The financial reform bill recently signed into law is an attempt to address some of the problems that contributed to the 2008 financial crisis. The legislation, officially known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, is considered the most wide-ranging overhaul of the U.S. financial system since the aftermath of the Great Depression. Because the problems it addresses are complex, the legislation itself is complex; much of the real impact will be felt only after regulations are developed to implement the law's provisions. Also, some provisions, such as those dealing with lending practices, will have a direct impact on individuals and investors; others will primarily affect the ways in which Wall Street functions. This is only a brief summary of some key provisions; consult your financial professional to see how these changes may affect you.

Credit and lending practices are revised

The Act requires originators of residential mortgages to disclose any conflicts of interest and compare costs and benefits of mortgages offered to a potential borrower. Lenders also will be required to verify whether, based on income, credit history, and other data, a borrower has a reasonable ability to repay a loan plus its associated taxes, insurance, and other costs. This could mean that self-employed people and others whose income is undocumented or irregular will need better documentation to qualify for a loan.

Lenders will no longer be able to give loan officers financial incentives that induce them to steer customers to a mortgage with a higher interest rate simply to increase their own commission. Their ability to impose prepayment penalties when a borrower repays a loan early also will be more limited, and a holder of a hybrid adjustable rate mortgage must receive notice of any change in the interest rate six months in advance.

Lenders are prohibited from refinancing an existing mortgage unless the new mortgage offers a net benefit to the borrower, and they may not coerce or induce an appraiser to make a faulty appraisal of a property's value. Loan applicants must receive a copy of the appraisal on the property no later than three days prior to the closing.

High-cost mortgages are subject to special regulations. Any balloon payments on high-cost mortgages cannot be more than twice as large as the average of earlier payments, and a borrower must receive qualified counseling on the advisability of a high-cost mortgage before credit can be extended.

Homeowners who are unable to make mortgage payments as a result of losing their jobs or because of a medical condition may now qualify for up to $50,000 in assistance loaned through HUD's existing Emergency Mortgage Assistance Fund.

Increased protection of bank deposits becomes permanent

During the financial crisis, the Federal Deposit Insurance Corp. (FDIC) temporarily increased from $100,000 to $250,000 the amount it will insure on deposit accounts in FDIC-insured banks. The $250,000 limit is now permanent

Greater transparency and accountability for investments and related services

Institutional investors' inability to determine the amount of global financial exposure to derivatives--investments based on the value of other investments--contributed to the panic at the height of the financial crisis. Over-the-counter derivatives must now be traded on a public exchange, and trades must be cleared through a registered clearinghouse. Nonstandard derivatives can still be traded privately, but must be reported to a central authority in order to increase regulators' ability to monitor the overall level of activity.

Hedge funds and private-equity advisors will be required to register with the Securities and Exchange Commission (SEC) and disclose to the commission information such as investment positions and the amount of leverage involved. Also, the $1 million minimum net worth required to be an accredited investor eligible to invest in such funds will no longer include a principal residence, and that $1 million threshold will be reviewed every four years.

Credit rating firms, which were criticized for being too lax in their evaluations of securities based on subprime mortgages, will be subject to oversight by the SEC, which can fine those that issue too many faulty ratings over time. Also, investors will now have the right to sue an agency for issuing ratings it knew or should have known were flawed.

Shareholders of public companies will have the right to a nonbinding vote on compensation for the company's executives. Also, protections for people reporting securities law violations have been enhanced. Whistle-blowers with information that leads to monetary sanctions of more than $1 million will be eligible for 10 percent to 30 percent of the funds collected from the offender; if an employer retaliates, a whistle-blower can sue without waiting until administrative remedies have been exhausted.

An Investor Advocate office will be established within the SEC to help individual investors resolve significant problems and to promote investor interests.

Risky banking practices are addressed

Banks will be required to hold additional capital to cover potential losses, and some securities are no longer acceptable as vehicles for capital reserves held by large banks. Banks also will be required to retain at least 5 percent of a loan on their books if the loan is sold and/or repackaged with other loans and securitized. (However, some relatively low-risk mortgages, such as fully documented loans with a fixed interest rate, are exempted.)

Banks also will be more limited in their ability to engage in proprietary trading in their own accounts, which could represent a conflict of interest with their responsibility to their clients. They also will have to set up separate operations to handle their most risky derivative trades, such as swaps. A bank will not be permitted to invest more than 3 percent of its core capital in hedge funds and private equity, but it may still organize and offer them as long as certain conditions are met.

A Consumer Financial Protection Bureau overseen by the Federal Reserve will be created to regulate consumer financial products and services.

Systemic risk will be monitored, and liquidation of large banks will be overseen

A new Financial Stability Oversight Council is charged with assessing and managing risks that could threaten the entire U.S. financial system. Also, the FDIC will manage the liquidation of a bank whose failure the Treasury Secretary determines would disrupt the stability of the nation's financial system. That will include firing corporate management responsible for the failure and prohibiting any payments to shareholders until all other claims are paid. The FDIC may borrow from an Orderly Liquidation Fund to pay for a liquidation, but those costs must be replenished not from taxpayer funds but from claims on the bank and, if necessary, assessments on large financial institutions. The Act does not permit the Federal Reserve or the FDIC to lend to or provide a guarantee for individual or insolvent companies or banks, but both may lend funds to provide liquidity.

Early in 2010, the Washington State Legislature passed a number of laws that have current or future tax impact for businesses and individuals.  For a list of changes, please click here http://dor.wa.gov/Docs/Pubs/Misc/LegislativeTaxUpdate.pdf.

Hidden in the various changes are two provisions that dramatically change the taxation of companies that do business in Washington State.   The first provision is the new “Economic Nexus” rule.  This revises the criteria to establish “nexus” in Washington State, thereby subjecting itself to Washington taxation.   For example, an out of state company who sells to Washington State customers but otherwise maintains no physical presence in the State is now subject to Washington taxation if its Washington sales are more than $250,000.  The same company could, prior to the enactment of this provision, avoid Washington State taxation by not maintaining any physical presence in Washington State regardless of the amount of its Washington sales. 

The second big change is the new apportionment method that must be used for businesses that report B&O tax under certain classifications, such as the “Service and Other Activities” classification. 
Apportionment is a way to allocate business income and expenses for companies that do business in multiple states.  The new apportionment method calls for the use of a single receipts factor, where the numerator is the total gross income of the business attributed to Washington, and the denominator is the total gross income worldwide.  Based on a temporary rule (WAC 458-20-19402), income is attributed based on a cascading method, with the first determining factor being where the customer received the benefit of the service.   This contrasts drastically with the previous apportionment method, which was based on the cost of doing business.

Both provisions are effective June 1, 2010.  Companies need to act now to analyze the impact these changes will have on their operations and bottom line.  Please contact us if you would like to discuss how these changes will impact you.

The “Hiring Incentives to Restore Employment Act of 2010” (The HIRE Act) was signed into law earlier this year. It provides tax benefits to businesses that hire and retain unemployed workers in 2010. Since the law’s enactment, the IRS has issued guidance as to how the new law affects employers. Here is a summary.

Payroll Tax Holiday

A key element of the HIRE Act is a payroll tax holiday relating to Social Security taxes:

• The HIRE Act relieves employers of the obligation to pay their share of Social Security (i.e., OASDI) employment taxes on qualifying wages paid to certain newly hired employees if the law’s requirements are met.
• An employer’s potential maximum tax benefit is $6,621: 6.2% of the employee’s wages up to $106,800 — the maximum amount of wages subject to Social Security taxes (in 2010).
• Workers hired after February 3, 2010, and before January 1, 2011, are eligible for the payroll tax forgiveness if certain conditions are met.
• However, only wages paid after March 18 qualify to receive the exemption for payroll taxes.
• The new employee cannot be a replacement for a former employee unless the former employee was terminated for cause or left voluntarily. Following a layoff, when business activity picks up again, the payroll tax exemption may apply with respect to the hiring of a new employee by the employer
• Employers must obtain signed affidavits (Form W-11 or its equivalent) from the workers certifying that they have not been employed for more than 40 hours during the 60-day period ending on the date employment began.
• No minimum weekly hour work requirement for new employees must be met in order for an employer to be eligible for the payroll tax break.
• There is no limit on the total amount of payroll tax an employer may be forgiven.
• The payroll tax break doesn’t reduce payroll taxes paid during the first calendar quarter of 2010. Instead, the tax reduction is treated as a payment against the employer’s second quarter Social Security tax liability.
• In addition to income taxes, employers are still required to withhold the employee’s 6.2% share of Social Security taxes.
• The reduced tax withholding will have no bearing on an employee’s future Social Security benefits.
• The employee’s and the employer’s share of Medicare taxes (1.45% each — on all wages) continues to apply.
• For workers that are otherwise eligible for the Work Opportunity Tax Credit (WOTC), the employer must select between the WOTC or the Social Security payroll tax reduction benefit under the HIRE Act; both cannot be claimed.

Retention Credit

The HIRE Act also offers employers a tax credit for retaining the workers they hire.

• The amount of the tax credit that the employer may generally claim for each newly hired workers retained for at least 52 weeks is equal to the lesser of:
  • $1,000, or
  • 6.2% of wages paid to the retained worker during the 52-week period.
• Accordingly, the credit for a retained worker will be $1,000 if the retained employee’s wages during the 52-consecutive-week period exceeds a little over $16,000.
• The credit is only applicable to the extent the amount of wages paid to the employee during the last 26 weeks of the 52-week period is at least 80% of the amount paid during the first 26 weeks of the period.
• The tax credit under the HIRE Act is claimed in the tax year in which the employee first satisfies the requirement of working 52 consecutive weeks for the employer.
• The employee cannot be a relative of the employer in order for either tax benefit to be claimed.

Sec. 179 Expensing

The HIRE Act also extends the 2009 enhanced expensing rules for small businesses under IRC Section 179 for tax years beginning in 2010. Under the expensing rules, qualifying businesses have the option to currently deduct the cost of business machinery and equipment, rather than depreciating it over a number of years.

• The HIRE Act provides that, for tax years beginning in 2010, a business may expense up to a maximum amount of $250,000.
• The expensing election amount begins to phase out when a business purchases expensing-eligible assets in excess of $800,000.

• These limits are in keeping with expensing levels in 2008 and 2009, which had expired.

• Prior to the HIRE Act’s enactment, expensing limits for 2010 were $134,000 of qualifying assets, with a phaseout beginning in excess of $530,000 of qualifying assets.
• The election applies to most non-real estate assets

If we can be of assistance to you in applying the HIRE Act’s provisions to your business, let us know.

The Patient Protection and Affordable Care Act (the “Act”, as amended) was recently signed into law. The Act will affect nearly every individual and business in the U.S.

The Act generally requires most individuals to have at least a minimum level of essential health care coverage (or imposes penalties on individuals who fail to do so). Under the new law, lower income individuals (with income up to 400% of the poverty level) may be entitled to receive tax credits and cost-sharing reductions to help pay for the coverage.

Employer Responsibilities

The Act also contains numerous provisions affecting employers.

Employer Shared Responsibility. While the Act does not require employers to provide minimum essential health coverage to employees, it encourages them to do so by offering penalties and incentives.

Employer Penalty. The new law exacts a penalty on larger employers (at least 50 full-time or full-time equivalent employees during the prior year) who fail to provide adequate coverage. If the employer doesn’t offer minimum essential coverage to employees and at least one employee receives a premium tax credit or cost-sharing reduction, it will be assessed a penalty of $2,000 per full-time employee per year. The Act excludes the first 30 employees from the penalty.

For those employers offering coverage where the coverage is “unaffordable” or where the coverage has an “actuarial value” of less than 60% of the cost of benefits, a penalty will apply if at least one employee receives a premium tax credit or cost-sharing reduction. The penalty is the lesser of $3,000 for each employee receiving the credit or reduction or $2,000 multiplied times the total number of full-time employees. Employers with fewer than 50 full-time employees are exempt from the penalty assessment.

SHOP Exchanges. The Act creates state-based exchanges (known as Small Business Health Options Program, or “SHOP”, Exchanges) through which small businesses (up to 100 full-time employees) can buy health care insurance coverage for employees (and possibly save money by doing so).

Small Employer Tax Credit. The Act offers small employers (generally those with no more than 25 full time employees and paying average annual wages of no more than $50,000 per employee) that purchase health insurance coverage for employees a sliding-scale income-tax credit to help them pay for the plan.

Free Choice Vouchers. Employers that offer coverage to their employees will be required to provide a “Free Choice Voucher” to certain employees whose income is not more than 400% of the federal poverty level under specified circumstances. The voucher is generally equal to an amount the employer would have paid to cover the employee under the employer’s plan.

Grandfathered Coverage. The Act allows personal or employer-provided health benefit coverage existing at the time of enactment to stay in place under a “grandfather” provision. The Act considers the grandfathered coverage to meet the law’s individual coverage mandate, if certain requirements are met.

Medicare Tax Increases

The Act imposes Medicare tax increases on higher income taxpayers.

Additional Medicare Tax on Earnings. Individual taxpayers who earn more than $200,000 a year, married taxpayers filing jointly who earn more than $250,000, and married taxpayers filing separately who earn more than $125,000 will have to pay an additional Medicare tax equal to .9% of their wages over the relevant threshold amount for their filing status. Self-employed individuals will be liable for an additional tax of .9% on self-employment income over certain thresholds. The additional self-employment tax is not deductible.

Surtax on Investment Income. A 3.8% surtax will be imposed on the investment income of higher income individuals, estates, and trusts. For individuals, the tax is equal to 3.8% of the lesser of (1) net investment income for the year or (2) the amount by which modified adjusted gross income exceeds the annual threshold amounts specified above for the additional Medicare tax on earnings. The thresholds are not inflation-adjusted. The 3.8% surtax does not apply to qualified retirement plan and individual retirement account distributions.

For More Information

The new law contains many more provisions that may affect you and your business. The good news is that, while some provisions of the Act take effect in 2010, most of the employer provisions go into effect later this decade. We would be happy to consult with you on what the new law means to you — today and tomorrow. Please let us know if we can be of assistance.

At a time when your career is reaching a peak and you are looking ahead to your own retirement, you may find yourself in the position of having to help your children with college expenses while at the same time looking after the needs of your aging parents. Squeezed in the middle, you've joined the ranks of the "sandwich generation."

What challenges will you face?

Your parents faced some of the same challenges that you may be facing now: adjusting to a new life as empty nesters and getting reacquainted with each other as a couple. However, life has grown even more complicated in recent years. Here are some of the things you can expect to face as a member of the sandwich generation today:

• Your parents may need assistance as they become older. Higher living standards mean an increased life expectancy, and you may need to help your parents prepare adequately for the future.
• If your family is small and widely dispersed, you may end up as the primary caregiver for your parents.
• If you've delayed having children so that you could focus on your career first, your children may be starting college at the same time as your parents become dependent on you for support.
• You may be facing the challenges of "boomerang children" who have returned home after a divorce or a job loss.
• Like many individuals, you may be incurring debt at an unprecedented rate, facing pension shortfalls, and wondering about the future of Social Security.

What can you do to prepare for the future?

Holding down a job and raising a family in today's world is hard enough without having to worry about keeping the three-headed monster of college, retirement, and concerns about elderly parents at bay. But if you take some time now to determine your goals and work on a flexible plan, you'll save much stress--and expense--in years to come. Planning ahead gives you the chance to take the wishes of the entire family into account and to reduce future disagreements with your siblings over the care of your parents.

Here are some ways you can prepare now for the issues you may face in the future:

• Start saving for the soaring cost of college as soon as possible.
• Work hard to control your debt. Installment debts (car payments, credit cards, personal loans, college loans, etc.) should account for no more than 20 percent of your take-home pay.
• Review your financial goals regularly, and make any changes to your financial plan that are necessary to accommodate an unexpected event, such as a career change or the illness of a parent.
• Invest in your own future by putting as much as you can into a retirement plan, where your savings (which may be matched by your employer) grow tax deferred until you retire.
• Encourage realistic expectations among your children; their desire to attend an expensive college will add to your stress if you can't afford it.
• Talk to your parents about the provisions they've made for the future. Do they have long-term care insurance? Adequate retirement income? Learn the whereabouts of all their documents and get a list of the professionals and friends they rely on for advice and support.

Caring for your parents

Much depends on whether a parent is living with you or out of town. If your parent lives a distance away, you have the responsibility of monitoring his or her welfare from afar. Daily phone calls can be time consuming, and having to rely on your parent's support network may be frustrating. Travel to your parent's home may be expensive, and you may worry about being away from family. To reduce your stress, try to involve your siblings (if you have any) in looking after Mom or Dad, too. If your parent's needs are great enough, you may also want to consider hiring a professional geriatric care manager who can help oversee your parent's care and direct you to the community resources your parent needs.

Eventually, though, you may decide that your parent needs to move in with you. If this happens, keep the following points in mind:

• Share all your expectations in advance; a parent will want to feel part of your household and may be happy to take on some responsibilities.
• Bear in mind that your parent needs a separate room and phone for space and privacy.
• Contact local, civic, and religious organizations to find out about programs that will involve your parent in the community.
• Try to work with other family members and get them to help out, perhaps by providing temporary care for your parent if you must take a much-needed break.
• Be sympathetic and supportive of your children--they're trying to adjust, too. Tell them honestly about the pros and cons of having a grandparent in the house. Ask them to take responsibility for certain chores, but don't require them to be the caregivers.

Considering the needs of your children

Your children may be feeling the effects of your situation more than you think, especially if they are teenagers. At a time when they are most in need of your patience and attention, you may be preoccupied with your parents and how to look after them.

Here are some things to keep in mind as you try to balance your family's needs:

• Explain fully what changes may come about as you begin caring for your parent. Usually, children only need their questions and concerns to be addressed before making the adjustment.
• Discuss college plans with your children. They may have to settle for less than they wanted, or at least take a job to help meet costs.
• Avoid dipping into your retirement savings to pay for college. Your children can repay loans with their future salaries; your pension will be the only income you have.
• If you have boomerang children at home, make sure all your expectations have been shared with them, too. Don't be afraid to discuss a target date for their departure.
• Don't neglect your own family when taking care of a parent. Even though your parent may have more pressing needs, your first duty is to your children who depend on you for everything.

Most importantly, take care of yourself. Get enough rest and relaxation every evening, and stay involved with your friends and interests. Finally, keep lines of communication open with your spouse, parents, children, and siblings. This may be especially important for the smooth running of your multi-generation family, resulting in a workable and healthy home environment.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

2010 is touted by some as the year of the Roth IRA conversion, because the adjusted gross income limit is removed, allowing those with high income to convert. Although converting Roth IRA provides many tax benefits, it is not for everyone.

Follow this link to an article from the Journal of Accountancy that provides an in-depth analysis of the pros and cons of conversion. You may also find it helpful to use a Roth IRA Conversion Calculator to run comparisons. Here is the link to the calculator from Charles Schwab. Each person’s situation is unique. Please contact us if you have questions pertaining to your specific needs.

Enacted in November 2009, the Worker, Homeownership, and Business Assistance Act of 2009 contains many tax provisions that affect individual and business taxpayers. For individuals, the Act provides an expansion of the first-time homebuyer tax credit by including existing homeowners who are “long-time residents.” A number of other key measures contain changes for businesses, including an important new net operating loss provision.

Homebuyer Tax Credit under Prior Law
Prior to the new law’s enactment, a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) was allowed for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, a taxpayer must have had no ownership interest in a qualifying principal residence in the U.S. during the three-year period before the purchase of the home.

Under prior law, the allowable credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

Homebuyer Tax Credit under New Law
The Worker, Homeownership, and Business Assistance Act generally extends the first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying “long-time residents” may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a “first-time homebuyer.”

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence.

The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns) for the year of purchase.

For purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

Extension of Five-year NOL Carryback
The Act liberalizes rules relating to business net operating losses (NOLs) by extending the prior law’s temporary five-year carryback of NOLs to apply to 2009 NOLs. The Act also provides an expansion of the five-year carryback’s availability to include generally all businesses, not just eligible small businesses.

Under prior law, for NOLs arising in tax years ending after December 31, 2007, an eligible small business could temporarily elect to increase the NOL carryback period for an applicable 2008 loss from a previous limit of two years to up to five years. (This carryback allows a business to use the loss to offset net income realized in an earlier year, thus qualifying for a refund for that prior year.) Generally, an eligible small business is a trade or business whose average three-year annual gross receipts are $15 million or less, ending with the tax year in which the loss arises.

The Worker, Homeownership, and Business Assistance Act of 2009 liberalizes the previous NOL provision by extending the five-year election to most businesses, as opposed to limiting it to only eligible small businesses.

Subject to the “only one election” rule, an applicable NOL arising from a business’s 2008 or 2009 calendar year, or that of a fiscal year beginning in 2007, 2008, or 2009, can be carried back to the third, fourth, or fifth preceding tax year. The NOL carryforward period of 20 years is not modified under the Act.

Limitation on NOL Amount
The Act generally limits the amount of an NOL that can be carried back to the fifth tax year prior to the loss to 50% of the taxpayer’s taxable income for that fifth preceding tax year.

The Worker, Homeownership, and Business Assistance Act of 2009 contains other important tax provisions, including modifications to failure-to-file penalties for pass-through entities (such as partnerships), and an extension of the FUTA surtax. We can help you understand how the new law’s provisions apply to you or your business. Contact us today for more information.

Now that the end of the traditional tax filing season is upon us, it may be tempting to purge certain tax documents from your files for the current and past tax years. However, you should be aware of the rules for retaining relevant tax records in the event that the IRS — or another taxing authority — requires that those records be produced as part of an audit.

Keep at Least Three Years
The following records are commonly used to substantiate a taxpayer’s income and expense items:

• Form(s)
• W-2 Form(s) 1099
• Form(s) K-1
• Bank and brokerage statements
• Canceled checks or other proof of payment of deductible expenses

At a minimum, the above tax records should be kept for a three-year period following the date that you filed your return, or its due date, if later.

However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, it is ideal to retain the above documents for six years to better protect yourself in the event of an audit.

Some Records to Keep Longer
Be aware that the tax consequences of a transaction that occurs in one year may depend on what happened in earlier years. Therefore, the period for which you should retain records must be measured from the year in which the tax consequences actually occur. This is true, for instance, where you sell propertythat you bought years earlier.

Example: Maria bought her home in 1987 for $90,000 and made an additional $20,000 of capital improvements in 1995. If she sells her home in 2007, Maria will need to know her tax basis (i.e., the original cost plus later capital improvements) to determine the tax consequences of the sale. So, she may have to produce records relating to the purchase in 1987 and the capital improvements in 1995. Therefore, those records should be kept for at least six years after Maria’s 2007 return is filed instead of just six years after the transactions occurred.

Although as much as $250,000 of home-sale gain can escape tax — up to $500,000 for joint-return filers — you should still retain all records relating to home purchases and improvements. You cannot know now how much the home will be worth when it’s sold. Plus you cannot be certain that the home-sale exclusion will still be available when your future saletakes place.

Similar issues apply to other property that is likely to be bought and sold — for example, shares in a corporation or in a mutual fund, bonds (or other debt securities), etc. Keep in mind that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase of stock, and the records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock issold.

Another example: The calculation of the casualty and theft loss deduction is determined in part by your basis in the damaged or stolen property. Therefore, you’ll need to keep records to support your basis until six years after you filethe return claiming the loss deduction.

What If You Lose Records?
Safeguard your records against loss from theft, fire, or other disaster. Consider keeping your most important records in a safe deposit box or other safe place outside your home. Moreover, consider keeping copies of the most important records in an easily accessible location so that you can quickly take them with you if you have to leave your home in an emergency.

If your records are lost or destroyed, don’t despair. It may be possible to reconstruct some of them. For instance, your stockbroker may be able to help determine the tax basis of securities you sold, and an attorney who represented you in the purchase of your home may retain records relating to the closing. Still, since you can never be sure whether those persons will actually have the records you need, the safest course of actionis to retain them yourself, in as safe a place as possible.

Prior Years’ Tax Returns
It is a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and state income-tax returns (and any tax payments) indefinitely. For instance, the IRS or another taxing authority could claim that you never filed a particular year’s return. If that occurs, the IRS (or other authority) could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.

Need More Information?
Filing your returns on a timely basis is just one aspect of properly handling your taxes. Be prepared to defend yourself in the event of an audit by retaining your records for the appropriate time period. Call us if you have any further questions.

The recently enacted American Recovery and Reinvestment Tax Act of 2009 (“the Act”) increases the period during which qualifying small businesses may elect to carry back a 2008 net operating loss (NOL) beyond the pre-Act limitation of two years.

The following are key factors to consider when determining the appropriate carryback period that maximizes the income-tax benefits for a qualifying business.

Background
An NOL is commonly defined as the excess of a business taxpayer’s deductions over gross income for a particular tax year. Under prior law, an NOL could be carried back two years and carried forward up to 20 years to offset taxable income in those years. By carrying back an NOL, a business can be entitled to a refund of taxes paid in the prior years.

Example: Michael’s Catering, Inc. had taxable income of $20,000 in Year 1 and $35,000 in Year 2. In Year 3, the business suffered a $55,000 net operating loss. The company may carry back the loss to offset taxable income in Year 1 and Year 2, resulting in a refund of taxes paid for those prior years.

Variations to NOL rules apply in certain circumstances, such as that relating to qualifying farming losses.

Generally, the NOL is carried back to the earliest tax year possible, and then any excess loss is applied to the next earliest tax year. Alternatively, a taxpayer may choose to carry the NOL forward and forego the applicable carryback period (when, for example, there were no taxes paid in the applicable carryback years).

Increased NOL Carryback Period Under the Act
An eligible business may now elect a two-, three-, four-, or five-year NOL carryback period in the case of an NOL for any taxable year ending in 2008. Alternatively, the taxpayer may choose to apply the new rule to an NOL for any taxable year beginning in 2008 (generally, this option may be desirable if the tax year is not the calendar year and extends into 2009). In general, an “eligible small business” is a trade or business whose average annual gross receipts are $15 million or less.

In assessing whether to carry back an NOL three, four or five years, a determination needs to be made as to which election results in the largest income-tax savings. For instance, the ability to carry back the NOL to a year in which income was taxed at a relatively higher tax rate will yield a greater tax refund in applying the NOL to that year. Alternately, depending on the combined income of the prior five years — and how that combined income relates to the amount of the NOL — it may be prudent to simply carry back the NOL for two years only or elect to carry it forward.

Example: ABC Company, an eligible small business, had an applicable NOL for 2008. ABC had no taxable income for both tax years 2006 and 2007, but did for 2005. Accordingly, ABC can elect a three-year carryback for the NOL, to 2005, offsetting 2005 income and generating a tax refund.

In summary, a qualifying small business incurring a net operating loss for 2008 can elect to carry the NOL as far back as 2004, if desired.

Have More Questions?
The opportunity to extend the carryback period for an NOL relating to the 2008 tax year is limited. If your business incurred a loss for 2008, we would be happy to discuss various tax-planning scenarios with you in an attempt to maximize a possible tax refund associated with the expanded NOL rules under the American Recovery and Reinvestment Tax Act of 2009.

The American Recovery and Reinvestment Tax Act of 2009 (the “Act”) was enacted on February 17, 2009, and contains several federal tax provisions aimed at stimulating the economy and providing job creation. Both individual taxpayers and businesses stand to benefit from the tax-relief measures in the Act.

Many of the Act’s individual income-tax provisions contain income phaseouts that limit the benefits available to higher-income taxpayers. The Act is designed to provide temporary tax relief in an effort to spur spending. Here is a summary of the law’s provisions.

Individual Tax Relief

• “Making Work Pay” Credit This refundable tax credit (up to $400 for individuals, $800 for couples filing a joint return) seeks to stimulate spending by generally providing an increase in take-home pay through the reduction of income taxes withheld.
• Economic Recovery Payment. A one-time payment of $250 is available to adults who are eligible for Social Security, Railroad Retirement, veterans’ disability compensation or pension benefits, or Supplemental Security Income benefits.
• First-time Homebuyer’s Credit. Increased to $8,000 for couples filing jointly, the Act provides a credit for qualifying principal residence purchases. The Act also eliminates the prior law’s requirement that the credit be paid back to the government, as long as certain conditions are met.
• Child Tax Credit. The Act expands the Child Tax Credit ($1,000 for 2009 and 2010) for each qualifying child under age 17 by reducing the income “floor” that applies when determining the refundability of the credit from $8,500 in 2008 to $3,000 in 2009 and 2010.
• AMT Exemption Increase. The Act increases the Alternative Minimum Tax exemption amounts for 2009 and provides for the use of various nonrefundable tax credits to offset both regular tax and AMT.
• Private Activity Bond Interest and AMT. Tax-exempt interest on private activity bonds issued in 2009 or 2010 is not deemed an AMT preference item.
• Deduction for Taxes on Car Purchases. The Act provides for an income-tax deduction for state and local sales taxes paid on up to $49,500 of the cost of a qualified vehicle.
• American Opportunity Tax Credit. The Hope Scholarship credit is modified and replaced with the American Opportunity Tax Credit, which equals up to $2,500 for the cost of qualifying tuition and related expenses (per year, per student).
• 529 Plans and Computer Costs. The Act expands the definition of qualified higher education expenses to encompass certain computer technology for 529 college savings plan distribution purposes.
• Transportation Fringe Benefits. Employees can exclude from income an increased amount of certain qualified transportation fringe benefits under the Act.
• COBRA Insurance Continuation. Under the Act, an individual who has been involuntarily terminated on or after September 1, 2008, through the end of 2009 is required to pay only 35% of the group health insurance premium to secure COBRA continuation coverage (for up to nine months).
• Income Exclusion for Unemployment Compensation. Federal and state unemployment benefits received (up to $2,400) in 2009 may be excluded from gross income.

Business Tax Relief

• Section 179 Expensing. The Act extends the enhanced Section 179 expensing limit ($250,000) for qualifying property placed in service in tax years beginning in 2009.
• “Bonus” First-year Depreciation. The additional first year depreciation deduction of 50% available for certain types of depreciable property is generally extended for another year.
• Net Operating Loss (NOL) Carryback. Smaller business taxpayers may elect to increase the NOL carryback period from two to five years for an NOL for the tax year ending in 2008 (or, at the taxpayer’s election, the tax year beginning in 2008).
• Work Opportunity Tax Credit (WOTC). Two new targeted groups have been included for purposes of the WOTC: disconnected youths and unemployed veterans. The amount of the credit that an employermay claim is based on first-year wages.
• Small Business Estimated Tax Payment Relief. Generally, for tax years beginning in 2009, the Act eases the annual estimated tax payment requirements for certain small business owners.
• Qualified Small Business Stock (QSBS).The Act generally increases to 75% the percentage of capital gain that a noncorporate taxpayer can exclude upon the disposition of QSBS acquired after February 17, 2009, and prior to 2011.
• S Corporation Built-in Gains. The Act temporarily reduces the recognition period for a converted C corporation on built-in gains from ten to seven years for tax years beginning in 2009 and 2010.

Can We Help?

The American Recovery and Reinvestment Tax Act of 2009 provides a number of tax-planning opportunities for individuals and businesses. This summary covers only the tip of the iceberg as to the new law, and professional advice is recommended to help determine how the Act’s measures relate to your specific tax situation.

The recent credit crisis is just a reminder of the importance and benefits of having a sound strategy that you can use to navigate through turbulent times. Don’t hesitate to contact your CPA for objective guidance in helping you make intelligent financial decisions for the future of your business. In the meantime, below are some tips to help you assess your current financial condition and start rethinking your business plan to face the current economic challenges.

1. Don’t panic. It’s difficult to make sound decisions if you do. To get a better sense of where you stand, begin by reviewing your cash position and anticipated cash needs. Are they in line with your business’s short-term needs, goals and risk tolerance?
2. Take a fresh look at your monthly income and expenses. Have you been meeting your budgeted projections? How much of a drop in revenues can your business withstand and for how long? What are your cash-flow needs for the next 90 to 120 days? Or 120 to 180 days? Do you have sufficient cash reserves for the next 30 to 60 days?
3. Check with your lenders on the status of your credit lines. Are you in compliance with their terms? Will your bank renew their commitments at similar amounts, rates and terms?
4. Eliminate your reliance on credit by disciplining your spending.
5. Refocus on your balance sheet and how much credit you are extending to your customers.
6. If your credit lines are frozen or at their maximum limits, consider meeting with vendors and working out a schedule of partial payments that would allow continued delivery of critical materials and supplies.
7. Look into alternative types of financing. Some to be considered are loans on life insurance policies, loans from key customers that rely on your business for their materials and supplies or from labor unions, local development agencies or the U.S. Small Business Administration.
8. Keep an eye on your accounts receivable. Watch for new patterns of slow payments and follow up immediately. Review your largest and riskiest accounts to determine whether credit constraint or economic slowdown will affect their ability to pay you. Keep receivables aging current at all times.
9. Manage accounts payable more closely. Forfeiting early pay discounts may be more advantageous in preserving cash that may be needed for critical items. Keep payables aging current at all times because that’s an important tool for managing cash.
10. Analyze your expenses and determine which ones can be controlled. Can you reduce spending in any areas to put less of a burden on your cash-flow needs? As necessary, communicate to staff/team members about the need to tighten spending. If you are a manufacturer, review inventory management practices. Are there opportunities to reduce your on-hand inventory? Service companies should make sure they’re capturing all their billable hours and invoicing promptly. Have you billed all your contractual items? How about all your pass-through expenses, such as billable third-party services and travel and living expenses?
11. Consider ways to pass your increased costs (i.e., fuel expense) on to your customers.
12. Check the safety of any cash deposits you have. On October 3, 2008 the FDIC deposit insurance was temporarily raised from $100,000 to $250,000 per depositor through December 31, 2009. If you have more than $250,000 in any one bank, move the excess to another FDIC insured bank. Consider investments such as CDARs (Certificates of Deposit Account Registry) to spread the risk of short- to medium-term cash you may have invested in CDs.
13. Don’t engage in panic selling of your investments. Make sure your portfolio is diversified and in accordance with your risk tolerance.
14. Come up with a plan NOW to respond to future declines in revenues, before they actually occur. Re-think your business strategies and update projections. Review your product/service lines to identify the most profitable items and determine how to leverage for future growth in profits.
15. Contact your good customers. Even casual discussions can lead to new business opportunities.
16. Review all your insurance coverage, particularly any from companies with weak balance sheets. Be careful not to surrender a policy, as securing new coverage might require underwriting that can affect your coverage.
17. Calm your employees’ fears about how this crisis will affect the company, their jobs and their retirement or other benefit plans. Speculation and gossip are counterproductive, so it’s better to address their concerns directly.

For help in understanding some of the issues facing small business, you can turn to the CPA profession’s free Financial Literacy Web site for consumers, http://www.360financialliteracy.org. It offers tools and tips to help you make important decisions for your business and your own personal financial planning needs.

Finally, remain focused on your own advantages. Remember that:

• Small businesses have greater flexibility and can more easily adjust to changes in the economy than their larger counterparts.
• Small business owners can use the recent crisis as an opportunity to buckle down, refocus, assess and make their company more financially sound, disciplined and less reliant on credit.

During tough times, it’s important to maintain communication with your CPA firm, your trusted adviser. Remember that you are not alone. We know and understand your business and the challenges you face, and we can work with you to navigate these turbulent times. We can help you gauge your current situation in the wake of recent market events and create a sound business plan in response. Contact us today for expert advice on how to maintain your company’s success.

Enacted on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “Act”) contains core provisions to help the financial services sector and boost the economy, along with various tax provisions that will affect individuals and businesses.

The following are some of the changes in the Act that may affect your year-end 2008 and 2009 tax planning.

Alternative Minimum Tax Relief
For 2008, the AMT exemption amounts had been scheduled to drop from the 2007 figures of $66,250 (married individuals filing jointly), $44,350 (unmarried filers), and $33,125 (married individuals filing separately) to $45,000, $33,750, and $22,500, respectively — the exemption amounts in effect in 2000. Under the Act, these exemption amounts are increased to $69,950 (married individuals filing jointly), $46,200 (unmarried filers), and $34,975 (married individuals filing separately) for 2008 only. Absent further legislation, the exemptions will drop back to the 2000 amounts for 2009.

State and Local Taxes
The new law extends two deductions for state and local taxes. A prior law had provided an additional standard deduction for individuals of up to $500 ($1,000 for married individuals filing jointly) for state and local real property taxes paid, available only for 2008. The Act extends the deduction through 2009. Also under the new law, taxpayers who itemize their deductions again have the option of deducting state and local general sales taxes instead of state and local income taxes on their 2008 and 2009 returns.

Education-related Deductions
The Act also extends two popular education-related deductions through 2009. Eligible taxpayers may once again be able to deduct a limited amount of tuition and related expenses paid for higher education. The above-the-line deduction is capped at either $2,000 or $4,000, depending on income. No deduction is available if modified AGI is more than $80,000 ($160,000 on a joint return) or if an education credit is claimed with respect to the student. And eligible K-12 educators can claim an above-the-line deduction for up to $250 of classroom-related expenses they incur.

Charitable Contribution Provisions
The Act extends expired charitable contribution provisions for both individual and business taxpayers. Individual taxpayers who have reached age 70½ can roll over money in individual retirement accounts (IRAs) to qualified charities on a tax-free basis through 2009. As much as $100,000 may be donated annually.

Through 2009, C corporations can claim enhanced charitable deductions for donations of books to schools, public libraries, and literacy programs. They can also claim enhanced deductions for charitable contributions of computer equipment and software to elementary, secondary, and post-secondary schools. Any business can take advantage of an enhanced charitable deduction for contributions of food inventory.

Energy Incentives
The Act includes a variety of energy incentives. For individual taxpayers, it extends the tax credit of up to $500 for the costs of making certain energy-efficient improvements to your principal residence, including energy saving exterior doors, windows, insulation, and certain metal roofs, and for the installation of equipment (such as a furnace or water heater) that meets specified standards for energy efficiency. The credit, which expired December 31, 2007, will now be available for 2009 (but not for 2008).

The new law also extends the 30% credit for installing solar equipment in your principal residence or second home through 2016 and, starting in 2009, eliminates the former $2,000 cap on the credit for solar electric equipment. Also extended is the credit for installing fuel cell property in a principal residence. And the Act adds a new credit for the installation of small wind turbine systems to generate electricity and for expenditures on qualified geothermal heat pump property.

For businesses, the Act extends numerous energy credits and deductions — some through as late as 2016 — and adds several new ones. Among the new provisions, starting in 2009, employers can reimburse employees who ride bicycles to work for expenses of up to $20 a month on a tax-free basis. This benefit can’t be funded through pretax salary deferral.

Other Business Provisions
The research and development credit is extended through 2009, with an increase in the alternative simplified research credit rate from 12% to 14% for tax years ending after December 31, 2008. The alternative incremental research credit is repealed for tax years beginning after December 31, 2008. In addition, businesses can depreciate qualified leasehold and restaurant improvements placed in service before 2010 over 15 years. Improvements made to qualifying retail space in 2009 are also eligible for a 15-year depreciation period.

We would be happy to discuss with you how these recent tax law changes might affect your tax situation.