Raising Financially Aware Kids

Transcription

1 T C LAIR Soltions Smmer 2015 Dear Clients and Friends Professionally Speaking Congratlations to Stephanie S. Sommers, CPA, 2015 PICPA Yong Leader Award recipient! This award recognizes Stephanie s excellent leadership and ongoing efforts in promoting the well-being of or profession and or commnity. Welcome! Or staff is growing with these new employees joining the St. Clair CPA Soltions family this smmer. Please join s in welcoming new Manager, Mareen A. Cardamone, CPA; Senior Accontant Edardo (Eddie) Hernandez; Staff Accontants Cecilia Bck, Travis Cohle and Gregory Hipps; and Administrative Assistants Gabriela Brito and Jlie Grant. Mareen, Eddie, Travis, Gabriela and Jlie will work in or PA office; Cecilia and Gregory will be based in or NJ office. Presented by St. Clair CPA Soltions and its sbsidiaries St. Clair CPAs, P.C. CPA Financial Grop, LLC Plan To Bild Wealth SM PERSONAL BUSINESS ESTATE An independent member of BKR International Raising Financially Aware Kids Helping Yor Kids and Grandkids Appreciate the Vale of a Dollar In a recent srvey of high school stdents, 88% said that they learned abot money from their parents. What lessons are yor financial discssions and more importantly, yor behavior teaching yor children and grandchildren? Retailers know that children have a powerfl inflence on the economy, making expenditre decisions that yield a direct economic inflence of $188 billion, and inflencing parental spending decisions p to $300 billion. By age five, children will have seen 30,000 advertisements that aim to trn yor child or grandchild into an insatiable consmer. Collectively, children spend $25 billion of their own money. To raise children who will grow into fiscally responsible adlts and consmers, American Centry Investments says that kids mst have nderstanding, an allowance, and practice in money management. The best person to teach them is the CFP, or Chief Financial Parent, which might in fact be one or both parents, or even grandparents. Research shows that kids Contined on page 4 Proposed DOL Rle May Make Millions More Eligible for Overtime Pay In his 2015 State of the Union Address last Janary, President Obama said employees shold get the overtime they ve earned. He then directed the U.S. Department of Labor (DOL) to review and amend the overtime rles nder the Fair Labor Standards Act (FLSA) to make more workers eligible. On Jne 30, the DOL took steps in that direction, proposing to significantly change the federal overtime rles. However, the path from the proposed rle to a final rle cold take several months and it s possible it cold be derailed. Crrent Overtime Rles Overtime pay is defined as one-and-one-half times an employee s sal pay rate for hors worked exceeding 40 per week. Today, for employees to be ineligible, they mst meet a three-part white collar exemption." Contined on page 5 In This Isse Raising Financially Aware Kids...1 Proposed DOL Rle May Make Millions More Eligible for Overtime Pay...1 Do Yo Keep Adeqate Records for Charitable Contribtions?...2 Health Coverage: IRS Gidance on Forms 1094 and Dedcting Bsiness Start-Up Expenses: Tax Cort Case Explains the Rles Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

2 2 ST CLAIR Soltions Smmer 2015 Do Yo Keep Adeqate Records for Charitable Contribtions? The IRS rles for sbstantiating dedctions for charitable contribtions are strict. The taxpayers in a recent U.S. Tax Cort case fond this ot the hard way when the cort denied their dedction of more than $37,000 for nmeros noncash items donated to varios charities. To add inslt to injry, the cort assessed a 20% accracy-related penalty on the taxpayers. Overview of Recordkeeping Reqirements For federal income tax prposes, a taxpayer is generally entitled to dedct the fair market vale (FMV) of donated property that s been held longer than a year, even if the property has appreciated in vale. Bt strict sbstantiation reqirements apply to all charitable contribtions. If yo fail to maintain timely, detailed records or overestimate an item s FMV, the IRS may challenge a dedction for donated personal property, claiming that the amont has been inflated. The IRS sggests sing gidelines from charities, sch as the Salvation Army or Goodwill, to establish the FMV of hosehold items that have declined in vale over the years. To qalify for any dedction, the items mst still be in good condition. The specific recordkeeping reqirements for non-cash contribtions depend on the vale of the gifts. Note: An acknowledgment is reqired for each contribtion of $250 or more, even if several donations are made to the same charity dring the tax year. Mltiple contribtions are not aggregated for prposes of the $250 limit as long as they are made on separate occasions. Gifts of $500 to $4,999. In addition to other sbstantiation reqirements, maintain records of the approximate date the property was acqired, the manner of its acqisition, a detailed description of the property, the cost or other basis of the property, the FMV of the property when it was donated, and the method yo sed in determining the vale. For this category, contribtions of similar items mst be aggregated. Gifts of $5,000 or more. In addition to the previosly mentioned reqirements, provide an independent appraisal of the donated property. Attach a copy of the appraisal to yor federal income tax retrn. When determining whether yor dedction is over $5,000, combine dedctions for all similar items donated to any charitable organization dring the year. Gifts nder $250. Obtain a receipt from the charity showing the name of the organization, the date and location of the contribtion, and a detailed description of the property. However, yo re not reqired to get a receipt when it s impractical. For example, no receipt is reqired if yo leave property at a charity s nattended drop box after hors. Yo mst also keep other reliable written records, inclding the FMV of the donated items and how yo arrived at that amont. Gifts of $250 to $499. Obtain a written contemporaneos acknowledgment from the charity, describing the property and specifying whether yo received any benefits in retrn for yor gift. If yo received benefits, provide a good-faith estimate of the vale of sch benefits. When shold yo obtain a contemporaneos written acknowledgment from a charity? The IRS reqires this docmentation to be obtained by the earlier of: 1. The date yo file yor tax retrn, or 2. The de date for the retrn (inclding any extensions). Case in Point A recent Tax Cort case demonstrates how these recordkeeping rles often trip p taxpayers who make charitable donations. On their 2011 tax retrn, a married cople claimed a total charitable dedction of $37,315, comprised of gifts of property to for organizations. The IRS denied these dedctions de to lack of sbstantiation. Contined on page 8 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

3 3 ST CLAIR Soltions Smmer 2015 Health Coverage: IRS Gidance on Forms 1094 and 1095 If yor company has 50 to 99 fll-time eqivalent employees, yo may want to start gearing p to meet some new IRS filing reqirements next year. These reqirements relate to the shared responsibility rles of the Affordable Care Act. In particlar, it s time to become familiar with two new IRS forms that report enrollment and eligibility for health care coverage. Larger employers shold already have done this. The IRS has provided both new and pdated qestion-andanswer gidance on the reporting reqirements for applicable large employers nder the federal tax code. As backgrond, beginning in 2016, applicable large employers mst file Forms 1094 and 1095 to provide 2015 health coverage information to the IRS and plan participants. The forms are sed by the IRS to enforce employer penalties nder the federal tax code, as well as individal mandate and tax credit eligibility rles. The latest gidance consists of pdated Q&As covering basic reporting reqirements and new Q&As addressing more specific isses that may arise while completing Forms 1094 and Note that even if yo have fewer than the minimm nmber of fll-time employees (at least 50 next year), the inclsion of part-timers in the fll-time eqivalent calclation may reqire yo to file Forms 1094 and Highlights of the recent IRS gidance inclde: Clarification on who mst report. The gidance clarifies that an applicable large employer with no flltime employees for any month of the year isn t obligated to report nless the employer sponsors a selfinsred health plan in which any employee, spose, or dependent is actally enrolled. In that case, it mst still file Forms 1094-C and 1095-C even if it has no flltime employees. The gidance also confirms that an applicable large employer mst file, and provide Form 1095-C to all fll-time employees, regardless of whether they were offered coverage dring the year. Controlled grops. Examples show how reporting differs where an applicable large employer reports for separate divisions and where applicable large employers are part of a controlled grop. In the former sitation, employees working for mltiple divisions mst receive aggregated information on a single Form 1095-C. In the latter sitation, employees will receive a separate Form 1095-C for fll-time employment with each applicable large employer in the controlled grop. Qalifying offer method of reporting. The pdated Q&As address reporting nder the qalifying offer method, which allows applicable large employers to frnish a simplified employee statement to employees receiving qalifying offers for all 12 months of the year. The IRS emphasizes that se of simplified statements is not available for employees who actally enroll in an applicable large employer s self-insred health plan. Delivery to employees. The gidance confirms that a Form 1095-C may be delivered to employees in any manner permitted for delivery of Form W-2, inclding hand-delivery. However, nlike Form W-2, employers need not frnish a midyear Form 1095-C pon an employee s reqest following termination of employment. New hires and terminating employees. When reporting offers of coverage on Part II of Form C, applicable large employers may indicate that a coverage offer was made for a month only if the offer wold have provided coverage for every day of the month. Therefore, applicable large employers shold report on Form 1095-C that no coverage was offered in the month an employee was hired (nless an offer of coverage extended to every day of that month). Similarly, if a terminating employee s coverage ends before the end of the month of termination, the applicable large employer mst report that no coverage was offered for the month. (The applicable large employer may be able to avoid liability for employer penalties nder the federal code, even thogh coverage was not offered for the fll month.) In contrast, when reporting coverage information nder Part III of Form 1095-C, an employee shold be reported as having coverage if the employee is enrolled on any day of the month. Third-party reporting. The gidance verifies that applicable large employers may designate third parties to perform reporting on their behalf. This confirms that a governmental applicable large employer may designate another governmental entity to accept reporting responsibility on its behalf. The Q&As also explain the allocation of responsibilities nder varios combinations of self-insred and flly insred coverage options. Contined on page 7 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

4 4 ST CLAIR Soltions Smmer 2015 Raising Financially Aware Kids, Helping Yor Kids and Grandkids Appreciate the Vale of a Dollar, cont. whose parents or grandparents talk to them abot money are more likely to be savers than spenders, and that talking abot money and financial behavior is critical to a child s sccessfl financial edcation. Experts say that the earlier yo start talking to kids abot money, the better, bt it s important to make it a dialoge and not a lectre. Even children as yong as age three can nderstand basic concepts sch as bartering, earning, saving, investing and crrency. Older children can manage more complex concepts sch as an allowance and money management. Start by explaining that money is a medim of exchange or measre of vale, and that good money behavior is another way of living yor vales. While yo re getting kids to nderstand principles of good financial behavior, be carefl not to jdge their priorities in terms of needs and wants: for example, a stffed animal that may seem like jst a toy to yo might be a sorce of comfort to child; or a teen s desire for designer clothing may really signal a need for peer acceptance. Before yo initiate an allowance, determine yor child s readiness and decide whether it will be nconditional or tied to a measre sch as grades, chores or good behavior. Another alternative is to let children earn their money and pay as they go to learn how to control spending and saving. Readiness might be signaled by the child expressing interest in wanting an allowance, demonstrating an nderstanding of the vale of money and the difference between needs and wants, the ability to cont and having a safe place for saving money at home, before it is deposited in a bank accont. Recognizing that yonger children have less need for their own fnds, once yo have decided to grant an allowance, a good rle of thmb is $1 for each year of age per week, so that a 12- year old wold receive a weekly allowance of $12 (nless the child is expected to pay for expenses sch as school lnches, clothes, gas and more, in which case a higher allowance might be necessary and appropriate). To teach money management, help children nderstand concepts sch as bdgeting, income, savings, investing, expenses, spending plans and financial goal setting by involving them in yor finances. Discss how yo earn money and how yo allocate it between yor family s needs and wants. Stress the importance of paying yorself first throgh retirement plans, investments and 529 College Savings Plans. When children express a financial goal, talk abot how they will achieve that goal throgh savings and/or earning more money. Accmlating wealth is accentated when the practice starts as early as possible, with reglar savings. James E. Stowers, fonder of American Centry Investments, encorages parents to remind children often that Yo can always spend what yo save, bt yo can never save what yo spend. Children who have the ability to nderstand the power of componding can experiment with examples that illstrate the impact of varios starting sms and rates of retrn over different periods of time. Ask children which they wold rather have: a check for $1 million or a penny that dobles in vale every day for 30 days? Getting kids interested, edcated and excited abot good financial management at an early age is one of the best gifts yo can give a child. To learn more and access additional resorces, visit or join s for an pcoming edcational event on this topic: OUR NEW JERSEY OFFICE 28 Soth Centre Street, Merchantville, NJ, Lnch n Learn Tesday, September 22 12:00-1:30 pm Evening Event Thrsday, October 15 6:30-8:00 pm OUR PENNSYLVANIA OFFICE 101 West Elm Street, Site 500, Conshohocken, PA Lnch n Learn Wednesday, September 30 12:00-1:30 pm Evening Event Tesday, November 20 6:30-8:00 pm Please register for these events on the Commnity page of or website, or contact Marsha Brown at mbrown@cpasoltionsllc.net or for personal assistance. Dedcting Bsiness Start-Up Expenses: Tax Cort Case Explains the Rles A recent U.S. Tax Cort decision drives home the important point that crrent dedctions aren t allowed for most expenses incrred while a new bsiness is still in the start-p phase. Other decisions have dealt with the same isse in recent years. As a reslt, the proper federal income tax treatment of start-p expenses remains an ongoing sorce of confsion for taxpayers. Contined on page 6 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

5 5 ST CLAIR Soltions Smmer 2015 Proposed DOL Rle May Make Millions More Eligible for Overtime Pay, cont. To be exempt from overtime pay, an employee mst generally meet the following reqirements: 1. Be paid a predetermined and fixed salary. 2. Be paid above a specific salary threshold, crrently $455 a week ($23,660 for a fll-year worker). The threshold was last increased in Primarily perform exective, administrative, or professional dties, as defined in DOL reglations. What is Being Proposed? Under the DOL proposal, the salary threshold for the white collar exemption wold increase to approximately $970 a week ($50,440 for a fll-year worker) and wold be adjsted annally. The exact amont is estimated in the proposed rle becase it relies on Brea of Labor Statistics compensation data that may need to be pdated by the time the rle change wold take effect in 2016 or later. If the increased exemption in the proposed rle is finalized, the DOL estimates that nearly 5 million workers will become newly eligible for overtime pay. The DOL is also proposing to set the highly compensated employee annal compensation level at $122,148 (from $100,000) for retirement plan discrimination testing prposes. This amont wold also be adjsted annally. Designed to Restore Effectiveness The prpose of raising the salary threshold and making it annally adjstable, stated the DOL, is to restore the effectiveness of the salary test and to ensre that the Fair Labor Standards Act s intended overtime protections are flly implemented." The DOL explained that the changes seek to pdate the salary level test to ensre that the FLSA s intended overtime protections are flly implemented, and to simplify the identification of overtime-eligible employees, ths making the white collar exemptions easier for employers and workers to nderstand." The reason the FLSA didn t provide overtime for some individals, according to the DOL, was premised on the belief that the exempted workers earned salaries well above the minimm wage and enjoyed other privileges, inclding aboveaverage fringe benefits, greater job secrity, and better opportnities for advancement, setting them apart from workers entitled to overtime pay." Job Dties Test These basic principles, taken from a DOL Wage and Hor Division fact sheet, gide job stats determination for three categories of white collar jobs: Exective Exemption: The employee s primary dty mst be managing the enterprise or managing a cstomarily recognized department or sbdivision of the enterprise. The employee mst cstomarily and reglarly direct the work of at least two or more other fll-time employees or their eqivalent. The employee mst have the athority to hire or fire other employees, or the employee s sggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of stats of other employees mst be given particlar weight. Administrative Exemption: The employee s primary dty mst be the performance of office or non-manal work directly related to the management or general bsiness operations of the employer or the employer s cstomers. The employee s primary dty mst inclde the exercise of discretion and independent jdgment with respect to matters of significance. Learned Professional Exemption: The employee s primary dty mst be the performance of work reqiring advanced knowledge, defined as work that is predominantly intellectal in character and work reqiring the consistent exercise of discretion and jdgment. The advanced knowledge mst be in a field of science or learning. The advanced knowledge mst be cstomarily acqired by a prolonged corse of specialized intellectal instrction. Contined on page 7 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

6 6 ST CLAIR Soltions Smmer 2015 Dedcting Bsiness Start-Up Expenses: Tax Cort Case Explains the Rles, cont. Here s what yo need to know abot dedcting start-p costs, along with an example of how the Tax Cort applied the rles. Dedct Section 162 Expenses Now Internal Revene Code Section 162 allows crrent dedctions for ordinary and necessary bsiness expenses. Section 162 expenses are basically rotine expenses incrred in operating an p-and-rnning bsiness. Examples inclde employee wages, rent, tilities, and advertising. Section 162 expenses can generally be dedcted in the year when they re paid or incrred. Many taxpayers are naware that Section 162-type expenses incrred by a start-p can t necessarily be dedcted right away. The reason is that these expenses are classified as Section 195 start-p expenses ntil the active condct of bsiness begins. Once a taxpayer meets the active-condct standard, Section 162-type expenses become Section 162 expenses, and the taxpayer can dedct them crrently. (This assmes that other provisions sch as the passive activity loss or at-risk basis rles don t come into play and prevent crrent dedctibility.) Dedct or Amortize Section 195 Expenses When Bsiness Commences Section 195 start-p expenses are Section 162-type expenses that are incrred before the bsiness actively commences operations. Start-p expenses can inclde costs incrred: To investigate the creation or acqisition of a bsiness; To create a new bsiness; or To engage in any for-profit activity before the active condct of bsiness begins, in anticipation of sch an activity becoming an active bsiness. Common examples of Section 195 start-p expenses inclde employee training, rent, tilities, and marketing expenses incrred prior to opening a bsiness. In the tax year when active condct of bsiness commences, the Section 195 rles allow taxpayers to elect to amortize start-p expenses. The election potentially allows an immediate dedction for p to $5,000 of start-p expenses. However, the $5,000 dedction allowance is redced dollar-for-dollar by the amont of cmlative start-p expenses in excess of $50,000. Any start-p expenses that can t be dedcted in the tax year the election is made are amortized over 180 months on a straightline basis. Amortization starts in the month in which the active condct of bsiness begins. A taxpayer is deemed to have made this election in the tax year when active condct of bsiness commences nless, on a timely filed tax retrn for the year, the taxpayer elects instead to capitalize start-p expenses. Important Note: Section 195 start-p expenses don t inclde interest expense, taxes, or research and development costs. Those expenses are sbject to specific rles that determine the timing of the dedctions. Section 195 start-p expenses also don t inclde corporate organizational costs or partnership or LLC organizational costs, althogh the tax treatment of those expenses is similar to the treatment of start-p expenses. How the Tax Cort Rled Recently A recent Tax Cort case demonstrates potential pitfalls that taxpayers shold avoid when claiming dedctions for startp expenses. In this case, the taxpayer was a civil engineer with 25 years of experience as a highway designer and constrction engineer. Contined on page 9 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

7 7 ST CLAIR Soltions Smmer 2015 Proposed DOL Rle May Make Millions More Eligible for Overtime Pay, cont. What Other Changes Might be Ahead? The proposed modifications to the overtime pay rle are significant, bt many related qestions remain that may soon be addressed, sch as: work after hors. The DOL didn t tackle that qestion in the proposed rle bt stated it wold ask for inpt on the topic in coming weeks. The Job Dties Test. The proposed rle didn t tamper with the job dties test. However, the DOL states that it is seeking comment on whether the standard dties tests are working as intended to screen ot employees who are not bona fide white collar exempt employees." Inclsion of Bonses. The DOL will consider whether nondiscretionary bonses, sch as certain prodction or performance bonses," shold be added to an employee s salary to determine eligibility or exemption from overtime pay reqirements. Working on Electronic Devices after Hors. When it first annonced that it was examining overtime rles, the DOL was asked to determine whether employees shold be compensated for time spent on devices, sch as smart phones and laptops, doing What Happens Now? There is a 60-day comment period for bsinesses and other interested parties to provide feedback to the DOL. The proposal immediately triggered criticism from some employer and indstry grops. For example, the National Retail Federation, the National Restarant Association, and the U.S. Chamber of Commerce issed statements that they oppose the changes. These and other grops arged that increased overtime costs may force employers to ct back on workers hors, limit opportnities for employees, and negatively affect bsinesses. For its part, the DOL said it wold finalize the proposed rle only after reviewing and considering all the comments it receives. Given the stakes, opponents are likely to not only comment bt to rge Congress and perhaps take legal action to modify, delay, or drop the proposal. Health Coverage: IRS Gidance on Forms 1094 and 1095, cont. Reporting offers of COBRA coverage. The IRS illstrates reporting nder varios COBRA scenarios. The gidance explains how sponsors of self-insred plans shold report enrollment information for non-employee COBRA beneficiaries, sch as former sposes. Qalified beneficiaries electing COBRA independently from the employee mst receive separate forms, while those who have COBRA de to an employee s election shold be inclded on the same form that is provided to the employee. (As previosly noted in the instrctions to the final forms, reporting may be made on either Form 1095-B or 1095-C for individals who were not employees at any time dring the year.) Shold an applicable large employer complete Form 1095-C for fll time employees who receive COBRA offers de to termination or a redction in hors? In general, a COBRA offer made de to termination of employment is reported as an offer of coverage only if the former employee enrolls in COBRA coverage and the employee s cost of coverage reflects the COBRA premim for the lowest-cost, self-only coverage providing minimm vale. In contrast, a COBRA offer made to an active employee de to a redction of hors wold be reported as an offer of coverage on Form 1095-C even if the employee declines COBRA coverage. Note: Unfortnately, the example sed to illstrate this final point does not extend more than 60 days after the loss of eligibility, so it is nclear whether the applicable large employer wold still report that coverage is offered after the employee s COBRA election period has ended. With mandatory reporting starting in early 2016 (for 2015 coverage), nderstanding the complexities of the reporting reqirements is critical. While some of the Q&As in the IRS gidance were previosly addressed in the instrctions to Forms 1094 and 1095, others provided helpfl clarification and new information. Employers sbject to the reporting reqirements shold contact their tax advisors with qestions and for assistance filing the forms. 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

8 8 ST CLAIR Soltions Smmer 2015 Do Yo Keep Adeqate Records for Charitable Contribtions?, cont. The taxpayers dedcted $13,115 of non-cash charitable contribtions to a chrch dring its annal flea market, inclding: As part of its analysis, the cort groped their 2011 charitable dedctions totaling $37,315 into the following categories: $8,000 of books; $1,303 of hosehold items; $1,000 of clothing; $822 of toys; $800 of telescopes; $780 of jewelry; and $410 of frnitre. Clothing valed at $21,920; Books valed at $8,000; Hosehold frnitre valed at $3,090; Hosehold items valed at $1,653; Toys valed at $1,072; Telescopes valed at $800; and Jewelry valed at $780. They also reported combined donations of $24,200 to Goodwill Indstries, the Military Order of the Prple Heart Service Fondation, and the Vietnam Veterans of America. The second grop of donations inclded: $20,920 of clothing; $2,680 of frnitre; $350 of hosehold items; and $250 of toys. The taxpayers testified that they contribted batches of items to Goodwill at varios times, generally leaving goods in large bins after hors. They left large items, sch as frnitre, otside the warehose door. For the donations to the Prple Heart and Vietnam Veterans, the taxpayers schedled pick-ps by charity personnel and left the items otside their home. The charity sally left a doorknob hanger saying only, Thank yo for yor contribtion." The taxpayers claimed they were carefl to ensre that the items in each batch were worth less than $250, becase they believed that this eliminated the need to obtain receipts. Sbstantiation Blnder The cort didn t find the taxpayers testimony to be credible. The contribtions to the chrch s flea market occrred as a single event worth more than $13,000. With respect to the other contribtions, the cort noted that for the taxpayers to have intentionally made contribtions worth less than $250 each, it wold have reqired 97 separate donations, which is implasible and has no spport in the record." What s more, the taxpayers didn t assign vales to the donated items ntil they prepared their 2012 tax retrn. Based on this analysis, the cort reasoned that the taxpayers failed to satisfy the extra sbstantiation rles for all seven categories. In addition, they also didn t provide reliable written records to spport the claims for drop-offs at nattended sites. Frthermore, two categories clothing and books had alleged vales exceeding $5,000. For these categories, the cople shold have also obtained independent appraisals and attached them to their federal tax retrn. Finally, most of the property the taxpayers claimed to have donated consisted of sed clothing and hosehold items. Becase they failed to present credible evidence that these items were in good condition, the entire dedction was disallowed. Bt that s not the end of the story. The cort also imposed a 20 percent accracy-related penalty on the taxpayers for intentionally disregarding the rles. The cort wasn t persaded by their contention that the nderpayment met the reasonable case exception becase they allegedly believed that they weren t reqired to obtain receipts or acknowledgments from the charities for drop-offs at charity locations after hors or pick-ps by charity personnel from their home. (Knkel v. Commissioner, T.C. Memo ) Bottom Line When making charitable donations, there s no sbstitte for accrate recordkeeping. Make sre yo comply with the strict letter of the law so yo can withstand any potential IRS challenge to yor dedctions. Contact yor professional tax advisor if yo re nsre abot the sbstantiation reqirements or need to be referred to a qalified appraisal professional. 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.

9 9 ST CLAIR Soltions Smmer 2015 Dedcting Bsiness Start-Up Expenses: Tax Cort Case Explains the Rles, cont. In 2008, while still employed in a fll-time job, he decided to start his own bsiness. He selected the name Civil Engineering Services (CES), printed bsiness cards, designed stationery, and set p a website. He also prchased a compter, a desk and other office spplies, and set p an office in the basement of his home. By mid-2008, the taxpayer s employer dramatically redced his salary, and he decided to devote more time to developing CES. From his years of work experience, the taxpayer knew many contractors and project engineers who worked in the state. He reglarly visited constrction sites after his reglar work to distribte bsiness cards and speak with managers and others performing constrction on local highways. In addition to promoting his bsiness, the taxpayer sed these visits to stay abreast of developments in the highway constrction engineering indstry. He contined these trips throghot 2009, 2010, and In late 2010, he became nemployed and began focsing all of his attention on CES. On his 2009 and 2010 federal income tax retrns, the taxpayer claimed Schedle C bsiness dedctions totaling $46,629 and $45,618, respectively, for expenses prportedly incrred in the new bsiness. After an adit, the IRS disallowed the dedctions on the gronds that: They weren t properly sbstantiated, and CES hadn t yet commenced bsiness becase it didn t have any clients, wasn t hired to perform any services, didn t bid on any highway engineering jobs, and earned no income. The IRS also disallowed some itemized dedctions claimed on the taxpayer s 2009 and 2010 retrns. The disallowed dedctions reslted in a delinqent tax bill of abot $30,000. The IRS also imposed a 20% sbstantial nderstatement penalty on the additional tax de. The Tax Cort pheld both the IRS deficiency and the nderstatement penalty (Tarighi v. Commissioner, T.C. Smmary Opinion ). Factors to Consider The Tax Cort has historically focsed on these three factors to determine if a taxpayer has commenced the active condct of a bsiness: 1. Did the taxpayer ndertake the activity intending to earn a profit? 2. Was the taxpayer reglarly and actively involved in the activity? 3. Has the activity actally commenced? In the case described above, the Tax Cort conclded the taxpayer wasn t engaged in a bsiness dring 2009 and 2010, becase his bsiness didn t have income or clients and didn t bid on any jobs dring those years. Althogh the taxpayer did engage in promotional activities, he didn t intend to earn a profit in those years, becase he didn t prse contracts or bid on jobs. Therefore, the cort rled that the IRS correctly denied the dedctions reported on the taxpayer s 2009 and 2010 retrns, becase they were amortizable Section 195 start-p expenses rather than crrently dedctible Section 162 expenses. However, if the taxpayer cold properly sbstantiate the expenses, the opinion noted that the taxpayer cold begin amortizing them in the year when his bsiness activity started. Finally, the cort rled that the IRS was correct in imposing the 20% sbstantial nderstatement penalty, becase the taxpayer failed to establish that there was any reasonable case for the tax nderpayment or that he had acted in good faith. Important Reminders abot Start-Up Costs When yo incr bsiness start-p expenses, it s important to remember two key points. First, start-p expenses can t always be dedcted in the year when they re paid or incrred. Second, no dedctions or amortization write-offs are allowed ntil the year when active condct of yor new bsiness commences. That sally means the year when the bsiness has all the pieces in place to begin earning revene. Time may be of the essence if yo have start-p expenses that cold be dedcted this year. Contacting yor tax adviser to explain yor plans can reslt in more favorable tax conseqences. 28 Soth Centre Street Merchantville, NJ (P) (F) West Elm Street, Site 500 Conshohocken, PA (P) (F) The financial professionals of CPA Financial Grop are Registered Representatives and Investment Adviser Representatives with/and offer secrities and advisory services throgh Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Tax and acconting services offered by St. Clair CPA Soltions are separate and nrelated to Commonwealth.