LLC and LLP Losses Held Deductible Against Salary

The U.S. Tax Court has recently ruled in a case that could

have a significant impact on the federal income-tax

treatment of business interests that are held in a limited

liability company (LLC) or limited liability partnership

(LLP).

Attractive LLP and LLC Features

LLCs and LLPs have enjoyed popularity as the business-

entity choice (for new businesses and conversions alike)

over the past decade or two. The combination of the limited

liability protection of a corporation with pass-through

taxation of income for owners, as is the case with a

partnership, represents the “best of both worlds” for many

entrepreneurs. An added wrinkle from a tax perspective

now makes LLCs and LLPs only look more attractive.

Generally, there has been a long-standing federal tax

law principle (and IRS position) that investment losses

generated by businesses held within an LLC or LLP

cannot by used to directly offset an owner’s salary from a

job and/or regular investment income. However, if not

overturned, this case stands to mark a significant

departure from that rule.

Losses Were Not Passive Losses

Prior to the Tax Court’s decision, investor-owners in small

businesses could generally deduct business losses only

against future profits from that business, potentially

postponing for years (or eliminating) the ability to realize

LLP and LLC loss deductions.

The facts of the case involve entrepreneurs – in this

case a husband and wife – who actively work in several

LLCs and/or LLPs that they have established. Historically,

the IRS considered losses relating to a taxpayer who plays

an active role in an LLC or LLP to be passive in nature.

The tax code also presumes that losses from an “interest

in a limited partnership as a limited partner” are passive

losses. And, in general, net passive losses cannot be used

to offset other income, such as salaries, capital gains, or

dividends. Rather, a taxpayer would have to wait until the

particular business entity that generated the passive losses

actually realized a profit (if at all) or was ultimately sold

in order for the losses to be deductible.

The ruling in this case is significant in that the Tax

Court held that since the LLP and LLC interests were not

held by the taxpayers as limited partners, the tax code’s

presumptive passive loss treatment was inapplicable.

Rather, the Tax Court essentially allowed the married

taxpayers to offset the losses of the businesses against the

current salaries or outside investment income earned by

the spouses when computing the couple’s income taxes.

Future of Holding Uncertain

The IRS may appeal the Tax Court’s decision to a federal

appeals court. Alternatively, the IRS may seek a

legislative solution and try to get Congress to enact a new

law to restore the tax treatment of LLC and LLP losses as

it was before the decision in this case.

Doeren Mayhew Can Help

In the meantime, if you have an ownership interest in an

LLC or LLP business that has sustained losses and actually

work in that business, please call Doeren Mayhew today at

(248) 244-3000. Our professionals can analyze your

situation to help you determine whether any losses that

your business has incurred may be used to offset your

other income, such as salary, capital gains, or dividends.

Doeren Mayhew Announces New Affiliate Company: Doeren Mayhew Financial Advisors, LLC

TROY MICHIGAN – Doeren Mayhew, Troy-based public accounting and management consulting firm, announces the formation of a new venture, Doeren Mayhew Financial Advisors LLC (DMFA).

DMFA combines the resources and experience of Doeren Mayhew’s accounting and consulting professionals with the financial advisory and brokerage expertise of The Southwick Group, formerly of Morgan Stanley Smith Barney.

Donald P. Southwick, President and CEO of DMFA, is a former national bank President and CEO, founder of a nationally chartered trust bank, and is currently one of 20 members of FINRA’s CE Council. FINRA’s CE Council is comprised of industry members from broker-dealers, representing a broad cross section of industry firms and representatives from Self-Regulatory Organizations.

DMFA is uniquely structured with access to the inventory and platforms of a wide array of independent investment providers. “The competitive sale or purchase of securities is preferable to a single firm’s inventory and proprietary product approach,” says Southwick. “High net worth individuals and families, institutions, municipalities/governments, and employee benefit plans are DMFA’s focused areas of interest,” he stated.

“The key for our clients is our ability to access multiple investment channels through Doeren Mayhew Financial Advisors. Our wealth advisors will never be required to push proprietary products,” said Mark Crawford, Managing Director of Doeren Mayhew. “The creation of DMFA, LLC substantially increases our depth of experience and expertise in the financial planning and advisory arena, and improves our ability to offer clients a full breadth of professional services all from one source.”

Doeren Mayhew, known internationally as Moore Stephens Doeren Mayhew, is the ninth largest firm in southeastern Michigan, with a staff of 220 including 33 directors. Doeren Mayhew is an independent firm associated with Moore Stephens International Limited, one of the world's major accounting and consulting associations consisting of 366 independent firms with 647 representative offices and some 21,244 people across 98 countries. Doeren Mayhew is the only Michigan-based certified public accounting and consulting firm to have ever attained Inside Public Accounting’s“Best of the Best” rating, signifying our status as one of the nation’s 50 best firms. This is an honor we are proud to have received for the past 14 years, including 12 years in the top 25.

Founded in 1932, Doeren Mayhew recently celebrated its 77th anniversary and has grown to become nationally and internationally recognized as trusted business advisors to thousands of individuals and businesses throughout North America and around the world. Doeren Mayhew represents manufacturers, contractors and builders, retailers, wholesalers, distributors, auto dealers, financial institutions, municipalities, school districts, and non-profit organizations, with a full range of accounting, audit, tax, merger and acquisition, financial, and consulting services.

DMFA offers securities through NRP Financial, Inc. Member FINRA/SIPC. Advisory services provided by NRP Advisors, Inc.

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IRS Provides Guidance on New COBRA Rules – Doeren Mayhew Breaks Down The New COBRA Rules

Doeren Mayhew Newsletter

Doeren Mayhew Tax Consultants

The IRS recently released guidance, in a question and answer format, addressing how employers are to administer and seek recovery of the new COBRA premium subsidy enacted under the American ecovery and Reinvestment Tax Act of 2009 (P.L. 111-5). The Act provides that an individual who has been involuntarily terminated on or after September 1, 2008, through the end of 2009 is required to pay only 35% of the group health insurance premium to secure COBRA continuation coverage (up to nine months).

The new guidance focuses on two broad areas: Form preparation – the mechanics of how an employer recovers the COBRA premium subsidy through a payroll credit claimed on IRS Form 941, and administration and eligibility. The guidance also addresses common inquiries surrounding the timing of when the subsidy begins and ends.

How the Subsidy Works

A former employee and his or her family are “assistance eligible employees” if they are eligible for COBRA health insurance continuation coverage as a result of any involuntary termination occurring from September 1, 2008, through December 31, 2009. These individuals are required to pay only 35% of the group health insurance premium that would otherwise apply.

Under the Act, the “person to whom the premiums are payable” – generally, the employer – pays the other 65% of the COBRA continuation premium. The employer will then be reimbursed by means of a federal payroll tax credit claimed on Form 941.

The Payroll Credit

Generally, an employer can claim the payroll credit for the COBRA premium subsidy on Form 941, Employer’s Quarterly Federal Tax Return. To do so, the employer should enter the amount of any COBRA premium assistance payments paid on behalf of employees for that quarter on Line 12a. The amount entered should equal 65% of eligible workers’ total COBRA premium payments – not amounts received from former employees.

In its Guidance, the IRS indicated that there has been some confusion surrounding the proper number of individuals to be reported on Line 12b as having received COBRA premium assistance reported on Line 12a. The guidance clarifies that only one individual should be counted for Line 12b purposes in a situation where a former employee has also secured coverage for other qualifying individuals such as a spouse and/or children.

Timing Issues

The IRS has also clarified that the COBRA premium reduction applies as of the first period of coverage beginning on or after February 17, 2009, for which a qualifying involuntary terminated employee is eligible to pay 35% of the premium.

The exact date of coverage is contingent upon the period to which premiums are charged to the plan. The 35% premium subsidy generally applies until the earliest of three events: (1) when the former employee secures other health insurance coverage; (2) the date that is nine months after the first day of the first month for which the special COBRA premium subsidy provision applies; or (3) the date the individual is no longer eligible for COBRA continuation coverage.

Doeren Mayhew Consultants

The American Recovery and Reinvestment Tax Act of 2009 provides many tax planning opportunities, including that relating to the special subsidy rules for COBRA premiums. Doeren Mayhew has extensive knowledge and insight into the new rules and how they can benefit you. If you have any questions regarding the new subsidy provisions under the Act, please call Doeren Mayhew today at (248) 244-3000 and speak to one of our professionals.

About Doeren Mayhew

As a leader among certified public accounting and consulting firms, Doeren Mayhew has been providing unsurpassed business expertise critical to middle-market, closely held companies and non-profit institutions since 1932. Please visit the Doeren Mayhew web site or any of the Doeren Mayhew networks for more information.

Doeren Mayhew 2009

IRS Eases Investment Rules for 529 College Savings Plans

Saving for college is always difficult and is even more so during the current economic downturn. One of the most popular college savings plans are so called “529 plans.” The IRS recently announced that participants in 529 plans will be able to change their investments more often in 2009 than in past years.

The IRS will allow a change in investment strategy twice in 2009. This is good news for 529 plan participants, especially those who may otherwise be locked into a mix of investments that has turned out to be more speculative than initially contemplated.

Tax-Free Distributions
A 529 plan is a type of qualified tuition program. In a 529 plan, taxpayers contribute to an account established for paying a student’s educational expenses. Eligible educational expenses include the costs of tuition, books, and fees at eligible institutions, such as colleges, vocational schools, and other postsecondary institutions.

Contributions to 529 plans are not tax-deductible. However, earnings are tax-free, and distributions used to pay the beneficiary’s qualified education expenses are tax-free.

A 529 plan should not be confused with a Coverdell Educational Savings Account (Coverdell ESA). The latter is also a savings account for education expenses that offers tax-free distributions. Funds saved in a Coverdell ESA can be used for elementary and secondary school
expenses as well as college costs.

Investment Decisions
Generally, participants in 529 plans must select only from among broadbased investment strategies designed exclusively by the program. Additionally, the IRS has traditionally permitted a change in investment strategy only once a year.

In response to the economic slowdown and the turmoil in the financial markets, the IRS will allow investments in a 529 plan to be changed during 2009 on a more frequent basis. A 529 plan will not violate the investment restriction if it permits a change in the investment strategy twice in calendar year 2009, as well as upon a change in the designated beneficiary of the account.

If you have any questions about 529 plans, or other tax incentives for education, please contact Doeren Mayhew at (248) 244-3000.

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Saving Your Tax Records: What You Need to Know

Now that the end of the traditional tax filing season is upon us, it may be tempting to purge certain tax documents from your files for the current and past tax years. However, you should be aware of the rules for retaining relevant tax records in the event that the IRS – or another taxing authority – requires that those records be produced as part of an audit.

Keep at Least Three Years

The following records are commonly used to substantiate a taxpayer’s income and expense items:

• Form(s) W-2
• Form(s) 1099
• Form(s) K-1
• Bank and brokerage statements
• Canceled checks or other proof of payment of deductible expenses

At a minimum, the above tax records should be kept for a three-year period following the date that you filed your return, or its due date, if later.

However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, it is ideal to retain the above documents for six years to better protect yourself in the event of an audit.

Similarly, you should keep investment records for a period of time after you liquidate any given investment. Documentation that substantiates the gain or loss on an investment should be kept for a period of time that corresponds with the time frame that you retain other tax documents supporting the return on which you report the sale.

Prior Years’ Tax Returns

It is a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and state income-tax returns (and any tax payments) indefinitely. For instance, the IRS or another taxing authority could claim that you never filed a particular year’s return. If that occurs, the IRS (or other authority) could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.

Need More Information?

Filing your returns on a timely basis is just one aspect of properly handling your taxes. Be prepared to defend yourself in the event of an audit by retaining your records for the appropriate time period. Call the professionals at Doeren Mayhew today at (248) 244-3000 if you have any further questions.

Individual Tax Relief

The American Recovery and Reinvestment Tax Act of 2009 (the “Act”) was enacted on February 17, 2009, and contains several federal tax provisions aimed at stimulating the economy and providing job creation. Both individual taxpayers and businesses stand to benefit from the tax relief measures in the Act.

Many of the Act’s individual income-tax provisions contain income phaseouts that limit the benefits available to higher-income taxpayers. The Act is designed to provide temporary tax relief in an effort to spur spending. Following is a summary of the law’s provisions.

Individual Tax Relief “Making Work Pay” Credit.

This refundable tax credit (up to $400 for individuals, $800 for couples filing jointly) seeks to stimulate spending by generally providing an increase in takehome pay through the reduction of income taxes withheld.

Economic Recovery Payment.

A one-time payment of $250 is available to adults who are eligible for Social Security, Railroad Retirement, veterans’ disability compensation or pension benefits, or Supplemental Security Income benefits.

First-Time Homebuyer’s Credit.

Increased to $8,000 for couples filing jointly, the Act provides a credit for qualifying principal residence purchases. The Act also eliminates the prior law’s requirement that the credit be paid back to the government, as long as certain conditions are met.

Child Tax Credit.

The Act expands the Child Tax Credit($1,000 for 2009 and 2010) for each qualifying child under age 17 by reducing the income “floor” that applies when determining the refundability of the credit from $8,500 in 2008 to $3,000 in 2009 and 2010.

AMT Exemption Increase.

The Act increases the Alternative Minimum Tax exemption amounts for 2009 and provides for the use of various nonrefundable tax credits to offset both regular tax and AMT.

Private Activity Bond Interest and AMT.

Tax-exempt interest on private activity bonds issued in 2009 or 2010 is not deemed an AMT preference item. Deduction for Taxes on Car Purchases. The Act provides for an income-tax deduction for state and local sales taxes paid on up to $49,500 of the cost of a qualified vehicle.

American Opportunity Tax Credit.

The Hope Scholarship credit is modified and replaced with the American Opportunity Tax Credit, which equals up to $2,500 for the cost of qualifying tuition and related expenses(per year, per student).

529 Plans and Computer Costs.

The Act expands the definition of qualified higher education expenses to encompass certain computer technology for 529 college savings plan distribution purposes.

Transportation Fringe Benefits.

Employees can exclude from income an increased amount of certain qualified transportation fringe benefits under the Act.

COBRA Insurance Continuation.

Under the Act, an individual who has been involuntarily terminated on or after September 1, 2008, through the end of 2009 is required to pay only 35% of the group health insurance premium to secure COBRA continuation coverage (for up to nine months).

Income Exclusion for Unemployment Compensation.

Federal and state unemployment benefits received (up to $2,400) in 2009 may be excluded from gross income.

For More Information about Individual Tax Relief, visit Doeren Mayhew.

Tax Planning Tip #4 - Considerations for the Tax Treatment of Bonds

• Interest on U.S. government bonds is taxable on your federal return, but it’s
  generally exempt on your state and local returns.
• Interest on state and local government bonds is excludible on your federal return. If the state or local bonds were issued in your home state, interest also may be excludible on your state return. Warning: Private activity municipal bonds may subject you to the alternative minimum tax (AMT).
• Corporate bond interest is fully taxable for federal and state purposes.
• Bonds (except U.S. savings bonds) with original issue discount (OID) build up “interest” as they rise toward maturity. You’re generally considered to earn a
  portion of that interest annually—even though the bonds don’t pay you this interest annually—and you must pay tax on it. So, these bonds may be best suited for tax-deferred vehicles, such as IRAs, or for investors with sufficient cash flow to absorb the tax.

Tax Planning Tip #3 - Save For, and With, Education Expenses

Whether you’re saving for your children’s (or grandchildren’s) education, paying higher education expenses for them or yourself, or even paying off student loan
debt, you may be eligible for tax breaks:

529 Plans
Section 529 plans enable parents (or grandparents) to either secure current tuition rates with a prepaid tuition program or create tax-advantaged savings plans to fund college expenses. In addition:

• For federal purposes, contributions aren’t deductible, but distributions used to pay qualified expenses are income tax free.
  (State treatment varies)
• The plans typically offer much higher contribution limits (determined by the sponsoring state or private institution) than ESAs, and there are no income limits for contributing.
• There generally is no beneficiary age limit for contributions or distributions.
• 529 plans provide estate planning benefits: By filing a gift tax return, you can elect to use annual exclusions for five years all at once and make a $60,000 contribution (or a $120,000 joint contribution with your spouse).

ESAs
Coverdell Education Savings Accounts (ESAs) allow more investment options than 529 plans, and they can fund expenses for elementary (including kindergarten) and secondary school as well as college. In addition:

• Contributions aren’t deductible, but distributions used to pay qualified education expenses are income tax free.
• The annual ESA contribution limit is only $2,000 per beneficiary, and your ability to contribute will be further limited or eliminated if your income is too high.
• Generally, contributions can be made only for the benefit of a child under age 18, and any amounts left in the ESA when the beneficiary turns 30 must be distributed within 30 days and any earnings will be subject to tax.

Education Credits
When your kids hit college, you may be able to claim the Hope credit (up to $1,800) or the Lifetime Learning credit (up to $2,000). Here are some other considerations:

• If your income is too high to qualify, your child may be able to claim one of the credits.
• Both a credit and tax-free 529 plan or ESA distribution can be taken as long as the expenses paid with the nontaxable distribution aren’t used to claim the credit.

Your tax advisor can help you select the most advantageous credit mix, depending on the amount of tuition paid and the number of students in your family. Student loan interest deduction. If you’re paying off student loans, you may be able to deduct up to $2,500 of interest.

Tax Planning Tip #2 - Save by Giving to Charity

Donations to qualified charities are generally fully deductible. For large donations, discuss with your tax advisor both the types of assets to give and the best ways to give them. For example:

Appreciated Assets
If you donate property you’ve held more than one year, you may be able to take a charitable deduction equal to its current fair market value. Plus you’ll avoid paying tax on the long-term capital gain you’d incur if you sold the property. For instance, instead of giving cash, donate appreciated publicly traded securities.

But beware: Gifts of appreciated assets are subject to tighter deduction limits than cash contributions. Excess contributions may be carried forward for up to five years.

CRTs
To benefit a charity while helping ensure your own financial future, consider funding a charitable remainder trust (CRT), which pays an annual amount to you for a given term. At the term’s end, the trust’s remaining assets pass to one or more charities. You receive an income tax deduction for the present value of the amount that will go to charity (the remainder interest). And you can contribute appreciated assets and avoid paying capital gains tax on their sale.

Tax Planning Tip #1 - Use Your Home as a Tax-Saving Tool

You can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. And you can deduct points related to a loan for purchasing or improving your principal residence. Also keep in mind these deductions and exclusions:

• Property tax deduction. Before paying your bill early to accelerate the deduction into 2008, review your AMT situation.
  If you end up subject to the AMT, the prepayment will be for naught because
  you’ll lose the deduction.
• Home equity debt interest deduction. Interest on home equity debt used to improve your principal residence—plus interest on up to $100,000 of home equity debt used for any purpose—is deductible. So consider using home equity debt to pay off credit cards or auto loans, whose interest isn’t deductible. But beware of the AMT: If the home equity debt isn’t used
  for home improvements, the interest isn’t deductible for AMT purposes.
• Rental income exclusion. If you rent all
  or a portion of your primary residence or second home for less than 15 days, you don’t have to report the income. But expenses associated with the rental aren’t deductible.
• Home sale gain exclusion. When you sell
  your principal residence, you can exclude up to $250,000 ($500,000 for joint filers)
  of gain if you meet certain tests. Losses aren’t deductible.

Because a second home is ineligible for the exclusion, consider converting it to rental use before selling. It will then be considered a business asset, and you may be able to defer tax on any gains by doing a like-kind exchange. Or you may be able to deduct a loss, but only to the extent attributable to a decline in value after the conversion.