News On The Tax Front--The latest tax news.
IRS Business Return Statistics for 2000--How many businesses are out there? Their size? Here are some statistics.
In Brief:--Tax, business, and personal finance tips.
Previously Reported In Daily Update
The IRS has issued a revenue ruling (Rev. Rul. 2003-76, IRB 2003-33) providing that the direct transfer of a portion of the cash surrender value of one annuity for another annuity for an annuity in another company will qualify as a tax-free exchange under Sec. 1035. The ruling also describes how a taxpayer would calculate his basis in the new annuity and his basis in the retained portion of the old annuity. The IRS announced that it is concerned that some taxpayers may enter into a partial exchange of a portion of one annuity contract for a new annuity contract as a means of reducing or avoiding tax that would otherwise be imposed under Sec. 72(e). In August 18, 2003, Notice 2003-51 (IRB 2003-33) the Service reported it is considering whether to exercise the authority granted under Sec. 72(e)(11) to promulgate regulations that would prescribe the tax treatment of these transactions. Notice 2003-51 provides interim guidance regarding the tax treatment of these transactions. Taxpayers should review Notice 2003-51 prior to entering into a partial exchange to determine whether their transaction is subject to the interim guidance provided by the notice.
Section 1042(a) provides that a taxpayer or executor may elect in certain cases not to recognize long-term capital gain on the sale of qualified securities to an employee stock ownership plan (ESOP) or eligible worker owned cooperative (as defined in section 1042(c)(2)) if the taxpayer purchases qualified replacement property within the replacement period of Section 1042(c)(3) and the requirements of Section 1042(b) and Sec.1.1042-1T are satisfied. The IRS has issued proposed amendments to the requirement of Sec. 1.1042-1T, A-3(b) of the Temporary Income Tax regulations that a statement of purchase for qualified replacement property be notarized within 30 days of the date of purchase of the property (30-day notarization requirement). See Temporary Regulations REG-121122-03.
The IRS has published final regulations (T.D. 9074) relating to the treatment of community income under Section 66 for certain married individuals in community property states who do not file joint federal income tax returns. The final regulations also reflect changes in the law made by the Internal Revenue Service Restructuring and Reform Act of 1998. These final regulations are effective July 10, 2003.
If you win a settlement as a result of a lawsuit, only amounts for physical injury or sickness are excludable from your income. In Stephen G. and Karen P. Shaltz (T.C. Memo. 2003-173) the taxpayer won a sexual harassment lawsuit. The wife claimed emotional distress associated with the harassment. The Court held the emotional distress does not qualify as physical injury or sickness, except for the amount paid for medical care attributable to emotional distress.
The IRS has issued proposed regulations (REG-112039-03) that would modify the circumstances under which certain forms of distribution previously available are permitted to be eliminated from qualified defined contribution plans. These proposed regulations affect qualified retirement plan sponsors, administrators, and participants.
The law allows a deduction on your individual income tax return for certain education expenses related to your job. But education expenses for education which is part of a program of study which will lead to qualifying him in a new trade or business aren't deductible. That's true even if the courses meet the express requirements of the employer. It is immaterial whether the individual undertaking the education intends to or does in fact become employed in a new trade or business. In George W. Warren and Florence J. Winterheld (T.C. Memo. 2003-175) the taxpayer was a part-time pastor. The Court found the courses taken by the taxpayer provided him with a background in a variety of social issues that could have prepared him for employment with several public agencies and private non-profit organizations outside of the ministry. Whether or not he remains in the ministry is irrelevant; what is important under the regulations is that the degree will lead taxpayer to qualify for a new trade or business.
A new U.S.-Mexico income tax treaty, signed November 26, 2002, went into force on July 3.
If you take an net operating loss (NOL) deduction, you've got to be prepared to support the deduction. That means you will have to retain records for the year the loss occurs to substantiate the loss for that year. In Fawzi and Dolores Tay Tay Assaad (T.C. Memo. 2003-171) the taxpayer was unable to support the loss incurred in the earlier year. The Court also found that the taxpayers could not show that loans to purchase the properties were repaid, nor could they show they made investments in excess of the loan amount.
The IRS has issued final regulations (T.D. 9072) that provide guidance concerning the requirements for retirement plans providing catch-up contributions to individuals age 50 or older pursuant to the provisions of section 414(v). These final regulations affect section 401(k) plans, section 408(p) SIMPLE IRA plans, section 408(k) simplified employee pensions, section 403(b) tax-sheltered annuity contracts, and section 457 eligible governmental plans, and affect participants eligible to make elective deferrals under these plans or contracts.
The IRS has issued proposed regulations (REG-130262-03) under Section 1502 that relate to stock basis after a group structure change. These proposed regulations affect corporations filing consolidated returns.
In Rev. Rul. 2003-88 (IRB 2003-32) the IRS ruled that the running of the statute of limitations for purposes of the excise taxes imposed by Sec. 4971 on failure to satisfy the minimum funding standards of Sec. 412 starts on the filing of Form 5330. If an accumulated funding deficiency or unpaid liquidity shortfall is disclosed on Form 5330 or in an attached statement, the three-year statute of limitations of Sec. 6501(a) applies. However, if the deficiency or unpaid liquidity shortfall is not disclosed on Form 5330 or in an attached statement, the six-year statute of limitations of Sec. 6501(e)(3) applies.
Generally, only settlement payments for physical injury or sickness are excludable from income. In Robert Henderson (T.C. Memo. 2003-168) the taxpayer excluded a $5,000 award resulting from a settlement with a credit card company. The card company reported the taxpayer's failure to pay an amount the company claimed was due as a default to the credit reporting agencies. The Court found the taxpayer did not show that any portion of the settlement was to compensate him for physical injury or sickness.
If you're going to deduct a bad debt, you've got to prove both worthlessness and that a bona fide debt exists. If you're trying to deduct the debt as a business bad debt, you've also got to show the debt was incurred in a trade or business. In Cathy M. and Randy L. Crosson (T.C. Memo. 2003-170) the taxpayer could show none of the factors. Their deduction for theft losses were also disallowed because they occurred more than 10 years before the tax year at issue. They were also denied deductions for expenses related to their trade or business because they either did not have the required documentation or they could not show the relationship to their trade or business.
You generally have only three years to file a claim for refund. The rules provide that if an informal claim for refund is filed within the time limit, you can file an amended claim after the deadline. In George Standford Holt and Jeannine H. Holt (2003-1 USTC 50,492; U.S. District Court, Dist. Utah, Cent. Div.) the Court noted that the IRS has to be appraised of the taxpayer's claim for refund and that the request must be in writing. The claim must contain sufficient information as to the tax and the year to enable the IRS to commence an examination into the claim. The Court noted that the taxpayer's had been in contact with the IRS, but the communication was not sufficient to constitute a valid claim.
In Patricia P. Kean (T.C. Memo. 2003-163) the taxpayer argued that amounts deposited in a joint checking account by her husband did not represent alimony taxable to her. The Court disagreed, holding the amounts were alimony and were received. The Court noted that the payments were to terminate on her death, a key requirement of alimony. The amounts were income to the taxpayer and deductible by her husband.
The IRS has issued final regulations (T.D. 9068) with respect to charitable guaranteed annuity interests and unitrusts. The affected sections are 170, 2055 and 2522.
The IRS has issued proposed regulations (REG-209377-89) relating to the treatment, for purposes of the at-risk limitations, of amounts borrowed from a person who has an interest in an activity other than that of a creditor or from a person related to a person (other than the borrower) with such an interest. Proposed regulations published in 1979 provide that amounts borrowed from a person who has an interest in an activity other than that of a creditor do not increase the amount at risk in certain enumerated activities. These proposed regulations extend this rule to all activities subject to the at-risk limitations. In addition, the rule is conformed to the current statutory language providing for its application to amounts borrowed from persons related to a person (other than the borrower) with an interest other than that of a creditor.
Tax law limits the depreciation deduction for luxury autos by capping the depreciation deductions. For 2002 the depreciation for the first year is limited to $3,060 ($7,660 if you can take the additional first-year depreciation allowance); $4,900 in the second year; $2,950 for the third year and $1,775 for the fourth and subsequent years. The limit applies to 4-wheeled vehicle which is manufactured primarily for use on public streets, roads, and highways, and which is rated at 6,000 pounds unloaded gross vehicle weight (or, in the case of a truck or van, 6,000 pounds gross vehicle weight) or less. (Trucks with gross vehicle weight of 6,000 pounds or more aren't subject to the limit.) The IRS has announced (T.D. 9069 and REG-138495-02) proposed and temporary regulations that would change the dollar limits on depreciation deductions for trucks and vans. There are two important changes. The first would simply increase the depreciation dollar limits based on a different inflation factor for vans and trucks. Thus, beginning in 2003, there would be one set of limits for autos, another for vans and trucks. (The actual limits have not yet been released.) The second change would eliminate qualified nonpersonal use vehicles from the depreciation limits. That includes certain special purpose vehicles such as hearses, ambulances, flat bed trucks, etc. and vans and trucks that have been specially modified such as by installation of permanent shelving, painting the vehicle to display company advertising, etc.
You may be able to avoid joint tax liability with your spouse, but you've got to meet a number of requirements. In Laura L. Brooks (T.C. Memo. 2003-166) the Tax Court held that the IRS properly denied the taxpayer innocent spouse relief related to her ex-husband's unreported income. The Court noted the taxpayer knew some of the income was unreported, benefitted from some of the other unreported income, and could not establish an economic hardship.
In Anthony J. Crico (2003-1 USTC 50,491; U.S. District Court, East. Dist. Pa.) the Court held the government was entitled to garnish the taxpayer's IRA. He had been convicted of filing a false return and conspiracy to defraud.
When will you get your advance payment under the new law for the child tax credit? If the last two digits of your social security number are between 00 and 33, the check will be mailed July 25; between 34 and 66, August 1; between 67 and 99, August 8. Treasury Department News Release JS-462.
The IRS has issued proposed regulations (REG-139796-02) relating to the capital account maintenance rules under Section 704. These regulations expand the rules regarding a partnership's right to adjust capital accounts to reflect unrealized appreciation and depreciation in the value of partnership assets.
The IRS has released two new/revised publications. Publication 1035, Extending the Tax Assessment Period, discusses the statute of limitations with respect to returns and the procedures and consequences of agreeing to an extension of the assessment period. Publication 557, Tax Exempt Status for Your Organization, discusses the rules for organizations seeking a federal income tax exemption under Section 501(a).
Section 4980B requires certain group health plans to make continuation coverage (COBRA) available to certain individuals who would otherwise lose their coverage under the plan as a result of certain occurrences (COBRA continuation coverage requirements). Section 4980B imposes an excise tax if a plan subject to the COBRA continuation coverage requirements fails to comply with those requirements. COBRA rules apply to employers who normally employed 20 or more employees during the previous calendar year. In Rev. Rul. 2003-70 (IRB 2003-27) the IRS provided guidance on the COBRA rules when two separate employers effect a merger to form a single employer and when an one employer acquires substantial assets (such as a plant or division or substantially all the assets of a trade or business) of another employer.
The IRS is reminding approximately 750,000 small and mid-size businesses using master and prototype retirement plan documents that they must update their plans by September 30, 2003. Businesses must formally adopt updates to maintain the tax benefits associated with the retirement plans. Employers or plan sponsors who need more information should call toll-free the customer account services at 1-877-829- 5500. For more details see IR-2003-81.
The Service has issued Announcement 2003-47 (IRB 2003-29), alerting taxpayers to recent changes to Form 8873, Extraterritorial Income Exclusion, and its instructions. The 2000 and 2001 Forms 8873 contained an error in the computation of the extraterritorial income exclusion (net of disallowed deductions) shown on line 55 of the form in certain instances in which a taxpayer used the foreign sale and leasing income method. This error may have led some taxpayers that used the foreign sale and leasing income method to claim excessive extraterritorial income exclusions for tax years 2000 and 2001. The Service has revised the 2002 Form 8873 and its Instructions to correct this error and to make other clarifications. Compared to the 2000 and 2001 Forms 8873, the 2002 Form 8873 has been revised as follows: line 46 has been modified, lines 52 through 54 have been deleted, and line 55 has been redesignated as line 52 and modified to reflect the deletion of lines 52 through 54. As a result, the 2002 Form 8873 reflects the correct calculation of the extraterritorial income exclusion (net of disallowed deductions) on line 52 regardless of whether the taxpayer uses the foreign trade income, foreign trading gross receipts, or foreign sale and leasing income method to calculate the amount entered on line 45. You can also call 202-435-5264 for further information.
If, in connection with your trade or business, you pay a vendor for services of over $600 during the year, you generally have to file a 1099-MISC. For example, you hire a plumber to do work on your office building, you have to send him a 1099 at the end of the year. If the service provider does business as a corporation (S or C), a 1099 is not needed. Generally, 1099s need not be sent if the payment was for merchandise. If for a combination of services and merchandise (e.g., the shop repairing your truck installs a new alternator) you must report the total amount. In an effort to simplify the determination of when a 1099 is required, the IRS has issued Notice 2003-37 (IRB 2003-26) that provides a proposed revenue procedure that, when finalized, would provide an optional procedure that payors and their authorized agents may use in determining whether payment card transactions are reportable under section 6041 or section 6041A. This revenue procedure provides an optional procedure that payors may use in determining whether payment card transactions are reportable under section 6041 or section 6041A. In general, this revenue procedure classifies businesses, by Merchant Category Codes (MCCs), according to whether they predominantly furnish services (for which payments are reportable) or predominantly provide goods (for which payments are not reportable). A payment card organization or one of its members or affiliates may assign MCCs, or equivalent Industry Codes, to merchant/payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent Industry Code assigned to a merchant/payee. A cardholder/payor may then rely on the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with that merchant/payee is subject to reporting under 6041 or 6041A.
Notice 2003-47 (IRB 2003-30), T.D. 9067, and REG-116914-03 addresses a transaction being promoted to and used by taxpayers to avoid or evade federal income and employment taxes related to compensatory stock options. The transaction involves employees who have been granted a nonstatutory compensatory stock option and the employee transfers the option to a related person. This notice alerts taxpayers and their representatives that the tax benefits purportedly generated by these transactions are not allowable for federal income tax purposes. This notice also identifies some of these transactions as listed transactions and alerts taxpayers and their representatives to certain responsibilities that may arise from participating in these transactions. addresses a transaction being promoted to and used by taxpayers to avoid or evade federal income and employment taxes related to compensatory stock options. Concurrent with this Notice, the IRS are issuing temporary and proposed regulations providing prospectively that, for purposes of Sec. 83 and Reg. Sec. 1.83-7, a sale or other disposition of a nonstatutory compensatory stock option to a related person will not be treated as a transaction that closes the application of Sec. 83 with respect to the option.
The IRS has issued Rev. Proc. 2003-48 (IRB 2003-29) which modifies and amplifies Rev. Proc. 96-30, providing in a checklist questionnaire the information that must be included in a request for a ruling under Sec. 355. In addition, this revenue procedure modifies Rev. Proc. 2003-3, which lists the areas of the Code relating to issues on which the Internal Revenue Service will not issue letter rulings or determination letters.
You can recover your legal fees in a court or administrative proceeding with the IRS if you won your case and can show that the IRS was not substantially justified in its position. In Dallas R. Hall (T.C. Memo. 2003-159) the Court denied the taxpayer his administrative costs. The Court found that the IRS acted reasonably in denying the taxpayer a deduction for his interest expense on Schedule C until he provided documentation verifying the information.
If you do work for your corporation or are an officer, you generally must take a salary. In Robert E. Kovacevich (T.C. Memo. 2003-161) the Court found the taxpayer performed substantial work for the C corporation of which he was a shareholder and president. Some payments made to the taxpayer or for his behalf were classified on the books as loans and were not included on any W-2 or 1099. The Court found that the amounts were wages. In addition, the Court found the taxpayer could not claim reliance on his accountant to avoid the negligence penalty, holding the taxpayer did not provide accurate information.
In order to claim the dependency exemption and the earned income credit (for qualifying children) the child or children have to reside with you for more than half of the year. In Etta James Linton (T.C. Memo. 2003-160) the Court denied the taxpayer head of household filing status, the dependency exemption and the earned income credit because her children were in foster care for the entire year. The food, clothes, etc. the taxpayer provided the children weren't enough to meet the requirements.
In order to avoid trafficking in net operating losses (NOLs) the law contains a provision that severely restricts the use of a loss by C corporations if there is a substantial change in ownership. The IRS has issued temporary and proposed regulations (T.D. 9063; REG-108676-03) under Section 382. The temporary regulations affect loss corporations and provide guidance on whether a loss corporation has an ownership change where a qualified trust described in section 401(a) distributes an ownership interest in an entity.
IRS Notice 2003-45 (IRB 2003-29) amplifies the tax relief granted in Notice 2001-70, and in Notice 2001-74, by permitting an automatic extension of time to make the election provided in those notices. Generally, taxpayers who place more than 40% of the total basis of property in service during the last 3 months of the tax year must use a mid-quarter convention. That not only complicates the computations, it will generally reduce your total depreciation deduction for the year. In Notice 2001-70, the IRS announced their intention to issue regulations permitting taxpayers to elect not to apply the mid- quarter convention rules contained in Sec. 168(d)(3) to property placed in service in the taxable year that included September 11, 2001, if the third quarter of the taxpayer's taxable year included September 11, 2001. Notice 2001-70 provided that, pending the issuance of the regulations, an eligible taxpayer that wished to elect not to apply the mid-quarter convention rules could make the election by writing "Election Pursuant to Notice 2001-70" across the top of the taxpayer's Form 4562. Many taxpayers were unaware of the rule. The IRS has just issued Notice 2003-45 (IRB 2003-29), amplifying Notices 2001-70 and 2001-74 to provide that a taxpayer qualifying under either notice who filed a timely tax return for the taxable year that includes September 11, 2001, but failed to make the election provided under the notices, is granted an automatic extension of time until December 31, 2003, to amend its tax return for the taxable year that includes September 11, 2001, and any subsequent taxable years, in order to make the election under Notice 2001-70 or Notice 2001-74 and reflect any necessary adjustments resulting from the election.
The IRS has issued two revenue rulings, Rev. Rul. 2003-74 (IRB 2003-29) and Rev. Rul. 2003-75 (IRB 2003-29) with respect to the business purpose requirement of Section 355, Distribution of Stock and Securities of a Controlled Corporation. The first dealt with a corporation that wanted to enable the management of each corporation to concentrate on its own business (one was a software company, the other a paper products business). The second involved a distribution to resolve a capital allocation problem between the two entities.
The IRS issues many statistics on taxpayers. Here are some interesting ones we've culled from a report from the Joint Committee on Taxation (JCX-62-03). The year 2000 represents the latest statistics available for this compilation. The report was designed to provide Congress with background on and proposals relating to changes in S corporations.
Partnerships and LLCs. In 1990 there were 1,267,000 general partnerships, 285,000 limited partnerships. There were essentially no LLCs. In 2000 there were 872,000 general partnerships, 349,000 limited partnerships and 719,000 limited liability companies. The number of nonfarm sole proprietorships increased by 2.1% annually between 1989 and 2000. During the same period C corporations decreased by 0.1%; S corporations increased by 6.6%; and partnerships by 2.1%. Here are the details of the number of businesses in each category from 1978 through 2000.
Total Businesses by Type -- 1978 - 2000
Sole C S Partner- Farms Total
Proprietor- Corpora- Corpora- ships
ship tion tion
1978 8,908,289 1,898,100 478,679 1,234,157 2,704,794 15,224,019
1979 9,343,603 2,041,887 545,389 1,299,593 2,605,684 15,805,674
1980 9,730,019 2,165,149 545,389 1,379,654 2,608,430 16,428,641
1981 9,584,790 2,270,931 541,489 1,460,502 2,641,254 16,498,966
1982 10,105,515 2,361,714 564,219 1,514,212 2,689,237 17,234,897
1983 10,703,921 2,350,804 648,267 1,541,539 2,710,044 17,954,575
1984 11,262,390 2,469,404 701,339 1,643,581 2,694,420 18,771,134
1985 11,928,573 2,552,470 724,749 1,713,603 2,620,861 19,540,256
1986 12,393,700 2,602,301 826,214 1,702,952 2,524,331 20,049,498
1987 13,091,132 2,484,228 1,127,905 1,648,035 2,420,186 20,771,486
1988 13,679,302 2,305,598 1,257,191 1,654,245 2,367,527 21,263,863
1989 14,297,558 2,204,896 1,422,967 1,635,164 2,359,718 21,920,303
1990 14,782,738 2,141,558 1,575,092 1,553,529 2,321,153 22,374,070
1991 15,180,722 2,105,200 1,696,927 1,515,345 2,290,908 22,789,102
1992 15,495,419 2,083,652 1,785,371 1,484,752 2,288,218 23,137,412
1993 15,848,119 2,063,124 1,901,505 1,467,567 2,272,407 23,552,722
1994 16,153,871 2,318,614 2,023,754 1,493,963 2,242,324 24,232,526
1995 16,423,872 2,321,048 2,153,119 1,580,900 2,219,244 24,698,183
1996 16,955,023 2,326,954 2,304,416 1,654,256 2,188,025 25,428,674
1997 17,176,486 2,257,829 2,452,254 1,758,627 2,160,954 25,806,150
1998 17,398,440 2,260,757 2,588,081 1,855,348 2,091,845 26,194,471
1999 17,575,643 2,210,129 2,725,775 1,936,919 2,067,883 26,516,349
2000 17,902,791 2,184,795 2,860,478 2,057,500 2,086,789 27,092,353
Here's a breakdown of C corporations, S corporations, and non-farm sole proprietorships by asset size. C Corporations, 2000
Firms classified by assets--
Number of Total Assets
Returns (millions)
$0 or less 135,277 0
$1 to $25,000 507,207 4,561
$25,001 to $50,000 221,757 8,111
$50,001 to $100,000 272,301 19,815
$250,001 to $500,000 237,187 84,392
$500,001 to $1,000,000 172,389 120,757
$1,000,001 to $10,000,000 216,080 595,066
$10,000,001 to $50,000,000 30,913 680,850
$50,000,001 to $100,000,000 7,685 546,532
More than $100,000,000 18,287 43,116,128
Total 2,184,795 45,236,160
S Corporations, 2000
Firms classified by assets--
Number of Total Assets
Returns (millions)
$0 or less 193,628 0
$1 to $25,000 894,381 7,942
$25,001 to $50,000 342,041 12,551
$50,001 to $100,000 344,662 24,950
$100,001 to $250,000 440,476 70,465
$250,001 to $500,000 246,616 86,559
$500,001 to $1,000,000 168,592 119,036
$1,000,001 to $10,000,000 206,394 571,139
$10,000,001 to $50,000,000 20,408 392,270
$50,000,001 to $100,000,000 1,925 132,721
More than $100,000,000 1,355 373,079
Total 2,860,478 1,790,712
Non-Farm Sole Proprietorships, 2000
Firms classified by assets--
Number of Total Assets
Returns (millions)
$0 or less 744,458 0
$1 to $2,500 3,725,905 4,349
$2,501 to $5,000 1,920,789 6,964
$5,001 to $10,000 2,368,238 16,980
$10,001 to $25,000 3,303,747 53,464
$25,001 to $50,000 2,222,008 78,987
$50,001 to $100,000 1,620,707 115,569
$100,001 to $250,000 1,265,942 194,855
$250,001 to $500,000 453,235 156,519
$500,001 to $1,000,000 187,188 125,017
$1,000,001 to $10,000,000 88,806 174,571
$10,000,001 to $50,000,000 1,523 28,584
More than $50,000,000 245 54,478
Total 17,902,791 1,010,337
Notice the distribution on sole proprietorships. Of the total, 50% of the businesses had less than $10,000 in assets; 80% had less than $50,000 and almost 90% had less than $100,000. S corporations tended to be larger, but 86% had assets of less than $500,000; 77% had assets of less than $250,000.
Previously Reported In Daily Update
IRS allows extension for filing of election of fiscal year . . . S corporations are generally required to have a tax year that's a calendar, not a fiscal year. The corporation can elect to have another year by filing Form 8716 by the earlier of (1) the 15th day of the fifth month following the month that includes the first day of the tax year for which the election will first be effective, or (2) the due date (without regard to extensions) of the income tax return resulting from the Sec. 444 election. In a recent letter ruling (LR 200313006) the taxpayer wanted to file Form 8716 and hire a qualified tax professional to do so. However, due to an error or misunderstanding on the part of the professional, the form was not filed. The IRS held that the error was not due to any lack of due diligence or prompt action on the part of the taxpayer and granted it 45-days from the date of the ruling to file the form.
Buying a business? . . . If you're buying a competitor think twice before totally integrating it into your existing company. Keeping the competitor active may help avoid your customers going to another competitor. For example, Madison does 20% of the fuel oil business in its area. It acquires Chatham Oil, which does 10% of the business in the same area. If Chatham is totally merged into Madison and it disappears as an entity, customers who become dissatisfied with Madison will go to another competitor. If Chatham remains separate, customers dissatisfied with Madison may just switch to Chatham; those dissatisfied with Chatham may switch to Madison. While some customers will almost surely go outside the group, you won't lose nearly as many. You've got to weigh the lost customer revenue against potential economies of scale and other factors. But don't automatically integrate the acquisition.
Claim for refund for worthless debt . . . If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. If the bad debt was totally worthless, you must file the claim by the later of:
If the claim is for a partially worthless bad debt you must file the claim by the later of:
Expanding your product line? . . . Diversifying is almost always a good idea. But don't drop existing products for a new one until it produces proven results. And early success may not last. Holding on to older products that are profitable can make sense. They may continue to sell to a loyal customer base with little or no advertising. Dropping them makes sense when they're no longer profitable (or throwing off cash) or they're reducing sales of newer, higher margined items.
529 College plans not guaranteed . . . Using a Section 529 plan to invest for college generally makes sense. Earnings in the plan escape taxation if they're used for your child's college education and a number of states offer a deduction for contributions to their plans. But that doesn't mean that returns are guaranteed. In fact, many plans have shown losses, some significant, using 3- and 1-year measurement periods. There's nothing magical about the plans. Most use standard mutual funds that invest in stocks and bonds and their track record mirrors other funds. If you're worried about preservation of capital, make sure that your funds are in conservative investments.
New IRS web page . . . The IRS has added a new web page, Electronic Business by the Small Business/Self-Employed Operating Division. It is geared as a resource center for companies that are involved in e-Commerce. Whether you transact the sale of goods or services via the internet, need information on electronic business infrastructure (hardware or software) or seek guidance on processes that organizations conduct over computer-mediated networks, this web page can help you out.
Strategic planning . . . Sometimes getting into a new business can be more profitable than trying to improve an existing one. One company cut and installed glass in structures using metal frames it purchased. Cutting the glass was so competitive that bidding on contracts was brutal. On the other hand, there was virtually no local competition for the metal frames. It bought automated equipment to manufacture the frames and got out of the glass business completely. It now purchases the glass and the business is much more profitable than before.
Get a lower mortgage rate . . . How? Ask for a shorter term when applying for the mortgage. While rates vary around the country and depend on other factors as well, the average rate for a 30-year mortgage is currently about 5.3%. For a 15-year loan, it's about 4.7%. That's about 0.6 percentage points lower. Your monthly payments will be higher with the shorter loan. For a $100,000 mortgage, the monthly payment will be $775 for a 15-year loan; $555 for a 30-year term. But you'll save interest over the term. The total interest is about $39,500 on the 15-year; $99,900 on the 30-year. While it's generally a good idea to opt for the shorter term, don't do it if you think you'll have problems paying the higher amount. Being late on even one payment could raise your rates for years on other new borrowings, offsetting a significant amount of the savings.
Certain land rental payments subject to self-employment tax . . . Real estate rental income is generally not subject to the self-employment tax. In a recent IRS Legal Memoranda (ILM 200325002) the IRS held that rental payments for land enrolled in the CRP (Conservation Reserve Program) where the taxpayer was engaged in the trade or business of farming prior to enrolling the land are subject to the self-employment tax (SECA). In a second situation, the land had been enrolled in the CRP by the previous landowner and the enrollment was continued by the taxpayer who was not engaged in farming prior to acquiring the land. The IRS ruled similarly in the second situation, that the payments were subject to SECA. The Service also held that the amounts should be reported on Schedule F, not Schedule E or Form 4835 (Farm Rental Income and Expenses).
Copyright 2003 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536