Tax Topics
Individuals
Casualty Losses
A taxpayer can take a deduction for losses incurred because of a casualty where the taxpayer has actually sustained a loss. A casualty is the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected or unusual nature such as fires, hurricanes, ice storms, car crashes or similar events. An individual can deduct the lesser of (1) the property's adjusted basis, or (2) its decline in value. The loss is then reduced for any salvage value, insurance proceeds received, or any other compensation received related to the property. Casualty losses are reported on Form 4684.
Charitable Contributions
Millions of Americans every year itemize their deductions on their federal return. One of the more common itemized deductions is a donation to a charitable organization. Over the last few years the IRS has tightened the rules on charitable contributions and the following are some guidelines you should follow when taking a charitable donation on your individual income tax return:
a. Only contributions to qualified organizations are deductible. The IRS issues Publication 78, which lists most of the qualified organizations.
b. Cash and non cash contributions can be made but special rules apply to both, information is available in the instructions to Schedule A, Form 8283, and/or IRS Publication 526.
c. Your tax file should contain records that support your contribution deduction including but not limited to: cancelled check, acknowledgement from the qualified charity, credit card statement, listing of non cash property donated including a description of the property, the value, whether or not it is in good working order, and the date of the contribution.
Moving Expenses
You can deduct moving expenses if you meet all three of the following criteria. One, your move is closely related, both in time and place, to the start of work at your new job location. Second, you meet the distance test, which states that your new main job location is at least 50 miles farther from your former home than your old job location. And third, you meet the time test, which states if you are an employee, you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location. Different rules apply for self-employed individuals.
Social Security Benefits
To determine if Social Security Benefits are taxable, you must take one-half of your SS Benefits and add it to your total other income. If that total is greater than your base amount, then a portion of your benefits will be taxable. If the total is less than your base amount, then the SS Benefits are not taxable. The base amount is $32,000 if you are married filing jointly. Your base amount is $25,000 if you are single or married filing separately and living apart. If you are married filing separately and living with your spouse, your base amount is zero.
Credits and deductions for higher education
There are two available higher educational tax credits for 2009, the American Opportunity credit (this credit modifies the Hope Credit for tax years 2009 and 2010) and the Lifetime Learning credit. A taxpayer must choose, each year, which credit is most beneficial. Each of the credits have limits such as the maximum credit allowed, who is eligible based on the taxpayers modified adjusted gross income, and the expenses that qualify for the credit. The American Opportunity credit covers four years of higher education where as the Lifetime Learning credit has no limit on the years you can claim. Also, available is the option to deduct up to $4,000 of qualified education expenses. This deduction is available whether or not you itemized your deductions or take a standard deduction. However, like the educational credit the education deduction is limited based on your modified adjusted gross income. If your modified adjusted gross income is below the limit and you have eligible educational costs you will need to determine which option is best for you since you can only utilize one of the above three options each tax year.
Winnings from Gambling & other Games of Chance
All gambling winnings are fully taxable and include lotteries, raffles, horse races, poker tournaments and casinos whether the winnings are cash or non cash. The payer of winnings is required to issue you a Form W-2G if you receive certain gambling winnings or if you have winnings subject to withholding tax. The amount of winnings must be reported on your Form 1040, line 21, whether or not you receive a Form W-2G from the payer. If you itemize your deductions, you can deduct gambling losses but only to the extent you have winnings and receipts to support the losses.
Businesses
Forms of Business
Your form of business determines which income tax return you will need to file. A sole proprietor is an unincorporated business that is owned by one individual. This type of business will complete a Schedule C which is filed with your Form 1040 - Individual Income Tax Return. A partnership is a business that is formed between two or more people and must file Form 1065 - Return of Partnership Income. The income from this form flows through to the partner’s Form 1040 – Individual Income Tax Return. Corporations issue stock in exchange for money and/or property and file Form 1120 - Corporation Income Tax Return. An S Corporation can be formed to avoid double taxation. It files Form 1120-S - Income Tax Return for an S Corporation and is exempt from federal income tax at the corporate level, but is taxed on the individual’s tax return like a partnership. A Limited Liability Company is an entity where none of the members are liable for its debts. It may be classified as a partnership, corporation, or a disregarded entity and files the return as it is classified.
Accounting Methods
If you are starting a new business, you must decide what accounting method you will use to report your income and expenses. There are several methods that are used, but the two primary methods are the cash method and the accrual method.
The cash method is just like it sounds, you record income when cash is received and expenses when cash is paid out. The accrual method is a little more complicated as you have to recognize income when it is actually earned and deduct the expense when it is incurred. The purpose of the accrual method is to match income and expenses to the correct year.
To change your accounting method at a later date generally requires IRS approval so you want to make sure you choose the correct method for your business.
Depreciation
Depreciation is a method which allows you to deduct the cost of certain types of property over a certain period of time. You can depreciate most types of tangible property except land. The IRS has many rules and methods related to the depreciation of property. Most property uses the Modified Accelerated Cost Recovery System (MACRS). In order to properly depreciate your property for tax purposes, you must determine the useful life of the property and apply the appropriate method.
Transportation costs
In general transportation costs that are incurred as part of a trade or business are deductible, however the cost of commuting between home and your regular place of work is not deductible. The taxpayer has an option of deducting the actual out-of-pocket expenses or taking the standard business mileage expense (the number of business miles driven x the standard mileage rate issued by the IRS).
If you choose to deduct the actual business expense remember to include the business use of insurance, maintenance, gasoline, oil, repairs that don't extend the useful life, interest to buy the car, depreciation, taxes, licenses, garage rent, parking, fees and tolls which are all tax deductible.
If you elect to take the standard business mileage deduction you can obtain this rate from looking on the IRS web site. This rate changes periodically and should be reviewed prior to completing your income tax return. Most tax preparation software products include the rate in effect during the tax year. The rates in effect for 2008 - 2010 are as follows:
| Jan 1 - June 30, 2008 | 50.5 cents/mile |
| July 1 - Dec 31, 2008 | 58.5 cents/mile |
| Jan 1 - Dec 31, 2009 | 55.0 cents/mile |
| Jan 1 - Dec 31, 2010 | 50.0 cents/mile |
TaxAnswers4U.com can answer any of your transportation cost questions such as which method is best for you, how to depreciate your automobile, whether or not a certain automobile cost or expense is deductible, or what is the current or former standard mileage rate.
Exempt Organizations
Charitable Organizations
Charitable organizations, also known as 501(c)(3) organizations, are one type of exempt or non-taxable organizations. If the organization is operated exclusively for charitable, religious, educational, literary, scientific, or testing for public safety purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, it may qualify for exemption from federal tax. The organization must be a corporation, community chest, fund, or foundation to qualify. The articles of organization must limit the purposes to exempt ones and not allow participation in non-exempt activities. An organization must engage primarily in activities which accomplish the exempt purposes and no part of the net earnings may inure to the benefit of private shareholders or individuals. An organization isn’t exempt if it serves a private rather than a public interest.
An organization isn’t exempt merely because it operates for one of the above purposes. To receive its exemption, a written application must be filed on either Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The exempt organization must also annually file a Form 990
IRS Form 990 series of returns and Filing Thresholds
The IRS has revised the Form 990 series effective for tax year 2008 (returns filed beginning in 2009). The IRS is phasing in the new returns over three years to allow smaller exempt organization more time to adjust to the new Form. During the transition, an organization’s annual filing requirement depends on its financial activity. The charts below indicate the exempt organization's filing requirements during the transition period.
2008 Tax Year
| Gross Receipts | Total Assets | Form to File |
| ≤ $25,000 | 990-N | |
| > $25,000 & < $1 million | < $2.5 million | 990-EZ/990 |
| ≥ $1 million | ≥ $2.5 million | 990 |
2009 Tax Year
| Gross Receipts | Total Assets | Form to File |
| ≤ $25,000 | 990-N | |
| > $25,000 & < $500,000 | < $1.25 million | 990-EZ/990 |
| ≥ $500,000 | ≥ $1.25 million | 990 |
2010 Tax Year and later
| Gross Receipts | Total Assets | Form to File |
| ≤$50,000 | 990-N | |
| > $50,000 & < $200,000 | < $500,000 | 990-EZ/990 |
| ≥ $200,000 | ≥ $500,000 | 990 |
Key changes to the new Form 990
The new Form 990 consists of a core form and multiple supplemental schedules. For most tax exempt organizations the sections of the core form that is creating the most questions are the sections related to governance and compensation. Particular attention should be given to these two sections. Guidance can be found in the instructions to the Form 990 or the IRS web site.
Passing the Support Test
Certain exempt organizations must pass a support test every year to maintain its exempt status. To pass the support test, an organization must receive 33 1/3% or more of its total support from governmental agencies, contributions from the general public, and contributions or grants from other public charities. However, if one individual gives more than 2 % of the total support, the full amount can not be counted in the public support calculation. If it fails the support test, it may remain an exempt organization if it passes the facts and circumstances test.
If you need additional assistance the partners at TaxAnswers4U have over 20 years of experience with non-for-profit organizations and the new 990 series of Forms.