Tax Update

In early November, President Obama signed a bill extending the five-year Net Operating Loss (NOL) carryback to taxpayers with annual gross receipts over $15 million. The NOL carryback was originally extended for individuals and small businesses earlier in the year. This temporary measure allows all taxpayers with losses in either 2008 or 2009 to offset those losses against the income that generated taxes paid over the prior five years. The result of the carryback will be a tax refund of these taxes.

Businesses can maximize their losses through several additional tax-saving strategies.

As part of the November legislative package, the First-Time Homebuyer Credit was expanded. The following are among the new provisions:

The American Recovery and Reinvestment Act of 2009 allows a credit against certain employment taxes for providing COBRA premium assistance to eligible individuals. The credit is available to businesses, as well as government and nonprofit institutions, who submit payroll taxes.

Employers are provided a credit against payroll taxes for amounts of COBRA continuation coverage premiums not paid by involuntarily terminated employees who qualify for premium reductions. Premium reductions are excluded from the employee’s gross income.

An assistance eligible individual is treated, for purposes of COBRA continuation coverage, as having paid the premium required for coverage if the individual pays 35% of the premium to their former employer. An assistance eligible individual is defined as any qualified beneficiary who:

The Internal Revenue Service has issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

SPECIAL CHARITABLE CONTRIBUTIONS FOR CERTAIN IRA OWNERS – This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or older, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

RULES FOR CLOTHING AND HOUSEHOLD ITEMS – To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

GUIDELINES FOR MONETARY DONATIONS – To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

REMINDER – Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2009 count for 2009. This is true even if the credit card bill isn’t paid until 2010. Also, checks count for 2009 as long as they are mailed in 2009 and clear, shortly thereafter.

For more information on these articles, please contact Ricky Max, Principal or Avrum Katz, Principal. You can also call us at 847-205-5000.

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In conformity with U.S. Treasury Department Circular 230 tax advice contained in this communication and any attachments is not intended to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code, nor may any such tax advice be used to promote, market or recommend to any person any transaction or matter that is the subject of this communication and any attachments. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.