TAX TIPS NEWSLINE JANUARY 2014

Produced monthly for clients of the Advisory Group AssociatesOur Mission: Sharing ideas that make a real difference.

ORGANIZE 2013 DATA: During January, 2014 we are mailing each client/taxpayer their Tax Organizer to be used to compile your 2013 records and efficiently deliver this data and information for preparation of an accurate tax return. This "Tax Organizer" often shows you what was reported in the prior year. Please answer the questions and complete this accurately. It is also a good idea to use pencil.

Do not wait to send us your 2013 data. Often Schedules K-1 from partnerships etc. are not issued until April. Best practice is to bring us what you have by Saturday, February 8, 2014, even if your forms 1099 and brokerage statements have not yet been received. (See Client Appreciation Brunch.) The goal is to have adequate time to let us process an accurate tax return. If you have any questions, please do not hesitate to contact us. Please notify us promptly of any address, e-mail, and telephone contact changes!

CLIENT APPRECIATION BRUNCH

Join us for brunch and take this opportunity to discuss your 2013 income tax return processingand, or to plan ahead for 2014 with our team of Professional Tax Associates.

We can assist in identifying and maximizing potential tax savings to help you to keepmore of what you earn.

Bring your data and “Tax Organizer” for discussion and preparation .

Saturday, February 8th, 10am until 2pm

At the offices of Advisory Group Associates, 1980 Concourse Drive, St. Louis, MO 63146.

Please R.S.V.P. At: 314-205-9595.

INSIDE THIS MONTH’S ISSUE

Most Often Overlooked Tax Breaks Oddball Tax Deductions Ways To Help Parents Prepare for Retirement 2014 Standard Mileage Rates Tax News New Rules Affect Business Tangible Property Using “Cash Basis” Method

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Cancelled Debt Wide Range Of Services Offered

MOST OFTEN OVERLOOKED TAX BREAKS

Here are some of the most often overlooked tax deductions. Claim them if you deserve them, and keep more of what you make!

State sales taxes. This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren’t the last word.

If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its web site to help you figure out the deduction, which varies by your state and income level.

Reinvested dividends. This isn’t really a deduction, but it is a subtraction that can save you a lot of money and it’s one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the fund. That, in turn, reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.

Out-of-pocket charitable contributions. It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2013, remember to deduct 14 cents per mile.

Student loan interest paid by Mom and Dad. In the past, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad.

Moving expense to take first job. Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct 23 cents per mile of the cost of getting

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yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle.

Child care credit. A credit is so much better than a deduction because it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.

But it’s easy to overlook the child care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts.

Earned Income Tax Credit (EITC). Millions of lower-income people miss out on this every year. However, 25% of taxpayers who are eligible for the EITC fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren’t aware that they qualify.

The EITC is a refundable tax credit, not a deduction, ranging from $487 to $6,044. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as “middle class”, including many white-collar workers, are now considered “low income” because they lost a job, took a pay cut, or worked fewer hours last year.

The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file for a tax refund, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.

State tax you paid last spring. Did you owe taxes when you filed your 2012 state tax return in 2013? Then remember to include that amount with your state tax itemized deduction on your 2013 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

Refinancing points. When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage, that’s a $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away?

Also, in the year you pay off the loan, because you sell the house or refinance again, you get to deduct all the points not yet deducted, unless you refinance with the same lender.

Jury pay paid to employer. Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers. The only problem is that the IRS demands that you report those fees as taxable income. If you give the money to your employer you have a right to deduct the amount so you aren’t taxed on money that simply passes through your hands.

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ODDBALL TAX DEDUCTIONS

Over the years the courts have allowed a few of your fellow taxpayers to deduct some crazy things that most of us wouldn’t even dream of claiming. Below are listed the weirdest deductions allowed, ranging from pet food to free beer.

Pet food. A couple who owned a junkyard was allowed to write off the cost of cat food they set out to attract wild cats. The feral felines did more than just eat; they also took care of snakes and rats on the property, making the place safer for customers. When the case reached the Tax Court, IRS lawyers conceded that the cost was deductible.

Moving the family pet. If you are changing jobs and meet a couple of tests, you can deduct your moving expenses, including the cost of moving your dog, cat or other pet from your old residence to your new home. Your pet, be it a Pekingese or a python, is treated the same as your other personal effects.

A trip to Bermuda. This island is more than just a scenic place to visit. It’s also a great place to schedule a tax write-off. Business conventions held in Bermuda are deductible without having to show that there was a special reason for the meeting to be held there. That’s a sweet perk.

Body oil. A professional bodybuilder used body oil to make his muscles glisten in the lights during his competitions. The Tax Court ruled that he could deduct the cost of the oil as a business expense. Lest it be seen as a softie, though, the Court nixed deductions for buffalo meat and special vitamin supplements to enhance strength and muscle development.

A private airplane. Rather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss.

Breast augmentation. In an effort to get more tips, a stripper with stage name “Chesty Love” decided to get breast implants to increase her size to 56FF. A female Tax Court judge allowed Chesty to write off the cost of her operation, equating her new assets to a stage prop. Alas, the operation proved to be a problem for Chesty. She later tripped and ruptured one of her implants.

Landscaping. Sole proprietors who regularly meet clients in a home office can deduct part of the costs of landscaping the property. The deductible portion is based on the percentage of the home that is used for business, according to the

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Tax Court. The Court also allowed a deduction for part of the costs of lawn care and driveway repairs.

Free beer. In a novel promotion, a gas station owner gave his customers free beer in lieu of trading stamps. Proving that sometimes beer and gasoline do mix.

Swimming pool. A taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regimen. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did.

The Tax Court allowed him to deduct the cost of the pool (to the extent that the cost exceeded its added value to the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals and a proportionate part of insuring the pool area were treated as medical expenses.

A girlfriend. The owner of several rental properties hired his live-in girlfriend to manage them. Her duties included finding furniture, overseeing repairs and running his home. The Tax Court let him deduct $2,500 of the $9,000 he paid her. The disallowed portion was considered to be for nondeductible personal services.

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WAYS TO HELP PARENTS PREPARE FOR RETIREMENT

It might be hard for busy adults to find time to help their parents as they inch toward retirement age, but there are some simple ways to help them plan.

Workers in their 60s have over $220,000 in retirement savings on average. That may seem like a lot, but a recent analysis by fidelity estimates that a couple retiring in 2013 will need that much just for medical expenses alone.

Fortunately, you can help smooth your parents’ transition, and here are some possibilities:

Help Them Secure a Home During Retirement. Keeping a roof over your parents’ heads is the top priority. Of course, if they have plenty of money and are mentally able, they’ll likely want to live on their own for as long as possible. However, as the average person retiring in 2013 will live into their mid-to late 80s, there’s a decent chance they’ll need assistance at some point. So it’s a good idea to plan for when your parents can’t care for themselves.

Their main options include assisted living and moving in with you or a sibling. They’ll need to set aside enough money if going the assisted living route. The costs vary in each state, but the national average base rate was $3,350 a month in 2012, according to a survey by MetLife.

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Take Them to a Financial Planner. Strongly consider taking your parents to a financial planner. He or she can offer professional advice based on your parents retirement savings, debt, medical expenses and so on.

It’s important to make sure the planner is not commission-based or fee-based, since both leave the potential for conflicts of interest. A fee-only planner does not receive money from third parties for referring your parents to them, unlike others who might be tempted to recommend certain financial products based on commissions.

Review Beneficiary Information. Review your parents’ beneficiary information yearly as they approach retirement and beyond. If they haven’t named beneficiaries, it’s time to make sure that happens. It’s a good idea to award each child an equal amount to prevent hard feelings down the line.

Be Alert for Scams. As your parents age, their mental capacity might decline. That makes them prime targets for scammers. While the list of potential scams is virtually limitless, look out for:

Unnecessary investments

Anti-aging products

Internet fraud (online purchase that never arrive, etc.)

Reverse mortgages (not necessarily scams, but be vigilant)Counterfeit prescription drugs (such as from a questionable online pharmacy)

Health Insurance fraud

Telemarketing fraud

To limit the risk of scammers cleaning out dad’s bank accounts, serve as an extra set of eyes. For instance, to limit the risk of telemarketing fraud, you could check dad’s caller ID every time you visit and ask about any suspicious numbers. You could also check him financial statements and verify that purchases are legitimate.

To be proactive, you also might tell him about some websites that are safe to use (for example, his mail-order pharmacy’s site for prescriptions, established retailers for electronics, etc.) and accompany him on trips to financial seminars. Remind him that if it sounds too good to be true, it probably is!

Don’t exhaust Your Resources and Savings. Middle-aged Americans are now what’s called the “Sandwich generation”. Many are supporting not only themselves, but their children and parents as well.

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While it would be great to have the resources to comfortably support everyone, that’s not realistic for most people. So be sure you’re taking care of your immediate family first, before taking care of your parents. After all, if they really can’t afford a comfortable retirement, they might have to move in with you or another family member to compensate, not consume savings that you need to take care of you and your family in the future.

The Takeaway. Helping your parents plan for retirement mostly involves figuring out where they’ll live and seeking the advice of a qualified financial planner. Making sure your parents have designated beneficiaries is a crucial step to prevent a family feud. Also be on the lookout for scams, because scammers prey on the elderly.

TIP: Remember to take care of your immediate family before offering financial assistance to your parents. After all, if your parents need to move in one day, you’ll need a home and solid finances.

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2014 STANDARD MILEAGE RATES

The 2014 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

56 cents per mile for business miles driven

23.5 cents per mile driven for medical or moving purposes

14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

As a reminder, contemporaneous mileage logs are required as support.

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TAX NEWS

The Internal Revenue Service announced a delay until January 31, 2014 to the start of the 2014 filing season to allow adequate time to program and text tax processing systems following the 16-day federal government closure. Our concern revolves around lateness.

The IRS will not process ANY tax returns before the start day of January 31, 2014. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.

NEW GUIDANCE ON THE 3.8% NII SURTAX. On November 26, 2013 the IRS released final regulations at TD 9644 regarding the Net Investment Income tax (NII). The regulations included significant changes to the proposed regulations and addressed many concerns taxpayers had raised with the IRS, including rules on regrouping, self-rented property, self-charged interest income, trader’s gains and losses, and real estate professionals. The new rules permit a single property to be a rental trade or business.

Self-Rented Property. Reg. section 1.1411-4(g) provides special rules for self-rented property and self-charged interest income. The final regulations provide that, in the case of rental income that is treated as non-passive by reason of regulation 1.469-2(f)(6) (which generally recharacterizes what otherwise would be passive rental income from a taxpayer’s property as non-passive when the taxpayer rents the property for use in an activity in which the taxpayer materially participates) the gross rental income is treated as derived in the ordinary course of a trade or business, meaning that self-rental income is not subject to the surtax! If the gain or loss from the disposition of property is treated as non-passive gain or loss under some conditions, the gain or loss is deemed to be derived from property used in the ordinary course of business also meaning that the sale of property is not subject to the surtax!

Self-Charged Interest. The IRS added a special rule that permits taxpayers to exclude from net investment income the amount of interest income equal to the taxpayer’s allocable share of the non-passive deduction for self-charged interest expense. However, this special rule does not apply in situations when the interest deduction is taken into account in determining self-employment income that is subject to tax under section 1401(b).

Real Estate Professionals. The final regulations also offer limited relief from net investment income tax in the form of a safe harbor for rental income of real estate professionals that is derived in the ordinary course of a trade or business.

The safe harbor test provides that, if a real estate professional (within the meaning of section 469(c)(7)) participates in rental real estate activities for more than 500 hours per year, the rental

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income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. Alternatively, if the taxpayer has participated in rental real estate activities for more than 500 hours per year in five of the last ten taxable years (one or more of which may be taxable years prior to the effective date of section 1411), then the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business.

This means that most real estate professionals will not be subject to the NII surtax.

Interestingly the IRS recognizes that some real estate professionals with substantial rental activities may derive such rental income in the ordinary course of a trade or business, even though they fail to satisfy the 500 hour requirement in the safe harbor test. As a result, the final regulations specifically provide that such failure will not preclude a taxpayer from establishing that such gross rental income and gain or loss from the disposition of real property, as applicable, is not included in net investment income. Special new rules are also provided for the treatment of suspended passive losses once an activity becomes active. The approved approach allows suspended losses from former passive activities in calculation of net investment income but only to the extent of the non-passive income from such former passive activity that is included in net investment income in that year.

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NEW RULES AFFECT BUSINESS TANGIBLE PROPERTY

The IRS has released its final regulations on the tax treatment of expenditures related to tangible property. The regulations provide guidance on how to comply with Sections 162 and 263 of the Internal Revenue Code, which require the capitalization of amounts paid to acquire, produce or improve tangible property but allow amounts for incidental repairs and maintenance of property to be deducted. The regulation (IRS T.D. 9636) generally will apply to tax years beginning on or after Jan. 1, 2014. They affect all businesses that own or lease tangible property, including buildings, machinery, vehicles, furniture and equipment.

Background. The new regulations have been under development for years. In 2006, the IRS released the first set of proposed regulations, which were subsequently withdrawn. The IRS released another set of proposed regulations in 2008, which never took effect.

In December 2011, temporary regulations were released that provided a general framework for capitalization. The final regulations replace those temporary regulations but retain many of their provisions. In addition, they modify several sections and create a number of new safe harbors.

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Amounts paid to improve property. A cost that results in an improvement to a building structure or to any of the enumerated building systems (for example, the plumbing or electrical system) must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of a unit of property. The final regulations make some significant changes and additions to the temporary regulations regarding improvement, including:

Routine maintenance safe harbor. An activity isn’t considered an improvement if the taxpayer expected to perform it as a result of its use of the property or to keep the property in its ordinarily efficient operating condition. The activity is considered routine if, at the time the property was placed in service, the taxpayer reasonably expected to perform the activity more than once during the property’s life.

The temporary regulations limited the safe harbor to tangible property “other than buildings,” but the final regulations extend it to buildings. The taxpayer must reasonably expect to perform the building-related activities more than once in 10 years. The regulations make several additional changes and clarifications to the routine maintenance safe harbor, applicable to both buildings and other property.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvement.

New safe harbor for small businesses. The regulations add a safe harbor for qualified small business taxpayers (generally, those with gross receipts of $10 million or less). For buildings that initially cost $1 million or less, taxpayers may elect to deduct the lesser of $10,000 or 2% of the adjusted basis of the property for repairs, maintenance, improvements and similar activity each year.

Betterment test. The final regulations address the temporary regulations’ test for determining whether an amount paid “results in” betterment. They no longer phrase the test in terms of amounts that “result in” betterment. Rather, they provide that a taxpayer must capitalize amounts reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that are a material addition to a unit property.

Restoration test. An amount paid for the replacement of a major component or substantial structural part of a unit of property is an amount paid to restore that property. The final regulations include a new definition for use in determining whether an amount spent on replacement constitutes a restoration.

They provide that an amount is for the replacement of a major component or substantial structural part if the replacement includes a part or combination of parts that comprises 1)a major component or a significant portion of the building structure or any building system or 2) a large portion of the physical structure of the building or any building system.

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Materials and supplies. The final regulations retain many of the 2011 rules regarding materials and supplies, but they increase the dollar threshold for property that’s exempt from capitalization from $100 to $200. The regulations also keep the temporary rule allowing taxpayers to make an election to capitalize certain materials and supplies but limit it to ratable, temporary or standby emergency spare parts. Taxpayers can revoke this election by filing a ruling request.

The final regulations clarify the optional method in the temporary regulations, which allowed taxpayers to treat the ratable and temporary spare parts as used or consumed in the year of deposition or elect to treat them as depreciable assets. Taxpayers are no longer required to use the method for all pools of ratable spare parts used in that trade or business – they can opt not to use the method for those pools for which they don’t use the optional method on their books and records.

The De Minimis rule for expensing. The temporary regulations provided that a taxpayer who expensed the purchase price of tangible property for financial reporting purposes – according to written accounting procedures for expensing those amounts – on an applicable financial statement could deduct the amount for tax purposes, up to an aggregate ceiling. The ceiling was set at the greater of 0.1% of the gross receipts for the tax year for income tax purposes or 2% of the total depreciation and amortization expense for the tax year. For this purpose, an applicable financial statement generally is a certified audited financial statement or one required to be submitted to a federal or state government or agency.

The final regulations replace the ceiling with a new safe harbor determined at the invoice or item level. A taxpayer with an applicable financial statement now can apply the De Minimis rule to deduct all amounts properly expensed as long as the amount paid for property doesn’t exceed $5,000 per invoice or per item.The final regulations allow taxpayers who are members of a consolidated group for financial statement purposes – but not federal income tax purposes – to use the group’s applicable financial statements and written accounting procedures to qualify for the De Minimis safe harbor.

The regulations also expand the De Minimis rule to encompass amounts paid for property having a useful economic life of 12 months or less as long as the amount per invoice (or item) doesn’t exceed $5.000. they add a de Minimis rule for taxpayers without applicable financial statements, as well.

In addition, the final regulations provide that the De Minimis rule is an irrevocable elective safe harbor, not mandatory. If elected, it must be applied to all amounts paid in the taxable year for tangible property that meets the requirements, including amounts paid for materials and supplies.

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The final regulations require that the De Minimis safe harbor be applied to all eligible materials and supplies if elected. The temporary regulations allowed taxpayers to select materials and supplies for application of the rule.

Going forward. If you have expenditures related to tangible property, the final regulations apply to you. Compliance may require changes to your current capitalization procedures and the filing of Form 3115, “Application for Change in Accounting Method”. If you have questions regarding the final regulations and how to best proceed, contact our professional tax advisors.

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USING “CASH BASIS” METHOD

Business Owners May Benefit From Revenue Procedure 2002-28.

Since 2002, Revenue Procedure 2002-28 expanded the number of businesses permitted to use the cash method of accounting rather than being required to use the accrual method.

The accrual method requires income to be reported in the year it is earned without regard to when payment is received.

Consequently, taxes could be owed on income for which no payment has actually been received.

For example, under the accrual method, income earned in December 2013 (assuming a calendar year) would be included in 2013 gross income and subject to taxes for that year even if payment was not received until 2014.

On the other hand, under the cash method, income is only reported in the year it is actually (or constructively) received regardless of when it was earned.

Therefore, under the cash method, income earned in December 2013 but not actually received until 2014, would be included in 2014 income and not 2013. For example, if you perform a service in December 2013, and get paid in 2014, you would have to report the income for tax year 2014 and the taxes are due in April 2015, plus extensions.

Depending on the amount of taxes deferred, the extra cash in your bank account could potentially be used to reduce debt, purchase inventory, replace equipment, or to increase your cash cushion in case of emergencies.

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Businesses that stand to benefit from the accrual method exception under Revenue Procedure 2002-28 include:

Service businesses, where the service is principal activity and merchandise related to the service may be sold.

For example, a pool service that also sells pool supplies out of a retail store.

Service businesses that must use materials and supplies in the performance of the service.

For example, a medical service provider that provides drugs to treat illnesses, a roofing contractor that uses materials and supplies to install roofs.

Custom manufacturing (other than mass production manufacturing).

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CANCELLED DEBT

The following explains the general rule for including cancelled debt in income and the exceptions to the general rule.

General Rule. Generally, if your debt is cancelled or forgiven, other than as a gift or bequest to you, you must include the cancelled amount in your gross income for tax purposes.

Exceptions. The following discussion covers some exceptions to the general rule for cancelled debt.

Price reduced after purchase. If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property.

Deductible debt. You do not realize income from a cancelled debt to the extent the payment of the debt would have led to a deduction.

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Cash method – You do not include the cancelled debt in income because payment of the debt would have been deductible as a business expense.

Accrual method – You include the cancelled debt in income because the expense was deductible when you incurred the debt

Exclusions. Do not include cancelled debt in income in the following situations. However, you may be required to file Form 982, reduction of Tax Attributes Due to Discharge of Indebtedness.

The cancellation takes place in a bankruptcy case under title 11 of the U.S. Code (relating to bankruptcy). See Publication 908, Bankruptcy Tax Guide.

The cancellation takes place when you are insolvent. You can exclude the cancelled debt to the extent you are insolvent. See Publication 908.

The cancelled debt is a qualified farm debt owed to a qualified person. See chapter 3 in Publication 225, Farmer’s Tax guide.

The cancelled debt is a qualified real property business debt. This situation is explained later.

The cancelled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2013. See form 982.

If a cancelled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 6 do not apply. If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent.

Debt. For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold.

Qualified real property business debt. You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition.

Cancellation of qualified real property business debt. Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions.

It was incurred or assumed in connection with real property used in a trade or business.

It was secured by such real property.

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It was incurred or assumed at either of the following times.

Before January 1, 1993.

After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property.

It is debt to which you choose to apply these rules. Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced.

You cannot exclude more than either of the following amounts.

The excess (if any) of:

The outstanding principal of qualified real property business debt (immediately before the cancellation), over

The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation.

The total adjusted bases of depreciable real property held by you immediately before the cancellation. These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Do not take into account depreciable real property acquired in contemplation of the cancellation.

Since reporting requirements are complex anyone involved with a cancelled debt should contact one of our professional tax advisors.

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ADVISORY GROUP ASSOCIATES

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Our experienced team of dedicated tax and accounting professionals are committed to providing personal attention, quality work, reliable and helpful services to make complex accounting and compliance tasks easier. This allows you more time to focus on growing your enterprise.

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For More Information, Contact us by phone or email(314) 205-9595 or toll free (888) 809-9595

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Our service offerings are tailored to each stage of a client's tax life, from basic compliance and tax return preparation, where our process is prioritized to minimizing costs; too many complex circumstances, where both our process and specialized knowledge are key to successful results.

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Tax Professional Standards Statement

The TAX TIPS NEWSLINE is published monthly to provide general educational tax compliance tips, information, updates and general business or economic data compiled from various sources. This document supports the marketing of professional services and does not provide substantive determination or advice affecting specific tax liability. It is not written tax advice directed at the particular facts and circumstances of any taxpayer. Nothing herein shall be construed as imposing a limitation from disclosing the tax treatment or tax structure of any matter addressed. To the extent this document may be considered written tax advice, in accordance with applicable requirements imposed under IRS Circular 230, any written advice contained in, forwarded with, or attached to this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

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