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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I have a small S corporation; I am the sole shareholder. I contract with new home builders to make and install custom cabinets, shelving and other woodwork. Does my S corporation qualify for the manufacturer’s deduction?

   The facts indicate that the corporation would qualify for the deduction under Section 199. Income that qualifies for the deduction is called Qualified Production Activities Income and equals the amount of Domestic Production Gross Receipts (DPGR) reduced by expenses. DPGR is defined as including construction performed within the United States . Limitations apply based on wages paid and profitability. For 2007, 2008 and 2009 the Section 199 deduction percentage is 6%. The deduction may not exceed 50% of the W-2 wages paid to the corporation’s employees during the year.

2. I am receiving $200 per week as an auto allowance from my employer. I do not have to provide any documentation. Is there any way I can deduct my auto expenses?
   

   You may claim your business auto expenses as an employee business expense. The expense is subject to the 2% of AGI limitation. If your employer would consent to institute an accountable plan, where you would have to document the business use of the automobile, you would be able to exclude from income the reimbursement for the expense to the extent it is documented. If you incur auto expense in excess of the amount reimbursed, those expenses would be deductible (subject to the 2% of AGI limitation).

3. I dissolved my corporation two years ago. Late last year a suit was filed against the corporation for something that happened before the corporation was dissolved and I paid an amount in settlement. Do I have to reactivate the corporation to deduct the payment?
   

   You may claim the payment made for the defunct corporation, including any interest, as a capital loss. The payment of the corporate obligation is considered to be a capital contribution by you that adds to your basis in the corporation and as the corporation is defunct, it is considered to be a capital loss.

4. I am a sole proprietor and have been in business for six years. My wife has been my only employee. I now want to hire one or two additional employees. I also want to institute a medical reimbursement plan. Can I do so without covering the new workers?

   You may institute a medical reimbursement plan that provides coverage to all employees and their dependents (so that you can get coverage through your spouse) except those with less than three years of service; those under age 25; those who are part-time (less than 35 hours per week) or seasonal (less than 9 months per year); or those who are covered by a union plan or that are non-resident aliens. Credit may be given for past service, and the plan may be less restrictive (as long as that lesser restriction applies to everyone), if desired.

5. I formed an LLC to operate my landscaping business earlier this year and I am the sole member. I was looking at the SS-4 that I filed and noticed I checked the “Partnership” box. Does this mean that a Form 1065 has to be filed for the LLC?

   Filing a Form SS-4 does not obligate you to form a particular entity. As you formed a single member LLC, that LLC is a disregarded entity (unless you elect to be taxed as a corporation). You should report the business activity on Schedule C. If IRS questions the employer ID number (which is unlikely) explain the error in checking the box on Form SS-4.

6. I am single and have a traditional IRA and contribute the maximum amount possible each year. I now want to establish and fully fund a Roth IRA in addition to the traditional IRA. My AGI is less than $99,000. Can I fully fund both?

   The annual IRA funding limit is a single limit that applies to a traditional IRA or a Roth IRA. You may fully fund one or the other, or may fund a combination up to that single annual contribution limit ($4,000 if under age 50, or $5,000 if age 50 or over for 2007). You may not fund each one up to $4,000 (or $5,000).