• Donna Beels
• 2008 Economic Stimulus Act
• Rental Real Estate Activity Compliance
• Cost Segregation
• Loans to Family Members
• Alternative minimum tax (AMT) "patch" passed by Congress

Donna Beels - Recognized as North Bay's 2008 "Top Forty Under 40" - May 2008

Donna Beels, 39
Partner Beels Soper LLP, Petaluma

After earning a bachelor's degree in accounting and a master's of taxation from Arizona State University, Donna Beels gained experience as a business adviser providing tax planning, financial issue analysis and auditing services and by applying generally accepted accounting principles to closely held firms and nonprofit organizations. In 2005, she launched a new public accounting firm in Petaluma with partner and fellow CPA William Soper and has seen 300 percent revenue growth in just two years. "My role involves developing and maintaining client relationships with the real estate developers and construction contractors we serve."

Most admired businessperson: "Oprah Winfrey. Not only is she a great business person, but she is also known for giving back to the community."

2008 Economic Stimulus Act - Business Tax Incentives

To help jumpstart the slowing U.S. economy, Congress has passed two valuable business tax breaks in the Economic Stimulus Act of 2008 . Although not as extensive as originally proposed, the business incentives are nonetheless very valuable with careful planning. The new law nearly doubles the amount of deductible Code Sec. 179 expensing for 2008 and also provides for bonus depreciation. The new law does not allow taxpayers to carry back net operating losses beyond the current limits. Many businesses lobbied hard for this treatment but Congress left it out. However, there is talk on Capitol Hill of a second stimulus bill, so there may be more business tax incentives later this year.

Small business expensing. Before the new law, a business could expense up to $128,000 of the cost of qualifying property in 2008. If the cost of qualified property placed in service during the year is more than $510,000, the ceiling for that business is reduced by the amount over the applicable limit. Under the new law, a business can expense up to $250,000 of the cost of qualifying property and the old $510,000 ceiling jumps to $800,000. These are some very generous changes. If you're thinking about making a purchase for your business, give us a call. We can help you maximize your tax savings under the new law.

The new law makes no changes to the general rules for the types of property that are eligible for expensing. Generally, the property must be tangible personal property, which is actively used in the taxpayer's business and for which a depreciation deduction would be allowed. The property must be used more than 50 percent for business and must be newly purchased property. The existing exception for computer software applies to the enhanced expensing amounts under the new law.

Bonus depreciation. The other incentive is bonus depreciation. The new law provides qualifying taxpayers 50 percent first-year bonus depreciation of the adjusted basis of qualifying property. This provision is substantial, providing American businesses with an estimate $44 billion in additional deductions in 2008. Even compared against the rebate checks $106 billion price tag, the new bonus depreciation is huge.

To be eligible to claim bonus depreciation, property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. The property generally must be purchased and placed in service during 2008. Original use of the property must begin with the taxpayer and must occur after December 31, 2007 and before January 1, 2009. There are exceptions for certain transportation property.

The new law also increases the Code Sec. 280F limitations on "luxury" auto depreciation to accommodate a modified version of the 50 percent bonus depreciation available to other "MACRS" property. The first-year limit on depreciation for passenger automobiles placed in service in 2008 is projected to be $2,960 for passenger vehicles and $3,160 for vans and trucks. The new law increases this limit to $8,000 if bonus depreciation is claimed for a qualifying vehicle placed in service in 2008 (for a maximum first-year depreciation of no more than $10,960 for autos and $11,160 for vans or trucks). If the vehicle is not predominantly used for business in a subsequent year, then bonus depreciation must be recaptured.

If you have any questions about the business tax breaks in the new law, please contact our office. Enhanced expensing and bonus depreciation really can make a difference in your tax savings. Moreover, because it's still early in the year, we can develop a tax strategy that uses maximizes your tax savings for 2008.

Rental Real Estate Activity Compliance

Rental real estate offers tremendous tax advantages and opportunity for tax planning. Taxpayers, such as you, can depreciate property far exceeding your actual investment, deduct interest on borrowed capital, exchange rather than sell properties to defer tax on gains, use installment sales to defer tax on sales, and profit from preferential rates on long-term capital gains. Most importantly, you can generate "positive cash flow," or monthly income, with depreciation deductions that turn the actual income into tax losses.

However, real estate income and loss is generally considered "passive" income and loss for tax purposes. Taxpayers generally cannot use "passive" losses to offset "ordinary" income from employment, self-employment, interest and dividends, or pensions and annuities. The rental real estate loss allowance and "real estate professional" status are two important exceptions to this rule. In addition, the tax consequences of renting out your vacation home depend upon the amount of time the home is rented and the amount of time you use the home for personal purposes.

As one exception to the passive loss rules, taxpayers with adjusted gross incomes of $150,000 or less can claim up to $25,000 in rental loss allowance from property they actively manage. Active management does not require regular, continuous, or substantial involvement. However, it does require that the taxpayer own at least 10% of the property and married taxpayers must file jointly.

The second exception allows real estate professionals not to treat their rental activity as a passive activity. Therefore, their losses are not limited to passive income. This exception requires material participation by the taxpayer which is demonstrated by meeting one of seven tests. These tests are complex and include the number of hours of participation and the facts and circumstances of the participation in the activity.

Vacation homes are taxed under one of three sets of rules depending on how long the homeowner rents the property. If you rent your vacation home for fewer than 15 days during the year, no rental income is includible in gross income. If you rent the property for 15 or more days during the tax year and it is used by you for the greater of (a) more than 14 days or (b) more than 10% of the number of days during the year for which the home is rented, the rental deductions are limited. Under this limitation the amount of the rental activity deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest and taxes.

If you have any questions as to how the rental real estate rules apply to your particular situation, please do not hesitate to call for an appointment. We can assist you in taking advantage of the available tax benefits and develop an overall tax plan.

Cost Segregation - February 2008

We would like to take this opportunity to describe a very important tax break approved by the IRS for owners of residential rental property and other types of buildings purchased or constructed after 1986. This tax break is called "cost segregation." The tax savings can be very substantial and realized immediately.

Most owners of residential rental property depreciate the entire cost of their building over 27.5 years. Owners of other types of buildings, such as offices, retail space, grocery stores, restaurants, warehouses, and manufacturing plants often depreciate the entire cost using a 39-year or 31.5-year depreciation period, depending upon the date of acquisition. Under IRS cost segregation guidelines, however, a significant portion of a building's cost can be depreciated over much shorter periods, usually five or seven years!

The cost segregation rules are complicated, but in brief, they allow a taxpayer to separately depreciate components of a building that are unrelated to its "operation and maintenance" over the shortened depreciation periods. In addition, these depreciation deductions are computed using an accelerated depreciation method (the "200 percent declining balance method") which allows costs to be recovered at twice the rate that applies under the "straight-line" method. The slower straight-line method is used to depreciate residential rental property and other types of buildings.

Many types of building components can qualify for the shortened depreciation period and accelerated depreciation method. It would be impossible to list them all, but common examples include molding, millwork, and other decorative elements, carpeting, wall coverings, partitions, window treatments, counters, cabinets, shelving, special lighting, specialized machinery and equipment (such as kitchen equipment), and the costs of plumbing and electrical allocable to such equipment. In addition, certain land improvements located outside of a building may be depreciated over 15 years. Land improvements include items such as landscaping, fences, sidewalks, curbs, parking lots, lighting, utilities, signs, swimming pools, tennis courts, and playgrounds. Depending upon the type of building, you can expect to deduct between 10 and 60 percent of its cost over the shortened recovery periods.

Please call our office to discuss how this service can benefit your company.

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Loans to Family Members - January 2008

If you want to lend money to a family member, you may think that the way you set up the loan is no one else's business, certainly not the IRS's. However, there may be tax ramifications to a family loan if you charge less than the going rate of interest for similar loans, or if you charge no interest at all. That's because you're treated as having made a gift to the borrower equal to the foregone interest (the interest you could have charged less the interest you actually charged, if any).

The worst-case scenario is an absolute disaster: If none of the exceptions applies, the tax law can transform the low- or no-interest family loan into the following series of events:

• You as lender are treated as having charged the full market interest rate on the loan,
• The family member who borrows from you is treated as having actually paid you market interest, or
• You are considered to have made a gift to the borrower equal to the foregone interest.

As a result, you might be required to pay income tax on phantom interest income. You also might be treated as having made a gift equal to the foregone interest. If your annual gifts to the borrower (including the foregone interest) don't exceed $12,000 ($24,000 if your spouse consents to join in the gift), however, there are no gift tax consequences.

Fortunately, you can completely avoid these tax problems if the principal balance of all of your loans (below-market rate or not) to the family-member borrower does not exceed $12,000. But this $12,000 exception does not apply to a below-market family loan if it is attributable to the purchase or carrying of income-producing assets. In other words, if you make a zero-interest loan to your son to enable him to buy an investment, this break does not apply.

In addition, special and on the whole very liberal rules apply to a below-market-interest family loan that doesn't exceed $100,000, as long as tax avoidance isn't one of the principal purposes of making the below-market loan. The amount of phantom interest income you're considered to have earned on the loan can't exceed the family-member borrower's net investment income. And if his or her net investment income doesn't exceed $1,000, you are not taxed on any phantom income at all. However, even though you avoid being taxed on phantom income, you are still treated as having made a gift of the foregone interest. The gift nonetheless can be sheltered from gift tax by the annual $12,000 per-donee gift-tax exclusion ($24,000, if the spouse consents to the gift), if you set the loan up in the right way. The best way to do that is to make the loan payable on demand. If you use a term loan (e.g., a loan payable over a set term of ten years), the amount of the gift takes into account the foregone interest over the life of the loan and could result in a gift in excess of the annual gift-tax exclusion.

We don't want to discourage you from making a bargain-rate loan to a family member, if that is what you want to do. We do want to steer you clear of a minefield of tax complications. Please call our office and we'll help you set up the loan in the right way.

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Alternative minimum tax (AMT) "patch" passed by Congress - January 2008

Congress has passed an alternative minimum tax (AMT) "patch." The patch and a host of other bills passed Congress just before lawmakers left Washington, D.C. in late December for their holiday recess.

AMT patch.

The patch is a temporary fix to a big problem. Nearly 40 years ago, Congress created the AMT so that a handful of very wealthy taxpayers would not avoid taxation. The idea worked well at the beginning but over time inflation has eroded the value of the dollar. That handful of very wealthy taxpayers has grown to be many millions. Even more taxpayers, especially taxpayers with household incomes of between $75,000 and $100,000, would have been liable for the AMT this year but for the patch. The Treasury Department predicted that without the patch, up to 25 million taxpayers would face an average tax increase of $2,000 for the 2007 tax year.

The patch prevents the AMT from spreading by giving taxpayers higher exemption amounts and allowing them to use most nonrefundable personal credits to offset AMT liability for the 2007 tax year. The 2007 AMT exemption amounts are $44,350 for single taxpayers and heads of household; $66,250 for married couples filing jointly; and $33,125 for married filing separately. These amounts are slightly higher than the 2006 exemption amounts, which is also good news for many taxpayers.

Calculating the AMT is far from simple. In fact, it is one of the most complicated provisions in the U.S. Tax Code. The patch is also very complex. Our office is ready to help you. If you have any questions about the patch and AMT liability, please give us a call today.

Foreclosure relief.

The housing boom in many areas of the country is in danger of becoming a housing bust. Problems in the lending industry, especially with so-called subprime mortgages, have contributed to the slide in the home sales and home values. Congress and the Bush Administration have proposed a variety of measures to help homeowners who are caught in the mortgage meltdown. One measure is in the recently-enacted Mortgage Forgiveness Debt Relief Act of 2007.

When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage and forgives all or part of the mortgage debt, the Tax Code treats the cancelled debt as taxable income to the taxpayer. The new law temporarily excludes from taxation discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and are incurred in the acquisition, construction or substantial improvement of the residence.

Let's take a look at an example. Cara's principal residence is subject to a $300,000 mortgage debt. Cara's creditor forecloses in 2008. The residence is sold for $240,000 in satisfaction of the debt later that year. Cara has $60,000 in income from the discharge of indebtedness. Before the new law, the $60,000 would have been includible in Cara's gross income. Now, it is exempt. The new law also addresses mortgage workouts. Sometimes, a mortgage workout or renegotiation may result in forgiveness of indebtedness income that would be taxable. The new law helps these taxpayers by giving them a full exclusion, too. The exclusion in the new law is temporary. Taxpayers have three years ...until December 31, 2009... to take advantage of the change. The exclusion is also retroactive to January 1, 2007.

If you have any questions about foreclosure relief, give our office a call. We'll explain the fine points of the new law and explore if it can benefit you. We'll also keep an eye on further developments to help taxpayers facing foreclosure and reforms for the lending industry when Congress returns to work after its holiday recess.

Mortgage insurance deduction.

In addition to foreclosure help, Congress also extended the itemized mortgage insurance deduction for three years. If you're unsure if your mortgage insurance qualifies, give our office a call. We'll let you know.

Home sale exclusion.

The new law may also help some recently-widowed individuals. The new law extends the time in which a surviving spouse may use the joint-filers' $500,000 home sale gain exclusion before being treated as a single individual who is entitled to $250,000 exclusion. As of January 1, 2008, the sale of a residence that had been jointly owned and occupied by the surviving spouse and the deceased spouse is entitled to the $500,000 exclusion if the sale occurs no later than two years after the death of the individual's spouse. Some special rules about use and occupancy also apply.

More tax acts.

As if the AMT patch and foreclosure help weren't enough last-minute tax legislation, Congress also passed a package of technical corrections to past tax laws, tax relief for volunteer emergency responders, an energy bill with some tax-related provisions, legislation to clarify the term of the IRS Commissioner, a bill to exclude memorial fund payments from gross income for the victims of the 2007 VirginiaTech tragedy, and an IRS budget for FY 2008.

Looking ahead.

Lawmakers still have a lot of tax legislation on their agenda when they return from their holiday recess. The House and the Senate have passed different versions of a military tax relief package. They also have passed different versions of a farm bill, which includes many farm-related tax breaks. Lawmakers are expected to iron-out the differences in both of these bills in early 2008.

Congress also may pass a package of extenders. These are popular but temporary tax breaks, such as the state and local sales tax deduction, the higher education tuition deduction and the teacher's classroom expense deduction. Congress could also revisit some of the consumer tax incentives that were dropped from the final energy bill, including extending some tax breaks for energy-efficient improvements to your home. There's also talk on Capitol Hill of holding hearings on abolishing the AMT. We'll be sure to keep you posted of all the important tax legislative developments in 2008.

As always, please do not hesitate to contact us if you have any questions about these new tax laws or pending bills. Meanwhile, we'll be watching for more developments to help you plan a tax strategy that meets your needs.

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