LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

First Quarter 2002 Tax Developments

The following is a summary of the most important tax developments that have occurred in the first quarter of 2002 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.

Economic stimulus package with retroactive tax breaks. After bickering for months, Congress suddenly and unexpectedly passed, and on March 9, the President signed into law, an economic stimulus package containing retroactive tax breaks. These breaks permit business taxpayers to claim a larger first-year depreciation allowance for many types of depreciable property placed in service after Sept. 10, 2001, and before Sept. 11, 2004. The dollar limit on the amount of first-year depreciation that may be claimed for a business auto has been increased from $3,060 to $7,660 for autos purchased after Sept. 10, 2001, and before Sept 11, 2004.

There is even good news for businesses with losses. The new law allows net operating losses for tax years ending in 2001 and 2002 to be carried back 5 years instead of the usual 2 or 3 years. This can yield an immediate refund for affected taxpayers.

A host of new tax breaks was adopted for businesses in lower Manhattan to help them cope with the impact of the 9/11 attacks. In addition, the new law has extended many tax breaks that had expired or were about to expire.

IRS is in the process of revising or creating many tax forms and publications to reflect the new law changes.

Rules relaxed for post Sept. 10, 2001, charitable contributions. Normally, a reduction is allowable for a charitable contributions of $250 or more only if the donor obtains a written acknowledgment from the donee organization on or before the date he files his return reporting the contribution or on or before the due date (including extensions) of the return, whichever comes first. IRS has become aware, however, that due to the overwhelming number of charitable contributions made in the wake of September 11^th, many donee organizations are unable to supply donors with the required acknowledgments in a timely manner. Because of this unique situation, IRS is giving donors until Oct. 15, 2002 to obtain the required written acknowledgment from charities or get evidence of a good-faith effort to obtain it. An example of a good-faith effort is sending the donee organization a letter or e-mail requesting a written acknowledgment. A copy of the letter or e-mail is evidence of a good faith effort. This means that a donor can obtain the written acknowledgment or get evidence of a good-faith effort to get it after he files his return, as long as he does so by Oct 15, 2002.

Good news for frequent flyers. IRS has announced that it won’t assert that an individual owes tax because of his receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to business or official (i.e., government-related) travel. However, the announcement doesn’t apply to travel or promotional benefits that are converted to cash, compensation paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.

More businesses can use the cash method. IRS has announced that qualifying small businesses with average annual gross receipts of $10 million or less may obtain automatic consent to use the cash method of accounting and to treat inventoriable items as non-incidental materials and supplies for eligible trades or businesses.

IRS change will permit businesses to currently deduct more items. IRS has indicated that it is likely to adopt regs having a "12-month" rule that would allow accrual or cash-basis taxpayers to currently deduct expenses relating to intangible assets or benefits having a relatively short duration, such as, amounts prepaid for services or other benefits (e.g, insurance), market entry payment (e.g., for doctor’s practice privileges at hospital, or access to multiple listing service), and amounts paid to obtain certain rights from a government agency (e.g., license or permit).

Guidance forthcoming on intangibles. IRS says it will issue proposed regs describing the specific categories of expenditures incurred in acquiring, creating, or enhancing intangible assets or benefits that taxpayers would have to capitalize and those expenditures for which capitalization would not be required under various safe harbors.

How to figure and maximize terrorist victims’ forgiven income taxes. IRS has issued a publication explaining how to compute the income taxes that are forgiven for the year of death and for the year before death for those who were killed in last year’s 9/11 or anthrax attacks or in the ’95 Oklahoma bombing. The publication provides valuable guidance for figuring and maximizing the amount of taxes that are forgiven for a victim who filed a joint return with a spouse who has survived. It also explains how to claim a $10,000 refund for a victim, such as a child, who owed no tax or who owed less than $10,000 in tax.

Afghanistan combat zone relief. Because President Bush declared Afghanistan and its airspace to be a combat zone starting Sept. 19, 2001, members of the U.S. Armed Forces and support personnel serving in there, and spouses of such individuals, will not have to file their 2001 income tax returns until at least 180 days after they leave that area. No interest or penalties will be charged during this extension period on any tax due for 2001. IRS will also suspend all tax return examinations and actions to collect back taxes owed by these taxpayers for years before 2001 until at least 180 days after the taxpayer leaves the combat zone. During this suspension, no interest or penalties will be added to the tax due.

New IRS compliance initiative. IRS is implementing a new compliance initiative starting in September 2002. Under this program, about 8,000 returns will be checked relying solely on information already provided to IRS, about 9,000 returns will include correspondence exchanges with taxpayers, about 30,000 returns will be subject to partial audits, and about 2,000 returns will be checked for everything.

Tax help for farmers. A special provision allows an individual farmer to compute his current-year tax liability by averaging over the three prior-year periods all or a portion of his income from farming. IRS has issued final regs that make averaging available for more income and to more farmers.

Tax help for restaurants and taverns. Taxpayers in the restaurant or tavern business may currently deduct the cost of "smallwares," such as glassware, flatware, dinnerware, bar supplies, food preparation utensils and tools, and certain small appliances.

Split-dollar rules eased. Many companies provide life insurance protection to executives and other key employees through split-dollar arrangements. Last year, IRS issued new rules for taxing the value of life insurance protection provided under these arrangements. Insurance companies cried foul and IRS has now decided to opt for a different approach altogether in forthcoming regs. It has also provided interim rules. The interim rules produce better results for companies and executives alike, as will the forthcoming regs.

(01/03/02)

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Last modified: November 29, 2002