Tax planning for year ending 2009 has become something of a business conundrum. The uncertainties stem from particular temporary tax breaks which are scheduled to expire in 2009. Whether or not these will be extended or whether an increase in capital rates and federal income tax is on the cards is a matter of speculation. These uncertainties make 2009 year end tax planning one of the most challenging in recent years.

Cirimelli, Pyle and Associates LLP is abreast of the difficulties faced by its clients and has put together a slew of tax planning thoughts for its clients. Cirimelli, Pyle and Associates is a Campbell, Ca, firm of Certified Public Accountants that services the accounts of a cross section of Bay Area businesses. For a free initial consultation, please call 408.879.9990 and do visit the website of this accounting firm at www.cpasllp.com.

In October 2009, Finance Minister Jim Flaherty announced amendments to the Income Tax Act that would put an end to the “tax planning schemes” that undermine the intent of Tax Free Savings Accounts (TFSA) as a savings vehicle.
These amendments addressed deliberate over-contributions, asset transfer transactions, prohibited investments and non-qualified investments.

Deliberate Over-Contributions

One of these “tax planning schemes” that was being widely used was the strategy of making deliberate over-contributions above the $5,000 annual contribution limit. Under the original rules these over-contributions would be subject a tax of 1% per month on the highest amount of excess contributions for the month.

Those who used this strategy were trying to generate a short-term rate of return on the deliberate over-contributions that would exceed the 1% per month penalty tax. The proposed amendments would make any income “reasonably attributable” to deliberate over-contributions, 100% taxable.

According to the backgrounder for the legislation “The Minister of National Revenue will maintain the discretion to waive or cancel all or part of the tax payable and the authority to adjust the taxpayer’s TFSA contribution room accordingly in appropriate circumstances.”

Asset Transfer Transactions

Asset transfer transactions (also known as swap transactions) consist of transfers of property (other than cash) for cash or other property between accounts. These transfers could for example be between an RRSP and another registered or non-registered account. Generally, these transactions are not considered a withdrawal and re-contribution, but instead are treated as a purchase and sale.

According to the government, when these asset transfer transactions are performed on a frequent basis in order to exploit small changes in asset value, they could potentially be used to shift value from a non-registered or RRSP account to a TFSA without paying tax, without any real intention of disposing of the assets.

The proposed amendments by the Ministry of Finance would prohibit asset transfer transactions between registered or non-registered accounts and TFSAs. According to the backgrounder on the subject “The prohibition would apply to transfers effected between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm’s length….Where these rules apply, TFSA amounts reasonably attributable to asset transfer transactions will be taxable at 100%.”

Prohibited Investments and Non-Qualified Investments

Similar to RRSPs, not all investments are eligible for being held in a TFSA account. Non-qualified investments include land and general partnership units among others. Examples of prohibited investments would be the shares of the capital stock of a corporation in which the holder has a significant (10% or greater) interest and investments in entities in which the holder does not deal at arm’s length.
Under the original TFSA rules, if a TFSA account held a non-qualified investment or prohibited investment, the holder of the TFSA would be subject to a tax equivalent to 50% of the fair market value of the property. If the investment is promptly disposed of from the account by the end of the year following the year in which the tax arose, the tax would be refundable to the holder.

While there are serious tax consequences for holding non-qualified or prohibited investments in a TFSA under the original rules, the investment income originating from those investments is not addressed in the rules and is subject to no penalty. This would result in a permanent increase in TFSA savings and contribution room as a result of abusing the rules.
To eliminate this loophole, the proposed amendments would consider any income attributable to prohibited investments to be an “advantage” and taxed at 100% as a result.

Tax Treatment of Withdrawals

Of note is the fact that withdrawal of amounts resulting from any of the above “tax planning schemes” including deliberate over-contributions, prohibited investments, non-qualified investments, or asset transfer transactions are not considered distributions for TFSA purposes and do not create additional TFSA contribution room.

In a letter published on December 8, 2009, the IRS provided “tax tips on end-of-year donations.”

These include the following tips:

1. IRA Charitable Rollover – While the required minimum distribution for 2009 has been waived, it still is permissible for an IRA owner to transfer up to $100,000 directly to a qualified charity.
2. Clothing and Household Items – Gifts of clothing or household items in “good used condition or better” will qualify for a deduction. If the value is over $500, a donor may obtain a qualified appraisal.
3. Cash Gifts – Gifts of money now require a bank record or written acknowledgement from the charity. The record must show the name of the charity, the date and the amount of the contribution. Credit card payments are also deductible and should show the name of the charity, the date of the gift and the date the transaction posted. For payroll deductions, a taxpayer should retain a pay stub or a Form W-2.
4. When Deductible – Donations are deductible when made. Checks mailed by December 31, 2009 that clear the bank are deductible in 2009.
5. Qualified Charity – Not all charities are qualified to receive deductible gifts. On www.IRS.gov, a donor can search for qualified charities in Publication 78 and determine whether a gift qualifies for a deduction. However, gifts to a church, synagogue, temple or mosque qualify even if the charity is not listed in Publication 78.
6. Itemized Deductions – If a taxpayer takes the standard deduction, there will be no added benefit from charitable gifts. In order to receive an additional charitable gift deduction, the taxpayer must itemize deductions.
7. Property Gift Records – For gifts of clothing, household items or other property, the charity should give a receipt with the name of the charity, date of the gift and a reasonable description of the property.
8. Car, Boat or RV Gifts – For vehicle gifts worth over $500 that are sold by the charity, the deduction is limited to the gross proceeds from the sale. The charity will provide IRS Form 1098-C to the donor. It must then be attached to the donor’s tax return.
9. Non-Cash Gifts Over $500 – If a donor makes non-cash gifts over $500, then IRS Form 8283 must be attached to the tax return.
10. Gifts of $250 or More – If a gift of property is valued at $250 or more, then the charity must provide a receipt to the donor. The donor must have the receipt when he or she files IRS Form 1040.

Video:  Year-End Tax Tips

Federal Law provides for additional incentive to individuals to invest in small businesses. Up to 75 percent of the gains from the sale of certain small business stock is tax exempt. This increased exemption is applicable only in the case of stock acquired between February 17, 2009 and January 1, 2011, and only in small businesses that qualify. For gains on stocks acquired earlier, the exclusion rate remains unchanged at 50 percent in most cases. 

Cirimelli, Pyle and Associates, a firm of Certified Public Accountants is conversant with all aspects of taxation and advises on the eligibility criteria of such businesses whose stock qualifies for exemption. This accounting firm of Campbell, Ca prepares tax returns and guides their clients on tax planning and appropriate tax shelters. For an initial free consultation it can be contacted on 408.879.9990. A listing of its many-faceted financial services may be viewed by clicking on www.cpasllp.com.

Author : , NATANIA

Penelitian ini bertujuan untuk mengetahui bagaimana penerapan perencanaan pajak didalam perolehan pengambilan keputusan perusahaan melalui leasing, tunai atau kredit dan alternatif pembiayaan manakah yang paling menguntungkan antara tunai, kredit dan leasing setelah adanya penerapan perencanaan pajak. Rancangan penelitian yang digunakan berupa studi kasus deskriptif dengan dua jenis data yaitu data kualitatif dan data kuantitatif. Data berasal dari sumber asli atau disebut data primer. Sumber data digolongkan menjadi sumber informasi internal (dari dalam perusahaan) dan eksternal (dari luar perusahaan). Alat yang digunakan untuk memperoleh data adalah daftar pertanyaan pedoman wawancara, sedangkan metode pengumpulan datanya adalah metode survey yaitu melalui interview atau wawancara secara langsung. Penelitian ini membuktikan bahwa alternatif pembiayaan melalui sewa guna usaha (leasing) merupakan alternatif yang paling menguntungkan karena penghematan pajak yang diperoleh perusahaan untuk alternatif ini lebih besar dibandingkan dengan alternatif pembiayaan melalui kredit bank dan pembiayaan secara tunai. Penelitian ini dilakukan pada PT “X” yang bergerak di bidang pengangkutan darat, pada tahun 2004.

Keyword : tax planning, tax saving, fixed assets, cash, bank loan, leasing

Sumber : http://repository.petra.ac.id/683/

Author : ANDRIANI, APRILLIA

Penelitian ini bertujuan untuk memberikan analisa tax planning pada PT. “X” untuk menentukan alternatif sumber pembiayaan dalam perolehan aktiva tetap, antara melalui pembelian secara tunai, pembelian secara kredit atau leasing, mana yang memberikan penghematan pajak yang paling besar. Semakin besar biaya pajak yang dapat dibebankan, maka semakin besar penghematan pajak yang diperoleh. Penelitian ini merupakan penelitian deskriptif, yaitu penelitian terhadap masalah atau peristiwa berupa fakta-fakta yang saat ini ada dalam perusahaan. Rancangan penelitiannya adalah studi kasus, yaitu pendekatan untuk meneliti masalah atau peristiwa yang terjadi dengan menganalisis satu kasus secara mendalam dan utuh. Tujuannya untuk memberikan analisa tax planning pada PT. “X” untuk menentukan alternatif sumber pembiayaan dalam perolehan aktiva tetap, antara melalui pembelian secara tunai, pembelian secara kredit atau leasing, mana yang memberikan penghematan pajak yang paling besar. Melalui penelitian ini diperoleh kesimpulan bahwa alternatif sumber pembiayaan melalui leasing memberikan penghematan pajak yang paling besar.

Keyword : tax planning, fixed asset

Sumber : http://repository.petra.ac.id/679/

Year-End Tax Planning for Small Business Owners

For 2009, there are plenty of year-end tax planning opportunities available to the small business owner.  Some new provisions help businesses that have been dramatically affected by the recession while others help businesses that have had very a profitable year.  Below is a general overview of several of the more important planning opportunities.

Bonus Depreciation:

Many companies used the bonus depreciation provision in 2008; however, due to the current economic conditions, business owners are much more restrained with regard to capital expenditures than in prior years.  Nick Parsons, one of the partners at our firm, recommends concentrating on capital purchases that are needed and will help generate more profit for the business rather than just purchasing for the sake of tax savings.  He also recommends looking at purchases that will need to be made in the next five to six months and accelerating those purchases if possible before year-end.  Even if the business had a poor year, bonus depreciation could produce a tax loss and actual tax refunds with the new net operating loss carryback rules (see below).

Bonus Depreciation details:

• Only available for NEW property, 20 year class life or less
• Provision is scheduled to expire after 2009
• Must be placed in service before year-end

Code Section 179 Depreciation:

Businesses with net taxable income are taking advantage of the new limits on 179 depreciation ($250k), which allow you to write-off the entire cost of the fixed asset within the year of purchase.  However, many businesses are looking at losses this year, so the bonus depreciation can be a better option.  Regardless, using the right mix of bonus and 179 depreciation can create a net operating loss that can be carried back five years under the new rules (see below).

One minor detail to keep in mind – unlike bonus depreciation, the property does not have to be new to qualify for 179 depreciation.

Vehicle Depreciation:

If a business is looking to buy a new vehicle in the next six months, accelerating the purchase before year-end could be very beneficial.  The luxury auto depreciation limits have been increased from $2,960 to $10,960 through 2009 thanks to bonus depreciation rules.  There are different rules for trucks, vans, and SUVs, but for a typical passenger car used more than 50% in business – this provides great tax savings.

Five Year Carryback of Net Operating Losses:

Many businesses affected by the recession have been able to make use of the expanded net operating loss carryback rules for the 2008 tax year, and many received substantial cash refunds that helped them with current cash flow problems.  Now the carryback rules have been extended for 2009 tax losses, which should bring some more immediate help.  However, the rules are a little more complicated this time around:

• For 2008, the expanded carryback was only applicable to businesses with gross receipts under $15 million.  The net operating loss could be carried back up to five years and there were no further complications.
• For 2009, the rule is expanded for all businesses, however, there are complications:
  • For businesses under the $15 million gross receipts limit, the 2009 NOL can be carried back up to 5 years even if the 2008 NOL was carried back under the prior rule.  The only difference is that for 2009, you can only use ½ of the taxable income in the fifth year.
  • For businesses over $15 million in gross receipts, they can use the extended NOL carryback for 2008 OR 2009, but not both years.  Also, like with small businesses, they can only use ½ of the taxable income in the fifth year.

Solo 401k Contributions / Profit – Sharing:

For small business owners that had a good year and are looking for tax deductions while putting away for retirement, the solo 401k is an excellent vehicle that many ignore because of the extra reporting requirements.  Small, family-owned businesses often use the SIMPLE IRA plan to put away up to $11,500 ($14,000 age 50 & older) under the 2009 limits.  However, given sufficient self-employment income, the same small business owner can put away up to $49,000 ($54,500 age 50 & older) using a solo 401k plan and also make the same contribution for the business owner’s spouse if they are involved in the business.  The are special requirements for the solo 401k, so it is definitely something you need to speak with a professional about before opening an account.  However, even if the solo 401k is not an option for you, there are other 401k plans that would still save you much more than with a SIMPLE IRA plan.

A Roth Conversion is the rollover of funds from your traditional IRA into a Roth. Most doctors, dentists, and many pre-retirees don’t qualify for Roth conversions, because of income limits, but in 2010 there will be no income limit. Generally, the amount of the rollover is added to your taxable income for the year but the tax bill can be paid over 2 years starting in 2010 through 2011.

365 Days to Fit: I went spinning today at 6:38pm. My calorie calculator tells me I burned 373 calories in 30 minutes. That’s a little bit more than walking. I feel great.  Spinning was invented by a world class cyclist from California named “Johnny G.” Goldberg, as a way for him to train for races.  I can see why. To be honest, this simple 30 minute workout was one of the toughest cardio workouts I’ve done.

A Roth Conversion is the rollover of funds from your traditional IRA into a Roth. Most doctors and many pre-retirees don’t qualify for Roth conversions, because of income limits, but in 2010 there will be no income limit. Generally, the amount of the rollover is added to your taxable income for the year but the tax bill can be paid over 2 years starting in 2010 through 2011.

365 Days to Fit: I went spinning today at 6:38pm. My calorie calculator tells me I burned 373 calories in 30 minutes. That’s a little bit more than walking. I feel great.  Spinning was invented by a world class cyclist from California named “Johnny G.” Goldberg, as a way for him to train for races.  I can see why. To be honest, this simple 30 minute workout was one of the toughest cardio workouts I’ve done.

Tools for Transition: A Roth Conversion is the rollover of funds from your traditional IRA into a Roth. Generally, the amount of the rollover is added to your taxable income for the year. You must qualify to do a Roth Conversion, and the decision can be based on various factors including your time to retirement. Doing it in a low tax year, such as in the year of a job change, can be a more tax efficient way to achieve the conversion objective.

Day 2: Spinning: I went spinning today at 6:38pm. My calorie calculator tells me I burned 373 calories in 30 minutes. That’s a little bit more than walking. I feel great.  Spinning was invented by a world class cyclist from California named “Johnny G.” Goldberg, as a way for him to train for races.  I can see why. To be honest, this simple 30 minute workout was one of the toughest cardio workouts I’ve done.

365 Days to Fit – A financial planner’s quest to get fit by doing 365 different 30 minute activities in 365 days.

Well, 2009 has flown by and it is time once again to start thinking about year-end tax planning and any opportunities available to lower your tax bill.  Whether you are have a complex business, investments, or just a simple individual tax return; you should take some time before the holidays get too busy to examine how things are looking for the year and look for any planning opportunities.

If you have not read the It’s Only Money column that was in the Sunday Oregonian entitled “Act Now to Save on 2009 Tax Bill”, make sure you check it out.  We had the opportunity to contribute to the small business section of the article, and it has some good information throughout.

There is a lot of ground to cover, but in Part 1 of this post I will concentrate on individual tax planning and opportunities related to your primary residence:

First-Time Home Buyer Credit Extension:

Most people are familiar with the existing first-time home buyer credit that was extended, but the new reduced credit for “long-time homeowners” is a great opportunity as well that some have not looked into.

• $6,500 credit ($3,250 married filing separately)
• Have to have owned and used the same principal residence for any 5 consecutive year period during the previous eight-year period ending with the date on which the new residence is purchased.
• Income phase-outs have been increased and start at $125k for single and $225k for joint returns.  For taxpayers near the phase-out limits, eligibility can be met with some good year-end tax planning.
• The extended date is 4/30/10; however, it is important that people realize that they just have to enter into a binding contract before 5/1/10 and close by 7/1/10.

I think that this will become popular for those looking to upgrade or downsize – especially after we get passed the holiday season.  However, one note of caution – if you are newly self-employed (within the last year or more), it is extremely to get a mortgage right now.  The new requirement is that you have to have two years of tax returns as a self-employed individual to prove the income.  If you have less than two years of self-employed returns, you may be looking at a serious road block keeping you from taking advantage of the new credit.

Residential Energy Property Credit:

This credit is 30 percent of the sum of expenditures for qualified energy efficiency improvements, including windows, furnaces, water heaters, heat pumps, and more, which are placed in service in 2009 and 2010, which is limited to $1,500 for 2009 and 2010.  The improvements must meet strict energy efficient standards, so taxpayers should do their homework on this one as a mistake could be costly.

Avoid an Unwelcome Surprise:

Lastly, if you are struggling financially due to a loss of a job or reduced income and are behind on mortgage payments and property tax on your primary residence, understand that this could change your 2009 taxes and you could be looking at an unwelcome surprise if you are significantly behind.  For many, interest and property taxes are very significant itemized deductions, so a few month’s worth of unpaid mortgage payments could really increase your tax liability.  It is not something you want to hear if you are in that situation, but it is something to be aware of, and if you can make a payment by the end of the year, it will help your tax situation.

Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let’s say you already give your children an allowance. You’re already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

In this season of holiday giving, many people begin to think how they might “give back” because of help they received from others that are so well off or have passed away so that they can never return the favor to them directly. If someone thinking along those lines plans to gift shares of stock to charity, they must act by year end. If it fits that person’s plans, it is a good strategy because, By gifting appreciated stock, they  can qualify for a potential income tax deduction, or by selling stock that has lost value and donating the proceeds, they can realize a loss to offset other gains.

In working up a gifting plan, “Santa” needs to complete any gift transfers to individuals by year-end. Not only will this make “Santa” feel good, but “Santa” will help reduce the value of his estate and future estate taxes that the reindeer and the elves will have to pay. Now, I know that “Santa” may not be a U.S. citizen, but if he were, he could transfer up to $13,000 per recipient in 2009 without incurring any federal gift tax. Also, “Santa” and “Mrs. Santa,” again if they happened to be U.S. citizens, together may gift up to $26,000 per elf or good little boy and/or girl they wanted to send this gift.

Santa also might want to talk to a financial advisor or tax advisor about how gifting through a 529 Plan can help reduce income or estate taxes. By making an accelerated gift through a 529 Plan, Mr. Claus can gift up to $65k ($130k for Mr. and Mrs. Claus together) per elf/reindeer/beneficiary.

If you have further questions about gifting strategies, you may reach us through the contact data on our website at www.thefisherlawoffice.com. If you are looking for someplace to send your gift list, I would research www.SantaClaus.com.

Good luck and best wishes for the season.

Randy Fisher

If someone is age 70 1/2 or older and considering a charitable gift, they should look to their IRA as a source of income. They can make a tax-free donation of up to $100,000 from their traditional or Roth IRA to a qualified charity. This opportunity expires at the end of the year, so someone so inclined should act now so the transfer can be completed before year-end.

Be sure to contact your tax advisor or financial planner for exact details. If you have further questions or would like a referral to a tax advisor or financial planner, you may reach us at the contact data on our website at www.theFisherLawOffice.com.

Good luck and good hunting.

Randy Fisher

Introduction to the L3C

To view the L3C Powerpoint, please click the link above.  For any information on forming an L3C or to provide comments or questions, please call Mr. Dinning at (757) 232-2619.  Thank you.

Income taxes are usually in an entrepreneur’s top five expense categories yet often receive only a fraction of the attention other expenses receive. A twice-a-year tax planning meeting with your CPA will cure that!

Every year it’s worth doing your end-of-year tax planning, but this year even more so due to recession-inspired income tax pain relievers being doled out by the federal government.

Here are some of the most common tax saving levers you have at your disposal:

• W-2 salary vs. shareholder distributions (S Corp)
• Retirement plan contributions
• Section 179 / accelerated depreciation
• NOLs from prior periods
• Accelerate expenses at year-end
• Defer revenues at year-end
• Spread taxable income over several years to reduce the dollars taxed at your highest brackets
• Inventory and Accounts Receivable write down to FMV
• Medical/health and college savings plans
• Taking stock losses to offset capital gains
• Etc.

So if your 2009/2010 tax plan isn’t in place yet, e-mail or call your CPA today – they want to help you!

Year-end tax planning is always a good idea. However, this year it is very important due to a volatile economy that may bring major tax changes as lawmakers confront the record deficit. Tax laws are constantly changes so please check with us before you make any major tax decisions.
Congress has just extended the First-Time Home-Buyer Tax Credit. The new rules took effect on November 6. The provision is a dollar for dollar tax credit of up to $8,000 for 10% of the cost of the home. It is available for purchases through July 1, 2010, if the buyer has a contract in place before May 1, 2010. The new law also authorizes a similar $6,500 credit for buyers who already own a home. There are phase-outs and limitations, so call us before you commit to the new purchase
If you fall into one of the following categories, you should come for a withholding check-up to ensure that you don’t have to write a big check this April.
• Are married and you both work
• Owed taxes when you filed last year and did not change your withholding
• Had a short sale or foreclosure, and / or
• Got married, divorced or became a widower this year.
A short tax planning session could save a big tax bill and penalties next year.
The IRS has $123.5 million in undelivered refunds. The IRS is looking for taxpayers who are due a total of $123.5 million from 107,831 refund checks that were returned by the U.S. Postal Service due to mailing address errors. Taxpayers can update their address, check the status of their refund, or initiate a refund trace with the “Where’s My Refund?” tool on www.irs.gov.
Please contact me with any questions or concerns you may have related to tax or financial matters. You can call me at (661) 253-0270 or e-mail steve@chegwin.com

Here are some year-end tips for dealing with retirement funds and retirement fund issues. You want to think these issues through in conjunction with a financial advisor, a tax accountant and an attorney. We offer them in the hopes that you can finish 2009 with a bang that carries over into 2010. They are as follows:

1. Anyone who owns a business which has a calendar tax year has until December 31, 2009 to adopt a qualified plan in order to deduct retirement contributions for 2009. If they miss this deadline, a SEP plan can be established and funded by the due date for filing the plan sponsor’s 2009 tax return (with extensions) – which, if that person is a sole proprietor, could be as late as October 15, 2010.

2. If someone is age 70 1/2 or older and has a Traditional, SEP or SIMPLE IRA, they don’t have to take Required Minimum Distributions (RMDs) for 2009 including the initial RMD which is due April 1, 2010.  They should consider how skipping a distribution this year may impact their 2010 distribution.

3. Everyone should explore the benefits of a Roth IRA. Tax law changes in 2010 will enable everyone to convert to a Roth IRA, which not only provides tax-deferred growth, but also tax-free income in retirement. Your Financial Advisor or Tax Advisor can provide appropriate analysis and discuss the rule changes.

4. Everyone should fully fund their IRA and/or company retirement accounts as soon as possible. Please consult your tax advisor to determine the deadline for contributing to a company retirement plan. Remember that everyone has until April 15, 2010 to fund their IRA for 2009.

Should you have any questions regarding these tips, or need a referral to a qualified financial planner or accountant, please call our office. You may reach us by checking out our website at www.theFisherLawOffice.com

Randy Fisher

Structuring Social Ventures: The L3C as a Non-Traditional Business Entity

By: B. Ray Dinning, JD, LLM (taxation)

December 7, 2009

The conundrum facing most social entrepreneurs is choosing between several imperfect options when it comes to structuring most social ventures as these ventures typically contain both for-profit and nonprofit elements and there is generally no single “all purpose” entity which completely addresses the myriad of issues in structuring a social venture. However, government, academia and the private sector are responding to this void in enacting new legislation and create new entities to address the needs of social entrepreneurs. The first of these new entities is the L3C or low income limited liability company.

Legislative History:

First enacted by Vermont (April 30, 2008), the L3C is rapidly gaining momentum as a social venture entity (my office is receiving calls on a weekly basis from people interested in setting up L3Cs). In 2009, several states have followed Vermont’s lead including: Michigan (January 15, 2009), Wyoming (February 26, 2009), Utah (March 23, 2009), Maine (effective September 12, 2009) and Illinois (signed August 4, 2009 and effective January 1, 2010) as well as the Crow Indian Nation and the Oglala Sioux Tribe. Reportedly, L3C legislation is pending in Georgia, Missouri, Montana, North Carolina, North Dakota, Oregon, Tennessee and Washington.

The L3C Generally: 

The L3C is a form of limited liability company (LLC) which possesses many of the same entity characteristics a typical LLC. For example, like a traditional LLC, the L3C is a for-profit business entity. Like a traditional LLC, the L3C offers a flexible ownership and management structure, whereby each member’s management responsibility, ownership interest, financial and tax interests may vary according to individual needs of the social entrepreneur or social venture. Like a traditional LLC, the L3C’s members enjoy limited liability for the actions and debts of the company. Finally, like a traditional LLC, the L3C is generally classified as a “pass-through entity” for federal tax purposes.

In fact, the L3C legislative structure is virtually identical to that of the traditional LLC. Vermont provides that “Organizing the L3C is the same as the regular LLC except that the L3C designation must be indicated when the articles of organization are filed and the name must include the words “L3C”.” See Vermont Secretary of State: Corporations Division.

However, there is one important distinction between the L3C and the LLC. Although both are profit-making entities, the primary purpose of the L3C is not to earn a profit, but to achieve a socially beneficial objective, with profit as a secondary goal. Whereas a traditional LLC may be organized and operated for any lawful business purpose, the L3C must be organized and operated at all times to satisfy the following requirements:

 • The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s). (For example, Vermont requires that the L3C must satisfy “one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986”).

• “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted to earn a profit). (Vermont adds that “the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property”).

 • The company must not be organized “to accomplish any political or legislative purposes.”

Finally, if the L3C ceases to satisfy any one of these requirements after its formation, it shall cease to be a L3C but shall continue to be a traditional limited liability company under state law.

L3C Requirements Intended to Assist Private Foundations in Funding L3Cs:

These three requirements, which must be specifically contained in the organizational documents of an L3C, are designed to mirror the requirements in the Internal Revenue Code governing the Program-Related Investments legislation for Private Foundations. Thus, the L3C was created and structured to meet the IRS requirements for Private Foundations and to set forth rules which would allow the L3C to qualify as a recipient of Program-Related Investment (hereinafter referred to as a “PRI”).

PRIs are allowable investments made by private foundations (such as the Bill Gates Foundation), usually into for-profit business ventures, to support a charitable project or activity. PRIs may involve significant risk, low return, or both, but these investments are made by foundations (despite the risks) because the PRIs are intended to achieve charitable purposes—and, as a result, receive special treatment under the federal tax law. Federal tax law generally requires private foundations to distribute at least five percent of their assets to social programs every year – or by making socially beneficial “program-related investments” of five percent or more of their assets every year in order to receive their tax benefits.

Prior to the L3C legislation, few private foundations chose to make PRIs, usually because of the difficulty, uncertainty  and expense of ensuring that a proposed investment will qualify as a PRI.  While the IRS has not ruled on whether investments to L3C’s will qualify as PRIs and has further warned that foundations may not rely on L3C status in determining whether or not an investment qualifies as a PRI, that guidance from the IRS will likely come in 2010.  Until such time, a private letter ruling is still required to “guarantee” that an investment by a private foundation in an L3C will qualify as a PRI.

New Financing Options with the L3C:

As a new, non-traditional business entity with both nonprofit and for-profit characteristics, the L3C can access the PRIs of private foundations to access billions of dollars of market-driven capital for social ventures designed to generate a social return on investment as well as a potential for a financial return on investment.  Because the L3C allows for a flexible ownership structure and it can have different classes of investors which may include: individuals, nonprofits, for-profits, and even governmental agencies, the L3C is the perfect vehicle for a social venture with both nonprofit and for-profit partners.

Because each of these “partners” in the L3C have different investment goals (social goals, financial goals and even public relations goals with various financial return requirements), then each of these partners in a social venture will likely be willing to assume different levels of financial risk. This is vitally important in the structure of the financing of a social venture – particularly when significant capital is needed in the project.

For example, in a recent Poverty Alleviation and Educational Social Venture that I structured in the hotel and tourism industry, three differing levels (or  tranches) of investment were involved in the social venture.  Thus, the L3C had three levels of investors to fund and finance the social venture. 

The first level (named the junior tier or equity tranche) is the capital that is the most at risk in the social venture.  Because the private foundation serves a social purpose with its PRI, this risky capital was provided by the private foundation in the form of PRI. Under this structure, the private foundation in the L3C has the least seniority or last claim on the assets of the social venture upon dissolution or termination and, based on the PRI discussion above, are willing to accept a lower rate of return on their investment. By allowing private foundations to absorb greater risk and receive lower returns, the first level or junior tier of investment from the private foundation provides the foundational capital of the L3C, strengthening its balance sheet and positioning it to attract additional capital from non-charitable individuals or financial investors.

In second level (intermediate tier or mezzanine tranche) of financing for the L3C social venture is designed for profit-seeking investors. This second level, mezzanine tranche was designed to attract socially-conscious individual investors whose were interested in “doing good and making money” and who were willing to forego market-rate financial returns and instead accept part of their return in the form of a social welfare return on investment (which has been referred to as the SROI or social return on investment).

The third level or senior tranche of capital in the tourism social venture was provided by investors that need to generate market rates of return and, as an ancillary benefit, are happy to invest in a project that meets a social need. With the PRI capital and the mezzanine tranche in place, the L3C was able to offer an attractive, market rate of return with a lower level of risk to institutional investors (e.g., banks, pension funds, investment banks and other traditional investors. Thus, the L3C’s investment structure was able to generate  substantial new funds to meet the financing needs of this tourism social venture.

General Tax Structure:

While L3Cs are specifically created under state law to further charitable purposes, L3Cs are not tax exempt charitable organizations. Thus, L3Cs are not exempt from paying federal and state taxes and investments in L3Cs are not tax-deductible. L3Cs, like traditional LLCs, are pass-through entities similar to partnerships. So, no federal or state income tax is payable by the L3C itself. Instead, all items of income, loss, deduction and expense are “passed through” the L3C to its individual members who are allocated these tax items in proportion to the members, and are reported on the members’ individual tax returns.

So, while L3Cs are intended to promote and further charitable purposes, the profits generated by the L3C are subject to taxation at the member level on the members individual tax returns. Tax-exempt nonprofits, however, will generally be able to receive profits from an L3C on a tax-free basis as long as the income is related to the charitable purposes of the nonprofit and the profits are used to further charitable purposes.

L3C Advantages in Structuring Social Ventures:

At the end of the day, the L3C is here to stay. While it may take state government, the IRS, private foundations, investors, social entrepreneurs and social ventures time to adjust to and adapt the L3C to its highest and best use, it is still an excellent step forward for structuring social ventures. To summarize, the basic advantages to using the L3C include (but are not limited to):

• The L3C is a defined for-profit entity organized under state laws which is established specifically to promote social ventures and to assist social entrepreneurs in providing a SROI or social return on investment;

• The L3C provides an excellent social joint venture entity for use in projects where there will be for-profit, nonprofit, individual, institutional and government partners where free market principles can apply unburdened by nonprofit governmental and IRS tax exempt organization regulations;

• The L3Cs financial structure allows for the flexible and tiered financing by promoting the creation of a salable product by the structured financial market of banks, investment banks and others;

• The L3C provides an investment vehicle for the PRIs of private foundations where the private foundations may buy ownership shares, make loans to, or otherwise financially invest with the L3C;

• The L3C is easy to set up, easy and flexible to operate and the set-up cost is minimized in comparison to other structural choices for entities and joint ventures;

• If the investment by the private foundation qualifies as a PRI then all or part of that investment will count towards the private foundation’s minimum payout requirement; and

 • Finally, the L3C has a flexible structure to promote the investment of private financing and capital to further a social purpose. Through the tiered financing approached discussed herein, the financial horizon of social ventures has been increased significantly.

Conclusion:

In conclusion, to a large extent, the field of social enterprise is still in its infancy. While social ventures and social entrepreneurship is growing rapidly, the economic success of this new sector on a significant scale is dependent on innovative, non-traditional legal structures which allow many parties to participate in social ventures. Furthermore, by allowing new, flexible financing structures, the L3C opens up financial markets to private foundations and investors who seek to align their own social values with their investment strategy, and who see social ventures as a means to this end. The legal structure of any social entrepreneur should therefore be driven by the financial and capital structure and business model it intends to pursue for its social venture, rather than some abstract notion of how a social enterprise “should” be structured. And, while there is in fact no single, correct way to structure a social venture from a legal point of view, the L3C is a formidable, potential tool to structuring social ventures. Of course, the market will ultimately determine if the L3C “works” best for them or not. At this early stage, only time will tell.

B Ray Dinning is a US attorney specializing in tax, mergers & acquisitions, social ventures, nonprofit joint ventures and corporate law.  Mr. Dinning assisted Professor Michael I. Sanders with the research and drafting of the authoritative legal text in this area called “Joint Ventures Involving Tax Exempt Organizations” by John Wiley & Sons in 1994 with later editions. To contact Mr. Dinning with comments or questions, please call (757) 232-2619.

Capital cost allowance (CCA) is a business expense that is used to reduce business income over time. It represents the cost of depreciating property that cannot be written off all in one year.

The 2009 budget replaced the CCA rate for investments in machinery and equipment acquired in 2010 and 2011 from 50% on a declining basis to a straight-line basis which results in depreciating these eligible assets at a quicker rate. The half-year rule, which restricts the CCA deduction to one-half the normal CCA rate in the year the assets are first available, will apply to this measure.

In addition, the 2009 budget proposes a temporary 100% CCA rate for eligible computers and software acquired after January 27, 2009 and before February 2011. The 100% CCA will not be subject to the half-year rule. As a result, business owners will be entitled to deduct the full cost of computers and software purchases between January 27, 2009 and February 2011. This makes it a great time to upgrade your computer systems.

As you take up a full-time job for the first time, you are subject to a tax range between zero per cent to 35 per cent.The social security tax and the Medicare tax will take 7.65 per cent of your salary up to $102,000 right from dollar one.Thereafter, 1.45 per cent of your tax will continue to go for Medicare.You are also subject to income tax by states depending on where you live.

Here are some valuable Tips

Expenses for hunting the job – if it is you first job; you cannot deduct the cost of looking out for a job.However, whenever you change your job thereafter, expenses like preparing resumes and travel expenses for job interviews are deductible.The only condition is, you should look out for a job in the same line.These costs can be deducted as miscellaneous expenses.If you want to claim these expenses, you can do so by itemizing and they should exceed two per cent of your adjusted gross income (AGI)Expenses for moving – If you have to move to get your first job, you can deduct the related moving expenses.These expenses can be claimed without itemizing also.The only condition is -your workplace should be at least 50 miles away from your residence.You can either deduct the cost of moving household goods on the basis of actual or claim 19¢ a mile if you have moved by your vehicle between January 1 and June 30, 2008.If you have moved thereafter, you can claim 27¢ a mile towards your expenses.Set your withholding correctly – This is the mistake majority of the workers make.Why nearly 100,000,000 taxpayers have to claim tax refunds every year?Because they allow too much withholding from their paycheck.When you commence your first , you will be asked to fill W4 form.This form will tell how much Federal income tax can be taken out of your check for IRS.The figure is based on your salary and the allowances you claim on your W4.You should read the instructions very carefully in order to include all the allowances which you are entitled to claim.This will cut down your withholding substantially.If you are commencing your in the mid of the year, you should request your boss to set your withholding based on your actual earning.This will make the calculations based on your actual earning rather than on one year basis.Naturally, this puts more money in your pockets.Signing up 401(k) – If the company you joined is offering 401(k) retirement plan, you should take it.Most of the firms offer matching contributions.You should contribute enough to get matching money from company contribution.If you are joining a traditional 401(k), the amount will go as pre-tax salary into the plan.That means if you are in a tax bracket of 25 per cent and contribute $1000, your home pay will drop by only $750 but you will have $1500 in your 401(k) account.If your company is offering Roth 401(k), it is still better for you to take.With this plan, you may be eligible for a special tax credit.This credit is in the range of $200 to $1000 depending on how much you put in your retirement plan.If your income is below $26,500 ($53,000 for married filing jointly) you can qualify for the credit.

A reimbursement account for the medical expenses – If you put money out of your salary in this account, you can use the money to pay your medical bills.The advantages: you need not pay income tax and social security on money put in this account.Paying your medical bills from this account can save up to 25 per cent as compared with the spending your after tax money.
Enjoy fringe benefits – Fringe benefits give you double benefit.Firstly your employer takes care all or part of the cost and the benefit comes tax-free.Suppose you are in 20 per cent bracket, you pay $200 tax on $1000 fringe benefit while you can earn $1333 for the items you buy with the after-tax dollars.You can use fringe benefit to cover many items like medical and dental insurance, free parking valued up to $220, transit passes value up to $115 for a month, company car and group term life insurance.
Stock options – This gives you an opportunity to buy the stock of your company at a discount. The incentive stock options (ISOs) give you an opportunity to buy stocks without paying any tax.However remember the alternative minimum tax (AMT).If you are hit by this deadly tax system, you need to pay tax on the benefit you get out of it – that is the difference between the market value and the value you paid for.You need to be very careful about these complicated tax provisions if stock options are offered to you in your employment package.

Discuss this with your financial advisor or tax accountant. If you have any questions regarding this strategy, or would like a referral to a financial planner to discuss this, please call our office.

Visit us at www.theFisherLawOffice.com for details on how to reach us.

Happy Holidays,

Randy Fisher