Check status of a charity before making a contribution

Americans donate hundreds of millions of dollars every year to charity. It is important that every donation be used as the donors intended and that the charity is legitimate. The IRS oversees the activities of charitable organizations. This is a huge job because of the number and diversity of tax-exempt organizations and one that the IRS takes very seriously.

Exempt organizations

Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status. The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.

Contributions

Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.

The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986. Similar information is available on an IRS Business Master File (BMF) extract.

In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract. Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.

Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization's revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.

Churches

As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.

Foreign charities

Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada. Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.

The rules governing charities, tax-exempt organizations and contributions are complex. Please contact Doeren Mayhew if you have any questions.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

How Do I? Compute the state and local sales tax deduction?

Taxpayers may elect to deduct state and local general sales and use taxes in lieu of deducting state and local income taxes for 2010 and 2011. Before Congress passed the 2010 Tax Relief Act (Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010), the sales tax deduction was not available for the 2010 tax year. However, the 2010 Tax Relief Act retroactively extends the sales tax deduction for 2010 and also makes it available for the 2011 tax year.

Thus, all individual taxpayers who itemize their tax deductions for 2010 and 2011 on Schedule A, Form 1040, have a choice between deducting state and local income taxes (as has always been the case for itemized deductions) or deducting state and local general sales taxes as an itemized deduction instead. The state and local sales tax deduction is particularly beneficial for those taxpayers who live in states without state income taxes (Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington state, and Wyoming), and thus don't benefit from the state income tax deduction.

Planning Note. The extension of the deduction for state and local general sales taxes does not impact states such as California, Illinois, and Oregon that have decoupled from the deduction, or states such as Connecticut, Michigan, or West Virginia that do not allow federal itemized deductions.

Comment. It is important to remember for taxpayers who are claiming itemized deductions on Schedule A for the 2010 tax year (thus affecting deductions for state sales tax) that due to the late passage of the 2010 Tax Relief Act, the IRS will not be able to process returns of those whose filings are delayed (Schedule A filers, among others) until February 14, 2011.

Methods for calculating the deduction

The right decision is usually made simply by determining which deduction is higher for you (if you live in a state that provides for the state income tax deduction.

If you elect to deduct state and local sales taxes in lieu of deducting state and local income taxes, you can chose between two methods of computation:

• The actual expense method; or
• The IRS's optional state sales tax tables method.

Actual expense method

Under the actual expense method, you must keep the actual sales receipts that show the sales tax paid. This may be somewhat more difficult for 2010 since the 2010 Tax Relief Act was not passed until December 2010, long after some taxpayers may have thrown most of their old sales slips for ordinary expenses into the trash. Nevertheless, collecting receipts, especially for major purchases, may prove enough to make use of the "actual expense method" instead of the IRS tables.

Some further complications. Qualifying state and local sales taxes allowed under the actual expense method include only sales taxes set at the general sales tax rate, with exceptions for food, clothing, medical supplies, and motor vehicles.

Optional state sales tax tables method

Under this method, you don't have to keep your receipts (although keeping some receipts from motor vehicle and other specified purchases may be advantageous (see below).

The IRS optional state sales tax tables are supposed to reflect the average state sales tax deduction paid by the average resident of your state, based on both income level and number of exemptions. Income levels on the tables for each state run from $0 to "$200,000 or more;" exemption columns go from 1 to "more than 5."

Income for purposes of the IRS tables includes adjusted gross income, plus certain non-taxable income that increases your purchasing power. The later amounts include tax-exempt interest, veterans' and Social Security benefits, nontaxable IRA withdrawals and the like. Since the higher the income level, the higher the table deduction amount, it is to your advantage (although it is not required) to include these in this computation.

The local sales tax computation. The IRS tables do not reflect local sales taxes. The IRS does not publish the appropriate local sales tax rates. You have to find it. Taxpayers compute their combined state and local sales tax deduction amount by:

1. (a) Dividing the local general sales tax rate by the state general sales tax rate; (b) Multiplying that figure by the amount of state general sales taxes in the IRS tables; and
2. Adding the amount of local general sales taxes (1) to the amount of state general sales taxes in the tables.

Moving during the year

The IRS Optional State Sales Tax Tables cover most states and the District of Columbia. Your legal state of residence for the year determines which table to use.

If you lived in more than one state during 2010, you must multiply the table amount for each state you lived in by a fraction, equal to the number of days you lived in each state, divided by 366. Prorating local sales taxes is also required if you moved from one locality to another in the same state.

Figuring out the new sales tax itemized deduction takes several steps. Nevertheless, the tax savings available may make it well worth your while to "do the math." You should consult your tax advisor with questions since deduction planning can be more complicated than many think.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

February 2011 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines.

This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2011.

February 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 26-28.

February 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 29-February 1.

February 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 2-4.

February 10

Employees who work for tips. Employees who received $20 or more in tips during January must report them to their employer using Form 4070.

February 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 5-8.

February 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 9-11.

February 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 12-15.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 16-18.

February 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 19-22.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

Doeren Mayhew: January 2011 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2011.

January 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 1-4.

January 10

Employees who work for tips. Employees who received $20 or more in tips during December must report them to their employer using Form 4070.

January 12

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 5-7.

January 14

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 8-11.

January 18

Monthly depositors. Monthly depositors must deposit employment taxes for payments in December.

January 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 12-14.

January 21

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 15-18.

January 26

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 19-21.

January 28

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 22-25.

January 31

All employers. Deadline for all employers to provide employees with their copies of Form W-2 for 2010.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

Year-end planning: Last minute tips for individuals

With the end of the 2010 tax year rapidly approaching, there is only a limited amount of time for individuals to take advantage of certain tax savings techniques. This article highlights some last-minute tax planning tips before the end of the year.

Make a charitable contribution by cash or credit card. Charitable contributions can be made at any time, in cash or in property. Taxpayers may also want to accelerate dues and fees for church or synagogue memberships. While a pledge is not deductible, an actual payment will qualify when the payment is made, not when it is received. Thus, putting a check in the mail qualifies as a payment when the payer gives up control of the check (assuming there are sufficient funds and the check is eventually honored), not when the check is received, deposited, or honored.


Charging a contribution is another means of accelerating payment. Payment by credit card is in effect a loan to the payer and is deductible when the charge is made, not when the bill is paid or the charge is honored. Thus, if you make the charge in 2010 but it is not honored until 2011, you can still take the charitable deduction on your 2010 return. Payment by debit card again is a payment when the transaction occurs, even if the amount is not debited until the following day.
Note: special rules may apply to contributions of property, especially motor vehicles.


Adjust withholding. State and local income taxes are deductible when withheld, paid as estimated taxes or paid with a return. If you anticipate owing taxes for 2010, you can increase withholding or make an additional payment to cover the expected liability. The payment must be made in good faith and be based on a reasonable estimate of your tax liability. Taxpayers paying estimated taxes can make the final payment before the end of 2010.


Itemized deductions. In past years, there have been limits on itemized deductions taken by higher-income taxpayers. These limits do not apply in 2010, so taxpayers should not feel constrained to limit their payments and contributions. For higher-income taxpayers, this is especially beneficial.


Deduction for health insurance costs. If you are self-employed, you can take a deduction for your health insurance costs when computing self-employment tax and the self-employment tax deduction.


Small business stock. If you sell qualified small business stock before January 1, 2011, and are eligible for the increased exclusion from income, you may be able to exclude 100 percent of the gains from the sale of stock. Speak with your tax professional before selling such stock, however, since the rules on eligibility and holding periods can be complex. For a majority of taxpayers, the traditional rules for accelerating/deferring income and/or maximizing or deferring deductions to lower your tax bill may still apply in 2010, despite the threat of higher income tax rates next year still possible. Depending on your situation, you may want to:


- Accelerate income if possible, including bonuses, into 2010;

- Defer selling capital assets at a loss until 2011 and later years;

- Sell capital assets that have appreciated in 2010 to take advantage of the lower capital gains rates (the maximum capital gains rate is 15 percent for 2010);

- Move some assets into tax-free instruments, like municipal bonds, that are not subject to federal tax;

- Accelerate billings and/or provide incentives for clients or customers to make payments in 2010 (if you are a self-employed and/or cash-basis taxpayer);

- Take taxable retirement plan distributions before 2011 (for taxpayers over age 59 1/2); and
- Bunch itemized or business deductions into the 2011 tax year.


Maximize "above-the-line" deductions. Above-the-line deductions are especially valuable because they reduce your adjusted gross income (AGI). Many tax benefits may be limited for taxpayers whose AGI is too high. Common above-the-line deductions include contributions to traditional Individual Retirement Account (IRA) and Health Savings Account (HSA), moving expenses, self-employed health insurance costs, and alimony payments.


Claim "green" credits. You may be able to claim tax credits for purchasing particular property. Certain hybrid cars, such as the Nissan Altima, qualify for an energy credit under Code Sec. 30B. It may be necessary to consult with an auto dealer or check IRS rulings to see what credits are in effect, because the credit for a qualifying "green" vehicle phases out over time and eventually is reduced to zero.


Another credit available for "green" taxpayers is the residential energy credit. The credit is 30 percent, up to a total of $1,500, of certain energy-efficient improvements made by a homeowner to his or her principal residence during 2009 and 2010. For example, the credit can be claimed by installing energy efficient windows and doors.


Make a tax-free gift. You can gift, tax-free, up to $13,000 per donee in 2010. A married couple can apply a combined exclusion of $26,000 to a gift of property for one person. Further amounts to any one taxpayer will be offset by the donor's lifetime exclusion before gift tax is owed. The exclusion applies per year. If it is not used, it is lost; it does not carry over to the succeeding year.


Use an installment sale. If you may be selling property at a gain, you can avoid recognizing the entire gain by using an installment sale. An installment sale has at least one payment after the year of sale. The payment is taxed when it is made, not at the time of the sale. Thus, income can be postponed. The installment method is not available for stocks and bonds, however.


There can be competing considerations, however. Tax rates may increase in 2011 and future years, although perhaps only for the highest-income taxpayers. Still, the amount of gain included in a future payment could be taxed at a higher rate. The 3.8 percent Medicare tax imposed on certain income starting in 2013 also is a factor.


Take your required minimum distributions (RMDs). RMDs have returned for 2010. Although Congress temporarily suspended the RMD requirements for distributions from IRAs and other retirement accounts in 2009, it did not extend this benefit into 2010. Therefore, taxpayers who are age 70 or older must take their RMD from a traditional IRA (Roth IRAs are not subject to the RMD rules), 401(k) or other retirement accounts by December 31. Failure to do so will subject you to a stiff penalty of 50 percent of the amount you were required to withdraw but failed to.


However, for taxpayers who turned age 70 in 2010, you have until April 1, 2011 to take your first RMD.


These are just a few last-minute tax planning strategies you may want to consider as year-end approaches. As always, please contact our office if you have any questions.

Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

Doeren Mayhew: December 2010 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2010.


December 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 24-26.


December 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 27-30.


December 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 1-3.


December 10
Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 4-7.
December 15
Monthly depositors. Monthly depositors must deposit employment taxes for payments in November.


Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 8-10.


December 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 11-14.


December 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 15-17.


December 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 18-21.


December 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 22-24.


Certified public accounting and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

How do I? Compute bonus depreciation?

The 2010 Small Business Jobs Act retroactively extended 50-percent additional first-year bonus depreciation for the 2010 tax year. Under the Small Business Jobs Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2010, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended (and enhanced) through 2011.

Note. The Small Business Jobs Act increased the maximum deduction for Code Sec. 179 expensing to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.

Bonus basics
The 2010 Small Business Jobs Act allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 31, 2009, and generally before January 1, 2011. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.

Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.

Computing your bonus depreciation
To figure your allowable 50-percent bonus depreciation deduction, you must multiply the unadjusted depreciable basis of the property by 50-percent. This is the amount of additional first-year depreciation you can deduct in 2010. For example, you purchase qualifying property for your business in 2010 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.

Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in cash, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).

Regular depreciation
After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2010 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.

Example. Assume that in 2010 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5 year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5 year property. Thus, 20 percent, or $100, is apportioned to 2010, which computes to an additional $50 regular depreciation deduction in 2010 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2010 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.

Code Sec. 179 expensing
The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.
Example. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of 2010 bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.

Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of 2010 bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.

Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings. 


This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice. Please contact Doeren Mayhew with any questions.