Israeloff, Trattner & Co. P.C.

Q: Tell me about the Tax Relief Act of 2010!

A: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law Dec. 17, extends and expands a wide variety of valuable tax breaks and includes tax provisions affecting individuals and businesses. Here's a brief summary of the most important provisions.

Individual tax provisions

General:

New two-percentage-point payroll tax cut for 2011
Extension of the lower ordinary income tax rates for all tax brackets through 2012
Extension of marriage penalty relief through 2012
Extension of the elimination of itemized deduction and personal exemption phaseouts through 2012
Extension of the deduction for state and local sales taxes in lieu of state and local income taxes through 2011
Extension of the increased alternative minimum tax (AMT) exemptions through 2011
Extension of the ability to offset AMT liability with certain nonrefundable personal credits through 2011

Investing:

Extension of the lower long-term capital gains rates through 2012
Extension of the lower qualified dividend tax rates through 2012
Extension of the 100% gain exclusion on certain qualified small business stock to stock acquired through 2011

Children and education:

Extension of the $1,000 child credit and other enhancements of the credit through 2012
Extension of the higher adoption credit and income exclusion for employer-provided adoption assistance through 2012
Extension of the higher dependent care credit through 2012
Extension of the American Opportunity education credit through 2012
Extension of the above-the-line tuition and fees deduction through 2011
Extension of the income exclusion for employer-provided education assistance through 2012
Extension of the enhancements to the student loan interest deduction through 2012
Extension of the $2,000 Coverdell Education Savings Account contribution limit and other enhancements through 2012

Charitable giving:

Extension of the ability to exclude from income direct contributions from IRAs to qualified charities (up to $100,000 annually) through 2011
Extension of the ability to take a larger deduction for donations of long-term capital gains real property for conservation purposes through 2011

Estate planning:

Reinstatement of the estate tax for 2010 with a top rate of 35% and a $5 million exemption (compared to 45% and $3.5 million for 2009)
Option for estates of taxpayers who died in 2010 to elect to follow the pre-Tax Relief act regime - no estate tax but limits on step-up in basis for transferred assets
Reinstatement of the generation-skipping transfer (GST) tax for 2010 at a 0% rate with a $5 million exemption (compared to 45% and $3.5 million for 2009)
Decrease in the top estate and gift tax rates and the GST tax rate to 35% for 2011 and 2012
Increase in the estate, GST and gift tax exemptions to $5 million for 2011, indexed for inflation in 2012
Ability of the estate of a taxpayer who dies in 2011 or 2012 to elect to allow the surviving spouse to use the deceased's unused estate tax exemption

Business tax provisions

Investment incentives:

Increase in bonus depreciation to 100%, generally for assets placed in service after Sept. 8, 2010, and before Jan. 1, 2012
Extension of 50% bonus depreciation, generally for assets placed in service Jan. 1, 2012, through Dec. 31, 2012
Increase in the Sec. 179 expensing limit to $125,000 (indexed for inflation) for 2012
Increase in the Sec. 179 expensing phaseout threshold to $500,000 (indexed for inflation) for 2012
Extension of accelerated depreciation for qualified leasehold-improvement, restaurant and retail-improvement property through 2011

Tax credits:

Extension of the research credit through 2011
Extension of the Work Opportunity credit through 2011

Charitable giving:

Extension of the enhanced deduction for food inventory donations through 2011
Extension of the enhanced deduction for donations of book inventory to public schools through 2011
Extension of the enhanced deduction for computer inventory donations for educational purposes through 2011

Just the tip of the iceberg
As you can see, the Tax Relief act includes numerous provisions, and we've only touched on some of them here. Many breaks are subject to a variety of rules and limitations, so it’s important to discuss them with your tax advisor to determine exactly how they'll affect you.

Q: With Income Tax Time just around the corner, how do I substantiate my entertainment expenses?

A: Entertainment and recreation have always played an important role in business. And while the IRS and courts pore over tax deductions for these activities, they also recognize that businesspeople conduct legitimate business over lunch or on the golf course.

The scrutiny isn't surprising. After all, entertainment is an area that's ripe for abuse. But if you follow the rules, you can successfully mix business and pleasure without giving up the tax benefits.

Supporting your entertainment expenses

Generally, your company can deduct "ordinary and necessary" business expenses. But the tax code imposes additional requirements on entertainment expenses.

To support an entertainment expense deduction, you must be able to show:

The expense is directly related to or associated with the active conduct of your business - an expense may be "associated" with your company if the entertainment directly precedes or follows a "substantial and bona fide business discussion"

The deduction is adequately substantiated by records (or other evidence) that establish the amount, time, place and business purpose of the expense, as well as the business relationship of the parties involved

You had "more than a general expectation" of gaining a business benefit from the entertainment

You engaged in some business activity, other than the entertainment, such as a meeting, negotiation, discussion or other bona fide business transaction

The "principal character or aspect" of the combined business and entertainment was business

The expense was attributable to you, your employees or others involved in conducting business

Keep in mind, Businesses are generally limited to deducting 50% of otherwise allowable meal and entertainment (M&E) expenses, but there are several exceptions, such as expenses:

Treated as compensation to employees

Excludible from employees' income as de minimis fringe benefits

Paid or incurred under a reimbursement or similar arrangement in connection with the performance of services

For employee recreational or social activities - for example, picnics and holiday parties

Unfortunately, separately identifying and reporting items that are 100% deductible can be complicated and time consuming. But if you spend a great deal on M&E expenses, it may pay to do so. Fortunately, the IRS now allows statistical sampling methods to be used to estimate the portion of M&E expenses that are fully deductible, which can ease the accounting burden.

Hunting - and fishing - for tax deductions

The case of Townsend Industries Inc. v. United States provides some important lessons for businesses deducting entertainment expenses. In this case, the Eighth U.S. Circuit Court of Appeals reversed a district court and held that the cost of a company's annual fishing trip was both deductible as a business expense and excludible from employee compensation as a working-condition fringe benefit.

Townsend was an Iowa-based manufacturer of printing equipment. Each summer the company gathered all its independent sales representatives for a two-day meeting at its headquarters. Following the meeting, Townsend sponsored a four-day, expense-paid fishing trip for its sales reps and factory employees at an upscale Ontario resort. Employees were encouraged, but not required, to attend. Although business discussions were conducted on an ongoing basis and one dinner meeting was held, workers were generally free to do as they pleased during the trip.

The IRS challenged Townsend's treatment of the trip expenses, contending they constituted wages that were subject to employment and income taxes. The district court agreed, finding: 1) the "fishing trips were not an ordinary and necessary business expense in light of the lax attendance policy for the trip," 2) there was "a disconnect between the sales meeting and the fishing trip," and 3) the company had no more than a general expectation to derive uncertain future benefits from the trips.

The court also found Townsend failed to meet substantiation requirements, citing the company's lack of contemporaneous, written records - details on why the expense is business related - and its reliance instead on employee testimony.

The Eighth Circuit disagreed, ruling that, despite the lack of contemporaneous records, trial testimony clearly established the fishing trips had a legitimate business purpose. Even though the trips were voluntary, employees "felt an obligation to attend, and some felt it was part of their job." Moreover, there was "extensive trial testimony" regarding specific business issues discussed and problems solved during the trips.

Although Townsend confirms the deductibility of travel and entertainment expenses that serve legitimate business purposes, the case also highlights the importance of substantiating these expenses with detailed, contemporaneous records. Even though the employer in Townsend ultimately prevailed without this information, the litigation cost was great.

Tax considerations not the only concern

In the current environment, companies also need to keep in mind that, even if an entertainment expense passes muster as a business deduction, it may not leave a good impression with others. While public companies may receive the greatest scrutiny, even private companies can harm their reputation in the community if it appears they're spending excessive amounts on unnecessary entertainment, especially if it benefits only the owners or other top management.

So before incurring entertainment expenses, consider both their potential deductibility and whether they could have any other negative impact on your business. And if you determine an expense is worthwhile, be sure to substantiate it.

Q: Can I still get a homebuyer credit?

A: Just before an important deadline was set to expire, the House and Senate extended the homebuyer tax credit for certain taxpayers. Previously, the credit was available to qualified taxpayers for purchases made before May 1, 2010 - or July 1 if a binding contract was in place before May 1. Congress has extended the July 1 deadline to Oct. 1, 2010.

It's important to note that the May 1 deadline was not extended - for a taxpayer to benefit from the credit, a binding contract still must have been in place before that date. The extension simply gives taxpayers with such a contract in place more time to complete the closing.

The maximum credit is $8,000 ($4,000 for married filing separately) for "first-time" homebuyers and $6,500 ($3,250 for married filing separately) for "long-time" homeowners. The credit starts to phase out for joint filers with modified adjusted gross incomes (MAGIs) exceeding $225,000 ($125,000 for single filers). It's completely eliminated for joint filers with MAGIs exceeding $245,000 ($145,000 for single filers).

Additional rules apply regarding who is eligible and what their maximum credit is, so it's important to consult your tax advisor to determine how the credit may apply to you.

Q: My friends are telling me I should have my pension plan reviewed now. Is this really necessary?

A: Absolutely yes. In the past year, retirement plans have come under the intense scrutiny of the federal government. Now, more than ever, you need to be empowered with as much information and trusted advice as possible.

It is strongly recommended that your retirement plan be reviewed with regard to the Pension Protection Act of 2006, and other more recent changes to the rules and laws that could directly affect you, and/or your retirement plan.

Some areas of concern that may need to be addressed:

Some pension plans may be underfunded due to recent market instability and in fact, may be in danger of losing their tax benefits!
A Pension Protection Act (PPA) ruling has mandated that all pension plans must be re-stated in 2010.
Retirement Plan Contribution limits have been increased, which can impact you.
The PPA requires increased monitoring of employees' retirement plans.
The PPA and subsequent court rulings implemented more stringent guidelines on pension plan reporting, and providing of benefit statements. In addition, there is increased fiduciary liability of key business officers in providing employees with information on, and control over their retirement accounts.
The PPA has required all 401K plans to now offer automatic enrollment.

We can help provide a thorough review of your pension plans in order to maximize your benefits and ensure your compliance with the new regulations. At Israeloff, Trattner & Co., our professionals are dedicated to providing you with the ideal solutions to help you achieve your financial objectives. Isn't it time you made Israeloff, Trattner & Co. part of your team?

Q: When do Employers have to make their Metropolitan Commuter Tax (MCTMT) payments?

A: Employers are required to make their MCTMT payments quarterly. However, if they participate in the PrompTax program for New York State withholding tax purposes, employers (other than school districts) are required to make MCTMT payments on the same dates their withholding tax payments are remitted under the PrompTax program.

Mandatory participation in PrompTax is determined annually for the July 1 through June 30th program year. In May, a review of all New York State Withholding Tax accounts is completed for the previous year to identify taxpayers who reported $100,000 or more in Withholding Tax liability. A Notice of Participation is sent on or about June 1, and Taxpayers must enroll within 20 days.