situation will dictate when you can afford to advertise, when you can expand your business, when you can take on more sales, etc. as opposed to you making those timing decisions.

Once you have determined why cash flow management is important to your business, the next step is to get into action. In order to effectively manage your cash flow situation, you need to forecast your cash flows and once done, develop and implement a cash flow plan.

Step 1: Forecast Your Cash Flows

Forecasting your cash flow is the first step in the process of effectively managing your cash flow. How often you will need to prepare cash flow projections and what intervals to use (i.e. annually with monthly intervals or monthly with daily intervals) will depend on the nature of your business.

Be realistic. A realistic approach to forecasting your cash flows will produce more dependable and effective results. Analyze your operations to know your historical results as well as your projected assumptions. All cash flow from operations, investing activities and financing activities should be considered.

Consider your cash inflows and outflows. Your business' cash inflows would include such items as accounts receivable collection, along with unusual and nonrecurring items such as tax refunds, proceeds from a sale of equipment, etc.… Normal cash outflows include recurring items such as purchasing and accounts payable, payroll, loan payments, etc. along with nonrecurring items such as estimated tax payments, bonuses, equipment purchases and others.

Project your cash flow. Once you have determined the appropriate interval for your business (let's assume monthly), you would take the cash at the beginning of the month, add the cash inflows and subtract the cash outflows. This will give you a projected end of month cash balance. Now repeat this for the next 11 months (if your forecast was based on an annual cycle). You now have a cash flow forecast. When you study this, you may notice some months with large cash balances and other months with little, or even negative, cash balances.

Step 2: Develop a Cash Flow Plan

The goal here is to alter the forecasted cash flows into planned cash flows. By doing this, you can smooth out the peaks and valleys and turn your forecast into a manageable plan.

Invest excess cash. For those months with excess cash, you should have automatic investment alternatives set up with your financial institution. Depending on the length of time you have an excess cash situation, you can have a nightly sweep whereby your funds are invested in government bonds or repurchase agreements. Longer periods of excess cash will require more sophisticated alternatives, such as certificates of deposit. The size of the business, along with its cycle, will determine the investment alternatives to choose.

Plan for cash shortages. For the months with little or negative cash, you can first try to adjust these shortages by reviewing your collection policies to find ways to accelerate cash inflows. You can also look at your vendors' terms to consider possible ways to defer your payables. You should always err on the side of conservatism when making these changes. After this exercise, if you are still in a cash poor situation, determine sources of additional financing. You will appear more organized to lending institutions if this can be arranged before the problem arises.

By first forecasting, and then planning your cash flows, you can take advantage of many unique business opportunities, and avoid the pitfalls of unplanned cash shortages. Taking a step towards controlling your cash flow will keep you from having your cash flow take control of you.

If you have any questions about how you can better manage your business' cash flow, please contact the office for a consultation.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

Other considerations

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

Although the cost of computers and peripheral equipment has dropped significantly over the past year, a tax deduction for all or part of the expense can still help lower the bottom-line price tag of this major purchase. But despite both the widespread use of computers and the temptation to somehow "write them off" on a tax return, the IRS has remained surprisingly quiet. Rather than release any direct guidance on the issue, the IRS has chosen to rely on old rules that were established before the recent computer revolution. As a result, the business use of your home computer will need to fall within these standard rules if you want to take any related deductions.

Business reason must be present

In order to claim a deduction for your home computer and any peripheral equipment, you will need to prove that the expense occurred in connection with an active business - just as you would for any other business expense. An active business for purposes of a business expense related to a home computer will usually arise from one of two types of business activities: as a self-employed sole proprietor of an independently-run profit-making business; or as an employee doing work from home. Deductions from both types of activities are handled differently on an individual's income tax return and there are separate conditions that must be met for either scenario.

Self-employed person. In order for you as a self-employed person to deduct computer-related costs on Schedule C - whether for a home-based computer or one in a separate business location - it is required that your expenses relate to a profit-motivated business versus a "hobby". In the eyes of the IRS, a business will be deemed a hobby if there is no profit motive and the "business" is half-heartedly pursued simply to write off items or achieve some other personal purpose. If your Schedule C business shows a net loss year after year, you may be considerably more likely to have the IRS audit your return to inspect whether your purported business is actually legitimate under the tax law.

Employee. A miscellaneous itemized deduction on Schedule A is allowed for computer costs that are directly related to the "job" of being an employee. In order to claim a deduction for computer-related expenses as an employee, you must show a legitimate reason related to your employment for regularly using a computer at home. The availability of a computer in the office, the ability for you to keep your job without the home computer, the lack of telecommuting policy at work, or the lack of proof that your computer is used regularly for office work will make it more difficult to convince the IRS that a legitimate business reason exists for the deduction.

Some taxpayers have succeeded in writing off the expense of a computer as an educational expense related to business. For you to succeed in this deduction, you must carefully document that the education is undertaken to maintain or improve skills required in your current business or employment, or to meet specific educational requirements set by your employer. Computer expenses related to education that qualifies you for a new trade or business is not deductible.

Note to employees: computer-related business expenses taken as a miscellaneous itemized deduction are deductible only to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. For many taxpayers, a good strategy is to "bunch" purchases of computer equipment all in one year so that more of the cost will rise above the 2 percent floor.

Other IRS considerations

Aside from applying the general rules discussed above for a for-profit business and miscellaneous itemized deductions to determine if you are able to deduct business-related computer costs, the IRS is likely to dust off other standard tax principles in evaluating whether your computer expense write off is acceptable:

If you have any questions regarding writing off the business-related costs associated with your home computer, please contact the office for a consultation.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

Starting your own small business can be hectic - yet fun and personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront and a promise to "keep it simple", you can get an effective system up and running in no time.

Starting your own small business can be hectic - but also personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront, you can get an effective system up and running quickly.

The IRS requires all businesses to keep adequate books and records but accurate financial records can be used by the small business owner in many other ways. Good records can help you monitor the progress of your business, prepare financial statements, prepare your tax returns, and support items on your tax returns. The key to accurate and useful records is to implement a good bookkeeping system.

The most important thing that you as a busy business owner should remember when planning your bookkeeping system is that simple is better. Bookkeeping should not interfere with the daily operations of your business or impede the progress of your business' goals in any way.

Decisions, decisions....

Probably the hardest part about bookkeeping for any small business is getting started. There are so many decisions to make that the business owner may seem overwhelmed. Single or double entry? Manual or computerized system? Should I try to do it myself or hire a bookkeeper?

Here are some good questions to ask yourself as you are making some very important upfront decisions:

• • Single or double entry (manual bookkeeping systems). While a single entry system can be simple and straightforward (especially when you are just starting out a small business), a double entry system has built-in checks and balances that can help assure accuracy and control.

• • Manual or computerized. Will a manual system quickly become overwhelmed with the expected volume of transactions from your business? Will your efforts be less if a certain element of your transactions were automated? If you plan on doing your books yourself, do you have the time/patience to learn a new software program?

• • Self-prepare or outsource. How much time will you or your employees have to allocate to recordkeeping activities each day? Do you have any accounting experience or at least a good head for numbers? Does your budget allow for the additional expense of an outside bookkeeper? If outsourcing was an option, would it make sense to outsource some of it and do some yourself (e.g. use a payroll processing service but do your own daily transaction input and bank reconciliation)?

As you sit down to make these fundamental decisions regarding your bookkeeping system, here are a few things to keep in mind:

Be realistic. Be honest with yourself and realistic about the amount of time and energy you will be able to devote to the bookkeeping task. As a new small business owner, you will be pulled in a hundred different directions - make sure that you take on only as much of the bookkeeping task as you feel you can do without making yourself crazy.

Do your homework. Before you commit to any bookkeeping decision, it makes sense to find out what resources are available and at what cost. For example, you may find out that having your payroll processed by an outside company costs much less than you imagined or that a bookkeeping software package you thought was difficult is actually very straightforward. An informed decision is a good decision.

Ask for references and recommendations. Other successful small business owners have a wealth of knowledge surrounding all aspects of running a business, including bookkeeping. Ask them about their experiences with recordkeeping and find out what has (and what has not) worked for their companies. If they know of a good, reasonably priced bookkeeper or they've had a good experience with a software package, take notes.

See the forest for the trees. Translation: Give the minutia only as much attention as it needs and concentrate on the big picture of your business' finances. Implementing a bookkeeping system - on your own or with outside help - that is simple and reliable will give you the opportunity to step back and evaluate how effectively your business is operating.

There are many important decisions to make when you start your own business, including ones that seem mundane - such as recordkeeping - but that can have a significant impact on your ability to successfully operate your business. Before you make any of these decisions, we encourage you to contact the office for a consultation.

Once you have decided on the type of bookkeeping system to use for your new business, you will also be faced with several other accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be carefully considered by the new business owner.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. Your method of accounting is chosen when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Cash method

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Accrual method

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

• If the business has inventory.
• If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

Other methods of accounting

In addition to the cash and accrual methods of accounting, there are other ways that your business can account for your income and expenses (e.g., hybrid, long-term contract). These methods are beyond the scope of this article but may be available for your business.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please contact the office.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

Q. A large portion of my portfolio is invested in Internet stocks and with the recent market downturn, I've accumulated some substantial losses on certain stocks. Although I think these stocks will eventually turn around, I'd love to use some of those losses to offset gains from other stocks I'd like to sell. From a tax standpoint, can I sell stock at a loss and then turn around and immediately buy it back?

Q. A large portion of my portfolio is invested in Internet stocks and with the recent market downturn, I've accumulated some substantial losses on certain stocks. Although I think these stocks will eventually turn around, I'd love to use some of those losses to offset gains from other stocks I'd like to sell. From a tax standpoint, can I sell stock at a loss and then turn around and immediately buy it back?

A. If only it were that simple. The transaction you are proposing is considered a "wash sale" in the eyes of the IRS. A wash sale is the sale of a security (e.g., stock or bond) at a loss where the taxpayer turns around and buys back substantially the same security within 30 days. With the wash sale rules, the IRS seeks to eliminate the ability to deduct current losses on these types of transactions, and instead allows a basis adjustment to the new security purchased, in effect deferring the recognition of the earlier loss.

Example: You sell 1,000 shares of Dotcom Co. stock at a loss of $2,000. Next week, you buy another 1,000 shares of the same company's stock for $5,000. Instead of allowing the deduction of the $2,000 on your return, the wash sale rules say you must instead adjust the basis of your newest purchase to $7,000. When you go to sell the stock later at say $10,000, instead of having a $5,000 gain ($10,000 sales price minus $5,000 purchase price), your gain would only be $3,000 ($10,000 sales price minus $7,000 adjusted basis).

So how do you avoid the wash sale rules? Keep good track of the purchase and sale dates of your securities. If you do feel the need to reinvest in a similar investment vehicle, make sure that some element of the new security is different enough to avoid the "substantially similar" rule (e.g., if you sell a stock mutual fund, you can purchase another type of stock mutual fund.) As always, please contact the office if you need further clarification of the wash sale rules.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

In the ruling, the IRS determined that the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code's new capital gains exclusion on the sale of the house. The exclusion permits those who sell their personal residence anytime after May 6, 1997, to exclude up to $250,000 in capital gains ($500,000 for those filing joint returns). The IRS concluded that the individual's inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.

Family trusts: A common estate planning tool

As part of an estate plan, an individual may place assets, such as a home, into a trust and name an income beneficiary or beneficiaries. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Only the trust's designated trustees have the power to make decisions related to the encumbrance or disposal of the trust's assets. When the asset is a personal residence, this type of trust allows for preferential estate tax treatment while the income beneficiary has the ability to continue living in the home.

IRS: "No Capital Gain Exclusion"

The IRS's stance is that, even though an individual may have enjoyed the use of a house for many years, if the house was in a family trust, ownership of the house would always be vested in the trust. Under the federal tax rules, a beneficiary of a trust may be deemed an owner of the trust if he or she has the power to reach and to take all of the trust's assets for his or her use. When a beneficiary is treated as an owner, a sale by the trust is equivalent to a sale by the beneficiary. However, when an income beneficiary has no control over the fate of the assets of the trust, the IRS has found that the beneficiary is not the owner of the trust and therefore would not qualify for the Tax Code's capital gains exclusion upon the sale of a residence held in such trust.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. Please contact the office for additional guidance in this area.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

Starting a new business can be an exciting, although expensive, event that finds you, the small business owner, with a constantly open wallet. In most cases, all costs that you incur on behalf of your new company before you open the doors are capital expenses that increase the basis of your business. However, some of these pre-opening expenditures may be amortizable over a period of time if you choose. Pre-opening expenditures that are eligible for amortization will fall into one of two categories: start-up costs or organizational costs.

Start-up Costs

Start-up costs are certain costs associated with creating an active trade or business, investigating the creation or acquisition of an active trade or business, or purchasing an existing trade or business. If, before your business commences, you incur any cost that would normally be deductible as a business expense during the normal course of business, this would qualify as a start-up cost. Examples of typical start-up costs include attorney's fees, pre-opening advertising, fees paid for consultants, and travel costs. However, deductible interest taxes, and research and development (R&D) expenses are treated differently.

Start-up costs are amortized as a group on the business' tax return (or your own return on Schedule C, if you are a sole proprietor) over a period of no less than 60 months. The amortization period would begin in the month that your business began operations. In order to be able to claim the deduction for amortization related to start-up costs, a statement must be filed with the return for the first tax year you are in business by the due date for that return (plus extensions). However, both early (pre-opening) and late (not more than 6 months) submissions of the statement will be accepted by the IRS.

Organizational Costs

Organizational costs are those costs incurred associated with the organization of a corporation or partnership. If a cost is incurred before the commencement of business that is related to the creation of the entity, is chargeable to a capital account, and could be amortized over the life of the entity (if the entity had a fixed life), it would qualify as an organizational cost. Examples of organizational costs include attorney's fees, state incorporation fees, and accounting fees.

Organizational costs are amortized using the same method as start-up costs (see above), although it is not necessary to use the same amortization period for both. A similar statement must be completed and filed with the company's business tax return for the business' first tax year.

Before you decide which, if any, pre-opening expenditures related to your new business you'd like to treat as start-up or organizational costs, please contact our office for additional guidance.

Q. My wife and I are both retired and are what you might call "social gamblers". We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

Q. My wife and I are both retired and are what you might call "social gamblers." We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

A. The technical answers to your questions are "yes" and "maybe," respectively. However, does it make much practical sense to report your $50 jackpot from the Sunday afternoon bingo game at the church? Probably not. In most circumstances, the taxpayer's cumulative gambling losses far exceed any winnings he may have had.

Here are the technical rules regarding reporting gambling winnings and losses:

Gambling winnings are taxable income and should be reported on your income tax return. In addition to cash winnings, you are required to report the fair market value (FMV) of all non-cash prizes you receive. For the most part, you are on the honor system when it comes to reporting small winnings to the IRS. Large payouts, on the other hand, will most likely be accompanied by IRS Form W-2G and a substantial amount will be deducted for withholding. Gambling winnings should be reported as "Other income" on the front page of Form 1040.

Gambling losses may only be included on your tax return if you itemize your deductions and then they are only deductible up to the amount of your gambling winnings. If you do itemize, those losses would be included as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income (AGI) limit on Form 1040, Schedule A. However, keep in mind that if your AGI exceeds a certain amount, your total itemized deductions may be limited, reducing the likelihood of a direct offset of gambling income and losses.

Once you've tallied up your winnings and losses and reported them on your tax return, how do you substantiate your gambling income and deductions to the IRS? Here are some guidelines offered by the IRS that will help you in the event that your gambling claims are ever questioned:

Keep a log or a journal. The IRS suggests entering all of your gambling activities in a small diary or journal - you may want to consider one that can be carried with you when you frequent gambling establishments. Here is the information you should keep track of:

Retain documentation. As with any item of income or deduction claimed on your return, the IRS requires adequate documentation be kept to substantiate the amount claimed. Acceptable documentation to substantiate gambling winnings and losses can come in many different forms, depending on what type of activity you are engaging in. Examples include lottery tickets, canceled checks, wagering tickets, credit records, bank withdrawals and statements of actual winnings or payment slips provided by the gaming establishment.

Although it may seem difficult to keep track of your gambling activity at the time, it is obvious that keeping good records can benefit you if you ever "hit the jackpot". If you have any further questions on this matter, please contact the office for assistance.

Any business or government entity (defined as a "service-recipient") that is required to file a federal Form 1099-MISC for services performed by an independent contractor (defined as a "service-provider") must report. A service-recipient means any individual, person, corporation, association, or partnership, or agent thereof, doing business in this State, deriving trade or business income from sources within this State, or in any manner in the course of trade or business subject to the laws of this State.

An independent contractor is defined as an individual who is not an employee of the business or government entity for California purposes and who receives compensation or executes a contract for services performed for that business or government entity either in or outside of California.

The information you provide to EDD will increase child support collection by helping to locate parents who are delinquent in their child support obligations.

You must report to EDD within twenty (20) days of EITHER making payments totaling $600 or more OR entering into a contract for $600 or more with an independent contractor in any calendar year, whichever is earlier.

You are required to provide the following information that applies.

Business or government entity's (service-recipient): Federal employer identification number California employer account number Social security number Business name, address, and telephone number

Independent contractor's (service-provider): First name, middle initial, and last name Social security number Address Start date of contract Amount of contract (including cents) Contract expiration date Ongoing contract (check box if applicable)

Report independent contractor information on the Report of Independent Contractors form (DE 542). To obtain forms and/or information, call (916) 657-0529. You may also contact your local Employment Tax Customer Service Office listed in your local telephone directory in the State Government section under "Employment Development Department" or access our Internet site at www.edd.ca.gov. For magnetic media filing, please call (916) 651-6945.

The reports should be sent to the following address:

Employment Development Department PO Box 997350 MIC 99 Sacramento CA 95899-7350

Fax: (916) 255-3211

For further assistance, the EDD may be contacted at their toll-free number 1-888-745-3886.