Haiti Donations Deductible for California

From the California Franchise Tax Board Tuesday:

The Franchise Tax Board (FTB) announced today that a new state law allows taxpayers to immediately deduct their donations made to provide relief for the January 12 Haitian earthquake.

"This is welcome news for Californians who are supporting earthquake recovery efforts in Haiti," said State Controller and FTB Chair John Chiang.

Charitable deductions are normally taken on a tax return the following calendar year. The new law gives donating taxpayers the added option to claim the deductions immediately on their 2009 returns instead of waiting to claim it on their 2010 returns.

To claim the charitable deduction on the 2009 tax return, both individuals and businesses must have made the Haitian-relief contributions to qualified charities before March 1, 2010. Only cash contributions such as those made by text message, check, credit card or debit card qualify. The contributions must be made specifically for the relief of victims in areas affected by the January 12, 2010, earthquake in Haiti.

The new legislation, Assembly Bill 347 (Stats 2010, Ch. 8), conforms to similar federal law (Haitian Relief Bill H.R. 4462; P.L. 111-126).

Information on the federal law is available in our previous post here.

Accelerated Deduction for Haiti Relief

On Friday, the President signed into law a special provision allowing taxpayers to deduct on their 2009 tax returns charitable contributions made to provide relief in Haiti. Today's IRS announcement provides guidance on the deduction, including the following requirements for a 2009 deduction:

• Only cash contributions qualify. This includes contributions made by text message, check, credit card or debit card.
• The contribution must be made after Jan. 11, 2010, and before March 1, 2010.
• The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.
• Taxpayers have the option of deducting these contributions on either their 2009 or 2010 returns, but not both.
• To get a tax benefit, taxpayers must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.

We do not have word yet as to whether California will conform to this legislation. We'll keep you posted.

Hobby or business?

Taxpayers often wonder if they can deduct expenses related to an activity that is a mixture of both business and pleasure. If an activity is truly a business, you can deduct a net loss, which can offset income from other sources such as wages or investment income. But if an activity is really a hobby, you cannot deduct a net loss. This is a murky area in the tax law, and one that is closely examined by the IRS. Here's a few key points from the information sheet the IRS published this week titled Eight Important Questions for Hobbyists: Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.

Here are eight questions that will help determine if your activity is a hobby or a business.

1. Is the purpose of your activity to make a profit?
2. Do you participate in your activity just for fun?
3. Do you depend on income from the activity?
4. Have you changed methods of operation to improve profitability?
5. Do you have the knowledge needed to carry on the activity as a successful business?
6. Have you made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Going green?

A helpful article about the energy tax incentives of the recent tax stimulus bill is available on the AICPA Corporate Taxation Insider website. You can also visit our previous blog posts on cutting energy costs, energy tax incentives , and credits for hybrid autos.

10 Tips for Deducting Charitable Contributions

10 tips from the IRS on deducting charitable contributions:

1. Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.

2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.

3. If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

4. Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.

5. Clothing and household items donated must generally be in good used condition or better to be deductible.

6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.

7. To claim a deduction for contributions of cash or property equaling $250 or more you must obtain a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document from the organization may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.

8. If you claim a deduction of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return.

9. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.

10. Contributions made for relief efforts in a Midwest disaster area receive special benefits. For more information, see Publication 4492-B, Information for Affected Taxpayers in the Midwest Disaster Areas.

Small businesses may be entitled to refunds

The federal economic stimulus package includes a change that could mean refunds for some small businesses. Under the new law, a small business that reports a federal taxable loss on its 2008 tax return may elect to carry the loss back 5 years to get a refund of taxes paid in the prior year(s). The new rule will benefit a business:

• That reports a net operating loss for 2008,
• Whose average gross receipts were less than $15 million for the three-years ending with the year of the loss, and
• That paid federal income tax in one or more of the 5 previous years.

From the IRS news release:

"The new provision, enacted as part of the American Recovery and Reinvestment Act of 2009, enables small businesses with a net operating loss (NOL) in 2008 to elect to offset this loss against income earned in up to five prior years. Typically, an NOL can be carried back for only two years. " 'The new net operating loss provisions could throw a lifeline to struggling businesses, providing them with a quick infusion of cash,' said IRS Commissioner Doug Shulman. 'We want to make it as easy as possible for small businesses to take advantage of these key tax benefits.' " We will communicate with any clients who are eligible for refunds under the new rule.

Tax deduction for auto expenses

A recent Tax Court case reminds us to keep records to support any tax deductions for auto expenses. In the case, the court recognized that the taxpayer, a traveling salesperson, did conduct business travel. But the court denied a deduction because the taxpayer didn't have credible substantiation for the mileage. The lesson learned? Keep a record of business mileage. Find a system that works for you. If you have an appointment book, consider writing down any mileage to get there and back. Even though tracking mileage is an inconvenience now, it will save you stress and tax dollars in an audit. For more information on the case, visit the article from the Journal of Accountancy. For more information on travel, meals and entertainment expenses, visit the FAQ on our website at: http://ty-llp.com/about_faq.html.

Tax deduction for home office expenses

In today's world of telecommuting and environmental awareness, many taxpayers opt to work from a home office. Deducting home office expenses can create tax savings, but should be done with care. The rules are very strict, and IRS scrutinizes home office deductions carefully. To help taxpayers determine whether to take the deduction, the AICPA published a short (less than 2 page) summary of the rules, which you can visit here. The IRS also published recent guidance, which you can find here.

New Mileage Rates For 2009

Well the good news is the cost of a gallon of gas has gone down significantly since this past summer, but the bad news is the IRS knows this. Here are the newly released Standard Mileage Rates that go into effect on January 1, 2009.

• Standard business mileage rate will be $.55 per mile
• Standard medical and moving mileage rate will be $.24 per mile
• Standard charitable mileage rate will be $.14 per mile

Don't forget to update your expense reports in January.

Happy Thanksgiving!