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December 27, 2002

With the holidays and all, sometimes year-end tax planning waits until all of the presents have been put away. Even if you squeeze your year-end planning into the week between the Hawaii Bowl and the Outback Bowl, you can still take a few steps before the BCS games to make April 15, 2003 a little less dreadful.

-CHARITABLE GIFTS. Any charitable contributions you squeeze in between now and December 31 are deductible.

While gifts of appreciated public securities are the best gifts, tax-wise, it can be difficult to get all of the paperwork done in the short time available. Be sure the charity and your stockbroker can get the transaction completed on time. If the charity may not be able to finish the paperwork, consider using a "donor-advised fund." The Greater Des Moines Community Foundation can manage such funds locally. (1) A donor-advised fund can accept your gift now and transfer the proceeds at leisure to the charity of your choice.

Remember, contributions mailed by check are considered made on the postmarked date. Contributions charged to a credit card before midnight January 1 are deductible in 2002, even if the credit card bill isn't paid until 2003.

-CAPITAL GAINS AND LOSSES. The stock markets are open December 30 and 31. This means you can still recognize stock losses for 2002. Losses on stock sales are recognized on the trade date; such losses, whether long-term or short-term, are deductible for individuals to the extent of capital gains plus $3,000.

If you wish to take a loss on a short position, however, the loss is only available on the settlement date.

-TAX PAYMENTS. If you pay your March property tax bill before year-end, you can deduct the payment if you mail it by December 31. The same goes for your 4th quarter state estimated tax payments, or, for that matter, your state income tax due next April.

Be warned: this technique is not a sure-fire winner. State and local taxes are not deductible in computing Alternative Minimum Tax (AMT). As we have discussed , the AMT applies to more people each year; don't count on this technique unless you have a good handle on your year-end tax situation. (2)


Businesses, too, may be able to reduce taxes with year-end tax planning. This is especially true with cash-basis businesses.

- CASH BASIS DEDUCTIONS. Cash-basis taxpayers may deduct in 2002 any mailed checks postmarked before January 1. Amounts charged to credit cards may also be deducted if charged before the end of the year.

- BUT DON'T OVERDO IT. Even cash-basis taxpayers cannot deduct expenses paid more than one year ahead of time. Still, if you want to prepay Roth & Company for more than one year, don't let a deferred deduction stop you!

- ACCRUAL BASIS TAXPAYERS also should mind their year-end planning. Expenses owed to related parties need to be monitored closely.

Normally, accrual basis taxpayers can deduct unpaid expenses accrued at year-end if "economic performance" occurs within the first 8 months of the following year; accrued salaries and wages must be paid within 2 months of year-end.

- ACCRUALS OWED TO CASH-BASIS RELATED PARTIES. Accrual-basis taxpayers can only deduct payments to cash-basis related parties in the year the payment is actually made. For C corporations, a related party is generally a 50% shareholder; attribution rules combine ownership of taxpayers and their ancestors, siblings and lineal descendants for this purpose; trusts, commonly-controlled corporations and partnerships may also be considered "related."

Accrual-basis S corporations and partnerships have tougher related party rules; ANY cash-basis shareholder must be actually paid by year-end for the expense to be deductible. The definition of related party also extends further, to a relative of a relative - e.g., aunts and uncles.

- ACCRUED CHARITABLE CONTRIBUTIONS can be deducted by C corporations if the deduction was both approved by the board of directors before year-end AND the payment is made within 2 months after year-end.


If a qualified plan is in place by December 31, both cash-basis and accrual-basis taxpayers can deduct for 2002 plan contributions made no later than the due date (or extended due date) of their business tax returns. For example, corporations that extend their 12/31/2002 returns have until September 15, 2003 to fund their deductible 2002 plan contributions.

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