.McQuade.Brennan.LLP.

The New Year brings five significant changes to consider as you prepare your 2009 federal income tax return.  These changes generally provide opportunities to decrease overall tax liability through increased deductions, taxpayer credits and more. 

When preparing your 2009 return consider these five changes:

1. The American Recovery and Reinvestment Act (ARRA) provides significant incentives for taxpayers. These include: 

- Those purchasing a home or improving energy efficiency.

- Those purchasing a car.

- Parents and students paying for college.

2. Expansion of IRA deduction to those covered by a retirement plan with adjusted gross income of less than $65,000 (single) or $109,000 (married filing jointly).

3. Increase in the Standard Deduction to $11,400 for those married and filing jointly, and $5,700 for singles and those who are married and filing separately.

4. Change to the standard mileage rate to $.55 per business mile.

5. Increase of investment income a child may receive ($1,900) without being taxed on their parents’ return.

The Small Business and Entrepreneurship Council (SBE Council) released the 14^th annual Small Business Survival Index 2009: Ranking the Policy Environment for Entrepreneurship Across the Nation. The index ranks states based on their public policy conditions for small businesses and entrepreneurship. Hometown Washington, D.C. was ranked dead last this year and Maryland, not much better, was ranked 37^th. However, Virginia was ranked 10^th.

The rankings are based on taxes, regulatory costs, government spending, property rights, and health care and energy costs to determine which states are the friendliest to small businesses. Virginia’s success is easy to explain – low tax rates. D.C. and Maryland refuse to address their job killing corporate tax rates. Around this time last year, I made a case for the elimination of the D.C. corporate income tax.

When pigs fly…

Click here to view the complete report.

Low inflation contributed to a five cent drop in standard business mileage reimbursement rate for 2010. Effective January 1, 2010, the mileage reimbursement rate for business and medical and moving expenses have changed, but the mileage rate for charitable organizations has remained the same.

The IRS announced the 2010 optional standard mileage rates beginning January 1, 2010:

-          50 cents per mile for business miles driven

-          16.5 cents per mile for medical or moving purposes

-          14 cents per mile driven in service of charitable organizations

Limitations

The business standard mileage rate cannot be used to compute the deductible expenses of automobiles used for hire, or five or more automobiles owned or leased by a taxpayer and used simultaneously. In addition, a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Currently, there are approximately 200,000 riders and 4,000 employers participating in Metro’s SmartBenefits program. The program allows employees to set aside of a portion of their salary, before taxes, for transit expenses. Metrorail, Metrobus and regional bus fares, parking at Metro lots and registered van pool expenses are loaded onto a SmartTrip card each month at vending machines located in Metro stations.

Metro has proposed the following program changes:

- Workers would be required to set an amount for transit rides and transit parking, a new requirement.

- Unused transit and parking benefits for the month would be returned to the employer, instead of rolling over. This change upset many employees, since some employers had decided to keep the funds and not credit employees.

- Riders will not need to visit vending machines each month to download their benefits. Instead, the transaction will occur at the fare gate, bus box, or parking exit. The program will use the new cards like debit cards, deducting used amounts from the benefit amount set aside for the month.

These changes were going to be effective Jan. 1st, but due to the volume of complaints from employers and employers, Metro has decided to postpone the transition another year to give employers and employees more time to review the proposed changes to the program.

IRS has agreed to the extension although a formal request is pending. Metro says the changes are needed to protect the benefit system from misuse and that the additional time will allow them to make other planned improvements to the program as well.

The Wall Street Journal had an interesting article Monday on corporation’s increasing use of outsourced financial professionals.

McQuadeBrennan’s CFO Service group has been the firm’s fastest growing division. What I see in the Washington, DC marketplace is a shortage of accounting professionals who can tackle the multiple accounting and tax issues that organizations face daily. A private equity group we work with likes to use the term “efficacy” when describing our services.  It’s difficult for management to make assessments of a finance department’s “efficacy”, but they can make judgments on a department’s results. 

Tax returns get filed on time, financial statements are available real-time and most importantly, and what McQuadeBrennan believes is its most valuable service, the financial operations and results are clearly explained to management. 

Taxpayers now have until October 15, 2009 to disclose their unreported income from hidden offshore accounts to the IRS. The deadline was initially extended until September 23, 2009, but after many requests from tax practitioners and lawyers flooded with taxpayer requests, the IRS extended the deadline once again. Taxpayers who do not voluntarily disclose hidden offshore accounts by the new deadline face harsher civil penalties, where applicable, and possible criminal prosecution.

By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it.

I’ve seen many of my client’s portfolios and financials showing more red than black this year due to the economic crisis. I suggest businesses and individuals consider taking advantage of the longer net operating loss carryback option included in the recovery act. Eligible individuals have until October 15^th to make their election and eligible calendar-year corporations have until September 15^th.

Businesses with gross receipts of less than $15 million over a three-year period in the tax year beginning or ending in 2008 can carryback their current net operating losses (NOL) up to five years instead of two years, as previously allowed.

Advantages of taking the NOL carryback include:

-         Offsetting the loss against income taxes paid up to five prior years

-         Using up part or all of the loss now, rather than waiting to claim it on future returns

Corporations use Form 1139 to make their election and offset taxes.

Individuals, estates, and trusts use Form 1045 to make their election.

Business owners should be aware of the Section 179 and bonus depreciation tax deductions announced in the American Recovery and Reinvestment Act of 2009.  For qualifying property purchased during 2009, businesses are allowed to take Section 179 deductions up to $250,000 on the full purchase price of qualifying equipment purchased or financed from your gross income.  The limit to the total amount of equipment purchased is $800,000. Qualifying property includes:

-         Equipment for business use

-         Tangible personal property used in business

-         Business vehicles with a gross vehicle weight in excess of 6,000 lbs

-         Computers

-         Off-the-shelf computer software

-         Office furniture

-         Office equipment

-         Property attached to your building that is not a structural component of the building

-         Equipment purchased for business and personal use, deduction based on the percentage of time it is used for business purposes

You may also take 50 percent bonus depreciation for property placed in service in 2008 and 2009. The tax break has been extended for property with longer production periods. The bonus depreciation allowance is available for property depreciable under MACRS and has a recovery period of 20 years or less; water utility property; off-the-shelf computer software; or qualified leasehold improvement property. 

For businesses who have delayed capital expenditures, this may be a good time to take action. Equipment and motor vehicle dealers are discounting across the board, and the IRS will subsidize a portion of the cost. 

Attention all business owners that conduct business in D.C.! The District has required all businesses that pay business taxes to have a valid District of Columbia Basic Business License (BBL). In general, if your business has a tax identification number, then you are required to obtain a BBL General Business License.   

There are rolling application deadlines based on your business zip code.  For businesses located in Maryland and
Virginia conducting business in the District, application deadlines will be based on the name of the city you are located. 

Maryland:                                      Virginia:

A-C     February 28, 2009             A-F    July 31, 2009

D-Q     March 31, 2009                G-Z     August 30, 2009

R-Z     April 30, 2009

Certain businesses are exempt from applying for a General Business License.  However, they are required to file an exemption request form. 

The following exemptions apply to businesses:

-  Who are required to maintain licensure by local, state or national certification board or body

-  Not having a Federal Employer Identification Number (FEIN)

-  Having a Basic Business License whose endorsements authorize all current business activities

-  Having a current occupational or professional license for business activities 

For example, health professionals, lawyers, professional service providers, educators, insurance providers, and service providers may file for exemption.

The 2009 Economic Stimulus Plan, officially known as the “American Recovery and Investment Plan”, was signed into law on February 17, 2009.  The bill, historical because of its many attributes, contains several incentives to jump start the economy.  

The following are key previsions businesses will find most beneficial: 

- NOL Carryback: Businesses with 2008 gross receipts of less than $15 million can carryback their current net operating losses (NOL) up to five years instead of two years, as previously allowed.  

- Industrial Development Bonds: The scope of state and local government issued industrial development bonds is temporarily extended to facilities manufacturing intangible property. 

- Bonus Depreciation and Section 179 Limits: For qualifying property purchased during 2009, businesses are allowed to take 50 percent bonus depreciation and Section 179 deductions of up to $250,000, certain restrictions apply. 

- Credit for Hiring “Disadvantaged” Workers:  A maximum tax credit of $2,400 for hiring unemployed veterans or individuals between the ages of 16 and 25 who have not been regularly employed or attending school in the past six months.  

- Reduction in S-Corp Asset Holding Period: The 10 year asset holding period requirement to avoid built-in gains tax on S Corporations has been temporarily reduced to seven years. 

- Transportation Fringe Benefits: The 2009 limit on pre-tax deductions for mass transit benefit has increased to $230 per month from the existing $120 and ties the benefit to inflation for future years.   

- COBRA Premium Subsidy: Includes 65% federal subsidy of COBRA premiums for involuntarily terminated employees for a period of up to nine months. To qualify for this premium subsidy, an employee must be involuntarily terminated between September 1, 2008 and December 31, 2009 and earn less than $125,000 if single, or $250,000 if married.  

Key previsions beneficial to individuals: 

- AMT Patch Extension: The existing alternative minimum tax (AMT) fix is extended for another year increasing exemption amounts up to $46,700 of an individual’s income and $70,950 of a couple’s income for 2009. It also allows the use of nonrefundable personal credits to avoid the alternative minimum tax. 

- Education Tax Credits: The Hope education credit limit is increased from $1,800 to $2,500 for all four years of college tuition. In addition, the credit will cover costs of textbooks and would now be 40 percent refundable. Also, computer related expenses are considered exempt under the new 529 College Savings Plan rules. 

- First-time Homebuyer’s Credit: A refundable tax credit increase of 10 percent of home value up to a maximum credit of $8,000 for purchases made before December 1, 2009 (November 30, 2009). The credit is forfeited if purchaser sells the house within three years. Certain income limitations apply.

- Credits for Residential Energy Efficiency Improvements: Tax credits are increased 30 percent up to a $1,500 maximum credit for home energy efficiency enhancement purchases, such as new furnaces or insulation. 

- Deductions for Car Buyers: Vehicles purchased in 2009 costing up to $49,500 qualify the car buyer to take above-the-line deduction for state, local and excise taxes as well as interest on their car loan. Phase out begins at $125,000 for individuals and $250,000 for married filing jointly.