The new hot button for the IRS is shareholder loans in S-Corps because there is usually a lack of documentation or interest being paid on these loans. It can be tough because if it is reclassified by the IRS as a shareholder distributions or salary it can dramatically increase the shareholder’s income tax.

 Success based fees Safe Harbor Deduction Election

• Normally under the Regulations, you can’t deduct fees and costs that facilitate a business acquisition or reorganization or fees contingent upon the successful closing of the transaction.
• Rev. Proc. 2011-29 provides a safe harbor election for allocating success-based fees paid in business acquisitions or reorganizations. 
• Under the new safe-harbor election, 70% of the fees are deductible and 30% are capitalized.

Foreign Bank anf Financial Accounts (FBARs) 

• A taxpayer must file Form TDF 90-22.1 if: 
  • The person has a financial interest or signature authority over an account in a foreign country AND
  • Aggregate Value of all foreign financial accounts exceeds $10,000 at any one time during the calendar year
  • Must be received by June 30^th. Not mailed.

By Suzanne Lieber

New Sales Tax deduction for motor vehicles! Whether you itemize or take the standard deduction, you can increase your deduction by the amount of sales tax you paid on the purchase of any number of new motor vehicles (including motorcycles and motor homes) that were purchased after February 16 th and before December 31 st 2009. Sales tax on only the first $49,500 of purchase price qualifies. The phase out begins at $250,000 (married) or $125,000 (single) taxpayers.

Energy-saving tax credits: The credit percentages for building envelope components (windows, doors) is now 30% and the maximum credit is $1,500. Also applies to furnaces, furnace fans, central a/c and water heaters. Credit is available in 2010 and there is no phase out.

Employers who offer Flexible Spending Accounts: As part of their Cafeteria Plan have until Dec 31 st to change the rules to enable employees to have another 2 ½ months in 2010 to spend their 2009 allotments. The first $13,000 of gifts ($26,000 for married couples) made by a donor to each donee in calendar year 2009 is excluded from the amount of the donor’s taxable gifts. You must act no later than Dec 31 st to take complete advantage of annual gift tax exclusions. Unused annual exclusions can’t be carried over and are forever lost. The check must be presented in the calendar year for which completed gift treatment is sought. The donee should be sure to deposit and cash the check before year-end, so that there’s no doubt as to when the gift was made.

Machinery and Equipment: Most new machinery and equipment (as well as software) bought and placed in service in 2009 qualifies for a 5 0% bonus first year depreciation deduction. This benefit has not yet been extended beyond 2009. I ndividual taxpayers who are at least 70 ½ years old may contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. High-income taxpayers who are over AGI limits for a Cloverdell Education Savings Account (CESA) can contribute to a qualified 529 tuition plan instead. There are no AGI limits on contributions to 529 plans. Distributions from 529 plans are tax free only if used to pay for higher education.

Businesses of all sizes can now carry back operating losses for up to five years: To claim a full deduction on the 2009 return for a contribution of “qualified appreciated stock” to a private foundation, the private foundation must be set up and the contribution made before December 31, 2009 . A self-employed person who wants to contribute to a Keogh plan for 2009 must establish that plan before the end of 2009. If that is done, deductible contributions for 2009 can be made as late as the taxpayers extended tax return due date for 2009. Business taxpayers can claim a deduction under Code Section 199 to offset income from domestic manufacturing and other domestic production activities . Since the rate of deduction will increase to 9% in 2010from 6% in 2009, taxpayers in this case should consider deferring some of their domestic production activity income from 2009 to 2010. Again, check with your ELLS advisor for further details on any of the above tax-saving strategies.

If you have any questions about these or any other tax credits or deductions please contact us at anytime.

For tax years beginning after 2009, the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated. Additionally, married taxpayers filing a separate return will be able to convert amounts in a traditional IRA into a Roth IRA. As a result, 2010 will be a pivotal one for retirement planning and poses significant tax planning challenges.

There are certain tax advantages to Roth IRAs. Qualified distributions are tax-free, they don’t enter into the calculation of tax owed on Social Security payments, and they have no effect on AGI-based deductions. These benefits flow through to beneficiaries of Roth IRAs as well.

Unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012. A major wild card is the tax-rate picture after 2010. Absent Congressional action, after 2010, the tax brackets above the 15% bracket will revert to their pre-2001 levels. That means the top four brackets will be at least 39.6%, 36%, 31% and 28%. And, it has been rumored Congress is considering adding a new top bracket to the existing structure.

High-income taxpayers who plan to make large conversions in 2010 can elect to opt out of the deferral of tax until 2011 and 2012. In that case, these taxpayers should be considering ways to defer deductions to 2010 and accelerate income from next year into 2009 in an effort to avoid being pushed in the highest brackets by a large IRA-to-Roth-IRA conversion in 2010 . Your ELLS advisor still has time to work with you to structure your 2009 tax return to reflect this strategy.