Tax incentives for employing a spouse
A common approach used by many business owners is to hire their spouse as an official employee. Hiring your spouse as an official employee can have some disadvantages; however, there are least six tax benefits you can receive from taking this approach.
The following tax benefits may be applicable to you:
1. Retirement plan contributions deduction in the full amount. Within generous limits and if all tax law requirements have been met, contributions made on behalf of your spouse can be deducted by the company.
2. Taking a salary. If you are operating a C Corporation, any wages you pay to your spouse would have stayed with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you will save tax overall if your spouse draws a salary.
3. “Back to school” advantages. Education expenses acquired to improve an employee’s job skills are deductible by the company and tax-free to the employee. Therefore, your company can plan to send your spouse “back to school” on either a part-time or a full-time basis.
4. Travel expenses. In general, you cannot deduct the travel expenses attributable to your spouse if he or she accompanies you on a business trip. On the other hand, if your spouse is an authenticated company employee and is going for a valid business reason, his or her travel costs — including airfare, lodging and 50% of meal expenses — may be deducted.
5. Health insurance coverage. If you are currently paying more to cover your spouse under your company health insurance plan, hiring your spouse shifts the expense to your company. Typically, your company can deduct the full cost of the health insurance paid for your spouse, just as it can for other employees.
6. Other benefits. Similar to health insurance, your spouse is entitled to the same group-term life insurance coverage as other employees in the company. The first $50,000 of employer-paid group-term coverage is tax-free to an employee.
In addition, depending on your form of business, you may also be entitled to new tax breaks for hiring a spouse under the Hiring Incentives for Restoring Employment (HIRE) Act. Hiring your spouse may have other tax-related implications, which is why you should always consult a tax specialist. Seeking advice from a tax accountant professional, like Emil Estafanous, CPA can minimize your taxes. For additional details, please contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at 562-868-6333 and his accounting staff will be glad to discuss the particulars of your situation and your no-cost, no-obligation Free Consultation.
Tax Changes for Individuals
There are several changes affecting Alternative Minimum Tax for 2009.
Child-Related Tax Changes
Information on adoption benefits, child’s investment income, the definition of a qualifying child, and additional child tax credit.
Decreased Estimated Tax Payments for Qualified Individuals With Small Businesses
For 2009, qualified individuals with small businesses may be eligible to make smaller estimated tax payments.
Deduction for Credit or Debit Card Convenience Fees
If you pay your income tax (including estimated tax payments) by credit or debit card, you may be able to deduct convenience fees.
Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles
In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010.
Earned Income Credit
The earned income credit amounts have increased for 2009 and 2010.
Economic Recovery Payment
Information on new economic recovery payments and credits.
Education-Related Tax Changes
Information on education savings bond exclusion, hope and lifetime learning credits, tuition and fees deduction, and student loan interest deduction.
Health/Medical-Related Tax Changes
Information on Archer Medical Savings Accounts (MSAs), Health Savings Accounts(HSAs), and long-term care premiums.
Home/Residence-Related Tax Changes
Information on mortgage insurance premiums, residential energy credits, and sale of main home by employees of intelligence communities.
Income Averaging for Farmers and Fisherman
New rules apply for averaging farming and fishing income. Information on settlements from Exxon Valdez litigation.
Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
New limits on exclusion payments made under a long-term care insurance contract.
Increase in Personal Casualty and Theft Loss Limit
Generally, a personal casualty or theft loss must exceed $500 to be allowed for 2009. This is in addition to the 10% of AGI limit that generally applies to the net loss.
Itemized Deductions
2009
If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2009, this amount is increased to $166,800 ($83,400 if married filing separately). See the instructions for Schedule A (Form 1040), line 29, for more information on figuring the amount you can deduct.
New Rules for Children of Divorced or Separated Parents
For tax years beginning after July 2, 2008 (the 2009 calendar year for most taxpayers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332 or similar form.
Penalty for Failure to File Income Tax Return Increased
If you do not file your return by the due date (including extensions) you may have to pay a failure-to-file penalty. For income tax returns required to be filed after 2008, the failure-to-file penalty for returns filed more than 60 days after the due date (including extensions) is increased. In this situation, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
Personal Exemptions
The deduction amount and phaseout income levels have increased for 2009.
Qualified Transportation Fringe Benefits
Changes to the monthly exclusion for commuter highway vehicle transportation and transit passes and reimbursement for reasonable expenses of qualified bicycle commuting.
Residential Energy Credits
Information on residential energy credits.
Social Security and Medicare Taxes
2009 Changes
The maximum amount of wages subject to the social security tax for 2009 is $106,800. There is no limit on the amount of wages subject to the Medicare tax.
2010 Changes
The maximum amount of wages subject to the social security tax for 2010 is $106,800. There is no limit on the amount of wages subject to the Medicare tax.
Special Limitation Period for Retroactively Excluding Military Retirement Pay
If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive.
Standard Deduction Increased
The standard deduction increased.
Standard Mileage Rate
2009
For 2009, the standard mileage rate for the cost of operating your car for business use is 55 cents per mile.
Medical- and move-related mileage. For 2009, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 24 cents per mile.
Charitable-related mileage. For 2009, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
Unemployment Compensation
For any tax year beginning in 2009, each recipient of unemployment compensation can exclude from gross income up to $2,400 of the amount he or she received during the year.
Wage Threshold for Household Employees
The social security and Medicare wage threshold for household employees is…
IRS raises per diems for 2010
Keeping detailed records of employee travel expenses is a hassle. But there’s a way your business can simplify matters without any tax downside: Use the IRS-approved “per diem rates”. This way, employees don’t have to account for every last cup of coffee or cab ride. The reimbursements are tax-free to the employees up to certain prescribed limits.
Furthermore, your company can deduct the per-diem reimbursements in full. One exception: The usual 50% deduction limit on meal expenses still applies.
The per-diem allowances are actually the approved travel rates for U.S. government employees, but the IRS also allows companies to take advantage of them. However, the per diem rates cannot be used for an employee who owns more than 10% of the company.
Employers have a choice between two per diem rates. The first is based on the specific travel destination of the employee. The General Services Administration (GSA) sets the following each year:
- The per diem rates for the 48 states in the contiguous United States and the District of Columbia (the “CONUS” rates)
- The per diem rates for areas outside the contiguous United States such as Alaska, Hawaii, Puerto Rico and U.S. possessions (the “OCONUS” rates); and
- The per diem rates for areas in foreign countries.
The second method identifies each city as either a “high-cost” or “low-cost” area. The GSA adjusts the per diems for both areas each year. It recently announced the new rates and high-cost areas in effect for the government’s 2010 fiscal year.
Our expert staff can assist your firm in implementing the new per-diem rates. Keep in mind that the IRS often challenges deductions for business travel expenses, so it’s extremely important to meet all the requirements in this area, If you’re unsure of the obligations or opportunities, don’t hesitate to call our office at 562-868-6333 and we will be sure to streamline your recordkeeping procedures.
Alternative Motor Vehicle Credit
The Alternative Fuel Motor Vehicle Credit was enacted by the Energy Policy Act of 2005 and includes separate credits for four distinct categories of vehicles:
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Qualified Hybrid Vehicles,
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Qualified Fuel Cell Vehicles,
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Qualified Alternative Fuel Motor Vehicles (QAFMV) and Heavy Hybrids, and
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Advanced Lean-Burn Technology Vehicles.
The amount of the potential credit varies by type of vehicle and which of the four credits applies.
Internal Revenue Code Section 30B provides for the Alternative Motor Vehicle Credit. Notice 2006-9 provides procedures for manufacturers to certify passenger auto and light trucks as Qualified Hybrid Vehicles and Advance Lean Burn Vehicles and Notice 2007-46 provides procedures for heavy hybrid vehicles. Notice 2006-54 provides procedures for manufacturers to certify vehicles as Qualified Alternative Fuel Motor Vehicles (QAFMV). Notice 2008-33 provides procedures for manufacturers to certify Fuel Cell Vehicles.
Each of the four credits under the Alternative Motor Vehicle Credit is addressed individually below.
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Qualified Hybrid Vehicles
Hybrid vehicles are a combination of gasoline and electric engines. These vehicles have drive trains powered by both internal combustion engine and a rechargeable battery.
Generally for qualified hybrids, a taxpayer may rely on the manufacturer’s certification that a specific make, model and model year vehicle qualifies for the credit and the amount of the credit for which it qualifies. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advance lean burn technology motor vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
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A qualified fuel cell motor vehicle is a vehicle that is propelled by power derived from one or more cells which convert chemical energy directly into electricity.
The base amount of the new qualified fuel cell motor vehicle credit varies with the gross vehicle weight rating of the vehicle. Passenger automobiles and light trucks are eligible for an additional fuel economy amount that varies with the rated fuel economy of a qualifying vehicle. A list of qualifying cell vehicles is available.
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Qualified Alternative Fuel Motor Vehicles (QAFMV) and Heavy Hybrids
For alternative fueled light and heavy duty vehicles to meet the requirements of QAFMV, the vehicles may be either new, original equipment installation vehicles or prior use vehicles that are converted to use an alternative fuel by an aftermarket installer. Qualified alternative fuel includes compressed natural gas, liquefied natural gas, liquefied petroleum gas (propane) and hydrogen. The vehicles may also operate on certain mixed fuels such as liquefied propane gas or liquefied natural gas and gasoline.
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Advanced Lean-Burn Technology Vehicles
Advanced Lean-Burn Vehicles are passenger cars or light trucks with an internal combustion engine designed to operate primarily using more air than is necessary for complete combustion of the fuel. The vehicles must also incorporate direct fuel injection technology and achieve at least 125 percent of the 2002 model year city fuel economy rating.
Available credit amounts may vary and include a base credit amount based on fuel economy compared to the 2002 model year city fuel economy rating and an additional amount based on the vehicle’s lifetime fuel savings.
Tax angles on donated ‘clunkers’
The hugely 
popular cash-for-clunkers program ended Aug. 25, 2009. This new program enabled vehicle owners to realize a tax-free discount of up to $4,500 on a trade-in. But you can still qualify for big tax benefits if you donate your “clunker” to charity.
Instead of trading in your vehicle, simply give it away to a qualified charitable organization. This entitles you to a deduction on your ‘09 return.
The rules for charitable donations of vehicles were recently tightened by the American Jobs Creation Act of 2004. However, you may be able to qualify under a special exception.
Prior to 2004, you could generally deduct the fair market value (FMV) of a vehicle you donated to charity. But Congress became concerned about some over-aggressive valuations for beat-up jalopies. Under the 2004 law, the charitable deduction for a vehicle valued above $500 is generally limited to the amount the charity receives from a resale of the vehicle. The crackdown also applies to donations of boats and aircraft.
On the other hand, if (1) the charity “materially improves” the vehicle (e.g., it repairs dents or installs new features like a nav system) or (2) it “significantly uses” the vehicle for its tax-exempt purpose and properly certifies its use, you can still deduct the full FMV.
In addition, the regular limit on the donation value doesn’t apply if the charity sells the vehicle after 2004 at a price significantly below FMV, or gives it away, to a “needy individual.” To qualify under this exception, the charity must be dedicated to relieving the poor and distressed or the underprivileged that are in need of transportation.
Don’t miss out on this tax-saving opportunity. We can help you maximize the tax benefits for charitable donations of vehicles. Before you give away a clunker, call our office and we will provide guidance.
Produce big manufacturing deductions
The so-called “manufacturing deduction” isn’t just limited to companies that manufacture products in the traditional sense of the word. It’s available to a wider range of business operations than you might think.
What’s more, the maximum deduction is increasing to 9% of qualified production activity income (QPAI) in 2010. If your company is in the top 34% tax bracket, this effectively amounts to a 3.15% tax cut.
Here’s some background information. Under Section 199 of the tax code, a qualified domestic producer can currently deduct 6% of the lesser of its QPAI or its taxable income. The maximum deduction was initially doubled from 3% after 2006.
Production activities must be performed in whole, or in significant part, on U.S. soil. The annual deduction is limited to 50% of the W-2 wages.
Obviously, the deduction is fair game for traditional manufacturers of goods, but it also applies to farmers, fishermen, miners and a variety of businesses in the construction field. In fact, IRS regulations single out construction activities for special treatment. For instance, a qualified company doesn’t actually have to construct buildings. The deduction may be extended to certain taxpayers in the business of painting, drywalling and landscaping.
Similarly, the deduction is generally available to engineers and architects. As long as the services are related to construction, the costs qualify for the deduction, even if no actual construction takes place. The deduction may also be claimed by businesses conducting feasibility and environmental impact studies.
Depending on your situation, you may want to modify your business operation to qualify for the increased deduction in 2010. Don’t make any snap judgments if your business operation appears to fall outside the scope of a traditional manufacturing activity. We can make a definitive assessment of your situation. Please do not hesitate to call us and schedule a meeting for this purpose.
