The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home.

The IRS has released the 2021-2022 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates;
2. the rate for the incidental expenses only deduction; and
3. the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates
The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS); and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the 2021-2022 special per diem rates are:

• $296 for travel to any high-cost locality; and
• $202 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality; and
• $64 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality; and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement. Further, the notice provides guidance under recent legislation, including: the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127), as amended by the COVID-Related Tax Relief Act of 2020 (Division N of P.L. 116-260) and the American Rescue Plan Act of 2021 ( P.L. 117-2). Employers are required to report these amounts to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2. The wage amount that the notice requires employers to report on Form W-2 will provide employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities.

Reporting Requirements
The guidance requires eligible employers to report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under (i) sections 7001 or 7003 of the Families First Act for leave provided during the period beginning January 1, 2021, through March 31, 2021, and (ii) Code Secs. 3131 and 3132 for leave provided during the period beginning April 1, 2021, through September 30, 2021. Moreover, eligible employers have separate reporting requirements for (i) leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, under the Families First Act; and (ii) leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, under Code Secs. 3131 and 3132.

Specific Reporting Instructions
Qualified leave wages paid in 2021 under the Families First Act and Code Secs. 3131 and 3132 are to be reported in Box 1 of Form W-2. To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively.

In addition to the regular reporting requirements, employers must report the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement to the employee:

• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $511 per day limit);
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $200 per day limit);
• the total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified family leave wages paid to the employee under EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021.

Model Language for Employee Instructions
As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages, and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The guidance provides model language for employee instructions.

Self-Employment Tax Reporting
If taxpayers have self-employment income in addition to wages paid by an employer, and they intend to claim any qualified sick leave or qualified family leave equivalent credits, they must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax return. The self-employed taxpayer may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.

The IRS has issued temporary and proposed regulations that authorize the assessment of any erroneous refund of the COVID-19 employment tax credits which were added by the American Rescue Plan Act of 2021 ( P.L. 117-2). These credits for certain wages paid by employers are:

The IRS has issued temporary and proposed regulations that authorize the assessment of any erroneous refund of the COVID-19 employment tax credits which were added by the American Rescue Plan Act of 2021 ( P.L. 117-2). These credits for certain wages paid by employers are:

• the Credit for Paid Sick Leave under Code Sec. 3131,
• the Credit for Paid Family Leave under Code Sec. 3132, and
• the Employee Retention Credit under Code Sec. 3134.

The text of the temporary regulations also serves as the text of the proposed regulations.

The temporary regulations apply to all credits under Code Secs. 3131 and 3132, including any increases to the credits under Code Sec. 3133, credited or refunded on or after April 1, 2021, including advanced refunds, as well as all credits under Code Sec. 3134 that are credited or refunded on or after July 1, 2021, including advanced refunds.

Erroneous Refunds
These credits are taken against the employer's share of Medicare tax imposed under Code Sec. 3111(b) and the attributable Railroad Retirement Tax Act tax imposed under Code Sec. 3221(a). If the amount of the credits exceeds these taxes for any calendar quarter, then the excess must be treated as an overpayment to be refunded or credited under Code Secs. 6402(a) and 6413(b). Any credits claimed that exceed the amount to which the employer is entitled, and that are actually credited or refunded by the IRS, are considered to be erroneous refunds of these credits.

If a small eligible employer specified in Code Sec. 3134(j)(2) receives excess advance payments of the credit, then the tax imposed under Code Sec. 3111(b) (or the attributable Code Sec. 3221(a) tax) for the calendar quarter are increased by the excess amount.

The temporary regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under Code Sec. 3111(b) (and the attributable Code Sec. 3221(a) tax). The temporary regulations authorize the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were the applicable taxes, subject to assessment and administrative collection procedures. This allows the IRS to prevent the avoidance of the purposes of the limitations under the credit provisions, and to recover the erroneous refund amounts efficiently, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation.

These assessment and administrative collection procedures do not replace the existing recapture methods, but instead represent an alternative method available to the IRS.

Any amount of the credits for qualified leave wages and certain collectively bargained contributions under Code Secs. 3131 and 3132, plus any amount of credits for qualified health plan expenses under Code Secs. 3131(d) and 3132(d), and including any increases in these credits under Code Sec. 3133, and any amount of the employee retention credit for qualified wages under Code Sec. 3134 that are erroneously refunded or credited to an employer must be treated as underpayments of the employer’s share of the applicable Medicare tax by the employer, and may be administratively assessed and collected in the same manner as the taxes. The temporary regulations provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS.

In certain situations, third-party payors claim tax credits on behalf of their common law employer clients. The temporary regulations address this by providing that employers against which an erroneous refund of credits may be assessed as an underpayment include persons treated as the employer under Code Secs. 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credits applied.

Effective Date; Request for Comments
The temporary regulations are effective on the date they are published in the Federal Register.

A public hearing on the proposed regulations will be scheduled if requested in writing by any person who timely submits electronic or written comments. Written or electronic comments and requests for a public hearing must be received by the date that is 60 days after the proposed regulations are published in the Federal Register.

The IRS has announced that it intends to defer until 2023 the applicability of certain final regulations under Code Sec. 1446(a) and (f) relating to withholding of tax on foreign partners’ share of effectively connected income.

Withholding Provisions on Transfers of Interests in Publicly Traded Partnerships Deferred
The amendments will defer the applicability date to January 1, 2023, for certain provisions relating to (1) withholding under Code Sec. 1446(f) on transfers of interests in publicly traded partnerships ( "PTP interests"); (2) withholding under Code Sec. 1446(a) on distributions made with respect to PTP interests; and (3) withholding under Code Sec. 1446(f)(4) by partnerships on distributions to transferees.

Code Sec. 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Code Sec. 1446(f)(1) generally requires a transferee of an interest in a partnership to withhold 10 percent of the amount realized if any portion of the gain on the disposition would be treated under Code Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States. Code Sec. 1446(f)(4) provides that if a transferee fails to withhold on the disposition as required under Code Sec. 1446(f)(1), the partnership must withhold on distributions to the transferee.

Taxpayers May Rely on Deferral Prior to Amendments
The final foreign partner withholding regulations were published on November 30, 2020, in T.D. 9926, I.R.B. 2020-51, 1602, and the provisions whose applicability dates the amendments will defer generally would have applied to transfers and distributions that occur on or after January 1, 2022. Taxpayers may rely on the deferrals announced in the notice prior to amendments being issued.

The IRS has reminded taxpayers to file their 2020 tax returns by the upcoming October 15, 2021 due date. Taxpayers must file on or before the extension deadline to avoid the penalty for filing late if they request an extension. Tax returns can still be filed through electronic filing options, such as the IRS Free File.

The IRS has reminded taxpayers to file their 2020 tax returns by the upcoming October 15, 2021 due date. Taxpayers must file on or before the extension deadline to avoid the penalty for filing late if they request an extension. Tax returns can still be filed through electronic filing options, such as the IRS Free File.

However, the following taxpayers may have more time to file their returns:

• members of the military and others serving in a combat zone as they have 180 days after they leave the combat zone to file returns and pay any taxes due, and
• taxpayers in federally declared disaster areas who already had valid extensions.

Taxpayers are usually not penalized for failure to file if a refund is due. However, people risk losing the refund if they wait too long to file and claim a refund. Taxpayers can avoid additional penalties and interest by filing the 2020 return as soon as possible and paying any taxes owed.

Taxpayers must remember the following while paying federal taxes electronically:

• electronic payment options are the best way to make a tax payment,
• payment can be made when taxpayers file electronically using tax software online,
• IRS Direct Pay permits taxpayers to directly pay online from a checking or savings account for free and to schedule payments up to 365 days in advance,
• taxpayers can pay with a credit card, debit card or digital wallet option through a payment processor, which would charge a fee for the transfer,
• the IRS2Go app provides mobile-friendly payment options, including Direct Pay and debit or credit card payments on mobile devices, and
• payment can be made conveniently using the Electronic Federal Tax Payment System Voice Response System.

Further, taxpayers can see the following information while preparing their tax return or following up on balances or notices through their online account:

• adjusted gross income,
• economic impact payment amounts,
• estimated tax payment amounts,
• amount owed for any past years, updated for the current calendar day,
• payment history and any scheduled or pending payments,
• payment plan details,
• digital copies of select notices from the IRS, and
• approve or reject authorization requests from tax professional

Direct Deposit for Refunds
Taxpayers must file electronically and have their refund electronically deposited into their bank or other financial accounts for safe and quick refund receipt. Taxpayers can use direct deposit to deposit their refund into one or more accounts or purchase U.S. Savings Bonds. People can visit the FDIC website or the National Credit Union Association to use their Credit Union Locator Tool for information on opening an online bank or credit union account if they do not have a bank account. Further, veterans can use the Veterans Benefits Banking Program (VBBP) to access financial services at participating banks.

Monthly Advance Child Tax Credit Payments
The IRS is using previous year tax information, 2019 for most, for determination of the credit amount for those eligible and on extension for their 2020 tax returns. People who request an extension must file as soon as possible if they experience a significant change like the birth of a child in 2020. The IRS can calculate the credit based on the 2020 return and pay it out in total over the remaining months in 2021 once that return is processed.

Taxpayers may be eligible for two payments of half the credit in 2021 if they file and have their 2020 return processed on or before November 1, 2021. Similarly, people may be eligible for one payment if they file and have their return processed on or before November 29, 2021. The IRS has encouraged taxpayers to file electronically for quick processing of returns and to avoid delays.

Claiming Missing Stimulus Payments
To claim missing stimulus payments, eligible people must file a 2020 tax return or use the Child Tax Credit Non-filer Sign-up Tool soon, even if they usually do not file. The IRS will also automatically evaluate the taxpayer’s eligibility for the third economic impact payment when the 2020 return is processed. It will continue to issue eligible taxpayers their third economic impact payment and plus-up payments through the end of 2021.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month.

Further, the IRS advised taxpayers to:

• secure critical documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space;
• duplicate and scan key documents for backup storage on electronic media such as a flash drive, CD or in the cloud, which provide security and easy portability;
• record all property, especially expensive and high value items. The IRS disaster-loss workbooks in Publication 584 and Publication 584-B can help individuals and businesses compile lists of belongings or business equipment;
• employers who use payroll service providers should check payroll service provider’s fiduciary bonds as they could protect the employer in the event of default by the provider;
• employers should create an Electronic Federal Tax Payment System account at EFTPS.gov to monitor their payroll tax deposits and receive email alerts; 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 the IRS's Reconstructing Records webpage.

In addition, taxpayers residing in a federally declared disaster can check for the available disaster tax relief on the IRS Tax Relief in Disaster Situations webpage or Around the Nation on IRS.gov. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers impacted by a disaster can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Further, taxpayers impacted by a disaster outside of a federally declared disaster area may qualify for disaster relief. This includes taxpayers who are not physically located in a disaster area but their records essential for filing or payment deadlines postponed during the relief period are located in a covered disaster area.

The IRS has emphasized the importance of correctly determining whether the individuals providing services to businesses were employees or independent contractors.

The IRS has emphasized the importance of correctly determining whether the individuals providing services to businesses were employees or independent contractors. Generally, an employee performs services that businesses control. Independent contractors offer their services to the public. Businesses have a right to control the details of the services performed.

The classification depends on the:

• company’s behavioral Control on what the worker does and how the job is performed;
• business’ direct or control the financial and business aspects of the worker; and
• relationship of the Parties ascertained by written contracts or employee type benefits.

Misclassification of Workers
Businesses could be held liable for employment taxes if an employee is misclassified without a reasonable basis.

Workers can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected taxes due on their compensation if they believe they have been improperly classified as independent contractors

Voluntary Classification Settlement Program
Taxpayers can reclassify their workers as employees for future tax periods for eligible taxpayers that agree to treat their workers as employees through the Voluntary Classification Settlement Program. Taxpayers must fulfill eligibility requirements, apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

Self-employed individuals must file an annual tax return and pay estimated tax quarterly. They pay self-employment tax (Social Security and Medicare tax) and income tax. If self-employed individuals use part of business home, they may claim the home office deduction.

Gig Economy
Taxpayers must report gig economy income on a tax return even if the income is part-time, temporary or side work; not reported on a Form 1099-K, 1099-MISC, W-2 or other income statements; or paid in any form, including cash, property, goods or virtual currency.

The IRS has allowed taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically.

The IRS has allowed taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The Service has balanced the e-signature option with critical security and protection needed against identity theft and fraud. The IRS will accept a wide range of electronic signatures. Acceptable electronic signature methods include:

• a typed name typed on a signature block;
• a scanned or digitized image of a handwritten signature that’s attached to an electronic record;
• a handwritten signature input onto an electronic signature pad;
• a handwritten signature, mark or command input on a display screen with a stylus device; and
• a signature created by a third-party software.

Moreover, the IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as tiff, jpg, jpeg, pdf, Microsoft Office Suite, or Zip.

The IRS has allowed taxpayers and representatives to use electronic or digital signatures on paper forms, which they cannot file using IRS e-file, including for example:

• Form 11-C, Occupational Tax and Registration Return for Wagering;
• Form 637, Application for Registration (For Certain Excise Tax Activities);
• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return and other forms in the 706 series;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 730, Monthly Tax Return for Wagers;
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations and other forms in the 1120 series;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

The Tax Court had jurisdiction to determine the appropriate relief available to an individual who sought innocent spouse relief for two tax years at issue. Initially, the taxpayer submitted a request for innocent spouse relief for one tax year, which the IRS denied in a final determination.

The Tax Court had jurisdiction to determine the appropriate relief available to an individual who sought innocent spouse relief for two tax years at issue. Initially, the taxpayer submitted a request for innocent spouse relief for one tax year, which the IRS denied in a final determination. Subsequently, the taxpayer filed an untimely petition for Tax Court review which was dismissed for lack of jurisdiction. Later, the taxpayer submitted a request for innocent spouse relief for an additional tax year at issue (two tax years). The IRS issued a final determination denying relief as to both years on the merits. The Tax Court held it had jurisdiction to hear the case even though the IRS previously denied relief for one year and argued that the year was included in the notice by mistake.

Notice Is Evaluated on its Face
The Tax Court has jurisdiction to review a final determination denying innocent spouse relief. The Tax Court concluded that when evaluating whether a notice serves as the predicate for jurisdiction, it generally does not look beyond the face of the notice unless its text is ambiguous or inconsistent. In this case, the notice unambiguously denied relief for two years. The court also stated that nothing in the law or regulations prohibits the Commissioner from issuing more than one final determination as to a given tax year. Thus, the notice could be a final determination conferring jurisdiction, even though there had been a prior final determination.

A pre-tax benefit can come in a variety of shapes and sizes, but usually can fit into one of two categories.

A pre-tax benefit can come in a variety of shapes and sizes, but usually can fit into one of two categories.

Most are benefits that an employee elects to pay for by using a portion of his or her compensation that would have otherwise been taxed as salary. The other category consists of benefits paid by your employer on a take-it-or-leave-it basis for which you are not taxed.

Pre-tax benefits usually are provided either within a cafeteria plan or separately.

Cafeteria plan pre-tax benefits

A cafeteria plan is a written plan under which all participants are employees who may choose among two or more benefits consisting of cash and qualified benefits.

Qualified benefits include:

1. Accident or health plan coverage;
2. Dependent care assistance;
3. Contributions to a cash or deferred arrangement such as 401(k) plans; and
4. Taxable and nontaxable group-term life insurance.

In general, the benefits that may be offered under a cafeteria plan are those that are not includable in the employee's gross income because of a specific Internal Revenue Code provision. However, cash, group-term life insurance on an employee's life in excess of $50,000, and group-term life insurance on the lives of the employee's spouse or dependents may be provided under a cafeteria plan even though they are taxable. Employees are not taxed on taxable options offered under a cafeteria plan unless they elect to receive them.

Other pre-tax fringe benefits

Employees are taxed on fringe benefits unless the benefits are specifically excluded from income by the Internal Revenue Code. Benefits that are specifically not included in an employee's taxable salary include:

1. Benefits that can be offered in a cafeteria plan, but are instead offered separately;
2. No-additional-cost services ("excess-capacity" services offered for sale to customers);
3. Employee discounts;
4. Working condition fringe benefits (for example, the use of a company car for business);
5. De minimis fringe benefits (benefits too small to count, such as occasional personal use of the company photocopier, or an occasional free ticket to a sporting event);
6. Qualified moving expense reimbursements;
7. Qualified retirement planning services; and
8. Qualified transportation fringe benefits (including van pooling, transit passes and qualified parking, up to specified dollar limits).

In connection with the last item-qualified transportation fringe benefits-either the employer can fund this benefit directly for everyone or only those employees who choose to receive this benefit can have a portion of their salary used to fund it.

Flexible spending accounts

A flexible spending account (FSA) can either form part of a cafeteria plan or it can be offered as a separate pre-tax fringe benefit. Either way, its purpose is to use funds that would otherwise be paid out as taxable salary to pay for certain benefits on a pre-tax basis.

An FSA is an arrangement under which an amount is credited to an account from which an employee may be reimbursed for health care, dependent care or other expenses that are excludable from gross income if paid by an employer. A separate account must be set up to pay for each type of expense, and the account cannot be drawn upon in any way other than for reimbursement of that type of expense. Beginning in 2013, an FSA for health care costs cannot exceed a $2,500 annual limit, as required under the Affordable Care Act.

The account may be funded by employer contributions or by a salary reduction agreement. An FSA can be a cafeteria plan if it is funded by a salary reduction agreement or otherwise allows employees to choose to receive cash instead of a qualified benefit. It is not a cafeteria plan if employees are not given this choice.

Please contact this office if you have any questions about taking advantage of pre-tax fringe benefits.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

Paperless

EFTPS is one of the most user-friendly programs developed by the IRS. EFTPS is totally paperless. Everything is done by telephone or computer. Because it's electronic, it's available 24 hours a day, seven days a week.

You make your tax payments electronically by:

• · Calling EFTPS; or

• · Using special computer software or the Internet.

Who can use EFTPS

EFTPS is available to businesses and individuals but businesses have more options.

Businesses: If your total deposits of federal taxes are more than $200,000 each year, you must use EFTPS. If not, you can still use EFTPS but you're not required to.

To calculate the $200,000 threshold, you have to include every federal tax your business pays, such as payroll, income, excise, social security, railroad retirement, and any other federal taxes.

The IRS wants businesses to use EFTPS and makes it difficult to stop using it. Once you meet the $200,000 threshold, you have to continue using EFTPS even if your annual tax deposits fall below $200,000 in the future.

Individuals: Individuals can also use EFTPS. Many of the individuals using EFTPS are making quarterly estimated tax payments but it's also available to people paying federal estate and gift taxes and installment payments.

How EFTPS works

There are two versions of EFTPS: direct and through a financial institution.

Direct: EFTPS-Direct is just what the name suggests. You access EFTPS directly - by telephone or computer - and make your tax payments. You tell EFTPS when you want to deposit your taxes and on that date EFTPS tells your bank to transfer the funds from your account to the IRS. At the same time, the IRS updates your payroll tax records to reflect the deposit.

Example. Your payroll taxes are due on the 15th. You have to contact EFTPS by 8PM at least one day before your tax due date. You either call EFTPS or log-on using special software or through the Internet. You enter your payment and EFTPS automatically debits your bank account and transfers the funds to the IRS on the date you indicate.

If you're a business, you can schedule your tax deposits up to 120 days before the due date. Individuals can schedule tax deposits up to 365 days before the due date.

Through a financial institution: You can also access EFTPS through a bank or credit union. Instead of contacting EFTPS directly and making your tax payments, your bank does it for you. Not all banks and credit unions participate in EFTPS so you have to check with your financial institution.

Only businesses can use EFTPS through a financial institution. If you're an individual and you want to use EFTPS, you have to use it directly. Also, while EFTPS-Direct is free, some financial institutions charge a fee for accessing EFTPS.

Getting started

To access EFTPS, you have to enroll. Your tax advisor can help you navigate the enrollment process and, once you're part of EFTPS, he or she can make the payments for you.

Q: What tax deductions am I entitled to as an investor?

A: Certain investment-related expenses are deductible, others are specifically restricted. Still others won't get you a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Certain investment-related expenses are deductible, while others are specifically restricted. Still other expenses likely will not provide you with a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Investor expenses

Investment counsel fees, custodian fees, fees for clerical help, office rent, state and local transfer taxes, and similar expenses that you pay in connection with your investments are deductible as an itemized deduction on Schedule A of Form 1040, subject to the 2% floor for all such itemized deductions.

Travel expenses related to the production or collection of income are deductible if you provide proof both of the expenses and the necessity for incurring them. Deductions for travel expenses related to attending investment seminars, however, are specifically prohibited. Travel expenses to attend stockholder meetings are permissible deductions only if travel is not for personal reasons and expenses are reasonable in relation to value of the investment.

Interest expenses

If you take out a loan to carry investment property, you are entitled to an itemized deduction for the interest you pay, reported on Form 4952, which is limited to your net investment income (dividends, interest, rents, etc.) Margin interest paid connected with your stock portfolio qualifies. The investment interest deduction is not subject to the 2% floor - you can start with deducting the first dollar of interest paid. Any disallowed interest over the net investment income limit can be carried over to a succeeding tax year.

Caution. Net capital gain from the disposition of investment property is not considered investment income. However, you may elect to treat all or any portion of such net capital gain as investment income by paying tax on the elected amounts at their ordinary income rates. This is usually not advisable.

Brokerage commissions

Brokerage commissions related to a particular stock purchase or sell, on the other hand, are considered a cost of the sale itself. As such, any commissions paid to buy a stock are added to your tax basis in the shares, which will later determine the amount of taxable gain you have when the property is sold. Any commission on the sale of the shares is netted from the amount you will be considered to realize on that sale.

Once you retire or reach age 70 ½ (depending on your retirement plan), the law requires that you start making -at a minimum-some periodic withdrawals. These withdrawals are called required minimum distributions.

Why required minimum distributions?

First, the tax policy behind letting you save in a tax-deferred account was to allow you to use those funds in your retirement, rather than to use them as just another way to build up your estate for your heirs. Second, because those accounts are usually tax-deferred, withdrawals after retirement are taxed to you as ordinary income. As a result, the IRS wants you to withdraw at least a minimum amount from those accounts each year so that it can be taxed.

New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years.

Good tax news

Good news for taxpayers who are interested in retaining funds in their IRAs and their tax-qualified plans because it means deferring income tax on the funds even longer.

If you are alive in the year in which you must begin required minimum distributions, your new MRD is calculated each year by dividing the account balance by your life expectancy, as determined by the uniform distribution period table (the "Uniform Table") in the new IRS rules.

• Example. At the time his required beginning date is reached (usually retirement or 70 ½), John Smith had a balance of $1 million in his IRA, as of the previous December 31. He previously named a beneficiary, who is age 67.

The difference in the computation of the RMD under the new rules is dramatic.

• Under pre-2001 rules, he checks the joint and last survivor table and finds that his divisor for his $1 million account is 22.

• Under revised rules in effect in 2001, his divisor is 26.2.

• Under the new Uniform Lifetime Tables now in effect, his divisor is 27.4.

The difference in required distributions is significant.

• Under pre-2001 rules, John must withdraw at least $45,454 this year

• Under the 2001 rules, John must withdraw at least $38,168 this year.

• Under the new tables, John must withdraw at least $36,496 this year.

Because of the new regulations, John has an extra $8,958 in his IRA at the end of the year over what he could have kept under the rules only a few years ago. This amount can then continue to accumulate earnings. This savings can be realized-and compounded-every subsequent year for the next 27 years. As a bonus, John's federal income tax (assuming a marginal rate of 35 percent) is more than $3,135 less ($12,773 instead of $15,908).

If you die before reaching your retirement having designated your spouse as beneficiary, distributions must begin by December 31 of the year following your death or the year that you would have turned 70½, whichever is later. At that time, RMD is computed over your spouse's life expectancy.

Caution!

The new rules-although more flexible-leave little room for mistakes in timing. Failure to take the minimum required distribution by the RBD will result in a 50 percent excise tax equal to half of the amount that should have been paid out but wasn't. Although early versions of proposed legislation included a decrease in the penalty from 50 percent to 10 percent, that provision is not the law.

If you'd like more specific advice on how the new Minimum Required Distribution rules apply to your retirement strategies, please contact this office.

Making gifts is a useful, and often overlooked, tax strategy. However, when thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

When thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

Different strategies, whether used alone or in combination, can produce the most advantageous tax results for you and the recipients of your generosity. However, everyone's situation is unique so before you start making gifts, talk to a tax professional.

Basic considerations

-- Generally, a minor is any person under age 18.

-- Different tax rules apply to gifts to minors under age 19 and minors under age 14.

-- Unearned income exceeding $950 (the 2009 amount) of a minor who is under 19 years of age (and college students who are under 24 years of age) will generally be taxed at the highest marginal rate of his or her parents under the "kiddie tax" rules.

-- Income from property given to a minor who is 14 years old or older will be taxed at the minor's marginal income tax rate.

-- If a minor's gift is in trust, there is a 15 percent tax rate on the first $2,300 (the 2009 amount) each year that grows in the trust.

Estate tax

The tax on your estate is determined at the time of your death. Making gifts over your lifetime is often overlooked and undervalued as a means of reducing your estate tax. When you make gifts of money or property during your life the net result is a smaller estate and a smaller tax. Also, when you give a gift of property to a minor, which later increases in value, your estate will not be taxed on this increase in value.

Annual exclusion

In general, you can give away up to $13,000 in 2009 to anyone (including minors) during the year, tax-free. You and your spouse, together, can also give up to $26,000, tax-free, in 2009, to each donee.

UGMA/UTMA accounts

Under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), annual gifts can be made by individuals to a custodial account.

Tax-free gifts can be made under the UGMA. In 2009, each taxpayer can transfer up to $13,000--and each married couple can transfer up to $26,000--to a custodial account. Some of the earnings will receive tax exemption while some or all of the earnings will receive taxation at the minor's tax rate. One drawback to UGMA accounts, however, is that the gifts are irrevocable. Another drawback is that if a student applies for financial aid, UGMA accounts may be deemed assets of the student that are part of the student's contribution toward his or her educational expenses.

UGMA and UTMA accounts have another downside that many parents dislike. When the minor reaches 18 or 21 years of age (depending upon state law), the child can generally do whatever he or she wants with the custodial account money. (That's why some individuals prefer "Crummey" trusts, which are discussed below.)

UTMA accounts operate very similarly to UGMA accounts. However, UTMA accounts let individuals make property gifts to their children that are tax-free.

Trusts

If you use property that does not produce income (such as a life insurance policy) to fund a minor's trust, this can have bad tax consequences. The IRS could assert that the true value of the gift cannot be determined, causing unavailability of the annual exclusion.

With a "Crummey" trust, your gift can stay in trust for as long as you desire without giving up the annual exclusion. However, contributions to a "Crummey" trust do not qualify for the annual exclusion unless the beneficiary receives notification that the contributions were made and is given a limited time (usually 30 days) to withdraw the contribution.

It is understood that the beneficiary will not withdraw the money or property. However, such an understanding should not be written because the IRS will use any evidence to say that the beneficiary had no withdrawal power.

If you are planning to make some gifts to your children or other minors, contact the office for additional guidance so we can make sure you get the best tax breaks possible.

No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.

Average wait time

The IRS suggests that you allow for "the normal processing time" before inquiring about your refund. The IRS's "normal processing time" is approximately:

• Paper returns: 6 weeks
• E-filed returns: 3 weeks
• Amended returns: 12 weeks
• Business returns: 6 weeks

IRS website "Where's my refund?" tool

The IRS now has a tool on its website called "Where's my refund?" which generally allows you to access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. The "Where's my refund?" tool can be accessed at www.irs.gov.

To get out information about your refund on the IRS's website, you will need to provide the following information from your return:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact whole dollar amount of your refund.

 Start a refund trace

If you have not received your refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online.

Getting a replacement check

If you or your representative contacts the IRS, the IRS will determine if your refund check has been cashed. If the original check has not been cashed, a replacement check will be issued. If it has been cashed, get ready for a long wait as the IRS processes a replacement check.

The IRS will send you a photocopy of the cashed check and endorsement with a claim form. After you send it back, the IRS will investigate. Sometimes, it takes the IRS as long as one year to complete its investigation, before it cuts you a replacement check.

A bigger problem

Another problem may come to the fore when the IRS is contacted about the refund. It might tell you that it never received your tax return in the first place. Here's where some quick action is important.

First, you are required to show that you filed your return on time. That's a situation when a post-office or express mail receipt really comes in handy. Second, get another, signed copy off to the IRS as quickly as possible to prevent additional penalties and interest in case the IRS really can prove that you didn't file in the first place.

Minimize the risks

When filing your return, you can choose to have your refund directly deposited into a bank account. If you file a paper return, you can request direct deposit by giving your bank account and routing numbers on your return. If you e-file, you could also request direct deposit. All these alternatives to receiving a paper check minimize the chances of your refund getting lost or misplaced.

If you've moved since filing your return, it's possible that the IRS sent your refund check to the wrong address. If it is returned to the IRS, a refund will not be reissued until you notify the IRS of your new address. You have to use a special IRS form.

IRS may have a reason

You may not have received your refund because the IRS believes that you aren't entitled to one. Refund claims are reviewed -usually only in a cursory manner-- by an IRS service center or district office. Odds are, however, that unless your refund is completely out of line with your income and payments, the IRS will send you a check unless it spots a mathematical error through its data-entry processing. It will only be later, if and when you are audited, that the IRS might challenge the size of your refund on its merits.

IRS liability

If the IRS sends the refund check to the wrong address, it is still liable for the refund because it has not paid "the claimant." It is also still liable for the refund if it pays the check on a forged endorsement. Direct deposit refunds that are misdirected to the wrong account through no fault of your own are treated the same as lost or stolen refund checks.

The IRS can take back refunds that were paid by mistake. In an erroneous refund action, the IRS generally has the burden of proving that the refund was a mistake. Nevertheless, although you may be in the right and eventually get your refund, it may take you up to a year to collect. One consolation: if payment of a refund takes more than 45 days, the IRS must pay interest on it.

If you are still worrying about your refund check, please give this office a call. We can track down your refund and seek to resolve any problem that the IRS may believe has developed.

Is a property transfer to your child or other minor a possible event on your horizon? If it is, just don't cover yourself on the tax consequences of such transfers. There are important legal considerations over and above the transfer's tax impact.

If you're considering a substantial gift to a young child, usually you don't let him or her take direct control of the property. Instead, one of two popular ways of transferring property is generally used -- through custodianships and trusts. Here are some points to consider.

Custodianship

Most states have adopted the Uniform Transfers to Minors Act (UTMA), with some variations. Under the UTMA, a person can transfer any type of property to a custodian (an adult), who manages it for a minor's benefit (the minor owns the property) until the minor reaches a certain age (the "age of majority," which is 18 or 21, depending on state law).

Since a minor or custodian could face possible personal liability problems via ownership of cars, real estate, etc., the UTMA in general gives protection for the minor and custodian from personal liability (if they are not personally at fault) to third parties.

However, custodianships can have drawbacks:

• When the minor reaches the specified age, there is no guarantee he or she will handle the property in a responsible manner.
  
• Once a person transfers the property to a custodial account, that donor can no longer get it back. Taking money from the custodial account could cause someone to be sued, or it could be prosecuted as a criminal act.
  
• Custodial accounts may cause financial aid from colleges to be reduced -- those amounts are considered to go 100 percent toward what a student is expected to contribute for his or her educational expenses.
  
• A custodianship can be set up for only one beneficiary -- for instance a parent cannot legally transfer money from the custodial account of one of their children to the custodial account of another.

Trusts

People often opt to use custodianships rather than trusts because there is less paperwork and generally lower administrative costs. Custodianships can be set up quite informally, while trusts can be more elaborate and require more formalities.

When large amounts are involved, most people use trusts rather than custodianships even though there are greater administrative costs. For instance, a trust will give someone more flexibility to specify at what age a trust beneficiary will be distributed trust funds. A trust can also allow the donor to split benefits among several beneficiaries.

If you are thinking about making a cash or other property transfer to a minor, please contact this office so that we can further discuss how to use the various options to properly carry out your intentions.

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

A: Many taxpayers unrealistically and, to their own detriment, believe that when the IRS grants them an extension to file their tax return, it is the "magic wand" that waves away all tax concerns until the extended filing deadline is upon them. This is not the case. Even though getting extensions has been made easier--individuals can obtain an automatic four-month extension by phone, the mail or computer, and an additional two months is granted for qualifying taxpayers--there are drawbacks, and certainly "no free rides."

When a taxpayer gets an extension to file his or her return, this does not mean that he or she has more time in which to pay any taxes that are owed without interest or penalty. An extension to file also does not extend the time for payment of taxes. Your ultimate tax liability is an official obligation that starts on April 15^th, 2008. You don't have to pay; but if you don't pay, interest charges (currently 7 percent, compounded daily) are applicable to any tax unpaid after the regular deadline. And that may only be the start.

If payments by the regular deadline are less than 90 percent of the actual 2007 tax, the IRS also has the right to asses a 0.5 percent per month late filing penalty. In addition, you must properly estimate the amount of total tax liability based on current information when filing for an extension. If the IRS later determines that estimate to be unreasonable, it can treat the extension as completely void and assess hefty failure-to-file penalties.

An extension, and not filing until October 15^th also means that you won't receive a stimulus rebate check (up to $600 for individuals and $1,200 for joint filers, not including any applicable $300 rebate for a qualifying child) until November or early December, rather than based on the May through July distribution schedule for those filing their 2007 returns by the regular April 15^th, 2008 deadline.

Some procedural pitfalls can also surprise taxpayers who had every intention of making a proper extension request. For example, if a husband and wife file separate returns, an automatic extension application filed by one does not give an extension of the filing time to the other.

It's always nice to have extra cash lying around in your business. Say you've had a good year, but you want to wait awhile before plowing the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

It's always nice to have extra cash lying around in your business. Perhaps you've had a good year, but want to wait awhile before putting the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

The accumulated earnings tax trap

If your business is taxed as a regular "C" corporation and the IRS believes that your corporation has retained cash beyond "the reasonable needs of the business," it can assess an additional tax on the corporation, in addition to normal corporate income taxes. The tax is called the accumulated earnings tax.

For tax years beginning before 2011, the accumulated earnings tax is equal to 15 percent of accumulated taxable income. Accumulated taxable income is taxable income, with adjustments, reduced by dividends paid deduction and earnings accumulated for reasonable business needs or minimum credit amount.

For tax years beginning after 2010, the rate of the accumulated earnings tax, which is imposed on the excess accumulated taxable income, is imposed at the highest rate of tax for single individuals. Currently, the highest tax rate for individuals is 35 percent, but may rise back to 39 percent in 2010 under proposals set forth by the Obama Administration.

If your business is either unincorporated or is taxed as a pass-through entity such as a Subchapter S corporation, it is not subject to the accumulated earnings tax. You get a "free pass" on the accumulated earnings tax because all profits are "passed through" to you as the owner automatically, with usually nothing paid on the corporate or entity level.

Avoiding accumulated earnings tax

What does your corporation need to do to demonstrate to the IRS that its current amount of retained earnings does not exceed the reasonable needs of the business?

IRS rules list the following as acceptable grounds for accumulating income:

(1) Business expansion and plant replacement,

(2) Acquisition of a business through purchase of stock or assets,

(3) Debt retirement,

(4) Working capital, and

(5) Investments or loans to suppliers or customers necessary for the maintenance of the corporation's business.

On the other hand, unacceptable grounds for accumulating income are:

(1) Loans to shareholders and expenditures for their personal benefit,

(2) Loans to relatives and friends of shareholders or to others with no reasonable connection with the business,

(3) Loans to a related corporation (common ownership),

(4) Investments that are not related to the business, and

(5) Accumulations to protect against unrealistic hazards.

Worse yet - the personal holding company tax

If -- due to a large surplus in your business' cash account in any particular year-- the investment income from your corporation becomes its main source of income, watch out! Your business may qualify as a  "personal holding company." A personal holding company tax is imposed on any corporation that meets the definition of a personal holding company even if the corporation was formed for legitimate business reasons. Personal holding companies are subject to an additional tax on any undistributed personal holding company income.

Any and all undistributed earnings of a personal holding company are subject to a 15 percent penalty tax in 2009 and 2010. This tax is imposed on top of the regular corporate income tax. Although the personal holding company tax should usually be avoided at all cost, it nearly always can be avoided with some planning.

If you anticipate holding more of your business profits than usual on the sidelines as cash for a while, please contact this office. We can make certain that you don't fall into a tax-trap situation that might otherwise be overlooked.

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

A. Cooking, cleaning and childcare: domestic concerns - or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it's particularly important that you don't stumble through ignorance in not fulfilling your obligations.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What it costs

In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.

Deciding who is an employee is not easy. Contact us for more guidance.

In the wake of the Enron collapse has come a new interest in the accounting profession and the spin on the news is often not too flattering. That's wrong. Accounting professionals play a very important role in our global economy but it's a role not too many people understand.

In a nutshell, auditors certify the accuracy of profits, losses, debts and other financial data reported by companies. They are hired by a company's board of directors - and the shareholders - to make sure that financial statements comply with federal law.

In the wake of the Enron collapse has come a new interest in the accounting profession and the spin on the news is often not too flattering. That's wrong. Accounting professionals play a very important role in our global economy but it's a role not too many people understand.

In a nutshell, auditors certify the accuracy of profits, losses, debts and other financial data reported by companies. They are hired by a company's board of directors - and the shareholders - to make sure that financial statements comply with federal law.

Publicly held companies are required by the Securities and Exchange Commission to issue financial statements that have been independently audited. The independent auditor assures investors that the company's' financial statements conform to generally accepted accounting practices (GAAP).

The audit process

An audit is an evaluation that is based on financial information prepared by the management of the company. The auditor has nothing to do with the preparation of this information. Once it has been provided to the auditor, he or she uses accepted testing techniques and professional expertise and judgment to develop an opinion on the accuracy and fairness of the financial statements.

An auditor speaks only to the company's finances. He or she doesn't express a judgment on how well management is doing its job. Neither does he or she offer advice about investing in or lending to a company nor guarantee that employees are honest and/or qualified.

The framework

It would be impossible for an auditor to examine every transaction so the auditor relies on selective testing techniques. Audits should not be expected to provide pinpoint accuracy. They should, however, give investors a reasonable level of assurance that the financial statements are accurate.

Before an auditor can form an opinion, he or she considers the company's internal control structure. The auditor identifies the risk of error in the financial statements and designs procedures to reduce that risk. The auditor also uses analytical procedures to evaluate financial information through the various stages of the audit.

The report

When an audit is completed, the auditor issues a report. The standard report consists of three paragraphs:

• · The first paragraph talks about the different duties of management and the auditor.

• · The second paragraph says that the audit was performed to obtain reasonable assurance about whether the financial statements are free of errors or irregularities. It also provides a brief description of what is involved in an audit and states that the auditor formed an opinion on the financial statements taken as a whole.

• · The last paragraph, the opinion paragraph, contains the auditor's conclusions. The auditor is also expected to take an extra step if the audit raises doubt that the company can stay in business. In that case, he or she has to include an explanation of why the company may be on shaky ground.

Professional opinion

The auditor issues one of the following types of professional opinions. Only the first one is generally considered acceptable for investors' purposes:

• · Unqualified (no significant limitations affected audit performance and no material deficiencies exist in the financial statements)

• · Qualified (the scope of the auditor's work is significantly restricted, or there is a material departure from generally accepted accounting principles)

• · Disclaimer (restrictions in the audit's scope are so pervasive that the auditor cannot form an opinion on the fairness of the presentation)

• · Adverse (departures from generally accepted accounting principles are so significant that the financial statements do not fairly represent the company's financial position)

An auditor's opinion is just that -- an opinion. It indicates that a professional judgment, not a guarantee, has been given on management's financial statements. If Enron has taught investors anything, it is that the underlying financial statements -- and all the small footnotes - are just as important as the auditor's report.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

Traditional IRAs

Individuals who receive compensation and who are not age 70½ or older can make contributions to Individual Retirement Accounts (IRAs). Money saved in a traditional IRA is not taxed until you take it out. Contributions are tax deductible.

For 2009, the maximum amount you can contribute to an IRA is $5,000 (not including rollover contributions) if you are under the age of 50. Individuals age 50 or older can add $1,000 for a total contribution of $6,000 in 2009. These are so-called "catch-up" contributions to help older workers save for retirement. Keep in mind, your contribution may be limited if your income is higher than thresholds set by Congress and you participate in certain employer-sponsored retirement plans. Sometimes, a taxpayer can also contribute to his or her spouse's IRA.

Deductible contributions to a traditional IRA must be made on or before April 15, 2009 (which is generally the deadline to file your federal individual income tax return).

Roth IRAs

Contributions to a Roth IRA are not deductible. Contributions, therefore, are made with after-tax dollars. However, income accrued on Roth IRA contributions is not taxed when it is withdrawn if it is a qualified distribution. A qualified distribution is any one of the following: -- On or after the date the individual attains age 59 ½;

-- For a qualified first-time home purchase

-- To a beneficiary or to the estate of the individual on or after the death of the individual; or

-- As a result of the individual becoming disabled.

As with a traditional IRA, the maximum annual contribution to a Roth IRA is $5,000 in 2009. And, like a traditional IRA, individuals who are 50 or older can make an additional $1,000 in "catch-up" contributions, for a total of $6,000.

Note. For tax years beginning after December 31, 2009, a taxpayer can convert a traditional IRA or make rollover from an eligible retirement plan to a Roth IRA without regard to the his or her income and without regard to whether he or she is a married individual filing a separate return. For conversions taking place before 2010, the taxpayer's adjusted gross income (AGI) cannot exceed $100,000 and the taxpayer cannot be a married individual filing a separate return. For conversions taking place in 2010, the taxpayer recognizes the conversion amount ratably in AGI in 2011 and 2012, unless the taxpayer elects to recognize it all in 2010. However, 2009 is a perfect year to start planning in order to take advantage of the new Roth IRA rules.

401(k)s

An employee can defer as much as $16,500 in 2009 on a pre-tax basis under a 401(k) plan. Employees who are 50 years old by the end of the plan year may make additional "catch-up" payments of up to $5,500 in 2009 (for a total contribution of $22,000). "Catch-up" contributions are also pre-tax, but only can be made if the plan permits. Employers can also make 401(k) contributions for their employees' benefit. In general, an employer's matching 401(k) contributions are not subject to the same annual limit as are employee contributions.

SIMPLE IRA and 401(k) plans

Employers can establish a Savings Incentive Match Plan for Employees (SIMPLE) if 100 or fewer of its employees received at least $5,000 in compensation from the employer last year. Eligible employees can make contributions of up to $11,500 in 2009 (indexed for inflation). Employees who are 50 and over can make additional catch-up contributions of $2,500 in 2009 (for a total of $14,000). Employer contributions to the SIMPLE plan are not included in the annual limit.

Tax-shelter annuity arrangements - 403(b) plans

Public school systems and certain types of tax-exempt organizations may provide retirement benefits to their employees through a tax shelter annuity plan, also referred to as a 403(b) plan. In 2009, employees can contribute up to $16,500 to a 403(b) plan and the maximum catch-up contribution is $5,500. As with other retirement plans, employees who are age 50 and above can make catch-up contributions.

Please contact this office if you have any questions concerning how much, or in what combinations, you can save in 2009 for your retirement on a tax-favored basis.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation?  In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation? In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

A corporation can make a distribution of a "dividend in kind" - which is a property distribution. For such purposes, a distributing corporation's stock and rights for such stock acquisition are not considered to be property. Dividend distributions in these forms are not treated as income that is taxable to the corporation's shareholders, with some important exceptions (e.g., distributions made instead of money; certain distributions made on preferred stock; distributions that are disproportionate; etc.).

A whole host of items can form the basis for your company's next property dividend:

• bonds issued by the government;

• real property;

• the distributing corporation's bonds;

• another corporation's bonds;

• assumption of the indebtedness to a third party of a shareholder;

• transferable vouchers enabling shareholders to receive company products or corporate services discounts;

• promissory notes from customers or other corporate asset purchasers;

• accounts and bills receivable;

• issued transferable vouchers for transportation, by an airline company;

• acquisition options for another corporation's stock; and

• rare coins (e.g., coins having a value that exceed their value as legal tender).

When a corporation distributes property that has increased in value, the corporation will recognize gain, for tax purposes, as if it had sold the property to the shareholder at the property's fair market value. However, the corporation recognizes no loss on distributions of property that have decreased in value. So it you're trying to get rid of property that is not much value to your company anyway, unfortunately, you can't get the added benefit of a loss deduction in planning a property dividend. The distribution amount that is received by a shareholder will be equal to the property's fair market value - decreased by any liabilities that the property is subject to or by any liabilities that the shareholder assumes.

Caution. For shareholders who are not corporations: according to the Tax Court, if a corporation assumes the liability of its shareholder, then at the time of liability assumption the shareholder has a dividend. The shareholder cannot assert a decrease to zero of the dividend due to secondary liability on his or her part. However, the Eighth Circuit has held that when there is a decrease in the shareholder's liability from primary to secondary, there can be no objective assessment of the shareholder's economic benefit so that the shareholder is treated as having no dividend until the corporation pays the debt.

The distribution amount is taxed as a dividend to the extent the corporation has enough earnings and profits in order to cover the distribution. Should the property's value (decreased by any debt) be greater than earnings and profits, the excess does not constitute a dividend. Rather, it is a capital return that is not taxable and is applicable first against the shareholder's basis until there is reduction to zero, at that point representing gain that is subject to taxation.

The shareholder's basis can differ from the corporation's basis in the same property. The shareholder's basis in the property that is distributed is equivalent to the fair market value of the property when it was distributed. Debt does not decrease the value for purposes of basis and the shareholder's basis is a measure of the shareholder's future gain or loss when the property is sold or deductions for depreciation if, in the possession of the shareholder, the property is depreciable.

Property distribution impacts corporate earnings and profits, which increases from gain which a corporation may recognize and decreases by the greater amount of the basis the corporation has in the distributed property or the property's value. The earnings and profits reduction decreases by any debt amount to which the property is subject.

Property dividends may make sense in a variety of circumstances, especially if the property can no longer be put to productive use by your business and only a small amount of taxable gain is at risk of being realized on the distribution. If the property's value is lower than its tax basis, however, a sale followed by a distribution of the cash proceeds may be the better way to go. Please consult the office if you wish to explore the opportunities presented by a possible property dividend in your business situation.

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes.  What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together. 

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes. What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together.

Retirement plan assets are part of taxable estate

When we begin to think about estate planning, one of the first things that we usually do is to take an inventory of what our current assets are and then we project into the future and try to estimate the assets we will have when we die. If you take a moment and think about this right now, aside from your residence, the most valuable asset you currently own (and that you will own at the time of death) is most likely to be your retirement savings (your IRAs, 401(k) accounts, and other employer-sponsored retirement plans). Looking at things from this perspective really drives home the importance of estate planning in connection with saving for retirement.

One of the reasons why we may not think about estate planning in connection with our retirement benefits is that we may have the false notion that these benefits are not part of our "estate" and therefore are not subject to estate tax. This is not true. All of your assets, regardless of the source are part of your estate and subject to estate tax (or, in other words, part of your taxable estate).This means that all of the issues that you may address with a lawyer or accountant or other financial professional regarding planning your estate will also need to be considered when planning for your retirement. When you sit down with a professional to help you plan your estate it is critical that you gather and provide as much information as possible regarding any and all retirement plans in which you participate-all IRAs, 401(k), and other plans sponsored by your employer.

Special issues involved with estate planning for retirement plan assets

Even though the funds that you have in your retirement plans are subject to the same estate planning rules and considerations as any other assets that are part of your estate, there are certain special or unique issues that come into play when you incorporate retirements savings into estate plans. Decisions made with respect to these issues may also have income tax consequences as well as estate tax repercussions. Some of the most important of these issues are:

•  Whether to elect for survivor benefits to be paid to a spouse (sometimes referred to as a joint and survivor annuity);

• Whether you should choose or designate a beneficiary with respect to your interest in an IRA or another retirement plan;

•  The tax differences to beneficiaries who receive benefits on your death but before you have begun to receive pay-out of your benefits and those beneficiaries who begin receiving benefits after retirement payments to you have commenced; and

• Benefits that may be subject to both income tax and estate tax (and are sometimes provided an income tax deduction due to the double taxation)

You must plan carefully to ensure that you get the best possible results regardless of the estate tax rules that are in effect. As you consider becoming more involved in estate and/or retirement planning, please contact the office for additional guidance.

During uncertain economic times, it's easy to feel pessimism and react hastily amid media reports about growing unemployment rates and stock market downturns. However, such actions can wreak havoc on your long-term personal and financial goals. Taking some time out now to put the uncertain future into perspective can help minimize the impact that many external forces can have on your personal and financial life.

During uncertain economic times, it's easy to feel pessimism and react hastily amid media reports about growing unemployment rates and stock market downturns. However, such actions can wreak havoc on your long-term personal and financial goals. Taking some time out now to put the uncertain future into perspective can help minimize the impact that many external forces can have on your personal and financial life.

Prepare for the unexpected. "Always be prepared" is a good motto to live by in order to position yourself, your family, and/or your business to survive and thrive in uncertain economic times. Getting your personal and financial houses in order can result in a viable fallback plan as well as peace of mind.

• Build an emergency fund. We've all heard the sage financial advice to keep 3-6 months of expenses in cash on hand - and many of us have quickly rejected this advice. How much sense does it make to have tens of thousands of dollars sitting around when there are credit card balances to pay off and children's college funds to contribute to? Well, just ask anyone who has unexpectedly lost their job or been faced with a devastating personal tragedy - cash is king. Make your emergency fund priority number one and if 3-6 months of cash seems unreachable to you, consider getting a home equity loan. Low interest rates coupled with high home values can get you into a home equity loan that will cost you little or nothing to maintain each year - an instant emergency fund. And don't procrastinate here - any kind of loan is tough to qualify for when you are unemployed or buried in debt.
• Keep your networking ties fresh. Keeping in touch with peers in your industry can cushion the blow of a job loss as you utilize this network to discover potential job openings. Since people are so mobile in the workplace these days, it's important that you make the effort to stay connected with those who may someday provide you with valuable leads and/or referrals. Remember, networking is a two-way street -- make sure these peers know that they can come to you for the same type of assistance should their careers hit a road bump.

Revisit your portfolio. Call it returning to the scene of the crime - your perhaps battered portfolio probably needs some attention. Revisiting your investment portfolio periodically to make adjustments to take into consideration current economic factors can help you feel a bit more in control of events outside of your control.

• Diversify, diversify, diversify. Diversification is key. It's worth taking the time to ascertain that your portfolio is properly allocated among many different investment vehicles in order to buffer it from potential market downturns or other uncontrollable financial events.
• Keep things in perspective. The stock market moves in a cycle with historically good times as well as bad. Keep your eye on your long-term goals and make sure that any short-term anxiety you may have doesn't knock your portfolio off track and keep you from maximizing your long-term average return.
• Be proactive, not reactive. Certain events - both major and minor - have the ability to send the financial markets on a white-knuckle roller coaster ride. Knee-jerk reactions to daily events unfortunately add more fuel to the fire and can result in an unstable investing environment. On a smaller scale, this same type of reaction can seriously affect your personal investment portfolio as long-term goals are derailed by short-term reactions. This is not to say you should turn a blind eye to current events - on the contrary, it is important to consider these events and their potential impact on your portfolio. However, any changes to your portfolio should be made in a proactive - not reactive - manner, and should take into consideration historical performance as well as possible future trends.

Relax and breathe. Dealing with uncertainty - whether related to your job, investments, health, etc., is never easy and can cause a certain level of anxiety and stress. However, how a person uses this new energy (positively or negatively) can determine their ability to not only survive through the bad times but to thrive as they open themselves up to new opportunities - to get their financial house in order or to prepare themselves to seek out another more fulfilling or secure job or career.

As illustrated above, preparation and perspective are two very important elements need to survive and thrive in an uncertain economy. If you find you need any assistance, do not hesitate to contact the office for additional guidance.

Q:  One of my children received a full scholarship for all expenses to attend college this year.  I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses.  Is this true and what amounts spent on my child's education will be treated as qualified expenses?

Q: One of my children received a full scholarship for all expenses to attend college this year. I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses. Is this true and what amounts spent on my child's education will be treated as qualified expenses?

A: Any amount received as a "qualified scholarship" or fellowship is not required to be reported as income if your child is a candidate for a degree at an educational institution. For the college that your child attends to be treated as an educational organization, it must (1) be an institution that has as its primary function the presentation of formal instruction, (2) normally maintain a regular faculty and curriculum, and (3) have a regularly enrolled body of students in attendance at the place where the educational activities are regularly carried on. Your child has received a qualified scholarship if he or she can establish, that in accordance with the conditions of the scholarship, the funds received were used for qualified tuition and related expenses.

Qualified tuition and related expenses include tuition and fees required for enrollment or attendance at the educational institution, as well as any fees, books, supplies, and equipment required for courses of instruction at the educational institution. To be treated as related expenses, the fees, books supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses, such as expenses for room and board, travel, research, equipment, and other expenses that are not required for either enrollment or attendance at the educational institution are not treated as related expenses. Any amounts that are used for room, board and other incidental expenses are not excluded from income.

Example: Assume this year your son received a scholarship in the amount of $20,000 to pay for expenses at a qualified educational institution. His expenses included $12,000 for tuition; $1,100 for books; $900 for lab supplies and fees; and $6,000 for food, housing, clothing, laundry, and other living expenses.

The $14,000 that your son paid for tuition, books and lab supplies and fees are considered to be qualified educational expenses and therefore would not have to be reported as income. The $6,000 that he spent on housing and the other living expenses is considered to be incidental expenses and would have to be reported in his income.

Note: This tax exclusion for qualified scholarships should not be confused with the Hope Scholarship Tax Credit, which has been temporarily renamed the American Opportunity Tax Credit and enhanced for 2009 and 2010 by the American Recovery and Reinvestment Act of 2009. The American Opportunity Tax Credit can reach as high as $2,500 for 2009 and 2010 for tuition expenses paid by you for yourself, a spouse or a dependent. Scholarship money that is excluded from income cannot be used in computing your costs for the American Opportunity Tax Credit (i.e. Hope Scholarship Tax Credit). "Financial aid" in the form of student loans, however, is not counted as a scholarship and any money applied to pay tuition can qualify for the Hope Scholarship Tax Credit.

There can be all sorts of complicating factors in assessing whether a particular scholarship will be taxed, such as the treatment of work-study scholarships, educational sabbaticals, scholarships paid by an employer, and stipends to cover the tax on the non-tuition portion of attending a university. If you need additional assistance in determining the taxability of scholarships funds, please contact the office.

How much am I really worth? This is a question that has run through most of our minds at one time or another. However, if you aren't an accountant or mathematician, it may seem like an impossible number to figure out. The good news is that, using a simple step format, you can compute your net worth in no time at all.

How much am I really worth? This is a question that has run through most of our minds at one time or another. However, if you aren't an accountant or mathematician, it may seem like an impossible number to figure out. The good news is that, using a simple step format, you can compute your net worth in no time at all.

Step 1: Gather the necessary documents.

You will need to gather certain documents together in order to have all the ammunition you will need to tackle your net worth calculation. This information is not much different than the information that you would normally gather in anticipation of applying for a home loan, preparing your taxes or getting a property insurance policy. Here's what you'll need the most recent version of:

• • Bank statements from all checking and savings accounts (including CDs);
  • Statements from your securities broker for all securities owned including retirement accounts;
  • Mortgage statements (including home equity loans & lines of credit);
  • Credit card statements;
  • Student loan statements;
  • Loan statements for cars, boats and other personal property

In addition, you will need to have a pretty good idea of the current market value of the following assets you own: real estate, stocks and bonds, jewelry, art & other collectibles, cars, computers, furniture and other major household items, as well as any other substantial personal assets. Current market values can be obtained via a call to your local real estate agent, the stock market and classified ad pages in your newspaper, or qualified appraisers. If you own your own business or hold an interest in a partnership or trust, the current values of these will also need to be gathered.

Step 2: Add together all of your assets.

Your "assets" are items and property that you own or hold title to. They include:

• • Current balances in your bank accounts;
  • Current market value of any real estate you own;
  • Current market value of stocks, bonds & other securities you own;
  • Current market value of certain personal articles such as jewelry, art & other collectibles, cars, computers, furniture and other major household items, and any other miscellaneous personal items;
  • Amounts owed to you by others (personal loans)
  • Current cash value of life insurance policies;
  • Current market value of IRAs and self-employed retirement plans;
  • Current market value of vested equity in company retirement accounts;
  • Current market value of business interests

Step 3: Add together all of your liabilities.

Your "liabilities" are the debts that you owe and are many times connected to the acquisition or leveraging of your assets. They can include:

• • Amounts owed on real estate you own;
  • Amount owed on credit cards, lines of credit, etc...;
  • Amounts owed on student loans;
  • Amounts owed to others (personal loans);
  • Business loans that you have personally guaranteed;

Step 4: Subtract your liabilities from your assets.

Almost done -- this is the easy part. Take the total of all of your assets and subtract the total of all of your liabilities. The result is your net worth.

Hopefully, once you've done the calculation, you will arrive at a positive number, which means that your assets exceed your debts and you have a positive net worth. However, if you end up with a negative number, it may indicate that your debts exceed your assets and that you have a negative net worth. If the net worth you arrive at differs substantially from the "gut feeling" you have about your financial position, take the time to carefully review your calculation -- it may be that you simply made a calculation error or overlooked some assets that you hold.

Evaluating your outcome

If you ended up with a positive net worth, congratulations! You've probably made some good investment and/or money management decisions in your past. However, keep in mind that your net worth is an ever-changing number that reacts to economic conditions, as well as actions taken by you. It makes sense to periodically revisit this net worth calculation and make the necessary adjustments to ensure that you stay on the right financial track.

If you arrived at a negative net worth, now may be the time to evaluate your holdings and debts to decide what can be done to correct this situation. Are you holding assets that are worth less than you owe on them? Is your consumer debt a large portion of your liabilities? There are many different reasons why you may show a negative net worth, many of which can be corrected to get your financial health restored.

Calculating and understanding how your net worth reflects your current financial position can help you make decisions regarding the effectiveness of your investment and money management strategies. If you need additional assistance during the process of determining your net worth or deciding what actions you can take to improve it, please contact the office for additional guidance.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

Fixed payments to charity

When you set up a charitable lead annuity trust (or CLAT, for short), the intention is for the assets of the trust, and the income they generate, to ultimately one day pass to one or more non-charitable beneficiaries, for example, your children. Before then, however, you may want one or more charities to receive some of the funds. Under a typical CLAT, the charity receives a fixed payout for a pre-determined number of years or, in some cases, for the lives of specified persons. The payments to the charity remain the same regardless of how the trust performs and no minimum payment is required. In most cases, the rules do not allow your beneficiaries to receive anything from the trust until the trust ends.

Individuals who can be used as the measuring lives would be restricted to the donor's life, the life of the donor's spouse, or a lineal ancestor of the beneficiaries. The IRS did this to prevent abuse of CLATs. Some people have tried to artificially inflate the tax benefits of CLATs by using unrelated individuals, such as those who were seriously ill and were expected to die prematurely, as the measuring lives.

Tax benefits

When the trust ends, the assets of the trust and the income earned by the trust pass to your beneficiaries tax-free. That is a potentially huge savings of federal estate and gift taxes. The top federal estate and gift tax rate in 2009 is 45 percent. If the original trust assets were passed directly to your heirs, taxes could reduce significantly your bequest. Placing the assets in a CLAT helps to preserve - and more importantly - grow them. The estate tax is fixed when the CLAT is created and not when the assets pass to your beneficiaries.

Generally, income paid to the charity is subject to tax by the owner of the trust. However, careful planning, such as funding the trust with tax-exempt bonds, can reduce or eliminate any tax liability on the part of the owner.

Timing the creation of a CLAT

CLATS need not be set-up after you die. You can fund a CLAT today and see the benefit of your gift as a charity makes good use of it. However, if you want to create a CLAT during your life, keep in mind that you will not be able to use assets in the trust.

A CLAT -- created either before or after your death -- can continue your legacy of giving to your favorite charities, while yielding overall tax savings for you and your family. Please contact the office if you have any questions on how a CLAT, or another variety of charitable trust, might work for you.

Q:The holidays are approaching and I would like to consider giving gifts of appreciation to my employees. What kinds of gifts can I give my employees that they would not have to declare as income on their tax returns? I also would like to make sure my company would be able to deduct the costs of these gifts.

A:First of all, anything given in the business setting is presumed, until proven otherwise, not to be a gift (e.g., is taxable income) -- that is, you are either rewarding an employee for work done or providing an incentive in which he or she will be inclined to do more work in the future. However, the Tax Code and related IRS regulations still allow many gifts to remain tax-free to the employee while being tax deductible to the business. Here is a short list of the rules:

$25 gift rule

A business may deduct up to $25 in gifts given to each recipient during any given year. However, you can't get around this limit by giving to each family member of the intended recipient: they all share in one $25 limit. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less.

No dollar limit exists on a deduction if the gift is given to a corporation or a partnership. The cost of gifts such as baseball tickets that will be used by an unidentified group of employees also qualifies for the unlimited deduction. However, once again, if the gift is intended eventually to go to a particular individual shareholder or partner, the deduction is limited to $25.

Separate "de minimis" rules

A "de minimis" fringe benefit from employer to employee is considered to be made tax-free to the employee. "De minimis" fringe benefits are not restricted by the $25 per recipient limit otherwise applicable outside of the employer-employee context. However, de minimis fringe benefits must be small "within reason." Typical de minimis gifts include holiday gifts such as a turkey or ham, the occasional company picnic, occasional use of the photocopy machine, occasional supper money, or flowers sent to a sick employee.

The general guidelines for de minimis fringe benefits are:

• the value of the gift must be nominal,
• accounting for all such gifts would be administratively nitpicking,
• the gifts are only occasional, and
• they are given "to promote health, good will, contentment, or efficiency" of employees.

Unfortunately, "gifts of nominal value" exclude such perks as use of a company lodge, season theater tickets, or country club dues. These cannot be given tax-free to an employee. But they do include occasional theater or sports tickets or group meals.

What's more, fringe benefits such as the use of an on-premise athletic facility or subsidized cafeteria are specifically included under IRS rules as de minimis fringe benefits. The traditional gold retirement watch -- or similar gift-- to commemorate a long period of employment is also treated as de minimis. However, cash or items readily convertible into cash, such as gift certificates, are taxable, no matter what the amount.