The IRS issued guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the further Russian invasion of Ukraine.

The IRS issued guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the further Russian invasion of Ukraine. Employer leave-based donation payments made by an employer before January 1, 2023, to Code Sec. 170(c) organizations to aid said victims (qualified payments) will not be treated as gross income, wages or compensation of the employees of the employer.

Similarly, employees electing or with an opportunity to elect to forgo leave that funds said qualified payments will not be treated as having constructively received gross income, wages, or compensation. Further, electing employees are not eligible to claim a charitable contribution deduction under Code Sec. 170 for the value of the forgone leave that funds said qualified payments.

During the National Small Business Week, May 1 to 7, the IRS highlighted tax benefits and resources tied to the theme for this year’s celebration: " Building a Better America through Entrepreneurship.".The IRS urged business taxpayers to take advantage of tax benefits for 2022, make estimated tax payments electronically, e-file payroll tax returns, and check out the Work Opportunity Credit.

During the National Small Business Week, May 1 to 7, the IRS highlighted tax benefits and resources tied to the theme for this year’s celebration: " Building a Better America through Entrepreneurship.".The IRS urged business taxpayers to take advantage of tax benefits for 2022, make estimated tax payments electronically, e-file payroll tax returns, and check out the Work Opportunity Credit.

The IRS urged business taxpayers to begin planning now to take advantage of the enhanced 100 percent deduction for business meals and other tax benefits available to them when filing their 2022 income tax return. For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. Further, more information about this provision is provided in IRS Publication 463, Travel, Gift, and Car Expenses.

Additionally, many business owners may qualify for the home office deduction, also known as the deduction for business use of a home. Usually, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Those eligible can figure the deduction using either the regular method or the simplified method. To choose the regular method, taxpayers can fill out and attach Form 8829, Expenses for Business Use of Your Home. Alternatively, business owners can choose the simplified method, based on a six-line worksheet found in the instructions to Schedule C, Profit or Loss from Business. Under both the regular and simplified methods, business expenses in excess of the gross income limitation are not deductible.

Further, the IRS informed taxpayers about a variety of other tax benefits often available to business owners. This includes business start-up expenses, qualified business income deduction and the health-insurance deduction for self-employed individuals. Finally, more information about these and other tax benefits is provided in Publication 535, Business Expenses.

Making Estimated Tax Payments Electronically

The IRS reminded all businesses to make estimated tax payments quarterly and that making them electronically is fast, easy and safe. Estimated tax is used to pay income tax and other taxes including self-employment tax and alternative minimum tax. If a taxpayer doesn’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty. However, generally, paying quarterly estimated taxes will lessen or even eliminate any penalties.

Further, the IRS informed that individuals, including sole proprietors, partners and S corporation shareholders, generally must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. For corporations, the threshold is $500 or more. Self-employed individuals and gig workers who also receive salaries and wages from an employer can avoid paying estimated tax by asking their employer to withhold more tax from their paycheck. They can check the Tax Withholding Estimator on the IRS website for more help. Individuals generally use Form 1040-ES to figure estimated tax while corporations generally use Form 1120-W.

Additionally, for estimated tax purposes, the year is divided into four payment periods. However, alternative payment periods are allowed if enough tax is paid in by the end of the quarter. Further, taxpayers can use the Electronic Federal Tax Payment System for all their federal tax payments. Individual Taxpayers can also create an IRS Online Account or use Direct Pay, a debit, credit card or digital wallet to make their estimated tax payments. The 2022 Form 1040-ES can help taxpayers estimate their first quarterly tax payment. Moreover, taxpayers may also send estimated tax payments with Form 1040-ES by mail. Finally, the IRS also provided a list of resources available to taxpayers, including the Small Business Tax Workshop and E-News for Small Businesses among others.

E-File Payroll Tax Returns

The IRS has urged small businesses to take advantage of filing their payroll tax returns and making tax payments electronically. Further, the IRS announced that payroll taxes include federal income tax withheld from employee wages, as well as both the employer and employee portions of Social Security and Medicare taxes. Payroll taxes also include the Federal Unemployment Tax.

Additionally, the IRS informed taxpayers that taxpayers who file on paper miss out on all the advantages of e-filing. E-filing saves time and is secure and accurate. The IRS acknowledges receipt of an electronically filed return within 24 hours. With electronic filing, any mistake is often discovered and fixed quickly. Additionally, employers choosing to e-file themselves will need to purchase IRS-approved software. Alternatively, the Authorized IRS e-file Providers Locator Service can help employers find a suitable tax professional.

Finally, the IRS informed that though some employers can choose to pay their taxes when they file their payroll tax returns, most need to deposit them regularly with the Treasury Department instead. Federal tax deposits must be made by electronic funds transfer (EFT). A fast, easy and free way to do that is through the Electronic Federal Tax Payments System (EFTPS). Payments can be made either online or by phone. To enroll or for more information, taxpayers can visit EFTPS.gov or call 800-555-4477.

Work Opportunity Tax Credit

The IRS reminded employers to check out the Work Opportunity Tax Credit (WOTC) for hiring long-term unemployment recipients and other group of workers facing significant barriers to employment. The WOTC encourages employers to hire workers certified as members of any of ten targeted groups facing barriers to employment. The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. Further, the IRS also provided a list of the ten groups mentioned above.

Additionally, the IRS announced that to qualify for the credit, an employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency (SWA). It must be submitted to the SWA within 28 days after the eligible worker begins work. Further, employers can help new hires by making sure they have the right amount of tax taken out of their pay and encourage them to use the Tax Withholding Estimator. This tool will also help them correctly fill out Form W-4, Employee’s Withholding Certificate.

The Financial Crimes Enforcement Network is behind but making progress on implementing the Anti-Money Laundering Act of 2020 (which includes the Corporate Transparency Act), FinCEN Acting Director Himamauli Das told Congress.

The Financial Crimes Enforcement Network is behind but making progress on implementing the Anti-Money Laundering Act of 2020 (which includes the Corporate Transparency Act), FinCEN Acting Director Himamauli Das told Congress.

According to written testimony provided to the House Committee on Financial Services prior to an April 28, 2022, hearing, Das noted that "timely and effective implementation of the AML Act, which includes the CTA, is a top priority," but he also acknowledged that "we are missing deadlines, and we will likely continue to do so" due to lack of funding from the government forcing the agency to make prioritization decisions, promoting Dim to advocate for Congress to accept the White House budget request of $210.3 million for fiscal year 2023.

That being said, Das highlighted the implementation progress to date.

"The AML Act has helped put FinCEN in the position to address today’s challenges, such as illicit use of digital assets, corruption, and kleptocrats hiding their ill-gotten gains in the U.S. financial system, including through American shell companies and real estate."

Combating the latter is a key focus of the activity surrounding the Corporate Transparency Act that the agency is undertaking. The CTA "will establish a beneficial ownership reporting regime to assist law enforcement in unmasking shell companies used to hide illicit activities," Das said, adding that beneficial ownership information "can add valuable context to financial analysis in support of law enforcement and tax investigations" in addition to providing information to the intelligence and national security professionals protecting the nation.

FinCEN has three regulations planned to implement the CTA, the first of which was published in the Federal Register in December 2021 as a notice of proposed rulemaking and is focused on the reporting requirements of beneficial ownership. The agency is currently reviewing the more than 240 comments received on this NPRM. Das said the timing of when the rule would be finalized "is not clear yet. It is a complex rulemaking that we need to get right—both for law enforcement and because of the effect that it will have on stakeholders such as small businesses and financial institutions."

The second NPRM under development will rules around access to beneficial ownership information by law enforcement, national security agencies, financial institutions, and other relevant stakeholders. That proposed rule is expected to be issued this year.

Finally, FinCEN also is working on a revision to the Customer Due Diligence regulation, which must be issued one year after the reporting requirement rule goes into effect. Dim did not provide a timeframe for when that proposal would be available for comment.

The agency also is developing a beneficial ownership database, known as the Beneficial Ownership Secure System.

"These beneficial ownership reporting obligations will make our economy—and the global economy—stronger and safer from criminals and national security threats," Das said.

FinCEN also is looking at the real estate market to close gaps in the nation’s anti-money laundering framework. Din referenced an advanced notice of proposed rulemaking that was issued in December 2021 to solicit comments on developing a rule to address money-laundering vulnerabilities in the real estate market. The ANPRM generated 150 comments and will ultimately lead to a proposed rule, although he said that "it is still too early to identify the scope of any NPRM or final rule."

The agency also is examining how to use its information collection authorities to enhance transparency and understand money laundering and terrorism financing through investment advisers.

"Even though investment advisers in the United States are not expressly subject to AML/CFT requirements under BSA [Bank Secrecy Act] regulations, investment advisers may fulfill some AML/CFT obligations in certain circumstances," Das said. "For example, investment advisers may perform certain AML/CFT functions because they are a part of a bank holding company, are affiliated with a dually-registered broker-dealer, or share joint custody with a BSA-regulated entity such as a mutual fund."

The testimony outlines a number of other AML Act requirements that the agency is working on, including understanding minimum standards for AML/CFT programs, certain information sharing requirements, technology, and training requirements and other modernization efforts.

"The FinCEN team is working diligently with law enforcement and regulatory stakeholders to promulgate rules and take other steps under the legislation that will further the national security of the United States and promote a more transparent financial system," Das concluded.

The IRS has reminded taxpayers to create or review emergency preparedness plans for surviving natural disasters. The Service has designated the month of May to include National Hurricane Preparedness Week and National Wildfire Awareness Month.

The IRS has reminded taxpayers to create or review emergency preparedness plans for surviving natural disasters. The Service has designated the month of May to include National Hurricane Preparedness Week and National Wildfire Awareness Month. Further, the IRS has advised taxpayers to:

• secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space, make their copies and scanning them for backup storage on electronic media such as a flash drive;
• record all property, especially expensive and high value items. The IRS disaster-loss workbooks in Publication 584 can help individuals and businesses compile lists of belongings or business equipment;
• employers who use payroll service providers should check fiduciary bonds as they could protect the employer in the event of default by the payroll service provider; and
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement. Further, taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

Additionally, the Service has urged taxpayers to not call the IRS to request disaster relief because it automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers impacted by a disaster with tax-related questions can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Taxpayers who do not reside in a covered disaster area, but suffered impact from a disaster should call 866-562-5227 to find out if they qualify for disaster tax relief and to discuss other available options. Moreover, taxpayers can find complete disaster assistance and emergency relief details for both individuals and businesses on the Service’s Around the Nation webpage. Lastly, the taxpayers can also visit the FEMA Prepare for Disasters web page to Build a Kit of emergency supplies.

Treasury Secretary Janet Yellen is calling on the United States and the European Union to get the global corporate minimum tax into law in their respective territories.

Treasury Secretary Janet Yellen is calling on the United States and the European Union to get the global corporate minimum tax into law in their respective territories.

The "EU and the United States must show leadership by expeditiously implementing the global minimum tax in our domestic laws," Yellen told attendees May 17, 2022, at the Brussels Economic Forum, according to her prepared remarks distributed by the Department of the Treasury.

Yellen’s remarks promoted the Organisation for Economic Co-operation and Development agreement signed by 137 countries that would, among other things, set the global corporate minimum tax at 15 percent.

"Once implemented, we can put the revenues produced by this deal toward funding investments to make our economies more sustainable and fairer—not just in the United States and the EU, but also in emerging and developing countries," she said. "And by moving together we will raise these revenues in a way that levels the playing field. Businesses will be able to compete on economic fundamentals, rather than on tax incentives, thereby contributing to our collective prosperity."

According to the Department of the Treasury, Yellen met with European Commission President Ursula von der Leyen, European Commission Executive Vice President Valdis Dombrovskis and European Commissioner for the Economy Paolo Gentiloni and identified ways to move forward on the international tax reform agreement, although those specific details were not made public. Her remarks also noted that in addition to addressing the global corporate minimum tax issues, known as Pillar 2 of the agreement, "[w]e must resolve the open issues in Pillar 1 so that the multilateral treaty can be ready for signature," although the specific issues that need resolution were not identified in the speech.

"Pillar 1 of this deal, focused on the taxation of digital services, puts an end to trade tensions between the EU and the United States that threaten our companies with multiple layers of taxation and our consumers with rising costs from tariffs."Yellen said. "That dynamic isn’t good for anyone."

She continued: "Pillar 1 will also update and stabilize the international tax architecture, providing a fairer allocation of revenues than the status quo and tax certainty that is good for business and investment. Rather than facing harmful unilateral measures, companies will be able to plan and thus invest their capital efficiently."

The Internal Revenue Service continues to struggle with issues related to staff shortages, the Treasury Inspector General for Tax Administration said.

The Internal Revenue Service continues to struggle with issues related to staff shortages, the Treasury Inspector General for Tax Administration said.

In a May 2, 2022, interim report on the 2022 filing season, the IG stated that "significant staffing shortages continue to hamper the IRS’s efforts to address backlog inventories and continue to affect the IRS’s ability to ensure that current year tax returns are processed timely."

The data in the report comes from March and predates a number of appearances of IRS Commissioner Charles Rettig before Congress where he has pledged that barring another significant spike in the pandemic or some other unforeseen issue, the backlogged inventories will be back to "healthy" by the end of the year.

The report highlights the agency’s overall "IRS Get Healthy Initiatives" and states the IG will be performing separate reviews on how the agency is addressing the backlog as well as hiring shortfalls.

The IG reported that as of March 15, 2022, the IRS onboarded 521 submission processing employees, or 9.5 percent of the hiring goal of 5,437, although Rettig has testified before Congress that in-person and virtual job fairs have yielded higher numbers since then and those hired should be onboarded and complete their training in June. The IG also reported that as of March 17, 2022, the agency onboarded 3,827 accounts management employees, or 76.5 percent of the hiring goal of 5,000 for the 2022 tax season.

Five staffing concerns were highlighted by the report, including:

• The use of a seasonal workforce that does not provide permanent employment or desirable schedules and shifts;
• Entry-level salaries that are lower than what can be obtained in private industry;
• Applicants who apply for multiple jobs, reducing the true number of candidates available to fill vacancies;
• Applicants who fail to respond to or pass pre-screnning or do not show up to work after they have been hired; and
• Long onboarding times.

IG estimates that as of the week ending March 12, 2022, there are nearly 5 million paper tax returns that still need to be processed. Through March 4, for the 2022 filing season, the IRS received nearly 55 million returns, including 1.5 million paper returns, which is 15 percent lower than the paper returns received in roughly the same window (March 5, 2021) during the previous year’s tax filing season.

As of March 4, the IRS has issued about 38 million refunds totaling $129.2 billion. Both represent increases from the same time in the previous tax filing season through March 5 that had about 36 million refunds issued totaling $107.8 billion.

Rettig Defends Budget Request Before Senate Appropriations Committee

Internal Revenue Service Commissioner Charles Rettig appeared May 3 before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee to defend the White House budget request for fiscal year 2023.

During the hearing, Commissioner Rettig testified on a number of the usual topics, noting the backlog of unprocessed returns and other written correspondence should be at a "healthy" level by the end of the year, assuming no other spikes in the pandemic or other unanticipated issues, as well as improvements to the workforce due to direct hiring authority granted by Congress, and the need for more funding to update and improve the IT infrastructure. He also touched on the need for more enforcement personnel to help close the tax gap, reiterating that enforcement will be targeted toward the wealthy who are avoiding paying taxes and not the low and middle income taxpayers.

A recent report by the Treasury Inspector General for Tax Administration primarily focused on the need for the Internal Revenue Service to expand its electronic filing capabilities also noted that the agency has destroyed some 30 million paper-filed documents in 2021.

A recent report by the Treasury Inspector General for Tax Administration primarily focused on the need for the Internal Revenue Service to expand its electronic filing capabilities also noted that the agency has destroyed some 30 million paper-filed documents in 2021.

"The continued inability to process backlogs of paper-filed tax returns contributed to management’s decision to destroy an estimated 30 million paper-filed information return documents in March 2021," the report, dated May 4, 2022, states. "The IRS uses these documents to conduct post-processing compliance matches such as the IRS’s Automated Underreporter Program to identify taxpayers not accurately reporting their income."

IRS said in a May 13 statement that the documents destroyed were document "submitted to the IRS by third-party payors, not taxpayers. 99 percent of the information returns we used were matched to corresponding tax returns and processed. The remaining 1 percent of those documents were destroyed due to a software limitation and to make room for new documents relevant to the pending 2021 filing season."

The agency added that there were "no negative taxpayer consequences as a result of this action. Taxpayers or payers have not been and will not be subject to penalties resulting from this action."

The IG report adds that agency management "advised us that once the tax year concludes, the information returns, e.g. Forms 1099-Miscellaneous Information, can no longer be processed due to system limitations. This is because the system used to process these information returns is taken offline for programming updates in preparation for the next filing season."

More E-Filing Needed

The revelation comes as the IG calls for more documents to be able to electronically filed.

Indeed, the first recommendation of the report was that IRS "develop a Service-wide strategy to prioritize and incorporate all forms for e-filing," a recommendation the IRS agreed with.

To put the need in context, the IG report highlights the cost of processing a paper return compared to an electronically filed return in 2020. For example, an individual Form 1040 costs 36 cents to process if the form that was filed electronically, but increases to $15.21 if the Form 1040 was filed in paper form. A Form 1041 costs 37 cents to process electronically and $14.02 to process a paper return.

E-filed returns also allow for "a number of upfront validations that check for more than 1,000 possible errors before the IRS accepts an e-filed tax return for processing" giving e-filed returns a greater degree of accuracy, compared to a paper return that requires an individual to keypunch all the details, a key contributor to the backlog of processing during the COVID-19 pandemic.

And while the agency has been relatively successful in getting individuals to electronically file their returns (a 93.4 percent e-file rate in 2020), it is not having the same success in getting businesses to do the same (63.3 percent e-file rate in 2020). That number goes down to 49 percent when looking at employment tax returns.

IG noted that the agency has not taking previously recommended actions, including:

• Developing a business tax return e-filing Service-wide strategy;
• Developing a less burdensome electronic signature process for employment tax returns; and
• Working with the Department of the Treasury to consider revising current requirements and/or creating new requirements for e-filing business returns.

IG also called upon the IRS to be more active in identifying business who are non-compliant with e-filing mandates and assessing the noncompliance penalties. The report noted that in 2018, there were 897 corporate taxpayers that were mandated to e-file but still filed paper returns. The agency could have assessed more than $2.4 million in penalties that were not assessed on these corporate filers.

The report notes that IRS did not take actions to assess penalties "because of potential implementation issues," an excuse the IG Office of Audit called "insufficient. The IRS could develop processes and procedures to identify these filers post-filing. In view of the paper backlogs of paper tax returns, the IRS should take additional steps in an effort to continue to reduce paper filings."

WASHINGTON–The Internal Revenue Service’s Independent Office Of Appeals has seen its cycle times for handling appeals cases stretch to more than year during the COVID-19 pandemic, but the office is working to get it back to pre-pandemic levels.

WASHINGTON–The Internal Revenue Service’s Independent Office Of Appeals has seen its cycle times for handling appeals cases stretch to more than year during the COVID-19 pandemic, but the office is working to get it back to pre-pandemic levels.

Speaking May 13, 2022, at the American Bar Association’s May Tax Meeting, office Chief Andy Keyso provided an update on where the agency stands as it, and the IRS as a whole, prepare for all offices to open for employees, as the end of June.

The cycle time for closed cases in fiscal year 2021 reached 372 days, up from 194 days in fiscal year 2018. Keyso noted that the upward trend started from there into FY 2019, where it increased to 229 days due to the government shutdown during that time, and then increased again in FY 2020 to 289 days during the first year of the pandemic that including a temporary shutdown as all employees were sent home and began working remotely.

Despite the increase, Keyso is optimistic that change can happen.

"I’m troubled by the increase in cycle time but I am not defeated by it," Keyso said. "I believe that it is reversible, and we will reverse it as we get people back in the office."

His optimism stems from the fact that while cycle times have gone up, it is not because more time is being spent on cases by appeals officers. That time hasn’t changed, he said. The problems are more a function of issues that are plaguing the agency as a whole since the start of the pandemic, including the backlog of processing written correspondence.

Getting that cycle time back down is one of the office’s priorities once people are back in their offices full time, Keyso said.

Cycle times went up despite declines in new case receipts by the office. In FY 2018, the office received 92,430 cases. That number dropped in the following two years to 85,286 in FY 2019 and then to 57,573 in FY 2020 before rebounding to 72,216 cases in the last fiscal year. As expected, total case closures follows a similar trend, with 94,832 cases getting closed in FY 2018, dropping down to 73,207 in FY 2019, and falling again to 62,997 in FY 2020. In the last fiscal year, 66,522 cases were closed.

Collection due process cases make up the most cases handled by the Independent Office of Appeals in FY 2021 (27,420), followed by examination cases (25,247) and then offers in compromise cases (6,858).

The Internal Revenue Service is not providing taxpayers with sufficient tools to manage their accounts online, National Taxpayer Advocate Erin Collins said.

The Internal Revenue Service is not providing taxpayers with sufficient tools to manage their accounts online, National Taxpayer Advocate Erin Collins said.

In an April 28, 2022, blog post, Collins stated that despite progress in the development of its online account application, "the IRS has yet to develop and adopt a one-stop solution for online and digital offerings that combine communications and interaction with individual and business taxpayers as well as with tax professionals."

Collins offered a number of solutions the IRS should be working on to help improve its virtual offerings, including:

• providing taxpayers with the ability to navigate to all IRS online information and services;
• making it simple for taxpayers to access various online tools;
• conditioning taxpayers to use Online Account application as the starting and ending point with their online interactions with the agency; and
• providing the option for those who are married and jointly file their tax returns to link their individual accounts.

Additionally, the IRS needs to offer a business version of the Online Account application to increase digital support for businesses that “at minimum” offers the same support features for individual taxpayers, Collins added.

For tax professionals, Collins said there is a need for better access by those professionals to their clients’ Online Account application from within the Tax Pro Account application.

"This one improvement would be significant for tax professionals in assisting taxpayers to meet their filing and payment obligations and provide much-needed assistance and guidance to them," she stated.

Collins also called for the IRS to integrate the "Where’s My Refund" tool into the Online Account application as well as prioritize improving its functionality to help decrease the call volume customer service representatives are dealing with.

The agency "needs to have robust online accounts available for all taxpayers and tax professionals that provide information, guidance, and the capability to work and resolve issues online," she stated.

You have carefully considered the multitude of complex tax and financial factors, run the numbers, meet the eligibility requirements, and are ready to convert your traditional IRA to a Roth IRA. The question now remains, however, how do you convert your IRA?

Conversion basics

A conversion is a penalty-free taxable transfer of amounts from a traditional IRA to a Roth IRA. You can convert part or all of the money in your regular IRA to a Roth. When you convert your traditional IRA to a Roth, you will have to pay income tax on the amount converted. However, a traditional IRA may be converted (or rolled over) penalty-free to a Roth IRA as long as you meet the requirements for conversion, including adjusted gross income (AGI) limits in effect until 2010. You should have funds outside the IRA to pay the income tax due on the conversion, rather than taking a withdrawal from your traditional IRA to pay for it - those withdrawals are subject to an early withdrawal penalty and they cannot be put back at a later time to continue to accumulate in the tax-free environment of an IRA.

Big news for 2010 and beyond

Beginning in 2010, you can convert from a traditional to a Roth IRA with no income level or filing status restrictions. For 2008, Roth IRAs are available for individuals with a maximum adjusted gross income of $116,000 ($169,000 for joint filers and heads of household). These income limits have prevented many individuals from establishing or converting to a Roth IRA. Not only is the income limitation eliminated after 2009, taxpayers who convert to a Roth IRA in 2010 can recognize the conversion amount in adjusted gross income (AGI) ratably over two years, in 2011 and 2012.

Example. You have $14,000 in a traditional IRA, which consists of deductible contributions and earnings. In 2010, you convert the entire amount to a Roth IRA. You do not take any distributions in 2010. As a result of the conversion, you have $14,000 in gross income. Unless you elect otherwise, $7,000 of the income is included in income in 2011 and $7,000 is included in income in 2012.

Conversion methods

There are three ways to convert your traditional IRA to a Roth. Generally, the conversion is treated as a rollover, regardless of the conversion method used. Any converted amount is treated as a distribution from the traditional IRA and a qualified rollover contribution to the Roth IRA, even if the conversion is accomplished by means of a trustee-to-trustee transfer or a transfer between IRAs of the same trustee.

1. Rollover conversion. Amounts distributed from a traditional IRA may be contributed (i.e. rolled over) to a Roth IRA within 60 days after the distribution.

2. Trustee-to-trustee transfer. Amounts in a traditional IRA may be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA. The financial institution holding your traditional IRA assets will provide directions on how to transfer those assets to a Roth IRA that is maintained with another financial institution.

3. Internal conversions. Amounts in a traditional IRA may be transferred to a Roth IRA maintained by the same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, in lieu of opening a new account or issuing a new contract. As with the trustee-to-trustee transfer, the financial institution holding the traditional IRA assets will provide instructions on how to transfer those assets to a Roth IRA. The transaction may be simpler in this instance because the transfer occurs within the same financial institution.

Failed conversions

A failed conversion has significant negative tax consequences, and generally occurs when you do not meet the Roth IRA eligibility or statutory requirements; for example, your AGI exceeds the limit in the year of conversion or you are married filing separately (note: as mentioned, the AGI limit for Roth IRAs will no longer be applicable beginning in 2010).

A failed conversion is treated as a distribution from your traditional IRA and an improper contribution to a Roth IRA. Not only will the amount of the distribution be subject to ordinary income tax in the year of the failed conversion, it will also be subject to the 10 percent early withdrawal penalty for individuals under age 59 1/2, (unless an exception applies). Moreover, the Tax Code imposes an additional 6 percent excise tax each year on the excess contribution amount made to a Roth IRA until the excess is withdrawn.

Caution - financial institutions make mistakes

The brokerage firm, bank, or other financial institution that will process your IRA to Roth IRA conversion can make mistakes, and their administrative errors will generally cost you. It is imperative that you understand the process, the paperwork, and what is required of you and your financial institution to ensure the conversion of your IRA properly and timely. Our office can apprise you of what to look out for and what to require of the financial institutions you will deal with during the process.

Determining whether to convert your traditional IRA to a Roth IRA can be a complicated decision to make, as it raises a host of tax and financial questions. Our office can help you determine not only whether conversion is right for you, but what method is best for you, too.

In a period of declining stock prices, tax benefits may not be foremost in your mind. Nevertheless, you may be able to salvage some benefits from the drop in values. Not only can you reduce your taxable income, but you may be able to move out of unfavorable investments and shift your portfolio to investments that you are more comfortable with.

First, you should keep in mind that gain and loss on a sale of stock or mutual fund shares depends on the fair market value of the shares when sold or disposed of, compared to the cost basis of the stock. Your investments may have lost substantial value over recent periods. Nevertheless, if the stock's value when sold is higher than the basis, you still have a gain.

Example. You purchased X Corp stock in 2004, when it cost $5. At the end of 2007, the stock is worth $12. In November, 2008, you sell the stock when its value is $8 a share. Even though your investment has declined in value by 33 percent, you have a gain of $3 a share on the sale ($8 sales price less $5 cost).

The same tax-basis situation that may cause capital gain on the sale of shares that have dropped significantly in value over the past year also is causing many owners of mutual funds that have declined in value to be surprised with a capital gains distribution notice from their fund managers. If you own the mutual fund shares at the time of the capital gain distribution date, you must recognize the gain. Of course, that gain may be netted against your losses from stock or other capital asset sales.

If you realize a profit on a stock sale, the long-term capital gains tax is a maximum of 15 percent, while taxes on wages and other ordinary income can be taxed as high as 35 percent. For taxpayers in the 10 or 15 percent rate brackets, there is no capital gains tax. These reduced capital gains rates are scheduled to expire after 2010. Short-term capital gains (investments held for one year or less) are taxed at ordinary income rates up to 35 percent.

Capital losses can offset capital gains and ordinary income dollar for dollar. Capital gains can be offset in full, whether short-term or long-term. Ordinary income can be offset up to $3,000. If net capital losses (capital losses minus capital gains) exceed $3,000, the excess can be carried forward without limit and can offset capital gains and $3,000 of ordinary income in each subsequent year.

Because a capital loss can offset income taxed at the 35 percent rate, it can be advantageous to sell stock that yields capital gains in one year, while delaying the realization of capital losses until the following year.

Example. Mary has two assets. One asset would yield a $6,000 long-term capital loss when sold. The other would yield a $6,000 long-term capital gain. If Mary sells both assets in the same year, she has a net capital gain of zero. If she realizes the gain in 2008 and the loss in 2009 (by selling the assets in different years), she will increase her 2008 taxes by a maximum of $900 ($6,000 X 15 percent), but will reduce her taxes in 2009 and 2010 by a maximum of $2,100 ($3,000 X 35 percent X 2 years). She will reduce her taxes by $1,200 merely by shifting the timing of the sales.

Worthless securities. You can write off the cost of totally worthless securities as a capital loss, but cannot take a deduction for securities that have lost most of their value from stock market fluctuations or other causes if you still own them and they still have a recognizable value. You do not have to sell, abandon or dispose of the security to take a worthless stock deduction, but worthlessness must be evidenced by an identifiable event. An event includes cessation of the corporation's business, commencement of liquidation, actual foreclosure and bankruptcy. Securities become worthless if the corporation becomes worthless, even if the corporation has not dissolved, liquidated or ceased doing business.

If you would like to discuss these issues, please contact our office. We can help you consider your options.

The high cost of energy has nearly everyone looking for ways to conserve and save money, especially with colder weather coming to many parts of the country. One surprising place to find help is in the financial markets rescue package (the Emergency Economic Stabilization Act of 2008) recently passed by Congress. Overshadowed by the financial provisions are some very important energy tax incentives that could save you money at home and in your business.

While the energy tax incentives in the new law are generous, they are also complex. The names of the tax credits and deductions themselves can be daunting. Don't be put off by all the complex rules. Our office can help you navigate them and take advantage of their benefits.

Individuals

Improvements. If you are thinking of installing insulation or new energy-efficient windows and doors, you may be eligible for the residential energy property credit. This credit (also known as the Code Sec. 25C credit) gives eligible taxpayers a lifetime credit of up to $500 for making energy-efficient improvements to their residences. Up to $200 of the credit can be taken for the cost of windows. Besides insulation and energy-efficient windows and doors, some electric heat pump water heaters, natural gas, propane and oil furnaces, and other items qualify. The credit limits and energy-efficiency ratings are very complex so please contact our office before you make a purchase. We don't want you to miss out on a potentially valuable tax break. However, because of a quirk in the new law, the residential energy property credit is not available for 2008. However, you can take advantage of it in 2009.

Alternative energy. This credit (also known as the Code Sec. 25D credit) sounds a lot like the credit for energy efficient property but it is different. The key word in the title of the credit is "alternative." This credit rewards individuals who install certain types of alternative energy systems in their homes, particularly systems that utilize solar power and wind energy. These include solar electric, solar water heating, small wind energy, and geothermal heat pump property. Generally you must install the property before the end of 2016.

Businesses

Solar and wind power. Businesses are also eligible for some valuable energy tax breaks. Businesses that install solar energy and small wind energy property can take advantage of special tax credits that can reach as high as 30 percent. Generally, the solar or wind energy property must be used to generate electricity that heats, cools or lights a building.

Improvements. There is also a special tax deduction for energy efficient improvements made to commercial buildings. Generally, the improvements to heating, cooling, ventilation, lighting, and other qualifying systems must significantly reduce annual energy costs. Many of the new heating, cooling and lighting systems currently on the market meet these standards. If you recently installed new heating, cooling or lighting systems, you may have qualified for a tax break without even knowing it.

Manufacturers and builders. Manufacturers of energy efficient appliances, such as washing machines and refrigerators, are eligible for special tax credits. Additionally, contractors that build energy efficient homes can take advantage of tax breaks.

Transportation

In the not too distant future, you may be able to purchase a plug-in electric vehicle. In anticipation of that day, Congress created a new plug-in electric vehicle tax credit. The credit is available to everyone: individuals and businesses. Electric plug-in vehicles could be on the market as soon as 2010 so keep this tax break in mind if you shop for one.

These are just the highlights of some of the many energy tax incentives in the new law. Please contact our office for more details.

Nonbusiness creditors may deduct bad debts when they become totally worthless (i.e. there is no chance of its repayment). The proper year for the deduction can generally be established by showing that an insolvent debtor has not timely serviced a debt and has either refused to pay any part of the debt in the future, gone through bankruptcy, or disappeared. Thus, if you have loaned money to a friend or family member that you are unable to collect, you may have a bad debt that is deductible on your personal income tax return.

The fact that the debtor is a family member or other related interest does not preclude you from taking a bad debt deduction, provided that the debt was bona fide and that worthlessness has been established. A direct or indirect transfer of money between family members may create a bona fide debt eligible for the bad debt deduction. However, these transactions are closely scrutinized to determine whether the transfer is a bona fide debt or a gift.

Bona-fide debt and other requirements for deductibility

You may only take a bad debt deduction for bona-fide debts. A bona-fide debt is a debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. You must also have the present intention to seek repayment of the debt. Additionally, for a bad debt you must also show that you had the intent to make a loan, and not a gift, at the time the money was transferred. Thus, there must be a true creditor-debtor relationship.

Moreover, nonbusiness bad debts are only deductible in the year they become totally worthless (partially worthless nonbusiness bad debts are not deductible).

To deduct a bad debt, you must also have a basis in it, which means that you must have already included the amount in your income or loaned out your cash (for example, if your spouse has not paid court-ordered child support, you can not claim a bad debt deduction for the amount owed as this amount was not previously included in your gross income).

Reporting bad debts

You can deduct nonbusiness bad debts as short-term capital losses on Schedule D of your Form 1040. On Schedule D, Part I, Line 1, enter the debtor's name and "statement attached" in column (a). Enter the amount of the bad debt in parentheses in column (f). If you are reporting multiple bad debts, use a separate line for each bad debt. For each bad debt, attach a statement to your return containing the following:

•  A description of the debt, including the amount and date it became due;
• The name of the debtor, and any business or family relationship between you and the debtor:
• The efforts you made to collect the debt; and
• An explanation of why you decided the debt was worthless (for example, you can show the debtor has declared bankruptcy or is insolvent, or that collection efforts such as through legal action will not likely result in the debt being paid).

If you did not deduct a bad debt on your original income tax return for the year it became worthless, you can file a refund claim or a claim for a credit due to the bad debt. You must use Form 1040X to amend your return for the year the debt became worthless. It must be filed with 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.

Note. If you deduct a bad debt and in a later year collect all or part of the money owed, you may have to include this amount in your gross income. However, you can exclude from your gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year you deducted the debt.

With the U.S. and world financial markets in turmoil, many individual investors may be watching the value of their stock seesaw, or have seen it plummet in value. If the value of your shares are trading at very low prices, or have no value at all, you may be wondering if you can claim a worthless securities deduction for the stock on your 2008 tax return.

Capital or ordinary loss treatment

When stock you own in a corporation becomes totally worthless during the tax year, you may be able to report a loss in the stock equal to its tax basis. Generally, a worthless stock loss is characterized as a capital loss because securities like stock that become worthless are usually treated as capital assets. When a security that is not a capital asset becomes wholly worthless, the loss is deductible as an ordinary loss. For example, if worthless stock is Code Sec. 1244 stock, ordinary loss treatment applies. Worthless stock is treated as if it was sold on the last day of the tax year.

Note. You may only deduct a loss on worthless securities if the loss is incurred in a trade or business, in a transaction entered into for profit, or as the result of a fire, storm, shipwreck, another casualty, or theft. It is generally assumed that an individual acquires securities for profit (although this assumption may be refuted).

Your stock is trading at $1.08 a share: Is it "worthlessness?"

A worthless stock deduction may only be taken when your securities have become totally worthless. You can not take the deduction for stock that has become only partially worthless. The Internal Revenue Code, however, does not define "worthlessness." Nonetheless, in the IRS's eyes, a company's stock is not going to be automatically considered worthless simply because the stock or security has plummeted in value and is now trading at mere dollars and cents.

With the current market turmoil, many stocks have taken big hits and dropped significantly in value, perhaps even trading for a $1.08 per share, but are nonetheless still alive and trading on an exchange. Therefore, you can not take a worthless stock deduction for a mere decline in value of stock caused by a fluctuation in market price or other similar cause, no matter how steep the decline, if your stock has any recognizable value on the date you claim as the date of loss. Even if a company in which you have stock files for bankruptcy, or lawsuits are filed against it, does not automatically qualify the stock or securities as worthlessness.

More hurdles to overcome

Even if you can establish that the stock you own has become totally worthless, the loss must be (1) evidenced by a closed and completed transaction, (2) fixed by identifiable events and (3) actually sustained during the tax year. First, you may only claim the deduction on your return for the tax year in which the stock has become completely worthless, and you must be able to show that the year in which you are claiming the loss is the appropriate tax year.

Generally, a worthless stock loss deduction can be taken in the year in which you abandon the stock. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security. But, whether the transaction qualifies as abandonment, and not an actual sale or exchange, is a facts and circumstances test.

If you would like to know whether the stock or other securities you own have become worthless, please contact our office. We can help you navigate these complex rules.

The Housing Assistance Tax Act of 2008 (2008 Housing Act) gave a boost to individuals purchasing a home for the first time with a $7,500 first-time homebuyer tax credit. The credit was enhanced from $7,500 to $8,000 and extended for certain purchases under the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act). This article explains how to determine the credit for eligible first-time homebuyers.

The $7,500 credit

The first-time homebuyer tax credit is a refundable, but temporary, tax credit equal to 10 percent of the purchase price of the residence, up to $7,500 for single individuals and married couples filing jointly, and $3,750 for married individuals who file separately. The $7,500 credit is only available for first-time purchases of primary residences (i.e. no second homes) made on or after April 9, 2008 and before July 1, 2009. To be eligible to claim the credit, however, an individual (or his or her spouse) must not have had any type of ownership interest in a principal residence during the three-year period before the date that the principal residence, for which the credit is to be taken, is purchased. You can claim a credit of up to either $7,500, or 10 percent of the purchase price, whichever is less.

The $8,000 credit under the 2009 Recovery Act

The 2009 Recovery Act raised the $7,500 maximum credit to $8,000, and extended that level through 2009 for eligible home purchases. The new law also eliminates any required repayment to the IRS after 36 months in the home. However, the enhanced $8,000 credit only applies to purchase of a principal residence made by a "first-time" homebuyer after December 31, 2008. Purchases on or after April 9, 2008 and before January 1, 2009 continue to be governed by the original first-time homebuyer credit enacted in the 2008 Housing Act.

The credit must be repaid in equal installments over the course of 15 years; the credit is interest-free. Repayments start two years after the year in which the residence is purchased. If the taxpayer sells or no longer uses the home as his or her principal residence before repaying the credit, the unpaid amount accelerates and becomes due on the return for the year in which the residence is sold or no longer used as a principal residence. The credit does not need to be repaid if the taxpayer dies. Special rules also exist for an involuntary conversion and a residence transferred in a divorce.

Example. Jim and Marsha, a married couple, are new homebuyers. They have never owned any other real property as a primary residence. Their combined modified adjusted gross income (AGI) is $74,600. They purchase their home in June 2009. Their first-time home purchase qualifies for the full $7,500 credit. They may file an amended 2008 return to claim the credit. Repayments of the $7,500 credit would begin in 2011.

Example. Mary and Tim are married joint filers who close title on a new home in February 2009. Their combined modified AGI is $100,000. They are entitled to claim the $8,000 first-time homebuyer tax credit. If they remain in the home for 36 months, they are not required to repay the credit to the government.

Phase-outs

The $7,500 and $8,000 credits both begin to phase-out for married couples with modified AGI between $150,000 and $170,000, and for single taxpayers with modified AGI between $75,000 and $95,000. However, the new credit benefits more than just single individuals and married couples, and can be taken by all co-owners, such as same-sex couples and family members who buy the residence together. However, the total amount of the credit allowed to such individuals, jointly, cannot exceed $7,500 (or $8,000).

Figuring the credit

If your modified AGI exceeds income threshold at which the credit begins to phase-out - $75,000 for single filers and $150,000 for joint filers - use the following steps to help determine the amount of the credit you can take.

1. Subtract the "phase-out amount" ($75,000 for single filers, or $150,000 for joint filers) from your (or you and your spouse's) modified AGI.
2. Take this dollar amount and divide it by $20,000.
3. Multiply this number by $7,500 (for single and joint filers), $3,750 for a married individual filing separately, or 10 percent of the purchase price of your home, whichever amount is applicable in your circumstances. (For example, if the purchase price of your home is $50,000, you would be able to claim the credit up to $5,000, since 10 percent of $50,000 (the purchase price) is less than $7,500). The resulting amount is the total amount of the credit that you may claim.

Note. This same formula will work for determining the $8,000 credit under the 2009 Recovery Act. Simply substitute $8,000 for $7,500 where applicable.

 Example. Jane, a single filer, is a first-time homebuyer. Her modified AGI is $80,000. She buys a home in October 2008 for $200,000. Because 10 percent of the purchase price ($20,000) is more than $7,500, the maximum credit amount she can claim is $7,500. However, because her modified AGI exceeds $75,000, she will not be able to claim the entire credit amount. Instead, she will be able to claim a credit of $5,625 ($80,000 - $75,000 = $5,000. $5,000 divided by $20,000 = .25. $7,500 multiplied by .25 = $1,875. $7,500 - $1,875 = $5,625).

Example. Michael is a single filer and first-time homebuyer. His modified AGI is $87,600. He buys a home in September 2008 for $50,000. Because 10 percent of the home's purchase price ($5,000) is less than the maximum amount of the allowable credit ($7,500), the maximum credit he can claim is $5,000. However, because his modified AGI exceeds the amount at which the credit phases out, his credit will be further reduced. Michael can claim a credit of $1,850 ($87,600-$75,000= $12,600. $12,600 divided by $20,000 = .63. $5,000 multiplied by .63 = $3,150. $5,000 - $3150 = $1,850.

Example. Linda and Ed, married joint filers, are first-time homebuyers. Their modified AGI is $162,400. They buy their first home in August 2008 for $300,000. Since their modified AGI exceeds the phase-out amount ($150,000 for joint filers), they will not be able to claim the entire credit amount of $7,500. Instead, they will be able to claim a maximum credit of $2,850 ($162,400 - $150,000 = $12,400. $12,400 divided by $20,000 = .62. $7,500 multiplied by .62 = $4,650. $7,500 - $4,650 = $2,850).

The credit amounts in every case will need to be repaid beginning two years after the date the home is purchased, in equal installments over the course of 15 years.

If you or anyone close to you is considering purchasing a first home as defined under the new law, the new tax credit may be able to make an otherwise difficult down payment sail through. Please contact this office for further details.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

Soon after you start making money and the world realizes that they cannot live without your goods or service, you will probably need to hire employees. Although necessary for your growing company, hiring employees increases your risk of loss through errors, oversights and theft.

Implementing internal controls to help you monitor your business can decrease the need for constant supervision of your employees. Internal controls are checks and balances to prevent fraud, limit financial losses and reduce errors or oversights by employees. For example, the most basic internal control concept requires that certain tasks be handled by different people. This process, called "separation of duties", can greatly decrease the probability of loss.

The following basic internal control checklist includes suggestions that, once implemented, can help you and your employees avoid concerns about fraud or theft in the workplace:

As your company grows, you may want to become less and less involved with the day-to-day operations of the business. The internal controls you put into place now will help keep the profits up, the losses down, and help you sleep better at night. If you need any assistance with setting up internal controls for you business, please feel free to contact our office.