FAQ Friday: How can I maximize my tax benefit from charitable contributions?

Many donors are not aware that their contributions may not be deductible, or that deductions may be limited. Here are the general rules:

When an organization claims to be tax-exempt, it does not necessarily mean contributions are deductible. "Tax-exempt" means that the organization does not have to pay federal income taxes, while "tax-deductible" means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these are eligible to receive contributions deductible as charitable donations.

Tip: When in doubt, call us or the IRS (800-829-1040) about the deductibility of a contribution.

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible.

Example: You pay $50 for a charity luncheon worth $30. Only $20 can be deducted.

Donations made directly to needy individuals are not deductible. Contributions must be made to qualified organizations to be tax-deductible.

Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible they are paid.

No donation of $250 or more is deductible unless the taxpayer has a receipt from the charity substantiating the donation.

Tax Tuesday: What taxes are due upon the death of a family member?

Here is a summary of the various taxes that may have to be paid on the death of a family member:

Federal Estate Tax. Amounts passing to a surviving spouse, and amounts passing to charity, are generally exempt from estate tax. Estate tax is generally only due on estates which, after reduction for what goes to spouse and charity, exceed the unified credit exemption equivalent, which for 2009 it is $3,500,000. This tax was repealed at the end of 2009, there is no exemption amount for 2010. In 2011, however, the exemption rate reverts back to old limits with the exemption at $1,000,000. These are the rules unless Congress elects to change the law.

Contact the IRS for a Form 706 if you need to file an estate tax return. A federal estate tax return must be filed and taxes paid within nine months of the date of death absent extension.

State Death Taxes. State laws vary. Many states impose estate taxes, which may apply in addition to federal estate taxes, or may apply even when federal estate taxes don't. Some states impose inheritance taxes, which are on individuals who receive inheritances, rather than on the estate.

Income Taxes. The federal and state income taxes of the deceased are due for the year of death. The taxes are due on the normal filing date of the following year, unless an extension is requested. The spouse of the deceased may file a joint federal income tax return for the year of death. A spouse with a dependent child may file jointly for two additional years. The IRS's Publication 559, "Information for Survivors, Executors and Administrators" may be helpful.

FAQ Friday: Incorporating

What is a corporation?
A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.


What is the difference between an "S" corporation and a "C" corporation?

All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C corporation becomes a S corporation by completing and filing federal form 2553 with the IRS. An S corporation's net income or loss is "passed-through" to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations. Subchapter S corporations, as they are also called, are restricted to having no more than 100 shareholders.

Tax Tuesday: Accelerate Capital Losses and Defer Capital Gains

If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). For most capital assets held more than 12 months the maximum tax is reduced to 15% for sales after May 5, 2003 and before 2013. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.

FAQ Friday: Small Business Owners

What steps can I take to improve my business cash flow?

To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:

• Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.  
• Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
• Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
• Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
• Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

Tax Tuesday: Important Business Automobile Deductions

An automobile is quite an expense, especially for those of you who own more than one. The mileage reimbursement rates for 2010 are 50 cents for business, 14 cents for charitable and 16.5 cents for moving/medical miles. For 2009, the mileage reimbursements rates were 55 cents per business mile, 14 cents per charitable mile, and 24 cents per moving/medical mile.

Another common way to increase deductions is to include both cars (if you own more than one car) in your deductions. This is possible since the business miles driven determine business use. To figure business use, divide the business miles driven by the total miles driven. You can do this for each car driven for the business and can bring significant deductions.

This is simply a wonderful way to save, but remember: in order to be effective, a consistent mileage log should be kept. Consider meeting with a professional to determine the most efficient way of tracking mileage and other costs. Happy driving!

FAQ Friday: Estate & Financial Planning for Unmarried Couples

What estate and financial planning steps are particularly important for unmarried couples?

The following steps are particularly important for unmarried couples:

• Prepare wills. If both partners make out wills, the chances are that the intentions expressed in the wills will be followed after one partner dies. If there are no wills, the unmarried surviving partner will probably be left high and dry.
• Consider owning property jointly. Owning property jointly with right of survivorship is a way of ensuring that property will pass to the other joint owner on one joint owner's death. Real property and personal property can be put into this form of ownership.
• Prepare a durable power of attorney. Should you become incapacitated, the durable power of attorney will allow your partner to sign papers and checks for you and take care of other financial matters on his or her behalf.
• Prepare a health care proxy. The health care proxy (sometimes called a "medical power of attorney") allows your partner to speak on your behalf when it comes to making decisions about medical care, should you become incapacitated.
• Prepare a living will. The living will tells the medical community what your wishes are regarding artificial feeding and other life-prolonging measures.

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FAQ Friday: Travel and Entertainment

What expenses can I deduct while traveling away from home?
A wide range of expenses can be deducted while traveling away from home.
Here are the main ones:

• Transportation fares, or actual costs (or a per mile rate) of using your own vehicle. Also, transportation costs of getting around in the work area-to and from hotels, restaurants, offices, terminals, etc.
• Lodging and meals (subject to the 50% limit on meals)
• Phone, fax, laundry, baggage handling
• Tips related to the above

Can I deduct the cost of meals on days I call on customers or clients away from my office?

Generally not. Usually, you can only deduct costs of meals when you're away from home overnight, or as part of business-related entertainment.

Even when deduction is allowed, it's only to the extent of 50% of the meals costs and related tips.



What can't be deducted as travel expenses?

The following travel expenses cannot be deducted:

• Costs of commuting between your residence and a work site, but it's a deductible business trip if your residence is your business headquarters.
• Travel as education