News / July 2011

Substantiating Charitable Contributions

July 25, 2011 Posted by admin
As we approach year-end, many of us may need to catch up on our charitable contributions for a number of reasons in addition to a tax break. So, let’s briefly review the IRS rules on deducting charitable contributions.

A donor will not be allowed any deduction for a contribution by cash or check, or any other monetary gift, regardless of the amount unless the donor retains either:

  1. a bank record that supports the donation or
  2. a written receipt or communication from the charity showing the name of the organization, date, and amount of the contribution.

 

Property donations valued at less than $250 must be substantiated by a written receipt or letter from the charitable organization showing the organization’s name, the date and place of the contribution, and a detailed description of the property. Donors must also obtain a written acknowledgment from the charity if the value of the contribution (in cash or other property) is $250 or more – a canceled check or other reliable records are not sufficient proof.

Please contact us if you have questions about substantiating charitable contributions.

Borrowing from Your 401K

July 25, 2011 Posted by admin
Individuals who participate in a 401(k) plan sometimes borrow from their plan. While you may justifiably feel squeamish about taking out a 401(k) plan loan, it can actually make good sense in appropriate circumstances?assuming it is paid back on time. For instance, in today’s tough economy, plan loans can be a source of much-needed cash when bank loans are unavailable or prohibitively expensive. 401(k) plan loans are generally economical and easy to obtain.

In particular, a 401(k) plan participant with less-than-stellar credit or tapped out credit lines may find it much easier and cheaper to borrow from their 401(k) plan than from a commercial lender. 401(k) plan loans provide participants with access (within limits) to their 401(k) plan dollars without incurring income tax liabilities and the 10% premature withdrawal penalty tax. The 10% penalty tax generally applies to withdrawals before age 59 1/2, however, exceptions are available. In essence, the participant (borrower) pays interest to himself or herself when taking out a plan loan. 

401(k) plan loans are only permitted if the plan document allows them, and many plans do. The maximum amount that can be borrowed is generally the lesser of $50,000 or 50% of the participant’s (borrower’s) vested account balance. Most 401(k) plan loans are secured exclusively by the participant’s vested account balance (although other forms of security, such as a lien against the participant’s home, are sometimes seen). 

At least two major potential pitfalls are associated with 401(k) plan loans. First, the participant’s account balance is irreversibly diminished if the loan is not paid back. Second, the federal income tax consequences are harsh for failure to pay back a plan loan according to its terms, and the loan will usually have to be repaid in full soon after the employee leaves the job for any reason. Such failure to repay the loan can result in a deemed distribution of the unpaid loan balance that triggers a federal income tax hit (possibly a state income tax hit, too). In addition, the dreaded 10% premature withdrawal penalty will generally apply unless the participant is age 59 1/2 or older. 

Interest paid on a loan secured by the participant’s (borrower’s) 401(k) plan account balance is nondeductible if any of the account balance used to secure the loan is attributable to elective deferrals (i.e., elective salary reduction contributions the employee signed up for). This is true regardless of how the loan proceeds are used and regardless of the existence of other security for the loan, such as the participant’s home. Since 401(k) account balances will almost always include at least some elective deferral dollars, interest on loans from such plans will usually be nondeductible. 

In most cases, borrowing from your 401(k) plan should only be done when funds are not available elsewhere. But, during this difficult economic time, it may be prudent to do so. Please contact us if you have questions on the tax ramifications of 401(k) plan loans or other tax compliance or planning issues.

Retaining Tax Information and Records

July 25, 2011 Posted by admin

 

Retaining and storing your income tax information and records is an important final step of your tax filing responsibility. This article contains information on the rules for keeping your tax records.

When determining how long to keep most of your income tax information and records, look at (a) the time frame over which the IRS can audit a return and assess a tax deficiency or (b) the time frame during which you can file an amended return. For most taxpayers, this period is three years from the original due date of the return, or the date the return is filed, if later. For example, if you filed your 2008 Form 1040 on or before April 15, 2009, the IRS has until April 15, 2012, to audit the return and assess a deficiency. However, if a return includes a substantial understatement of income, which is defined as omitting income exceeding 25% of the gross amount reported on the return, the statute of limitations period is extended to six years.

A good rule of thumb for keeping tax records is to add a year to the IRS statute of limitations period. Using this approach, you should keep your income tax records for a minimum of four years, but it may be more prudent to retain them for seven years, which is what the IRS informally recommends. State tax rules must also be considered, but holding records long enough for IRS purposes will normally suffice for state tax purposes, assuming the federal and state returns were filed at the same time.

Certain tax records, however, should be kept much longer than described above and some, indefinitely. Records substantiating the cost basis of property that could eventually be sold, such as investment property and business fixed assets, should be retained based on the record retention period for the year in which the property is sold. Tax returns, IRS and state audit reports, business ledgers, and financial statements are examples of the types of records you normally should retain indefinitely.

Keep in mind that there may be nontax reasons to keep certain tax records beyond the time needed for tax purposes. This might include documents such as insurance policies, leases, real estate closing statements, employment records, and other legal documents. Your attorney can provide additional guidance.

We hope this brief overview helps you under-stand the income tax record retention rules. If you have any questions regarding your specific situation or if you would like to discuss these rules in more detail, please give us a call.


How Do I Handle Business Personal Property Listings?

July 25, 2011 Posted by admin

Business Personal Property Listings are filed with the North Carolina County in which your business personal property is located and is due on or before January 31st and includes property on hand at January 1st.

What is Business Personal Property?

Business Personal Property includes machinery, equipment, computers, furniture, fixtures, farm machinery, supplies, airplanes, construction in progress, etc that is used in connection with a business or rental activity and is located in North Carolina.

Are you required to list your business personal property?

If you own or possess personal property used in connection with a business or rental activity you must file a Business Personal Property Listing with the county in which the property is used.

Should you need assistance with your listing or if you are unsure if you are required to list, please give us a call. We will be happy to help.

Useful links and downloads:

Brunswick County Business Personal Property Division website

 

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