Important Notice

Brian DiBella has left the firm.

Gary Gomola and all of the other staff members
have merged with Mahoney, Sabol & Company

www.mahoneysabol.com

We are now located at 213 Court Street, Suite 204, Middletown CT 06457
Phone: 860-344-8883 Fax: 860-346-3057

CLIENT ALERT - WINTER 2003

The information contained in this newsletter is designed to keep our clients and friends informed of developments and ideas which we feel are important. Should any subjects be of interest please call one of us. The articles contained in this newsletter are not intended as a substitute for legal, accounting or tax advice. You should seek professional advice on the particular issues which concern you.

Protecting Start Up Expense Deductions

Are you thinking about expanding or starting a new business?  You are probably going to incur many expenses related to your new business.   Maybe you'll be conducting market and facilities surveys. You might engage a lawyer and accountant to set up a corporation or LLC.  Advertising for the opening of the business and salaries for employees in training may have to be paid.  These are obviously deductible business expenses, right?  Not so, says the IRS.  In fact, the IRS considers expenses that are incurred before your business begins as nondeductible. 

Luckily, taxpayers are allowed to make an election to write-off these start-up costs over a period of 60 months or more, once they actually start the business.  How do you make this election?  You must attach Form 4562 and an accompanying election statement to the return for the first tax year you are in business.    Even if the IRS later decided that you were too aggressive in deducting expenses, and reclassifies operating expenses as start up expenses, the election will cover these as well.   If the election is not timely made, the expenses will never be deductible.  Such an oversight can be costly. 

Naturally, the rule to disallow the deduction of start-up expenses does not apply once the business actually starts.  Once the business has begun, those types of expenses are considered "ordinary and necessary" and are fully deductible.  Who determines when the business has actually started?  The IRS often tries to "push back" a new business' start date.  If they can successfully claim that your business actually began in an earlier year than you determined, your right to make the election to amortize would be lost, and with it, your tax deductions. 

What if you incur expenses to research a new business venture and reach the conclusion that now is not the best time to start?   Or what if you wanted to buy an existing business and the deal never went through?  If you are an individual, these expenditures may not be deductible, and even if they are, they are considered miscellaneous itemized deductions which are only allowed when they exceed 2% of your adjusted gross income, and are subject to the various phase out limits. For this reason, if you are contemplating making some substantial expenditures, we recommend that you consider forming a small business corporation or LLC.  Since the organizations are presumed to be engaged in an activity for profit, they do not have to meet the requirements that individuals do to prove that an expense is related to a for-profit activity.  If a company incurs expenses in investigating a new venture, and later abandons the search, the owners would be entitled to an ordinary loss deduction. 

As you can see, it's important to keep records of your startup expenses and, when necessary, make the proper election.  Written by Tanis M. Crosby, CPA - Senior Accountant taniac@ctcpas.com

Clean Auto Tax Breaks

Several tax provisions in the Internal Revenue Code have been designed to encourage the production and use of environmentally friendly vehicles.  A 10 percent credit of up to $4,000 has been available for the cost of an electric vehicle since 1993.  Also since 1993, an above the line deduction of up to $2,000 for the cost of an automobile has been available for the purchase of a qualified clean-fuel vehicle.  These environmentally friendly provisions in the code have, up until this point, not been widely utilized.   

However, car manufacturers are starting to make hybrid gasoline and electric vehicles that promise to be much more popular with consumers.  The IRS has recently certified three models of hybrid vehicles to qualify for the $2,000 deduction described above.  These are the Toyota Prius, Honda Insight and Honda Civic Hybrid.  Other manufacturers have hybrid vehicles in the works, but they have not yet received IRS certification.  The Toyota Prius and Honda Insight models have been certified for the 2001, 2002 and 2003 model years; and the Honda Civic Hybrid for its new 2003 model.  You can amend your 2000 or 2001 tax return to claim this deduction for vehicles purchased in those years.  The $2,000 deduction is an “above the line” deduction, meaning that taxpayers do not have to itemize to claim this deduction. 

If you have already purchased a hybrid vehicle or have been considering it, these special tax incentives could make that decision easier.  Please call our office if you have any questions on these rules.   
Written by Brian C. DiBella, CPA, - Partner      briand@ctcpas.com

Important Changes In Split Dollar Insurance     

If you are a party to a split-dollar life insurance arrangement you must take some action during 2003.  The IRS has issued regulations that change the way split-dollar life insurance will be treated for income tax purposes.  They will be taxed either as an economic benefit, or as loan transactions.  We occasionally find that our clients have entered into split-dollar arrangements, and have not told us about it.  Accordingly, they may not be properly reflected on the company books.   

The new regulations define a split-dollar life insurance arrangement broadly as any arrangement between a life insurance contract owner and a non-owner, under which either party pays all or part of the premiums. And the party paying the premium is entitled to recover, conditionally or unconditionally, all or part of the premiums, with that recovery to be made from, or secured by a contract.  If the arrangement is connected with the performance of services or stock ownership, a split-dollar arrangement is any arrangement where one party pays all or part of the premiums, and the beneficiary or the death benefit is designated by the employee.  This definition pulls in arrangements where the payer is not entitled to recover any premiums. 

The details of the new taxation consequences are much too complicated to cover in this article.  The major points are that they must be properly accounted for.  The employee must include the “economic benefit” of the insurance protection in income annually, and that currently existing “collateral assignment” arrangements must be terminated by  December 31, 2003 and replaced by a loan.  If this does not occur the employee will be subject to taxation on the equity build up in the policy, even if no cash is currently received.  Don’t let this happen.  Meet with us and your insurance professional. Written by Gary R. Gomola, CPA, CVA - Partner   garyg@ctcpas.com

Tax Credits For Hiring Employees

This could be your last chance to take advantage of two tax credits that are scheduled to expire, but are still available for the 2002 and 2003  tax years.   

The Work Opportunity Tax Credit is available on an elective basis for employers hiring individuals from one of seven targeted groups.  The credit percentage is 25% of qualified wages if the hours of service are at least 120 hours but less than 400 hours and 40% if the hours are 400 or more.  Qualified wages are wages for service for a one year period beginning with the day the individual begins work.  Generally, no more than $6,000 of wages can be taken per individual, and therefore, the maximum credit per individual can be $2,400.  Also the tax deduction for wages is reduced by the amount of the credit.

An individual is not treated as a member of a targeted group unless the employer receives a written certification from the Department of Labor, or completes a pre-screening notice that is submitted to the DOL within 21 days of the date of hire.  We have the pre-screening notice form in our office if you would like a copy of it.  The form describes in more detail the seven targeted groups that are eligible for the credit.   

Another similar tax credit is the Welfare to Work Credit.  This credit is on the first $20,000 of eligible wages paid to qualified long term family assistance recipients during the first two years of employment.  The credit is 35% of the first $10,000 of wages in the first year of employment and 50% of the first $10,000 of wages in the second year of employment.  Thus, the maximum credit is $8,500 per employee.  If the welfare-to-work credit is allowed for an individual for a tax year that employer may not also take a work opportunity credit for that individual for that year.  Like the work opportunity tax credit, an employer must receive written certification for the employee or complete the pre-screening notice.