INDEX

• Mileage Rates for 2008 Increase

• Mileage Rates for 2007 Increase

• 2006 Year-End Tax Tips for Small Biz

• 2006 Year-End Donation Tips

• Congress Passes Tax Break Extensions

• Medicare Reimbursements Decline to Doctors

• Sole Proprietors Likely Target of IRS Audit

• Key Tax Changes for 2005 Individual Returns

• IRS Audits S Corporations

• Tax Highlights for 2004

• Tap Your IRA Penalty Free

• Simplified Business Per-Diem Rates

• Employees vs Independent Contractors

• West Virginia News

• Which States Have The Best Business Climate?

• 2008 Federal Stimulus Package

WASHINGTON — The Internal Revenue Service today issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile; the standard rate for medical and moving purposes is based on the variable costs as determined by the same study. Runzheimer International, an independent contractor, conducted the study for the IRS.

The mileage rate for charitable miles is set by law.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously.

Revenue Procedure 2007-70 contains additional information on these standard mileage rates.

As always, we are available to discuss any of these matters with you.

Your resource for all of your tax, financial and business planning matters,

"That is a very significant noncompliance rate," Everson told reporters. "We do not have specific conclusions as to how much of this is willful or confusion."

Sole proprietors are at least 10 times more likely to be audited this year than other business entities, dailybreeze.com says. Last year, with more enforcement personnel available, the IRS audited almost twice as many individuals as five years previously, blackenterprise.com says.

Daniel Kehrer, writing in dailybreeze.com, advises sole proprietors to consider making their businesses corporations or LLCs to avoid audits and to hire a certified public accountant for tax advice.

What are the red flags the IRS will be looking for in sole proprietor returns? Kehrer says that underpayment of quarterly estimated payments, or late payments, could be significant to the IRS. Sole proprietors should also watch their income-to-deduction ratio. If this ratio exceeds 52 percent, an individual is more likely to be audited, according to tax attorney Stephen Fishman, Kehler reports. Finally, beware the home office deduction - a prime IRS deduction, he says, and avoid vague expense categories, such as miscellaneous.

Kevin McKeon, an IRS spokesman for the metro area, was asked by the New York Daily News what red flags the agency looks for and "how it determines who would get audited."

McKeon said that common errors that tip off the bureau are invalid or incorrect Social Security numbers for the filer or dependents, math errors, and incorrect bank deposit numbers or routing numbers. Returns will get special attention when the taxpayer fails to sign and date the return or fails to attach W-2s.

Generally the IRS assigns a numeric score "somewhat like a credit rating" to each return, the Daily News says, and thereby determines which returns will require more review. But "the major reason of all audits is illegal tax shelter," McKeon said, "or the use of offshore credit cards." "Sometimes we (the IRS) look at an industry and if you work in that industry you might be audited," he added.

Returns prepared by computer are neat and less likely to have math errors experts agree. Taxpayers should prepare their returns early, but should not file early, ABC News says.

As always, we are available to discuss any of these matters with you.

Your resource for all of your tax, financial and business planning matters,

Key Tax Changes for 2005 Individual Returns

Deduction limits and other rules that applied on 2004 returns may be entirely new for 2005 returns.  Here is a roundup of key changes affecting personal returns for 2005:

Tsunami relief.  Those who contributed money to tsunami relief in January 2005 and deducted this amount on a 2004 return cannot deduct it in 2005.  However, if the deduction was not claimed in 2004 (e.g, the donor did not itemize deductions), it may be deducted on the 2005 return.

•  401(k) plans: $14,000 ($18,000 for those age 50 or older by Dec. 31,  2005)

• Savings Incentive Match Plan for Employees (SIMPLE): $10,000 ($12,000 for those age 50 or older by Dec. 31, 2005),

• Profit-sharing and simplified employee pension (SEP) plans:  $42,000 annual contribution, and

• Defined benefit (pension) plans: $170,000 in benefits.

Roth IRA conversions.  Individuals with traditional IRAs can convert them to Roth IRAs if modified adjusted gross income (MAGI) does not exceed $100,000.  Conversions mean that income earned on the account becomes tax free after five years if distributions are not taken until after age 59 1/2 or because of another permissible event.  Starting in 2005, MAGI does not include required minimum distributions from qualified retirement plans and IRAs, allowing more individuals to qualify for Roth IRA conversions.

•  Personal and dependency exemption amount: $3,200.

• Standard deduction amounts: $10,000 for married couples filing jointly and surviving spouses, $7,300 for heads of households, and $5,000 for singles and married persons filing separate returns.  For those age 65 and older and/or blind - who also are unmarried and not a surviving spouse - the additional standard deduction amount is $1,250 ($1,000 for other taxpayers).

• Deductible limit for long term-term care premiums:  $270 for those under age 40, $510 for those age 41 through 50, $1,202 for those age 51 through 60, $1,720 for those age 61 though 70, and $3,400 for those age 70 and older.

• Exclusion for employer-paid transportation benefits:  $200 per month for free parking, and $105 per month for transit passes and van pooling.

• Income limits also increased to qualify for the adoption credit, hope and lifetime learning credits, exclusion for interest on savings bonds used for higher education, and the deduction for student loan interest.

The dollar limit for expensing equipment purchases in lieu of depreciating them over a number of years increases to $105,000 (up from $102,000 in 2004).  However, bonus depreciation - and additional first-year write-off --- expired at the end of 2004 and cannot be claimed on 2005 returns.
 

As always, we are available to discuss any of these matters with you.

Your resource for all of your tax, financial and business planning matters,

IRS AUDITS S-CORPORATIONS

IRS AUDITS S CORPORATIONS

The IRS is launching a new research compliance program of S corporations.  The study will examine 5,000 randomly selected S corporation returns from tax years 2003 to 2004.  The 5,000 represents 1.6 thousandths of 1% of all S corporations.

The last compliance study was in 1984, prior to tax law changes that spurred the growth of S corporations from 724,749 to 3,154,377 in 2002.

Purpose of the Audits

Research programs are undertaken periodically to ensure that corporations and individuals pay their fair share of taxes.  Based on study results using statistical analysis, the IRS updates its methods of finding returns that might potentially have problems.

Salary Abuse

The impetus for the S corporation study is a result of Social Security hearings early in 2005.  The highlight of the hearings was the loss of payroll revenue to the federal government. "People are taking salaries that are too low, sometimes as little as zero, to beat the 15.3% FICA tax.  Or there are those who pay themselves $10,000, but take out $90,000 in distributions."

Inappropriate Deductions

The study expects to find a disproportionate amount of inappropriate deductions in small and midsized businesses.

WHAT YOU SHOULD DO BEFORE AN AUDIT

Compensation to owner employees should be reasonable: what you would have to pay a third party to perform your services. In addition, all expenses should be directly related to the business of the S-Corporation, and be well documented. Contact your CPA to determine if you will pass the new IRS research program audit.

As always, we are available to discuss any of these matters with you.

Your resource for all of your tax, financial and business planning matters,

TAX HIGHLIGHTS FOR 2004

On October 4, 2004, Congress passed The Working Families Tax Relief Act of 2004. The Act prevented a tax increase of $146 billion by virtue of extending that amount of tax cuts that were scheduled to expire in 2004.

OVERVIEW

Other than a new sales tax deduction option, the expiration of the 50% bonus depreciation at 12-31-04, and major change in deduction for cars donated to charity after 12-31-04, 2004 was reasonably quiet for tax changes. The only thing that will 'stick it to you' is the Alternative Minimum Tax. Income tax changes in recent years continued to reduce regular tax, but haven't affected the AMT tax much. We can expect that more and more taxpayers will be paying an AMT tax and wonder where their share of all the tax deductions went!

Don't count out the abolishment of the estate tax in 2005. Right now you get taxed when you earn, again when you save, and again when you get dividends. And if you're stupid enough to die, they tax you again.

My assessment of the cost of keeping the "peace" in Iraq and Afghanistan, a major political fight over the Social Security gorilla, the increasing humungous trade deficit with China, is that President Bush may be forced to increase income tax rates by the third quarter of 2005 or by 2006. In the near future we must consider that foreign creditors who are letting us borrow $600 billion a year may decide that it's not a wise portfolio choice on their part. Couple this with the fact that as a nation we are saving less than 2% of our national income (the lowest since 1934), and you might conclude some major fiscal juggling is in order.

INDIVIDUAL TAXES

Individual tax rates have been cut every year in the last 4 years. They will be the same in 2004 and 2005 as they were in 2003. The spread between the lowest and highest rates (excluding the low income 10% bracket) is the narrowest in memory.

Planning pointer: Parents should consider shifting income to their 14 and older children to take advantage of the 10% bracket. You can give appreciated stock to the children which they can sell and pay a 5% capital gains tax if they are in the 10% bracket.  Examples: The child who is a dependent of his parent can take capital gains of about $16,000 and pay no tax, saving the parent in the 28% or 35% bracket from $4,400 to $5,500 in taxes. If the child is not a dependent he can take capital gains of about $30,000 and save the parent between $8,500 to $10,500 in taxes.

Long-term care insurance. There are 77 million baby boomers and they represent a third of the U.S. population. The Congressional Budget Office predicts that long-term care costs will rise from $123 billion to $207 billion by 2020. It is cost effective to purchase long-term care insurance before retirement when it is affordable, and before inflation makes it more difficult. Some pointers for choosing a long-term care policy are:

1. Determine resources. If you qualify for Medicaid, you don't have enough money for premiums.

2. Purchase at the appropriate age to save on premiums.

3. Don't forget inflation protection.

4. Buy a tax qualified plan. Nearly 90% of plans sold are tax qualified.

State and local general sales tax deduction (new)
In October of this year, Congress passed another tax Act which included the following: At the election of the taxpayer, an itemized deduction may be taken for State and local general sales taxes in lieu of the itemized deduction for state and local income taxes. Taxpayers have 2 options to determine the sales tax amount: 1) Accumulate receipts that show the general sales tax paid, or 2) Use IRS tables, plus general sales tax paid for the purchase of motor vehicles, boats, aircraft, home, or home building materials. [IRS tables can be found at www.irs.gov/pub/irs-pdf/p600.pdf]  (NOTE: the general sales tax rate in California is 6.0%. Do not include the local sales tax. i.e. Total sales tax in Los Angeles is 8.25% and in Anaheim is 7.75%, but you can only deduct at the general sales tax rate of 6.0 %.)

You would then compare the highest of 1) or 2) with your State and Local income taxes to determine which gives you the best deduction.

NOTE: The sales tax deduction in lieu of state and local income taxes is most favorable to low income taxpayers and taxpayers in zero income tax states like Nevada, who itemize deductions. It is also a hassle to deal with. The IRS table amount for a family of 2 with adjusted gross income of $75,000 would be $836, excluding autos, etc.

Auto contributions to charity - LAST CHANCE FOR 2004 - rules change in 2005

Under rules in effect for 2004, taxpayers can deduct the fair market value of autos donated to charity. They should take the following steps:

• Check that the organization is qualified

• Itemize your deductions in order to receive the benefit

• Calculate the fair market value

• Deduct only the car’s fair market value

• Document the charitable contribution deduction

As of January 1, 2005, the rules change. For 2005, if the claimed value of a motor vehicle, boat, or plane donated to charity exceeds $500 and the item is sold by the charity, the taxpayer's deduction is limited to the gross proceeds from the sale. The charitable organization must provide an acknowledgement to the donor within 30 days of the sale, stating the amount of gross proceeds. Alternatively, if the charity significantly uses or materially improves the vehicles, the charity must certify this intended use and duration and provide an acknowledgement to the donor within 30 days of the contribution - in which case the donor may deduct the vehicle's fair market value.

Although charities that accept donated vehicles should know the rules in 2005, they may not decide on a sale until months after the donation. Therefore, prior to the donation in 2005, have an understanding with the charity as to whether they will sell or use the vehicle.

Social security and Medicare. The wage base is projected to increase from $87,900 (2004), to $90,000 (2005), $93,000 (2006), $97,500 (2007) and $101,400 (2008). Medicare B premium was $66.60 a month in 2004, and will be $78.20 a month in 2005.

Health Savings Accounts (HSA). This is a new medical expense plan effective January 1, 2004. Conceptually, the HSA is an individual retirement account for medical expenses. Earnings are generally exempt from tax. Favorable deductions are available to individuals and self-employed persons. The plan works best for healthy, younger persons or families, who currently do not incur large medical expenses. They will be able to fund an HSA for use in later years when their medical bills will probably be greater and at the same time reduce current year outlay for medical insurance costs. The plan may be attractive to small employers who are looking to control the exponential rise in insurance premiums for employees. Distributions from HSA are tax-free, provided the distributions relate to qualified medical expenses of the account beneficiary or family members.  The rules are complex. You may contact me for further information or find information at www.msabank.com or www.hsainsider.com.

FDIC coverage for bank accounts in excess of $100,000. The rules are simplified and expanded. Bank funds in a Family Trust, Decedent’s Trust, or Marital Trust that covers Trustors and various beneficiaries will receive $100,000 coverage for each person (covering a person only once). Old rules protected the owner of the Trust and not the beneficiaries.

BUSINESS TAXES

S-Corporations. An election can be made to allow members of a family to be treated as one shareholder in determining the number of eligible shareholders, which has been increased to 100. (A family is defined as the common ancestor and all lineal descendants of the common ancestor, as well as the spouses, or former spouses of these individuals - for six generations or less removed from the youngest generation of shareholders who would (but for this rule) be members of the family.)

Substantiation for business use of autos, home computers and cell phones. The general rule for autos has been to take your odometer reading at the start and end of the year to know total miles driven. Then, to determine the business miles by maintaining a log that shows business miles driven, date driven, and business purpose. From this you can determine the percent business use and apply the percent to the actual expenses, or use the business miles times the mileage rate allowance. (For home computers and cell phones the regulations suggest using 'minutes of use' instead of miles.)

You may also arrive at business use by a sampling method by maintaining your log or record for 3 months, or one week a month.

Bonus depreciation expires December 31, 2004. The rule has been that you can elect either 30% or 50% of special depreciation on any original use property (including automobiles) used in a trade or business which is depreciable under the MACRS system of depreciation with a recovery period of 20 years or less. If business use of the property falls to 50% or less, bonus depreciation and any amount expensed under Section 179 must be recaptured (taken into income).

There is little time left this year to acquire and put into use before December 31, 2004, property that will be eligible for bonus depreciation.

Section 179 expensing. This section allows a taxpayer to deduct a portion of the cost of certain new or used business personal property instead of depreciating it. The maximum deduction for 2004 is $102,000.

After October 22, 2004, this deduction is limited to $25,000 for a sports utility vehicle rated at 14,000 pounds gross vehicle weight (GVW) or less. An SUV is defined to exclude any vehicle that 1) is designed for more than nine individuals in seating rearward of the driver’s seat, 2) equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length, or 3) has
an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

Auto expense. The rules for depreciation of autos are very complex. Autos are grouped into several 'categories', each with different rules.

1. Passenger autos included any four-wheeled vehicle manufactured primarily for use on public streets, roads, and highways that has an unloaded GVW (i.e. curb weight fully equipped for service but without passengers or cargo) of 6,000 pounds or less.

2. Trucks or vans (including a sport utility vehicle or minivan built on a truck chassis) are treated as passenger autos if they have a gross vehicle weight rating (i.e. maximum total weight of a loaded vehicle as specified by the manufacturer) of 6,000 pounds or less.

3. Some large SUVs, trucks, and vans (i.e. over 6,000 pounds gross vehicle weight rating) are not treated as passenger autos.

4. SUVs (see page 4 under Section 179 expensing for a special rule)

NOTE: The GVW is listed on a metal plate on the inside of the driver's door. GVW can be found at www.kiplinger.com/php/tools/trucktax/tax.php  or www.intellichoice.com.

Depreciation rules for the above categories of autos.

1. Passenger autos are called 'listed property' (which by nature lends itself to personal use), and are also 'luxury' autos if their cost exceeds $14,800. IRS tables for passenger autos allow the least amount of depreciation for this category of auto.

2. Trucks or vans (including a sport utility vehicle or minivan built on a truck chassis) of 6,000 pounds or less are entitled to slightly higher depreciation based on IRS tables, to account for higher costs associated with these vehicles.

3. Large SUVs, trucks, and vans over 6,000 pounds are not subject to the depreciation caps applicable categories a. and b. above. These vehicles are allowed Section 179 expensing on the first $102,000 of cost, then 30/50% bonus depreciation if acquired and put into use prior to January 1, 2005 (on the remainder of cost), and regular MACRS depreciation (on the balance of cost). (As to SUVs, see page 4 under Section 179 expensing for a special rule)

IRA provisions. The baby boomers, born between 1946 and 1964, represent almost 1/3 of the United States population. Of our 281 million people, 76.9 million were 50 and older. In the next 10 to 15 years about 1/2 of the baby boomers (40 million) are going to question, worry, and plan for retirement. 46.3 million taxpayers held IRA accounts worth a total of $2.6 trillion in fair market value. There are 3 rules for comfortable retirement:

• start saving early

• save more money

• invest wisely

The maximum contribution to a Traditional or Roth IRA is $3,000 ($4,000 for 2005 to 2007). Those age 50 and over are allowed an additional 'catch-up' contribution of $500 (2004 to 2005) - subject to earned income, if neither spouse is in an employer plan.

ADDITIONAL TAX HIGHLIGHTS

Additional Tax Highlights can be found at our web site at www.irs.gov  under Breaking News, as Tax Highlights for 2003. The topics listed there that have not changed in 2004 offer additional valuable insight to the tax laws affecting you - explained in easy-to-understand language, with many planning pointers. The 2003 topics that remain unchanged in 2004 are:

• Individual and corporate rates

• 10% tax bracket expanded

• Dividend income now taxed at 5% and 15% rates

• Social Security benefit calculator

• Alternative Minimum Tax

• Self-employed health insurance

• Long-term care insurance

• Section 529 educational plans

• Gift tax

• IRA provisions

• Sale of stock by nonresidents

• Reduction in capital gains rate

As always, we are available to discuss any of these matters with you.

Your resource for all of your tax, financial and business planning matters,

SMALL BIZ TAX TIPS FOR 2006 YEAR END

The last minute moves that every small business owner should make before the end of the year to ease their tax burden.

• New Tax Break for IRA Owners - An IRA owner, age 70 1/2 or over, can directly transfer tax-free, up to $100,000 per year to an eligible charitable organization. This option is available in tax years 2006 and 2007. Eligible IRA owners can take advantage of this provision, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans are not eligible.
  
  To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
  
  Not all charities are eligible under this provision. For example, donor-advised funds and supporting organizations are not eligible recipients.
  
  Transferred amounts are counted in determining whether the owner has met the IRA's required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRA's, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
   
• Rules for Clothing and Household Items - To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
   
• Guidelines for Monetary Donations - To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date.
  
  Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
  
  Prior law allowed taxpayers to back up their donations of money with personal bank registers, diaries or notes made around the time of the donation. Those types of records are no longer sufficient.
  
  This provision applies to contributions made in taxable years beginning after Aug. 17, 2006. For taxpayers that file returns on a calendar-year basis, including most individuals, the new provision applies to contributions made beginning in 2007.
  
  The new law does not change the prior-law requirement that a taxpayer get an acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2006. This is true even if the credit-card bill isn't paid until next year. Also, checks count for 2006 as long as they are mailed this year.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found on www.IRS.gov under, "Search for Charities." In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Schedule A can claim a deduction for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2006 Schedule A, available now on www.IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes a description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes a description of the property and its condition.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor's tax return. See IRS Publication 526, Charitable Contributions, for more information.