Payments subject to this requirement include fixed or determinable income or compensation, but do not include payments for goods or certain other payments that are subject to other specific reporting requirements, which includes all payments to corporations.

This is all going to change in 2012 when reportable payments expand to include all payments over $600 to any entity for all services and products except those made to tax-exempt corporations.  While IRS guidance is still needed to determine how the reporting process will be affected, nearly all businesses will feel the impact of this provision in some way.  If you are an S-Corporation or C-Corporation, you will begin receiving 1099s for the first time and will have to provide your Taxpayer Identification Number (TIN) to each of your customers who have purchased over $600 in goods or services from you.  If you sell products, you will receive countless additional 1099s from your customers.  Any customer that purchases goods in excess of $600 in a calendar year with you will need to provide you with a 1099.

The most important item to consider with this change is that all business owners will need to keep better records of their vendors, including obtaining information on their legal name, address and TIN.   While the 2012 tax year seems like a while off, it is important that businesses begin the process of obtaining and maintaining the information that will be required for the preparation of these forms.   It will be much easier to request and obtain this information from your vendors prior to paying them.

For questions please contact us at info@ppandco.com or 408-287-7911.

Starting in March 2010 census forms will be delivered to every residence in the United States and Puerto Rico.  The form will have 10 short questions and a postage-paid return envelope.  The data collected will help communities receive federal funds for community services such as hospitals, schools and emergency services.

Beginning in April and continuing through July 2010, U.S. Census takers will begin visiting residents who did not mail back the form.  The U.S. Census counts every resident in the United States, and is required by the Constitution to take place every 10 years.  The Census Bureau advises people to be cooperative, but cautious, so you will not become a victim of fraud or identity theft.  The first phase of the census will involve workers verifying the addresses of households across the country.  Census workers may only contact you by telephone, mail, or in person at home.  They will not contact you through the internet or by e-mail.  The Bureau advises never to click on any link or open any attachment in an e-mail purported to be from the U.S. Census Bureau.

Door-to-door census workers will only verify address information and verify how many people live at your address.  Do not give out your Social Security number, credit card or banking information to anyone.  While the Census Bureau might ask for basic financial information, such as salary range, you are not required to provide this information.

If a U.S. Census worker knocks on your door, they will have a badge, a handheld device, a Census Bureau canvas bag and a confidentiality notice.  We recommend you ask to see the badge, write down their name, and make sure the worker has the other equipment before answering any questions.

To avoid the possibility of a home visit, return your completed 2010 Census Form as soon as it is received.   For more advice on protecting your privacy and avoiding identity theft and fraud, visit the Census Bureau website at http://2010.census.gov.

You live in California. Most of your net worth was in real estate, which is now depressed in value. You are at a Christmas cocktail party making awkward conversation with someone you likely will never see again and you have exhausted the small talk on weather and Tiger Woods. Then the conversation moves to something that peaks your interest –“hey, I just did a short sale on my property…” At first you think he has sold his house to Danny DeVito, but then realize there is more to this. You learn that a short sale is a real estate term for selling a home for less than the mortgage balance, with the lender forgiving the unpaid balance.

The primary reason debtors consider short sales instead of a basic foreclosure is to try and protect credit history. Be aware that short sales are indeed taxed under the same rules as foreclosures. You should consult your attorney first to determine the status of your mortgage – is it recourse or nonrecourse? If it is recourse, you are personally liable for the debt. If it is nonrecourse, the debt is only secured by the property, and you are not personally liable for the balance. In California, most mortgages to purchase homes are nonrecourse, but mortgages from refinances are typically recourse. This is important, because they are taxed differently. If it is a nonrecourse debt, you simply treat the debt forgiven as your sales price, subtract your tax basis (your cost less any depreciation taken) and the difference is your capital gain. If it is a personal residence, you may qualify for up to a $250,000 ($500,000 if jointly held)exclusion on that gain. If it is recourse, the debt is satisfied only up to the fair market value of the property – which is the amount you use to determine your capital gain. But if the lender forgives a recourse debt and it exceed the fair market value of the property, that is “cancellation of indebtedness “ ordinary income. This income may also be excluded from gain if it is “qualified principal residence” indebtedness. The point is that you need to know the tax consequences of a short sale before completing the transaction – to that end, we may be able to find you a good accountant to assist you in doing your due diligence.

“No Army can withstand the strength of an idea whose time has come…” I don’t think Victor Hugo was referring to IRA conversions when he said that, but there is nothing like a pretentious quote to get this blog moving.  So, as Ross Perot would say “here’s the deal” –

Due to law changes, the year 2010 may be an ideal time to convert your regular IRA into a Roth IRA.  Remember that a Roth IRA is an IRA turned on its head – you get no deduction for the Roth contribution, but the ultimate distributions from your Roth accounts are not taxable.  Since the inception of Roths over a decade ago, clients have been considering converting existing IRAs to Roths, only to have their knowledgeable CPA tell them they either earned too much or that the immediate tax hit would be too great on the conversion.  The new rules for 2010 change that equation.  To be eligible for a Roth conversion this year, your 2009 adjusted gross income cannot exceed $100,000.  In 2010, the $100,000 restriction will go away unless Congress changes the deal.  Moreover, taxes on income recognized in 2010 from a Roth conversion are deferred until 2011 and 2012.  So, 2010 may be an ideal time to convert, particularly if your account is still recovering from the market  beatdown from last year.  

There are other variables to consider in this analysis but give it some thought (and talk to your CPA).

Amid much ado, Congress has passed the “stimulus” bill, attracting proud praise from liberal commentators—and prodigious pans from conservative commentators. These polarized views were reflected by Congress, with almost all Democrats voting yea, and almost all Republicans voting nay.

As for income tax issues, while there is nothing especially sweeping in these measures—no radical overhaul of the Internal Revenue Code, no changes in tax rates—but there are tax saving provisions of note. Unfortunately, many PPCo clients will be unable to share the wealth, as most of these provisions contain phase outs that negate any benefit for taxpayers whose income is too high.

Individual tax:

The “Making Work Pay” credit is up to $400, or $800 per couple, for the years 2009 and 2010. Eligible taxpayers have adjusted gross income (AGI) of under $75K, or $150K per couple. This will not be a rebate check, but rather a reduction in FICA withholding from employees’ wages. The employer’s 6.2% share remains the same.

There will be a one-time $250 payment in 2009, mainly to retirees.

The alternative minimum tax (AMT) exemption “patch” is extended to 2009. This is an increase in the AMT exemption to about $46K, or about $71K per couple.

First time homebuyer tax credit increased to $8K for taxpayers with AGI under $75K, or $150K per couple. Even in today’s real estate market, that’s still not much bang for the buck in Silicon Valley.

New car deduction. Apparently there was heavy lobbying from U.S. automakers, as some taxpayers will be able to take an “above the line” sales tax deduction on their new car purchase. (“Above the line” means that it is deducted from AGI, and not an itemized deduction.) Even non-“green” vehicles, such as big SUV’s up to 8,000 pounds—and motor homes—qualify. Naturally, there are limits: the sales tax is deductible only on the portion of the purchase price under about $50K—thus about a $4K deduction in Santa Clara County. Also, the deduction is phased out for taxpayers with AGI over $125K, or $250K for a couple.

The education credit formerly known as “HOPE” is increased to $2,500 per year. Phase out at $80K AGI, or $160K per couple. They now call the credit the “American Opportunity Tax Credit,” perhaps because “hope” was used as a theme by a prominent presidential campaign.

Unemployment benefits up to $2,400 are not taxable for 2009. The remainder is entirely subject to federal income tax, but not California income tax.

Section 529 plans. These provide tax-free distributions for education expenses. For 2009 and 2010, beneficiaries can use distributions to pay for computers and internet.

Business tax:

“Bonus” depreciation. First year depreciation deduction of 50% is extended through the end of 2009.

Vehicle depreciation. First year depreciation deduction for business autos is raised to about $11K for 2009.

Section 179. Small business can expense up to $250K of equipment purchases during 2009. The old limit was $125K.

Net operating loss carryback. For “small” businesses, i.e., gross receipts less than $15 million, a five-year net operating loss carryback is available for losses incurred in 2008. For 2009, the carryback reverts to two years.

Old AMT or R&D credits. If a business would have been eligible to take the 50% business depreciation, they can instead elect to claim a refund of old accumulated AMT credits or R&D credits. This was already 2008 law, but the stimulus bill extends it to 2009. The credits must have originated before 2006.

David Cooper, PP & Co CPA, Manager

As the dust settles on the 2008 elections, we embark on the era of hope and change. What can taxpayers hope will—and won’t—change in 2009?

The Democratic Party enters 2009 with a decisive legislative edge, and arguably a sweeping policy mandate, but how will the new president and new Congress actually govern?

After taking control of Congress in the 2006 elections, the Democrats made no effort to repeal the Bush Administration’s tax cuts, although that would have been a quixotic effort given Bush’s veto pen. How will the Democrats behave with its new muscular majorities and an executive in office who is decidedly friendly to their interests?

Will the President-elect seek a pragmatic middle ground? As the transition process moves along, a number of commentators feel that Mr. Obama is doing just that, hiring some “moderate” Washington insiders with Clinton Administration ties, tapping the president of the New York Federal Reserve as the Treasury Secretary nominee, and is even keeping Bush’s Defense Secretary. Some on the far left indeed feel slighted, complaining, “Liberals left out of Obama’s cabinet.”

Obama and his transition team has even floated the idea of keeping President Bush’s tax cuts intact through 2009, delaying tax increases for at least a year. It is a stunning concession to the recent economic upheaval, especially given the many months of let’s-raise-taxes-on-the-rich rhetoric from Mr. Obama’s campaign.

Will something completely unexpected happen? While there have been tax surprises from past presidents (see below), sometimes they do just what they said they would do. Presidents Reagan and Bush Jr. both campaigned on tax cut platforms, and both delivered soon after their inaugurations.

President-elect Obama had campaigned on promises of a middle-class tax cut coupled with tax increases on the “wealthy,” usually defined as “anyone making over $250,000 per year,” although lower levels were occasionally bandied about by Mr. Biden.

Lower income “taxpayers” were promised refunds. This is essentially a proposed expansion of the earned income tax credit, where low income workers currently get a refund of up to about $5,000. Many in the lower income tiers pay little or no income taxes anyway, so the proposal indeed has a tinge of “spread the wealth” flavor.

Middle income taxpayers were promised a tax cut. Mr. Obama’s campaign proposal was essentially to keep the current tax brackets of 10%, 15%, 25% and 28%. These brackets are already in place under existing law for 2008 and 2009, but they are scheduled to automatically revert in 2010 back to the higher levels from 2000 without further congressional action. For 2009, the 28% bracket reaches up to taxable income of about $209K for a married couple, $172K for a single taxpayer.

Towards the upper end of the income spectrum, the current 33% bracket would increase to 36%. The 35% bracket (in 2009, for taxable income over $373K married, $186K single) would increase to 39.6%. Augmenting these increases would be reductions (“phase-outs”) of personal exemptions and itemized deductions. Consequently, the highest effective federal income tax rate would be over 40%.

Alternative minimum tax…oh, the horror! Most PP&Co clients know this tax all too well. Congress has already passed a temporary “patch” in AMT, increasing the exemption amounts that reduce or eliminate AMT for some taxpayers—however; the patch is for 2008 only. The Obama proposal would be keep the AMT, but to make the patch permanent. Note that the increase in regular tax rates (max. 39.6%) would keep some higher income taxpayers out of AMT entirely, given that their “regular” tax would be higher than the “alternative” tax.

Capital gains…ah, the memories. Although realizing a capital gain is becoming scarce in the current environment, an increase in long-term capital gains rates is proposed. Most taxpayers are now taxed at 15% for long-term capital gains and qualified dividends. These would be taxed at 20% under the plan Obama campaigned on.

Business taxes. Senator Obama had spoken in general terms of lowering the corporate tax rate, as long as unnamed “loopholes” are closed. He apparently supports keeping the current $250K limit for first-year expensing (“Section 179”) of equipment purchases for 2009, as well as making the R&D credit permanent.

Estate tax. Under current law, the year in which someone dies can have a dramatic tax impact on the tax borne by the estate: the exemption is $2 million for 2008, increasing to $3.5 million in 2009, is completely repealed in 2010, but then returns in 2011—with an exemption of only $1 million. Obama’s campaign had proposed a $3.5 million exclusion.

Other non-specific proposals included a possible healthcare credit for small business, education tax credits, tax-free unemployment benefits (for 2008 and possibly 2009), and “green” energy incentives.

With respect to Social Security taxes, during the campaign Mr. Obama was “considering” an extra 1% to 2% withholding on employees on the portion of their wages in excess of $250K per year, “to be phased in over many years.” Employers would match the extra withholding. Self-employed individuals would pay both portions.

Apparently this means that employees earning wages up to about $107K (based on the 2009 limit as currently constituted) would pay Social Security at a 6.2% rate. Wages between that amount and $250K would pay zero additional Social Security. The portion of one’s wages over $250K would incur Social Security tax in the 7% to 8% range.

Keep in mind, however, that Social Security is known as the “third rail” of American politics: anyone who touches it dies. The political graveyard is indeed filled with many a miscreant politician who dared to propose even the mildest adjustment to the Social Security regime.

Will the new president keep his word, at least with respect to where he promised vote-getting tax reductions? Will he seek additional tax increases unmentioned in the campaign? History provides cautionary counsel.

George Bush Sr. had campaigned on the, “read my lips, no new taxes!” pledge, but while jogging a couple years later, told reporters to “read my hips” and pointed to the appropriate portion of his anatomy. Days later he signed a tax increase bill. Many of us remember Bill Clinton’s promised middle-class tax cut. It was part of his standard stump speech and a central theme to his campaign. Within a month after taking office, however, he announced to the nation that although he had “never worked harder in my life,” he could not implement his tax proposal; rather, a retroactive tax increase was enacted for 1993. Both men paid dearly in political terms: Bush lost his job and Clinton lost the congress.

Will President Obama defy history and keep his word? One can hope.

David Cooper, PP & Co CPA, Manager

Christopher Thornberg informed and entertained the crowd at this year’s Financial Forum. His analysis of financial trends was filled with humor, insight and optimism (if obscured by some grey clouds). As he has done in past years, Thornberg gave the audience both his astute interpretation of the current economic standing and his calculated prediction of where the economy is headed. As he sees it, the country went from denial to outright hysteria. He clarified that “Things are bad . . . but not that bad!”

He explained that we are, in fact, experiencing a recession, which is indicated by the noted increase in unemployment. Any relief the GDP has seen recently is over. Exports will drop because the US Dollar is recovering internationally, and the rebate was not much more than a temporary boost. Even so, he proclaimed, “Recovery is a given,” just not the timing of it.

In fact, he considers this downturn of the economy, specifically California’s, a source of hope and long-term benefit to the State. He believes that the return of the housing market to a more natural price level will bring jobs and financial rejuvenation to the region. Also, he expects the desperation that most Californians are feeling will motivate them and their governmental representatives to implement “real fiscal reform” that is so badly needed.

By the end of the night, the audience was feeling grounded in reality- with the good and the bad. His clear thinking and forward looking approach quieted many of the concerns plaguing us all. Thornberg gave his onlookers the tools to survive the current slump and the confidence to be patient for the recovery. Recap by Helen Zelinsky, PP&Co staff member.

To view Chris’s slide presentation it is available on his website at http://www.beaconecon.com/products/Presentations/vica.pdf .

Chris’s presentation was also videotaped and is available on our website. The Petrinovich Pugh & Co. website is: http://www.ppandco.com/.

Welcome to the unveiling of the new PP&Co ; our effort to translate current events in the world of tax into something a bit more understandable and accessible to those who don’t have the Internal Revenue Code next to the latest Grisham novel on the bedside table.Whether they call it the “Bail-out Plan”, “Rescue Plan” or the “We’re Trying To Save Our Phony Baloney Jobs Plan”; the recently passed Emergency Economic Stabilization Act (see this website and our newsletter for a detailed summary of the Act) contains some significant law changes that have flown under the radar. One is the alternative minimum tax (AMT) patch, which increases the 2008 AMT exemption amount to $69,950 for married couples filing jointly and $46,200 for single taxpayers. This patch will insulate middle-income taxpayers from the tentacles of the AMT. This patch will save millions of taxpayers from falling into AMT in 2008, and was expected even before the recent calamities.What was not foreseen was a provision that accelerates and eases the ability of those who have AMT credits from prior years (usually from the exercise of Incentive Stock Options) to release those credits. A brief history – an unintended and agonizing consequence experienced by many taxpayers who exercised Incentive Stock Options during the dot.com bust of 2000-2001 was that they had to recognize phantom income for AMT purposes and pay substantial AMT tax. While this tax was supposed to be refundable over time, income and phase-out limitations made it impossible to recover the credit. Past efforts to solve this problem have had a limited impact due to phase-out limits that kept many from receiving a benefit. The new law allows 50% of the long-term unused minimum tax credit to be refunded over each of two years. That’s it –no phase-outs, no catches.The new law will also abate AMT liability stemming from the exercise of ISOs before 2008, effective for any unpaid liability on the law’s date of enactment. Interest and penalties on the unpaid amounts would also be abated. For many Silicon Valley taxpayers, this is a very big deal.