New Rules Tighten Proof of Contributions

Guidelines issued by the IRS increased the level of documentation required for many contributions to charitable organizations. All monetary contributions must now be supported with either bank records or a written receipt from the organization that gives information about the date and amount of the donation.

Until this change, documentation from the charity was only required for individual contributions over $250. Now that bank records or receipts are required, some smaller cash contributions that we previously deducted are likely not going to qualify. For instance, dropping cash in the collection plate at church, contributing to the Salvation Army's kettle, and pitching in a buck or two at your Rotary meeting will be nondeductible without a receipt from the organization.

Sometimes it seems like the IRS has it in for charities. I'm not sure what that motivation would be, so I'll presume I'm wrong. I just don't see the damage in allowing some minimal threshold for deductible cash contributions with no receipts, if the circumstances seem reasonable.

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IRS to Delay Refund Processing for Some Filers

Because Congress failed to fix the alternative minimum tax (AMT) until the last moment, the IRS announced that it will have to delay processing for some returns potentially affected by the AMT changes. Instead of delaying all returns, as was originally thought to be the case, the IRS will only delay processing of returns that use the affected forms.

The forms that will trigger an e-file rejection until the IRS systems have been updated are the following:

• Form 8863, Education Credits.
• Form 5695, Residential Energy Credits.
• Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
• Form 8396, Mortgage Interest Credit.
• Form 8859, District of Columbia First-Time Homebuyer Credit.

This seems to be pretty good news, as these forms are not incredibly common among returns filed by our office. The Education Credit form is probably the one that would affect the most filers, but the IRS still expects to be ready to accept these returns by February 11. The number of returns filed by our office before February 11 last year? Three.

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2008 Mileage Rates Released

The IRS announced that the mileage rate for business use of a vehicle will increase to 50.5¢ per mile for 2008. This is just a two cent increase from 2007.

For moving and medical expenses, you can use a mileage rate of 19¢ in 2008. This is actually a one penny drop from 2007. Apparently there are special, cheaper gas stations you can use when moving or heading to the hospital.

And since the rate is set by statute, the charitable mileage rate of 14¢ remains another year.

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Business or Hobby?

Is raising pigs for your kids' 4-H project a business? How about selling kitchen supplies just so you can buy at wholesale prices? In many cases, the IRS has found activities like these to be hobbies, not businesses. The IRS has issued fact sheet FS-2007-18 to explain the rules for determining if an activity qualifies as a business and what limitations apply if it's a hobby.

Basically, if you don't have a realistic chance of making money, the IRS will want to call your activity a hobby. The big downside of this treatment is that your expenses have to go on your Schedule A, in the section that's reduced by 2% of your gross income from all sources. The expenses also can't be more than the gross income from the activity. Don't worry too much about how to report it; just know that it's a lose-lose situation if your activity is deemed a hobby.

Oh, and even if you don't get any benefit from your deductions because of the rules above, you still get to pay tax on the revenue from the activity. Isn't that generous?

Things you can do to help your activity seem more like a business include having a business plan that realistically shows you could make money on the deal, handling things in a businesslike manner (business cards, advertising, etc.), and, well, making money! If you have a profit three out of five years, the IRS will leave you alone. Of course, you can be in a legitimate business and lose every year; the burden of proof is yours, though.

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Tax Preparers Gone Wild

Nothing against our friends in the transportation industry, but if your school bus driver is preparing your tax return, you might have a problem. Such was the case for over 300 individuals in Missouri

A daytime bus driver and nighttime tax preparer, Yolanda White, has been accused of filing scores of bogus tax returns for people. Apparently, the IRS audited 30 of her clients, and they all contained fraudulent deductions. Guess who else the IRS will be auditing? That's right, the other three hundred clients of hers.

So when it comes to taxes, remember that the same person who gets you bussed can also get you busted.

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Do You Owe Tax on eBay Sales?

The friendly folks at the Internal Revenue Service want to make sure you know that if you sell things on eBay, you might owe them money. They issued a summary that gives some guidelines on whether you're in the 'business' of auction sales.

Basically, if you're just selling things occasionally, in the online equivalent of a garage sale, you're clear. But if your activity is repetitive, or you buy items with the intention of reselling them for a profit, you could well be in business, whether you know it or not. In addition to regular income tax, the Service could want an extra 15% self-employment tax.

They just wanted to make sure you know! ;)

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New Rules for 2007

As we begin the new year, you'll want to keep in mind some of these new or updated tax law provisions that take effect January 1:

Individuals

• Charitable contributions have to be documented in order to count. Cancelled checks or receipts can fill that requirement. No more deductions for cash in the offering plate or Salvation Army kettle, though.
• Private Mortgage Insurance (PMI) is now deductible if you get your mortgage in 2007 or beyond.
• You can contribute an extra $500 to your 401(k) plan with a new maximum amount of $15,500.

Businesses

• Maximum amount of equipment purchases you can immediately expense instead of depreciate increases to $112,000.
• Standard mileage rate is up to $0.485 per mile.
• For contractors and manufacturers, the pruduction activities deduction increases from 3% to 6% of your income.

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IRS Gives Business Formula for Telephone Tax Refund

The IRS has announced a formula that businesses can use to determine the amount of a telephone tax refund. A while back, I discussed the fact that individual taxpayers will receive refunds of telephone taxes that were determined to have been illegally charged by the government. Individuals were given a formula based on the number of dependents that would determine their refund amount, but businesses were supposed to add up the tax from their phone bills.

Instead, the IRS has issued an easier way to calculate a refund amount. It's still a little complicated, but better than having to dig out all your old phone bills. You're supposed to figure the percentage of your bill that was made up of the tax, based on your September and April 2006 bills, then apply that percentage to your total phone bills for the refund period, March 1, 2003 to July 31, 2006.

The bottom line is that when we prepare a business's tax return, we're going to need those two months' phone bills in order to figure the refund that's due you. A business, for this purpose, is a corporation or partnership

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