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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Early fall is a great time to start planning for next year tax return, although; you may not be thinking about it right now. Organized records make preparing your return easier, but may also remind you of relevant transactions that may help you prepare a response if you receive an IRS notice, or substantiate items on your return if you are selected for an audit.

Few things the IRS wants individuals to know about recordkeeping.

1. In most cases, the IRS does not require individuals to keep records in any special manner. Keep any and all documents that may have an impact on your federal tax return and have a designated place for tax documents and receipts.

2. Individual taxpayers should keep the following records for at least three years:

• Bills 
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

Keep records relating to property for at least three years after you sell or otherwise dispose of the property, examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

3. If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications: 552 Recordkeeping for Individuals (PDF), Starting a Business and Keeping Records, Publication 583 (PDF), and, Travel, Entertainment, Gift, and Car Expenses Publication 463 (PDF). These publications are available at IRS’ website www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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In the first two blogs (April and August) of the three-part series, we have examined the basis qualifications for the R&D credit and discussed the level of documentation necessary to substantiate the R&D credit.  In this final installment, we will briefly examine the calculation methods used to calculate the credit and the various ways that the credit may be of value to your company. 

There are two methods utilized when calculating the R&D tax credit.  The Regular Research Credit (RRC) is calculated on the basis of increases in research activities and expenditures. It is not intended to reward static programs, but those that pursue innovation with continually increasing investment.  The regular method of calculating the credit uses a base period that can reach back as far as 1984 and can be a very complex calculation.  Depending on a taxpayer’s situation, the regular method may lead to results that can reward some taxpayers with a windfall and deny a credit to others. The Alternative Simplified Credit (ASC) is the other method of calculating the credit.  This alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline when compared with prior years.  The ASC uses the average Qualified Research Expenses (QREs) for the three taxable years preceding the credit determination year. If there were not any QREs in three preceding tax years, the ASC rate defaults to six percent (6%).  One caveat of the ASC is that the election to claim the ASC must be made on an original tax return and cannot be made retroactively on an amended return.  Furthermore, taxpayers who do not elect the reduced credit under either method must reduce the amount of otherwise allowable R&D expenses deducted on their tax return by the amount of the credit.

Taxpayers should carefully evaluate both the RRC and ASC methods to see which provides the best results.  In addition, the documentation required for each method is somewhat different, so it is important to evaluate the Company’s ability to produce applicable documents.  Typically, taxpayers may benefit from using the ASC method if the company has high base period research activity under the RRC, incomplete records pertaining to the  base period activity, a significant trend of gross receipt increases in recent years, or  a history of mergers, acquisitions, or dispositions.  As mentioned earlier, calculating and substantiating the RRC method is more complex than its alternative, specifically with regard to documenting the base period activity.  Electing the use of the ASC method reduces the administrative burden because it computed based on the three prior years without reference to a base period.  For some companies, the base period was so long ago that retrieving all the required documents is quite burdensome.    Another advantage of the ASC method is that taxpayers with decreasing QREs can still claim some amount of credit, whereas the RRC only results in credits when there is an increase in activity.

The R&D credit is subject to limitations of the general business credit.  The total amount of general business credits allowed is limited to 25% of the taxpayer’s net tax liability over $25,000.  If the taxpayer does not use all or part of the R&D credit, the remaining credit has a 20-year carryforward.  An additional opportunity may exist for taxpayers subject to Alternative Minimum Tax (AMT).  Depending on the situation, the taxpayer may elect out of bonus depreciation and be able to utilize the credit to offset its AMT liability.  Another opportunity exists in a number of states that have adopted alternative forms of R&D tax credits.  Lastly, R&D credits are fully transferrable when a company is sold allowing the purchasing company to obtain the selling company’s R&D credits.  This most likely adds value (and subsequently increases the price) in the event the company is sold.

This concludes our three part look at the R&D tax credit.  We hope this information was useful to you and that you saw how the R&D credit can be an extremely valuable, but complex tax planning instrument.

 If you have any questions on this article or would like help with your R&D tax credits, please contact Brett Rugen, CPA and member of the Stone Carlie Tax and Business Services group, 314-889-1100.


Blog Disclaimer: This article is for informational purposes only. The nature of the information is intended to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that if tax, R&D credit advice or other expert assistance is required, the services of competent professional person should be obtained.

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There are a variety of different types of trusts that can be used to achieve diverse financial and tax objectives. Below is a summary of four of the more commonly discussed trusts. Trusts have always been a great planning vehicle and can even provide opportunities for you to achieve non-financial objectives. It is important for you to convey all your objectives to your representatives when determining which trust is the best fit for you.

1. Revocable Living Trust - This is the most commonly used trust. Assets are transferred into the trust (simply by titling the asset in the trust's name). The creator of the trust, known as the Grantor, retains the power to alter, amend or even revoke the trust at any time. At death the trust becomes irrevocable allowing all the assets of the trust to transfer to the beneficiaries without a need for probate. Avoiding probate costs can lead to substantial savings, and not only for the wealthy.

2. Charitable Remainder Trust/Charitable Lead Trust - Feeling charitable? Many find that they want to give a substantial amount to charity but an outright donation isn't always the best solution. Charitable Remainder Trusts allow assets to be set-aside for the charity of the Grantor's choosing but allows the Grantor to receive the income from the asset(s) during his/her life. A Charitable Lead Trust is just the inverse, while the charity receives an annual income distribution; the underlying assets are eventually distributed to beneficiaries designated by the Grantor (usually family members.)

3. Bypass or Credit Shelter Trust - This trust is set up to protect trust property from estate tax. Since estate tax planning is the primary focus, these trusts are generally used by more wealthy individuals. The trust is funded at death and generally has a value equal to the decedent's applicable estate tax exclusion amount.

4. Crummy Trust - Where the Credit Shelter Trust is used for estate tax planning, the Crummy Trust is used for gift tax planning. The idea here is simple, gifts to children or grandchildren can be risky given their financial immaturity. However, making a gift to a trust that they will benefit from when they are older and more likely to make good financial decisions tends to be more desirable to the donor. The Crummy Trust is a vehicle used for precisely this purpose. The donor can make gifts to the trust and by allowing the donee a small window of "opportunity" to retrieve the money (know as Crummy letters), the gift then qualifies for the annual gift tax exclusion and the donor can rest easy knowing that the gifts are accumulating each year and will benefit the donees in the future

Which trust(s) work best for you and why?

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You may be liable for additional employment taxes if you incorrectly categorize an employee as an independent contractor.

Determining the Status of a Worker

While there is no set number of factors that can automatically classify a worker as an employee vs. an independent contractor, the IRS does offer “common law rules” regarding the degree of control an employer has over its employee or contract worker to determine their status. Facts examined to determine the degree of control fall into three categories:

1) Behavioral: How much control does the company have over how and what the worker does?

2) Financial: Who controls the financial aspects of the worker---how the worker is paid, whether expenses are reimbursed, who provides the supplies needed to complete the  work?

3) Type of Relationship: Does an employment contract exist? Are employee benefits offered? Is the work for an indefinite period or on a project basis?

To read more on how the IRS classifies employees and contractors visit the IRS website. If a conclusion regarding the status of your worker is still uncertain, you or the worker can file a Form SS-8 with the IRS to officially determine the worker’s status.

The Implications of a New Worker

Once you have determined the status of an employee or independent contractor, there are different taxes and forms required for each:

Independent Contractor

• Form W-9 to request worker’s Taxpayer Identification Number

• Form-1099 sent to worker, to report any payments made

• No withholding of pay or taxes on payments made

Employee

• Form W-2, Wage and Tax Statement, must be filed and sent to both the employee and the Social Security Administration

• Withhold federal income, social security, Medicare, and federal unemployment taxes

• Pay a matching amount of the social security and Medicare taxes

Complete details on proper tax protocol for employees can be found through the IRS website. For more information on all taxes impacting your business, visit the Stone Carlie blog.

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