2009 Small Business Tax Workshop Book

Table of Contents / Page No.

ACCOUNTING METHODS 1 - 25
Cash Method 1 - 7
Deductions 2
Gross Receipts Test for Cash Method 3 - 4
More than $1 Million and Not More than $10 Million Test 4 – 6
Miscellaneous Rules 7
Accrual Method 8
Special Advance Payment Rules 8 – 9
Advance Payment for Services 8 – 9
Prepaid Rent 9
Books and Records 9
Advance Payment for Sales 10
Exception for inventory goods 11 – 12
Other Methods 12 – 14
Indirect Job Costs for Small Contractors 15
Worksheet – Percentage of Completion Method 16
Worksheet – Completed Contract Method 17
Changing Accounting Methods 18
Automatic Changes in Accounting Methods 19 – 20
Form 3115 Filing Deadline 20 – 21
Cash to Accrual – Automatic Change Procedure 22 – 23
Accrual to Cash – Automatic Change Procedure 24 – 25

SOLE PROPRIETOR 27 – 80
Recordkeeping 27
Business Audits and Recent Trends 27 – 28
Reconstructed Income by the IRS 28 – 29
Business Start Up Expenses 30
Amounts paid or incurred after October 22, 2004 30 - 36
Expenditures incurred on or before October 22, 2004 30 – 31
Distinguish Deductible and Amortizable Costs from Capitalized Costs 31
Investigation expenses 31
Pre-opening costs 31 – 32
Election to Deduct Start-up Costs 33
Business Expansion Costs 34 – 35
Treatment of Costs after Disposition or Abandonment of Business 35
Seminar Costs 36
Sole Proprietorship – Non-Tax Considerations 37
Sole Proprietorship – Tax Considerations 37
Advantages / Disadvantages of Sole Proprietor Operations 37
Hiring your Spouse or Child 38 -41
When to Report Rental Income on Schedule C 41

SCHEDULE C, PROFIT OR LOSS FROM BUSINESS 42 - 60
Line B, principal business or professional activity code 42
Line D, employer ID number 42
Line G, material participation 42
Part I: Income, Lines 1 to 7 42 - 43
Part II: Expenses, Lines 8 to 31 43 - 57
Car and truck expenses, Line 9 43 – 46
Simultaneous use of multiple automobiles 44
Consistency rules 44
Taxpayers with an Office-in-the-Home 46
Line 11, Contract Labor 47
Employee benefit programs, Line 14 47
Pension and profit-sharing plans, Line 19 47
Rent or lease, Line 20 48
Self Charged Rent 48 - 49
Repairs and maintenance, Line 21 49 - 50
Taxes, Line 23 50
Cell Phones 50 - 51
Wages, Line 26 51
Other expenses, Line 27 52
Bad debts 52
Expenses for business use of you r office, Form 8829 52 - 58
Net profit or loss, Line 31 58
At Risk, Line 32 58 - 59
Schedule C Example 59 – 60

COMPONENTS OF SELLING BUSINESS PROPERTY 61 – 71
Depreciation Recapture and Unrecapture 61
Recapture of net ordinary §1231 losses 61 - 62
§1245 – Gain from Disposition of Certain Depreciable Property 62
§1250 – Gain from Disposition of Certain Depreciable Realty 62 – 63
Depreciation allowed or allowable 63
Recapture of depreciation under Code Sec. 1245 63 – 64
Unrecaptured Section 1250 Gain 66
What about depreciation overlooked? 66 – 71

BUSINESS SALE 72 – 80
Example – Business Sale 72 – 75
Form 8594 – Asset Acquisition Statement 76
Allocating Purchase Price 76 – 77
Miscellaneous Schedule C Business Sale Issues 79 – 80

HOBBY vs. BUSINESS 81 - 86
Determination Factors 81
Hobby Loss Rules 82
Deductions 82 – 83
Example 83 - 86

DAY TRADER 87 – 98
Investors 87
Dealers 87
Traders 87
Tax Treatment 89
Mark-to-Market Election 89 – 90
Tax Reporting Issues for Stock Traders 90 - 91
Trader – Example 91 – 95
Mark-to-Market Election – Example 96 - 98

MEALS AND ENTERTAINMENT 99 - 110
Business Requirement for Meals and Entertainment Expenses 99
50% Limitation for meal and entertainment 99
Exceptions to the 50% limitation 99 - 100
Substantiation of Travel and Entertainment Expenses 100
Adequate Records 101
Documentary Evidence 101
Per Diem Method of Substantiating the Amount of Travel Costs 101 - 102
Proration of federal per diem rate for partial travel days 102 - 103
Transportation Industry Workers 103
Optional high-low substantiation method for per diem travel expense 104
Domestic Per Diem Rates – Wisconsin – FY 08 105
Domestic Per Diem Rates – Arizona – FY 08 106
Summary 107
Standard meal and snack rates for family day care providers 107 - 110

DOMESTIC PRODUCTION ACTIVITIES DEDUCTION 111 - 128
Activities eligible for U~S~ production activities deduction 111 - 112
What is substantial renovation? 112
Land Improvements may qualify 112 - 113
Food and Beverage Industry 113
What constitutes manufacture “in significant part” 113 - 114
Substantial in nature test 113
Safe harbor test 114
Packaging design and development activities 114
Qualified production activities income (QPAI) 115
Domestic production gross receipts defined~ 115
Three options available to allocate costs 116
Taxable income/AGI limitation 117
50%-of-W-2-wages limitation 117 - 118
Calculation Methods 118
Married Filing Joint vs. Married Filing Separate 119
Deduction of pass-thru entities 119
Example: Partnership – Schedule K-1 119 - 123
Deduction of “expanded affiliated groups” 124
Co-op payments for Domestic Production Activities Deduction 124
Domestic production activities deduction example 124 - 126
Form 8903 126
Businesses that qualify and don’t qualify for the deduction 127

LIMITED LIABILITY COMPANY 129 – 150
Non-Tax Considerations 129 – 130
Liability Insurance 130
Need for Limited Liability 130
Charging Order 131
Protection in Bankruptcy 131 – 132
Operation 132
Self-Employment Tax and LLCs 132 - 134
Confusion Regarding Employment Taxes 134
Recent Changes to Employment Tax Reporting 134 - 135
Reason for the change 135 - 136
Disregarded Entities 136
Employment Tax Liability 136
Licenses Business cannot be California LLC 137
Tax Considerations 138
Qualified Joint Venture 138 - 140
Husband and Wife (Community Property States) 140 - 141
What about “check the box” elections? 141 - 142
Continuation of an LLC after a Member Withdraws 142 – 143
Section 1244 treatment not allowed 143
Switching from Corporation to LLC 144
Advantages / Disadvantages of LLC Operations 144
Required Records for LLC 144 - 145
LLC vs. LLP 146
Arizona LLCs 147 - 150

MONEY SERVICES BUSINESS 151 - 160
Money Services Business defined 151
Bank Secrecy Act Requirements 151 – 152
Registration Requirements 152
Filing Instructions 153
Registration Renewal 153
Agent Lists 153 – 154
Supporting Documentation 154
Failure to Comply 154
Suspicious Activity Reporting 154 – 155
FinCEN Form 107, Registration of Money Services Business 156 – 157
FinCEN Form 109, Suspicious Activity Report by Money Services Business 158 - 160

RECENT DEVELOPMENTS 161 – 200
Disclosure or Use of Taxpayer Information by Preparers 161 – 163
Penalty for “reckless” disclosure – criminal penalty 163
Penalty for “improper” disclosure – civil penalty 163
Requirements for consent to disclose taxpayer information 163 – 166
Multiple disclosure consents 166
Electronic consent 166 – 167
Sample Consent to Disclose 168
Hybrid Vehicle Update 169
Estimated Tax Requirement Modified 170
High-income taxpayers 170
Qualified individual 170
Small Business 170
2009 depreciation limits for business autos, light trucks and vans 171 – 173
Exclusion for Volunteer Emergency Responders 174
Differential Wage Payment Withholding for Active Military Duty 175
Temporary COBRA premium assistance 176 – 180
Documentation 176
Form 941 for 2009 177
Penalty for failure to notify group health plan 178
Assistance eligible individual 178 – 179
Terminated workers must be notified 179
Recapture of COBRA subsidy for high-income taxpayers 179
Recapture phase-in 180
Notice 2009-27 – COBRA premium assistance 180
Procedures for electing NOL carryback period of 3, 4, or 5 years 181 – 183
Missed election 182
Changed procedures 182
Time and manner of making the election 182
Electing on original return 182
Electing on an appropriate form 182 – 183
Form 941X – Correcting Withholding after 2008 184 – 190
Underreported taxes 184
Overreported taxes 184
Specific Instructions for Form 941-X 185 – 186
Due Date 186
Where to file 187
Example – Form 941 187 - 190
Form 943 – Reporting Adjustments after 2008 191
Form 945 – Reporting Adjustments after 2008 191
Work Opportunity Credit 192 - 199
Targeted groups for the work opportunity credit 192
Minimum work requirement 192 - 193
Qualified summer youth employees 193
Long-term family assistance recipients 193 – 194
Enhanced credit for certain qualified veterans 194
Certification requirements for targeted group members 194
Form 8850 – Pre-Screening Notice and Certification Request 195 - 196
Deduction for wages reduced by credit 197
Election out of work opportunity credit 197
No credit for certain otherwise qualified employees 197
Hurricane Katrina employees for purposes of the WOTC 198
Example – WOTC – Form 5884 198 – 199
S Corporation Built-in-Gains Holding Period 200

BUSINESS CASUALTY 201 – 208
Aggregating business properties for casualty loss 201
Insurance as compensation for losses 202
Example 202 – 204
Involuntary Conversions 205 – 208
Replacement Period 205
When replacement period begins 205
When replacement period ends 205
Special rules for Property Damaged by Federally Declared Disasters 206
Replacement Property – Similar or Related in Service or Use 207
Replacement Property Acquired from Related Person 207
Reporting Requirements 207
Required Statement 207
Replacement property acquired before the tax return is filed 208
Example 208

DISABLED ACCESS CREDIT 209 – 212
Partnership / S Corporation Rules 209
Eligible small business 209 – 210
Eligible access expenditures 210
No credit allowed – court case 210
Example – Form 8826 211 - 212

RETIREMENT PLANS 213 – 246
Simplified-Employee Pensions (SEPs) 213 - 217
Self-Employed Contribution Rate 214
SEP Worksheet – 2009 215
Simplified-Employee Pensions – Example 216 - 217
Savings Incentive Match Plan For Employer - SIMPLE 218 - 229
Salary Reduction Contributions (Employee’s Contribution) 218
Employer’s Contribution 219
Lower matching percentage permitted in some years 219
Employees for purposes of the “100-employee limitation” 220
Employees who must be eligible to participate 221
Employees covered by other employers’ plans are eligible 222
Changes to salary reduction elections 223
SIMPLE plan contribution withholding and employment tax liability 224
Tax and penalty of distributions 225
Tax-free rollovers from SIMPLE IRAs 225
How to set up a SIMPLE IRA plan 225 - 226
SIMPLE Worksheet – 2009 227
SIMPLE Example 228
Reporting for the Employee/Participant 229
Individual 401(k) 230 - 235
What factors might prohibit an individual 401(k)? 230
Timing Considerations 231
Individual 401(k) Worksheet – 2007 232
Individual 401(k) - Example 233
Individual 401(k) - Summary Points 234 - 235
Retirement Plan Comparisons 235
Traditional 401(k) Plan 236 - 239
Discrimination Rules 236
Contributions 236
Age 50 and Over 237
Reporting requirements 237
Traditional 401(k) Worksheet – 2009 238
Example – Traditional 401(k) 239
Safe Harbor 401(k) Plan 240
Vesting 240
Notice Requirements 240
Hardship Distributions 241 - 242
Retirement Plan Loans 243 – 245
Term Requirement 243
Repayment 243
Deemed distributions 244 – 245
Interest Expense on Qualified Retirement Plan Loans 245

CAPITAL LEASE 247 - 252
Is it really a lease 247
Real Estate vs. Equipment 248
Equipment Leasing 248 – 249
Leveraged lease 249
What if the lease is properly characterized as a sale? 250 - 251

EMPLOYEE BENEFITS BY THE ENTITY 253 - 279
Non-Cash Fringe Benefits 254 – 255
Food and Lodging Provided by Employer 256 - 257
Medical Reimbursement Plans 257 - 261
Sample Reimbursement Plan 260 - 261
Health Insurance (Coverage obtained through an insurance company 262 – 267
Hiring the Spouse 263
New IRS Development 263 – 264
Partnerships 265
S Corporations 265 - 267
Disability Insurance 268
Long-Term Care 269
Section 125 Plans / Flex Spending Plans 270 – 272
Day Care Benefits (“Dependent Care Assistance Programs”) 273 – 274
Group Term Life Insurance 275 – 276
Employee Benefits – Non-related Employees 277
Employee Benefits – Business Owner 278
Employee Benefits – Business Owner Spousal Employee 279

PARTNERSHIPS 281 - 322
Partnership Non-Tax Considerations 281
Joint Undertaking– Joint Venture 281 – 282
Investment Club Election Not to be Taxed as a Partnership 282 – 283
Family Partnerships 283 – 285
Partnership – Tax Considerations 285 – 286
Pass through items 286
At-Risk Rules 286
Employer/Employee Relationship 286
Form 1065 – Due Date 287
Partnership Extensions – New for 2008 287
Guaranteed Payments to Partners 288
How to make a Section 754 election 289
Example of a §754 Election 290 – 293
Designated Tax Matters Partner (TMP) 294
Self-Employment Taxes and the LLC 295 - 300
Partner contributing property to Partnership 300 Disguised Sale 301
Partnership Basis 302 - 303
Deference between Inside and Outside Basis 303 – 304
Partnership Transfers 305
Current and Liquidating Distributions 305 – 306
Identifying Section 751
“Hot” Assets 307 – 312
Special Look-through Rule for Collectibles Gains 313
Special Look-through Rule for Unrecaptured Section 1250
Gains 313 – 314
Example – Partnership Sale 315 – 319
Miscellaneous Partnership Items 320 – 321
Partnership - Advantages / Disadvantages 322