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President Biden support extending the individual tax provisions of the Tax Cuts and Jobs Act, many of which are set to expire next year, Department of the Treasury Secretary Janet Yellen said.

President Biden support extending the individual tax provisions of the Tax Cuts and Jobs Act, many of which are set to expire next year, Department of the Treasury Secretary Janet Yellen said.

"The President has made it clear that he would oppose raising back the taxes for working people and families making under $400,000," Secretary Yellen testified before the Senate Finance Committee during a March 21, 2024, hearing to review the White House fiscal year 2025 budget proposal.

She then affirmed that "he would" support extending the individual tax provisions of the TCJA when asked by committee Ranking Member Mike Crapo (R-Idaho), who noted that the budget did not make any mention of this.

Yellen defended the fiscal 2025 budget request against assertions that taxes will indeed go up for those making under $400,000, contrary to President Biden’s promise, because the taxes that are targeted to wealthy corporations to ensure they are paying their fair share will ultimately be passed down to their consumers in the form of higher prices and lower wages.

"I think what the impact when you change taxes on corporations, what the impact is on families involves a lot of channels that are speculative," Yellen said. "They are included in models that sometimes the Treasury used for the purposes of analysis, in a tax that is levied on corporations, that has no obvious direct effect on households."

The proposed budget would increase the corporate minimum tax from the current 15 percent to 21 percent, as well as raise the tax rate on U.S. multinationals’ foreign earnings from the current 10.5 percent to 21 percent. The current corporate tax rate would climb to 28 percent and the budget would eliminate tax breaks for million-dollar executive compensation. It would also increase the tax rate on corporate stock buybacks from 1 percent to 4 percent, among other business-related tax provisions.

By Gregory Twachtman, Washington News Editor

Corporations and billionaires will be paying more in taxes if Congress follows recommendations President Biden gave during his State of the Union address.

The IRS has launched a new initiative to improve tax compliance among high-income taxpayers who have not filed federal income tax returns since 2017.

The IRS has launched a new initiative to improve tax compliance among high-income taxpayers who have not filed federal income tax returns since 2017. This effort, funded by the Inflation Reduction Act, involves sending out IRS compliance letters to over 125,000 cases where tax returns have not been filed since 2017. These mailings include more than 25,000 to individuals with incomes exceeding $1 million and over 100,000 to those with incomes ranging between $400,000 and $1 million for the tax years 2017 to 2021. The IRS will begin mailing these compliance alerts, formally known as the CP59 Notice, this week.

Recipients of these letters should act promptly to prevent further notices, increased penalties, and stronger enforcement actions. Consulting a tax professional can help them swiftly file late tax returns and settle outstanding taxes, interest, and penalties. The failure-to-file penalty is 5 percent per month, capped at 25 percent of the tax owed. Additional resources are available on the IRS website for non-filers.

The non-filer initiative is part of the IRS's broader campaign to ensure large corporations, partnerships, and high-income individuals fulfill their tax obligations. Non-respondents to the non-filer letter will face further notices and enforcement actions. If someone consistently ignores these notices, the IRS may file a substitute tax return on their behalf. However, it's still advisable for the individual to file their own return to claim eligible exemptions, credits, and deductions.

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An individual’s claim for innocent spouse relief was rejected for lack of jurisdiction because the taxpayer failed to file his petition within the 90-day deadline under Code Sec. 6015(e)(1)(A). 

An individual’s claim for innocent spouse relief was rejected for lack of jurisdiction because the taxpayer failed to file his petition within the 90-day deadline under Code Sec. 6015(e)(1)(A). The taxpayer argued that the deadline to file a petition for a denial of innocent spouse relief was not jurisdictional and asked that the Tax Court hear his case on equitable grounds. However, the Tax Court noted that a filing deadline is jurisdictional if Congress clearly states that it is. The IRS argued that argues that the 90-day filing deadline of Code Sec. 6015(e)(1)(A) was jurisdictional because Congress clearly stated that it was and the Supreme Court’s decision in Boechler, P.C. v. Commissioner, 142 S. Ct. 1493, in addition to numerous appellate cases, supported this argument.

The Tax Court examined the "text, context, and relevant historical treatment" of the provision at issue and concluded that the 90-day filing deadline of Code Sec. 6015(e)(1)(A) was jurisdictional. On the basis of statutory interpretation principles, the jurisdictional parenthetical in Code Sec. 6015(e)(1)(A) was unambiguous. It did not contain any ambiguous terms and there was a clear link between the jurisdictional parenthetical and the filing deadline. Specifically, Code Sec. 6015(e)(1)(A) is a provision that solely sets forth deadlines. Further, it was unclear what weight, if any, should be given to the equitable nature of Code Sec. 6015. The statutory context arguments were not strong enough to overcome the statutory text. Accordingly, the Tax Court ruled that the 90-day filing deadline in Code Sec. 6015(e)(1)(A) was jurisdictional.

P.A. Frutiger, 162 TC —, No. 5, Dec. 62,432

The IRS has continued to increase the amount of information available in multiple languages. This was part of the IRS transformation work under the Strategic Operating Plan, made possible by additional resources provided by the Inflation Reduction Act (P.L. 117-169).

The IRS has continued to increase the amount of information available in multiple languages. This was part of the IRS transformation work under the Strategic Operating Plan, made possible by additional resources provided by the Inflation Reduction Act (P.L. 117-169). On IRS.gov, taxpayers can select their preferred language from the dropdown menu at the top of the page, including Spanish, Vietnamese, Russian, Korean, Haitian Creole, Traditional Chinese and Simplified Chinese. Additionally, the Languages page gives taxpayers information in 21 languages on key topics such as "Your Rights as a Taxpayer" and "Who Needs to File."

"The IRS is committed to making further improvements for taxpayers in a wide range of areas, including expanding options available to taxpayers in multiple languages," said IRS Commissioner Danny Werfel. "Understanding taxes can be challenging enough, so it’s important for the IRS to put a variety of information on IRS.gov and other materials into the language a taxpayer knows best. This is part of the larger effort by the IRS to make taxes easier for all taxpayers," he added.

If taxpayers cannot find the answers to their tax questions on IRS.gov, they can call the IRS or get in-person help at an IRS Taxpayer Assistance Center. Finally, hundreds of IRS Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs have access to Over the Phone Interpreter services. VITA and TCE offer free basic tax return preparation to qualified individuals.

The IRS has granted to withholding agents an administrative exemption from the electronic filing requirements for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

The IRS has granted to withholding agents an administrative exemption from the electronic filing requirements for Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. Under the exemption:

• withholding agents (both U.S. and foreign persons) are not required to file Forms 1042 electronically during calendar year 2024; and
• withholding agents that are foreign persons are not required to file Forms 1042 electronically during calendar year 2025.

The exemption is automatic, so withholding agents do not need to file an electronic filing waiver request to use the exemption.

Electronic Filing of Form 1042

Under Code Sec. 6011(e), the IRS must prescribe regulations with standards for determining which federal tax returns must be filed electronically. In 2023, final regulations were published to implement amendments to Code Sec. 6011(e) that lowered the threshold number of returns for required electronic filing of certain returns. The regulations included requirements for filing Form 1042 electronically.

The final regulations provide that:

• a withholding agent (but not an individual, estate,or trust) must electronically file Form 1042 if the agent is required to file 10 or more returns of any type during the same calendar year in which Form 1042 is required to be filed;
• a withholding agent that is a partnership with more than 100 partners must electronically file Form 1042 regardless of the number of returns the partnership is required to file during the calendar year; and
• a withholding agent that is a financial institution must electronically file Form 1042 without regard to the number of returns it is required to file during the calendar year.

The final regulations apply to Forms 1042 required to be filed for tax years ending on or after December 31, 2023. This means that withholding agents must apply the new electronic filing requirements beginning with Forms 1042 due on or after March 15, 2024.

Challenges to Withholding Agents

Since the final regulations were published, the IRS received feedback from withholding agents noting challenges in transitioning to the procedures needed for filing Forms 1042 electronically. Withholding agents expressed concerns about the limited number of Approved IRS Modernized e-File Business Providers for Form 1042, and difficulties accessing the schema and business rules for filing Form 1042 electronically. Withholding agents that do not rely on modernized e-file business providers said that they needed more time to upgrade their systems for filing on the IRS’s Modernized e-File platform. Agents also noted challenges specific to foreign persons filing Forms 1042 regarding the authentication requirements necessary for accessing the platform.

In response to these concerns, the IRS used its power under the regulations to provide the exemption from the electronic filing requirement for Form 1042, in the interest of effective and efficient tax administration.

Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.

Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.

Estimated income tax payments are required from taxpayers who:

1. expect to owe at least $1,000 in tax for the year, after subtracting taxes that were paid through withholding and tax credits; and
2. expect that the amount of taxes to be paid during the year through other means will be less than the smaller of—

• 90% of the tax shown on the current year's tax return, or
• 100% of the tax shown on the previous year's return (the previous year's return must cover all 12 months). This 100-percent test increases to 110 percent if the taxpayer's AGI for the previous year exceeds $150,000.

U.S. citizens who have no tax liability for the current year are not required to make estimated tax payments.

Form 1040-ES. Taxpayers use Form 1040-ES to calculate, report and pay their estimated tax. The annual liability may be paid in quarterly installments that are due based upon the taxpayer's tax year. However, no payments are required until the taxpayer has income upon which tax will be owed. Taxpayers may also credit their overpayments from one year against the next year's estimated tax liability, rather than having them refunded.

Generally, the required installment is 25 percent of the required annual payment. However, a taxpayer who receives taxable income unevenly throughout the year can elect to pay either the required installment or an annualized income installment. The use of the annualized income installment method, provided on a worksheet contained in the instructions to Form 2210, Underpayment of Estimated Tax by Individuals and Fiduciaries, may reduce or eliminate any penalty for underpaid taxes.

Due Dates. For most individual taxpayers, the quarterly due dates for estimated tax payments are:

Penalties. A penalty generally applies when a taxpayer fails to make estimated tax payments, pays less than the required installment amount, or makes late payments. However, the IRS may waive the penalty if the underpayment was due to casualty, disaster or other unusual circumstances.

Q. Last year I underwent a number of elective surgical procedures and would like to deduct the cost of these expensive procedures on my personal tax return. What are the criteria for medical expenses to be deductible? Do they have to exceed a certain dollar amount?

Q. Last year I underwent a number of elective surgical procedures and would like to deduct the cost of these expensive procedures on my personal tax return. What are the criteria for medical expenses to be deductible? Do they have to exceed a certain dollar amount?

A. While many medical expenses are clearly deductible, such as amounts paid for doctors/dentists, insurance premiums, prescription drugs, etc.., there are certain medical expenses that are not so easily identifiable as deductible and may require certain conditions be present to be considered deductible. Here are some examples of medical expenses that you should make sure you don't miss on this year's tax return:

Cosmetic Surgery. In general, you cannot include in medical expenses the amount you pay for unnecessary cosmetic surgery. "Unnecessary cosmetic surgery" is defined as any procedure that is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Examples of these types of procedures include face-lifts, hair transplants, hair removal and liposuction. However, you can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

Stop Smoking Treatments. A new law change in 1999 means that you can now include in medical expenses amounts you paid for a program to stop smoking. Keep in mind, however, that you cannot include in medical expenses amounts you paid for drugs that do not require a prescription, such as nicotine gum or patches, that are designed to help stop smoking.

Alcoholism treatment. Medical expenses incurred in connection with an inpatient's treatment at a therapeutic center for alcohol addiction (including meals and lodging provided by the center during treatment) are deductible medical expenses. In addition, if you receive medical advice that states that you should attend meetings of an Alcoholics Anonymous Club for the treatment of a disease involving the excessive use of alcoholic liquors, you are entitled to deduct medical transportation expenses (at 10 cents per mile) for travel to the meetings.

Capital expenditures. Certain expenses you paid for special equipment installed in your home, or for improvements, may be deductible as medical expenses. To qualify, the main purpose of the expense is medical care for you, your spouse, or a dependent. The costs of permanent improvements that increase the value of the property may be partly included as a medical expense. These costs are deductible medical expenses to the extent that they exceed the increase in the value of the property. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.

Limit on deductibility. Unfortunately, the IRS has imposed a rather steep threshold for the deduction of medical expenses. Taxpayers can deduct only the amount of their medical and dental expenses that exceed 7.5% of their adjusted gross income.

If, as you are gathering your tax information, you have any questions about the potential deductibility of a medical expenditure, please contact our office and we will be happy to assist you.

Please contact the office for more information on this subject and how it pertains to your specific tax or financial situation.

Q. Our daughter is entering college and we're considering seeking financial aid to help with tuition expenses. My spouse and I have always made the maximum contributions to our IRA accounts. Will our IRA accounts effect our child's ability to get financial aid for college costs? Should we hold off on this year's IRA contributions?

Q. Our daughter is entering college and we're considering seeking financial aid to help with tuition expenses. My spouse and I have always made the maximum contributions to our IRA accounts. Will our IRA accounts effect our child's ability to get financial aid for college costs? Should we hold off on this year's IRA contributions?

A. Go ahead and make the contributions. The child's parents' retirement assets are not taken into consideration when determining eligibility for many forms of financial aid. Therefore, neither of your regular or Roth IRA accounts should affect your child's ability to obtain federal financial aid. Please note, though, that an educational IRA established for your child would be considered an asset of your child for these purposes. Since the parents' taxable income is a main consideration when applying for financial aid, you should plan to keep your taxable income at a minimum in those years when your child is just about to enter college if you would like to obtain federal aid. Contact the college's financial aid center for more details and guidelines.

In addition, Taxpayer Relief Act of 1997 added a provision that provides penalty-free treatment for all IRA distributions made after December 31, 1997 if the taxpayer uses the amounts to pay qualified higher education expenses (including graduate level courses). This special treatment applies to all qualified expenses of the taxpayer, the taxpayer's spouse, or any child, or grandchild of the individual or the individual's spouse. "Qualified expenses" include tuition, fees, books, supplies, equipment required for enrollment or attendance, and room and board at a post-secondary educational institution.

When your business' bottom line is not as healthy as it should be, laying people off eventually may become your only option. However, before you cut people from your business, consider implementing these cost-cutting measures for a healthier bottom line and greater peace of mind.

When your business' bottom line is not as healthy as it should be, laying people off eventually may become your only option. However, before you cut people from your business, consider implementing these cost-cutting measures for a healthier bottom line and greater peace of mind.

Revisit your budget. Most budgets have some fat in them. Take a good look at your existing budget: are there some areas of excess that you may not have previously noticed? Evaluate viable alternatives for expenses that could result in cost savings. For example, check your printing costs. Are you photocopying something that should actually be printed? If you make many copies of a document, you are not only racking up charges in paper and labor, you are also adding to the wear and tear on the machine. Consider having local printers bid on a few of these jobs. You should be able to save money.

Get new bids on jobs. As easy as it is to stay with the same vendors year after year, this practice can be costly. One of the best suggestions to lower your overall costs is to collect invoices of everything purchased in the last year and separate the 20 percent that represent 80 percent of all purchases. Send those out for new bids and you may find you can cut your costs significantly.

Turn to your employees. Consider having them take responsibility for the costs associated with their positions. Ask them for suggestions on ways to cut costs. Most of them will be able to give you at least a few suggestions or point out some areas of waste. Once you have evaluated their suggestions, put the good ideas to work.

With a little work and a lot of persistence, you may be able to avoid the unpleasant task of laying off employees in a business downturn by simply tightening your business's belt. Please feel free to contact the office for additional suggestions and information.

Q. My company recently downsized its workforce and eliminated my position. I thought this would be a good opportunity to start my own consulting business in the same industry. What are some of the things I should consider before my last day on the job?

Q. My company recently downsized its workforce and eliminated my position. I thought this would be a good opportunity to start my own consulting business in the same industry. What are some of the things I should consider before my last day on the job?

A. Corporate downsizing and restructuring has swelled the ranks of the self-employed in recent years as those employees with an entrepreneurial spirit venture out on their own. Planning ahead for your career change while you are still on the job is a wise move and one that will most likely improve your chances for success.

Know your rights as a former employee. If you plan on bringing any of your current customers/clients with you, make sure you are familiar with the terms of any existing noncompete agreement with your employer. Violating such an agreement can put you out of business before you even get started. Consult an attorney if you are unclear on any of the details. Also confirm what your rights are to unemployment benefits and whether earnings from your new business will reduce or eliminate those rights.

Save for a rainy day. It may take a while to adjust to living without a paycheck while building your new business so make sure you have a decent cash reserve set aside before you leave your job. Many small businesses can take a year or more to become profitable so it pays to be prepared. Restrict expenditures to only items that are absolutely necessary. Consider using credit cards and/or lines-of-credit to buy furniture, inventory and other essentials for your business to conserve cash. The use of credit should, of course, be monitored closely to ensure that you don't get in over your head. Note: arrange for adequate credit before you quit, as the same credit may be difficult to get once you lose your employee status and become self-employed.

Keep your health insurance. Finding the right health insurance as a self-employed individual can take time. If your spouse has insurance through his/her employer, you may be able to be added to that policy. However, if you would like to continue with your current insurance, consider making a COBRA election with your employer to get coverage for up to 18 months following the end of your employment with the company. Contact the benefits department of your company for more information about terms and pricing.

Note. The American Recovery and Reinvestment Tax Act of 2009 alters COBRA coverage for individuals who are involuntarily separated from their employment between September 1, 2008 and January 1, 2010. Eligible individuals may elect to pay 35 percent of his or her COBRA coverage, with the former employer required to pay the remaining 65 percent under a reimbursement arrangement with the federal government.

The decision to go out on your own can be exciting and unsettling at the same time, but if you prepare well before you leave your job, your chances of a smooth transition should greatly increase. Please let us know if you need any assistance or support in this area.

The rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.

The rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.

Your best weapon to combat illegal access is a password system. Once it is installed, take the following steps to support it and ensure its effectiveness:

Create password guidelines. Clearly worded and easily accessible password guidelines can nip a computer security problem in the bud. Keep in mind that an outside hacker does only 15 percent of computer break-ins - 85% of such security breaches comes from inside, usually from disgruntled employees.

Create a clear access rights policy and be sure everyone knows what it is. Certain levels and certain positions will have rights to specified parts of the system. Review log-in registers to see if a change in pattern pops up. Investigate anything suspicious immediately.

Control remote access. An off-the-shelf program, such as a firewall or encryption program, will add the security you need. A firewall system will allow access only to specific programs from the outside. Unfortunately, it's often the protected information your workers need. Encryption programs use codes to "scramble" data. Although persistent hackers can crack codes, these programs can make your information relatively safe.

If you take these steps to better your company's data security, you can be certain that the investment will pay off in the end. If you have any further questions, please feel free to contact our office.

You're 57 years old and as part of an early retirement package, you've just been offered a large cash bonus and salary continuation, along with a lump sum payment from the company retirement plan and continuing medical benefits. Is this a dream come true or a potential financial nightmare?

You're 57 years old and as part of an early retirement package, you've just been offered a large cash bonus and salary continuation, along with a lump sum payment from the company retirement plan and continuing medical benefits. Is this a dream come true or a potential financial nightmare?

Corporate downsizing is a fact of life for America's workforce. As companies look to reduce their payroll, many older employees are offered early retirement packages. When faced with the possibility of early retirement, many factors must be considered in order to make an informed decision.

Can you really afford to retire?

If your retirement package is offered to you 10 years before you had planned to retire, you may have to find another job or start your own business in order to make ends meet. In general, you will need between 70 and 80 percent of your pre-retirement salary to maintain your present standard of living once you retire. This can be achieved through a combination of your company pension, Social Security benefits and any other sources of continuing income that you may have. If your health is good and you would like to continue to work elsewhere, maintaining your current lifestyle after early retirement may be possible. You would need to have other sufficient financial resources to draw upon.

Will early retirement negatively affect your long-term retirement benefits?

In many cases, accepting an early retirement package can mean sacrificing some pension benefits. This is because these benefits are usually based on a formula that considers how many years on the job you have and your salary in the last few years of employment. To make your early retirement package more appealing, some employers add years to your age or time on the job when making the calculation. It's important to get educated on how your employer deals with this potentially costly issue.

Is this the best package you can get?

What is the reason behind the company offering you an early retirement package? Is it possible that you may get a larger payoff or more benefits if you were to wait six months or a year? Or do you risk losing your job as part of a larger layoff? Is your company hiring or downsizing? Evaluate the company's motivation for offering you an early retirement plan as part of your decision process to avoid regrets later.

Are you ready to retire?

For some people, going to the office every day gives them a sense of purpose and structure in their life. Once you retire, your familiar daily routine is gone and you must find ways to fill your days. Some people flourish with the extra time now available to pursue their other interests and hobbies such as travel, exercise, or charitable work. For others, though, the loss of routine and structure in their lives can be devastating. If you do not plan to continue working, make sure that you are prepared to change your daily routine when considering early retirement.

Before you decide whether or not to accept an early retirement package, please feel free to contact our office. We would be happy to assist you as you explore your options.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

An LLC is a legal entity existing separately from its owners that has certain characteristics of both a corporation (limited liability) and a partnership (pass-through taxation). An LLC is created when articles of organization (or the equivalent under each state rules) are filed with the proper state authority, and all fees are paid. An operating agreement detailing the terms agreed to by the members usually accompanies the articles of organization.

Choosing the LLC as a Business Entity

Choosing the form of business entity for a new company is one of the first decisions that a new business owner will have to make. Here's how LLCs compare to other forms of entities:

C Corporation: Both C corporations and LLCs share the favorable limited liability feature and lack of restrictions on number of shareholders. Unlike LLCs, C corporations are subject to double taxation for federal tax purposes - once at the corporate level and the again at the shareholder level. C corporations do not have the ability to make special allocations amongst the shareholders like LLCs.

S Corporation: Both S corporations and LLCs permit pass-through taxation. However, unlike an S corporation, an LLC is not limited to the number or kind of members it can have, potentially giving it greater access to capital. LLCs are also not restricted to a single class of stock, resulting in greater flexibility in the allocation of gains, losses, deductions and credits. And for estate planning purposes, LLCs are a much more flexible tool than S corporations

Partnership: Partnerships, like LLCs, are "pass-through" entities that avoid double taxation. The greatest difference between a partnership and an LLC is that members of LLCs can participate in management without being subject to personal liability, unlike general partners in a partnership.

Sole Proprietorship: Companies that operate as sole proprietors report their income and expenses on Schedule C of Form 1040. Unlike LLCs, sole proprietors' personal liability is unlimited and ownership is limited to one owner. And while generally all of the earnings of a sole proprietorship are subject to self-employment taxes, some LLC members may avoid self-employment taxes under certain circumstances

Tax Consequences of Conversion to an LLC

In most cases, changing your company's form of business to an LLC will be a tax-free transaction. However, there are a few cases where careful consideration of the tax consequences should be analyzed prior to conversion. Here are some general guidelines regarding the tax effects of converting an existing entity to an LLC:

C Corporation to an LLC: Unfortunately, this transaction most likely will be considered a liquidation of the corporation and the formation of a new LLC for federal tax purposes. This type of conversion can result in major tax consequences for the corporation as well as the shareholders and should be considered very carefully.

S Corporation to an LLC: If the corporation was never a C corporation, or wasn't a C corporation within the last 10 years, in most cases, this conversion should be tax-free at the corporate level. However, the tax consequences of such a conversion may be different for the S corporation's shareholders. Since the S corporation is a flow-through entity, and has only one level of tax at the shareholder level, any gain incurred at the corporate level passes through to the shareholders. If, at the time of conversion, the fair market value of the S corporation's assets exceeds their tax basis, the corporation's shareholders may be liable for individual income taxes. Thus, any gain incurred at the corporate level from the appreciation of assets passes through to the S corporation's shareholders when the S corporation transfers assets to the LLC.

Partnership to LLC: This conversion should be tax-free and the new LLC would be treated as a continuation of the partnership.

Sole proprietorship to an LLC: This conversion is another example of a tax-free conversion to an LLC.

While considering the potential tax consequences of conversion is important, keep in mind how your change in entity will also affect the non-tax elements of your business operations. How will a conversion to an LLC effect existing agreements with suppliers, creditors, and financial institutions?

Taxation of LLCs and "Check-the-Box" Regulations

Before federal "check-the-box" regulations were enacted at the end of 1996, it wasn't easy for LLCs to be classified as a partnership for tax purposes. However, the "check-the-box" regulations eliminated many of the difficulties of obtaining partnership tax treatment for an LLC. Under the check-the-box rules, most LLCs with two or more members would receive partnership status, thus avoiding taxation at the entity level as an "association taxed as a corporation."

If an LLC has more than 2 members, it will automatically be classified as a partnership for federal tax purposes. If the LLC has only one member, it will automatically be classified as a sole proprietor and would report all income and expenses on Form 1040, Schedule C. LLCs wishing to change the automatic classification must file Form 8832, Entity Classification Election.

Keep in mind that state tax laws related to LLCs may differ from federal tax laws and should be addressed when considering the LLC as the form of business entity for your business.

Since the information provided is general in nature and may not apply to your specific circumstances, please contact the office for more information or further clarification.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• • Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
  • You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• • You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• • Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• • Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
  • Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

Medical Expenses

Medical expenses that you pay during the tax year for yourself, your spouse, and your dependents are deductible to the extent the total exceeds 7.5% of your adjusted gross income. This limitation can be hard to reach if you claim only medical insurance premiums and the co-pay on your kid's doctors' visits. Keep these potential deductions in mind as you tally up this year's medical expenses:

To maximize your deduction, try to bunch your medical expenses into one year to exceed the 7.5% limit. For example, schedule costly elective medical and dental treatments to be performed and billed in the same tax year.

Taxes Paid

Many of the taxes that you pay such as real estate taxes for your home, state and local taxes, and auto registration fees are deductible as itemized deductions on your return. Don't forget these:

Interest Expense

Although in recent years Congress has made the tax laws regarding interest deductions more strict, much of the interest that you pay during the year is still deductible. For interest paid to be deductible, you must be legally responsible for the underlying debt and the debt must result from a valid debtor-creditor relationship. While gathering your home mortgage interest numbers, dig a little deeper to get this inf

Since personal interest paid on credit cards and other unsecured loans is not deductible, it may be wise to make that interest deductible by paying off that debt with a home-equity loan. Interest on home-equity loans of up to $100,000 is generally deductible on your return.

Miscellaneous Expenses

Miscellaneous itemized deductions such as unreimbursed employee business expenses and tax preparation fees are deductible to the extent that the total of all of these expenses is more than 2% of your adjusted gross income. Here's a few more to add to the list:

Take the time this year to evaluate all of your expenditures made last year; you may be pleasantly surprised by what you find.

A. When you contribute an auto to a charitable organization, you must determine its fair market value at the time of the contribution to determine the amount of the charitable deduction on your tax return. For a contribution valued at over $5,000, a written appraisal is required and must be attached to the return.

While guides like the Kelly Blue Books are helpful and can provide a good estimate of the value of your auto, the values shown are not "official" and do not qualify as an appraisal of any specific donated property. Once a qualified appraisal of the property has been secured, you must complete Section B of Form 8283 for each item or group of items for which you claim a deduction of over $5,000. The organization that received the property must complete and sign Part IV of Section B. Failure to properly report the contribution on Form 8283 or attach the appraisal report can result in the IRS disallowing your deduction for your noncash charitable contribution. Please note that appraisal fees do not increase your charitable deduction but are miscellaneous itemized deductions on Schedule A of Form 1040.