WHERE IS MY REFUND?

I filed my tax return some time ago and was supposed to get a refund but I have not received it. Can I call the IRS to find out what is happening? How do I call?

Renee

Renee, you do not even need to call. Simply go out to the IRS website, fill out a couple of questions and they will give you the status of your refund. Here is a hot link. Let me know if you have any problems.

Larry Kopsa CPA

Check on Your Refund

SMALL BUSINESSES ARE THE LATEST TARGET FOR CYBERCRIMINALS

Small-business bank accounts increasingly are being targeted by cybercriminals. The criminals use sophisticated programs to gain access to bank accounts through online portals, then add payees to the company's accounts. Shawn Henry, assistant director of the Cyber Division at the Federal Bureau of Investigation, said losses have amounted to hundreds of millions of dollars in the last year or so. The Wall Street Journal

CREDIT FOR HOUSE PURCHASE

I just ran across your website and blog. Thanks for all the information. Maybe you can answer a question for me and my husband. We have owned a house and are looking at purchasing a different home. Do we or don’t we get money from Obama? Thanks in advance.

Yvonne

Yvonne, thanks for the kind words. Unfortunately, with the information that you gave me I can’t specifically answer your question. There have been three different housing credits. Here is some information that may help.

You must buy – or enter into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you enter into a binding contract by April 30, 2010, you must close on the home on or before June 30, 2010.

What is kind of confusing is that there are now two different classifications; First Time Homebuyer and secondly, Long Time Resident Homebuyer.

To be considered a first-time homebuyer, you and your spouse must not have jointly or separately owned another principal residence during the three years prior to the date of purchase. The maximum credit for a first-time homebuyer is $8,000.

To be considered a long-time resident homebuyer you and your spouse must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased. Additionally, your settlement date must be after November 6, 2009. The maximum credit for a long-time resident homebuyer is $6,500.

There are some new reporting requirements. You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Therefore, if you claim the credit you will not be able to file electronically. In addition, since the IRS supposedly approved over 79,000 incorrect credits, even giving $8,000 to a 4-year old, supposedly they are now checking the requests closer which could slow down your refund.

In addition, new homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the dated certificate of occupancy. Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract.

If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

I hope that this helps.

Larry Kopsa CPA

NEW VEHICLE SALES TAX DEDUCTION

The IRS just released a tax reminder for people that purchased a new vehicle between February 16, 2009 and December 31, 2009. I thought it might be of interest.

Eight Facts about the New Vehicle Sales and Excise Tax Deduction

If you bought a new vehicle in 2009, you may be entitled to a special tax deduction for the sales and excise taxes on your purchase.

Here are eight important facts the Internal Revenue Service wants you to know about this deduction:

1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.

2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.

3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. New motor homes are not subject to the weight limit.

4. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.

5. Purchases made in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.

6. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.

7. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

8. Taxpayers who do not itemize must complete Schedule L, Standard Deduction for Certain Filers to claim the deduction.

For more information about these rules and other eligibility requirements visit www.IRS.gov/recovery.

NEW CREDIT-CARD RULES OFFER CONSUMERS NEW PITFALLS

New credit-card rules that went into effect in February are aimed at improving disclosure for consumers, but there are some potential pitfalls. The new law could result in card issuers implementing higher fees to compensate for interest-rate caps, and it could become tougher for consumers to get a new credit card. The new law also is likely to curb the number of rewards offered by companies, this article says. CNN Money had a really good summary of how this new legislation may impact you. CNNMoney.com

EDITORIAL: 'U.S. CREDIT RATING COULD BE DOWNGRADED AS DEBT-TO-GDP RATIO NEARS 70%'

(Wall Street Journal) -- In an editorial at WSJ.com, the editorial staff at The Wall Street Journal reports that "fear of defaults by European countries sent stocks reeling" last week. And while some believe "that could never happen in the U.S.," Moody's Investors Service "caused a market stir" when it said "that on Washington's present spending and debt track, maybe it could" -- and that Moody's could downgrade America's government bond rating. According to the WSJ editorial, the ratio of U.S. federal public debt to GDP "fell in the 1990s as the economy grew rapidly and the post-1994 Republican Congress restrained spending for a time and struck a balanced budget deal with Bill Clinton." The editorial notes that in 2007, the debt ratio had soared to a concerning 36.2%, but "now the public debt ratio is climbing even faster amid slow economic growth and a spending binge, reaching an expected 63.6% this year, 68.6% next year and above 70% later this decade even by White House reckoning." Moreover, "these White House estimates are surely understated if current U.S. policies continue," the Journal opines. The editorial goes on to blast the "$2 trillion in tax hikes that Mr. Obama proposed" in his budget, saying "they will strike an economy still emerging from a deep recession." Read it at http://online.wsj.com/article/SB20001424052748704259304575043600254910186.html>

QUOTE OF THE WEEK

"Little minds are tamed and

subdued by misfortune; but

great minds rise above them."
--Washington Irving

MIDDLE CLASS FACING HIGHER TAXES IN 2010

Millions of middle-class households may be facing higher taxes in 2010 because Congress has failed to extend tax breaks that expired on January 1, most notably a "patch" that limited the impact of the alternative minimum tax. The AMT, initially designed to prevent the very rich from avoiding income taxes, was never indexed for inflation. Now the tax is affecting millions of middle-income households, but lawmakers have been reluctant to repeal it because it has become a key source of revenue.

Without annual legislation to renew the patch this year, the AMT could affect an estimated 25 million taxpayers with incomes as low as $33,750 (or $45,000 for joint filers). Even if the patch is extended to last year's levels, the tax will hit American families that can hardly be considered wealthy -- the AMT exemption for 2009 was $46,700 for singles and $70,950 for married couples filing jointly.

Middle-class families also will find fewer tax breaks available to them in 2010 if other popular tax provisions are allowed to expire. Among them:

* Taxpayers who itemize will lose the option to deduct state sales-tax payments instead of state and local income taxes;

* The $250 teacher tax credit for classroom supplies;

* The tax deduction for up to $4,000 of college tuition and expenses;

* Individuals who don't itemize will no longer be able to increase their standard deduction by up to $1,000 for property taxes paid;

* The first $2,400 of unemployment benefits are taxable, in 2009 that amount was tax-free.

READ MY LIPS – WHAT HAPPENED TO NO TAX INCREASES FOR THE MIDDLE CLASS?

The Obama administration's plan to cut more than $1 trillion from the deficit over the next decade relies heavily on so-called backdoor tax increases that will result in a bigger tax bill for middle-class families. In the 2010 budget tabled by President Barack Obama on Monday, the White House wants to let billions of dollars in tax breaks expire by the end of the year -- effectively a tax hike by stealth.

While the administration is focusing its proposal on eliminating tax breaks for individuals who earn $250,000 a year or more, middle-class families will face a slew of these backdoor increases. The targeted tax provisions were enacted under the Bush administration's Economic Growth and Tax Relief Reconciliation Act of 2001. Among other things, the law lowered individual tax rates, slashed taxes on capital gains and dividends, and steadily scaled back the estate tax to zero in 2010.

If the provisions are allowed to expire on December 31, the top-tier personal income tax rate will rise to 39.6 percent from 35 percent. But lower-income families will pay more as well: the 25 percent tax bracket will revert back to 28 percent; the 28 percent bracket will increase to 31 percent; and the 33 percent bracket will increase to 36 percent. The special 10 percent bracket is eliminated.

Investors will pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital-gains tax increasing to 20 percent from 15 percent. The estate tax is eliminated this year, but it will return in 2011 -- though there has been talk about reinstating the death tax sooner.

QUESTION ON MY TAX RETURN

This last year I had a son born who only survived 1 day. Do I need to get a Social Security number for him? Do I claim him as a dependent?

Helen

Helen, unfortunately I had a child that died at birth so I have a deep appreciation of how difficult this is for you and your family. My sympathies and thoughts are with you and your family.

I do have a bit of good news for you. You can claim your son on your tax return and you do not have to get a Social Security number for him. You just need to attach a copy of his birth certificate, death certificate, or hospital records to your tax return. Then, write “DIED” in column (2) of line 6c of your Form 1040. Most likely you will have to paper-file your return as opposed to electronically filing.

Again, my sympathies. I sincerely wish you joy in 2010.

Peace to you.

Larry Kopsa CPA

ONE OF THE SEVEN HABITS OF HIGHLY EFFECTIVE PEOPLE

I was just re-reading Stephen R. Covey's "The Seven Habits of Highly Effective People." (Simon & Schuster, New York.). We recently had a customer service meeting with our staff that the fact that we should try to work in Quadrant II came up during the meeting. Doing tasks, both business and personal, in Quadrant II will take a lot of stress out of your life. If you have not read the book I would recommend it highly. Here is the way that Covey breaks down tasks into four quadrants:

Quadrant I: Urgent and important. This category includes problems and crises. For example, you might have a contract review with your biggest customer, critical meetings with a deadline and other pressing issues that can potentially hurt important projects. However, if you only focus on this quadrant, it can grow and eventually dominate other aspects of your life.

Quadrant II: Important but not urgent. This is where you should focus most of your energy and yet these tasks and activities are often overlooked. They include doing those tasks that need to be done but not waiting until the last minute, relationship building, relaxation and strategic planning that, if done well and consistently, make a huge difference in your life. The time spent here must come from the following two quadrants. If you don’t get these things done they either become Quadrant I or go away.

Quadrant III: Urgent but not important. Many business owners find themselves stuck here, handling tasks are time sensitive but not important.

Quadrant IV: Not urgent and not important. This includes complete time wasters that have no relevance to your life. Examples include non-business Internet surfing for long periods of time and watching too much television.

WANT TO GET DEPRESSED? CHECK OUT THE ATTACHED UNEMPLOYMENT MAP.

We all know that unemployment is a huge problem. The attached map shows how unemployment has increased since January 2007.

UNEMPLOYMENT MAP

Warning: The attached video may cause mild to severe cases of depression. Viewers have, in a few limited circumstances, found themselves carrying a sign at a Tea Party. If you have high blood pressure or you are on heart medications, consult your doctor before viewing. If you experience any of these symptoms: suffer headaches, are unable to sleep or start thinking Sara Palin is the one, turn off you computer immediately. If you have a job, be very thankful.

Larry Kopsa CPA

DON’T LEND MONEY TO THE GOVERNMENT INTEREST-FREE

It is always nice to get a refund when you file your tax return; but if you think about it, that is money you could have had if you had not over withheld. There are many variables when determining how much to withhold.

A nice resource is on the IRS website. Check it out at Withholding Calculator.

THOUGHT FOR THE WEEK

When Reagan was President...

When Ronald Reagan was president,

we also had Bob Hope and

Johnny Cash still with us...

Now we have Obama with

no Hope and no Cash.

TAX BREAKS FOR HAITIAN EARTHQUAKE RELIEF

The recent earthquake in Haiti reminds us all to count our blessings. Even in today's lousy economy, Americans are finding ways to give generously to ease the disaster - and Congress just gave us one more.

Here are some tips for making the most of your earthquake relief donations:

• You can deduct up to 50% of your adjusted gross income for cash gifts to 501(c)(3) organizations or public charities working for earthquake victims.
• If you give more than $250, you'll need a written receipt dated no later than the filing date of your return.
• Gifts of clothing, furniture, electronics, and household items are deductible at fair-market value, such as the price they would bring at a resale shop. Keep track, you might be surprised how much you save!
• Congress and the IRS have cracked down on inflated car and truck deductions. If you give away a vehicle, you can deduct its fair market value only if the charity uses it for "tax-exempt" purposes (such as a church using a van to drive parishioners). If the charity sells the vehicle, your deduction is limited to the charity's actual proceeds.
• Washington has just passed special legislation letting you take a 2009 deduction for contributions of cash (but not property) on behalf of earthquake relief you make before March 1, 2010. That new law also eases recordkeeping requirements for such "accelerated" deductions, especially for those you make by phone. If you give by text message, for example, your phone bill satisfies the new requirements if it shows the recipient, date, and amount of the contribution.

As always, the IRS and Better Business Bureau caution you to seek out qualified charities.

Larry Kopsa CPA

IS THIS REALLY OUR AMERICA???

VOTE AS IF YOUR FUTURE DEPENDS ON IT… BECAUSE YOUR HEALTH CARE DOES……

If this health care bill passes we will get - - - - - CHANGE!!!!!!

PLEASE PLEASE PLEASE watch this U tube video. If you can't get
it on your computer, send it to someone who can and then go see it.

We have to do something and NOW.

Know The Truth About The Government Health Care Bill

CLAIMING DONATIONS MADE TO HAITI

Have you made a charitable donation to Haiti? Check out the following link to see if you can claim those donations on your 2009 Tax Return.

Ten Facts About Claiming Donations Made to Haiti

YOU'RE NOT GOING TO BELIEVE THIS...

The following blurb was published in the February 5th edition of THE WEEK.

Equal-opportunity employment, after a British government-run jobs center rejected an ad from a company specifying that applicants "must be very reliable and hardworking." A government official told the company that it could get sued "for discriminating against unreliable people."

EXPENSING DEDUCTIONS

Here is a good summary of section 179. It looks like the authors are not optimistic about a $250,000 and a 50% bonus continuation to 2010. In addition to the following memo, check out this attachment: Section 179 Eligibility Checklist.

What Year Is an Asset Eligible for IRC Section 179 Expensing?
As accountants advising businesses who report for tax purposes under the cash method of accounting, each year we receive a flurry of questions regarding last minute transactions. This year was no exception and this release is a reminder to all of us of the rules regarding what it takes to claim a Section 179 deduction for fixed assets purchased in the year. The asset must be purchased and placed into service during the tax year to be eligible for the Section 179 Election to Expense.

Background
Congress has used Section 179 for economic stimulus purposes, often with dramatically different results from year to year. The timing of an asset’s eligibility not only affects the year of deduction, but also the amount. In view of the apparent decrease in the Section 179 limit, it’s appropriate to review the issues that affect eligibility and timing of Section 179 deductions.

2009 and 2010 Section 179 Deduction Limits
As we know, the Economic Stimulus legislation continued the expanded Section 179 deduction of $250,000 for years beginning in 2009. For tax years beginning in 2010, the limit has dropped to $134,000 (this is the 2007 limit of $125,000 indexed for inflation). In addition, the asset addition phase-out range drops back to $530,000 - $664,000 in 2010 (Rev. Proc. 2009-50).

Caution: Congress could choose to retroactively restore the expanded Section 179 deduction and 50% bonus depreciation for one more year. But at this point, with signs of economic activity improving and the draft of the 2010 “extender bill” omitting these provisions, it appears both of these depreciation incentives will be allowed to expire.

Be aware that a fiscal year pass-through entity would be eligible to claim up to $250,000 for its year ending in 2010. However, the individual 1040 reporting the pass-through Section 179 will be limited to $134,000. Any excess is a wasted deduction that is neither allowed in 2010 nor is a suspended deduction. There is no carryover provision for a Section 179 deduction that is in excess of the individual’s Section 179 dollar limit (Rev. Proc. 2008-54, Example 3).

As a quick reference to the many rules affecting this provision, we have attached an updated Section 179 Eligibility Checklist.

When Is a New Fixed Asset Purchase Eligible for the Election?
Two portions of IRC Section 179 determine the proper tax year for the deduction:

1. According to IRC Section 179(d)(1)(C), property is eligible for the first-year deduction only if it is purchased. “Purchased” means that the taxpayer has either paid for the asset or has a legal liability for the purchase of the asset.

2. According to IRC Section 179(a), the deduction is allowed for the year in which the property is placed in service. The asset has to be available to the taxpayer for its intended business use to qualify as being placed in service.

Both tests must be met for the asset to be eligible. The following examples illustrate these rules.

Example 1 – Section 179 Deduction in 2010
Tim Farmer had a long crop harvesting season this past fall. Since harvest is over, he has reviewed his operation and decided that a new grain dryer would speed up his harvesting operation and allow for a more timely harvest of his corn crop. The grain handling companies which sell crop dryers have pricing specials which end on December 31st.

If Tim writes a check for the dryer purchase on or before December 31st, he has met the purchase requirement for the Section 179 depreciation deduction. However, if the dryer will be manufactured in spring of the next year and delivered to Tim’s farm site in the summer of 2010, he has not met the placed-in-service requirement. Therefore, even though Tim has paid for the dryer during 2009, it is not eligible for depreciation or the Section 179 deduction until 2010, and a $134,000 Section 179 limit applies.

Example 2 – Section 179 Deduction in 2009
Assume the same facts as Example 1, except Tim buys and pays for a used portable grain dryer that is sitting on the dealer’s lot in December. If Tim has the dryer delivered and placed into his grain handling system so that it is available to dry corn before December 31st, then the dryer has been placed in service and it is available for his use. In this situation, Tim is eligible for the Section 179 deduction for the dryer even though he does not use it to dry corn until much later in the following tax year.

Example 3 – Section 179 Deduction in 2008
Jim Lately made the decision that a new combine would improve his farming operation during 2008. The equipment manufacturer had a promotional deal for no down payment and no interest until the following year on the purchase of this new model. Jim completed the paperwork to purchase the combine in September of 2008 and used it in his harvest during the fall of 2008. Jim had a legal liability to the equipment manufacturer’s finance division as of the purchase date in 2008, even though he did not expend any cash for the purchase of the combine that year.

In compiling his 2008 tax data, Jim overlooked the loan paperwork and did not mention to his tax preparer that he purchased the combine. In the preparation of his 2009 tax return, Jim and his tax preparer notice the first payments on the combine and recognize the oversight. According to the two eligibility tests, Jim did have a purchase during 2008 and the asset was placed in service during 2008. Therefore, the Section 179 election for the combine may only be made in his 2008 tax return (via the filing of an amended return). Jim is not eligible to make a 179 election in his 2009 return for this combine.

Glen Steiner and Rick Christiansen

QUOTE OF THE WEEK

“If you don’t know where

you are going, you might end

up someplace else.”

Yogi Berra

SEX CHANGE NOW DEDUCTIBLE

Sex change costs, except those for breast augmentation, held deductible as medical expenses

O'Donnabhain (2010), 134 TC No. 4

The Tax Court has held that an individual could deduct as a medical care expense under Code Sec. 213 amounts paid for hormone therapy and sex reassignment surgery that were incurred in connection with a condition known as gender identity disorder, which the Tax Court found to be a disease. However, it found that breast augmentation surgery that the individual also had in connection with the disorder was cosmetic surgery and amounts paid for it were not deductible under Code Sec. 213(d)(9) .

Background. Code Sec. 213(a) permits a deduction for expenses paid during the tax year for medical care of the taxpayer, spouse or dependent; an expense is for medical care if it is paid for the diagnosis, cure, mitigation, treatment or prevention of disease. Amounts paid for “cosmetic surgery” or other similar procedures can't be taken into account as a medical expense deduction, unless the surgery or procedure is necessary to ameliorate a deformity arising from (or directly related to) a (1) congenital abnormality, (2) personal injury resulting from an accident or trauma, or (3) disfiguring disease. ( Code Sec. 213(d)(9)(A) ) “Cosmetic surgery” is any procedure that is directed at improving the patient's appearance and doesn't meaningfully promote the proper function of the body or prevent or treat illness or disease. ( Code Sec. 213(d)(9)(B) )

Facts. Rhiannon G. O'Donnabhain (the Tax Court petitioner) was born a genetic male with unambiguous male genitalia. However, she was uncomfortable in the male gender role from childhood and first wore women's clothing secretly around age 10. (Reflecting O'Donnabhain's preference, the Court used the feminine pronoun to refer to her throughout the opinion). Her discomfort regarding her gender intensified in adolescence, and she continued to dress in women's clothing secretly.

As an adult, O'Donnabhain earned a degree in civil engineering, served on active duty with the U.S. Coast Guard, found employment at an engineering firm, married, and fathered three children. However, her discomfort with her gender persisted. She felt that she was a female trapped in a male body, and she continued to secretly wear women's clothing.

O'Donnabhain's marriage ended after more than 20 years. After separating from her spouse in '92, her feelings that she wanted to be female intensified and grew more persistent. Eventually, she contacted Diane Ellaborn (Ms. Ellaborn), a licensed independent clinical social worker (LICSW) and psychotherapist, and commenced psychotherapy sessions in August '96. In early '97, after approximately 20 weekly individual therapy sessions, Ms. Ellaborn's diagnosis was that O'Donnabhain was a transsexual suffering from severe gender identity disorder (GID), a condition listed in the Diagnostic and Statistical Manual of Mental Disorders (4th ed. 2000 text revision) (DSM-IVTR), published by the American Psychiatric Association.

Medical professionals who treat gender identity disorder prescribe for its treatment in genetic males, depending on the severity of the condition, (i) administration of feminizing hormones; (ii) living as a female in public; and (iii) after at least a year of living as a female, surgical modification of the genitals and, in some circumstances, breasts to resemble those of a female (sex reassignment surgery).

Pursuant to this treatment regimen, O'Donnabhain was prescribed feminizing hormones in '97 and continued to take them through 2001. In 2000, after plastic surgery to feminize facial features, she began presenting full time in public as a female. In 2001 she underwent sex reassignment surgery, including breast augmentation surgery.

O'Donnabhain claimed a medical expense deduction for the cost of the surgeries, transportation and other related expenses, and feminizing hormones, for tax year 2001. IRS disallowed the deduction.

Court's holdings. The Tax Court held that O'Donnabhain's gender identity disorder is a “disease” within the meaning of Code Sec. 213(d)(1)(A) and Code Sec. 213(d)(9)(B) . It further held that her hormone therapy and sex reassignment surgery were “for the...treatment...of” and “[treated]” disease within the meaning of Code Sec. 213(d)(1)(A) and Code Sec. 213(d)(9)(B) , respectively, and consequently the procedures were not “cosmetic surgery” excluded from the definition of “medical care” by Code Sec. 213(d)(9)(B) . Rather, the amounts paid for the procedures were expenses for “medical care” that were deductible under Code Sec. 213(a) .

However, the Tax Court held that O'Donnabhain's breast augmentation surgery was directed at improving her appearance and that she had not shown that the surgery either meaningfully promoted the proper function of the body or treated a disease within the meaning of Code Sec. 213(d)(9)(B) . Accordingly, the breast augmentation surgery was “cosmetic surgery” within the meaning of Code Sec. 213(d)(9)(B) that was excluded from the definition of deductible “medical care” by Code Sec. 213(d)(9)(A) .

CAN AN S CORPORATION HELP MINIMIZE EMPLOYMENT TAXES?

I have just converted my business to an S Corporation. I understand that an S corporation can help minimize my employment taxes. Just how aggressive can I be?

Mitch

Mitch, this is a very timely question. You should make sure that you are working with a knowledgeable professional that knows all of your circumstances. Here is some general information.

As I mentioned, this is a very timely question in that the IRS has begun taking a harder look at S-corps.

According to IRS figures, the "average" S corporation delivers approximately 41.5% of its economic benefit to shareholders in the form of salary and the remaining 58.5% in the form of K1 distributions. Of course, that's just an average, and covers a lot of different circumstances. Former Presidential candidate and famed philanderer John Edwards organized his law practice as an S-corporation four years before joining the U.S. Senate. He paid himself a salary of $360,000, and avoided over $562,000 in Medicare tax during those years four years.

The key to paying "reasonable compensation" is to determine how much comparable employees are paid by comparable corporations to perform comparable work. Unfortunately, neither the internal revenue code nor treasury regulations offer specific guidance for determining "reasonable compensation."

In some cases, you can use industry averages and surveys.

You can find salary data:

• Online
• From the economic development departments
• Local want ads
• Industry publications
• The State of Federal Departments of Labor
• Parade magazine has an annual “What Do They Make” issue

You can answer the question, "what are you paying people doing a similar job at your workplace?"

These questions will become more important as Washington starts taking a closer look at S corporation issues -- especially those involving shareholder compensation. The General Accounting Office just released a report, Actions Needed to Address Noncompliance with S Corporation Tax Rules, revealing several areas of concern:

For starters, 68% of S-corps filing returns for 2003 and 2004 misreported at least one item. 80% of those errors favored the taxpayer.

13% of S corporations paid inadequate wages to shareholders. The smallest corporations, those with 1-3 shareholders, were the worst offenders.

Several options exist for closing that "wage gap." They include:

• making all S corporation income subject to employment tax,
• making all service business income subject to employment tax, or
• making all active shareholder or majority shareholder income subject to employment tax.
  
  These changes would require legislation -- and Congress has shown no great appetite for changing S corporation income rules.

Because the S corporation is such a popular strategy we keep a close eye on these issues.

Good luck with your new form of business. Let me know if you have any other questions.

Larry Kopsa CPA

TAX INFORMATION CHEAT SHEET

We have created our very own Tax Information Cheat Sheet. It includes information on:

• Deduction Limits
• Tax Brackets
• Standard Deductions
• Mileage Allowances
• Auto Depreciation Limits
• Self-employed Health Insurance
• Earnings Ceiling for Social Security
• Long-term Care
• Day Care Deductions
• And more...

Check it out. It's conveniently located under Tax Information Cheat Sheet on our website at www.kopsaotte.com.

DEDUCTING GAMBLING LOSSES

Casual gamblers must net their winnings or losses on a daily basis when figuring their taxes, the Tax Court says.

"A couple played the slots on occasion. On one day, they hit a $2,000 jackpot and netted $1,100 for the day.

They lost a total of $2,264 on their other trips. In the Court’s view, the $1,100 in winnings is taxed as income and the offsetting $1,100 in losses can be claimed as an itemized deduction. However, since the couple took the standard deduction,they cannot write off the $1,100 in losses (Shollenberger, TC Memo. 2009-306)."

Remember, too, that gambling losses in excess of winnings cannot be deducted.

BACK TO THE OLD RULES ON PENSION DISTRIBUTION

In 2009 Congress changed the rules on distributions from retirement plans for people over 70 ½ which said that they could skip taking a distribution if they so desired. Unfortunately, Congress did not extend the waiver beyond 2009 so required minimum distributions from IRAs and plans resume this year. Taxpayers that turned 70½ in 2009 needn’t take any payout for 2009 by April 1, 2010, but they must take a distribution for 2010 by Dec. 31, 2010. Withdrawals for 2010 are based on Dec. 31, 2009 balances.

Heirs stuck with the five-year payout period get an extra year because the five-year span is calculated without regard to 2009. So if an IRA owner died in 2004, heirs have until Dec. 31, 2010 to clean out the IRA.

THE US ECONOMY GREW IN THE 4TH QUARTER

Why didn’t that make the headlines? Apparently only bad news makes the headlines.

'Finally Some Good News: U.S. economy grows at 5.7% pace, fastest in six years'
(AP/Yahoo!) -- The AP writes that the U.S. economy "grew faster than expected at the end of last year" at a 5.7% annual growth rate in the fourth quarter, "the fastest pace since 2003." According to the story, "The Commerce Department report Friday is the strongest evidence to date that the worst recession since the 1930s ended last year." The AP notes that "the report provided an upbeat end to an otherwise dismal year" as the "nation's economy declined 2.4% in 2009, the largest drop since 1946" and "the first annual decline since 1991." See the article at http://finance.yahoo.com/news/Economy-likely-grew-faster-in-apf-3028347842.html?x=0&.v=9>


U.S. economy grew 4.6% in Q4, Wall Street analysts predict
The U.S. economy appears to be picking up steam faster than many experts had expected. A broad range of Wall Street analysts forecast that the economy grew an annualized 4.6% in the fourth quarter, more than double the third quarter's 2.2%. That would mark the strongest quarterly expansion since 2006. Some estimates run as high as 6% GDP expansion for the quarter. The Guardian (London) (1/29) , The Wall Street Journal (1/29) , Reuters (1/28)

STAFF RETREATS

If you are going to own a business, there are certain expenses that are necessary. Can you imagine running a business without paying rent or utilities or having employees? It would be nice if we did not have to pay these bills, but we all know that if we don't make these investments we won't be in business.

Another expenditure that I feel is just as important is incurring the cost and the time to have staff retreats. Our accounting firm just had a one day retreat and I have to share with you that it was well worth the time and cost.

A staff retreat can be a source of great unity and inspiration. During the retreat we learn many things. We focus on how each of the members of our organization has different strengths and how we can utilize these strengths to be a better team. We also develop deeper understandings of who we are as individuals and as a group.

Spending time with coworkers in a way that is fun, relaxed, and reflective can be nourishing as well as productive. Rarely in this culture do we take the time to simply pause from the frantic pace of our actions. A commitment to pausing on an organizational level can lead to the manifestation of an entirely different and powerful orientation toward work, vision, community, and self.

I urge you to keep in mind this important tool for running a successful business.

OUR NEW ADDITION

My oldest son James and my 14th grandchild. John was born on December 24th. What a great Christmas present!

QUOTE OF THE WEEK

"Opportunity is missed by

most people because it is

dressed in overalls and

looks like work."

Thomas Edison