The last month of the year offers a unique time to make last minute "adjustments" to your business' Year 2000 tax situation. This fine-tuning can significantly affect the amount of taxes that your business will owe when it files its Year 2000 tax return next year.

The last month of the year offers a unique time to make last minute "adjustments" to your business' Year 2000 tax situation. This fine-tuning can significantly affect the amount of taxes that your business will owe when it files its Year 2000 tax return next year.

By now, you have a fairly good picture of how much your business has made and what expenses it has incurred. This information can be invaluable in determining whether you can benefit from adopting tax strategies that will accelerate certain income or deductions into this tax year, or that will defer them until 2001.

Here are some year-end tax strategies that you might consider for your business:

Whether it looks as if your business will end up with too much taxable income or too little, timing year-end compensation payments can be a key solution to your problems.

 

• Deferred compensation plans. Adopting a deferred compensation plan can help start to shift compensation deductions into next year and beyond. Remember, however, that a formal, written plan usually must be prepared and compensation for past services cannot be included.

 

• Year-end bonuses. Paying year-end bonuses in December or in January can also add or defer a significant compensation-based business deduction. If you pay yourself a bonus as a key employee, you can also defer or accelerate income on your own personal tax return as well. You need to be careful that any bonus paid to yourself is reasonable, or you may trigger dividend income. If your business has done well, however, paying yourself a bonus at year end is good timing since you now have all the facts to form a defense to possible IRS questions regarding reasonableness.

• Incentive stock options. Keeping track of incentive stock options can also make a difference in how much taxable income you recognize in 2000. If your business gives you as an employee a qualified incentive stock option (ISO) to purchase its stock, you will not be taxed until you dispose of the stock. In other words, there is no regular tax on receipt or exercise of the option. As a result, as an employee you may delay income by holding on to the option or stock. However, the bargain element on the option must generally be considered for alternative minimum tax (AMT) purposes when your rights in the option become transferable or when these rights are no longer subject to a substantial risk of forfeiture.

If your business doesn't have a "qualified retirement plan" (that is, a pension or profit-sharing plan set up under the rules of the Internal Revenue Code), you might consider putting one in place before the end of the year. In doing so, your business will be able to deduct contributions that it makes based on a full year's salary for each eligible employee. As long as the appropriate plan documents are executed by December 31^st and they state that the plan begins January 1, 2000, your business gets the full-year deduction.

If your business has a qualified retirement plan in place, or if you and your employees rely on individual retirement accounts (IRA), make sure you maximize contributions for 2000. For employees, that means earmarking contributions for 2000 and making them before their 2000 tax returns are filed. Some key numbers to consider in implementing this strategy are the $10,500 maximum for elective deferrals under 401(k) plans and $2,000 annual contribution maximum for IRAs.

Accelerate or postpone business deductions

If you anticipate the need for certain assets in your business, you might consider purchasing them now, instead of in 2001, to accelerate your deduction for its purchase. In planning purchases, it is also important to consider maximizing deductions both under the depreciation rules and the "section 179" expensing provisions.

 

• Depreciation. Depreciation rules permit some purchases to qualify for a half-year or a mid-quarter convention, the time in the year when depreciation is deemed to start. For property other than real estate, a half-year convention calls for all depreciation for all property you place in service during the year to start in the middle of the year, thereby entitling you to half of the first year's depreciation (the other half is made up at the end in the year in which the asset is sold or otherwise disposed of). The mid-quarter convention applies if the aggregate bases of property that you place in service during the last three months of the year exceed 40 percent of the total for the year. Under this convention, each asset begins to be depreciated in the middle of the quarter when it was placed in service. The mid-quarter rule usually works to your disadvantage since by definition, at least 40 percent of your first-year depreciation will be at a five-percent rate. So, before you make any year-end purchases, figure your depreciation.
• First year expense. If you are a small business owner, your business is allowed to bypass depreciation altogether and write off up to $20,000 of the cost of otherwise depreciable assets that you place in service before the end of 2000. This expense deduction is referred to as a "Section 179" deduction. (A lower limit applies to business cars.) In 2001, the amount climbs to $24,000, making it important to spread qualifying purchases out between 2000 and 2001 in order to maximize the combined $44,000 deduction for 2000 and 2001.

At the other end of the equation from timing deductions, timing income recognition at year end can likewise save you overall tax dollars. Like-kind exchanges and installment sales are two common ways to defer income. Accelerating the collection of business receivables, as well as negotiating for larger upfront payments in certain business transactions, are techniques to push more taxable income into 2000 and out of 2001.

Although December may be the traditional season for giving, you or your business may find that postponing a gift until January may work best all around if you or your business will be in a higher tax bracket next year. Otherwise, if you plan to give to charity, making the gift count for December usually makes the most sense. Some important timing rules to remember are:

• If you donate appreciated property (for example, high-performing stock), you will realize a double benefit -- you avoid capital gains tax on any of the appreciation and you get a charitable tax deduction for the full fair market value of the asset.
• A mere pledge is not enough to support a charitable deduction; you have to pay the pledge before the end of the year to be entitled to a deduction for 2000.
• Payment by credit card is considered payment in the year the contribution is charged to your account. Payment by check will be considered paid by year-end if mailed before January 1^st and paid by your bank upon timely presentation by the charity.
• Charitable contributions of $250 or more generally must be substantiated to be deductible. You must receive a contemporaneous written acknowledgement from the recipient organization (which can be received up until the due date of your 2000 return).

It is obvious that, if you are a business owner, it may be worth your while to take a few moments out of your holiday festivities to consider what tax strategies can be employed before year end in order to reduce your 2000 tax bill. Feel free to contact the office for a consultation.

An increasing number of charities have been using the Internet to solicit funds, allowing potential donors to make contributions online. Now, you can even create an account in a special type of planned giving instrument: a donor-advised fund. According to recent government figures, donor-advised funds hold more than $8 billion in assets. What are these funds, and are they right for you?

With many Americans looking for ways to give back to others some of their new-found wealth, it is not surprising that new ways for charitable giving have developed. One of the hottest alternatives to outright gifts at one extreme and private foundations at the other has been the "donor-advised charitable fund." To make these funds work, however, the donor must protect his or her right to an immediate charitable deduction.

Nature of donor-advised funds

Donor-advised funds are similar to private foundations in many ways and can allow you a certain degree of control over how your contributions are invested and distributed, all without the expenses associated with setting up and running a private foundation.

Here's how it usually works: Upon a contribution to a charity, the charity opens up an account in the donor's name in a special fund. The donor can recommend where the funds are invested, how and when the income is distributed, and to what charities. However, the charity managing the fund need not follow the donor's recommendation and it has ultimate say as to the disposition. Many donor-advised funds require an initial contribution of $100,000, although as they have grown in popularity, some funds offer a minimum contribution of $5,000 or less. In addition to being offered on the Internet, many donor-advised funds are offered by banks and brokerage houses.

IRS: Contributions are assets of the charity

In a recent case confronting the IRS, the organization was an online distributor of philanthropic information. Individuals coming to the web site would learn about donor-advised funds and, if they wished, would be able to open an account online. The site would disclose to visitors that while donors would be able to recommend where their dollars would be donated, the organization would make the final decision.

The IRS concluded that contributions made online to the donor-advised fund would be assets of the organization. The organization intended to review the donor recommendations with diligence. In addition, since it had ultimate control of the assets and made donors affirmatively agree to that control, the IRS was confident that the organization would control the contributions.

Proceed with caution

Contributing to a donor-advised fund in which your wishes are respected, although perhaps not legally enforceable, may provide you with the extra degree of tangible participation that can make your charitable contributions more meaningful to you. Such charitable giving, however, does require some research to make sure that the IRS recognizes your initial contribution as a charitable deduction. Before making a substantial initial contribution, you also should investigate other ways to give, from designated gifts to setting up your own private foundation. Please feel free to contact the office for a consultation.

Are you considering retiring from your business? Or has financial hardship forced you to try to find a way out? Whatever your reason for wanting to sell your business, it pays to do a substantial amount of preparation well in advance to ensure that you get the best return on your investment of time and money.

Fringe benefits to employees often provide the "sizzle" to keep them aboard during times of high employment. One increasingly popular benefit -- from the perspective of both employees and employers alike -- comes in the form of "qualified transportation fringe benefits." Set up properly, this fringe benefit arrangement can fund a substantial portion of an employee's commuting expenses with either pre-tax dollars or tax-free employer-provided benefits.

Commuting expenses to and from a place of business and home are generally considered nondeductible, personal expenses. The magic of "transportation fringe benefits," however, is that they can turn some commuting expenses into tax-favored benefits. They do so by defraying some of an employee's commuting expenses with either pre-tax dollars that reduce otherwise taxable compensation, or with direct, employer-subsidized amounts that are considered tax free.

What are "qualified transportation fringe benefits"?

Qualified transportation fringe benefits include transit passes, van pooling and qualified parking. These benefits are not included in an employee's gross income up to an inflation-adjusted monthly cap. For 2000, the exclusion is available for up to $65 per month of transit passes and van pooling, and $175 per month of qualified parking. In 2001, the monthly cap remains at $65 each month for transit passes/van pooling, but rises to $180 for parking. Beginning after 2001, the benefits will increase even more substantially for van pooling and transit passes each month, to $100 per month. Benefits that exceed the limitation are included in an employee's income.

Transit passes. A transit pass --which is tax-free up to $65 per month-- includes a pass, token, fare card, voucher or similar item entitling a person to ride at a reduced price on mass transit facilities or in a highway vehicle with a seating capacity of at least six adult passengers. Transit passes also include cash reimbursements only if a voucher is not readily available for direct distribution by the employer to employees.

Van pooling. Transportation in a vanpool may be valued at its fair market value, or under the automobile lease valuation rule, the vehicle cents-per-mile rule, or the commuting valuation rule. Cash reimbursement for this transportation is allowed. Car pooling arrangements can obtain pre-tax benefits only if organized and administered by the employer. Private arrangements among employees won't work.

The van that is used must carry a seating capacity of at least six adults, not including the driver. At least 80 percent of its mileage use must be reasonably expected to be for purposes of transporting employees.

Parking. Some employers assume -- incorrectly -- that transportation fringe benefits are available only in circumstances that are "environmentally correct." Parking subsidies, which may persuade some employees not to use mass transportation, nevertheless can amount to a tax-free fringe benefit. Since 1999, employees have been able to exclude from income up to $175 a month in employer-provided parking as a qualified transportation fringe benefit. In 2001, the monthly cap rises to $180.

The exclusion is available only for the value of parking provided to an employee at the business premises of the employer or at a staging area from which the employee commutes to work by car pool, commuter highway vehicle, or mass transit facilities. Parking provided by an employer includes parking for which the employer pays, either directly to a parking lot operator or by reimbursement to the employee, or provides on premises it owns or leases.

In compensation-reduction arrangements, the employee's election must be in writing or in another form, such as electronic, that includes, in a permanent and verifiable form, the required information. The election must contain the date of the election, the amount of the compensation to be reduced, and the period for which the benefit will be provided. The employer may provide as a default that employees will be provided with the fringe unless they elect to receive cash, provided that employees receive adequate notice that a reduction will be made and are given adequate opportunity to make a contrary election.

The portion of a qualified transportation fringe benefit that is included in income is subject to withholding and reporting rules. Such amount is treated as wages for federal income and employment tax withholding purposes, and must be reported on an employee's Form W-2, Wage and Tax Statement. Qualified transportation fringes not exceeding the applicable monthly limit are not wages for purposes of withholding and employment taxes.

If you are self-employed, qualified transportation fringe benefits are not available to you. For this purpose, self-employed persons include independent contractors, partners and 2-percent shareholders of S corporations. However, a de minimis fringe rule for transit passes continues to apply: tokens or farecards worth $21 or less, provided by a partnership to a partner that enable the partner to commute on a public transit system, are excludable from the partner's gross income. In addition, if a partner performing services for a partnership or a director of a corporation would be able to deduct the cost of parking as a trade or business expense, the value of free or reduced-cost parking is entirely excludable as a working condition fringe.

Providing some assistance to your employees to offset their commuting costs in the form of transportation fringe benefits can prove to be an effective employee recruitment and retention tool. If you are interested in finding out more about this type of fringe and how it could benefit your business, please contact the office for a consultation.

Q. Since our children are grown and now out on their own, my husband and I are considering selling our large home and purchasing a small townhouse. We have owned our home for years and have quite a lot of equity built up (the market value has increased tenfold!). How do we figure out how much our potential capital gain would be? Will we pay more in taxes because we are moving to a less expensive home? 

A. With home values across the country at the highest levels seen in years, you may find that you could actually have a gain from the sale of your home in excess of the new IRS exclusion amount of $500,000 ($250,000 for single and married filing separately taxpayers). Some good news -- the new law means that you will no longer be penalized (in the form of recognizable capital gains) for buying a less expensive home that doesn't require that you reinvest all of your gain.

 As an individual or business, it is your responsibility to be aware of and meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing dates for individual, business, and other taxpayers for the month of December 2000.

Alumni Computer Group specializes in Legal Accounting and currently serves over 16,000 law firms ranging in size from sole practitioners to 50-lawyer firms.