Business Taxation

ByDanny C. Santucci

The author is not engaged by this text, any accompanying electronic media, or lecture in the rendering of legal, tax, accounting, or similar professional services. While the legal, tax, and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed. For that reason the accuracy and completeness of this information and the author's opinions based thereon cannot be guaranteed. In addition, state or local tax laws and procedural rules may have a material impact on the general discussion. As a result, the strategies sug-gested may not be suitable for every individual. Before taking any action, all refer-ences and citations should be checked and updated accordingly.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert advice is required, the services of a com-petent professional person should be sought.

—-From a Declaration of Principles jointly adopted by a committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright June 2018 Danny C. Santucci

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TABLE OF CONTENTS CHAPTER 1 - Structure, Reporting & Accounting ................................1-1Introduction ................................................................................................................................................ 1-1

Entity Tax Divide ................................................................................................................................. 1-2Passthrough Entities - 20% Deduction .......................................................................................... 1-2

Limitations ............................................................................................................................... 1-2Deduction Amount ................................................................................................................... 1-3Qualified Trade Or Business .................................................................................................... 1-3

Corporations - 21% Rate ............................................................................................................... 1-4Types of Business Organizations ............................................................................................................... 1-4

Sole Proprietorships .............................................................................................................................. 1-5Schedules C & C-EZ ..................................................................................................................... 1-5Self-Employment Taxes ................................................................................................................ 1-6Estimated Tax Payments ............................................................................................................... 1-6Advantages .................................................................................................................................... 1-7Disadvantages ................................................................................................................................ 1-7

Partnerships .......................................................................................................................................... 1-7Agreement ..................................................................................................................................... 1-7General Tax Aspects ...................................................................................................................... 1-8

Form 1065 ................................................................................................................................ 1-8Limited Partnerships ...................................................................................................................... 1-9

Passive Presumption ................................................................................................................ 1-9At-Risk Rules - §465 ..................................................................................................................... 1-9

Financing ................................................................................................................................. 1-9Passive Loss Limitations - §469 .................................................................................................... 1-10

Active/Passive Determination .................................................................................................. 1-10Triggering Suspended Losses .................................................................................................. 1-10

Regular Corporations ............................................................................................................................ 1-11Electronic Federal Tax Payment System (EFTPS) ........................................................................ 1-11Form 1120 - Corporate Income Tax Return .................................................................................. 1-12

Which Form To File ................................................................................................................ 1-12Penalty for Late Filing of Return ............................................................................................. 1-13Penalty for Late Payment of Tax ............................................................................................. 1-13Limit on Deduction for Dividends ........................................................................................... 1-13Effect of Net Operating Loss ................................................................................................... 1-14At-Risk Rules for Closely Held Corporations ......................................................................... 1-14Alternative Minimum Tax for Corporations ............................................................................ 1-14Tax Rate - 21% ........................................................................................................................ 1-15

Advantages .................................................................................................................................... 1-15Disadvantages ................................................................................................................................ 1-16

Qualified Personal Service Corporation ............................................................................................... 1-16S Corporations ...................................................................................................................................... 1-18

Advantages .................................................................................................................................... 1-19Disadvantages ................................................................................................................................ 1-20

Limited Liability Company .................................................................................................................. 1-21

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Advantages .................................................................................................................................... 1-22Disadvantages ................................................................................................................................ 1-22

Record keeping ........................................................................................................................................... 1-23Why Keep Records? ............................................................................................................................. 1-23

Monitor the Progress of a Business ............................................................................................... 1-23Prepare Financial Statements......................................................................................................... 1-23Identify Source of Receipts ........................................................................................................... 1-24Keep Track Of Deductible Expenses ............................................................................................. 1-24Prepare Tax Returns ...................................................................................................................... 1-24Support Items Reported On Tax Returns ....................................................................................... 1-24

Kinds of Records to Keep ..................................................................................................................... 1-24Supporting Documents .................................................................................................................. 1-24Gross Receipts ............................................................................................................................... 1-24Purchases ....................................................................................................................................... 1-25Expenses ........................................................................................................................................ 1-25Assets ............................................................................................................................................ 1-25

Business Transactions ........................................................................................................................... 1-26Basic Recordkeeping ..................................................................................................................... 1-27

Business Checkbook ................................................................................................................ 1-27Reconciling the Checking Account ......................................................................................... 1-28

Bookkeeping Systems ........................................................................................................................... 1-29Single-Entry................................................................................................................................... 1-29Double-Entry ................................................................................................................................. 1-29Computerized System .................................................................................................................... 1-30Microfilm ...................................................................................................................................... 1-30Electronic Storage System ............................................................................................................. 1-30

How Long To Keep Records ................................................................................................................ 1-33Employment Taxes ........................................................................................................................ 1-33Assets ............................................................................................................................................ 1-33Records for Nontax Purposes ........................................................................................................ 1-34

Accounting Periods & Methods ............................................................................................................ 1-34Tax Year ........................................................................................................................................ 1-34

Section 444 Election ................................................................................................................ 1-34Business Purpose ..................................................................................................................... 1-35Changes in Accounting Periods ............................................................................................... 1-35

Accounting Method ....................................................................................................................... 1-35Changing a Business’s Method of Accounting........................................................................ 1-36

Inventories ............................................................................................................................................ 1-36Identification Methods ................................................................................................................... 1-37

Specific Identification Method ................................................................................................ 1-37FIFO Method ........................................................................................................................... 1-37LIFO Method........................................................................................................................... 1-37

Valuation Methods ........................................................................................................................ 1-38Cost Method ............................................................................................................................ 1-38

Uniform Capitalization Rules - §263A ................................................................................ 1-38Lower of Cost or Market Method ............................................................................................ 1-39

CHAPTER 2 - Business Income, Credits & Assets ..................................2-1Business Income ......................................................................................................................................... 2-1

Overview .............................................................................................................................................. 2-1

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Types of Income ................................................................................................................................... 2-2Barter ............................................................................................................................................. 2-2

Information Returns ................................................................................................................. 2-2Rental Income ................................................................................................................................ 2-3

Individual Lessors .................................................................................................................... 2-3Advance Rent .......................................................................................................................... 2-3Lease Bonus ............................................................................................................................. 2-3Security Deposits ..................................................................................................................... 2-3Payment for Canceling a Lease ............................................................................................... 2-4Payments to Third Parties ........................................................................................................ 2-4Settlement Payments ................................................................................................................ 2-4

Interest ........................................................................................................................................... 2-4Uncollectible Loans ................................................................................................................. 2-4Below-Market Loans ............................................................................................................... 2-4Installment Sales ...................................................................................................................... 2-4Interest on Insurance Dividends............................................................................................... 2-5

Discharge of Debt Income ............................................................................................................. 2-5Exceptions from Income Inclusion .......................................................................................... 2-5Reduction of Tax Attributes .................................................................................................... 2-5

Order of Reductions ............................................................................................................ 2-6Sale of Products or Services .......................................................................................................... 2-6Dividends ...................................................................................................................................... 2-6

Ordinary Dividends ................................................................................................................. 2-6Money Market Funds .......................................................................................................... 2-6Dividends on Capital Stock ................................................................................................. 2-7Dividends Used to Buy More Stock .................................................................................... 2-7

Qualified Dividends ................................................................................................................. 2-7Tax on Net Investment Income - §1411 ........................................................................................ 2-8Recoveries ..................................................................................................................................... 2-9

Itemized Deduction Recoveries ............................................................................................... 2-10Recovery Limited to Deduction .......................................................................................... 2-10Recoveries Included in Income ........................................................................................... 2-10

Non-Itemized Deduction Recoveries ....................................................................................... 2-11Amounts Recovered for Credits............................................................................................... 2-11Tax Benefit Rule ...................................................................................................................... 2-11

Recapture of Depreciation............................................................................................................. 2-11Sale Or Exchange Of Depreciable Property ............................................................................ 2-11Listed Property......................................................................................................................... 2-12Section 179 Property ................................................................................................................ 2-12

Sole Proprietorship Income .................................................................................................................. 2-12Partnership Income ............................................................................................................................... 2-12

Partnership Agreement ............................................................................................................ 2-12Partnership Return ................................................................................................................... 2-13Partner’s Return ....................................................................................................................... 2-13

Corporate Income .......................................................................................................................... 2-13S Corporation Income .................................................................................................................... 2-13

S Corporation Return ............................................................................................................... 2-14Shareholder’s Return ............................................................................................................... 2-14Distributions ............................................................................................................................ 2-14

Alternative Minimum Tax Income ................................................................................................ 2-14Business & Investment Credits .................................................................................................................. 2-15

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Business Credit Carryback & Carryforward Rules - §39(a) ................................................................. 2-16NOL Comparison .......................................................................................................................... 2-16

Disposition of Business Assets ................................................................................................................... 2-16Amount Realized .................................................................................................................................. 2-17Basis of Assets ...................................................................................................................................... 2-17

Unstated Interest ............................................................................................................................ 2-17Allocation of Purchase Price ......................................................................................................... 2-18

Asset Types .......................................................................................................................................... 2-18Section 1231 Assets ....................................................................................................................... 2-18

Character of Gain or Loss ........................................................................................................ 2-185 Year Averaging ..................................................................................................................... 2-19

Like-Kind Exchanges ........................................................................................................................... 2-19Qualified Property Requirement .................................................................................................... 2-19Like-Kind Requirement ................................................................................................................. 2-20

Goodwill Prohibition ............................................................................................................... 2-20

CHAPTER 3 - Selected Business Expenses ...............................................3-1Section 162 ................................................................................................................................................. 3-1

Cost of Goods Sold ............................................................................................................................... 3-2Capital Expenses .................................................................................................................................. 3-3

Cost Recovery Depreciation .......................................................................................................... 3-3Personal vs. Business Expenses ............................................................................................................ 3-3At-Risk Amounts - §465....................................................................................................................... 3-3Passive Losses - §469 ........................................................................................................................... 3-4Net Operating Loss - §172.................................................................................................................... 3-4

Creation of an NOL ....................................................................................................................... 3-4Individual NOLs ............................................................................................................................ 3-4

Carryovers ............................................................................................................................... 3-4Farming ............................................................................................................................... 3-5

Corporate NOLs ............................................................................................................................ 3-5Timing of Expense Deduction - §447 ........................................................................................................ 3-5

Economic Performance - §461 ............................................................................................................. 3-5Prepayment of Expenses ....................................................................................................................... 3-6Contested Liability ............................................................................................................................... 3-6Related Person ...................................................................................................................................... 3-6

Expenses of Not-for-Profit Activities - §183 ............................................................................................. 3-7Presumption of Profit ............................................................................................................................ 3-7

Using The Presumption Later ........................................................................................................ 3-8Limit on Deductions ............................................................................................................................. 3-8

Partnerships & S Corporations ...................................................................................................... 3-10More Than One Activity ....................................................................................................................... 3-10

Rent Expenses ............................................................................................................................................ 3-12Rent Paid In Advance ........................................................................................................................... 3-13Lease vs. Sale ....................................................................................................................................... 3-13

Leveraged Leases .......................................................................................................................... 3-14Leveraged Leases Of Limited-Use Property ............................................................................ 3-14

Leases over $250,000 - §467 ................................................................................................................ 3-14Taxes on Leased Property ..................................................................................................................... 3-15Cost of Getting a Lease ........................................................................................................................ 3-15

Options To Renew ......................................................................................................................... 3-15

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Cost Of A Modification Agreement .............................................................................................. 3-16Commissions, Bonuses, & Fees .................................................................................................... 3-16Loss On Merchandise & Fixtures .................................................................................................. 3-16

Pre-2018 Leasehold Improvement, Retail Improvement & Restaurant Property - §168 ...................... 3-17Qualified 15-Year Leasehold Improvement Property - §168(e)(3)(E)(iv) .................................... 3-17

Qualified Leasehold Improvement Property ............................................................................ 3-17Subsequent Owner ................................................................................................................... 3-18

Qualified 15-Year Retail Improvement Property - §168(e)(E)(ix) ................................................ 3-18Qualified Retail Improvement Property ................................................................................... 3-18

15-Year Restaurant Improvement Property - §168(e)(3)(E)(v) ..................................................... 3-19Qualified Restaurant Property ................................................................................................. 3-19

Expensing & Bonus Depreciation Permitted ................................................................................. 3-19Expensing - §179 ..................................................................................................................... 3-19Bonus Depreciation - 168 ........................................................................................................ 3-19Recapture Considerations - §1245 & §1250 ............................................................................ 3-19

Post-2018 Qualified Improvement Property Consolidation - §168(e)(6)(A) ........................................ 3-20Assignment of a Lease .......................................................................................................................... 3-20Capitalizing Rent Expenses - §263A .................................................................................................... 3-20

Interest Expense - §163 .............................................................................................................................. 3-21Business Interest - §162........................................................................................................................ 3-21

Interest Paid In Advance ............................................................................................................... 3-22Mortgage Interest .................................................................................................................................. 3-22

Prepayment Penalty ....................................................................................................................... 3-22Points - §461 .................................................................................................................................. 3-22Expenses to Obtain a Mortgage ..................................................................................................... 3-22

Interest on Installment Purchases - §483 & §1271 ............................................................................... 3-23Investment Interest - §212 .................................................................................................................... 3-23

Investment Property....................................................................................................................... 3-23Limit on Deduction........................................................................................................................ 3-24

Net Investment Income ............................................................................................................ 3-24Investment Income .............................................................................................................. 3-24

Capital Gain Inclusion Election ...................................................................................... 3-24Investment Expenses ........................................................................................................... 3-25

Losses from Passive Activities ........................................................................................ 3-25Carryover ................................................................................................................................. 3-25

When to Deduct Investment Interest ............................................................................................. 3-25Form 4952 ................................................................................................................................ 3-25

Interest on Margin Accounts ......................................................................................................... 3-26Interest on a Market Discount Bond .............................................................................................. 3-26

Nondeductible Interest .......................................................................................................................... 3-26Interest on Income Tax Owed ....................................................................................................... 3-26

Penalties .............................................................................................................................. 3-26Commitment Fees & Service Charges ........................................................................................... 3-27Capitalized Interest ........................................................................................................................ 3-27

Production Period .................................................................................................................... 3-27Traced Debt ............................................................................................................................. 3-28Avoided Cost Debt .................................................................................................................. 3-28When Interest Is Paid or Incurred ............................................................................................ 3-28Partnerships & S Corporations ................................................................................................ 3-28

Interest Related To Tax-Exempt Income - §265 ........................................................................... 3-28Interest on Insurance Policy Loans - §264 .................................................................................... 3-31

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Single Premium Life Insurance ............................................................................................... 3-31Systematic Plan of Borrowing ................................................................................................. 3-31

Key Person Insurance .................................................................................................................... 3-31Deductibility of Premiums & Interest on Life Insurance ......................................................... 3-31

Existing Interest on Purchase ........................................................................................................ 3-32Corporate Acquisition Interest ....................................................................................................... 3-32

Interest Allocation Rules for Multi-Purpose Loans .............................................................................. 3-32Allocation period ........................................................................................................................... 3-33Proceeds Not Disbursed To Borrower ........................................................................................... 3-33Proceeds Deposited In Borrower's Account .................................................................................. 3-33Order Of Funds Spent .................................................................................................................... 3-34Payments From Checking Accounts .............................................................................................. 3-34Amounts Paid Within 30 Days ...................................................................................................... 3-34Optional Method For Determining Date Of Reallocation ............................................................. 3-34Interest On A Separate Account .................................................................................................... 3-35Accrued Interest ............................................................................................................................ 3-35

Accrued Interest Before Debt Proceeds Are Received ............................................................ 3-35Loan Repayment ............................................................................................................................ 3-36Continuous Borrowings ................................................................................................................. 3-36Loan Refinancing .......................................................................................................................... 3-36Special Rules for Partnerships & S Corporations .......................................................................... 3-37

Debt-Financed Acquisitions .................................................................................................... 3-37Reallocation ......................................................................................................................... 3-37How to Report ..................................................................................................................... 3-37

Debt-Financed Distributions.......................................................................................................... 3-37Optional Method .................................................................................................................. 3-38How to Report ..................................................................................................................... 3-38

Deductible Taxes - §164............................................................................................................................. 3-38Tax Refunds .......................................................................................................................................... 3-38Change in Date of Tax Accrual ............................................................................................................ 3-39Real Estate Taxes.................................................................................................................................. 3-39

Local Benefits ................................................................................................................................ 3-39Real Estate Taxes on Purchase Or Sale ......................................................................................... 3-40

Choosing To Ratably Accrue ................................................................................................... 3-41Separate Choices ................................................................................................................. 3-41Making the Choice .............................................................................................................. 3-41Form 3115 ........................................................................................................................... 3-41

State & Local Income Taxes ................................................................................................................. 3-42Foreign Income Taxes ................................................................................................................... 3-42

States & Local Sales Tax for Individuals ............................................................................................. 3-42Temporary Sales Tax Deduction for Qualified Vehicles (Expired) .............................................. 3-42

Employment Taxes ............................................................................................................................... 3-42Unemployment Fund Taxes .......................................................................................................... 3-43Self-employment Tax .................................................................................................................... 3-43

Other Taxes .......................................................................................................................................... 3-43Casualty & Theft Losses - §165 ................................................................................................................. 3-43

Proof of Loss ........................................................................................................................................ 3-44Amount of Loss .................................................................................................................................... 3-44Limitations ............................................................................................................................................ 3-44

Dividends Received Deduction - §243 ....................................................................................................... 3-44Dividends from Domestic Corporations ............................................................................................... 3-44

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65% Exception .............................................................................................................................. 3-45Ownership ............................................................................................................................................. 3-45Limitation ............................................................................................................................................. 3-45

Other Selected Deductible Costs ................................................................................................................ 3-47Home-Office Deduction - §280A ......................................................................................................... 3-47

Requirements - §280A ................................................................................................................... 3-47Non-Exclusive Use Exceptions ..................................................................................................... 3-48Income Limitation ......................................................................................................................... 3-48Home Office Deduction After 1998 .............................................................................................. 3-48

Research & Experimental Cost Deduction - §174(a)............................................................................ 3-48Definitions ..................................................................................................................................... 3-49

Product ..................................................................................................................................... 3-49Costs Not Included ........................................................................................................................ 3-49When & How To Choose .............................................................................................................. 3-50

Business Start-Up & Organizational Costs - §195 ............................................................................... 3-50How To Make The Choice ............................................................................................................ 3-50

Carrying Charges .................................................................................................................................. 3-51Intangible Drilling Costs ...................................................................................................................... 3-51Exploration Costs ................................................................................................................................. 3-51

Partnerships ................................................................................................................................... 3-51Reduced Corporate Deductions For Exploration Costs ................................................................. 3-51Recapture Of Exploration Expenses .............................................................................................. 3-52

Mine Development Costs ..................................................................................................................... 3-52Circulation Costs .................................................................................................................................. 3-52Reforestation Costs ............................................................................................................................... 3-52Retired Asset Removal Costs ............................................................................................................... 3-52Barrier Removal Costs .......................................................................................................................... 3-53

Deduction Limit ............................................................................................................................ 3-53Partners & Partnerships ................................................................................................................. 3-53Qualification Standards ................................................................................................................. 3-53Other Barrier Removals ................................................................................................................. 3-54

How To Make The Choice ....................................................................................................... 3-54Amortization .............................................................................................................................................. 3-54

Deducting Amortization ....................................................................................................................... 3-54Start-Up Costs - §195 ........................................................................................................................... 3-54

Amortization Period ...................................................................................................................... 3-55Qualifying Costs ............................................................................................................................ 3-55Purchasing An Active Trade Or Business ..................................................................................... 3-55

Corporate Organizational Costs - §248 ................................................................................................ 3-56Qualifying Costs ............................................................................................................................ 3-56Nonqualifying Costs ...................................................................................................................... 3-56

Partnership Organizational Costs - §709 .............................................................................................. 3-57Qualifying Costs ............................................................................................................................ 3-57Nonqualifying Costs ...................................................................................................................... 3-57Partnership Liquidation ................................................................................................................. 3-58

Costs of Obtaining a Lease ................................................................................................................... 3-58Intangibles - §197 ................................................................................................................................. 3-60

Cost Attributable To Other Property ............................................................................................. 3-60Section 197 Intangibles Defined .................................................................................................... 3-61

Goodwill .................................................................................................................................. 3-61Going Concern Value .............................................................................................................. 3-61

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Workforce In Place, Etc. .......................................................................................................... 3-61Business Books And Records, Etc. .......................................................................................... 3-61Patents, Copyrights, Etc. .......................................................................................................... 3-61Customer-Based Intangible ...................................................................................................... 3-61Supplier-Based Intangible ........................................................................................................ 3-62Government-Granted License, Permit, Etc. ............................................................................. 3-62Covenant Not To Compete ...................................................................................................... 3-62Franchise, Trademark, Or Trade Name ................................................................................... 3-63

Professional Sports Franchise .............................................................................................. 3-63Contract For The Use Of, Or A Term Interest In, A §197 Intangible ...................................... 3-63

Assets That Are Not §197 Intangibles ........................................................................................... 3-63Computer Software ........................................................................................................................ 3-64

Computer Software Defined .................................................................................................... 3-64Rights Of Fixed Duration Or Amount ........................................................................................... 3-64Safe Harbor for Creative Property Costs ....................................................................................... 3-64Anti-Churning Rules ..................................................................................................................... 3-65Disposition of §197 Intangibles ..................................................................................................... 3-65

Nondeductible Loss ................................................................................................................. 3-65Covenant Not To Compete ...................................................................................................... 3-65Nonrecognition Transfers ........................................................................................................ 3-66

Research & Experimental Cost Amortization - §174(f) ....................................................................... 3-66Optional write-off method ............................................................................................................. 3-66Amortizable Costs ......................................................................................................................... 3-67Election .......................................................................................................................................... 3-67

Pollution Control Facilities ................................................................................................................... 3-67Certified Pollution Control Facility ............................................................................................... 3-67

Reforestation Costs ............................................................................................................................... 3-68Depletion - §613 ......................................................................................................................................... 3-68

Cost Depletion ...................................................................................................................................... 3-68Basis For Depletion ....................................................................................................................... 3-69Total Recoverable Units ................................................................................................................ 3-69Number Of Units Sold ................................................................................................................... 3-69Determining The Cost Depletion Deduction ................................................................................. 3-70

Percentage Depletion ............................................................................................................................ 3-70Gross Income ................................................................................................................................. 3-70Taxable Income Limit ................................................................................................................... 3-70

Partnerships & S Corporations ............................................................................................................. 3-71Partner’s or Shareholder’s Adjusted Basis .................................................................................... 3-71Records .......................................................................................................................................... 3-71Reporting the Deduction................................................................................................................ 3-71

Mines & Geothermal Deposits ............................................................................................................. 3-72Gross Income From The Property ................................................................................................. 3-72Excise Tax ..................................................................................................................................... 3-73Extraction ...................................................................................................................................... 3-73Treatment Processes ...................................................................................................................... 3-73Transportation Of More Than 50 Miles ......................................................................................... 3-73

Lessor’s Gross Income ......................................................................................................................... 3-73Bonuses & Advanced Royalties .................................................................................................... 3-73

Timber .................................................................................................................................................. 3-73Business Bad Debts - §166......................................................................................................................... 3-75

Credit Transactions ............................................................................................................................... 3-76

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Income Inclusion ........................................................................................................................... 3-77Accrual Method Taxpayers ...................................................................................................... 3-77Cash Method Taxpayers .......................................................................................................... 3-77

Former Business ................................................................................................................................... 3-77Debt Acquired from a Decedent .................................................................................................... 3-77

Political Debts ...................................................................................................................................... 3-77Insolvency of Partner ............................................................................................................................ 3-78Business Loan Guarantees .................................................................................................................... 3-78Reporting .............................................................................................................................................. 3-78Methods of Treating Bad Debts ............................................................................................................ 3-79

Specific Charge-Off Method ......................................................................................................... 3-79Partly Worthless Debts ............................................................................................................ 3-79

Deduction Disallowed ......................................................................................................... 3-79Totally Worthless Debts .......................................................................................................... 3-79Recovery of Bad Debt ............................................................................................................. 3-80Property Received for a Debt ................................................................................................... 3-80Bankruptcy Claim .................................................................................................................... 3-80Sale of Mortgaged Property ..................................................................................................... 3-81Net Operating Loss .................................................................................................................. 3-81

Nonaccrual-Experience Accounting Method ................................................................................ 3-81Performing Services ................................................................................................................. 3-81Interest & Late Charges ........................................................................................................... 3-81

Refueling Property & Electric Vehicles ..................................................................................................... 3-82Alternative Fuel Refueling Property (Expired) - §30C ......................................................................... 3-82Plug-In Electric Drive Motor Vehicle Credit - §30 .............................................................................. 3-82

Plug-in Electric Motorcycles & 3-Wheeled Electric Vehicles - §30D(g) ...................................... 3-83Advanced Energy Investment Credit - §48C ........................................................................................ 3-83

Depreciation - §168.................................................................................................................................... 3-84Personal Property .................................................................................................................................. 3-84

ACRS - §168 ................................................................................................................................. 3-84Applicable Percentage ............................................................................................................. 3-84Straight-line Election ............................................................................................................... 3-85

MACRS ......................................................................................................................................... 3-85Elections .................................................................................................................................. 3-86Bonus (or Additional First-year) Depreciation - §168(k) ........................................................ 3-86

Qualifying Property ............................................................................................................. 3-86Coordination with §179.......................................................................................................3-87

MACRS Conventions .............................................................................................................. 3-87Mid-quarter Convention Exception ..................................................................................... 3-87

Recapture - §1245 ......................................................................................................................... 3-88Real Property ........................................................................................................................................ 3-88

ACRS ............................................................................................................................................ 3-88MACRS ......................................................................................................................................... 3-88

Recapture - §1250 & §1245.................................................................................................................. 3-89Section 1245 .................................................................................................................................. 3-89

Full Recapture .......................................................................................................................... 3-89Section 1250 .................................................................................................................................. 3-89

Partial Recapture ...................................................................................................................... 3-89MACRS Recapture Exception for Real Property .......................................................................... 3-89

Alternative Depreciation System - §168(g) .......................................................................................... 3-90Mandatory Application .................................................................................................................. 3-90

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Method .......................................................................................................................................... 3-90

CHAPTER 4 - Employee Compensation & Benefits ...............................4-1Wages, Salary & Pay .................................................................................................................................. 4-1

Employee vs. Contractor Status ............................................................................................................ 4-2Factors ........................................................................................................................................... 4-2

Tests for Deducting Pay to Employees ................................................................................................. 4-4Test #1 - Reasonableness ............................................................................................................... 4-4

Overall Limitation ................................................................................................................... 4-4Allowance of Deduction ...................................................................................................... 4-4

Publicly Traded Corporation Limitation ......................................................................... 4-5Limitation on Accrual Deduction ........................................................................................ 4-5Employment Contracts ........................................................................................................ 4-5

Scope of Examination .............................................................................................................. 4-5Officer’s Compensation ....................................................................................................... 4-5

Factors ..................................................................................................................................... 4-5Employee’s Qualifications .................................................................................................. 4-5Size of the Business ............................................................................................................. 4-6Employee’s Compensation History ..................................................................................... 4-6

Unreasonably Low Salaries ............................................................................................. 4-6Past Service ......................................................................................................................... 4-6Reasonable Dividends ......................................................................................................... 4-6

Bonuses as Constituting Dividends ................................................................................. 4-7Payback Agreements ........................................................................................................... 4-7Miscellaneous Factors ......................................................................................................... 4-7

Test #2 - For Services Performed .................................................................................................. 4-7Employee-Shareholder Salaries ............................................................................................... 4-8

Selected Types of Compensation .......................................................................................................... 4-8Awards .......................................................................................................................................... 4-8Bonuses ......................................................................................................................................... 4-8

Employee Gifts of Nominal Value .......................................................................................... 4-8Education Expenses ....................................................................................................................... 4-8Fringe Benefits .............................................................................................................................. 4-8Life Insurance Coverage ................................................................................................................ 4-9Welfare Benefit Funds ................................................................................................................... 4-9Loans or Advances ........................................................................................................................ 4-9Property ......................................................................................................................................... 4-9

Restricted Property .................................................................................................................. 4-10Sick & Vacation Pay ..................................................................................................................... 4-10

Payroll Tax Withholding & Reporting ................................................................................................. 4-10Form 941 ....................................................................................................................................... 4-11

Deposit Rules ........................................................................................................................... 4-11Lookback Period .................................................................................................................. 4-11

Monthly Depositor .......................................................................................................... 4-12Semi-Weekly Depositor .................................................................................................. 4-12One-Day Rule ................................................................................................................. 4-12

Form W-4 ...................................................................................................................................... 4-12Whistle-Blowing ...................................................................................................................... 4-13

Form W-2 ...................................................................................................................................... 4-13Form W-3 ...................................................................................................................................... 4-14

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Social Security’s Payroll Tax or FICA - §3111 & §3121 ..................................................................... 4-14Rates .............................................................................................................................................. 4-14

FUTA - §3301 & 3306 ......................................................................................................................... 4-15Form 940 ....................................................................................................................................... 4-15

Selected Fringe Benefits ............................................................................................................................. 4-15Old Dichotomy - Statutory v. Nonstatutory .......................................................................................... 4-16

Fringe Benefit Provisions .............................................................................................................. 4-16TRA ‘84 - §132 ........................................................................................................................ 4-16Discrimination ......................................................................................................................... 4-16Only Statutory Benefits ........................................................................................................... 4-16

No-Additional-Cost Services - §132(b) ................................................................................................ 4-16Covered Employees ....................................................................................................................... 4-17Line of Business Requirement ....................................................................................................... 4-17

Definition ................................................................................................................................. 4-17Qualified Employee Discounts - §132(c) ............................................................................................. 4-17

Manner of Discount ....................................................................................................................... 4-18Real Estate & Investment Property Exclusion ......................................................................... 4-18

Amount of Discount ...................................................................................................................... 4-18Working Condition Fringes - §132(d) .................................................................................................. 4-18

Covered Employees ....................................................................................................................... 4-18Exceptions ..................................................................................................................................... 4-18Substantiation ................................................................................................................................ 4-19

De Minimis Fringes - §132(e) .............................................................................................................. 4-19Subsidized Eating Facilities .......................................................................................................... 4-19

Employee Achievement Awards - §74(c) & §274(j) ............................................................................ 4-21Exclusion ....................................................................................................................................... 4-21Definition of Employee Achievement Awards .............................................................................. 4-21Qualified Plan Award .................................................................................................................... 4-22Employer Deduction Limits .......................................................................................................... 4-22

Aggregation Limit ................................................................................................................... 4-23Special Partnership Rule .......................................................................................................... 4-23Employee Impact ..................................................................................................................... 4-23

Group Term Life Insurance - §79 ......................................................................................................... 4-23Dependent Care Assistance - §129 ....................................................................................................... 4-23

Amount of Assistance.................................................................................................................... 4-23Requirements ................................................................................................................................. 4-24Conflict with Dependent Care ....................................................................................................... 4-24

Cafeteria Plans - §125........................................................................................................................... 4-24Definition ...................................................................................................................................... 4-24Qualified Benefits .......................................................................................................................... 4-24

Non-Qualified Benefits ............................................................................................................ 4-25Controlled Group Rules ................................................................................................................. 4-25Salary Reduction Plans .................................................................................................................. 4-25Nondiscrimination ......................................................................................................................... 4-25

Meals & Lodging - §119 ...................................................................................................................... 4-26Income Exclusion .......................................................................................................................... 4-26

Convenience of Employer ....................................................................................................... 4-26Self-Insured Medical Reimbursement Plans - §105 ............................................................................. 4-26

Allowable Expenses ...................................................................................................................... 4-26Requirements ................................................................................................................................. 4-26Benefits .......................................................................................................................................... 4-27

xii

Exposure ........................................................................................................................................ 4-27Employee Educational Assistance Programs - §127 ............................................................................ 4-27Employer-Provided Automobile - §61 & §132 .................................................................................... 4-27

General Valuation Method ............................................................................................................ 4-27Annual Lease Value Method ......................................................................................................... 4-28

Computation ............................................................................................................................ 4-29Cents Per Mile Method .................................................................................................................. 4-29Commuting Value Method ............................................................................................................ 4-29

Interest-Free & Below-Market Loans - §7872 ...................................................................................... 4-29Permissible Discrimination ...................................................................................................... 4-30Employee Needs ...................................................................................................................... 4-30

Imputed Interest ............................................................................................................................. 4-30Types of Loans .............................................................................................................................. 4-30

Demand Loans ......................................................................................................................... 4-30Term Loans .............................................................................................................................. 4-31

Application of §7872 and Rate Determinations ............................................................................ 4-31Summary ....................................................................................................................................... 4-31

Moving Expense Reimbursement Suspended - §217 ........................................................................... 4-31Family & Medical Leave - §45S .......................................................................................................... 4-32Parking Exclusion & Passes Suspended - §132.................................................................................... 4-32Employer-Provided Retirement Advice & Planning - §132 ................................................................. 4-32Financial Planning - §67 & §212 .......................................................................................................... 4-33

Popularity ...................................................................................................................................... 4-33Taxation ......................................................................................................................................... 4-33

Tax Planning - §67 & §212 .................................................................................................................. 4-33Taxation ......................................................................................................................................... 4-33

Estate Planning - §67 & §212 ............................................................................................................... 4-34On-premises Athletic Facility - §132(j)(4)(B) ...................................................................................... 4-34ERISA Compliance .............................................................................................................................. 4-35

Welfare Plans ................................................................................................................................ 4-35Additional Requirements ......................................................................................................... 4-35

Equity Participation .................................................................................................................................... 4-35Stock Transfers or Equity Grants ......................................................................................................... 4-36Stock Sales or Unrestricted Stock Plan ................................................................................................. 4-36Stock Plans ........................................................................................................................................... 4-37

Stock Bonus ................................................................................................................................... 4-37ESOT ............................................................................................................................................. 4-37Phantom Stock ............................................................................................................................... 4-37

Advantages .............................................................................................................................. 4-38Comparison with Profit Sharing Plans ..................................................................................... 4-38

Repurchase or Restricted Stock Agreement .................................................................................. 4-38Stock Options ....................................................................................................................................... 4-39

Section 83 ...................................................................................................................................... 4-39Risk of Forfeiture ..................................................................................................................... 4-39Election .................................................................................................................................... 4-39

Stock Appreciation Rights Plans ................................................................................................... 4-39Tandem Plans .......................................................................................................................... 4-40

Qualified Incentive Stock Option ......................................................................................................... 4-40Requirements ................................................................................................................................. 4-40

Nonqualified Deferred Compensation ........................................................................................................ 4-43Postponement of Income ...................................................................................................................... 4-43

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Advantages ........................................................................................................................................... 4-43IRS Scrutiny & Approval .............................................................................................................. 4-44Nondiscrimination ......................................................................................................................... 4-44

ERISA ...................................................................................................................................... 4-44Funding .......................................................................................................................................... 4-44

No Immediate Cash Outlay...................................................................................................... 4-44Annual Report ............................................................................................................................... 4-44

Notice Requirement ................................................................................................................. 4-44Purposes ................................................................................................................................................ 4-44Benefit Formula .................................................................................................................................... 4-45

Incentive ........................................................................................................................................ 4-45Deferred Bonuses .......................................................................................................................... 4-45

Tax Status ............................................................................................................................................. 4-45Service’s Position .......................................................................................................................... 4-45

Rationale .................................................................................................................................. 4-46Constructive Receipt ............................................................................................................................. 4-46

Beyond Actual Receipt .................................................................................................................. 4-46Simple Set-Asides Are Not Possible ........................................................................................ 4-46

Revenue Ruling 60-31 ......................................................................................................... 4-46Regulations .......................................................................................................................... 4-47

Time & Control Concept ............................................................................................................... 4-47Control ..................................................................................................................................... 4-47Timing ..................................................................................................................................... 4-47

Economic Benefit ................................................................................................................................. 4-48Has Something of Value Been Transferred? ................................................................................. 4-48

Insurance Coverage Has a Calculable Value ........................................................................... 4-48Segregated Funds Have Immediate Economic Value .............................................................. 4-48

General Principles ......................................................................................................................... 4-48Unfunded Bare Contractual Promise Plan - Type I .............................................................................. 4-49

Risk................................................................................................................................................ 4-49Funded Company Account Plan - Type II ............................................................................................ 4-49

Ownership & Segregation ............................................................................................................. 4-49Bookkeeping Reserve or Separate Account .................................................................................. 4-50Employee Bears Economic Risk ................................................................................................... 4-50

Limited Protection ................................................................................................................... 4-50Investment of Deferred Amounts ........................................................................................ 4-50Life Insurance ...................................................................................................................... 4-50Premiums ............................................................................................................................. 4-51Third Party Guarantees ........................................................................................................ 4-51

Segregated Asset Plan - Type III .......................................................................................................... 4-51Section 83 Approach ..................................................................................................................... 4-52Tight Rope Format ........................................................................................................................ 4-52Transferable or Not Subject To A Risk of Substantial Forfeiture ................................................. 4-52

Substantial Restrictions............................................................................................................ 4-52Redemption or Forfeiture .................................................................................................... 4-52Condition Related to a Purpose of the Transfer ................................................................... 4-53Noncompetition ................................................................................................................... 4-53Consultation......................................................................................................................... 4-53Time Alone is Not Enough .................................................................................................. 4-53

Realization & Taxation.................................................................................................................. 4-5330-Day Election Period ................................................................................................................. 4-53

xiv

Deduction Allowed ........................................................................................................................ 4-54Timing ........................................................................................................................................... 4-54

Withholding ............................................................................................................................. 4-54Tax Consequences ................................................................................................................................ 4-54

Reciprocal Taxation/Deduction Rule ............................................................................................ 4-54No Difference for Cash or Accrual .......................................................................................... 4-54

Separate Accounts for Two or More Participants .......................................................................... 4-55Income Tax on Employer Held Assets .......................................................................................... 4-55Inclusion in Income Under §409A ................................................................................................ 4-55

CHAPTER 5 - Automobiles ........................................................................5-1Apportionment of Personal & Business Use .............................................................................................. 5-1

Car Pool ................................................................................................................................................ 5-2Fines ..................................................................................................................................................... 5-2Parking Fees ......................................................................................................................................... 5-2Interest Deduction Limit for Individuals .............................................................................................. 5-3

Self-Employed Exception.............................................................................................................. 5-3Property Taxes ...................................................................................................................................... 5-3Sales Taxes ........................................................................................................................................... 5-3

Sales Tax Deduction for Qualified Vehicles (Expired) - §164 ...................................................... 5-3Actual Cost Method ................................................................................................................................... 5-4

Deduction Limitations .......................................................................................................................... 5-5Definition of Car ........................................................................................................................... 5-5Depreciation and Expensing .......................................................................................................... 5-5

Basis ........................................................................................................................................ 5-5Trade-In of Old Car for New ............................................................................................... 5-6

Placed in Service ...................................................................................................................... 5-6Conversion to Business Use - “Lesser of” Rule .................................................................. 5-6

MACRS - 5 (Actually 6) Years ............................................................................................... 5-7200%Double Declining Balance Method ............................................................................ 5-7

150% Declining Balance Method Election ..................................................................... 5-8Straight-Line Method Election ........................................................................................ 5-8

Half-Year Convention ......................................................................................................... 5-9Mid-Quarter Convention ..................................................................................................... 5-9

Depreciation “Caps” ................................................................................................................ 5-11Separate Depreciation Caps for Trucks & Vans .................................................................. 5-13Post-Recovery Period Depreciation - Max Reduction Rule ................................................ 5-13Partial Business Use ............................................................................................................ 5-14Improvements ...................................................................................................................... 5-14Bonus (or Additional First-year) Depreciation - §168(k) .................................................... 5-14

Expensing - §179 .................................................................................................................................. 5-15Cost of Car..................................................................................................................................... 5-15Basis Reduction ............................................................................................................................. 5-16Making the §179 Election ............................................................................................................. 5-16Business Use Reduction ................................................................................................................ 5-16SUV Limitation ............................................................................................................................. 5-16

Predominate Business (More Than 50%) Use Rule.............................................................................. 5-17Qualified Business Use .................................................................................................................. 5-18

Exclusions ................................................................................................................................ 5-19Change From Personal to Business Use .................................................................................. 5-20

xv

Employee Use of Their Own Car............................................................................................. 5-20Failure to Meet Predominate Business Use Rule ........................................................................... 5-20Later Reduction in Qualified Use .................................................................................................. 5-21

ITC Recapture - Highly Unlikely ............................................................................................ 5-21Straight-line Depreciation ........................................................................................................ 5-21Excess Depreciation Recapture ............................................................................................... 5-21

Short Tax Year Depreciation Reduction ........................................................................................ 5-22Auto Leasing ........................................................................................................................................ 5-24

Pros & Cons................................................................................................................................... 5-25Leasing Terminology ..................................................................................................................... 5-25Closed-End vs. Open-End Lease ................................................................................................... 5-27Formula for Monthly Payments ..................................................................................................... 5-28Leasing Deduction Restrictions ..................................................................................................... 5-29

Income Inclusion Amount ....................................................................................................... 5-29Separate Lease Inclusion Table for Trucks & Vans ............................................................ 5-29

Cars Leased For 30 Days or More After 1986 ......................................................................... 5-29Computation of Inclusion ........................................................................................................ 5-30

Nine-Month Following Year Rule ....................................................................................... 5-32Buying v. Leasing .................................................................................................................... 5-33

Standard Mileage Method .......................................................................................................................... 5-33Limitations on Standard Mileage Method ............................................................................................ 5-35

Use, Ownership & Prior Depreciation ........................................................................................... 5-35Switching Methods ............................................................................................................................... 5-35Charitable Transportation ..................................................................................................................... 5-36Medical Transportation ......................................................................................................................... 5-37

Auto Trade-In vs. Sale................................................................................................................................ 5-37Working Condition Fringe Benefits ........................................................................................................... 5-38

Qualified Transportation - §132(f) ....................................................................................................... 5-38Exclusion Limits ............................................................................................................................ 5-39

Employer-Provided Automobile ........................................................................................................... 5-41General Hypothetical Valuation Method ....................................................................................... 5-42Special Method #1 - Lease Value .................................................................................................. 5-42

Annual Lease Value - For Entire Calendar Year ..................................................................... 5-42Fair Market Value ............................................................................................................... 5-44

Safe Harbor Value ........................................................................................................... 5-44Items Included in Annual Lease Value Table ...................................................................... 5-45

Prorated Annual Lease Value - For 30 Days or More ............................................................. 5-45Daily Lease Value - For Less Than 30 Days ........................................................................... 5-46

Special Method #2 - Cents per Mile .............................................................................................. 5-46Regular Use - 50% Business .................................................................................................... 5-47Mileage Rule - 10,000 Miles ................................................................................................... 5-47Items Included In Cents-Per-Mile Rate ................................................................................... 5-47

Special Method #3 - Commuting Value ........................................................................................ 5-48Control Employee .................................................................................................................... 5-48Employer-Provided Transportation in Unsafe Areas ............................................................... 5-49

Qualified Employee ............................................................................................................. 5-50Nonpersonal Use Vehicles - 100% Excludable ............................................................................. 5-50

Clearly Marked Police or Fire Vehicles ................................................................................... 5-50Unmarked Law Enforcement Vehicles .................................................................................... 5-51

Law Enforcement Officer .................................................................................................... 5-51Trucks & Vans ......................................................................................................................... 5-51

xvi

Pickup Truck Guidelines ..................................................................................................... 5-51Van Guidelines .................................................................................................................... 5-52

Qualified Automobile Demonstration Use .................................................................................... 5-52Full-time Automobile Salesperson .......................................................................................... 5-53Restrictions on Personal Use ................................................................................................... 5-53

Reporting by Employer ................................................................................................................. 5-53Election Not to Withhold for Income Taxes ............................................................................ 5-53Value Reported ........................................................................................................................ 5-54Accounting Period ................................................................................................................... 5-54

Special Accounting Period - Pour Over Method ................................................................. 5-54

CHAPTER 6 - Business Travel & Entertainment ....................................6-1Business Travel .......................................................................................................................................... 6-1

Transportation & Travel Distinguished ................................................................................................ 6-1Travel Expenses ............................................................................................................................ 6-2Transportation Expenses ............................................................................................................... 6-2

Definition of “Tax Home” .................................................................................................................... 6-2Circuit Court Test .......................................................................................................................... 6-2IRS Test ......................................................................................................................................... 6-3

Employment Area .................................................................................................................... 6-3No Tax Home ................................................................................................................................ 6-3

Itinerant Worker ....................................................................................................................... 6-3Two Work Locations ..................................................................................................................... 6-4

Temporary & Indefinite Assignments .................................................................................................. 6-4Temporary Assignment ................................................................................................................. 6-4Indefinite Assignment ................................................................................................................... 6-4Time .............................................................................................................................................. 6-4

Prior Law Presumptions........................................................................................................... 6-5One-Year IRS Presumption ................................................................................................. 6-5Less than Two-Year Exception ........................................................................................... 6-5

Regular Home ................................................................................................................. 6-5Temporary Job That Became Permanent ............................................................................. 6-6

Current Law - One-Year Rigid Time Rule .............................................................................. 6-6Away From Home Requirement ........................................................................................................... 6-6

Sleep & Rest Rule ......................................................................................................................... 6-7Correll Case ............................................................................................................................. 6-7

Business Purpose Requirement ............................................................................................................. 6-7All or Nothing ............................................................................................................................... 6-7Primarily for Business Test ........................................................................................................... 6-8

Time ......................................................................................................................................... 6-8Other Factors ....................................................................................................................... 6-8

Existing Trade or Business ...................................................................................................... 6-851/49 Percent Test ................................................................................................................... 6-8

Domestic Business Travel ............................................................................................................. 6-8Foreign Business Travel ................................................................................................................ 6-8

Personal Pleasure ..................................................................................................................... 6-9Primarily Business ................................................................................................................... 6-9Full Deduction ......................................................................................................................... 6-9Definition of Business Day ...................................................................................................... 6-10

Meals & Lodging .................................................................................................................................. 6-10

xvii

50% Deduction Limitation ............................................................................................................ 6-10Conventions & Meetings ...................................................................................................................... 6-10

Agenda Test ................................................................................................................................... 6-10Foreign Conventions ..................................................................................................................... 6-11

Factors ..................................................................................................................................... 6-11North American Area .............................................................................................................. 6-11

Allowable Expenses ...................................................................................................................... 6-12Cruises .................................................................................................................................................. 6-12

Deduction Limitation..................................................................................................................... 6-12Reporting Statements ..................................................................................................................... 6-12

Luxury Water Travel ............................................................................................................................ 6-12Exceptions ..................................................................................................................................... 6-13

Family Member Travel Expenses ......................................................................................................... 6-13Statutory Exceptions - §274(e) ............................................................................................................. 6-16

Food and Beverages for Employees .............................................................................................. 6-16Expenses Treated as Compensation .............................................................................................. 6-17Reimbursed Expenses .................................................................................................................... 6-17Recreational Expenses for Employees........................................................................................... 6-17Employee, Stockholder and Business Meetings ............................................................................ 6-17Trade Association Meetings .......................................................................................................... 6-17Items Available to Public .............................................................................................................. 6-17Entertainment Sold to Customers .................................................................................................. 6-17Expenses Includible in Income of Non-employees ....................................................................... 6-18

Percentage Reduction for Meals - §274(n)(1) ...................................................................................... 6-18Application of Reduction Rule ...................................................................................................... 6-18Exceptions - §274(n)(2) ................................................................................................................. 6-18

Employee Business Expenses Subject to 2% Floor Suspended ............................................................ 6-18Entertainment Facilities ........................................................................................................................ 6-20

Exceptions ..................................................................................................................................... 6-20Covered Expenses ......................................................................................................................... 6-20Club Dues ...................................................................................................................................... 6-20

OBRA '93 & TCJA .................................................................................................................. 6-21Sales Incentive Awards ................................................................................................................. 6-21

Substantiation & Record Keeping - §274(d) ........................................................................................ 6-21Documentation .............................................................................................................................. 6-22

Payback Agreements ............................................................................................................... 6-22Employee Expense Reimbursement & Reporting ................................................................................ 6-22

Family Support Act of 1988 .......................................................................................................... 6-23Remaining Above-The-Line Deductions ....................................................................................... 6-23

Accountable Plans ................................................................................................................... 6-23Reasonable Period of Time ................................................................................................. 6-24

Fixed Date Safe Harbor ................................................................................................... 6-24Period Statement Safe Harbor ......................................................................................... 6-24

Adequate Accounting .......................................................................................................... 6-24Per Diem Allowance Arrangements ................................................................................ 6-24

Reporting Per Diem Allowances ......................................................................................... 6-30Reimbursement Not More Than Federal Rate ................................................................. 6-30Reimbursement More Than Federal Rate........................................................................ 6-30

Nonaccountable Plans ......................................................................................................... 6-33Non-Reimbursed Employee Expenses - Suspended ............................................................................. 6-33

When an Employee Needs to File Form 2106 - After 2025? ........................................................ 6-34

xviii

Self-Employed Persons ......................................................................................................................... 6-34Expenses Related to Taxpayer's Business ..................................................................................... 6-34Expenses Incurred on Behalf of a Client & Reimbursed ............................................................... 6-34

Meal (and Entertainment before 2018) Expenses .................................................................... 6-35With Adequate Accounting ................................................................................................. 6-35Without Adequate Accounting ............................................................................................ 6-35

Non-Meal Expense Deduction ................................................................................................. 6-35Employers ............................................................................................................................................. 6-35

When Can an Expense Be Deducted? ........................................................................................... 6-36Economic Performance Rule ................................................................................................... 6-36

Corporation.................................................................................................................................... 6-36Nondeductible Meals ..................................................................................................................... 6-36Employer-Provided Auto ............................................................................................................... 6-36

CHAPTER 7 - Retirement Plans ................................................................7-1Deferred Compensation .............................................................................................................................. 7-1

Qualified Deferred Compensation ........................................................................................................ 7-1Qualified v. Nonqualified Plans .................................................................................................... 7-1Major Benefit ................................................................................................................................ 7-2

Current Deduction ................................................................................................................... 7-2Timing of Deductions .............................................................................................................. 7-2Part of Total Compensation ..................................................................................................... 7-2

Compensation Base ....................................................................................................................... 7-2Salary Reduction Amounts ...................................................................................................... 7-2

Benefit Planning ............................................................................................................................ 7-3Corporate Plans ............................................................................................................................. 7-3

Advantages .............................................................................................................................. 7-3Current ................................................................................................................................. 7-4Deferred ............................................................................................................................... 7-4

Disadvantages .......................................................................................................................... 7-4Employee Costs ................................................................................................................... 7-4Comparison with IRAs & Keoghs ....................................................................................... 7-6

Basic ERISA Provisions ................................................................................................................ 7-6ERISA Reporting Requirements .............................................................................................. 7-6Fiduciary Responsibilities........................................................................................................ 7-7

Bonding Requirement .......................................................................................................... 7-7Prohibited Transactions ........................................................................................................... 7-7

Additional Restrictions ........................................................................................................ 7-7Fiduciary Exceptions ........................................................................................................... 7-8Loans ................................................................................................................................... 7-8

Employer Securities ................................................................................................................. 7-9Excise Penalty Tax .................................................................................................................. 7-9PBGC Insurance ...................................................................................................................... 7-9

Sixty-Month Requirement ................................................................................................... 7-10Recovery Against Employer ................................................................................................ 7-10

Termination Proceedings ......................................................................................................... 7-10Plans Exempt from PBGC Coverage ....................................................................................... 7-10

Basic Requirements of a Qualified Pension Plan ................................................................................. 7-11Written Plan ................................................................................................................................... 7-11

Communication........................................................................................................................ 7-11

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Trust .............................................................................................................................................. 7-12Requirements ........................................................................................................................... 7-12

Permanency ................................................................................................................................... 7-12Exclusive Benefit of Employees .................................................................................................... 7-12

Highly Compensated Employees ............................................................................................. 7-13Reversion of Trust Assets to Employer ................................................................................... 7-13

Participation & Coverage .............................................................................................................. 7-13Age & Service.......................................................................................................................... 7-13Coverage .................................................................................................................................. 7-14

Percentage Test .................................................................................................................... 7-14Ratio Test ............................................................................................................................ 7-14Average Benefits Test ......................................................................................................... 7-15Numerical Coverage ............................................................................................................ 7-15Related Employers .............................................................................................................. 7-15

Vesting .......................................................................................................................................... 7-16Full & Immediate Vesting ....................................................................................................... 7-16Minimum Vesting .................................................................................................................... 7-16Nondiscrimination Compliance ............................................................................................... 7-18

Contribution & Benefit Limits ...................................................................................................... 7-18Defined Benefit Plans (Annual Benefits Limitation) - §415.................................................... 7-18Defined Contribution Plans (Annual Addition Limitation) - §415 .......................................... 7-19Limits on Deductible Contributions - §404 ............................................................................. 7-19

Assignment & Alienation .............................................................................................................. 7-19Miscellaneous Requirements ......................................................................................................... 7-20

Basic Types of Corporate Plans ............................................................................................................ 7-23Defined Benefit ............................................................................................................................. 7-23

Mechanics ................................................................................................................................ 7-23Defined Benefit Pension .......................................................................................................... 7-23

Defined Contribution ..................................................................................................................... 7-23Mechanics ................................................................................................................................ 7-23Discretion................................................................................................................................. 7-24Favorable Circumstances ......................................................................................................... 7-24

Types of Defined Contribution Plans ............................................................................................ 7-24Profit Sharing ........................................................................................................................... 7-24

Requirements for a Qualified Profit Sharing Plan ............................................................... 7-25Written Plan .................................................................................................................... 7-25Eligibility ........................................................................................................................ 7-25Deductible Contribution Limit ........................................................................................ 7-25Substantial & Recurrent Rule .......................................................................................... 7-25

Money Purchase Pension ......................................................................................................... 7-26Cafeteria Compensation Plan ................................................................................................... 7-27Thrift Plan ................................................................................................................................ 7-28Section 401(k) Plans ................................................................................................................ 7-28

Death Benefits ............................................................................................................................... 7-29Defined Benefit Plans .............................................................................................................. 7-30Money Purchase Pension & Target Benefit Plans ................................................................... 7-30

Employee Contributions ................................................................................................................ 7-30Non-Deductible........................................................................................................................ 7-30

Life Insurance in the Qualified Plan .............................................................................................. 7-30Return ...................................................................................................................................... 7-31Universal Life .......................................................................................................................... 7-31

xx

Compare ................................................................................................................................... 7-31Plan Terminations & Corporate Liquidations ................................................................................ 7-31

10-Year Rule ............................................................................................................................ 7-32Lump-Sum Distributions ......................................................................................................... 7-32Asset Dispositions ................................................................................................................... 7-32IRA Limitations ....................................................................................................................... 7-32

Self-Employed Plans - Keogh .............................................................................................................. 7-33Contribution Timing ...................................................................................................................... 7-33Controlled Business ....................................................................................................................... 7-33

General Limitations ................................................................................................................. 7-34Effect of Incorporation .................................................................................................................. 7-34

Mechanics ................................................................................................................................ 7-35Parity with Corporate Plans ................................................................................................. 7-35Figuring Retirement Plan Deductions For Self-Employed .................................................. 7-36

Self-Employed Rate ........................................................................................................ 7-36Determining the Deduction................................................................................................................... 7-37Individual Plans - IRA’s ....................................................................................................................... 7-39

Deemed IRA .................................................................................................................................. 7-40Mechanics ...................................................................................................................................... 7-40

Phase-out ................................................................................................................................. 7-40Special Spousal Participation Rule - §219(g)(1) ...................................................................... 7-40Spousal IRA ............................................................................................................................. 7-42

Eligibility ....................................................................................................................................... 7-42Contributions & Deductions .......................................................................................................... 7-42

Employer Contributions ........................................................................................................... 7-42Retirement Vehicles ...................................................................................................................... 7-43Distribution & Settlement Options ................................................................................................ 7-43

Life Annuity Exemption .......................................................................................................... 7-43Minimum Distributions ........................................................................................................... 7-44

Required Minimum Distribution ......................................................................................... 7-442009 Waiver of Required Minimum Distribution Rules - Expired ................................. 7-44Definitions ....................................................................................................................... 7-44Distributions during Owner’s Lifetime & Year of Death after RBD .............................. 7-45Sole Beneficiary Spouse Who Is More Than 10 Years Younger .................................... 7-46Distributions after Owner’s Death .................................................................................. 7-47

Inherited IRAs ......................................................................................................................... 7-49Estate Tax Deduction .......................................................................................................... 7-50Charitable Distributions from an IRA ................................................................................. 7-50

Post-Retirement Tax Treatment of IRA Distributions ................................................................... 7-51Income In Respect of a Decedent ............................................................................................ 7-51Estate Tax Consequences ......................................................................................................... 7-51Losses on IRA Investments ..................................................................................................... 7-51

Prohibited Transactions ................................................................................................................. 7-51Effect of Disqualification ......................................................................................................... 7-52Penalties ................................................................................................................................... 7-52

Borrowing on an Annuity Contract ............................................................................................... 7-52Tax-Free Rollovers ........................................................................................................................ 7-52

Rollover from One IRA to Another ......................................................................................... 7-53Waiting Period between Rollovers ...................................................................................... 7-53Partial Rollovers .................................................................................................................. 7-53

Rollovers from Traditional IRAs into Qualified Plans ............................................................ 7-54

xxi

Rollovers of Distributions from Employer Plans ..................................................................... 7-54Withholding Requirement ................................................................................................... 7-54Waiting Period between Rollovers ...................................................................................... 7-54Conduit IRAs ....................................................................................................................... 7-55Keogh Rollovers .................................................................................................................. 7-55Direct Rollovers From Retirement Plans to Roth IRAs ...................................................... 7-55

Rollovers of §457 Plans into Traditional IRAs ........................................................................ 7-55Rollovers of Traditional IRAs into §457 Plans ........................................................................ 7-56Rollovers of Traditional IRAs into §403(B) Plans .................................................................. 7-56Rollovers from SIMPLE IRAs ................................................................................................ 7-56

Roth IRA - §408A ......................................................................................................................... 7-57Eligibility ................................................................................................................................. 7-57Contribution Limitation ........................................................................................................... 7-58

Roth IRAs Only ................................................................................................................... 7-58Roth IRAs & Traditional IRAs ............................................................................................ 7-58

Conversions ............................................................................................................................. 7-60Recharacterizations .................................................................................................................. 7-61Reconversions .......................................................................................................................... 7-62Taxation of Distributions ......................................................................................................... 7-62

No Required Minimum Distributions .................................................................................. 7-62Simplified Employee Pension Plans (SEPs) ......................................................................................... 7-63

Contribution Limits & Taxation .............................................................................................. 7-65SIMPLE Plans ...................................................................................................................................... 7-65

SIMPLE IRA Plan ......................................................................................................................... 7-65Employee Limit ....................................................................................................................... 7-66Other Qualified Plan ................................................................................................................ 7-66Set up ....................................................................................................................................... 7-66Contribution Limits ................................................................................................................. 7-66

Salary Reduction Contributions ........................................................................................... 7-67Employer Matching Contributions ...................................................................................... 7-67

Deduction of Contributions ..................................................................................................... 7-67Distributions ............................................................................................................................ 7-67

SIMPLE §401(k) Plan ................................................................................................................... 7-68

CHAPTER 8 - Insurance ............................................................................8-1Company Paid Insurance ............................................................................................................................ 8-1

Popularity ............................................................................................................................................. 8-1Types of Life Insurance .............................................................................................................................. 8-2

Group Term Life - §79 ......................................................................................................................... 8-2Requirements ................................................................................................................................. 8-2Cost Of Group-term Life Insurance ............................................................................................... 8-2“Key Employee” Defined .............................................................................................................. 8-4

Retired Lives Reserve ........................................................................................................................... 8-4Revenue Ruling 68-577 ................................................................................................................. 8-4Taxation ......................................................................................................................................... 8-4

Split Dollar Life .................................................................................................................................... 8-5Low-Cost Term Insurance ............................................................................................................. 8-5Regulatory Requirements .............................................................................................................. 8-5Taxation ......................................................................................................................................... 8-7

Death Benefit Only Plan - Repealed ..................................................................................................... 8-7

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Business Travel Accident Insurance ..................................................................................................... 8-7Medical & Dental Insurance ................................................................................................................. 8-7

Premiums ....................................................................................................................................... 8-7Disability Income Insurance ................................................................................................................. 8-8

Repeal of Exclusion....................................................................................................................... 8-8Tax Credit for Disabled ................................................................................................................. 8-8

Interest Limitation on Policy Loans - §264 ................................................................................................ 8-8Deductibility of Premiums & Interest on Life Insurance ...................................................................... 8-8

Exclusion Of Inside Buildup & Amounts Received ...................................................................... 8-8Premium Deduction Limitation ..................................................................................................... 8-8Interest Deduction Disallowance With Respect To Life Insurance ............................................... 8-9

Prorata Disallowance of Interest on Debt to Fund Life Insurance ........................................... 8-9Interest Limitation for Tax-Exempt Interest Income .................................................................................. 8-12Other Selected Insurances .......................................................................................................................... 8-12

Self-Employed Health Insurance Deduction ........................................................................................ 8-12Long-Term Care Premiums .................................................................................................................. 8-13Capitalized Insurance ........................................................................................................................... 8-13Health Savings Accounts ...................................................................................................................... 8-13Small Business Health Insurance Expense Tax Credit - §45R ............................................................. 8-14

CHAPTER 9 - Estate Planning ..................................................................9-1Unlimited Marital Deduction ................................................................................................................ 9-2

Outright To Spouse........................................................................................................................ 9-2Marital Deduction Trust ................................................................................................................ 9-3Qualified Terminable Interest Property Trust ................................................................................ 9-3

Applicable Exemption (or Exclusion) Amount .................................................................................... 9-3Spousal Portability of Unused Exemption Amount - §2010(c)(2) ................................................ 9-5

Stepped-up Basis & Modified Carryover Basis .................................................................................... 9-5Modified Carryover Basis - §1022 ................................................................................................ 9-6Limited Basis Increase for Certain Property ................................................................................. 9-8

2010 Special Election .............................................................................................................. 9-8Basic Estate Planning Goals ................................................................................................................. 9-9Primary Dispositive Plans .................................................................................................................... 9-9

Simple Will.................................................................................................................................... 9-9Danger for Larger Estates ........................................................................................................ 9-10Probate ..................................................................................................................................... 9-10Assets Not Subject to a Will .................................................................................................... 9-10Assets Subject to a Will ........................................................................................................... 9-12

Trusts .................................................................................................................................................... 9-12Types of Trusts .............................................................................................................................. 9-13

Living Trusts ............................................................................................................................ 9-13Testamentary Trusts ................................................................................................................. 9-13Revocable & Irrevocable ......................................................................................................... 9-13

Living “A-B” Revocable Trust ...................................................................................................... 9-13Living “A-B-C” (QTIP) Trust ....................................................................................................... 9-16Impact of Spousal Portability on Trust B under TUIRJCA........................................................... 9-16

Charitable Trusts................................................................................................................................... 9-18Charitable Remainder Trusts ......................................................................................................... 9-18Charitable Income Trusts .............................................................................................................. 9-18

Insurance Trusts .................................................................................................................................... 9-18

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Family Documents ................................................................................................................................ 9-20Living Will .................................................................................................................................... 9-21Property Agreement & Inventory .................................................................................................. 9-21Durable Power Of Attorney ........................................................................................................... 9-21

Power of Attorney for Health Care .......................................................................................... 9-22Conservatorship ............................................................................................................................. 9-22Funeral Arrangements ................................................................................................................... 9-22Anatomical Gifts ........................................................................................................................... 9-24

Private Annuity ..................................................................................................................................... 9-24Advantages to the Transferor ........................................................................................................ 9-24Disadvantages to the Transferor .................................................................................................... 9-24Advantages to the Transferee ........................................................................................................ 9-24Disadvantages to the Transferee .................................................................................................... 9-25

Business Valuation ............................................................................................................................... 9-27Relevant Facts ............................................................................................................................... 9-28Revenue Ruling 59-60 ................................................................................................................... 9-28Tangible Assets ............................................................................................................................. 9-30

Special Real Estate Election - §2032A .................................................................................... 9-30Limitations........................................................................................................................... 9-31Related Party Cash Lease .................................................................................................... 9-33

Intangible Assets & Goodwill ....................................................................................................... 9-33R.R. 68-609.............................................................................................................................. 9-33

Land Subject To Conservation Easement - §2032A(c)(8) ............................................................. 9-34Family Member ....................................................................................................................... 9-34Indirect Ownership of Land ..................................................................................................... 9-34Qualified Conservation Easement ............................................................................................ 9-35

Qualified Real Property Interest .......................................................................................... 9-35Qualified Organization ........................................................................................................ 9-35Conservation Purpose .......................................................................................................... 9-35

No Additional Income Tax Deduction ..................................................................................... 9-35Valuation Discounts ...................................................................................................................... 9-36

Minority Interests ..................................................................................................................... 9-36Special Valuation plus Minority Discount .......................................................................... 9-38

Fractional Interests ................................................................................................................... 9-38Lack of Marketability .............................................................................................................. 9-39Swing Vote Premium ............................................................................................................... 9-39

Buy-Sell Agreements ..................................................................................................................... 9-40Redemptions Under §303 ..................................................................................................................... 9-40

Requirements ................................................................................................................................. 9-41Corporate Accumulation For §303 Redemption ............................................................................ 9-42Accumulation in Anticipation of Shareholder’s Death .................................................................. 9-43

Death of a Spouse ................................................................................................................................. 9-43Bypass Trust .................................................................................................................................. 9-44

Lifetime Dispositions ........................................................................................................................... 9-44Gifts ............................................................................................................................................... 9-44Stock Redemptions Under §302 .................................................................................................... 9-45

Substantially Disproportionate Redemption - 80/50 Rule ....................................................... 9-45Redemptions Not Essentially Equivalent to a Dividend .......................................................... 9-45Complete Redemptions ............................................................................................................ 9-46Constructive Ownership - §318 ............................................................................................... 9-46

Double Attribution .............................................................................................................. 9-46

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Stock Attribution in Complete Redemptions ....................................................................... 9-47Stock Recapitalization ................................................................................................................... 9-47

Section 306 Taint ..................................................................................................................... 9-48Deferred Compensation Agreements ............................................................................................. 9-48

Installment Payment of Federal Estate Taxes - §6166 .......................................................................... 9-49Computation .................................................................................................................................. 9-49Eligibility & Court Supervision ..................................................................................................... 9-50Closely Held Business ................................................................................................................... 9-50Acceleration of Payment ............................................................................................................... 9-50

Learning Objectives

After reading Chapter 1, participants will be able to: 1. Recognize sole proprietorships, partnerships, and corporations as organi-zational formats for new and existing businesses. 2. Identify how choice of entity relates to the type of records to keep, list-ing issues related to substantiation and documentation. 3. Specify available accounting periods and methods and the methods for identifying and valuing inventory items.