NEW IRS PROCEDURE MAY MAKE AMENDED RETURNS PAY – ESPECIALLY FOR TAXPAYERS GOING ON CASH BASIS IN 2001

Many taxpayers who had already filed their 2001 returns scrambled to take another look at them when Congress this month passed a new law making retroactive taxpayer-friendly changes.  Not to be outdone, the IRS will make amended returns worthwhile for many taxpayers with last week’s unheralded announcement (Rev. Proc. 2002-19) changing the procedures for changes in accounting methods.   In many cases, these rules are retroactive to 2001 – for the most part on an optional basis.

The IRS requires taxpayers to receive its permission before changing a method of accounting.  If permission is not obtained, the IRS gets to undo the method change; if permission is obtained, the IRS cannot challenge the method used in prior years.  To save itself the headache of closely evaluating every method change request, the IRS has issued blanket permission for many accounting method changes, provided taxpayers give the IRS proper notice and follows rules set forth by the service.  Rev. Proc. 2002-19 is the most recent IRS update of these rules

Many of our community bank clients took advantage of one of these blanket permissions to change from accrual method to cash method with their 2001 tax returns. 

FOUR YEARS IF INCOME GOES UP, ONE IF INCOME GOES DOWN

The IRS buried a bomb within this seemingly dull Revenue Procedure.  A change in accounting methods causes an immediate change in taxable income.  For example, taxpayers going from the accrual method to the cash method have to back out of income all of their accrued but not received income.  This difference is called, poetically, the “Section 481(a) adjustment.”  The IRS has required most such adjustments to be spread over four years, whether they increased or reduced taxable income.

The new rules keep the four-year adjustment period when the adjustment INCREASES taxable income, but require taxpayers to take REDUCTIONS into account in only ONE YEAR. 

WHAT’S NOT TO LIKE?

There are actually times when you might want to spread a deduction over four years.  This is especially true if you did your 2001 tax planning assuming the old rules would continue to apply.  Problems that could arise from a one-year negative adjustment include, among others:

-- S corporation distributions for 2001 that had been tax-free could become taxable dividends.

-- The deduction could be large enough to create a taxable loss, which could cause an S corporation to be a “tax shelter,” which could make it ineligible to be a cash-method taxpayer.

-- If the adjustment is a “built-in loss,” you might want to spread it to cover anticipated “built-in gains” for S corporation tax purposes.

EFFECTIVE DATES AND TAXPAYER CHOICES

--Taxpayers who have already changed their 2001 accounting methods have until September 10 to amend their returns to claim a one-year adjustment.

--Taxpayers who have extended returns or have not yet filed for their changes for 2001 have until April 15 to file for an automatic method change if they want to use a four-year spread for a negative adjustment; otherwise the one-year spread is automatic.

--Taxpayers looking to make a method change for 2002 have until April 15 to file a change using a four-year negative spread; otherwise, they will be required to use a one-year adjustment.

TAX SHELTER DISCLOSURES ROLL IN…

Well, maybe “trickle” is more accurate.  As of March 13, 75 taxpayers have taken already taken advantage of the IRS so-called tax shelter amnesty program, as set forth in Announcement 2002-2, according to a report by Tax Analysts.  The deadline is April 22; as with any such deadline, we can expect filings to come in mostly in the last few days.

The program waives penalties for a number of return positions (not just those involving tax shelters) if they are fully disclosed.  The program is attractive to taxpayers who might have an, ahem, aggressive position on their tax return that would not avoid a penalty on examination even if it were fully disclosed.  For taxpayers with a high likelihood of audit, the program lowers the stakes when IRS comes looking at the return.

PIGS GET FAT, BUT HOGS…

It’s a maxim in the tax world, even though city folk at Roth & Company don’t really understand where it comes from: “pigs get fat, but hogs get slaughtered.”  The point is that you should be aggressive on your taxes, but if you go too far, you will get in trouble.  The idea behind the saying is sound, even though we’re pretty sure that in the barnyard (or finishing facility) pigs and hogs eventually meet the same fate.

Fortunately, some taxpayers are willing to push the envelope, saving the rest of us from the nicks and scrapes that result from close encounters with the tax enforcement system.  The folks at Highway Farms, Inc. in Boone County, Iowa recently tried to expand the use of a quaint relic of our rural past.  The tax law allows the payment of some agricultural wages made “in-kind” – with produce of livestock – to escape FICA tax.

The officers of Highway Farms, Inc. arranged to take title to a few hogs shortly before the hogs went to market.  The court noted that “The officer employees who received the (hogs) did not market their hogs separately from other Highway Farms hogs.  Rather, the transferred hogs and the Highway Farms hogs were loaded on to the same truck and sold to the same buyer on the same terms.  Because the hogs were market-ready at the time of transfer, there was little risk that they could not almost immediately be converted into cash.”   Apparently the court requires a more traditional relationship with the livestock to avoid FICA taxes: “The hog bonuses were disguised cash transfers whose sole purpose was tax avoidance.  The bonuses were the equivalent of cash bonuses, subject to FICA taxes.”

BORDER TENSIONS HEAT UP WITH ILLINOIS

Illinois and Iowa are on the outs over Governor Vilsack’s proposal to end Iowa’s tax reciprocity agreement with Illinois.  Under the agreement, taxpayers who live in one state and work in the other are only taxed in their state of residence.  The Governor thinks Iowa loses revenue this way, and he wants to end the agreement to help cope with the state’s budget crisis.  Iowa estimates that it loses $16,000,000 annually under the agreement; Illinois says the Iowa loss is only about $2,000,000.  Colin Powell has declined to intervene thus far.

NOT THAT ANYTHING WOULD BE WRONG WITH THAT

The Roth & Company, P.C. shareholder group includes alumni from four of the “Big 5” firms.  Only Andersen is unrepresented.

March 8, 2002

CONGRESS AIDS PROCRASTINATORS AT EXPENSE OF RETURN PREPARERS

If you have been putting off preparing your business returns for 2001, Congress has justified your leisurely approach by changing the rules for 2001.  If you have been a prompt and timely taxpayer, you may be rewarded with the opportunity to file an amended return.  In a two-day frenzy of legislation, Congress has agreed on the economic stimulus package (H.R. 3090) that has been crawling through the legislative process since September.  The Senate approved the bill this morning, and the President says he will sign the bill.  With only a week left before the corporate return due date, return preparers couldn’t be more thrilled.

ENHANCED ASSET WRITE-OFFS EFFECTIVE LAST YEAR

The provision with the broadest reach will allow taxpayers to expense 30% of most depreciable property placed in service after September 10, 2001.  This provision only applies to assets that were both acquired AND placed in service after September 10; it does not apply if the purchase commitment was made before that date. 

It works like this: a calendar-year taxpayer who purchased and placed in service a depreciable asset with a five-year life in November 2001 for $1,000,000 may expense $300,000 of it – regardless of taxable income or the amount of other assets placed in service during the year.  The $700,000 remaining cost is depreciated under normal tax rules, providing a $140,000 depreciation deduction for 2001.  The taxpayer recovers $440,000 of the cost in 2001 this way; without the law change, the taxpayer would have only a $200,000 depreciation deduction for 2001.  

OF COURSE, IT CAN’T BE TOO SIMPLE

The provision applies to software and to depreciable assets other than real estate.  It applies also to leasehold improvements on buildings less than four years old.  Finally, it applies to automobiles, to the extent of $4,600 per car.  It does not apply to property financed with tax-exempt bonds.

WHAT IF I HAVE ALREADY HAD MY RETURN PREPARED?

See whether amending the return will provide enough savings to be worthwhile. If you have questions, your preparer will be delighted to take a break from redoing all of the March 15 returns that were about to be mailed to have a leisurely chat about this new provision.

A GREAT TIME TO HAVE A REALLY BAD YEAR

The new law allows taxpayers with net operating losses in 2001 and 2002 to carry the losses back against prior taxable income for five years.  The normal carryback period is only two years.  The usual rules that require the payment of some alternative minumum tax in loss carryback years are also waived for 2001 and 2002 carrybacks.

ANY OTHER GOOD STUFF?

The bill includes a host of tax breaks for New York City taxpayers.  It also extends jobless benefits and repeals the “Gitlitz” case for insolvent S corporations for debt forgiveness after October 11, 2001; a March 1, 2002 deadline applies for taxpayers in bankruptcy.

WHAT DIDN’T HAPPEN?

The tax bill passed because it was stripped of all rate reductions, alternative minimum tax relief, capital gain and other business tax breaks. 

IOWA LEGISLATURE EMU-LATES CONGRESS

If the federal bill isn’t stimulating enough, Iowa’s lawmakers have more excitement for you.  Governor Vilsack has signed into law the venture capital credit bills discussed in recent Tax Updates.  These provisions pale into insignificance in comparison to Senate File 335, which stimulates the Iowa economy by resolving the status of Rheas, Emus and Ostriches as livestock; avian status no longer automatically carries the “poultry” stigma.  As a result, certain capital gains on the sales of these big birds by their farmers (ranchers?) qualify as tax-exempt sales of livestock.

TAX ME MORE?

In case you have any doubts that the Iowa Legislature is serious about tackling the state’s fiscal problems, they should be erased by Senate File 2307.  Introduced by Senator Kitty Rehberg (R-Rowley), the bill provides for a fund to receive contributions from Iowans who think they do not pay enough state tax. The bill also allows the donors to make non-binding suggestions for the use of the funds.  Psychiatric evaluations for the donors should be on the list.

Sen. Joe Bolkcom (D-Iowa City) dismissed the bill as "a ridiculous publicity stunt."

ROTH & COMPANY ARTICLE IN IOWA BANKING MAGAZINE

 Vice-president Cheney has begun to venture from his undisclosed location to make public appearances.  The Bush Administration tax simplification ideas that have also been stored there will also begin to appear in coming weeks, according to Treasury Secretary Paul O’Niell.

 The Secretary says that political realities prevent a major overhaul of the tax code for now.  Instead, the Treasury will issue a series of reports about simplifying specific areas of the tax law.  Some of the ideas likely to be addressed include: 

• individual and corporate alternative minimum tax;
• having one definition of “child” for all tax law purposes;
• stripping income based phaseouts from the code;
• consolidating and clarifying education incentives;
• increasing or removing income limits imposed on individual retirement account contributions and deductions;
• individual capital gains;
• depreciation and capitalization issues for businesses;
• tackling the existing accrual and inventory accounting, uniform capitalization rules and the percentage of completion method guidelines for tax accounting purposes; and
• revamping international tax rules.

Simplification is a worthy goal, but an elusive one.  By our count, 24 pieces of tax legislation have been introduced in Congress so far this month.  The Administration’s recent budget draft contains at least 18 tax breaks of different flavors.  The overall attitude in Washington is sympathetic to simplification, as long as it doesn’t affect any actual tax laws.

MORE ADVENTURES IN VENTURE CAPITAL

 The Iowa Legislature has passed another set of venture capital incentives for the Governor’s expected signature.  This bill provides two credits: 

• A credit of up to 20% of direct investment by individuals in “qualifying business.”  These are businesses with a net worth of up to $3,000,000 with principal operations located in Iowa, and with owners who meet certain training or experience requirements.  The business cannot be “primarily engaged in retail sales, real estate, or the provision of professional services.
• A credit of up to 20% of a cash investment by individuals, corporations or financial institutions in a “community based seed capital fund.” 

These credits will be available for investments made after January 1, 2002, but will not actually reduce taxes until 2005.  For the text of the legislation, click here.

 MISADVENTURES IN VENTURE CAPITAL

 Alert readers point out that the discussion of the “Fund of Funds” venture capital credit failed to discuss an important provision.  While the credit will protect investors from a substandard return, the bill also caps the returns to the fund of funds investors.  Any investment returns in excess of the cap – which is to approximate the return on medium-term government instruments – will go to the state venture capital corporation for new venture capital investments.  

For a response to our Tax Update discussion of the Fund of Funds credit, click here. 

For the full text of the FOF bill, click here. 

ADVENTURES IN STATE TAX RATES

 The goal of encouraging venture capital formation is a worthy one, and the new venture capital credits address an important need.

 Unfortunately, Iowa’s tax rates do not encourage businesses to stay here once they graduate from “venture” stage to the important “profitable” stage.  The tax rates of Iowa and neighboring states speak for themselves.  These rates don’t tell the whole story – for example, Iowa has more favorable deductions for federal taxes than its neighbors, and generally more favorable apportionment of multi-state income – but the part of the story they do tell doesn’t have a happy ending in Iowa.

 TOP CORPORATE RATES:

TOP INDIVIDUAL RATES

MARCH APPLICABLE FEDERAL RATES ARE OUT

 The minimum rates required for loans before interest is imputed are as follows March 2002:

• Short Term (demand loans and loans with terms of 1-3 years): 2.69%
• Mid-Term (loans from 3-9 years): 4.52%
• Long-Term (over 9 years): 5.48%

For complete AFRs, click on the "Links" link on the border on the left side of this page.

IOWA VENTURE CAPITAL LEGISLATION INCLUDES S CORPORATION BENEFIT

The details of this are fascinating, to those of us who are fascinated by such things. If you want to know Iowa's treatment of multistate S corporations, click here: For information on the rest of the venture capital legislation, read on.

PRESIDENT'S NEW TAX PROPOSALS: KINDER, GENTLER AND DOOMED

Look for more analysis of the budget proposals in future Tax Updates.

January 21, 2002

CLOSING TIME IMPENDS AT THE SPLIT DOLLAR TAVERN

The IRS is developing new rules to cover split dollar insurance arrangements. Taxpayers with such arrangements have this week to make sure their arrangements are exempted in some respects from the new rules.

"Split Dollar" arrangements to hold life insurance have become a popular executive benefit in recent years. A "split dollar" arrangement divides the ownership interests in a policy between and employer and employee. Typically, the employer gets its premiums back at the maturity of the policy, while the employee gets the remaining death benefit and cash surrender value buildup. The employee generally only included the value of one year's worth of term insurance in income each year - ignoring the increase in cash surrender value that also inured to the employee.

The IRS, never really happy with split dollar deals, voiced its displeasure last year with Notice 2001-10. The notice said that proposed regulations would tax these arrangements in line with their economics. The notice provoked howls of protest from life insurance companies and brokers. Taking into account the howls, the IRS this month provided more details of its plans in Notice 2002-8.

Split dollar arrangements can be structured with either the employer or the employee as the nominal owners of the insurance policy. Under the new rules, the taxation of the policies will depend on who the nominal owner is. If the employee is the owner, the premiums paid will be treated as interest-free loans to the employee, with interest imputed on the paychecks of the employee. Any of the "loans" not repaid will be taxed as income to the employee.

If the employer owns the policy, the employee will be taxed on the term insurance benefit each year under new tables issued with Notice 2002-8. While cash value increases will not be taxed automatically to an employee as they accrue, they will be taxed to the employee when they "become available" - for example, when the employee can buy out the policy at retirement for less than its fair market value, or when the employee is permitted to draw out cash values without being required to repay them.

The new rules will apply to existing arrangements, but with important "grandfather" provisions. If the employer is entitled to the return of its premiums, an arrangement set up before January 28, 2002 may be terminated before 2004 without the imputation of income to the employee for the unrecognized economic gain. Other grandfather provisions may also apply based on the January 28 date.

Employers and employees with split dollar arrangements should revisit their policies this week to make sure they are in order and qualify for any grandfathered benefits. They will then have to take a hard look at whether to terminate split dollar plans before the end of 2003. Any new split dollar arrangements should be written with Notice 2002-8 in mind.

January 18, 2002

AUDITS FROM HECK

The IRS this week announced a new program to replace their "Taxpayer Compliance Measurement Program," popularly known as "Audits from Hell." The new program, designed to gather statistics to help the IRS to determine which returns to examine and what to look for in the audits, is touted as kinder, gentler, and less intrusive than the old TCMP program. Audits from Heck, as it were.

The new program is called the "National Research Program," which has an almost therapeutic and scientific ring to it. The IRS expects to randomly select 50,000 tax returns to "research." The IRS says about 8,000 of these returns will be examined using only third-party matching data, primarily W-2s and 1099s. These taxpayers will never know that they have been "researched." This can be considered the first circle of Heck.

In the second circle, another 9,000 returns would be researched by mail. Most research subjects would be subject to torments in the deeper circles of Heck. They would be subjected to examinations look a lot like regular audits; for these guinea pigs, parts of the returns would be verified by a cursory examination - primarily third-party matching - but with detailed verification required for much the return information.

The ninth circle of Heck will be reserved for 2,000 wretched taxpayers. The IRS plans to intensively research these returns line-by-line, much like the old Audits from Hell. The Service says these audits are needed to verify the reliability of the rest of the 50,000 research projects.

If you wind up in Heck, the IRS would like you to know that the research is for a good cause: if it knows what to look for, it will help it concentrate on issues likely to raise revenue and enable it to leave innocent taxpayers alone. The last TCMP audits were conducted in the late 1980s. The IRS hopes to begin researching 2001 returns sometime this fall.

IRS ANNOUNCES FEBRUARY APPLICABLE FEDERAL RATES

The IRS has announced the Applicable Federal Rates for February, 2002. These rates are the minimum permitted to be charged for certain purposes, including gift loans and employee loans. The rates shown below use annual compounding:

Short Term (demand loans and loans with terms of 1-3 years): 2.74%

Mid-Term (loans from 3-9 years): 4.63%

Long-Term (over 9 years): 5.6%

To find historical AFRs, visit our web site, www.rothcpa.com, and click on "links."

START NOW

Most taxpayers fail to fund their IRAs, College Savings Plans, SEPs and similar investments until the last possible date. This is, as the Wizard of Oz might say, disorganized thinking. The sooner these plans are funded, the more time they have to work their tax-advantaged magic. Fund the plans now, and reap the tax benefits all year.

January 14, 2002

THE PRISONERS DILEMMA, IRS STYLE

Most of us have encountered "the prisoner's dilemma" somewhere - maybe as a discussion topic in college, or perhaps at the hands of a wily parent. In the classic version, two criminals are arrested for a crime they have committed together. The police lack the evidence to convict either prisoner without the cooperation of at least one of them. The two prisoners are separated and each offered a reduced sentence in exchange for cooperation. If they fail to cooperate and are convicted, a severe sentence is imposed. If neither cooperates, they both go free. Each prisoner faces betrayal by the other, and a potential long sentence -- or the prospect of ending up in jail unnecessarily by confessing, if the other prisoner remains silent. Of course, the more prisoners there are, the more likely it is that at least one will crack.

The IRS puts the prisoner's dilemma to use in its sort-of amnesty for tax shelters, Announcement 2002-2. This notice offers to waive penalties for taxpayers who have taken what might be called "aggressive" positions -- positions that others might less politely call "cheating." The "prisoner," or taxpayer, is required to cooperate by disclosing the details of the "crime" - the tax shelter. These details include the name and address of the tax shelter promoter and copies of all promotional and legal materials underlying the tax shelter transaction. The IRS can be expected to use these materials to extract the names of the other "prisoners" -- that is, the other tax shelter participants -- from the promoters, to the everlasting regret of the shelter participants. As most tax shelters have multiple participants, the chances of someone disclosing the shelter are pretty good.

Announcement 2002-2 gives taxpayers until April 23 to decide whether to get on the good side of the law and avoid negligence or substantial understatement penalties by disclosing the suspect transactions. Disclosure of the transaction does not by itself cause the taxpayer to have to pay additional tax, or even to admit that the shelter transaction is in any way improper.

BUT IT ISN'T JUST FOR TAX SHELTER PARTICIPANTS

The relief offered by Announcement 2002-2, while aimed at tax shelters, is also available for many other items. If a taxpayer expects a tax return position to be discovered and challenged by IRS in a future audit, the taxpayer can use Announcement 2002-2 to lower the stakes to the tax only - eliminating the possibility of the 20% negligence and substantial understatement penalties. The relief is available to all tax return items other than:

1) issues resulting from a transaction that did not in fact occur, in whole or in part, but for which the taxpayer claimed a tax benefit on its return;

2) items involving the taxpayer's fraudulent concealment of the amount or source of any item of gross income;

3) items involving the taxpayer's concealment of its interest in, or signature or other authority over a financial account in a foreign country;

4) items involving the taxpayer's concealment of a distribution from, a transfer of assets to, or that the taxpayer was a grantor of a foreign trust; or

5) issues arising from the treatment of personal, household, or living expenses as deductible trade or business expenses.

Taxpayers and their advisors have until April 23 to consider whether their hand in the income tax poker game would be strengthened by laying some cards face-up on the table. Where the return position involved involves a matter of timing of income or deductions over a relatively short term, and when the taxpayer will probably be audited anyway, disclosure may be especially attractive.

MORE NEW NUMBERS FOR 2002

-The maximum compensation to be taken into account for determining defined contribution plan contributions is $200,000 in 2002, up from $170,000 in 2001.

-The maximum employer profit-sharing plan contribution on behalf of any employee is 25% of compensation, to a maximum contributon of $40,000; the $40,000 limit is not reduced by 401(k) elective deferrals. This is an increase from the 2001, when the maximum contribution was 15% of compensation, with a $35,000 maximum. In 2001, these limits were further reduced by any 401(k) employee deferrals into account.

-The maximum employer contribution to a money-purchase pension plan remains at 25% of compensation for 2002. Many employees will want to merge their money-purchase plans into their profit-sharing plans in 2002, now that the profit-sharing plan limit is also 25%.

DID YOU KNOW?

Did you know that you can find tax rate tables, automobile mileage rates, and historical Applicable Federal Rates (AFRs) via the Roth & Company web site? Go to www.rothcpa.com and click on the word "Links" on the left side of the page.

January 2, 2002

HAPPY NEW YEAR!

Why happy? Because a host of tax breaks and rate reductions took effect on New Year's Day.

INCOME TAX RATE REDUCTIONS: All individual tax rates at all brackets over 15% level are reduced by ½%; the top rate is reduced from 39.1% to 38.6%.

HIGHER PENSION LIMITS: The maximum individual deferral for 401(k) arrangements rises to $11,000 for 2002, from $10,500. Perhaps as important, 401(k) deferrals no longer count against the overall limits to plan contributions, so 401(k) contributions will no longer reduce the amounts that employers can contribute to profit-sharing plans.

The contribution limits to IRAs (both "traditional" and "Roth") also rise to $3,000 for 2002, from $2,000 in prior years.

CATCH-UP CONTRIBUTIONS: Taxpayers who reach age 50 by the end of 2002 can add $1,000 to their 401(k) deferrals in addition to the $11,000 normally allowed. These taxpayers also can contribute $500 more to their IRAs than would otherwise be allowed.

ESTATE AND GIFT BREAKS FOR 2002: The top estate tax rate falls to 50%, from 55%, for those who finish life's race in 2002. Estates (and cumulative lifetime gifts) up to $1,000,000 will be exempt from federal estate tax; the exempt amount last year was $675,000. The annual amount that can be given tax free in addition to the lifetime limit rises to $11,000 in 2002, from $10,000.

SO WHAT ELSE IS NEW?

Reimbursable business auto mileage rate: 36.5 cents per mile (34.5 cents in 2001)

Mileage rate for moving and medical mileage: 13 cents (12 cents in 2001)

Charitable mileage: 14 cents (same as 2001)

FICA base: $84,900 ($80,400 for 2001)

ALSO:

Employer-provided graduate study is tax free in 2002.

Student loan interest is deductible without regard to whether it is incurred within 60 months after college (subject to income limits).

Employees with incomes below certain limits can claim a credit of up to 50% of their 401(k) contributions.

WHAT'S THE CATCH?

While regular tax rates are reduced, the alternative minimum tax (AMT) rates are unchanged. As taxpayers pay the higher of the regular tax or AMT, more taxpayers will have the once exclusive, but never coveted, privilege of paying AMT. Because state taxes aren't deductible for AMT, a high deduction for state income taxes in proportion to your income is likely to cause AMT. This makes it important to match tax payments with the year the income is incurred, especially for those of us in high tax states (like Iowa).

SO:

Roth & Company wishes you a happy new year, high income, low taxes, and no AMT.

December 20, 2001

STIMULUS PLAN NEEDS CARDIAC STIMULATION

The prospects for an economic stimulus package from Congress this year appear dire. Congressional negotiators broke off talks and scampered for rhetorical high ground after negotiations collapsed yesterday.

In an apparently futile symbolic gesture, Republicans in the House passed a trimmed down stimulus package this morning based on President Bush's last offer. It appears doomed in the Senate, where it needs 60 votes to get past procedural roadblocks set up by the Democratic leadership.

Senator Daschle, the Senate Majority Leader, has apparently concluded that his party is better off without a stimulus bill unless it is their own plan. The Republicans wanted a package more than the Democrats; they abandoned many elements of their package in the negotiations, including AMT repeal and significant individual rate cuts. Ultimately, the Republicans were unwilling to give up any more of their remaining agenda to accommodate Senator Daschle.

Some efforts continue to get a bill passed before the Christmas recess, but the Senators express little hope of success. Efforts may resume in January, but any bill passed next year is much less likely to have provisions retroactive to September 11, 2001.

LAST MINUTE DEDUCTION SHOPPING

Looking for the ideal last minute tax deduction? Try one of these old favorites:

· Make a charitable contribution with your credit card. Contributions paid by credit card before year end are deductible this year, even if the credit card bill is paid next year.

· If you have any left, use appreciated stock to make a charitable contribution.

· Take enough capital losses to offset any capital gains for this year, plus $3000.

· Make estimated tax or property tax payments before the end of the year (but only if you are not subject to alternative minimum tax).

· Get your January home mortgage interest and student loan interest payments mailed right away so it is included on your 1098 form for 2001.

· Make it a jolly holiday season for your investment professionals and tax preparers by paying their fees by December 31; if they are willing to charge you enough, they might get your total deductions over the 2% of adjusted gross income threshold where they (the deductions, not the professionals) become useful.

December 12, 2001

IRS INCREASES AVAILABILITY OF CASH BASIS

The IRS has made it possible for more taxpayers to operate on a cash basis. In Notice 2001-76, the IRS says taxpayers with average annual gross receipts under $10,000,000 over the last three years will be able to change to the cash method of accounting without advance permission from IRS. This applies to businesses OTHER THAN C corporations , Retailers, Wholesalers, Manufacturers and Publishers. It is available for C corporations with average annual gross receipts under $5,000,000.

As a result of this procedure, S corporation banks, service businesses, construction subcontractors and others may be able to qualify for an automatic method change for their current tax year. This procedure, which applies to tax years ending 12/31/2001 and afterwards, is made with the tax return for the year of change.

BUSH PROPOSES A STIMULUS COMPROMISE

President Bush chopped a few more pieces off of his proposed economic stimulus package in hopes of finding common ground with enough Democratic Senators to pass a bill. Senate Majority Leader Daschle appeared unmoved by the effort.

The President threw overboard the repeal of the corporate alternative minimum tax and most of the tax rate cuts he had been pushing. The primary elements of his proposal now are

-30% expensing of new business assets purchased after September 11;

-5 year carryback period for net operating losses;

-Cutting the 2002 27% tax bracket to 25%;

-Tax credits to help displaced workers buy health insurance.

Senator Daschle, who insists he won't support a bi-partisan effort without the approval of 2/3 of the Democratic senators, appears unwilling to accept any tax rate cuts.

Given the speed and decisiveness in which the stimulus package is advancing, one hopes the economy is ready to recover without legislative help.

MORE YEAR END PLAYS

Many taxpayers finish the tax year with a flurry of gifts - charitable and personal. A few items to keep in mind:

- Gifts of appreciated publicly-traded securities held for over one year are very tax-efficient. You get to take a full fair market value deduction without paying tax on the appreciation. You can replace the donated securities by buying them new at any time.

- If you want to fund charitable gifts with securities that have declined in value, you should sell them and use the cash proceeds; otherwise, you get no tax benefit for the price decline. Be careful not to replace the donated loss securities within 30 days before or after the sale.

- Accrual method C corporations can deduct gifts made within 75 days after year end if they are authorized before year end. The IRS has announced that S corporations must actually pay any such gifts by the end of the year to get a current deduction.

Personal (non-charitable) gifts are tax-free up to $10,000 per donee per year. This means that a married couple can give each child $20,000 in gifts annually tax free. Any year a taxpayer fails to fully fund annual gifts is an opportunity forever lost to pass property to the next generation tax free. The annual exclusion increases to $11,000 in 2002.

December 4, 2001

TAX BILL LOGJAM BROKEN?

After two weeks of stalemate in the development of an "economic stimulus" bill, House and Senate leaders finally have come to an agreement. Not an agreement on the contents of the bill, of course; they have agreed on who will try to work out an agreement.

The Congressional leaders have appointed a group of six to try to develop an agreement that can get through Congress. Two House Republicans and One Senate Republican will take on one House Democrat and Two Senate Democrats in a six-man tag-team free-for-all. The leaders hope this group, which includes Iowa Senator Grassley, will quickly pull a bill together.

Reading between the lines, the outlines of the final bill are beginning to come together. In exchange for a variety of spending proposals championed by Democrats, the Republicans will get special depreciation provisions for post 9/11/01 property acquisitons and some acceleration of tax rate reductions scheduled to occur in the next few years. The depreciation break will likely be a 20% to 30% expensing of assets purchased during a 2 to 3-year period beginning 9/11/01. The proposed repeal of the corporate alternative minumum tax appears to be dying.

If all works as well as the optimists in the leadership hope, an agreement may be reached yet this week. Or it may not.

YEAR-END THOUGHTS

December is the best time to do tax planning. By now most taxpayers have a pretty good idea of how the year will shape up, but there remains time act. Among the important tax planning moves still available:

- Paying the March property tax installment by December 31.

- Year-end charitable gifts - especially those using appreciated stock held for over one year.

- Setting up a Keough plan for self-employed taxpayers.

- Making a gift to College Savings Iowa to get a state tax deduction and exemption of future earnings on funds set aside for college.

- Prepaying state income taxes otherwise due in April.

The best way to do year-end planning is to work with your tax advisor on a year-end tax projection.

November 21, 2001

NO PROGRESS ON TAX BILL

Congress will recess for Thanksgiving without having completed work on a "stimulus" package.  The process bogged down in the Senate, where Democrats were unable to muster the 60 votes needed to move their spending-oriented proposal.   Republican lawmakers want a package based on tax cuts.  The White House says it will work "quietly" with Senate swing votes to craft a compromise in the coming days.

DECEMBER FEDERAL RATES

The IRS has issued the minimum interest rates required for most loans made in December.  For loans compounded annually, the rates are:

Complete historical AFRs may be found at www.rothcpa.com by clicking the "links" link on the sidebar.

NEW TAX CREDIT ENCOURAGES 2002 401(k) PARTICIPATION

The new tax law passed earlier this year encourages employees to use 401(k) plans to save for retirement by providing a tax credit based on elective deferrals of income to the plan by the employees.  The credit is available to employees filing joint returns with adjusted gross income of up to $50,000 ($37,500 for heads of household and $25,000 for single taxpayers).

The credit directly reduces employee taxes by 10% to 50% of the income deferred, depending on employee income.

Business with low participation rates in their 401(k) plans may want to publicize this credit in the coming weeks to encourage increased participation by employees in 2002.

November 21, 2001

IRS EXPANDS DEPRECIATION RELIEF

The IRS has expanded the elective waiver of the "mid-quarter convention" to taxpayers whose fourth quarter of their tax year includes September 11, 2001 (Notice 2001-74).  The IRS had initially given the waiver only to taxpayers whose third quarter included September 11 (See prior edition of the Roth & Company Tax Update).

As a result, the taxpayers whose tax years end in September, October, November and December, 2001, and January and February, 2002, may elect to disregard the mid-quarter convention.

Normally, fixed assets placed in service during a taxable year are depreciated using the "half-year convention" -- meaning that depreciation is computed as if the assets were placed in service in the middle of the year.

If, however, more than 40% of depreciable assets are placed in service in the last three months of a tax year, the "mid-quarter convention" normally applies,.   Under "mid-quarter," depreciation is computed for each asset as if it were placed in service in the 4th quarter would get 1/8 year depreciation.  Under the newly-issued IRS guidance, this rule may be waived at the election of the taxpayer.

November 9, 2001

IRS INCREASES MILEAGE RATE FOR 2002

The IRS has announced the standard mileage reimbursement rates for 2002.  The business mileage reimbursement rate for 2002 will be 36.5 cents per mile, effective January 1, 2002.  (The rate is 34.5 cents per mile for 2001).

"MID-QUARTER CONVENTION" IS WAIVED FOR CALENDAR YEAR TAXPAYERS

The IRS has announced that taxpayers may compute depreciation on assets purchased in the current tax year without regard to the "mid-quarter convention" if the third quarter of the tax year includes September 11, 2001.

Normally, fixed assets placed in service during a taxable year are depreciated using the "half-year convention" -- meaning that depreciation is computed as if the assets were placed in service in the middle of the year.

If, however more than 40% of depreciable assets are placed in service in the last three months of a tax year, the "mid-quarter convention" applies.  Under "mid-quarter," depreciation is computed for each asset as f it were placed in services at the midpoint of the quarter in which it was placed in service; for example, an asset placed in service in the 4th quarter would get 1/8 year depreciation.

FINANCE COMMITTEE PASSES STIMULUS PACKAGE

The Senate Finance committee passed a Democratic version of the economic stimulus package on a party-line 11-10 vote November 8.  The principal business-related provisions of the bill are

House and Senate Republicans have their own proposals, which provide for 30 percent first year expensing of fixed asset purchases for a three-year period, repeal of the corporate alternative minimum tax, and individual rate cuts.  As 60 votes will be necessary to get the bill out of the Senate, the final version may include more of the Republican provisions.

The Finance Committee stimulus bill also has a crucial provision addressing Citrus Canker Disaster Payments.  No word yet on the Republican stance on this issue.

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