To Our Clients and Friends:
 
 
Tax Planning for Businesses
  
 
Ø  S-Corporation Employee Expense Reimbursement - As an employee-shareholder in an S-corporation there are many times when you may personally incur business expenses.  These expenses can be reimbursed without being included in your gross income if the S-corporation has properly established a reimbursement or expense allowance plan.  For the reimbursements to be excluded from your gross income, they must be paid in accordance with an “accountable plan.”   
 
An “accountable plan” must contain three elements: 1) Reimbursements to the employee are for business expenses; 2) Employee reimbursements are substantiated; and 3) Employee reimbursements are not greater than the expenses incurred.  The first requirement ensures that only expenses related to and incurred while carrying on the business of the S-corporation are reimbursed.  To meet the second requirement, the plan must stipulate that all expenses be substantiated (to the extent that the type of expense and that it had a business purpose can be identified) in order to be reimbursed.  The last requirement is that employees are not reimbursed for more than the business expenses they incurred.  If the reimbursement payment is greater than the expense incurred, the plan is not automatically disqualified, but the employee must return the excess within a reasonable amount of time or the business will include the overpayment on the employee-shareholder’s W-2 form.  
 
In addition to these three requirements, it is essential that there is also substance to the transactions.  This means that there should be cash outflows from the S-Corporation to the employee that can be traced through the accounting records.
 
It is possible for the S-corporation to pay reimbursements for non-business related expenses.  These reimbursements would be considered paid pursuant to a “non-accountable plan” and therefore would be included in the employee’s gross wages.  An S-Corporation is permitted to have both an accountable and non-accountable plan.
 
If you, as an S-Corporation shareholder-employee, have incurred business expenses on behalf of the S-corporation and they have not been reimbursed, it is still possible to receive a deduction.  The business expenses paid by the shareholder-employee would be considered a miscellaneous itemized deduction on your personal tax return.  Unfortunately, this deduction will be limited to the amount paid that exceeds 2 percent of your adjusted gross income, which could result in a very minimal deduction or none at all.
 
It is important that all business expenses paid by an employee-shareholder on behalf of the S-Corporation be reimbursed by the S-Corporation (under the rules stated above) in order for the expenses to be deductible by the S-Corporation.  If this does not happen the un-reimbursed employee expenses can be reported by the employee-shareholder on their individual return but these expenses will be, mostly likely, limited and generally, no deduction will result.
  
 
Tax Planning for Individual Taxpayers
  
 
Ø Home Mortgage Interest - Often the most substantial itemized deduction taxpayers can take is for interest paid on their home mortgage.  In order to qualify for this interest expense deduction, the payment must be made on a loan secured by a qualified residence.  Your principal residence and one additional residence (e.g. a vacation home) are both considered qualified residences.  In order for the interest expenditure to be deductible, the IRS requires that the loan be: (1) used for acquiring, constructing, or substantially improving the residence, and (2) secured by the residence.  
  
There is an additional limitation to the deductibility of “home” interest expense.  The total amount of your principal residence loan plus your vacation or second home loan cannot exceed $1,000,000.

  

The IRS has several methods to determine if your loan balance is over the $1,000,000 limit.  One method is a simple average balance method.  For example, if you have a loan of $1,300,000 at the beginning of the year and it is paid down to $900,000 at the end of the year, the simple average balance is $1,100,000 (($1,300,000 + $900,000) / 2)).  In this situation only 90.9% of the interest paid is deductible ($1,000,000 limit / $1,100,000 average balance). If you paid $50,000 of interest on this loan during the year, then $45,455 is the deductible amount of home mortgage interest.  The remaining amount would NOT be deductible.
 
In addition to the first mortgage, you can also deduct interest paid on a home equity loan.  As with the home mortgage loan, the home equity loan must also be secured by your residence.  Interest on home equity loans is similarly limited, but the loan balance threshold is set much lower at $100,000.
 
So keep these limitations in mind when considering taking out a home loan or purchasing a vacation home.
 
Ø  Bonus Depreciation - As a part of the Economic Stimulus Act of 2008, additional depreciation is available for certain asset purchases.  The additional (bonus) depreciation is available to any business for tax years ending after December 31, 2007.  The property must be acquired after December 31, 2007 and before January 1, 2009.  Bonus depreciation generally can be taken on property with class lives of 20 years or less, off the shelf computer software, and “qualified” leasehold improvement property.  The property must be new (not just new to the taxpayer.)  The bonus depreciation deduction allowed is equal to 50 percent of the adjusted basis of the property and will be in addition to the normal depreciation allowed based on the property’s class and useful life.  Both Section 179 depreciation and bonus depreciation can be taken if the property also qualifies for Section 179 depreciation.   
 
Example: In 2008, your business’ only purchase was a large piece of new equipment for $350,000.  Your total depreciation deduction for 2008 would be $310,000!  This is comprised of $250,000 of Section 179 deduction, $50,000 bonus depreciation (50 percent of the remaining basis of $100,000 after Section 179 is taken) and $10,000 of regular depreciation on the remaining basis of the asset.
 
Tax Planning Items to Note:
1. Leasehold improvements, normally written off over 15 years, may, if completed in 2008, receive a 50% write off.  Planning point: If your place of business needs a face lift or walls moved, 2008 is an excellent year to do it.
2. Note that the one-time write off of costs for new asset additions increased to $250,000 for 2008.  This creates an excellent opportunity to acquire or replace equipment or furniture and immediately write off the cost against your taxable income.   
 
Ø  Charitable Contributions – Before making a cash contribution to a charitable organization, you should be aware of the new recordkeeping requirements.  In order for a cash donation to be deductible you must maintain either a bank record of the donation or written documentation from the charitable organization.  The bank record could include the canceled check, a bank copy of the canceled check, or a bank statement, but the documentation must include the name of the charity, and the date and amount of the contribution.  Note that out-of-pocket donations given without a receipt are no longer deductible. 
 
Ø  2008 Deductions, Limitations and Certain Tax Rates -  
Roth and Traditional IRAs: In 2008 you may contribute $5,000 to your IRA, which is up from $4,000 in 2007.  If you are at least 50 years old, you have the ability to make an additional $1,000 “catch-up” contribution for a total of $6,000 in contributions to your IRA.
 
401(k) Elective Deferrals: The 2008 amount for 401(k) deferrals is $15,500.  There is also a $5,000 catch-up allowed for those at least 50 years old.
 
SIMPLE Plan: You may contribute $10,500 to the plan in 2008.  The catch-up amount for those at least 50 years old is $2,500.
 
SEP Plan: The contribution for 2008 is the lesser of $46,000 or 25 percent of compensation.  This is up from $45,000 in 2007.
 
Gift Exclusion: Gifts of up to $12,000 per person are excluded from gift taxation and separate gift tax return compliance in 2008.
 
Mileage Reimbursement Rates: 

Purpose

Rates for 1/1/08 – 6/30/08

Rates for 7/1/08 – 12/31/08

Business

50.5 ¢

58.5 ¢

Medical/Moving

19 ¢

27 ¢

Charitable

14 ¢

14 ¢

 
Capital Gain Rates:  In 2008 the income tax rate (for noncorporate taxpayers) on long-term capital gains and qualified dividends has been lowered to 0% for those individuals in the 10% or 15% tax brackets!  For all others the tax rate will remain at 15%.  This means that couples filing jointly will not pay any tax on capital gains if their combined taxable income is less than $65,100; for single filers, the taxable income limit is $32,550. 
 
 
IMPORTANT UPDATES – TO ALL CLIENTS
 
 
Ø  Federal Regulation – A new federal tax regulation requires that we (Soukup, Bush and Associates, P.C.) do not send any of your tax return information to third parties, without prior written consent.  The new government regulations require a six part written consent form to be signed by you prior to allowing us to disclose your information to third parties.  Bookkeepers, bankers, mortgage lenders, controllers, attorneys, etc., are considered third parties and a separate consent form for each will need to be completed in order to release tax return information.  If you would like to provide authorization to disclose tax return information to third parties, please contact us and we will prepare the consent form for you.

 

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