A regular form of fundraising by charitable organizations consists of sales or auctions of property or services at a price in excess of value. These are referred to as “quid pro quo” contributions or dual payments made that consist partly of a charitable gift and partly of consideration for goods or services provided to the donor.
Quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, etc., and are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution.
Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the good or services purchased.
Example #1—A taxpayer purchases a cookbook from a charity for $100. The charity provides the taxpayer with a good faith estimate of $20 for the value of the book in a written disclosure statement. Thus, the taxpayer’s charitable deduction is $80 ($100 minus the $20 value of the book).
Example #2—A taxpayer attends a charity auction. The charity provides a catalog of the items for auction and a good-faith estimate of the value of each item. The taxpayer is the successful bidder for a vase valued at $100 in the catalog, for which the taxpayer bid and paid $500. The taxpayer’s charitable deduction is $400 ($500 minus the good-faith valuation of $100).
Example #3—A taxpayer pays $40 to see a special showing of a movie for the benefit of a qualified charity. The ticket read “Contribution $40”. If the regular price for the movie is $10, the contribution would be $30 ($40 minus the regular $10 ticket price).
If you made or are considering making a quid pro quo purchase from a charitable organization and have questions relating to the amount that will represent a charitable contribution, please give this office a call.
The Housing and Economic Recovery Act of 2008 required third-party payment entities, such as credit card companies, to begin filing informational returns with the IRS reporting merchant card transactions, such as credit and debit card payments. The purpose was to give the IRS the ability to match a business’s credit and debit card sales with the amount the business reported on their tax return.
This reporting requirement began for the 2011 tax year using the new IRS Form 1099-K. In addition, the IRS added a line to the various 2011 business returns to separately report income from credit and debit transactions. However, for the 2011 tax year, the IRS instructed businesses to leave that line blank, allowing a one-year grace period to modify their bookkeeping and recordkeeping to enable them to reconcile their income between credit and debit card income and other sources of income, such as checks and cash, for 2012.
This reconciliation requirement added a substantial bookkeeping burden to businesses—especially small businesses—and many trade and business associations across the nation have been lobbying the government to drop the 1099-K reconciliation requirement.
On February 9, in a letter to the National Federation of Independent Businesses, Steven Miller, Deputy IRS Commissioner, stated that the 1099-K entry line will be dropped from the 2012 and all future business returns, eliminating the need for businesses to reconcile their incomes with the 1099-K informational reporting.
Even though the reconciliation requirement is being eliminated, a business owner must recognize that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. The IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at an estimated gross income for the various types business. This will help them select their audit targets.
If you have any questions, please give this office a call.
Beginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired in 2011 and subsequent years and to include that information on the information-reporting document 1099-B.
For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.
This new system of reporting is not a solve-all solution for the IRS because it does not have the cost or basis information for securities acquired prior to 2011 or for securities acquired by gift or inheritance. Special adjustments are required for wash sales and when sales can be attributed to a prior purchase of the same security. Some brokers also may report on Form 1099-B the cost information, if known, for stocks purchased prior to 2011.
So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included on the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):
Long-term sales where the broker IS reporting the cost of the security
Short-term sales where the broker IS reporting the cost of the security
Long-term sales where the broker IS NOT reporting the cost of the security
Short-term sales where the broker IS NOT reporting the cost of the security
Long-term sales for which no 1099-B is issued
Short-term sales for which no 1099-B is issued
To accommodate separating the transaction into the six categories, the IRS has provided a new Form 8949. A separate 8949 must be used for each category. This will allow the IRS to match and verify transactions where the brokerage firm supplied the cost basis.
Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.
Please call this office if you have questions relating to reporting your security sales this year.
Couples who are married on December 31 are viewed as married for the entire year. Most couples file joint federal income tax returns, and for good reasons. Doing so allows the couple to use the tax table or rate schedule for married filing jointly, which operates to average the tax over both individuals and produce tax savings. Joint filing is also necessary in order to take advantage of certain tax breaks. However, there are some situations in which filing separately may make sense.
When joint filing is mandatory
Married couples must file jointly in order to use the following tax breaks:
The $25,000 rental loss allowance
Credit for the elderly or permanently disabled
IRA deduction for a nonworking spouse
Education credits
Tuition and fees deduction
Student loan interest deduction
Dependent care credit (unless living apart for the last 6 months of the year)
Earned income credit (unless living apart for the last 6 months of the year)
If you receive Social Security benefits, joint filers may need to include only 50% or perhaps none of the benefits in income; separate filers automatically must include 85% of benefits in income.
When separate filing is a good idea
Even though there are compelling reasons to file jointly, there are two key situations in which separately filing is advisable:
To limit tax liability for the other spouse. If a joint return is filed, both spouses usually are liable for the tax. When one spouse has concerns about the other spouse’s tax positions, separate filing will avoid liability related to the other spouse’s positions that could result.
To maximize deductions and lower taxes. If couples itemize and the spouse with the lower income has greater medical, casualty and theft, and/or miscellaneous itemized deductions (deductions that have adjusted gross income thresholds), separate filing can enable greater write-offs and result in lower total income tax for the couple.
Best advice
When in doubt about which filing status to use, figure your taxes both ways—joint and separate—and compare your results.
Keeping track of tax changes these days is quite a task. Congress is constantly tweaking the tax laws in an effort to stimulate the economy and deal with the budget deficit. The following is a compilation of recent changes to keep you up date.
Cell Phones No Longer Listed Property – This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property. This is effective for tax years beginning after Dec. 31, 2009.
Business Owners’ Health Insurance Deduction – A one-year law change allowed business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax. For years before and after 2010, the deduction is used only as an above-the-line deduction from gross income on the self-employed individual’s income tax return and does not affect the SE tax.
Medicare B as an SE Health Insurance Deduction – The IRS very quietly reversed its position related to the deductibility of Medicare B premiums as an SE health insurance deduction. The 2009 Form 1040 instructions indicated that it was not deductible, while the 2010 instructions reversed that position to indicate that it is. The 2011 instructions also permit voluntarily paid Medicare premiums to be treated as SE health insurance premiums.
Payment Card and Third-Party Payment Transactions – Beginning in 2012 (for 2011 returns), payment settlement entities (e.g., a bank) will have to make an annual information report in settlement of reportable payment transactions (e.g., a credit or debit card transaction) and transactions settled through third-party payment networks (e.g., PayPal) that settle online transactions. The report is made to the merchant and the IRS stating the gross amount paid to the merchant during the previous calendar year. Form 1099-K will be used for this reporting.
The IRS had intended to require business owners to reconcile credit and debit card income with the gross income reported on business returns beginning with 2012 returns filed in 2013. However, in February of 2012, the IRS announced that they were dropping that requirement.
Even though the reconciliation requirement is being dropped, business owners should be aware that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. On a cautionary note, the IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at the estimated gross income for various types of businesses. This will help them select their audit targets.
Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000). The $5,000/$50,000 amounts return for tax years beginning in 2011.
Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation.
For tax years beginning in 2010 and 2011, a taxpayer is allowed to expense (under Section 179) up to $500,000 (up from $250,000 under prior law) of the cost of qualifying business property, which includes machinery, equipment, and certain software placed in service during the year. For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit. The maximum Sec. 179 deduction and investment cap amounts for 2012 are $139,000 and $560,000, respectively.
Certain Real Property Can Be Expensed – Generally, real property is not eligible for Sec 179 expensing. However, for property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of expensed property can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Bonus First-Year Depreciation Extended and Expanded – Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years. Congress extended the 50% rate for qualifying property purchased through September 8, 2010 and doubled the first-year bonus rate to 100% for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain property). The bonus rate for 2012 (through 2013 for certain property) will again be 50%.
Lower SE Tax Rate – Beginning in 2011, Congress authorized a 2 percentage-point reduction in the employee’s portion of the payroll tax (OASDI) and a corresponding reduction in the SE tax for self-employed individuals. Thus, the overall SE tax rate dropped from 15.3% to 13.3% for 2011. The reduction was subsequently extended to apply to all of 2012.
Research Credit – The research tax credit expired at the end of 2009. As part of the 2010 Tax Relief Act, Congress reinstated the credit for 2010 and extended it through 2011.
Small Employer Health Insurance Credit – The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for their employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.
Credit for Hiring Veterans – The VOW to Hire Heroes Act of 2011 added two new categories to the existing qualified veteran targeted group for the Work Opportunity Credit (WOTC). Employers may claim the WOTC for veterans certified as qualified veterans and who begin work before January 1, 2013. The credit can be as high as $9,600 per qualified veteran, but the amount of the credit will depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. Non-profit organizations are also eligible to claim this credit. All employers must obtain certification from their respective state workforce agency that an individual is a member of the targeted group before the employer may claim the credit.
Other Provisions with Limited Application – Calculations of the built-in gains tax on C-corporations converted to S-corporations, special rules for long-term contract accounting, the extension of certain business energy credits, and the limitation of the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.
If you have questions related to any of these tax benefits or wish to schedule a tax planning appointment to see how your business might benefit, please give this office a call.
