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Your Legal Corner - Client Alert Blog

2009 Tax Credits and Deductions To Think About Now

Written By: Melissa C. Marsh, Esq., California Attorney, November 2009 Add to Favorites
Tax Increases.
Most economists expect the top two individual income tax rates, currently set at 33% and 35%, to roll back to their 2000 levels of 36% and 39.6% at the end of 2010. I mention this first because for tax planning purposes it may be important to you. The top capital gains rate likely will also rise to 20% from 15%.

Net Operating Loss Tax Provisions May Entitle You To A Refund.
The American Recovery & Reinvestment Act of 2009 (Stimulus Bill) permits a small business reporting a net operating loss for 2008 to offset those losses against income they earned in the five prior years. (Typically, a net operating loss can be carried back for only two years.). It is also very likely that similar carry back provisions will be extended to this tax year – 2009. You may wish to speak to your accountant if you reported a net operating loss in 2008, or will be reporting a net operating loss in 2009 as if you file an amended return you may be entitled to an immediate additional tax refund on your one of your prior federal tax returns.

Sale Inventory and Bad Debt.
If your business has inventory in its warehouse that has declined in value this year, you may be able to take a deduction for the loss. Your business must document that loss in value and the deductions taken on bad (uncollectible) debt before the end of the year,. Keep records of your best efforts to collect on old debt, including telephone call logs, copies of letters you sent, and other efforts you made to get the money, including hiring an attorney or collection service to demand payment.

50% Bonus Depreciation on New Equipment Purchases.
The Stimulus Bill extended the tax deduction that allows a business to depreciate the cost of new equipment purchased and used by 50% during its first-year. This bonus provision is in addition to normal depreciation and tax deductions available under Internal Revenue Code Section 179. It applies to purchases of tangible personal property such as equipment, computers, telephone systems, and office furniture made prior to December 31, 2009.

Sales Tax Deduction For NEW Vehicle Purchases Extended Through 2009.
The American Recovery and Reinvestment Act permits taxpayers to take a deduction for state and local sales and excise taxes paid on the purchase of new motorcycles, cars, light trucks, and motor homes. The deduction is available on new vehicles purchased from 02-17-2009 through 12-31-2009, but only on applies to the taxes and fees paid on the first $49,500 of the purchase price of the vehicle and then only if the individual taxpayer’s modified adjusted gross income (MAGI) is less than $135,00 ($260,000 for joint filers). This deduction is available whether or not a taxpayer itemizes deductions on Schedule A. Any taxpayer that qualifies for the deduction but does not typically itemize their deductions may add the amount of the deduction to their standard deduction on their 2009 tax return. To estimate the deduction, see Worksheet 10 in IRS Publication 919.

Did You Pay Any Points When You Refinanced?
Any points paid to refinance a principal residence can be deducted on a monthly basis over the life of the new loan. So if you refinanced your mortgage on June 1, 2009, for a 30-year term, seven out of 360 months will have passed after Dec. 31, 2009. If you paid $2000 in points, you can write off $38.88 ($5.56 a month for seven months) for 2009. You can write off $66.72 for 2010 and each year thereafter until the points have been deducted in full. The amount may not be huge, but every little bit helps. So what happens to the points I paid on the old loan that I just refinanced? All unamortized points on an old refinancing can be deducted in the year of a new refinancing.

Health Insurance Premiums.
Are you employed by a corporation, or are you self-employed? If you're self-employed and not covered by any other employer-paid plan, though, you can deduct 100% your health insurance premiums. But if you are employed by a corporation, or if your employer provides health insurance, then for your health insurance premiums to be deductible, it along with your other medical expenses must exceed 7.5% of your adjusted gross income.

Making Work Pay $400 Tax Credit.
The Making Work Pay Tax Credit is worth 6.2% of an individual's earned income, with a maximum credit of $400 ($800 for married couples filing joint).

Whether you are self-employed, or an employee, if you earn less than $75,000 ($150,000 if married filing joint) you will still need to claim The Making Work Pay tax credit on your 2009 and 2010 tax returns to ensure that the amount of the tax credit is properly calculated. This is true even though employers were required to adjust their employees’ tax withholding to reflect this new tax credit by April 1, 2009. The IRS explains it this way, "Though all eligible taxpayers will need to claim the credit when they file their 2009 income tax return next year, the benefit will generally be spread out over the paychecks they receive beginning this spring and continue until the end of the year."

The Making Work Pay credit starts to be reduced for individuals whose adjusted gross income is $75,000 ($150,000 for joint filers). The credit is reduced by 2% of the tax filer’s income that exceeds the $75,000 (or $150,000) threshold. The credit is completely eliminated individuals whose AGI exceeds $95,000 ($190,000 for joint filers).

$1,000 Retirement Tax Credit.
If your adjusted gross income is $25,000 or less ($50,000 for joint filers), you qualify for a Tax Credit (Not a mere deduction) of up to 50% on the first $2,000 you place in a traditional or Roth IRA or 401k. So if you place $2,000 in a Roth IRA, you will get a $1,000 tax credit. If you place just $2,000 in a traditional IRS you will get a Tax Credit of $1,000 and a tax deduction of $2,000.

0% Tax on Capital Gains and Dividend Distributions for individuals in the 15% and 10% Tax Brackets.
The current ordinary income tax rates for individuals are 10% (up to $8,350), 15% (up to $33,950), 25% (up to $82,250), 28% (up to $171,550), 33% (up to $372,950), and 35% (Over $372,950). Certain capital gains and qualified dividends (i.e., adjusted net capital gains) are taxed at 15% for most taxpayers, and a mere 5% for taxpayers in the 15% or 10% tax brackets (individuals with an adjusted gross income of 34,000 or less). Pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and extended by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the 5% capital gains tax rate drops to 0% from 2008 to 2010 for individuals with an adjusted gross income of $34,000 or less ($68,000 for couples filing jointly).

Converting Your IRA or 401(k) to a Roth IRA or Roth 401(k).
Starting in 2010, ALL taxpayers will be eligible to convert a regular IRA to a Roth IRA. The once existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversion from a regular IRA to a Roth IRA is treated as a distribution and requires the taxpayer to include the converted amount in income. However, the 10% early withdrawal tax for distributions prior to age 59½ does not apply. In addition, conversions that occur in 2010 will be able to split the tax bite over two years – the taxpayer may elect to report half the income in 2011 and the other half in 2012.

Tuition and Enrollment Fees Deduction.
The federal government offers parents and students two tuition tax credit programs (the Hope/American Opportunity and the Lifetime Learning Tax Credits) and if you exceed the income thresh hold, then up to a $4,000 tax deduction for qualified higher education tuition and required enrollment fees paid for yourself, your spouse or a dependent.

1. American Opportunity Credit – Up to $2,500 Per Eligible Student
Obama’s American Recovery and Reinvestment Act of 2009 (the Stimulus Bill), expanded the existing Hope Tax Credit through 2010. The expanded program allows the Hope Tax Credit (now called the American Opportunity Credit) to be claimed for four years (up from two), and also expands income eligibility. To claim this credit: (1) the student must be enrolled at least half-time in a program leading to an undergraduate degree, or other legitimate education credential; and (2) the taxpayer claiming the credit must have a modified adjusted gross income under $90,000 (under $180,000 if married filing joint).
  • For parents or guardians to claim a Hope credit for their child's college expenses, the student must be listed as a dependent on the tax form. If the student is not listed as a dependent on another person's tax form, the student can claim the credit.
  • If the tax filer claiming the credit does not owe much in taxes, the tax credit is partially refundable—if the credit exceeds the total tax bill, up to $1,000 could be refunded.
  • There is no limit on how many family members can receive the credit.
  • Tax credit is 100% of the first $2,000 paid in qualified tuition and related expenses; and 25% of the next $2,000 paid in qualified tuition and related expenses (for a total of $2,500).
For more information on the American Opportunity Credit, see IRS Publication 970 (Tax Benefits for Education). 2. Lifetime Learning Tax Credit – up to $2,000.
Although the Lifetime Learning credit can only be used for tuition and fee, this tax credit is available not only for all years of a postsecondary education but also for courses (even a single course) to acquire, or improve, job skills. The Lifetime Learning Credit can be claimed for 20% of the amount paid in Tuition (see maximum limits below).
  • The Lifetime Learning Tax Credit may be used for almost any post-secondary school tuition, even if part time.
  • A taxpayer may claim the tax credit for 20% of the first $10,000 paid in qualified tuition and fees. This equates to a $2,000 tax credit in 2008 and 2009.
  • The amount of the tax credit begins to phase out if the taxpayer’s adjusted gross income is between $50,000 and $60,000 for a single return and between $100,000 and $120,000 for a joint return.
For more information on the Lifetime Learning Credit, see IRS Publication 970 (Tax Benefits for Education) 3. $4,000 Deduction for Higher Income Wage Earners
If your income exceeds the thresh hold for either the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, you may try to avail yourself of the $4,000 Tuition and Fees Deduction. The deduction is available to single filers whose income is $80,000 or less ($160,000 for joint filers).
Does Your Business Export its Products or Supply an Exporter?
Look into the IC-Disc (Interest Charge-Domestic International Sales Corporation) program. Because it involves setting up a separate domestic entity to act as your firm's commissions agent, it is a fairly complicated and costly strategy. But firms that have at least $300,000 to $400,000 in export sales should consider it, If your company directly exports or supplies a company that exports product overseas, there is a big tax advantage involving treating earnings like dividends.

The following Two Possibilities Are Very Difficult For The Small Business to Acquire....

1. Research and Development Tax Credits.
Although both large and small business corporations are entitled to tax credits for research and development, few small and midsize firms are capable of claiming the credit because the IRS scrutinizes them more strictly. If your company is in any way involved in making things greener, cleaner, quicker, or cheaper, you should consult your accountant to determine if your company qualifies for this tax break.

In 2003, the federal government expanded the research and development tax credit to include not only "groundbreaking" work, but for any reasearch and development costs directly related to advancing a business' own work in a novel way. ZThe federal government also permitted the research and development tax credit to be claimed retroactively, up to 10 years. According to Business Week, “Livermore Software Technology in California had been developing computer simulation software since 1987, but didn't start taking the R&D Tax Credit until 2007, when it filed for work going back to 2003.” However, most if not all small businesses agree that getting the R&D Tax Credit approved has been extremely difficult and complex. It is extremely important to keep detailed records on how much time had been devoted to research and how much has been expended on research as opposed to other aspects of the business and even then this credit will require you to use an extremely talented CPA.

2. Using Your 401K to Start A Business – Tricky But Can Be Done Without the 10% Penalty
This is NOT a do it yourself project. The IRS will scrutinize you closely and you WILL NEED both a Lawyer and an Accountant. First you will need to use your own personal non-retirement funds to set up a corporation. Once the corporation is properly formed and organized, you will then need to set up payroll. Once both have been accomplished and you have made yourself an employee of the corporation, the Corporation will need to set up a self directed 401(k) plan that permits the rollover of existing retirement funds into the newly created 401(k) plan. Under your direction, the 401(k) plan will then purchase stock in your newly formed corporation. The corporation then may use the money invested as seed money to cover your start up expenses (wages, inventory, and other working capital needs). If executed and documented properly, you should be able to effectuate the transfer of funds from your 401(k) to your corporation tax free and penalty free. The key to converting your retirement account into instant business capital is properly documenting that your new 401(k) is making an investment, not a distribution.

Attention to detail will make or break this 401(k) transaction. If you fail to execute this properly the IRS will go after not only the deferred income taxes and the 10% early-withdrawal penalty, but other penalties too. The IRS has cautioned that while it will continue to carefully scrutinize IRA and 401(k) rollovers into business startups on a case by case basis, it will seek the deferred taxes and penalties if the arrangement is predicated on superficial stock valuations.

To pass muster, the IRS will require:

  • That all employees involved in the business startup have the right and ability to invest in company stock.
  • A proper valuation of the new company’s stock.
  • The retirement plan to be permanent.
  • Details of the plan must be properly communicated to all new employees who join after the business is up and running.
Despite these hurdles, if done correctly, it is legal so if you are willing to chance it you may be able to use your existing 401(k) to fund your new venture.
This office does not provide tax advice. Please confirm all information in this post with your CPA.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that, to the extent this communication concerns any tax matter, it was not written to be (and may not be) relied upon to (1) avoid tax-related penalties under the Internal Revenue Code, or (2) promote, market or recommend to another party any transaction or matter addressed in this Blog post.

Posted In: Tax Update 

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Disclaimer: The information presented on this web site was prepared by Melissa C. Marsh for general informational purposes only and does not constitute legal advice. The information provided in my articles and alerts should not be relied upon, or used as a substitute for professional legal advice from an attorney you retain to advise or represent you. Your use of this Internet site does not create an attorney- client relationship. Transmission of this article is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All uses of the contents of this site, other than personal uses, are prohibited. You may print or email a copy of any information posted on this web site for your own personal, non-commercial, use, but you may not publish any of the articles or posts on this web site without the Express Written Permission of Melissa C. Marsh.

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.