Archive for the ‘Uncategorized’ Category

Jessica Dorsett

Saturday is Jessica’s birthday and she is the thoughtful person who posts all the Happy Birthdays on our blog so here’s my feeble attempt to honor hers! 

Jessica has been with the firm over 5 years.  Paul recruited her on her wedding day!

Here’s the story…. 

Paul’s daughter Regina and Jessica are good friends.  A spot had opened up on our audit staff a week before Jessica’s wedding.  Paul knew that Jessica was a high achiever from years of connection when Regina and Jessica got together at the Polito house.  As often happens, Jessica had been recruited before graduation by a firm in San Diego and hadn’t even thought about our firm.  Literally on her way out the door to Jessica’s wedding, Paul asked Regina, “Do you know where she is going to work?”  “Some firm in Sand Diego, she’s not looking forward to the drive from Escondido”.   Paul told Regina to let Jessica know that “We would make her an offer she couldn’t refuse”, which Regina relayed to Jessica at her wedding.  After the honeymoon, Jessica interviewed with Don and decided to join our firm. 

She is thorough, professional and proactive and her contributions to our firm grow each year.  Her clients love her and often take the time to let us all know what a great CPA and person she is. 

She has propelled the firm’s baby boomers into the 21^st century leading development of our website design and blog content.  She also monitors our quality control program on the attest side of the practice. 

She is a dear friend to us all and raises the bar by her dedication.  This is going to be a great year for her as she and her husband Brett are expecting a new brother or sister for their 21 month old son Chase!

Paul Polito

Many of you who know me personally know that I am an amateur guitar builder.  I picked up this hobby when I was in high school back in the 60’s.  Every Christmas I usually receive gifts that “feed” this habit…….I mean hobby!  Most years its tools, gift certificates to woodworking equipment stores and the like.  This year, my lovely wife Helen gave me a new book written by Bob Taylor, founder and president of Taylor Guitars.  Bob grew up in about the same timeframe as me, loved the same music  I did and built his first guitar for the same reason I did…..he didn’t have the money to buy one!

In this very inspiring book called “Guitar Lessons” Bob shares with the readers the incredible story of how this tiny company started out and survived many years of no profits to become the most successful guitar manufacturer in the world.  I especially enjoyed hearing about how they hung on and improved the company during the 1980’s when acoustic guitars fell out of favor and the market dried up.  The market for acoustic guitars in the 1980’s was probably similar to the market for buggy whips in the roaring 20’s!

Each chapter recounts a lesson learned about things like lean manufacturing, automation and technology, employee relations, marketing, brand building, and more.  Any aspiring or struggling business person should read this book.  For years Bob and his partner Kurt couldn’t rub two nickels together so this book will definitely be a source of inspiration for anyone struggling to get a business off the ground.  There are many great lessons in this book about how perseverance eventually pays off and how listening to others can be the key to a breakthrough.  There are also great lessons in this book about risk and reward and doing the right thing no matter what.  The fact that it involves a very “hip” company makes it a valuable book for young people.

One of the nice features of the book is the short chapters which make “Guitar Lessons” a very easy book to read.  For someone like me who takes over a year to build one guitar, hearing about how Taylor Guitars got from one guitar a month to 500 per day was truly inspiring!  This is honestly one of the most enjoyable books about business I have ever read!

“Guitar Lessons, A Life’s Journey Turning Passion Into Business” is available at  Barnes and Noble both in hard cover or as a Nook Book.  I will send a free copy of Guitar Lessons to the tenth new subscriber to our Blog after this book review is posted.  New subscribers email your subscription request to Mary McDannold at  mmm@politoeppich.com .

Today is Mary’s birthday.  She is our amazing firm administrator and Paul’s assistant.  I don’t know what we would do without her.  It’s not an easy position for many reasons, but she’s been handling it well with grace and patience.  Mary has been with the firm for about 2 ½ years now and has brought a lot to the position.  Her quirky humor will always put a smile on your face and her dedication is evident in her work. 

Mary, we are blessed to have you.  Have an amazing birthday!

Christmas came and went entirely way too fast, as it usually does.  It’s my favorite time of year; I start as early as possible.  I had the Christmas music playing right after Halloween and had about 95% of my Christmas shopping done by mid November.  And now it’s 2011, can you believe it!?

It was quite the interesting year in the legislature and our tax code took quite the hit (and let me tell you, tax planning was not easy waiting for all the last minute tax changes).  Congress finally extended the Bush-era tax cuts, gave us another AMT “patch” – will they ever just fix it?, and modified the estate tax at the very last minute.   Everyone was affected by the tax law changes.  I won’t bore you with the details; some of our previous posts have touched on the highlights.

We are looking forward to what 2011 will bring us and we hope it brings you success and prosperity beyond your imagination. 

Happy New Year from all of us at Polito Eppich Associates.

The recently enacted Small Business Jobs Act contained a provision that may have escaped the notice of taxpayers who own real property.  In particular, rental property owners making payments of $600 or more to service providers in course of earning rental income are required to provide Forms 1099 to the service providers. Therefore, aside from a tenant calling you in the middle of the night to have a plumber correct a clogged drain, you are required to send a Form 1099-MISC to the plumber (and IRS) if you pay him $600 or more over the calendar year. The provision is effective starting January 1, 2011; however, there are a few exceptions:

• Individuals who demonstrate that the requirement will create hardship. The IRS is directed to issue regulations, but have yet to do so.
• Individuals who receive rental income below the filing threshold “not more than a minimal amount”. Again, the IRS is directed to issue regulations on what constitutes the “minimal amount” but has yet to do so.
• Military personnel if substantially all their rental income comes from renting their principal residence on a temporary basis.

A way to prepare for this provision is to obtain a Form W-9 for each service provider you use during the year. This will reduce the hassle of trying to obtain the service providers taxpayer identification number, and to sift through providers who do not want to comply.  The penalty for noncompliance is $100 per 1099 not filed.  Please see a tax professional for any further information you may need on this requirement.

For taxpayers who die in 2010, when estate tax has been completely repealed, the basis of property acquired from a decedent will be the lesser of:

1)      Adjusted basis of the property in the hands of the decedent immediately prior to death.

2)      Fair market value as of the date of death, or

Each estate will receive $1,300,000 of basis step-up adjustment that can be applied to assets selected by the executor. 

In addition to the $1,300,000 basis step-up, there will be additional increases in asset value in an amount equal to the sum of the following:

1)      The decedents unused capital loss carry forward

2)      The decedents unused net operating loss carry forward

3)      Passive activity losses unused as of date of death

In addition to the above mentioned increases, the estate is entitled to another $3,000,000 of basis step-up for transfers to the surviving spouse.

The Internal Revenue Service is designing Form 8939 “Allocation of Increase in Basis for Property Received from a Decedent” to report the transfers of property taking place in 2010.  Form 8939 is not available yet, but it must be filed with the decedent’s final income tax return for 2010.

Here are 2 illustrations:

John, a single man, dies in with the following estate:

FMV (Fair Market Value)                              $ 8,000,000

Decedent’s Basis                                            2,000,000

Heir’s carryover Basis                                     2,000,000

Plus step-up                                                    1,300,000

Heir’s total basis                                            $ 3,300,000 

If heirs were to sell the assets right away, they will incur a gain of $4,700,000 (difference of 8,000,000 – 3,300,000). 

Joe, a married man, dies in 2010 with the following estate: 

FMV (Fair Market Value)                              $ 8,000,000

Decedent’s Basis                                            2,000,000

Plus spousal step up                                       3,000,000

Plus step-up                                                    1,300,000

Spouse’s total basis                                      $ 6,300,000

If spouse were to sell the assets in 2010 she will incur a gain of $1,700,000 (difference of 8,000,000 – 6,300,000).

These are simplified illustrations but when preparing the actual form 8939, you will need to allocate the step up in basis to the specific inherited assets.  See your tax professional to find out how this may affect you if you’ve lost a loved one in 2010.

IRS has issued proposed regulations which will eliminate the use of paper-based federal tax deposit coupons after 2010.

Under current regulations, taxpayers whose aggregate annual deposits exceed $200,000 must generally use electronic funds transfer (EFT) to make federal tax deposits. Depositors not currently required to use Electronic Federal Tax Payment System (EFTPS) for deposits may instead use the paper-based FTD coupon system to make a deposit by presenting a check and a federal tax deposit coupon to a bank teller at one of the financial institutions authorized as a government depository or a financial agent.

The proposed regulations require all deposits of the following federal taxes to be made via EFTPS beginning January 1, 2011:

-          Corporate income and corporate estimated taxes;

-          Unrelated business income taxes of tax exempt organizations;

-          Private foundation excise taxes;

-          Taxes withheld on nonresident aliens and foreign corporations;

-          Estimated taxes on certain trusts;

-          FICA taxes and withheld income taxes;

-          Nonpayroll taxes, including backup withholding;

-          Federal Unemployment Tax Act (FUTA) taxes; and

-          Excise taxes reported on Form 720, Quarterly Federal Excise Tax Return.

Some business paying a minimal amount of tax can, however, continue to make their payments with the related tax return, instead of using EFTPS.

The proposed regulations are expected to be finalized by the end of this year.

In early January we will send our business tax update letter to all business clients.  We will also post this update on our website.  If you are not already using the EFTPS system for tax deposits, watch for important information regarding this change in Treasury Department policy in our annual letter.

In my previous blog on this matter, I explained some tax exclusions available for debt forgiveness on a rental property used in trade or business.  Let me explain what qualifies as trade or business and then tell you what the tax impact is for rental properties that don’t qualify. Keep in mind, if you are insolvent, none of this matters.  Your insolvency will make all debt forgiveness a non taxable event. 

First, there is no definition provided by the IRS for the term “trade or business”.  But what’s new?  However, the courts have developed two definitional elements.  First, you have to be trying to make a profit.  You can’t buy a house with an outrageous mortgage and not collect enough rent to pay for it.   This commonly happens when parents buy a house for their kids and don’t charge the kids enough rent (and in some cases, no rent at all).  The second element relates to the scope of the activities.  If you only have one rental and collect net rents (meaning a management company handles all transactions and provides you with the monthly distribution of the net amount), then it is not truly a trade or business.  On the flip side, if you own 10 properties, you handle collecting rent, paying the expenses and managing the properties, that would likely qualify as a trade or business.  Now, making the determination for the situations in the middle… you’ll need to sit down with your tax preparer and look at the facts. 

So now you’ve determined that your rental property does NOT qualify as a trade or business.  What are the tax implications of the short sale or foreclosure? 

First determine if your loan is a recourse or nonrecourse loan:  A nonrecourse loan is one where the lender has no recourse against the borrower if the proceeds from foreclosure are less than the outstanding mortgage.

• Nonrecourse loan is almost always the case of the ORIGINAL loan you took out to acquire the property.  The loan is secured by the property and has never been refinanced.
• Recourse debt is usually the case when you refinanced the loan – regardless if you pulled out money or not. There are some limited cases in which a refinanced loan is not a recourse loan… you probably need a lawyer to figure it out for you. 

The easy one is nonrecourse debt.  The amount of nonrecourse debt forgiven in nonrecourse debt is NOT taxable cancelation of debt (COD) income.  Therefore, you only need to calculate the gain/loss on the property in which the total debt becomes the sales price in the case of a foreclosure. 

Example:

                Nonrecourse debt                                                         $300,000

                Basis (purchase less depreciation)                             (250,000)

                Gain                                                                           $  50,000

 The foreclosure is treated entirely as an exchange with gain.  There is no COD income, only gain or loss. 

Recourse debt is more difficult.  You must consider both cancelation of debt income and the income from disposing of the property.

• If the fair market value (FMV) of the property is higher than the basis, there is a gain on the disposition of the property.(Example 1)
• If the outstanding debt exceeds the FMV of the property, there is taxable cancelation of debt (COD) income.  In a foreclosure, the FMV of the property is always less than the debt forgiven. (you would have sold it if you could and saved your credit). (Example 2)

 Example 1:

                Recourse debt                                                                    $300,000

                FMV                                                                                    (275,000)

                COD income                                                                    $  25,000           

                FMV                                                                                     $275,000

                Basis                                                                                   (250,000)

                Gain                                                                                   $  25,000 

Example 2:

                Recourse debt                                                                    $300,000

                FMV                                                                                     (250,000)

                COD income                                                                     $  50,000  

                FMV                                                                                     $250,000

                Basis                                                                                    (275,000)

                Loss                                                                                  $  (25,000) 

As always, see a professional when considering your personal situation.

Did you know that it is technically illegal for a non profit entity to pay penalties and fines?  That’s right!  It’s even asked about on the annual tax return (form 990).  The Board of Directors is responsible for paying all penalties and fines imposed on a non profit.  This makes sense because the board is responsible for making sure the non profit is following all rules and laws and a fine or penalty would only be incurred if a rule or law is broken.  It’s up to the board members to determine who is paying and how much, and the IRS doesn’t care as long as the non profit is not paying it out of its funds. 

You might ask, “what if the non profit already paid the penalty?”  The board members should reimburse the charity.