Income Tax Changes 2010

Source: http://www.money-zine.com/Financial-Planning/Tax-Shelter/Income-Tax-Changes-2010/

What better way to start the New Year then with a review of the income tax changes for 2010?  Due to the economic recession, there were not a lot of changes to the tax provisions in 2010.  That being said, we will outline changes to Social Security, standard deductions, exemptions, mileage rate deductions, earned income credits, Hope and Lifetime Learning tax credits, as well as changes to retirement savings accounts such as 401k plans, IRAs, and Roth plans.

Federal Income Tax Filing Deadline

The tax filing deadline for the tax year 2009 is April 15, 2010 - which falls on a Thursday.  In the remainder of this publication, we're going to be discussing the changes that became effective in the tax year 2010, which will become part of your income tax filing in 2011.

Social Security and Medicare

For 2010, the Medicare tax will remain at 1.45% while Social Security remains at 6.20%.  The wage limit, or Social Security maximum, remains at $106,800 - the same value as was in place during 2009.  The Cost of Living Adjustment (COLA) was 0.0% - a direct reflection of the slow growth we're experiencing in the U.S. economy.

Standard Deductions in 2010

According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns.  In 2010, there was only one change to the standard deductions - the head of household standard deduction went up by $50.  The deduction for all other taxpayers remained the same.  The standard deductions that apply in 2010 include:

• Single - $5,700
• Married filing separately - $5,700
• Head of household - $8,400
• Married taxpayers filing jointly / qualifying widow(er)s  - $11,400

Exemption Values

The amount you can deduct for each exemption you claim on your federal income taxes in 2010 did not increase from 2009.  The 2010 value of $3,650 is the same value of an exemption in 2009.  Here again, we saw no increase in 2010 and only a $250 increase over the last three years.

Mileage Deduction Rates

Studies funded by the IRS demonstrate that it's less expensive to drive a car in 2010.  And that means the standard mileage deduction rates are decreasing.  The following table outlines the mileage deduction rates for the tax year 2010:

Mileage Deduction Rates 2010

Category	Rate
Business Miles	50.0 cents per mile
Charitable Services	14.0 cents per mile
Medical Travel	16.5 cents per mile

2010 Increase to Earned Income Credit

The earned income credit applies to working taxpayers that have earned income that falls below certain thresholds.  The qualification threshold depends on the number of persons in each family.  The thresholds in 2010 to qualify for this credit include:

• No Children - earnings must be less than $13,460 or $18,470 if married filing jointly.
• One Child - earnings must be less than $35,535 or $40,545 if married filing jointly.
• Two Children - earnings must be less than $40,363 or $45,373 if married filing jointly.
• Three or More Children - earnings must be less than $43,352 or $48,362 if married filing jointly.

The credits themselves have also increase in 2010, with the maximum credits that can be received as indicated below:

• No Children - $457
• One Child - $3,050
• Two Children - $5,036
• Three or More Children - $5,666

Lifetime Learning and Hope Credits

In 2010, tax law changes also apply to the Hope Credit.  The maximum Hope Credit, available for the first two years of post-secondary education, has increased to $2,500.  This includes 100% of qualifying tuition and related expense not in excess of $2,000 plus 25% of those expenses that do not exceed $4,000.
 In 2010, the taxpayer's modified adjusted gross income will be used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits.  Credit reductions start for taxpayers with an AGI in excess of $80,000, or $160,000 for those filing joint returns for the Hope Credit.  The threshold for the Lifetime Learning Credit remains at $50,000, or $100,000 for those filing joint returns in 2010.

Contributions to Retirement Accounts

There was not a lot of good news in 2010 for those individuals looking to increase the rate of savings into their retirement accounts.  Contribution limits for 401k as well as 403b plans remained the same in 2010 at $16,500.  Catch up contributions also remained at $5,500 in 2010.  Contribution limits to SIMPLE retirement plans also remained at $11,500, as did the catch up contribution limit of $2,500.
The income limits for those willing to contribute to traditional IRAs as well as Roth IRA plans increased modestly in 2010.  The income phase-out threshold for Roth IRAs now starts at $167,000 for those filing joint returns - an increase of $1,000.  There was no change for taxpayers filing as head of household or single.
Finally, if you're covered by a retirement plan at work and you are considering contributing to a tax-deductible traditional IRA, then the 2010 income phase-out limits start at $89,000 for joint filers (same as 2009), and increases to $56,000 for those with a filing status of single or head of household.

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About the Author - Income Tax Changes 2010

Copyright © 2009 Money-Zine.com

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When are services subject to California sales tax?

 Source: http://www.calcpa.org/Content/25604.aspx

Q: I’m a tailor based in California. Since I provide a service, do I have to charge sales tax?

Because of your particular situation, there is no easy answer to this question. You may sometimes have to charge sales tax, while at other times you should not.
California law restricts the application of sales or use tax to transfers or consumption of tangible personal property or physical property other than real estate. Unlike many other states, California does not tax services unless they are an integral part of a taxable transfer of property. The law does not specifically name most services as exempt, but such activities are automatically excluded from the tax base because they are outside the definition of tangible personal property.
Two types of service activities still may be swept into the tax base, however. The first is any service that is so tied to the sale of property that it is considered a part of that sale and, thus, inseparable from the measure of the tax. Example: a taxable sale of machinery that the seller must calibrate as a condition of the sale. The calibration fee will be taxable even if the seller separates the charge.
The second taxable service is fabrication. Fabrication (manufacturing) is the labor involved in creating tangible personal property that is different in form or function from its component parts. This type of labor includes something as simple as drilling holes in a metal strap and bending the strap to make a bracket. The charge for drilling and bending would be taxable unless some other exemption applied.
The line between taxable fabrication and nontaxable repair labor can be hard to discern. For example, the alteration of new garments is taxable but the alteration of used clothing is exempt. Thus, if a person buys new clothing and takes it to a tailor to be altered, the tailor must charge sales tax on both the labor and the price of any materials provided. Reason: the alteration is regarded as a step in the creation of a new item, which is taxable fabrication. (See California Sales and Use Tax Regulation 1524(b)(1)(A).)
Conversely, if the same person buys the clothing, wears it, and then brings it to the same tailor for the same alteration, the tailor’s services will be regarded as exempt repair or restoration labor. The tax will only apply to the sale of any accompanying materials and supplies, and then only if either the retail value of the materials and supplies is separately stated on the bill or the value exceeds 10 percent of the tailor’s total charge. (California Sales and Use Tax Regulation 1524(b)(1)(B).)
Sales and use tax law is often assumed to be relatively simple and straightforward.
As you can see, that assumption may be hazardous to your financial health.


Dan Davis, CPA, CFE, is a partner with Associated Sales Tax Consultants in Sacramento. You can reach him at 888-369-1202 or ddavis@astc.com.

What can I deduct as an independent contractor?

Article Source: http://locumlife.modernmedicine.com/locumlife/article/articleDetail.jsp?id=176558&sk=&date=&pageID=1  Aug 1, 2005By: Dan Kobaly, EALocumLife This month, we will look at some of the different categories of tax deductions available to independent contractors. Even though each entity—sole proprietor, C-corporation, S-corporation, and Limited Liability Company (LLC)—is required to file a specific tax form, and there are some differences (especially at the state level), the rules for deductions are predominantly similar, particularly for a single-member or "closely held" entity. GENERAL RULES First, according to Internal Revenue Service (IRS) Publication 535, Business Expenses, "in order to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." Because of the broad scope of this definition, in audit, IRS generally only denies the most flagrant expenses—and more often attempts to differentiate and deny non-deductible personal expenses. However, even the business use percentage of an otherwise personal expense is also deductible (such as the portion of a vacation spent conducting business.) Also, IRS always looks at the individual "facts and circumstances" of a claimed business deduction to determine if there is a "preponderance of evidence" to support the use of the expense to reduce income. As a result, a given expense may be deductible for one business, but not another. IRS also requires documentary evidence of any expense over $75, such as receipts, bills, or cancelled checks. A diary or log is sufficient evidence for mileage deductions. Most independent contractor business deductions reduce net self-employment income—which reduces self-employment tax (15.2%), as well as federal tax (up to 35%) and state taxes. The few allowable personal deductions (1040 Schedule A) and employee unreimbursed employee expenses (1040 form 2106) only reduce federal and state taxes. TRAVEL EXPENSES If you maintain a permanent "tax home" that you return to on a regular basis to live and work, then you may deduct travel expenses between temporary assignments (less than 12 months). Any additional costs for your family would not be deductible. If you do not maintain a permanent home, then you are considered an "itinerant worker"— wherever you work is considered your tax home, and the travel expenses between assignments are not deductible. If your assignment is, or becomes permanent, then you may deduct some costs as personal moving expenses (on 1040 form 3903), but not as business expenses. Should your agency not provide reimbursement for travel (typically airline fares), hotel, rental car, or gas, you may deduct these out-of-pocket travel expenses. Additional items that can be deducted include fees for U-Hauls, packing supplies, storage, tolls, parking, and vehicle expenses such as mileage. VEHICLE EXPENSES These types of costs are deductible when traveling between temporary assignments (less than 12 months) and while on temporary assignment. They are not deductible for personal use, including commuting to and from a permanent job. There are two ways to deduct vehicle expenses—using either the business-use percentage of actual expenses or using the current federal mileage rate. Actual expenses include gas, maintenance, repairs, insurance, license, lease payments, and/or depreciation. The mileage rate for 2005 is 40.5 cents per mile; up from 37.5 cents for 2004, and includes all vehicle expenses except tolls and parking. TEMPORARY LIVING EXPENSES Generally, the largest deduction for locum tenens physicians with a permanent home is temporary living expenses while working away from their residences. If you maintain a permanent home, and return there on a regular basis to live and work, then you may deduct all duplicated out-of-pocket expenses while on temporary assignment—including housing, utilities, and half of your meals. As an alternative, you may use a daily meal per diem rate from IRS publication 1542, without receipts. However, keep in mind that you may not deduct the lodging per diem found in this publication, which is for employers to use for reimbursements.  Any deductions taken should be offset by reimbursements, stipends, or allowances. Reimbursements received on a dollar-for-dollar accounting program are not included as income to you and not deductible. In addition, any stipends or in-kind benefits you may receive on temporary assignment (such as a lodging stipend or apartment), that you would have been able to deduct had you paid for them, are tax-free to you. PROFESSIONAL EXPENSES All licensure expenses are deductible—including state license fees, DEA license fees, drug testing, and fingerprinting; as well as continuing education expenses and seminars. Also, any contractor paid liability insurance is deductible—such as malpractice insurance—if you purchase your own policy. Special-use clothing and equipment, such as scrubs, shoes, lab coats, and stethoscope, may be deducted, as well. Care and maintenance—from laundering to cleaning—also falls into this category, whether on temporary assignment or at home. Professional journals, subscriptions, and reference books are also deductible. The business-use percentage of Internet expenses and cost of any on-line research can be deducted, too. TELEPHONE EXPENSES You cannot deduct any charges for basic local telephone service for the first telephone line to your home, even if used for business, or required for on-call. However, you can deduct business long distance, any additional business line, and extra features for business use, such as call waiting. Additionally, answering service expenses are deductible. For cell phones, the cost of all billable business calls can be deducted. It also seems appropriate, though not audit-tested, to take a percentage of initial so-called "free" air minutes based on the business-use percentage of total minutes, as well as the cost of the phone if it—and its charges—are not covered by your staffing company. CAPITAL EQUIPMENT The purchase cost of business-use equipment with a useful life of more than one year ("capital equipment"), such as vehicles, computers, PDAs, furniture, cell phones, and office equipment is supposed to be spread over the life of the equipment (depreciation). However, the business owner may, under tax code section 179, elect to accelerate some portion of the depreciation into the year of purchase. This is available for up to $100,000 of capital equipment for 2005 through 2008; but is scheduled to drop back to the old limit of $25,000 for 2008. Depreciation has many pitfalls, especially since not all states follow federal guidelines, and should probably be left to a professional. HOME OFFICE Taking "home office" expenses for business conducted at home is risky due to the restrictions of defining such an entity and the red flag nature of deducting it. Fortunately, home office deductions at temporary assignments for locum tenens physicians is inconsistent with the deduction of temporary living expenses—since the entire cost of temporary lodging is already deductible. INSURANCE In addition to malpractice insurance and vehicle insurance (if using the actual expense method), independent contractors who are self-employed may currently deduct 100% of health insurance premiums paid on behalf of the owner, as well as his/her spouse and dependents. However, while the deduction reduces federal and state income taxes, it does not lower self-employment tax. Life insurance premiums, on the other hand, are a personal, non-deductible expense. NON-DEDUCTIBLES Other non-business expenses include personal income taxes (federal, state, and local—although state and local taxes may be taken as a personal deduction on 1040 schedule A), charitable contributions, and political contributions. The last word. While this discussion could not cover all possible deductible or non-deductible business expenses, any omissions hold little if any significance. For more information, explore http://www.irs.gov/. REFERENCES Internal Revenue Service. (2005, May). Per diem rates [IRS Publication 1542]. Washington, DC: Author.

Internal Revenue Service. (2004). Business expenses [IRS Publication 535]. Washington, DC: Author.
Internal Revenue Service. (2004). Tax guide for small businesses [IRS Publication 334]. Washington, DC: Author.
Internal Revenue Service. (2004). Travel, entertainment, gift, and car expenses [IRS Publication 463]. Washington, DC: Author.
Internal Revenue Service. (2004). Your federal income tax [IRS Publication 17]. Washington, DC: Author. Internal Revenue Service. (2004, December 6). Optional standard mileage rates, Rev. Proc. 2004–64, Internal Revenue Bulletin 2004-49 [p. 898].
The preceding discussion is general in nature, and should not be considered advice for any individual tax situation. You should consult with your personal tax planning professional for specific guidance relating to your unique circumstances.

Accounting 101 - Deferred Rent 78

 Article resource: http://hubpages.com/hub/Accounting-101-Deferred-Rent

Accounting for Deferred Rent

Note:  The following is from a series of accounting reference articles found on Big4Guru.com.
Deferred Rent
What is it?
The simplest way to understand deferred rent is to think of an example.  Let’s say you started a business and the first thing you did was sign a five-year lease for office space.  In an effort to sign you as a tenant, the landlord (aka “lessor”) offers you lower rent payments in the first year that “escalate” (i.e. go up) as the years progress.  To keep it simple, let’s say the rent schedule is this:
Year 1:   $1,000 / month = $12,000 / year
Year 2:   $1,250 / month = $15,000 / year
Year 3:   $1,500 / month = $18,000 / year
Year 4:   $1,750 / month = $21,000 / year
Year 5:   $2,000 / month = $24,000 / year
These amounts represent the actual cash that you will be paying each month.  When booking the journal entries for this, this will be the credit (either to cash or a payable).  The question is what is the debit?
ASC section 840-20-25-1 states the following:
Rent shall be charged to expense by lessees (reported as income by lessors) over the lease term as it becomes payable (receivable). If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.
You see, the FASB requires that rental expense be “recognized on a straight-line basis.”  This means that the same amount of expense must be recognized each month, regardless of the actual rent payment during the month.  Let’s calculate our monthly rent expense.
From the table above, we can easily compute that the total rent paid over the course of the lease is $90,000.  ($12k +$15k + $18k + $21k + $24k).  This figure, divided by the total months in the lease (60), gives us out straight-line rent expense:
Total Rent / Total Periods = Straight-Line Rent Expense per period
$90,000 / 60 months = $1,500 / month = $18,000 per year. 
We now have the debit in our journal entry.
With a debit to expense for one amount and a credit to cash for another amount, the plug goes to deferred rent.  Depending on the payment schedule, deferred rent can either be an asset or a liability.
In the case of a lease with increasing payments each year, as in our example, deferred rent is a liability.  The liability balance builds through the first two years when the expense exceeds the cash payments, levels off during year 3 when these amounts are equal, and then drops down to zero over the course of the final two years when rent expense is less than the rent payments.  The journal entries for each year are as follows:
Journal Entries – Year 1
Dr. Rent expense        1,500
       Cr. Deferred rent                         500
       Cr. Cash                                       1,000
Journal Entries – Year 2
Dr. Rent expense        1,500
       Cr. Deferred rent                         250
       Cr. Cash                                       1,250
Journal Entries – Year 3
Dr. Rent expense        1,500
       Cr. Cash                                       1,500
Journal Entries – Year 4
Dr. Rent expense        1,500
Dr. Deferred rent            250
       Cr. Cash                                       1,750
Journal Entries – Year 5
Dr. Rent expense        1,500
Dr. Deferred rent            500
       Cr. Cash                                       1,750

Business Meals & Entertainment Expenses

Article Source: http://www.taxpros-plus.com/travelandentertainment.html

Several months ago, I did an article regarding the deductibility of business travel, meals and entertainment.  In this article I would like to revisit some of these issues, as it has been brought to my attention that many businesses are not deducting as much for theses expenses as is allowed.  The percentage of deductibility for meals and entertainment is somewhat confusing and I am hoping that by giving businesses more details on these matters, it will increase their awareness, as well as their business expense deductions, in the future.

Do I need to keep receipts for all meals related to my business?

While it is a good idea to keep receipts and/or a journal documenting all meals and entertainment expenses, receipts are only required for meal expenses of $75 or more.  Documentation of entertainment and meal expenses should include the amount, date, place, people entertained, type of entertainment, business purpose, and business relationship, and notes on the business discussion which occurred immediately before, during or immediately after the meal.

The IRS only allows a 50% deductions for meals and entertainment.  Why do I have to keep such detailed documentation?

It's true that most business expenses for meals and entertainment are only deductible at 50%.  However, some of these expenses are fully deductible.  The documentation is necessary in the event of an audit.  Whether your expense is 50% or 100% deductible, you would hate to have a portion of these deductions disallowed because of lack of documentation.

I was not aware that any meals or entertainment expenses were 100% deductible.  How do I know the difference between a 50% and 100% deductible meal?

The Tax Code has three basic categories that apply to the 50% limitations.  They are:

1. Entertaining clients or customers.
2. Business travel away from home.
3. Attending business conventions, meetings or luncheons.

Chances are if your expense does not fit into one of these categories, it can be fully deducted.

What are some examples of expenses that are 100% deductible?

The following expenses would qualify for a full deduction:

1. Meals provided to employees related to social or recreational activities.  For instance, a company Christmas party, annual picnic, or retirement party would all be fully deductible provided that they include a nondiscriminatory class of employees.
2. Meals that are provided to employees for the convenience of the employer.  These could include meals provided due to short lunch periods, unavailability of nearby eating facilities, necessity of employees being available at all times for emergency phone calls, and meals furnished to food service employees during and immediately before or after their working hours.  Also, meals provided to employees immediately after working hours that would have been provided during working hours for a business purpose, except work duties prevented employees from eating during working hours are included in the 100% deductibility category.  
3. If a meal is provided to more than half of the employees for the employer's convenience, the employer can then deduct meals provided to all employees at 100%.
4. “De minimis” fringe benefits meals also qualify for the 100% deduction.  This includes meals that are provided infrequently or cost so little that it is not worth the time spent to fully account for them.  Examples would be an occasional meal or meal money provided to employees who work late hours or perform work-related duties outside the normal workday, or coffee and doughnuts. 
5. Under the de minimis rule, 100% deductibility may also be allowed for meals provided to “promote goodwill, boost morale, or attract prospective employees.”
6. Meals provided to several prospective clients at one time at which a marketing presentation is made are also 100% deductible.

I was not aware of the 100% deduction for these expenses and have expenses in past years that would qualify for the full deduction.  Can I still get credit for the remaining 50% deduction that wasn't taken?

Yes.  Provided you have adequate records to document such expenses, you can amend your tax returns for up to three prior years and claim the full deduction.  The dollar amount of the additional deduction will no doubt play a role in your decision to amend prior returns. 

And remember, documentation is the key.  The IRS is aware that many businesses do not keep adequate records for meals and entertainment expense, thus creating an audit target.

How can I be sure that I am taking the full allowable deduction on meals and entertainment expenses in the future?

The best way to assure yourself that you are taking these expenses to your fullest advantage is to learn the deduction categories well and keep adequate records documenting these expenses.  Also, teach your employees about the meals and entertainment deduction categories and how to keep records containing the necessary information.

How to file your Form 571-L / Business Property Statement (BPS)

What is a Form 571L Business Property Statement (BPS)

• A property tax form that is required for declaring business personal property (assets owned) as of 12:01 a.m. January 1st (Lien date)
• This is an annual filing that is required in each of the California counties where your business(es) is located.
• The 571L (BPS) form is used to declare cost information regarding supplies
• Business equipment and leasehold improvements for each business location.   (The cost information the business owner provides is used to assess and tax property in accordance with California state law)

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What is the "lien date" for property tax purposes?

• January 1st of every year
• Lien date is the date on which property becomes assessable
• The date property taxes for become a lien against a business property owner

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Who must file a BPS?

• Anyone who was sent a form by the Assessor's Office.
• Any business that owns business property (supplies, business equipment and leasehold improvements) having a total combined cost of $100,000 or more is required to file the form even if the Assessor does not request that you file one.

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What is business personal property?

All property used in the course of doing business that is not otherwise exempt.
Examples: (not limited to this list)

• Computers
• Manufacturing Equipment
• Office Furniture
• Copiers
• Fax Machines
• Lab Equipment
• Video Equipment
• Printing Equipment
• Shop Equipment
• Restaurant Equipment

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What equipment is not taxable or exempt?

• Business Inventory (equipment held for sale or rent)
• Application Software (examples: Microsoft Excel, Word)
• Licensed Vehicles (DMV licensed vehicles)

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What is the deadline for filing the BPS?

• The form is due on April 1st.
• The form is considered delinquent if filed in person after 5 p.m. on May 7th. (If mailed, the form must be postmarked May 7th) If May 7th falls on a weekend or a holiday, then the form is due by 5 p.m.on the next business day.

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Books and records you will need to file your BPS:

• California State Tax Returns
• Balance Sheet or General Ledger
• Fixed Asset Listing or Depreciation Schedule
• Income Statement or Profit & Loss Statement
• Purchase price of equipment (if purchased an existing business)

NOTE: Use records as of 12/31 of the year immediately preceding the filing year. For example, if filing a 2008 BPS, use records as of 12/31/07.

FDIC Insurance Coverage Basics

Article Source:  http://www.fdic.gov/deposit/deposits/insured/basics.html

The FDIC - short for the Federal Deposit Insurance Corporation - is an independent agency of the United States government. The FDIC protects depositors of insured banks located in the United States against the loss of their deposits if an insured bank fails.
Any person or entity can have FDIC insurance coverage in an insured bank. A person does not have to be a U.S. citizen or resident to have his or her deposits insured by the FDIC.
FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC began operation in 1934, no depositor has ever lost a penny of FDIC-insured deposits.
What does FDIC deposit insurance cover?

FDIC insurance covers all types of deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account (MMDA) or time deposit such as a certificate of deposit (CD).
FDIC insurance covers depositors' accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank's closing, up to the insurance limit.
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank.
The FDIC does not insure safe deposit boxes or their contents.
The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government.
How much insurance coverage does the FDIC provide?

The standard maximum deposit insurance amount is described as the “SMDIA” in FDIC regulations. The SMDIA is $250,000 per depositor, per insured bank, through December 31, 2013. On January 1, 2014, the SMDIA is scheduled to return to $100,000 per depositor, per insured bank, for all account ownership categories except Certain Retirement Accounts, which will remain at $250,000 permanently per depositor, per insured bank. ¹.
The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank. For instance, if a person has a checking account at Bank A and has a checking account at Bank B, both accounts would be insured separately up to the SMDIA. Funds deposited in separate branches of the same insured bank are not separately insured.
The FDIC provides separate insurance coverage for funds depositors may have in different categories of legal ownership. The FDIC refers to these different categories as “ownership categories.” This means that a bank customer who has multiple deposits may qualify for more than $250,000 in insurance coverage if the customer’s accounts are deposited in different ownership categories and the requirements for each ownership category are met.

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¹ In 2006, the U.S. Congress permanently increased the SMDIA for Certain Retirement Accounts to $250,000 per depositor, per insured bank.

GAAP Requirements for Nonpublic Companies New Views on ‘Big GAAP’ Versus ‘Little GAAP’

Article Source: http://www.nysscpa.org/cpajournal/2006/506/essentials/p40.htm

By Jeffrey S. Zanzig and Dale L. Flesher

MAY 2006 - The accounting profession has long struggled with the idea that the financial reporting needs of small, closely held businesses often differ from those required by large, publicly traded companies. In formulating generally accepted accounting principles (GAAP), the profession has primarily addressed the needs of a public corporation. This is partly attributable to the importance of ensuring the integrity of U.S. capital markets. Smaller, private organizations have generally been subject to the same reporting requirements as the public corporation. This article addresses the AICPA study regarding the subject of “Big GAAP” versus “Little GAAP,” issued by the Private Company Financial Reporting Task Force in February 2005.
The task force report points out that deficiencies exist in current GAAP’s ability to meet the financial reporting needs of nonpublic companies. A resolution subsequently passed by the governing Council of the AICPA on May 23, 2005, directs “AICPA management to work with the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB) to identify and implement a process that would evaluate, where appropriate, potential changes in recognition, measurement, and disclosure from current GAAP as applied by public companies.”
The profession recognizes that GAAP reporting must provide relevant information that is useful for the decision-making needs of those groups for whom the information is provided. For example, in 1974 the standards division of the AICPA performed a study of the application of GAAP for small or closely held businesses. In 2004, the AICPA’s Private Company Financial Reporting Task Force conducted a nationwide survey to determine how to address the continuing concern over differences in the reporting requirements of public and private companies. This article presents findings of the study regarding GAAP and its relevance in the reporting environment of private organizations.
Background
There are diverse perspectives on the subject of GAAP as applied to public and private companies.
Separate GAAP requirements. For many years, it has been proposed that the same accounting standards do not have to be required for both public and private companies. In the December 1972 Journal of Accountancy, two CPAs expressed frustration with GAAP requirements’ being applied to smaller organizations. Betty McGill, a small-firm practitioner, pointed out that local practitioners are aware that requiring smaller organizations to name a long list of noncompliance with GAAP can be so confusing to clients that the statements become meaningless and sometimes intolerable to the client. Peter Arnstein, a partner of a large regional firm, suggested that clients are reluctant to pay for services that they see as providing no value to them or to the public. Arnstein suggested that certain closely held companies should be exempt from GAAP requirements that primarily serve the readers of publicly held companies’ financial statements.
In a 1974 article discussing the necessity of duality in accounting standards for public and private organizations, CPA Journal editor Max Block stated that “the accounting standards should not have been made mandatory to public and private companies without exception. In some instances, later exemplified, they should have been made optional to private companies.” Later, in a 1977 article, Block makes use of the words of John C. (Sandy) Burton, SEC chief accountant from June 1972 to September 1976, to point out that public accounting is actually two professions. In one, where the primary relationship is between the accountant and the client, attestation is less important, because it really exists only with parties that have a direct relationship with the client, such as its bankers. The other profession also has a relationship with the client, but it primarily serves the interests of outsiders. Burton suggested that although a basic accounting model is appropriate for all preparers of financial statements, this is different from the need for specific detailed disclosures and comparability between financial statements. In referring to Burton’s statements, Block clarified his perspective that public corporations and nonpublic companies are actually more like two types of clients that should be sharply distinguished.
In 1976, Haim Falk, Bruce C. Gobdel, and James H. Naus published “Disclosure for Closely Held Corporations” (Journal of Accountancy, October 1976). They had surveyed commercial lending officers regarding their process of evaluating closely held companies and found the following factors to be of importance:

• Disclosures regarding balance sheet items tend to be important in evaluating a closely held company. This is in contrast to research indicating that analysts evaluating public companies find income-statement items such as earnings per share to be most important.
• Information regarding obligations such as contingent liabilities and commitments, leases, and long-term debt is important.
• The statement of changes in financial position is an important financial statement.
• The disclosure of accounting policies is important, particularly with regard to changes in accounting methods.
• Information such as earnings per share, price-level adjustments, and product-line reporting was found to be relatively unimportant.
• Commercial lending officers often encourage their customers to have audited financial statements.
• The lenders strongly believe that the accountant’s report for unaudited financial statements should disclose known departures from GAAP.

Jane E. Campbell, in “An Application of Protocol Analysis to the ‘Little GAAP’ Controversy” (Accounting Organizations and Society, vol. 9, No. 3/4, 1984), studied the process by which commercial bank loan officers evaluate financial information of small and closely held companies to see if the officers use certain GAAP requirements in extending credit to their customers. Campbell found little or no evidence that bank officers used earnings per share and deferred tax disclosures in reaching their decisions. In contrast, it appeared that capitalized lease information was useful to the loan officers. It should be kept in mind that SFAS 109 has since changed the reporting of deferred taxes. (The AICPA’s 2005 task force report points out that the concept of deferred income taxes for private companies is relevant to the decision-making process of the creditor/lender group).
Although much time has elapsed—and GAAP and the business environment have changed—since this research was conducted, it does provide the background necessary to appreciate the driving force behind the AICPA’s 2004 study.
Common GAAP requirements. In contrast to the preceding opinions supporting a separate GAAP for closely held businesses, James Naus, in “Practitioners Forum: Unaudited Financial Statements Revisited” (Journal of Accountancy, January 1974), took a position contrary to his coauthors, Betsy McGill and Peter Arnstein, and presented reasons for not allowing separate rules for public and private companies. First, Naus pointed out that allowing alternative treatments may weaken a CPA’s position in achieving fair presentation and full disclosure. Second, a private company may still interact with the public environment. For example, an organization may wish to compare itself with larger competitors or later become a public corporation. Naus implied that CPAs associated with nonpublic organizations would do better to influence GAAP in a way that would meet the reporting needs of all entities.
A compromise position. In the 1970s, the AICPA’s accounting standards division studied the application of GAAP to small and closely held businesses. As explained by Charles Chazen and Benjamin Benson in “Fitting GAAP to Smaller Businesses” (Journal of Accountancy, February 1978), in reporting its findings the committee distinguished between two sets of principles. First are principles that are used in the measurement process. The committee believed that this process should not be affected by the nature of the user, because confusion would result from similar transactions’ being reported on an inconsistent basis. Second are principles that regulate disclosure practices. The committee supported the idea that particular disclosures may depend upon the needs of the user or on other factors.
A flickering interest in separate GAAP requirements. In the 1970s, the opposing perspectives described above received significant attention that led to a comprehensive study, supported by FASB, to provide detailed empirical data to consider the possibility of having different accounting principles govern reporting by public and by private companies. The statistics in the study, “Financial Reporting by Private Companies: Analysis and Diagnosis” (completed in 1983; principal researcher A. Rashad Abdel-Khalik), indicated that although accountants believed that a separate GAAP would be beneficial, bankers found GAAP-based statements useful for decision making and favored the continued reliance of all companies on one set of GAAP. No consistent opinion was found among managers. In addition, in 1983 FASB published a special report which found that most lenders and other creditors feel “that their financial information needs and decision making practices are essentially the same for private as for public companies.”
This temporarily settled the issue until 1995, when the AICPA’s Private Companies Practice Executive Committee (PCPEC) concluded that standards overload was one of the most significant concerns of members practicing in small firms. The issue of separate GAAP for private companies was again rejected, however, when it was decided that allowing a new basic accounting method would only contribute to the standards overload problem. Therefore, in 1996 the AICPA’s “Report of the Private Companies Practice Section Special Task Force on Standards Overload” recommended that the best approach would be to have “the Financial Accounting Foundation (FAF) make a concerted effort to recruit and select trustees, FASB board members, and FASB staff persons who have experience with and understanding of the needs of small non-public entities.” In fact, The CPA Journal had reported that in 1989 the Private Companies Practice Section (PCPS) of the AICPA Division for CPA Firms had promoted other comprehensive bases of accounting (OCBOA) as an alternative for small businesses to meet financial reporting needs in certain situations, but not as an alternative form of GAAP. After the turn of the century, the AICPA noted that no in-depth study of the issue had been conducted in recent years. This concern led to the following study.
Private Company Financial Reporting Task Force Study
The AICPA’s Private Company Financial Reporting Task Force began comprehensive research in early 2004 to consider whether the general-purpose financial statements of private companies, prepared in accordance with GAAP, meet the financial reporting needs of constituents of that reporting, as well as whether the cost of providing GAAP financial statements is justified compared with the benefits they provide to private-company constituents.
GAAP requirements. One survey question presented 12 GAAP requirements and asked respondents to rate the requirements in regard to relevance or decision usefulness. The following GAAP requirements were included in the survey:

• Accrual basis accounting
• Cash flow statement
• Classification of liabilities and equity (e.g., mandatory redeemable financial instruments, such as ownership buyout agreements as addressed in SFAS 150)
• Comprehensive income measurement (e.g., items excluded from the income statement)
• Deferred income taxes (e.g., deferred tax assets and liabilities)
• Fair-value basis of measuring assets and liabilities (e.g., as compared with historical-cost measurement)
• Guarantees (e.g., recognizing and measuring their fair value)
• Intangibles (e.g., goodwill accounting)
• Leases (e.g., capitalized versus operating)
• Postretirement and retirement plans (e.g., pensions)
• Share-based payments (FASB’s current proposal allows private companies to use the intrinsic-value method instead of the fair-value method for determining compensation expense related to stock options)
• Variable-interest entities (e.g., the need to consolidate entities if certain conditions exist).

Survey participants. The respondents were separated into three groups: owners/managers, practitioners, and external stakeholders. Respondents were further broken down by the size of the company (by revenues), the number of partners, and the type of stakeholder (creditor/lender, investor/venture capital, surety/bonding).
Responses were received from 3,709 individuals. The discussion uses a classification scheme based on the mean response on each GAAP requirement for the respondent categories. Subcategory information for respondents is presented only where there is inconsistency in the mean score rating for the overall respondent group.
Basic measurement principles. The respondents were permitted to rate each of the study’s 12 GAAP requirements on a scale of low (1), medium (2), or high (3). Respondents were also given the option of indicating either that the requirement did not apply to them or that they did not know.
Three GAAP requirements received a mean score greater than 2.0 from each of the three groups: accrual basis of accounting, cash flow statement, and classification of liabilities and equity. The consistently high score for these items indicates that they are perceived as important to relevance/decision usefulness. In accordance with the previously described recommendation of the AICPA’s accounting standards division, the authors propose that these items be included as part of principles used in the measurement process in order for financial statements to comply with GAAP (public or private organizations). In other words, they are not to be considered optional requirements when a GAAP presentation is the intent of the information provider.
Value-added service unrecognized by practitioners. Exhibit 1 identifies the GAAP requirements which all groups of external stakeholders and some owners/managers rated high on relevance/decision usefulness. Practitioners, however, scored these requirements as medium or low. Although the results show that some owners/managers also rated the requirements as low, overall the requirements provide perceived value that should receive further evaluation. Future research is needed to determine the role that organizational size and possibly other factors play in determining the value of specific GAAP requirements for private companies.
It is possible that practitioners view comprehensive income measurement and fair-value measurement of assets and liabilities as unnecessary requirements for private companies. It does appear, however, that this information is often something that external stakeholders desire and that some owners/managers may be willing to pay to have provided.
Demonstrate value or discontinue. The information shown in Exhibit 2 identifies GAAP requirements that external stakeholders and owners/managers scored as medium or low on relevance/decision usefulness. Practitioners’ ratings are somewhat mixed, except for the high value assigned to leases. Some practitioners, however, rated each of the Exhibit 2 requirements at the high end of the scale.
This is not to suggest that these GAAP requirements are of no value in providing appropriate financial reporting for private companies. If the profession wishes to continue these requirements, however, owners/managers and stakeholders should be educated as to their value. With the exception of leases, not even practitioners are in agreement on the value of these requirements, because practitioners in different-sized firms evaluated the relevance/decision usefulness at varying levels.
Educate owners and managers. The information shown in Exhibit 3 identifies GAAP requirements that some external stakeholders and practitioners ranked highly. Owners/managers, however, scored the requirements as medium or low. Although both practitioners and external stakeholders were mixed in their evaluation of these requirements, the external stakeholder groups of creditor/lender and surety/bonding both rated the requirements on the high end of the scale. Also interesting is that firm size was directly correlated with practitioners’ rating assigned to both deferred income taxes and guarantees.
Because the purpose of financial reporting is to satisfy the needs of decision makers with capital, owners/managers should be shown the value that certain external stakeholders place on financial information. Given the mixed results for practitioners, accountants may need to further evaluate the value of the Exhibit 3 requirements to their clients.
Consider discontinuing the requirement. The mean scores for the GAAP requirement shown in Exhibit 4 are medium to low on relevance/decision usefulness for all three groups of respondents. If information about share-based payments is not perceived to add value to private-company financial reporting, then this area might not be relevant for private companies. (Of course, some may argue that it is not relevant for public companies either.)
Confronting the Inadequacy of a Single GAAP
The AICPA task force concluded that most of the constituencies in the 2004 study are of the opinion that it would be useful if the underlying accounting for public versus nonpublic (private) companies were different in certain situations. It found that some of the GAAP requirements for public companies studied lack relevance/decision usefulness for private companies. In addition, the task force found that, although respondents rated certain GAAP requirements as low on decision/relevance usefulness, respondents appear to believe that the benefits of complying with GAAP outweigh the costs. This apparent conflict may be explained by the favorable ratings given the overall value of GAAP.
The task force also concluded that allowing GAAP exceptions and other bases of accounting is not an appropriate response to the unique needs of private-company financial reporting. The task force believes that such an approach would erode the overall recognized value of GAAP, while other bases of accounting may not adequately serve the needs of private companies.
In essence, the task force recommends that a recognized set of standards be established as GAAP for private companies. Although the task force has not attempted to determine the structure of such an arrangement, it has suggested that the framework include the following:

• Changing the composition of FASB and the FAF to be more representative of private-company constituents; or
• Increasing private-company constituents’ representation on the FAF and establishing a new private-company GAAP standards-setting board under the FAF that would address only the needs of these constituents; or
• Creating a new private-company GAAP standards-setting body outside the FAF.

Perhaps the creation of the Public Company Accounting Oversight Board (PCAOB), with its responsibility for establishing separate auditing standards for public companies, has renewed interest in the differences between financial reporting for public and for private companies The 2004 study conducted by the AICPA’s Private Company Financial Reporting Task Force clearly points out the inadequacy of having a single set of GAAP that is geared to public companies. Both public and private companies have unique and important reporting environments that can best be addressed by having GAAP applicable to what is truly useful to the parties using the information.
As eloquently stated by FASB Chairman Robert Herz in 2005: “Private companies are a vital force in the nation’s economy and it is, therefore, critical that their financial reporting be conceptually sound, cost effective, and provide relevant, reliable and useful information.” This does not mean that there should be two sets of GAAP requirements that do not share some common components. The information drawn from the task force study provides a good starting place for identifying the beginning principles of GAAP for private companies.

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Jeffrey S. Zanzig, PhD, CPA, is an assistant professor of accounting at the College of Commerce and Business Administration of Jacksonville State University, Jacksonville, Ala.
Dale L. Flesher, PhD, CPA, is associate dean of the Patterson School of Accountancy of the University of Mississippi, University, Miss.

 

How to Deal with Bill of Exchange

Article Source:  http://churmura.com/business/finance/how-to-deal-with-bill-of-exchange/33057/
The holder of the Bill of Exchange has following options to deal with the bill:
1. Retain the bill till the date of maturity;
2. Discount the bill with the bank;
3. Endorse the bill in favour of a creditor ; and
4. Send the bill for collection.
1. When the Bill is Retained Till the Date of Maturity
When the bill is retained till the date of maturity, the drawer receives the money from the drawer on the due date. The entry is :
      Cash or Bank A/c                         …Dr.           [With the amount of the bill]
          To Bills Receivables A/c                             [With the amount of the bill]
Cash or Bank Account is debited because cash comes in and Bills Receivable Account is closed by crediting the account because the amount has been received against the bill receivable.
 2. When the Bill is discounted with the Bank
Entries in the Books of Drawer or Person Receiving the Bill: When the holder of the bill takes amount from a bank against the bill before the due date, it is known as discounting of the bill. The bank charges an amount termed as ‘Discounted Charges .’ The charges depend upon the rate of interest and the period of maturity. If, for example, a bill for Rs. 10,000 payable after three months is discounted @6% p.a, the
          amount discount will be Rs 150,                            Rs 10,000×6x3
                                                                                                -—————- The student must always
                                                                                                     100×12
Be careful to calculate the discounting charges with reference to the remaining period, from the date of discounting till the due date. For example, if a bill having three months maturity is discounted after one month, the discount charges will be Rs.120.
Accounting Entry
 When bill is discounted and Cash is received or credited to bank account:
       Cash or Bank A/c                               ….Dr.                             [The amount of the bill less discount]
       Discounting Charges A/c                 .…Dr.                                  [The discount charge by the bank]
     To Bills Receivables A/c                      …Dr.                                              [The full amount of the bill]
 Drawee’s Books: The acceptor or drawee is not affected by discounting of the bill and therefore, does not make any entry in his books in this regard. He will pay it to the holder of the bill (whosoeverhe may be) on maturity.
Accounting Entry
    Bills Payable A/c                     …Dr.
     To Cash or Bank A/c
 3. When a Bill is Endorsed or Negotiated in Favour of a Creditor
  When the holder of a bill transfers the bill to a third party, the bill is said to have been endorsed or negotiated. The term endorsement or negotiation means the transfer of a bill of exchange or promissory note to another person. The person who endorse the instrument (bill) is called the endorser.The person to whom the instrument (bill) is endorsed is called the endorsee.
Accounting Entry
In the Books of Drawer or Person Receiving the Bill:
Creditor                                                              ….Dr.
     To Bills Receivables A/c
  (Being the bills Receivable endorsed )
Creditor’s account is debited because a liability has been paid and Bills Receivable Account is credited because Bills Receivable has been endorsed.
As on the date of maturity, the payment will be received by the endorsee. Hence, at the time of payment, the endorser does not pass any entry in his books.
Acceptor’s Books: The acceptor of the bill does not pass entry relating to endorsement of the bill. He will pay the amount on the due date to the holder of the bill  and record the following entry:
    Bills Payable A/c                     …Dr.
      To Cash or Bank A/c
Endorsee’s Books: From endorsee’s viewpoint, the transaction entered into is: Receiving a bill receivable from the endorser. The Journal entry is:
Bills Recevable A/c                                   …Dr.
       To Endorser                
When bill is honoured at maturity, the following entry is made:
     Cash or Bank A/c                                …Dr.
         To Bills Receivable A/c
4. When the bill is Sent to the Bank for Collection
  The person receiving the bill of exchange, may retain the bill till maturity date and receive the amount as per the bill. But in order to ensure safety, he may send it to his bank with instructions that the bill be retained and realized on its due date. It means bank will retain the bill in safe custody and present it for payment on the due date. The bank will credit the account of the customer on realization of amount. If the bill is sent to the bank with such instructions, it is known as ‘bill sent for collection’. It is better to make a record of this also in books by passing the following entry:
   Bills Sent for Collection A/c                             …Dr.
       To Bills Receivable A/c
When the amount is realized, the entry is:
   Bank A/c                                                                 …Dr.
    To Bills Sent for Collection A/c
The balance  in the Bills Sent for Collection Account is shown in Balance Sheet as an asset.
Note that the drawee will not pass any entry in his books for the bills sent for collection. He will pass the entries in his books in the usual manner when he makes the payment, no matter whether the payment made to the drawer or his bank or an endorsee.

Frequently Asked Questions on 1031 Exchanges

Article Source: http://www.1031exchangemadesimple.com/1031-faq.html

Equity and Gain

Is my tax based on my equity or my taxable gain?
Your tax will always be based upon calculations of the taxable gain. Contrary to misconceptions, gain and equity are two separate and distinct items. When determining your gain, you should identify your original purchase price. From that, deduct any previously reported depreciation and then add the value of any improvements, if any, which have been made to the property. The resulting figure is your cost or tax basis. To calculate your gain, subtract the cost basis from your original net sales price.

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Deferring All Gain

Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?

If the following actions are performed, all taxable gain on your property is to be deferred.

1) A replacement property equal to or greater in value than the net selling price of your relinquished (exchange) property is purchased.

2) Equity is move from one property to the other.

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Definition of Like-Kind

What are the rules regarding the exchange of like-kind properties? May I exchange a vacant parcel of land for an improved property or a rental house for a multiple-unit building?

If properties are of the same nature or character, regardless of whether or not they differ in grade or quality, they are “like-kind” properties. The two properties must be of the same type, disregarding any improvements made. To clarify, two residential pieces of real estate are “like-kind” towards one another. A residential piece of real estate and a car would not be.

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Four most common 1031 exchange misconceptions:

1. All 1031 exchanges must involve swapping or trading with other property owners...... (NO)
   
   Well before delayed exchanges were codified (by IRS) in 1984, all simultaneous exchange transactions of Real Estate required the actual swapping of deeds plus the simultaneous closing among all parties to a 1031 exchange. In most cases these type of exchanges were comprised of many of exchanging parties, as well as numerous exchange real estate properties. Now today, there's no such requirement to swap your own property with someone else's property, in order to complete an IRS approved exchange. The rules have been refined and ratified to the point that the current process is much more indicative of your qualifying intent, rather than the logistics of the Real Estate property closings.
2. Its required that all types of 1031 exchanges must close simultaneously....... (NO)
   
   There was a time when all types of exchanges had to be closed on a simultaneous (same day) basis, now they (1031) are rarely completed in this type of format any longer. As a matter of fact, a majority of the exchanges executed are closed now as delayed exchanges.
3. "Like-kind" means purchasing the same type of property which was sold....... (NO)
   
   Often the definition of "like-kind" has been misinterpreted or misunderstood to mean "The requirement of the acquisition of property to be utilized in the same form as the exchange property". In laymen's term, hotels are for hotels, apartments are for apartments, farms are for farms, etc. This is all true however, the exact definition is again more reflective of intent than its use. As a result, there are currently only 2 types of properties that qualify as a 'like-kind':
   -- Property held for investment and/or
   -- Property held for a productive use, as in a trade or business.
4. 1031 Exchanges must be limited to 1 exchange and 1 replacement property....... (NO)
   
   This statement is a perfect example of another 1031 exchanging myth. Let me repeat, there are no provisions within either the IRS Code or the US Treasury Regulations that can restrict the amount and number of real estate properties that can be involved in an exchange. Thus, in exchanging out of several properties into one replacement property or the vice versa of selling of one property and acquiring several other properties, are perfectly acceptable strategies and uses of a 1031.

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Simultaneous Exchange Pitfalls

Is it possible to complete a simultaneous exchange without an intermediary or an exchange agreement?

It is possible to complete an exchange without an intermediary or an exchange agreement, yet is not recommended. In addition, it is very difficult to perform this process due to the Safe Harbor addition of qualified intermediaries in the Treasury Regulations and the recent adoption of good funds laws in several states. As two closing entities cannot hole the same exchange funds on the same day, the Exchanger is left with serious constructive receipt and other legal issues for attempting such a simultaneous transaction.

The main reason for the addition of the intermediary Safe Harbor was to suppress the practice of attempting such marginal transactions. Many tax professionals believe that an exchange that is completed without an intermediary or exchange agreement will not qualify for deferred gain treatment. If such a transaction had already been completed, it would not pass an IRS examination due to constructive receipt and structural exchange discrepancies. As you may have hesitation to invest in a qualified intermediary, we advise you to do so, as in comparison to the tax risk that is associated with attempting this exchange, the investment is easily insignificant.

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Property Conversion

How long must I wait before I can convert an investment property into my personal residence?

A one-year holding period before investment is advised. As there is no definitive holding period that currently exists, the IRS did propose a one-year holding period before investment property could be converted, sold or transferred, yet it was never adopted by Congress. Please do not misconstrue the failure of the adoption of this proposal as an approval to convert investment property at any time. As the one-year period reflects the intent of the IRS, most tax practitioners advise clients to hold their property at least one year before converting into a personal residence.

As intent is extremely important, we remind you that it should be your intention at the time of acquisition to hold the property for its productive use in a trade or business, or for its investment potential.

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Involuntary Conversion

What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or eminent domain action?

If your property is involuntarily converted, reinvestment must occur within 24 months from the end of the tax year in which the property was converted. It is also possible to apply for a 12 month reinvestment extension. This information is addressed within Section 1033 of the Internal Revenue Code for reference.

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Facilitators and Intermediaries

Is there a difference between facilitators?
There is most definitely a difference in facilitators. Similar to most professional disciplines, the capability of facilitators will vary based upon their exchange knowledge, experience and real estate and/or tax familiarity.

Facilitators and Fees

Should fees be a factor in selecting a facilitator?

Fees should be a factor in selecting a facilitator, however, they should be considered only after first determining each facilitator's ability to complete a qualifying transaction. This can be accomplished by researching their reputation, knowledge and level of experience. It is recommended that fees are not considered first as you may get a good price, yet not good quality.

Personal Residence Exchanges

Do the exchange rules differ between investment properties and personal residences? If I sell my personal residence, what is the time frame in which I must reinvest in another home and what must I spend on the new residence to defer gain taxes?

The previously stated rules that dictated that you had to reinvest the proceeds from the sale of your residence within 24 months before or after the sale, and that you had to acquire a property which reflected a value equal or greater than the value of the residence sold, have been discontinued with the passage of the 1997 Tax Reform Act. These were formerly found in Section 1034 of the Internal Revenue Code. Currently, if a personal residence is sold, provided that residence was occupied by the taxpayer for at least two of the last five years, up to $250,000 (single) and $500,000 of capital gain is exempt from taxation.

Exchanging and Improvements

May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?

Although the attempt to move equity from one investment property to another is essential to tax deferred exchanging, unfortunately, you may not exchange into property you already own.

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Related Parties

May I exchange into a property which is being sold by a relative?

Unfortunately, you cannot exchange into a property being sold by a relative. An Exchanger may sell to a related party; however, the related party will then be subject to a two-year holding period.

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Exchanges During Divorce

I am married and I am going through a divorce, can I still do a 1031 exchange?

This is a very difficult question to explain because there is no clear answer set forth with the IRS and very little case law, on the subject. In most cases it is recommended that the title be switched to the person in need of a 1031 exchange (before the divorce is complete). The problem comes into play with the joint ownership of the property. What is needed is to get the property into ONE name and simplify things. This can be achieved in a number of different ways. First, you can simply execute a "quit claim deed" to get the property into one single name. Second, you can have your spouse simply buy out the other person involved and get sole title into ONE name. Another option is that you keep the property in both names and then buy the new property in both names - execute a 1031. Then once the 1031 is complete, split up the property, so that in this case taxes are deferred by both husband and wife. There is no clear answer on this subject so you have to speak with your accountant or attorney for legal or tax advice.

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Partnership or Partial Interests

If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?

Yes you may. Partial interests qualify for exchanging within the scope of Section 1031 of the Internal Revenue Code. However, if your interest is not in the property but an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excluded from Section 1031. But don't be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.

Another caveat, those individuals or groups owning partnership interests who desire to complete an exchange, and have for tax purposes, made an election under IRC Section 761(a) can qualify for deferred gain treatment under Section 1031. This can be a tricky issue! See elsewhere in this publication for more information. Then, only undertake this election with proper tax counsel and only with the election by all partners!

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Reverse Exchanges

Are reverse exchanges considered legal?

Yes, reverse exchanges are considered legal. Although reverse exchanges were deliberately omitted from Section 1031, the Internal Revenue Service issued the addition of Revenue Procedure 2000-37 in September, 2000 which provides a safe harbor for reverse exchange transactions.

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Selling A Business

I am selling my business, can I execute a 1031 exchange?

Yes, but it is important to determine first what portion of the business is actual property and what portion is deemed "business" or "good will". Only the portion that is deemed "property" can be applied to a 1031 Exchange.

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Condo's and Co-Op's

I own a Condo or Co-OP, can I still do a 1031 Exchange?

Yes, In the state of New York, even a Co-Op is deemed Real Property and is qualified for a 1031 Exchange.

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Identification

Why are the identification rules so time restrictive? Is there any flexibility within them?

The current identification rules represent a compromise which was proposed by the IRS and adopted in 1984. Prior to that time there were no time-related guidelines. The current 45-day provision was created to eliminate questions about the time period for identification and unfortunately, there is absolutely no flexibility written into the rule and no extensions are available.

In a delayed exchange, is there any limit to property value when identifying by using the Two Hundred Percent Rule?

Yes. Although you may identify any three properties of any value under the Three Property Rule, when using the Two Hundred Percent Rule there is a restriction. When identifying four or more properties, the total aggregate value of the properties identified must not exceed more than 200% of the value of the relinquished property.

There is an additional exception for those whose identification does not qualify for either the Three Property or Two Hundred Percent rules. The Ninety-five Percent Exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired totals at least 95% of the properties identified.

Should identifications be made to the intermediary or to an attorney or escrow or title company?

Identifications may be made to any party listed above. On many occasions, however, the escrow holder is not equipped to receive your identification if they have no yet opened an escrow. Therefore it is easier and safer to identify through the intermediary, provided the identification is postmarked or received within the 45-Day Identification Period.

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Master Lease

What is a "Master Lease" and how does it work?

The master lease is a management structure where a single entity is known as the "master lessee". The management company leases the entire property from the owners in return for a stipulated rent. This means that the owners [the investors] have a single tenant and predictable, stable rent, which will be stated in the prospectus accompanying the offering. Under the "triple net lease", the master lessee is responsible for all aspects of management, maintenance, repairs and leasing; and furthermore is responsible for paying expenses associated with the property, including real estate taxes and assessments, insurance and all maintenance and repair costs (excluding capital expenditures). Should these costs increase, the master lessee is obligated to pay them without reducing the rent due the owners.