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Quarterly
Review Fall 2008
Outsourcing Your
Payroll Only
Makes Sense Tax Planning Tips Can Mean
There's more to managing payroll than
writing checks and handing them out on
Money In Your Pocket
time. It is critical to get the process right, L owering your taxes starts with proper tax credit, the education tax credits, and
and mistakes can be costly in terms of fines planning, and the sooner you begin, the so forth). By deferring income every other
and penalties as well as employee reten- better. Given the temporary nature of many year, you may be able to substantially in-
tion. Fortunately, the payroll function can of the tax breaks currently in effect, plan- crease your eligibility for these tax breaks
be separated from the rest of the business ning is essential. In order to keep more of every other year.
function relatively easily. what you earn, you need to minimize your Alert: Depending on the outcome of the
If dealing with your company’s payroll is tax liabilities and take advantage of every November elections, high-income taxpay-
dominating your valuable time, consider available savings opportunity. This article ers (those with taxable incomes exceeding
these benefits of outsourcing: presents some tax planning ideas for you to around $250,000) stand a good chance
consider. of seeing higher regular
Experience. Outsourcing allows the payroll
function to be performed by individu- Leverage Standard Deduc- income tax rates in 2009.
als well-versed in federal, state and local tions by Bunching Deduct- If that becomes the case, it
payroll tax laws and regulations. Most ible Expenditures. Are your may pay to accelerate in-
business owners and their staff do not have 2008 itemized deductions come from 2009 into 2008.
the time or resources to keep up with these likely to be just under, or Time Investment Gains
constantly changing regulations. just over, this year’s stan- and Losses. As you evalu-
dard deduction amount? If ate investments held in
Reliability. In-house payroll processing
so, consider the strategy of your taxable accounts,
is only as reliable as the staff in place to
bunching together expen- consider the impact of
do the work. This means illness, vacation,
ditures for itemized deduc- selling some appreciated
or turnover can cause inefficiencies in
tion items every other year, securities, especially those
processing. Outsourcing ensures the speed
while claiming the standard you’ve held for over a year
and quality of your payroll processing
deduction in the interven- that would generate long-
won’t vary in accordance with your staffing
ing years. Bunching two years’ worth of term capital gains. The maximum federal
issues, and you’ll never have to train new
expenses into one year enables you to income tax rate on most long term capital
hires.
increase your total deductions over the gains from 2008 sales is only 15%. So,
Saves Time. Business owners are most two-year period and avoid losing the tax now may be a good time to cash in some
effective when they use their unique talents benefit from your deductions. long-term winners to benefit from histori-
to the best of their ability. Outsourcing can
Examples of deductible items that can be cally low tax rates. Depending on how the
free up time to concentrate on core com-
bunched together include: annual property November elections turn out, higher capital
petencies and allow more time for running
taxes, annual home mortgage interest, gains taxes in 2009 are a definite possibil-
the business.
charitable contributions, and state income ity.
Confidentiality. Keeping employee payroll tax payments. Selling some loser securities (currently
information confidential is an important
Consider Deferring Income. It may also worth less than you paid for them) be-
business practice. Outsourcing can provide
pay to defer taxable income from this year fore year-end can be a good idea too. The
a confidential way to pay owners and em-
to next year, especially if you expect to resulting capital losses will offset capital
ployees without disclosing specific payroll
be in a lower tax bracket in 2009. Defer- gains from other sales this year (including
information to company employees.
ring income may also be helpful if you’re short-term gains from securities owned for
Avoid Penalties. Calculating withholdings, affected by unfavorable phase-out rules one year or less). If capital losses exceed
taxes and filing payroll-related tax returns that reduce or eliminate various tax breaks capital gains, the excess losses can be used
(continued "Payroll" on Page 2) (such as itemized deductions, the child (continued "Planning" on Page 2)
Insight. Integrity. Results.™
Smith Elliott Kearns & Company, LLC Page 2
"Planning" ... elections turn out. To hedge against that (and may change again for the 2008 tax
(Continued from Page 1) possibility, consider the following ideas: year), you may want our assistance.
to shelter up to $3,000 of your high-taxed • Take Dividends in 2008. They will be Don’t forget about your estate. The federal
ordinary income from salaries, bonuses, taxed at a federal rate of no more than estate tax exemption for 2008 is $2 million.
self-employment, and so forth ($1,500 if 15%. If you wait, dividends in future For 2009, the exemption is scheduled to
you’re married and file separately). years could be taxed at 39.6% or higher. increase to $3.5 million, and for 2010 it is
2008 may be a good year for dividends, • Do Stock Redemption Deal in 2008. scheduled to be repealed – but just for that
stock redemptions, and stock sales. Higher Depending on exact circumstances, one year. The most likely scenario is that
tax rates on dividends and long-term gains payments from your corporation will we will continue to have a federal estate
are scheduled to kick in starting with 2011. generally be treated as either taxable tax beyond 2010, so planning to avoid or
The maximum federal rate on dividends dividends or as proceeds from selling minimize this tax should still be part of
will jump from the current 15% to a your shares, and taxed at a maximum your overall financial game plan.
whopping 39.6%, and the maximum rate federal rate of no more than 15%. If you Reducing your estate by making annual
on most long-term gains will jump from wait, you run the risk of paying a 20% gifts continues to be an easy and tax-smart
the current 15% to 20%. While 2011 may to 39.6% federal tax rate on these pay- strategy. If you have some favorite relatives
seem to be in the distant future, we could ments. or unrelated persons, you can give each of
see those higher tax rates as early as next • Sell Stock in 2008. Speaking strictly them up to $12,000 this year (so can your
year – depending on how the November from a tax-rate perspective, selling spouse). These gifts will reduce your estate
shares in 2008 and paying a federal rate tax exposure without any adverse gift tax
of no more than 15% (for shares held effects.
over one year) beats paying a 20% rate, Early planning is the key to making the
or higher, on gains from sales in future most of your opportunities. Call us soon to
years. schedule a tax planning strategy session.
Take advantage of generous but temporary
tax breaks:
• Section 179 Deduction. For tax years
beginning in 2008, the maximum Sec- "Payroll" ...
This informal newsletter of accounting, tax and tion 179 deduction is $250,000, but it’s (Continued from Page 1)
investment developments is published quarterly for can not only be a hassle, but doing it incor-
use by clients and friends of Smith Elliott Kearns scheduled to drop back to $130,000 for
& Company, LLC. tax years beginning in 2009. Various rectly can result in stiff penalties. Accord-
limitations apply to the Section 179 ing to the IRS 40% of small businesses pay
Editor an average penalty of $845 per year for
Barbara J. Hose deduction privilege, so please contact us
if you need more information. late or incorrect fil-
Professional Services ings. Avoid penalties
Auditing & Financial Planning • 50% First-year Bonus Depreciation. In from miscalcula-
Business Advisory Services addition to the Section 179 deduction, tions and late filings
Business Valuations your business can also claim first-year
Computer Advisory Services by outsourcing to
Employee Benefit & Retirement Plans bonus depreciation equal to 50% of experienced profes-
Health Care Advisory Services the cost of most new equipment and sionals.
Mergers & Acquisitions software acquired and placed in service
Payroll/Bookkeeping Direct Deposit.
Personal Financial Planning by December 31st of this year. Act Increasingly, busi-
Tax Compliance, Advocacy & Planning now - this break will expire at year-end nesses are recog-
unless Congress takes further action. nizing the benefits
Offices
480 N. Potomac Street, Hagerstown, MD 21740 Watch for the alternative minimum tax. of direct deposit to
301-733-5020 While many recent tax-law changes may their employees and
19 Brookwood Avenue, Carlisle, PA 17015 be helpful in reducing your regular federal their business.
717-243-9104
income tax bill, they don’t do much to It saves employees a trip to the bank, and
637 Frederick Street, Hanover, PA 17331 reduce the odds that you could owe the eliminates time-consuming and error-prone
717-637-5915
dreaded alternative minimum tax (AMT). paperwork for businesses. However, provid-
804 Wayne Avenue, Chambersburg, PA 17201 Therefore, it’s critical to evaluate all tax ing direct deposit can be difficult for small
717-263-3910
planning strategies in light of the AMT businesses that are not using an outsourced
www.sek.com rules before actually making any moves. payroll provider.
info@sek.com
Because the AMT rules are complicated (continued "Payroll" on Page 3)
Special R epor t – P age 1
EMERGENCY ECONOMIC
STABILIZATION ACT OF 2008
O n October 3, 2008, Congress passed and President Bush signed the Emergency Economic
HIGHLIGHTS: Stabilization Act of 2008. Although the new law's primary purpose is to solve the credit crunch
in the financial markets, it also serves as one of the largest tax bills in recent years. The new
F $150 Billion in Tax Relief law makes almost 300 changes to the Internal Revenue Code and over $150 billion in separate
tax breaks. The majority of the changes provide taxpayer relief immediately. Consequently,
F Almost 300 Changes to
year-end tax planning takes on a special urgency this year to maximize use of these new tax
the Tax Code
breaks both before 2008 ends and immediately at the start of 2009.
F 2008 AMT Patch
INDIVIDUAL TAX INCENTIVES
F Tax Extenders
AMT Patch. Congress included an alternative minimum tax (AMT) patch in the new law but
F Energy Incentives
only for the 2008 tax year. The AMT exemption amounts increase $69,950 for married couples
F Enhanced Child Tax Credit filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household, and
$34,975 for married couples filing separately for 2008.
State and Local Sales Tax Deduction. The American Jobs Creation Act of 2004 and subsequent
legislation allowed individuals to deduct state and local general sales taxes in lieu of state and local income taxes, but expired at the end of
2007. The new law makes the deduction retroactive for 2008 and extends it for two years through December 31, 2009.
Higher Education Tuition Deduction. The new law extends through December 31, 2009, the above-the-line
higher education tuition deduction. The deduction allows eligible taxpayers to deduct the costs of qualified
higher education expenses paid during the year for themselves, a spouse, or a dependent. The maximum
deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for
joint, filers). Taxpayers whose income exceeds that limit but does not exceed $80,000 ($160,000 for joint
filers) may deduct up to $2,000 in qualified expenses.
Additional Standard Deduction for Real Property Taxes. The new law extends the additional standard
deduction for real property taxes for non-itemizers through 2009. Congress authorized a maximum $500 additional standard deduction
($1,000 for joint filers) in the Housing Assistance Tax Act of 2008 but made it available only for the 2008 tax year. The deduction is in ad-
dition to the standard deduction.
Teachers' Classroom Expense Deduction. For 2008 and 2009, teachers and other education professionals can deduct,
above-the-line, up to $250 of certain out-of-pocket classroom expenses, including the cost of books, supplies, equipment,
and software used in the classroom, this deduction is available to qualified educators regardless of whether or not they item-
ize their deductions.
Tax-Free Distributions from IRAs for Charitable Purposes. This popular charitable contribution option had expired Janu-
ary 1, 2008. The new law permits individuals aged 70 ½ or older to make tax-free distributions from IRAs for charitable purposes through
December 31, 2009. The maximum contribution limit for 2008 and again for 2009 is $100,000.
Incentive Stock Options. The new law provides relief to those left holding worthless stock options but a large tax bill based on AMT
calculations when the tech industry collapsed. The new law will abate AMT liability stemming from the exercise of incentive stock options
(ISOs) before 2008, effective for any unpaid tax liability on the law’s date of enactment. Interest and penalties on the unpaid amounts
would also be abated. The law allows all individuals, including those who paid their ISO AMT liabilities, to accelerate the refund of the
minimum tax credit that has not been used. The law also increases the minimum tax credit by 50 percent of any interest and penalties paid
before the date of enactment.
Smith Elliott Kearns & Company, LLC
www.sek.com
Special R epor t – P age 2
Homeowner Debt Forgiveness. The rescue plan extends a temporary rule for cancellation
of indebtedness income. When a lender forecloses on property, sells the home for less than
the borrower’s outstanding mortgage and forgives all or part of the excess mortgage debt,
the tax code treats the cancelled debt as taxable income to the homeowner. The Mortgage
Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax those dis-
charges involving up to $2 million of indebtedness ($1 million for married taxpayer filing
a separate return) secured by a principal residence and incurred in the acquisition, con-
struction or substantial improvement of the residence. The new law extends this treatment
from the end of 2009 through 2012. The Mortgage Forgiveness Debt Relief Act also helps
homeowners whose mortgage debt may have been reduced through restructuring. Short
sales and deeds-in-lieu-of-foreclosure are also covered by the extension.
Energy Incentives. The new law extends a host of energy tax incentives, some targeted to consumers and others to producers and manu-
facturers. The energy incentive impacting most individuals is the Code Sec. 25C credit for the purchase of residential energy property. A
credit of up to $500 is available for non-business energy property that meets the requirements for qualified
energy efficiency improvements or qualified residential energy property expenditures. Eligible improve-
ments include insulation materials, exterior windows, including skylights and exterior doors.
Child Tax Credit. The new law enhances the child tax credit. The credit is currently refundable to the
extent of 15 percent of the taxpayer's earned income in excess of approximately $12,050 (reflecting infla-
tion adjustments from the original floor of $10,000). Under the new law, the earned income floor falls to
$8,500. Additionally, the rescue plan changes the definition of a "qualifying child" with respect to age and
joint returns, clarifies the tiebreaker rules, and ties the child tax credit to the child dependency exemption.
BUSINESS TAX INCENTIVES
Research Tax Credit. The new law extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also modifies the
credit, increasing the alternative simplified credit while repealing the alternative incremental research credit. The new law increases the
credit to14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preced-
ing tax years, and makes some technical corrections.
Leasehold and Restaurant Improvements. Under the new law, qualifying restaurant improvements and leasehold improvements will be
eligible for 15-year cost recovery, rather than a 39-year period, through December 31, 2009. Similarly, Congress authorized a 15-year
recovery period for depreciation of certain improvements to retail space. This treatment is extended through December 31, 2009, and ap-
plies to retailers that own or lease their buildings.
Charitable Contributions. The Tax Code gives businesses enhanced deductions for contributions
of food to charitable organizations, as well as contributions of books and computer equipment to
qualifying schools. The new law extends these tax breaks through December 31, 2009.
S-corp shareholders are also eligible for special tax treatment when making charitable contribu-
tions of qualifying property. The new tax law extends the special rule allowing S-corp share-
holders to take into account their pro-rata share of charitable deductions even if such deductions
would exceed the shareholder’s adjusted basis in the S-corp through December 31, 2009.
Energy. The new law extends several energy-efficiency and energy property tax incentives as well as incentives to encourage the produc-
tion of renewable energy. The Code Sec. 179D deduction for energy efficient commercial buildings is extended through December 31,
2013. The credit for producing electricity from qualified wind facilities has been extended through December 31, 2009. The credits for
producing electricity through biomass and other qualifying renewable sources are extended through September 30, 2011. The credit for
solar energy, fuel cell, and microturbine property is extended through December 31, 2016.
Smith Elliott Kearns & Company, LLC
www.sek.com
Insight. Integrity. Results. ™
Smith Elliott Kearns & Company, LLC Page 3
Owners of Multiple Understanding the Revised Form 990
Homes -- Beware!
The IRS has released the final draft of the revised Form 990, Return of Organization Ex-
O wners of multiple empt Form Income Tax, with the most significant changes in over 20 years. The revisions
homes need to mark to this form include a core form of eleven pages and a series of 16 supporting schedules.
January 1, 2009 on The core form allows an organization to describe its exempt accomplishments and mission
their calendars. That’s up-front and provides more opportunities throughout the form to explain its activities. The
the day the rules revised Form 990 will be effective for years ended December 31, 2008 and later.
change regarding how much profit you may
be able to exclude on your federal tax return The most notable theme emerging from the revisions is a demand for more detailed infor-
when you sell your home. mation about the internal governance and policies of nonprofit organizations, as well as
increased reporting of compensation and benefits for highly-paid employees.
Under current law, if you have lived in a
home as your primary residence for two The IRS will allow for transition relief for smaller organizations by phasing-in the require-
out of the last five years, you can exclude ment to file the new form over a three-year period. These organizations will have the option
a gain of $250,000 ($500,000 for joint to file Form 990-EZ in lieu of Form 990 providing it satisfies both the gross receipts and
filers) from the sale of the home. Under asset tests below:
the new law, if, after January 1, 2009, there May file 990-EZ for: If gross receipts are: And assets are:
were periods the home was a second home
rather than a primary residence you will 2008 tax year (filed in 2009) > $25,000 and < $1 million < $2.5 million
have to pay tax on a portion of the gain 2009 tax year (filed in 2010) > $25,000 and < $500,000 < $1.25 million
even if you meet the two of the last five 2010 and later tax years > $25,000 and < $200,000 < $500,000
years test. (This exemption may not apply to certain supporting organizations.)
Please contact us on how this new provi- Organizations with gross receipts of $25,000 or less must file Form 990-N, Electronic No-
sion might impact you. tice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ.
Recommendations. As a result of these significant changes, we are encouraging our non-
"Payroll" ... profit clients to become familiar with the new requirements before the organization’s next
(Continued from Page 2) year end. We expect significantly more time will be required to compile information, as
You know your business inside out. It well as to prepare the new Form 990. We also expect this form to require more involvement
only makes sense to leave your payroll to by management in the review process.
experts. Leaving the experts to manage In preparation for filing the new Form 990, nonprofit organizations should consider taking
something that is not one of your business’s the following actions:
main activities makes sense. If you’ve ever
experienced late paychecks, accounting • Identify any “non-independent” voting members of the governing board
mistakes, missed tax payments or penalties, • Estimate the total number of “volunteers”
then you know how much trouble payroll • Ensure preparation and maintenance of contemporaneous minutes for meetings of the
can be. Factor in potential cost savings, plus governing board and governing board committees
substantial savings in time, energy and frus- • Identify or create policies and procedures for chapter, branches, and affiliates
tration, and it’s easy to make the decision to • Develop a process for sharing the draft or final Form 990 with the governing board
outsource your payroll function. • Identify or create governance policies addressing: conflicts of interest; whistleblower
protection; document retention and destruction; objective determination of compensa-
SEK&Co tailors payroll services to meet tion of the organization’s key officers and employees; and tax exemption ramifications
individual client needs. There are no mini- of joint ventures or similar arrangements with taxable entities.
mums or maximums for check processing, • Consider whether government documents, conflicts policy, and financial statements will
fees are based on services rendered for each be disclosed to the public.
client and are not sold as pre-set packages. • Identify officers, directors, trustees, key employees, highest compensated employees,
Flexibility includes e-mail, fax, phone or and independent contractors. Ensure tracking of reportable W-2/1099 compensation.
secure remote transmission for sending your • Ensure forms of compensation are being tracked for individuals listed above in anticipa-
data. We can even process payroll directly tion of providing compensation breakdowns.
from your QuickBooks® file. Direct deposit • Ensure tracking of entertainment or travel expenses on behalf of federal, state, or local
and e-filing of payroll tax returns can fur- public officials in view of new federal-level prohibitions on expenditures with potential
ther simplify your payroll responsibilities. criminal penalties.
Call your local SEK&Co office today for The new Form 990 may be a significant burden for nonprofits, particularly small organiza-
the details, and turn your focus back to run- tions. Starting now to identify what information is required will ensure accurate and timely
ning your business.
PRSRT STD
U.S. POSTAGE PAID
Hagerstown, MD 21741
Permit No. 39
P.O. Box 947
Return Service Requested
Inside
Outsourcing Your Payroll ....1
Tax Planning Tips ...............1
Special Report
Owners of Multiple
Houses - Beware! .............3
Revised Form 990 ...............3
The Better Way ...................4
New Hanover Office ...........4
Printed on Recycled Paper
Look for Our New Building in
The Better Way Hanover - 55 Wetzel Drive!
H i Bracket's favorite nephew
wanted to buy his first house
and needed $50,000 for the
down payment. Hi, wanting
to help, gave him the money
so all could live happily ever
after. require that if a certain rate
When tax time came, Hi was of interest was not charged on
surprised to find that since a loan, then interest income We are excited to announce renamed Smith Elliott Kearns
the gift was over $12,000, he would be imputed to the lender that we are preparing to move and Company, LLC.
needed to file a federal gift anyway (however this rate is our Hanover office to a new We would like to thank our
tax return. While no money generally low). Also, loans of location at 55 Wetzel Drive clients, the community, and our
was due with the return, the up to $10,000 may well be ex- in Hanover (behind Hanover business colleagues for their
level at which his estate would empt from this requirement and Honda). The practice has been continued support of the firm.
be taxed had been lowered so may loans of up to $100,000 in the current Frederick Street We are proud to note that we
by $38,000 and at a 45% if the loan is between individu- location since the 1970’s and continue to serve some of the
federal estate tax rate - that als and the borrower's income has undergone several building families of clients dating back
could hurt! He certainly didn't is at a certain level with respect expansions. Due to the con- to Mr. Howe’s original practice.
intend this to happen; all he to investment income. tinued growth and success of
our firm and clients, we have We hope to move to the new lo-
wanted to do is help! There are many other consider-
outgrown our current space. cation before tax season begins.
The Better Way would be to ations that should be addressed Our phone number will remain
give the excludable $12,000 in such a program and we often The original practice was the same. If you want to con-
and loan the balance which help clients find the right mix established by Mr. Ed Howe in firm your appointment location,
could be forgiven as gifts in for the whole family. Give us a the 1950’s. In 1985 SEK&Co give us a call at 717-637-5915.
future years. Tax rules would call to see what's best for you! acquired the practice and it was Stay tuned for more details.
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