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BACK TO WORK!

July 27, 2004

Vacation's over, and our desktop is largely visible after a day of digging through the accumulated debris of two weeks off. It appears that the tax law was relatively quiet while we were away, but a few items worth mentioning made the news.

IRS STARTS PROCESSING RETURNS UNDER NEW SYSTEM

The IRS recently started processing returns using its new Customer Account Data Engine (CADE) system. Years late and millions over budget, the CADE system is the first upgrade of the IRS data processing system in about 40 years. If you just had to download the 87th security patch this year to your "Windows" operating system, you may admire the robust nature of the old IRS system, but it's time to let the remaining programmers who understand the old system finally relax and enjoy their World War I retirement benefits.

EDWARDS: TAX SHELTER GUY?

The Wall Street Journal and the New York Times did us a favor when it called Senator John Edward's S corporation law practice a "Tax Shelter." The Senator elected S corporation status for his law practice in 1995. S corporations don't generally pay tax; their income is instead reported on their owners' personal tax returns directly. As a personal injury lawyer, Senator Edwards drew a $380,000 salary and received his remaining share of the law practice income on his K-1. This added up to about $27 million before he left his practice to take his senate seat.

The "tax shelter" arises because S corporation K-1 income is not subject to self-employment tax. While Senator Edwards paid the maximum FICA tax each year, he avoided the Medicare tax of 2.9% on amounts passing through on the K-1 of what the Times called his "so-called" S corporation. The savings are said to exceed $500,000.

Why is this good for us? We have a lot of S corporation clients. Now when clients question whether we are being sufficiently agressive in our tax planning, we can say, "Hey, we put you in John Edwards' tax shelter! What more do you want?" Sure, it's pretty much bread-and-butter tax planning, but we don't have to tell people that.

ETI CONFERENCE DELAYED

Republican taxwriters delayed the conference to reconcile the House and Senate ETI repeal bills until September. This means the $100,000 Sec. 179 maximum deduction for new sport utility vehicles remains available for qualifying taxpayers awhile longer.

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