To figure out taxable income for your business, you must choose a tax year. A tax year is an annual accounting period used for keeping records and reporting income and expenses. The tax year determines the accuracy with which your business's income is matched with the expenses that generate the income. All the income received or accrued within a single year is reported on that year's tax return, along with all the expenses paid or accrued.

The two tax year options are calendar year and fiscal year (including a 52-53-week tax year). Unless you are part of a partnership, S corporation or personal service corporation (PSC) and have a required tax year (required tax years for partnerships, S corporations and PSC’s will be discussed in next week’s blog posting), you can adopt a tax year by filing your first income tax return using that year. If you have already selected a tax year, but wish to change it, see the section below entitled “Changing Your Tax Year.”

Calendar Year - 12 consecutive months beginning on January 1 and ending on December 31

If you use the calendar year, you must maintain your books and records and report your income and expenses from January 1 through December 31 of each year on your tax return. You are required to adopt the calendar year if:

• You do not keep books or records
• You do not have a tax year
• Your present tax year does not qualify as a fiscal year
• You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations

Fiscal Year - 12 consecutive month period ending on the last day of any month except December 31

If you are allowed to adopt a fiscal year, you must maintain your books and records and report your income and expenses using the same tax year.

Schools generally report their financials using a fiscal year from July 1 to June 30. By using this time period, the schools’ accounting and tax records conclude at about the same time that the school year ends and students are off for the summer.

52-53-Week Tax Year - fiscal tax year that varies from 52 to 53 weeks, but does not need to end on the last day of a month

If your business has a specific, non-calendar business cycle, you may want to consider the 52-53-week tax year. A highly seasonal business, such as a restaurant in a summer resort area, would likely benefit from a fiscal year because it would provide a better measure of a how the business performs over its natural business cycle.

If you make this election, your 52-53-week tax year must always end on the same day of the week. For example, if you elect a tax year that always ends on the last Monday in March, your 2011 tax year will end on Monday, March 26, 2012.

To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return:

1. The month in which the new 52-53-week tax year ends
2. The day of the week on which the tax year always ends
3. The date the tax year ends. It can be either of the following dates on which the chosen day:
   • Last occurs in the month in (1) above or
   • Occurs nearest to the last day of the month in (1) above

Changing Your Tax Year: If you wish to switch from a calendar year to a fiscal year (or vice versa), you will need to obtain permission from the IRS by filing Form 1128, Application To Adopt, Change or Retain a Tax Year.

For more information on tax years, please go to http://www.irs.gov/pub/irs-pdf/p538.pdf.

This posting serves as part of the Education portion of the new Stone Carlie SC CARES Program. SC CARES further demonstrates Stone Carlie’s commitment to promoting Community Awareness, Responsibility, Education & Service to our clients and the community.

Circular 230 Compliance: Pursuant to Treasury regulations, any federal tax advice contained in this communication (including all constituent email correspondence, attachments, enclosures and/or exhibits) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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The 2012 due date for personal income tax filings will be Tuesday, April 17. The U.S. Internal Revenue Service is delaying the deadline because the traditional deadline for personal income taxes is April 15, but that will fall on a Sunday this year. Monday, April 16, is Emancipation Day, a D.C. holiday. Last year, tax day fell on Monday, April 18, 2011 because D.C. observed Emancipation Day on Friday, April 15.The IRS will begin accepting e-file returns on January 17.  The news release which overviews the IRS “kick off” of the 2012 tax filing season can be viewed at [IR-2012-1]

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Individuals and businesses that make contributions to charity should keep in mind some important tax law provisions that have taken effect in recent years.

Special Charitable Contributions for Certain IRA Owners

The Special Charitable Contributions for Certain IRA Owners provision is currently scheduled to expire at the end of 2011. This provision created in 2006 offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible; donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

Clothing and household items (furniture, furnishings, electronics, appliances and linen) donated to charity must be in good used condition or better to be deductible. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn’t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. It can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2011 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
• It’s important to keep good records and receipts. Full IRS Article
  

IRS.gov has Additional information on charitable giving including:

• Charities & Non-Profits
• Publication 526, Charitable Contributions.

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As we approach the New Year and turn our focus towards 2011, it’s hard to believe how quickly the past year has flown by… and how much of our unfinished to-do list has gone with it. With only a handful of days remaining this December, now is the perfect time to get organized and start off the New Year on the right foot.

With the increased scrutiny of nonprofits and a call for increased transparency by donors, it’s extremely important to have your accounting books in order and related policies in place. The following tasks are just a few of the items that you should consider. Addressing these, along with additional issues on your to-do list, will result in the year-end process being much less painful for you than in years past. Let’s start crossing these compliance issues off your list:

• Ensure that all accounting and company policies are in writing and approved by the board

• Review the allocation of expenses between program service, management and fundraising for proper reflection and provide guidance to the internal staff

• Document all meetings of the board and committees with the authority to act

• Gather all necessary data to file all required Form 1099s and subsequently file those required 1099s

• Identify all new programs and ascertain all costs and revenues are properly being captured

• Gather all necessary information required for grant reporting and filings

• Identify all family and business relationships amongst all insiders that may need to be disclosed

• Ascertain documentation is prepared to support classification of workers as independent contractors

• Update your employee manual to reflect all policy changes

As board members continue to step down and be replaced with new faces, it’s important to keep in mind the importance of board governance and the roles and responsibilities those board members have. A strong board who fully its organization and the respective roles of its members will only help an organization in the advancement of its mission.

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