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President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.

The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.

The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.

"In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force," the agency posted to its website on January 24, 2025. "However, reporting companies may continue to voluntarily submit beneficial ownership information reports."

The posting follows a Supreme Court order stating on January 23, 2025, that the injunction put in place by the United States District Court for the Eastern District of Texas on December 5, 2024, was removed.

Justice Ketanji Brown Jackson offered a dissenting opinion on lifting the injunction.

"However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our interventions," Justice Jackson wrote, citing two reasons: the Fifth Circuit Court of Appeals has already expedited the hearing of the case and the government has deferred the implementation of the regulations on its own accord.

"The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course," Justice Jackson added.

By Gregory Twachtman, Washington News Editor

The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.

The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.

The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.

The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.

The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.

The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.

Background

Reg. §1.861-18 provides rules for classifying cross-border transactions involving digitized information, specifically computer programs, broadly grouped into the following categories:

• the transfer of a copyright;
• the transfer of a copyrighted article;
• the provision of services for the development or modification of a computer program; and
• the provision of know-how relating to the development of a computer program.

The 1998 final regulations focus on the distinction between the transfer of the copyright itself and transfer of a copyrighted article, using a substance-over-form characterization approach and by examining the underlying rights granted to the transferee. Transfers of copyrights and copyrighted articles are further characterized as complete or partial transfers, resulting in the transfers being characterized as either sales or licenses, in the case of a copyrights, or sales or leases, in the case of a copyrighted articles.

2025 Final Regulations

The 2025 final regulations maintain the basic framework for characterizing transfers of content and extend the characterization framework to digital content. Digital content is generally defined as any computer program or other content protected by copyright law, not just transactions involving computer programs.

The categories of transactions include:

• the transfer of a copyright in the digital content;
• the transfer of a copy of the digital content (a copyrighted article);
• the provision of services for the development or modification of the digital content; and
• the provision of know-how relating to the development of digital content.

The 2025 final regulations also provide for cloud transactions and characterize the transactions as a provision of services.

Cloud transactions are generally defined as transactions through which a person obtains on-demand network access to computer hardware, digital content, or similar resources.

The 2025 final regulations replace the de minimis rule and the concept of arrangement with a predominant character rule that applies to both digital content transactions and cloud transactions. Under the rule, a transaction with multiple elements is characterized based on the predominant character of the transaction.

Request for Comments on 2025 Final Regulations

The Treasury and IRS are considering whether the characterization rules should apply to all provisions of the Code and have requested comments on any specific areas that would be affected, with examples if appropriate. Comments are also requested on any guidance that would be needed and the approach the guidance should take. In addition to general comments, the Treasury and IRS also request comments on the desirability and effect of applying the rules in specific areas and the guidance need.

Comments should be submitted 90 days after the Notice requesting comments is published in the Internal Revenue Bulletin, with consideration for comments submitted after that date that do not delay the guidance. Comments may be submitted electronically via the Federal eRulemaking Portal www.regulations.com or or by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-6, Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.

Proposed Sourcing Rules for Cloud Transactions

Gross income from a cloud transaction is sourced as services. Under the Code, gross income from the performance of services is sourced to the place where the service is performed.

To determine the place of performance, the proposed regulations would take into account the location of the employees and assets, including both tangible and intangible assets, that contribute to the provision of cloud transactions. The sourcing rules would apply on a taxpayer-by-taxpayer basis.

The place of performance of a cloud transactions is established through a formula composed of a fraction that has three parts-the intangible property factor, the personnel factor, and the tangible property factor. The factors make up the denominator of the fraction. The numerator is the sum of each portion of each factor that is from sources within the United States. The gross income from a cloud transaction multiplied by the fraction is the U.S. source portion of the gross income.

T.D. 10022

Proposed Regulations, NPRM REG-107420-24

Notice 2025-6

The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.

The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.

The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.

Energy Efficient Home Improvement Credit

The credit is limited to $2,000 per taxpayer per taxable year in the aggregate for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves or boilers.

Thus, a taxpayer could claim a total credit of $3,200 if they had sufficient expenditures in property categories (or a home energy audit) subject to the $1,200 limitation and in property categories subject to the $2,000 limitation.

Additionally, a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home, or for an addition to or renovation of an existing home, but not for a newly constructed home.

Residential Clean Energy Property Credit

One of the FAQs mentions that this credit is a nonrefundable personal tax credit. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability.

The credit is generally limited to 30 percent of qualified expenditures made for property placed in service between 2022 and 2032. However, the credit allowed for qualified fuel cell property expenditures is 30 percent of the expenditures, up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.

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The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.

The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.

Section 530 Safe Harbor

Section 530 provides that an employer will not be liable for federal employment taxes regarding an individual or class of workers if certain statutory requirements are met. Section 530 relief applies only if the taxpayer did not treat the individual as an employee for federal employment tax purposes for the period at issue, and meets each of the following requirements for that period:

• the taxpayer filed all required federal tax returns, including information returns, on a basis that is consistent with the taxpayer’s treatment of the individual as not being an employee (reporting consistency requirement);
• the taxpayer did not treat the individual or any individual holding a substantially similar position as an employee (substantive consistency requirement); and
• the taxpayer had a reasonable basis for not treating the individual as an employee (reasonable basis requirement).

Rev. Proc. 85-18, 1985-1 CB 518, provided instructions for implementing section 530 relating to the employment tax status of independent contractors and employees.

Updated Guidance

The updated guidance clarifies provisions in Rev. Proc. 85-18 regarding the definition of employee, the section 530 requirement for the filing of required returns, and the reasonable basis safe harbor rules. The updated guidance also includes new provisions that reflect certain statutory changes made to section 530 since 1986.

Among other things, the updated guidance amplifies guidelines in Rev. Proc. 85-18 which interpreted the word “treat” for purposes of determining whether a taxpayer did not treat an individual as an employee for section 530 purposes. Under the updated guidance, with respect to any individual, actions that indicate “treatment” of the individual as an employee for section 530 purposes include:

• withholding of income tax or FICA taxes from any payments made;
• filing of an original or amended employment tax return;
• filing or issuance of a Form W-2; and
• contracting with a third party to perform acts required of employers.

Provisions in Rev. Proc. 85-18 that explained how refunds, credits, abatements, and handling of claims applied to taxpayers who were under audit or otherwise involved in administrative or judicial processes with the IRS at the time of enactment of section 530 are no longer applicable and were not included in the updated guidance. Section 530 relief remains available at any stage in the administrative or judicial process if the requirements for relief are met.

Effect on Other Documents

Rev. Proc. 85-18, 1985-1 CB 518, is modified and superseded.

Rev. Proc. 2025-10

The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.

Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.

The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.

The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.

PFML Contributions

Mandatory contributions made by employers under PFML programs are classified as excise taxes deductible as ordinary and necessary business expenses under Code Sec. 164. These payments are deemed state-imposed obligations for the purpose of funding public programs and are not included in employees' gross income under Code Sec. 61. In contrast, mandatory contributions withheld from employees’ wages are treated as state income taxes under Code Sec. 164(a)(3). Employees may deduct these amounts on their federal tax returns if they itemize deductions, subject to the state and local tax (SALT) deduction cap under Code Sec. 164(b)(6).

The ruling further specifies the treatment of benefits paid under PFML programs. Family leave benefits, which provide wage replacement during caregiving periods, are included in the recipient’s gross income under Code Sec. 61 but are not considered wages for federal employment tax purposes under Code Sec. 3121. By comparison, medical leave benefits attributable to employee contributions are excluded from gross income under Code Sec. 104(a)(3). However, medical leave benefits attributable to employer contributions are partially taxable under Code Sec. 105 and are subject to FICA taxes.

The ruling also addresses scenarios where employers voluntarily cover portions of employees’ contributions, referred to as "employer pick-ups." Such pick-ups are treated as additional compensation, included in employees’ gross income under Code Sec. 61, and are subject to federal employment taxes. Employers, however, may deduct these payments as ordinary business expenses under Code Sec. 162.

To ensure compliance, the IRS requires states and employers to report benefits exceeding $600 annually under Code Sec. 6041 using Form 1099. Additionally, benefits subject to employment taxes must be reported on Form W-2.

The ruling modifies prior guidance and includes a transition period for 2025 to allow states and employers to adjust their systems to meet reporting and compliance requirements. This clarification provides a framework for managing the tax implications of PFML programs, ensuring consistent treatment across jurisdictions.

Effective Date

This revenue ruling is effective for payments made on or after January 1, 2025. However, transition relief is provided to the states, the District of Columbia, and employers from certain withholding, payment, and information reporting requirements for state-paid medical leave benefits paid made during calendar year 2025.

Effect on Other Guidance

Rev. Rul. 81-194, Rev. Rul. 81-193, Rev. Rul. 81-192, and Rev. Rul. 81-191 are amplified to include the holdings in this revenue ruling that are applicable to the facts in those rulings. Rev. Rul. 72-191, as modified by Rev. Rul. 81-192, is further modified.

Rev. Rul. 2025-4

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National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.

National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.

"Although the [Internal Revenue Service] has processed several hundred thousand claims in recent months, it was still sitting on a backlog of about 1.2 million claims as of October 26, 2024," Collins noted in her just released 2024 Annual Report to Congress. "Many claims have been pending for more than a year, and with the imminent start of the 2025 filing season, the IRS will shift its focus and resources to administering the filing season, resulting in even longer ERC processing delays."

Collins is calling on the IRS to provide more specific information with claims denials, more transparency on the timing of claims processing, and allowing taxpayers to submit documentation and seek an appeal before disallowing a claim that was not subject to an audit.

In addition to ERC processing, Collins identified delays in processing of tax returns as another serious problem taxpayers are facing, including delays associated with the more than 10 million paper 1040 returns and more than 75 million paper-filed returns and forms overall each year, as well as issues surrounding rejections of e-filed returns, most of which are valid returns. These delays end up delaying refunds and can be particularly hard on low-income filers who are receiving the Earned Income Tax Credit.

"We recommend the IRS continue to prioritize automating its tax processing systems, including by scanning all paper-filed tax returns in time for the 2026 filing season and processing amended tax returns automatically," the report states.

Another processing issue identified in the report deals with delays in processing and refunds for victims of identity theft.

Collins reported that the delays in addressing identity theft issues grew to 22 months in fiscal year 2024, affecting nearly 500,000 taxpayers.

"The IRS has advised us that it has begun to prioritize resolution of cases involving refunds over balance-due returns rather than following its traditional ‘first in, first out’ approach," the report states. "This is somewhat good news, but I strongly encourage the IRS to fix this problem once and for all during the coming year."

Other issues in the top 10 include:

• Taxpayer service is often not timely or adequate;
• The prevalence of tax-related scams;
• Employment recruitment, hiring, training, and retention challenges are hindering transformational change within the industry;
• The dependence on paper forms and manual document review in processing Individual Taxpayer Identification Numbers is causing delays and potential security risks;
• Limited taxpayer financial and tax literacy;
• The IRS’s administration of civil tax penalties is often unfair, inconsistently deters improper behavior, fails to promote efficient administration, and thus discourages tax compliance; and
• Changes to the IRS’s criminal voluntary disclosure practice requirements may be reducing voluntary compliance and negatively impacting the tax gap.

Collins also called on Congress to ensure the IRS receives adequate funding specifically for taxpayer services and technology upgrades, noting that many improvements that are highlighted in the report were made possible by the Inflation Reduction Act, which provided supplemental funding to the agency.

"Much of the funding has generated controversy – namely, the funding allocated for enforcement," the report notes. "But some of the funding has received strong bipartisan support – namely, the funding allocated for taxpayer services and technology modernization."

She reported that telephone service has improved dramatically, correspondence processing has improved dramatically, and in-person has become more accessible following the IRA funding, as well as technology improvements including increased scanning and processing of paper-filed tax returns electronically; increases in electronic correspondence; expansion of secure messaging; the ability to submit forms from mobile phones; and increases in both chatbot and voicebot technology.

"I want to highlight this distinction so that if Congress decides to cut IRA funding, it does not inadvertently throw the baby out with the bathwater," she reports.

By Gregory Twachtman, Washington News Editor

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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.