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Despite its name, the new Pension Protection Act
of 2006 includes many important tax provisions completely unrelated
to retirement plans. For instance, the new law overhauls the tax
rules for deducting charitable deductions. Some of the provisions
favor taxpayers while others may make it more difficult to claim
deductions on your personal return.
With that in mind, the following is a brief summary of the key new
law provisions affecting charitable donations.
Cash donations: The new law denies deductions for cash
contributions unless the donor has written proof as to the amount of
the contribution, the date and the name of the charity. This change
appears to give taxpayers no leeway. Cash donations must be
substantiated by a cancelled check, bank record, or credit or debit
card statements.
This change is effective for tax years beginning after August 17,
2006 (i.e., the 2007 tax year for calendar-year taxpayers).
Clothing and household goods: Under the new law, deductions
for clothing and household goods generally will be denied unless the
items are in "good condition." However, the new law does not provide
a technical definition of this term. The change is effective for
contributions made after August 17, 2006.
Food and books: The new law extends through 2007 certain
enhanced tax breaks under the Katrina Emergency Tax Relief Act of
2005. These deductions apply to donations of food and books made by
various business entities. Previously, only a C corporation could
benefit from an enhanced deduction. The deduction is equal to the
lesser of (1) two times the basis in the property or (2) the basis
plus one-half of the fair-market value above the basis.
Conservation easements: The new law raises the deduction
limit for qualified conservation easements from 30% to 50% of
adjusted gross income (AGI), if certain conditions are met. This tax
break is available only for 2006 and 2007.
Facade easements: The new law imposes special rules for
building contributions in historic districts. Furthermore, the
charitable deduction of a facade easement is reduced if a
rehabilitation tax credit was claimed for the work. Other technical
rules may apply. This is generally effective for contributions after
July 25, 2006.
IRA distributions: Under the new law, a taxpayer age 70-1/2
or over can directly roll over funds tax-free from a traditional or
Roth IRA to a qualified charity. The maximum annual cap on tax-free
distributions is $100,000. This tax break is scheduled to expire
after 2007.
Fractional donations: The new law restricts deductions for
donations of tangible property such as artwork. It effectively
requires you to recapture the tax benefits if you fail to give away
the entire interest within ten years or if the charity does not take
possession during that time. The new law change affects donations
made after August 17, 2006.
Of course, this is only a brief summary of the new rules. Obtain
more information concerning specific charitable contributions.
Tax filing tip: Special requirements may apply to
donations claimed on your 2006 tax return, including substantiation
for cash contributions of $250 or more. Consult with a tax
professional with respect to your personal situation.
What Does Your Company
Stand For?
Image may be everything to clients or customers
Say that a potentially large client is torn
between choosing your product or service and a competitor's. In the
client's eyes, there is very little separating the two of you.
Ultimately, the client simply goes with the outfit he or she has a
"good feeling" about.
Do you win the contract when this happens? The answer often depends
upon your company's public image.
Establishing a positive image in the business world doesn't happen
overnight (not usually, anyway). Instead, a corporate identity
evolves over time. For better or worse, it becomes an intangible
aspect of your business. And once your image is set in the public's
mind, it is often difficult to change.
How is a corporate image developed? Frequently, the business owner
or the CEO of the company (if that is a different person) sets the
tone. This person's public image and the company's image tend to
become one and the same. For instance, Bill Gates and Microsoft are
often associated with each other. What's more, the smaller your
business, the more likely that your image will become the company's.
Of course, clients and customers also identify a company with the
employees they usually deal with. For example, if vendors and
suppliers meet with only one salesperson, that person is the company
as far as they are concerned. The upshot: Employees who have
regular contact with the public must be trained to project a
positive image for the company.
Furthermore, don't overlook the importance of the atmosphere within
the company. If morale is down or workers take little pride in their
efforts, it may become apparent to outsiders. You should try to
create an environment that indicates a strong work ethic and
commitment to excellence.
Does that mean supervisors must keep after employees every single
moment? Not at all. Although it may be prudent to establish
guidelines, being flexible can be an advantage. For instance, an
employer might require its employees to dress in a business-like
fashion and be well-groomed. But employees still may appreciate a
break in the routine (e.g., "dress-down days" on Fridays).
What can management do to improve a company's image? While there are
no guarantees, here are a few possible suggestions.
▪Step back and take a long, hard
look at the company. Get some input from outsiders. You may be
surprised to find your company's image is not quite what you thought
it was.
▪Set some goals for the future.
Consider writing a mission statement that reflects your position.
The statement doesn't have to be longer than a paragraph, but it
should summarize what you hope to achieve.
▪Communication is a two-way
street. Employees must know what is expected of them. On the other
hand, management should remain receptive to new ideas.
▪Be consistent. For instance,
you cannot blame employees for being confused if you insist that
"the customer is always right," but you turn around and berate
someone who voices a complaint or criticism.
Practical idea: One frequently used marketing technique is
to develop an "identity system" for the company. In that way, the
company can become readily identified by a specific symbol or logo.
Extreme Makeover: A New Look for 401(k) Plans
Roundup of significant new law features for
plans
Does your company have a flexible spending
arrangement (FSA) on the books? This setup enables employees to use
pre-tax dollars to pay for certain health care or dependent care
expenses. In a new ruling, the IRS has liberalized the rules for
paying FSA expenses.
Specifically, the new ruling encourages the use of debit cards or
credit cards. The change can reduce the paperwork load for employers
and employees. Reimbursements can be made quickly without having to
go through the hassle of substantiation.
Background: The IRS had previously established guidelines for
substantiating FSA reimbursements made by debit card or credit card.
Receipts or further review are not required if the following
conditions are met:
►The dollar amount of the health
care transaction equals the dollar amount of the copayment for that
service under the plan covering the employee;
►The employer permits automatic
reimbursement without further review of recurring expenses that
match expenses previously approved as to amount, provider and time
period; or
►The merchant, service-provider
or other independent third party verifies to the employer that the
charge has been incurred for a medical expense.
Now the new ruling expands this benefit to charges that are exact
multiples of the specified copayment dollar amount provided by the
health care provider, for up to five times the amount. (The service
provider must be identified by its merchant category code.)
If a plan has multiple copayments for the same benefits (e.g., a
tiered copayment), exact matches of multiples or combinations of
copayments will be considered substantiated. In other words, the
transaction cannot exceed five times the amount of the maximum
copayment.
The IRS will also allow an employer to implement a system that
approves or rejects payment card transactions using inventory
control information. Furthermore, it has clarified the rules for
direct third-party substantiation. Additional substantiation is not
required from the employee if the thi
Five
Ways to Stoke a "Hot Team"
Over the last two decades, the 401(k) plan
has become a popular type of qualified retirement plan. And no
wonder: Employees are able to defer part of their salary to their
personal account through pre-tax contributions. These contributions
can continue to grow on a tax-deferred basis until they are
withdrawn. Furthermore, the company may agree to provide matching
contributions (e.g., 50 cents for every dollar of salary deferred).
Of course, a 401(k) plan must meet nondiscrimination requirements
prescribed by law. Besides overall tax law limits on contributions,
the annual limit on elective deferrals for 2007 is $15,500. Note: An
individual age 50 or over can make an extra $5,000 catch-up
contribution in 2007.
Update: The new Pension Protection Act of 2006 includes
numerous changes for 401(k) plans and other qualified retirement
plans. Here are some of the most important features that may give
your company's 401(k) plan a "new look" for the future.
Automatic-enrollment plans: Under the new law, it will be
easier for employers to establish automatic-enrollment 401(k) plans.
Such a plan requires employees to opt out of participation. It tends
to increase participation, which, in turn, may benefit higher-paid
employees. Employers can also automatically increase the percentage
of contributions by employees.
Investment advice: The new law permits providers of 401(k)
plans and other plans to offer personalized investment advice to
participants. Generally speaking, any fees received by advisers for
these services, including commissions, cannot be based on the
investment options selected by the participants. Also, while
personalized advice can be provided to account holders, 401(k) plan
providers cannot advise employers about which funds and investments
to include in the plan.
Military reservists: Individuals who are called to active
military duty may make penalty-free withdrawals from a 401(k) plan.
The new law gives reservists up to two years after their service to
re-contribute amounts without paying tax on the distributions.
Hardship withdrawals: The new law authorizes the U.S.
Treasury to issue new rules concerning hardship withdrawals by
beneficiaries of 401(k) plans. More information on this issue will
be forthcoming.
Nonspouse beneficiaries: An individual may roll a deceased
spouse's interest in a 401(k) plan into an IRA. Then the normal
distribution rules apply. The new law extends this flexibility to
nonspouse beneficiaries.
Roth 401(k) plans: This feature enables participants to
combine some of the benefits of a Roth IRA, such as tax-free
distributions after a five-year holding period, with a traditional
401(k) plan. Under the new law, the provision authorizing Roth
401(k)s has been extended beyond 2010.
Finally, many other favorable retirement plan provisions in the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
were scheduled to expire after 2010. The new law repeals these
"sunset" provisions affecting 401(k) plans -- including higher
contribution and benefit amounts, catch-up contributions for older
workers, faster vesting on employer matching contributions -- and
makes the EGTRRA provisions permanent.
Four Steps to
Better Computer Management
Proper management of your company's computers is
essential. You can improve your security -- and provide more peace
of mind -- by following these basic steps.
1. Take initial precautions. Whenever a new computer is
brought online, you should apply operating systems updates, install
an antivirus program and reset default passwords (e.g., the password
for the administrator's account). Consider the use of a firewall
program, but check with your information technology personnel or
computer adviser first.
2. Establish a security routine. This may include automating
operating systems and antivirus updates. Be sure to regularly run a
spyware program. If possible, do your own work in non-administrator
accounts.
3. Be prepared for contingencies. Significantly, you should
ensure that the files are backed up regularly. In addition, improve
your ability to rebuild the system in case of an infection. Have a
plan in place for handling emergencies and facilitating upgrades.
4. Be suspicious. Do not open unexpected e-mail attachments
or download unknown programs. Don't share your password with
outsiders.
IRS Rings Up
Refunds for Telephone Tax
New safe harbor amounts approved for
individuals
The IRS recently released safe harbor amounts that may be used to
claim refunds for the federal telephone tax. The announcement
follows a concession earlier in 2006 that the IRS cannot impose the
tax on long-distance charges.
Using the IRS-approved safe harbor amounts may be the easiest method
for individual taxpayers. However, it may be possible to provide a
larger deduction by digging through old records.
Background: The excise tax on long-distance services, which
is currently 3%, was initially imposed to help finance the
Spanish-American War. The constitutionality of the tax has been
contested numerous times over the years. Finally, after suffering
several stinging losses in the courts, the IRS agreed to issue
refunds or credits for long-distance services billed between
February 28, 2003, and August 1, 2006.
Refunds for the long-distance telephone tax must be claimed on your
personal tax return for 2006. To help facilitate the process, the
IRS has released standard amounts based on the number of personal
exemptions. The amounts are as follows: $30 for one exemption; $40
for two exemptions; $50 for three exemptions; and $60 for four or
more exemptions.
These safe harbor amounts may bail you out if you have not kept
statements of all of your telephone charges. However, if you can
sort through your records and determine the actual tax paid, you may
fare much better. If you choose this approach, you must be able to
substantiate the amount of tax charged and the actual amount of tax
paid.
Caveat: If you already received a credit or refund from your
telephone service provider, you're not eligible for the tax refund.
There is no IRS-approved safe harbor method for businesses and
nonprofit organizations. The tax refunds claimed by these entities
must be based on the actual amount of tax paid for long-distance
charges.
Note: As of this writing, the excise tax will continue to
apply to local telephone charges. However, several bills have been
introduced in Congress that would repeal this tax.
Facts
and Figures
Timely points of particular interest
→No Free Lunch
-- In a new case, a taxpayer offered proof of expenses through
several documents, but the information was conflicting or
incomplete. For instance, the Tax Court determined he did not
provide reliable evidence for the amount, time and place of his meal
expenses. Therefore, the deductions were disallowed. Caveat:
Under the so-called Cohan rule, you may be able to approximate
deduction amounts if it is clear that some expenses were incurred.
→Social Security
-- The Social Security Administration has announced the new "wage
base" for Social Security tax. For 2007, the OASDI portion of the
tax is 6.2% on the first $97,500 of an employee's wages (up from
$94,200 for 2006). The 1.45% HI portion of the tax applies to all
wages. Note: The wage base for self-employment tax is the
same, but the tax rates are doubled. A self-employed person can
deduct half of the tax.
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