Like-Kind Exchanges

Normally, whenever you sell a business or investment property and you have a gain, you pay tax on the gain at the time of sale, even if you plan on reinvesting the proceeds in another property.

 

Not so when you choose to exchange, not sell, your property for a similar property. Such exchanges, called a like-kind exchange, allow you to postpone paying tax on the gain until a later time.

 

But you have to know what qualifies for an exchange. Below are four conditions you need to know about:

• You must exchange your property, not sell it, for another one.
• You must hold both the property traded and the property received for business or investment purposes. 
• The properties must be of similar nature, character, or class, regardless of quality or grade. For example, improved real estate can be traded for unimproved real estate.  
• The properties cannot be certain excluded property, including stocks, bonds, notes, securities, evidences of debt, or partnership interests. In addition, the properties must not be held primarily for sale.

The big benefit? Although you will eventually be responsible for paying tax on both the original deferred gain and on gain realized in the interim, by deferring the tax, you can immediately apply all of the appreciation in your property, undiminished by the tax that would otherwise be payable, toward acquiring replacement property.

 

I can help you thoroughly understand like-kind exchanges and choose whether a “simultaneous” exchange or a “deferred” exchange will benefit you the most. Both have their advantages and disadvantages but should be chosen carefully based on your particular circumstances. In addition, structuring like-kind exchanges can be complex, but the tax deferral is often worthwhile.

 

I welcome the opportunity to evaluate your personal situation. Please contact me to set up a consultation to discuss your needs and how I can help you.

What Tax Records to Keep and for How Long

Filing your taxes isn't just a once-a-year endeavor. Maintaining good records throughout the year—and disposing of old ones when appropriate—not only provides you with greater confidence now when you prepare your tax return, but it also provides you with documentation you may need down the road.

 

Lucky number six. One of the most common questions I'm asked is, how long should I keep my tax returns? Although you can get away with keeping them only three years, I recommend you keep all federal and state income tax returns and supporting documents for a full six years.

 

Why so long? Once you've filed your returns, the IRS has up to three years to assess additional taxes. However, it can take up to six years to make a tax assessment if it determines that you omitted a substantial amount of income from your return. You may believe your returns are accurate and all-inclusive, but the IRS may feel differently.

 

Be sure to file your U.S. Postal Service or electronic mailing receipts with your returns, too. If your return is ever lost or misplaced, having a receipt showing the date the return was submitted will save you from penalties.

 

File it, but don't forget it. Some events produce documentation that should be kept permanently: settlement records from all of your home purchases and sales, investment purchases, divorce agreements, etc.

 

But just because an event ends doesn't mean that the documentation process should. Before you move your records to the attic, remember that regularly filing “updates”—home improvement receipts, records that show a return of capital on your investments, estate and gift tax returns under which you received property, etc.—will help to compute your gain/loss when you sell.

 

There are other situations in which you would benefit from keeping records, including any nondeductible contributions you have made to an IRA or Roth IRA. Review your personal and financial history with a professional to ensure you have all your bases covered.

 

So, how complete are your files?

 

I welcome the opportunity to discuss your personal situation. Please contact me to set up a consultation where we can discuss your tax needs and how I can help you.

Making Sure Business Entertainment Expenses Yield Deductions

Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It's easy to think of these entertainment costs as deductible business expenses, but they may not be. As a general rule, your company can deduct meals and entertainment as a business expense only if specific conditions are met. What's more, the deduction for either type of expense generally is limited to 50 percent of the cost.

Meals and entertainment directly connected to business. To be considered directly connected to business, the meal or entertainment event must meet three conditions:

* It must have been scheduled with more than a general expectation of deriving future income or a specific business benefit from the event. In other words, a meal or dinner date arranged for general goodwill purposes does not qualify.

* A business meeting, negotiation, or transaction must actually occur during the meal or entertainment, or immediately preceding and following it. In other words, business actually must be discussed.

* The main character of the event, considering the facts and circumstances, is the active conduct of your company's trade or business.


For example, an executive employee who treats a client to a golf game in order to discuss the general parameters of a business deal in an informal atmosphere is engaged in entertainment that is directly connected to business. So is a manager who discusses sensitive business plans with a subordinate over lunch at an off-premises restaurant.

Applicable limitations. In general, only 50 percent of expenses incurred for entertainment and meal expenses is deductible. A limited exception applies to entertainment or on-premise meals provided to employees.

Expenses with respect to entertainment facilities generally are not deductible at all. A facility includes any item of personal or real property owned, rented, or used by a taxpayer if it is used during the tax year for or in connection with entertainment. They include yachts, hunting lodges, fishing camps, swimming pools, tennis courts, bowling alleys, automobiles, airplanes, apartments, hotel suites and homes in vacation resorts.

Country club dues are not deductible (although the meals purchased with business clients at the club are, up to the 50 percent limit). Deductions for skyboxes or other private luxury boxes at sporting events are limited to the face value of a nonluxury box seat ticket multiplied by the number of seats in the box.

Record-keeping requirements. Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met to the letter. A carefull review by your CPA can help you determine how to comply with these requirements at minimum cost and expense, and how your company's typical meal and entertainment expenses fare under the deduction rules.

Starting a Business - What to Consider

Before you start a new business, there are a number of preliminary decisions to be made. One of the first choices you will face, is the legal form in which you will operate the business. Should it be an unincorporated sole proprietorship, a partnership, a limited liability company, a regular corporation, or an S corporation? Each of these forms has both tax and non-tax advantages and disadvantages that must be weighed in conjunction with your own plans and personal situation.

Sole proprietorships, for example, are the easiest and cheapest business form to set up, and they can be operated with few formalities. However, they offer no personal liability protection and don't allow you to get many of the tax benefits that are available to corporate employees.

Partnerships offer many of the same advantages and disadvantages as the sole proprietorship, but they allow the business to be owned and run by more than one person. Also, the liability problem can be overcome to a certain extent by forming a limited partnership, but partners whose liability is limited cannot be involved in actively managing the business. And losses from these partnerships may be restricted by the so-called passive activity rules .

A newer form of entity, known as the limited liability company, which is approved for use in almost every state, offers what many see as the best alternative for the typical small business. These entities can be set up to be taxed as partnerships, avoiding the corporate income tax, while the managing members' personal assets remain fully protected from business creditors.

S corporations also offer liability protection, without a separate corporate tax. Like partners and sole proprietors, however, more-than 2% S corporation shareholders are ineligible for tax-favored fringe benefits. Another potential drawback of S corporations results from limitations on the number and kind of permissible shareholders. These restrictions can limit an S corporation's growth potential and access to capital in some businesses. In others, however, an S corporation can be a key ingredient toward success.

What about regular corporations, known as C corporations? They do not have the shareholder restrictions that apply to S corporations, but they are subject to a double system of taxation. That is, their profits are subject to income tax at the corporate level, and are also taxed to the shareholders if distributed as dividends. But if profits are to be plowed back into the business to foster the company's growth, the tax price is usually lower than with an S corporation. And there are many situations in which the double tax can be substantially minimized. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life.

Besides the question of choosing a form of entity for your new business, there are many other tax decisions to be made, and much planning to ensure that you meet your income and payroll tax reporting and compliance chores properly. How will you handle your start-up costs? Will your workers be employees or independent contractors? Can you qualify for a home office deduction? Should you set up a qualified retirement plan, and, if so, what kind?

2009 Recovery Act: NOL Carryback Period Extended

As you may know, NOLs can generally be carried back two years and forward 20 years. The carryback and carryover periods are determined by the law applicable to the year in which the NOL arises, rather than any of the years to which it is carried back or forward. An NOL that is not utilized within its statutory time-frame expires without providing any tax benefit.

The American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act) provides relief for small business owners by extending the maximum carryback period for 2008 net operating losses (NOLs) from two years to any number of years greater than two and less than six (i.e., three, four, or five years). The number of years selected for the carryback is discretionary within these parameters, but the election must be properly executed in a timely manner and cannot be revoked.

Fiscal-year businesses can apply these rules either to NOLs generated in tax years ending in 2008, or to NOLs generated in tax years beginning in 2008. If a small business has already waived an NOL carryback for the applicable 2008 tax year, the election can be revoked in order to obtain NOL carryback relief under the 2009 Recovery Act provisions. However, the prior election must be revoked and the new election executed within 60 days of the legislation's enactment.

Because you sustained an NOL, these provisions present an opportunity for an immediate refund of prior year taxes paid.

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