April: Greetings from the IRS

Business owners making an automobile purchase in 2010 will get less in tax benefits from the purchase than in 2009. This is the case because the bonus depreciation has lapsed and as of this writing Congress has yet to reinstate it. Thus, for 2010, the maximum first year deduction (not including Section 179 for vehicles that weigh in excess of 6,000 pounds) is $3,060, down from $10,960 in 2009.

The IRS has finally agreed to grant relief to taxpayers who have attempted a like-kind (1031) exchange but had the exchange fail due to the bankruptcy or receivership of the Qualified Intermediary (thus preventing the sale transaction from closing). Prior to IRS Revenue Procedure 2010-14, the taxpayer was out of luck in these situations and simply lost the tax benefits of the exchange. Now, a 1031 exchange can still work its magic from a tax perspective if a Qualified Intermediary is bankrupt if the taxpayer satisfied the following requirements: he or she must have transferred the relinquished property to the Qualified Intermediary properly and properly and timely identified the replacement property. In addition, the taxpayer must not have received any funds from the Qualified Intermediary with respect to the relinquished property and did not complete the exchange solely due to the bankruptcy or receivership situation of the Qualified Intermediary. There are a number of complicated calculations that must be performed here (better left for your tax return preparer!) but this revenue procedure is welcome news for those who have been victims of a bankrupt Qualified Intermediary. These new rules apply only to those exchanges in which the Qualified Intermediary defaulted on or after January 1, 2009.

The IRS has ruled that a company that hires a nanny to watch the owners’ children will have the nanny be treated as an employee of the business. While this may sound like good news in that the business will get a tax deduction for the wages, it will also need to pay employment taxes and will also make all corporate fringe benefits available to the nanny. This is simply another good reason why you want to keep your business and personal financial matters separate from each other.

The IRS and Department of Justice have completed a series of successful criminal prosecutions associated with tax fraud. Several tax preparers were caught, including those who were claiming tax withholdings on fictitious Forms W-2, identity theft issues (and using the information to claim tax refunds before the actual folks filed their tax returns), abuse of the homeowners tax credit and many other scams involving false credits and deductions. Given that we are in the middle of Tax Season 2010, it is important that you, as the taxpayer, review your tax preparer’s work very carefully before you sign the return. It is up to you to ask questions if you do not understand your tax return!