AICPA's Hottest Tax Topics For '08

• Chapter 1 -Individual Tax Corner
  • Learning Objectives
  • Introduction
  • Tax Tips for Home Sellers
    • Section 121 Gain Exclusion Basics
    • Watch Out for Impact of "Old Law" Tax-Free Rollovers
    • Tax-Smart Drill for Clients with Two "Main" Homes
    • Tax-Smart Drill for Clients with One or More Vacation Homes
    • Partial Exclusions Are Often Available for "Premature" Sales
    • Some Clients Should Think Twice about Staying Unmarried
    • When Part of Principal Residence Was Used As a Deductible Home Office
    • When Part of Principal Residence Was Rented Out
    • Sale before Divorce
    • Sale in Year of Divorce or Later
    • When "Nonresident Ex" Has Continued Ownership Long after Divorce
    • Plan for Tax-Smart Home Sale after Remarriage
    • "Electing Out" of the Gain Exclusion Break
    • Rent Out Former Principal Residence and Claim Gain Exclusion Years Later
    • Swap Greatly Appreciated Residence for Income-Producing Property in Tax-Deferred Deal
    • Combine Section 1031 Exchange with Section 121 Gain Exclusion Break and Collect Tax-Free Cash "Boot"
    • Claim Gain Exclusion for Sale of Land Adjacent to House
    • Hold Greatly Appreciated Home until Bitter End
  • Reverse Mortgage Can Be Tax-Smart Strategy for Seniors Who Own Hugely Appreciated Homes
    • Reverse Mortgage Can Provide Cash for Continued Home Ownership and Other Living Expenses
    • Reverse Mortgage Trends and Fees
    • Deducting Interest on a Reverse Mortgage
    • Other Reverse Mortgage Considerations
  • How to Take Advantage of the Real Estate Exceptions to the Dreaded Passive Loss Rules
    • Plan A: Take Advantage of "Small Landlord Exception"
    • Plan B: Take Advantage of "Real Estate Professional Exception"
  • Structuring Tax-Effective Family Loans
    • Get It in Writing
    • Below-Market and Interest-Free Loans: How to Beat the System
    • Loophole No. 1: The $10,000 Rule
    • Loophole No. 2: The $100,000 Rule
  • Claim Medical Expense Deductions for Costs to Enter and Stay in Continuing Care Retirement Communities
    • How CCRCs Work in a Nutshell
    • Fee Arrangements
    • Now for the Tax Angle
  • Tax Issues for Bankrupt and Insolvent Individuals
    • The Basics on Excluded Debt Discharge Income
    • Relief for Bankrupt Individuals
    • Relief for Insolvent Individuals
    • Reduction of Debtor's Tax Attributes Is Price for DDI Exclusion Privilege
    • How Individual Bankruptcy Estates and Bankrupt Individual Debtors Are Treated for Federal Income Tax Purposes
  • Tax Implications of Personal Residence Short Sales and Foreclosures
  • Tax Rules for Debt Discharge Income
  • What If the Lender Forecloses?
  • New Exception for Debt Discharge Income from Principal Residence Mortgages May Save the Day
  • Update on the Kiddie Tax Rules
    • Child's Age Is the Key Factor
    • Kiddie Tax Rules for 2008 and Beyond
    • Kiddie Tax Avoidance Strategies for 2008 and Beyond
    • Dealing with Existing Crummey Trusts and Custodial Accounts
  • Clients Should Take Advantage of Zero Percent Tax Rate Before It Is Gone
    • Gift and Estate Tax Consequences
    • Income Tax Consequences
  • Update on the Ever-Changing Health Savings Account (HSA) Rules
    • How HSAs Work in a Nutshell
    • Determining Eligibility for HSA Contributions
    • HSA Contribution Eligibility Can Be Determined at Yearend (but Watch Out for Nasty Recapture Rule)
    • The Nasty Recapture Rule
    • New HSA Rollover Deal for FSA and HRA Balances (but Watch Out for Nasty Recapture Rule)
    • New IRA-to-HSA Rollover Deal (but Watch Out for Nasty Recapture Rule)
    • Pay Attention to Important Timing Considerations
    • Summary Client Advice on HSAs and HDHPs
  • Making Charitable Contributions from IRAs
    • Qualified Charitable Distribution (QCD) Definition
    • Sunset Date and Annual Limitation Rules
    • Senior IRA Beneficiaries Can Do QCDs Too
    • QCDs Offer Income and Estate Tax Advantages
    • Who Can Benefit?
    • Do QCDs from Roth IRAs Make Sense?
    • "Bad Old Rules" Will Apply for 2008 Unless Congress Extends QCDs
  • IRA Rollover Privilege for Non-Spousal Retirement Account Beneficiaries
    • General Rollover Mechanics
    • Required Minimum Withdrawal Rules Apply to Receiving IRA
    • Special Considerations When Plan Participant Dies before RBD
    • Special Rollover Mechanics When Plan Participant Dies before RBD
    • Conclusions on Non-Spousal Rollover Privilege
  • Tax-Deferred Section 1031 Exchanges of Vacation Homes Are Now IRS-Approved
    • Section 1031 Exchange Basics
    • New Safe Harbor for Vacation Home Swaps
    • Only Dwelling Units Qualify for Safe Harbor
    • What Counts as Personal Use?
    • Tax Filing Implications
    • Conclusions on Vacation Home Exchanges
  • Summary
• Chapter 2 - Small Business Tax Corner
  • Learning Objectives
  • Introduction
  • Updated Guide to Entity Choices for the Very Small Business
    • Liability Limiting Entities for the One-Owner Business
  • Liability Limiting Entities for Husband-Wife Businesses
    • Husband-Wife LLC Offers Maximum Tax Flexibility
    • Husband-Wife S Corp Can Reduce Social Security and Medicare Taxes
    • Husband-Wife C Corp: Last but Not Necessarily Least
    • Conclusions on Husband-Wife Liability Limiting Entities
  • Update on Filing Returns for Unincorporated Husband-Wife Businesses
    • How to Elect Out of Partnership Status
    • Definition of Qualified Joint Venture
    • IRS Admits Husband-Wife Rental Real Estate Business Can Be Qualified Joint Venture, but Watch Out for Tricky Tax Reporting Procedure
    • Unofficial IRS Guidance Says Husband-Wife LLC Cannot Be Qualified Joint Venture
    • Determining When Unincorporated Husband-Wife Businesses Must Be Treated as Partnerships for Tax Purposes
  • Long-Term Care Insurance Tax Benefits for Small Business Owners
    • Tax Treatment of Benefit Payments
    • Deductions for Long-Term Care Insurance Premiums
    • Bigger Breaks for Small Business Owners
  • Tax Benefits of Combining HSA with Section 105 Medical Expense Reimbursement Plan
    • Section 105 Plan Basics
    • Section 105 Plan Can Pay First-Dollar Reimbursements for Certain Health Expenditures without Jeopardizing Employee-Spouse's HSA Contribution Privilege
    • Putting the Tax-Saving Pieces Together
    • Do Not Forget to Account for Client's Age
  • Depreciation Rules for Business Vehicles
    • "Heavy" SUVs, Pickups, and Vans Used for Business Still Rule
    • Reduced $25,000 Section 179 Deduction for Heavy SUVs
    • Despite $25,000 Limitation, Depreciation Rules for Heavy SUVs Are Still Quite Favorable
    • Mind These Caveats
  • The Current State of Leasing Versus Buying for Business Autos
    • The Analytical Framework
    • Using the After-Tax Present Value Framework: Comprehensive Example
    • Financial and Tax Implications of Car Leasing Terminology
  • Update on Health Insurance Premiums Paid for More-Than-2% S Corporation Shareholder- Employees
    • More-Than-2% S Corporation Shareholder-Employees Treated Same as Partners for Fringe Benefit Purposes
    • Specifics for More-Than-2% S Corporation Shareholder-Employees
    • 2006 IRS Website Article Created Controversy Out of Thin Air
    • IRS Adopts More Reasonable Stance in Notice 2008-1
    • What to Tell Affected Clients
  • Clients Can Subdivide and Prosper with Tax-Saving Section 1237 Exception
    • Qualifying for Low-Taxed Capital Gains Treatment
    • Definition of Tract of Real Property
    • Definition of Substantial Improvements
    • Election to Disregard Substantial Improvements
    • Unfavorable Rule Can Dilute Tax Savings
    • Conclusions
  • Developer Entity Strategy Can Slash Taxes on Appreciated Land
    • Step 1: Establish S Corp to Be the Developer
    • Step 2: Sell the Land to the S Corp
    • Step 3: Develop the Property and Sell It Off
    • Make Sure The Developer Entity Is an S Corp!
    • Anticipate IRS Challenges and Take Steps to Avoid Them
  • Self-Employed Clients Should Not Overlook Roth IRA Contribution Opportunities
    • Objection No. 1: Client's Income Is Too High for Roth Contributions (Oops, That May Be Wrong!)
    • Objection No. 2: Roth Contributions Are Less Attractive Than Deductible Retirement Plan Contributions (Oops, That May Be Wrong Too!)
  • Summary
• Chapter 3 - Corporate Tax Corner
  • Learning Objectives
  • Introduction
  • Setting Reasonable Compensation Levels for Shareholder-Employees of Closely Held C Corps
    • What Is Reasonable?
    • Reasonable Compensation Checklist
    • Selected Reasonable Compensation Court Decisions
    • Tax Planning Impact of Reduced Tax Rates on Dividends
  • Is S Corp Shareholder-Employee Compensation Now a Hot Button for the IRS?
    • Times Are Changing
    • Tax Planning Implications
  • Benefits of Including Debt in C Corporation Capital Structure
    • Using Third-Party Debt
    • Using Owner Debt
    • How to Ensure Owner Debt Will Be Respected as Such
  • How C Corporation Shareholders Can Borrow from Their Corporations at Historically Low Interest Rates
    • Relatively Low AFRs Create Taxpayer-Friendly Results
    • Timely Corporation-to-Shareholder Loan Strategies
    • Avoiding Below-Market Loan Rules Is Good Idea
    • Seven Commandments for Corporation-to-Shareholder Loans
  • Planning for Zero-Basis Client Receivables and Professional Goodwill When Professional Corporation Converts to LLC or LLP Status
    • Damage Control Tax Planning Strategies
  • Arrange for Dividends, Stock Redemptions, and Stock Sales Now to Avoid Possible Future Tax Hikes
    • Strategy No. 1: Take Dividends Right Now
    • Strategy No. 2: Do Low-Taxed Stock Redemption Deal Right Now
    • Strategy No. 3: Sell Stock Right Now
    • The Bottom Line
  • Estate Tax Value of Closely Held Stock Can Be Reduced by Hypothetical Tax on Corporation's Appreciated Assets
    • How Should Hypothetical Tax Liability Be Calculated?
    • Now Eleventh and Fifth Circuits Both Like Taxpayer-Friendly Dollar-for-Dollar Method
  • Understanding When Expenditures Related to Intangibles Must Be Capitalized (or Not)
    • Amounts That Generally Must Be Capitalized
    • Acquired Intangibles for Which Capitalization Is Required
    • Created Intangibles for Which Capitalization Is Required
    • Other Intangibles Generally Must Be Separate and Distinct Assets for Capitalization to Be Required
    • Certain Transaction Costs Must Also Be Capitalized
    • Taxpayer-Friendly 12-Month Rule for Created Short-Term Intangibles (Including Prepaid Expenses)
    • Coordination of Section 263(a) Regulations with Rules for Accrual-Method Taxpayers
    • Separate Capitalization Rules for Amounts Paid to Facilitate Acquisitions, Restructurings, Contributions to Capital, Formations of Disregarded Entities, Etc.
    • Remember Taxpayer-Friendly Loopholes to Avoid Capitalization
    • Treatment of Capitalized Amounts
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures to Internally Start Up Brand New Business
    • Tax Compliance Drill for Pre-Opening Expenditures Incurred to Internally Start Up a Brand New Business
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures to Internally Expand Existing Business
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures Incurred in Connection with Same-Line-Of-Business Acquisition
    • Tax Compliance Drill for Pre-Opening Expenditures Incurred to Expand Existing Business (Internally or Via Acquisition)
    • Impact of Section 263(a) Regulations on Pre-Opening Expenditures Incurred in Connection with Acquisition of Dissimilar Business
    • Tax Compliance Drill for Pre-Opening Expenditures Incurred in Connection with Acquisition of Dissimilar Business
  • Summary
• Chapter 4 - New Tax Law Corner
  • Learning Objectives
  • Introduction
  • Tax Changes in the Food, Conservation, and Energy Act of 2008
    • New (but Delayed) Limit on Schedule F Farming Losses
    • Changes to Optional Self-Employment Tax Methods
    • Conservation Donation Breaks Extended for Two Years
    • Three-Year Depreciation for Racehorses
    • Conservation Reserve Payments to Retired and Disabled Individuals Exempted from SE Tax
    • Section 1031 Treatment for Swaps of Stock in Farm-Related Entities
    • New Farming Deduction for Endangered Species Recovery Expenses
    • One-Year Tax Cut for Timber Gains
    • Favorable REIT Tax Treatment for Timber Gains
    • Miscellaneous Changes
  • Tax Changes in the Heroes Earnings Assistance and Relief Tax Act of 2008
    • No Social Security Number Required for Tax Rebate
    • Election to Treat Tax-Free Combat Pay as Earned Income for EIC Purposes Made Permanent
    • Enhanced Retirement Plan Benefits
    • New Rules for Differential Pay
    • New (but Temporary) Differential Pay Credit for Small Employers
    • Exclusion for State and Local Bonus Payments for Military Service
    • Favorable Exception for Early Retirement Account Distributions Received by Military Reservists Made Permanent
    • Clarification Regarding Income Exclusion for Volunteer Firefighters and Emergency Responders
    • Increase in Minimum Failure-to-File Penalty
    • Miscellaneous Changes
  • Tax Changes in the Economic Stimulus Act of 2008
    • Free Money "Rebates" for Most Individuals (but High-Income Folks Are Left Out)
    • Basic Rebate Amount
    • Section 179 Deduction Gets Jacked Up (Temporarily)
    • First-Year Bonus Depreciation Is Back (Temporarily)
  • Tax Changes in Late Breaking 2007 Legislation
    • One-Year AMT Patch in Tax Increase Prevention Act of 2007
    • Tax Provisions in 2007 Mortgage Relief Act
    • Tax Provisions in 2007 Energy Act
  • Tax Changes in the Small Business and Work Opportunity Tax Act of 2007
    • Section 179 Deduction Rules Extended and Made Even Better
    • Taxpayer-Friendly S Corporation Changes
    • Simplified Tax Compliance for Qualifying Husband-Wife Businesses
    • Work Opportunity Tax Credit (WOTC) Changes
    • Employer Tip Credit Change
    • WOTC and Employer Tip Credit Can Reduce AMT Liabilities
    • Gulf Opportunity Zone Tax Incentive Changes
    • Pension Protection Act Technical Corrections
    • Now for the Dreaded Revenue Raisers (Tax Increases)
• Chapter 5 - Ethics Focus: Taxation
  • Ethics Overview
  • Recent Developments
  • Spotlight on Independence in Tax Services
  • Key Ethical Dilemmas and Judgment Calls
  • Addressing Ethical Dilemmas
  • Available Resources
• Chapter 6 - Latest Developments

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Chapter 2 Small Business Tax Corner

Learning Objectives

• Help very small business clients (including husband-wife ventures) choose the best type of liability-limiting entity for their operations.
• Know recent tax-filing developments for unincorporated husband-wife businesses.
• Understand the small business tax breaks available for long-term care insurance premiums.
• Advise husband-wife business clients on the advantages of combining an employerprovided health savings account (HSA) with a Section 105 medical expense reimbursement plan.
• Know the current depreciation rules for business vehicles.
• Evaluate the lease versus buy question for business vehicles.
• Understand how to handle health insurance premiums paid for S corporation shareholderemployees.
• Help clients take advantage of the special IRC Section 1237 tax break for real estate subdividers.
• Know when to use the S corporation "developer entity" strategy for real estate development projects.
• Understand when self-employed clients can make Roth IRA contributions.

Introduction
This chapter covers the preceding "hot topics" that affect many small business tax clients. Some of the topics are "hot" due to recent tax law developments. Others are "hot" because of economic or societal trends. Both compliance and planning tips are presented in the discussion.

Updated Guide to Entity Choices for the Very Small Business
Say the FedEx man slips and falls on the icy doorstep of your client's business location - which might also be his personal residence. The client's personal assets could be at risk when the FedEx guy decides to sue for a disabling back injury.

The solution: help your client set up a liability limiting entity to operate his business. These include S and C corporations and LLCs. Each of these entities will form a protective legal wall around the client's personal assets. Since most business-related liabilities cannot penetrate that wall, his personal assets should be safe from the FedEx man's lawsuit. On the other hand, if the client continues operating his business as a sole proprietorship, or as a husband-wife partnership, his personal assets will remain exposed to all business-related liabilities.

Once your client decides he needs a liability limiting entity, the next step is to choose which kind. Now the tax angles become important, because different tax rules apply to each type of entity. We want the entity that delivers the best tax results for your client's circumstances.

Before diving into the details, there is one very important thing to know about liability exposure. In general, no type of liability limiting entity can protect a client's personal assets from liabilities related to his own professional errors and omissions or his own tortious acts. (Tortious acts are things like reckless operation of an auto resulting in injuries or property damage to others.) In order to protect his assets from exposure to professional and tort liabilities, the client must conduct his business and personal life with due diligence and buy adequate insurance coverage. No surprise there!

Next, the client should consider adding a second layer of protection by establishing a liability limiting entity to shield his personal assets from various business-related liabilities that may arise from things totally beyond his control - like foibles committed by an employee or the dreaded icy doorstep at the business location. That is what this section is all about.

So without further ado, let us start by looking at the liability limiting entity options for singleowner businesses. The second part of this section covers appropriate entity choices for husbandwife operations.

Liability Limiting Entities for the One-Owner Business
In this section, we start with the simple and move on to the more complicated. Here goes.

Single-Member LLCs (SMLLCs) Are Good and Simple
The laws of all but a few states now explicitly allow single-member (one-owner) limited liability companies (SMLLCs). Owners of LLCs, including SMLLCs, are referred to as members. SMLLCs provide two big advantages:

1. Liability protection.
2. Maximum federal-tax simplicity.

Specifically, SMLLCs offer corporate-style liability protection. This generally means only assets owned by SMLLC itself (if any) are exposed to liabilities related to its business activities. The member's (owner's) personal assets are generally off limits.

SMLLCs also deliver favorable federal income tax results. Here is why. IRS regulations say an SMLLC is ignored for federal income tax purposes [Reg. 301.7703-3(a) and (b)]. For example, say your client sets up a new SMLLC to conduct what was previously her sole proprietorship business. As far as the IRS is concerned, nothing has changed, because the existence of the SMLLC is ignored. So the client's business is still considered to be her sole proprietorship for federal income tax purposes. Therefore, she continues reporting her business income and expenses on Schedule C, she continues computing self-employment tax on Schedule SE, and she continues making quarterly estimated tax payments just as she always has.

Now say your client establishes a new SMLLC to take over her existing rental real estate operation. Once again, the SMLLC's existence is ignored for federal income tax purposes. So the client continues reporting her rental real estate income and expenses on Schedule E and keeps on making quarterly estimated tax payments just as before. As you can see, the big tax advantage of SMLLC status is simplicity. The client is not required to file a separate federal income tax return for her business, and she need not worry about causing unexpected tax problems when she conducts transactions between herself and her business entity (like taking money out of the SMLLC's checking account or transferring ownership of an asset between herself and the SMLLC). Simple is good!

Key Point. Under the laws of some states, SMLLCs may be prohibited from engaging in certain types of business activities (for example, agriculture or professional practices). Also, some professional standards and licensing bodies may prohibit the use of SMLLCs (the AICPA is not among these).

Warning: SMLLCS Are Now Tax-Paying Entities for Some Purposes
As explained earlier, SMLLCs are called disregarded entities because their existence is generally ignored for federal income tax purposes. However, recently amended final regulations require SMLLCs to pay certain federal excise taxes and federal employment taxes in their own names. In other words, SMLLCs are now treated as separate taxpaying entities for purposes of these taxes. (The disregarded entity status of SMLLCs for federal income tax purposes will remain unchanged.

Excise Tax Rules.
The new excise tax rules are effective on January 1, 2008, and cover excise taxes and excise tax activities reported on the following Forms:

• Form 720 (Quarterly Federal Excise Tax Return).
• Form 730 (Monthly Tax Return for Wagers).
• Form 2290 (Heavy Highway Vehicle Use Tax Return).
• Form 11-C (Occupation Tax and Registration Return for Wagering).
• Form 8849 (Claim for Refund of Excise Taxes).
• Form 637 [Application for Registration (For Certain Excise Tax Activities)].

Employment Tax Rules.
The new federal employment tax rules, which impact many more SMLLCs, are effective on January 1, 2009. These rules cover FICA and FUTA taxes, FIT withholding, and related reporting obligations such as filing Forms W-2 and 941. The new rules, imposed by amendments to Reg. 301.7701-2 generally require separate-entity federal employment tax payment and reporting with respect to the SMLLC's employees, effective for wages paid on or after January 1, 2009.

• Under the new rules, the SMLLC is treated as a corporation for federal employment tax payment and reporting purposes.
• An individual who owns an SMLLC is not considered to be an employee of the SMLLC for federal employment tax purposes. Instead, the owner must include any net trade or business income from the SMLLC in his or her self-employment tax calculation on Schedule SE (nothing new about that).
• Earlier federal employment tax rules provided in Notice 99-6 apply to wages paid to employees of SMLLCs before the January 1, 2009, effective date of the new rules.

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