The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please contact us for more information about any of these developments and what steps you should take to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

• Tax relief for victims of Hurricane Floyd
• Built-in inflation adjustments mean slightly lower taxes next year
• Favorable charitable deduction rules apply to skyboxes at college sports events
• It’s easier to provide free on-premises meals to employees and fully deduct the cost
• IRS approach makes it tough to get quick write-offs for software development
• One year temporary travel rule doesn’t apply to intermittent work assignments
• Longer payout periods OK’s for multiple IRA beneficiaries
• New rules for installment sales of realty

Tax relief for victims of Hurricane Floyd. The IRS granted some forms of tax relief to victims of the hurricane that recently devastated large portions of the Eastern U.S. The deadlines for filing certain kinds of returns have been extended, and penalties for failure to make some types of business deposits have been waived. Also, hurricane victims in places designated as disaster areas can choose to deduct their uninsured casualty losses on their 1998 returns instead of their 1999 returns. This choice (which requires filing an amended return for 1998) may generate a quick tax refund.

(back to top)

Built-in inflation adjustments mean slightly lower taxes next year. The individual tax rate brackets, the standard deduction, and the exemption amount all are adjusted annually for cost-of-living increases. "Unofficial" but highly reliable estimates of the adjustments for the year 2000, based on Government CPI figures, indicate an adjustment of approximately 2% for next year. If your income and deductions for 2000 will be about the same as for 1999, your taxes will automatically drop by a small amount. For example, if married persons filing a joint return have $43,850 of taxable income in both years, they will pay $104 less in tax. For 2000, the exemption amount (the amount you can claim for yourself, and if applicable, spouse and each of your dependents) will be $2,800 (it’s $2,750 for 1999), and the basic standard deduction will be higher as well. For example, it will be $7,350 for joint filers ($7,200 in 1999), and $4,400 for singles (up from $4,300 in 1999).

(back to top)

Favorable charitable deduction rules apply to skyboxes at college sports events. As a general rule, a charitable contribution made in exchange for goods and services is deductible if (1) you intend to make a payment that exceeds the value of the goods and services, and (2) your contribution exceeds the value of what you get in return. The deduction, subject to various charitable contribution limits, can’t be more than what you contributed less the fair market value of what you received in return. However, there’s a special rule for those who make an otherwise deductible payment to or for the benefit of a college or university, and as a result receive the right to buy seating tickets at an athletic event in the institution’s athletic stadium. In this case, 80% of the payment for the right to buy tickets is treated as a charitable contribution. Any amount paid for the actual purchase of a ticket, as opposed to the right to buy it, is treated as a separate payment and is nondeductible. The IRS has said that this favorable rule applies even if the contributor obtains the right to buy tickets at a skybox located in the school’s stadium. In other words, 80% of the payment for the right to buy tickets in the skybox is deductible, subject to the usual charitable contribution limitations and requirements.

(back to top)

It’s easier to provide free on-premises meals to employees and fully deduct the cost. A business may find it pays to provide free, on-premises meals to employees. Such meals are tax-free to the employees, and fully deductible by the employer (instead of being only 50% deductible along with other meal expenses), if they are furnished for the employer’s convenience. Earlier this year, the Ninth Circuit Court of Appeals held that the "convenience of employer" requirement is satisfied if the employer supplies the meals to enforce a stay-on-premises policy (one that requires employees for valid business reasons to stay on-premises until their shifts end). The IRS has announced its acquiescence to this decision – it now accepts the holding in the case. This means tax savings for businesses that provide in-house meals to make a "stay-on-premises" rule work.

(back to top)

IRS approach makes it tough to get quick write-offs for software development. Favorable tax rules allow a business to currently deduct research or experimental (R&E) costs, or write them off over 60 months. The IRS has said that these favorable tax rules don’t apply if a company contracts with an outsider to develop software, if the software developer bears all the risks for development and operability of the software. Its position is that for the favorable R&E rules to apply to software development, a company must (among other conditions) be at risk in the event the software doesn’t work as anticipated, or can’t be completed.

(back to top)

One year temporary travel rule doesn’t apply to intermittent work assignments. If you’re on temporary travel status (temporarily away from home on business), you can deduct 100% of your lodging costs plus 50% of your meal costs at the out-of-town business location. However, there generally are no deductions if you are away from home for a period of employment that exceeds one year. The Tax Court has ruled that the one-year rule didn’t apply to a business consultant even though his away-from-home assignments for a single client spanned a five-year period. As a result, he was allowed to deduct his business travel costs, including meals and apartment rentals, at the out-of-town location. The Court said that the one-year temporary travel rule didn’t apply to the consultant’s situation because of the on-again, off-again nature of his work assignments. The consultant’s client continually renewed his engagements because of unexpected events, such as the serious illness of a key executive.

(back to top)

Longer payout periods OK’d for multiple IRA beneficiaries. When a retirement plan participant or IRA owner dies, the remaining account balance must be paid out no later than a prescribed period of time. This period depends on a number of variables, such as whether the person died before beginning to take required withdrawals from the plan or IRA, who the account beneficiary is, and the beneficiary’s age. In the past, it was believed that if there were multiple beneficiaries of a single IRA, the payouts to each had to be based on the age of the beneficiary with the shortest life expectancy. So, for example, if a person had an IRA that contained $200,000 and named two beneficiaries, a son age 40 and a daughter age 48, it was assumed that the IRA had to be paid out to both beneficiaries based on the daughter’s (the older beneficiary’s) life expectancy. In that case, the period over which distributions to the younger beneficiary could be stretched out would be shortened, resulting in loss of some of the IRA's tax benefit. In several private letter rulings, the IRS has OK’d a way to make payouts over longer periods of time where there are multiple IRA beneficiaries. Using the IRS-approved mechanism, where a son age 40 and a daughter age 48 are IRA beneficiaries, payouts to the daughter are spread out over her shorter life expectancy, but payouts to the son may be spread over his longer life expectancy. In this example, the net result is a longer tax-deferral period for the son.

(back to top)

New rules for installment sales of realty. When you sell on the installment method, you pay tax on your gain as your buyer makes payments, instead of reporting all of the gain in the year of sale. If you use the installment method for a capital asset such as investment land you’ve held for more than one year, the gain part of each payment generally will be taxed at a maximum rate of 20%. However, there are complications if you sell depreciable realty. If you sell depreciable realty acquired after 1986, that part of your gain representing the depreciation you took during ownership is taxed at a maximum rate of 25% (part of the gain on the sale of realty acquired before 1987 also may be taxed at 25%).

Under recently issued IRS regulations, when you sell such depreciable realty, the part of your gain that’s taxed at a maximum rate of 25% is reported as payments are received before the balance of your gain (taxed at a maximum rate of 20%) is reported. For example, a person sells an office building for $400,000 and makes a gain of $200,000 of which $100,000 is taxed at a maximum rate of 25% and the other $100,000 is taxed at a maximum rate of 20%. The buyer makes four equal annual installment payments of $100,000. Half of each payment is taxable gain. Under the new regulations, the gain part of the first two payments is taxed at a maximum rate of 25% ($50,000 gain part of each $100,000 installment, times 2), and the gain part of the second two payments is taxed at a maximum rate of 20%. In a nutshell, this "front-loading" rule means that when you sell depreciable realty on the installment method, the early payments may be taxed at a higher rate than the later payments.

(back to top)