PAUL’S TAX BLOG

Recent public announcements and internal memos to IRS agents give us an indication of some areas that will be scrutinized heavily in the coming months. Several areas to note:Tax returns for S corporations have been statistically shown to have a very high error rate – 68%. Look for increased audits on these entities focusing on travel expenses, meals and entertainment, automobile expenses, and the big favorite, taking dividends in lieu of compensation to avoid payroll taxes.Refund claims involving R&D credits are being looked at closely.Random audits of payroll tax returns will commence next month. This is an area that has…

Many Federal tax breaks expired on 12/31/2009 that were widely expected to be extended. Congress, primarily the Senate, failed to take up many provisions that we have taken as permanent. Consider how many of these will affect you:The AMT exemption amounts automatically roll back to pre-2001 levels. This will make many more of us subject to this tax.Sales tax, college tuition and teacher’s supply deductions have been suspended.R&D credits are suspendedTax free IRA payouts to charities are no longer allowed.50% bonus for first year depreciation and high limits for expensing assets are gone.And of course the estate tax and stepped…

Never let it be said that taxes are boring. William Halby, an attorney in New York, recently appeared before the tax court to argue that the $7,373 he spent on pornography and the $108,086 he spent on prostitutes over a two year period should be allowed as deductible medical expenses. Mr. Halby argued that these expenditures should be allowed as medical expenses due to the positive health effects of sex therapy, and presented a detailed log of “treatments” and “service providers” as support for the deductions.Not surprisingly, Mr. Halby lost his case. Not only did the Tax Court deny all…

In the “if its good policy lets limit it” category:Our state legislature feels that in this economic climate, small businesses need an incentive to hire new employees. As a result, there is a new law that provides that if you own a small business that employed 20 or less employees as of 1/1/2009, and if you hired any new full time employees during 2009, you may be entitled to as much as $3000 in tax credits for each new full time hire.The glitch here is that there is a finite amount of funding available for this giveaway, and once a…

I’ve been beating on the State of California a bit (it’s so easy) so I thought I would switch topics to our friends in Congress.In 2001, Congress enacted estate tax reform which provided that the estate (aka inheritance) tax would expire Jan 1, 2010 for one year only. I wrote about this topic in an earlier piece and opined that Congress would “fix” the sunset provision by now and likely settle the amount that a decedent could pass tax free to heirs at $3.5 million. In what has been labeled by some as “congressional malpractice”, the Senate failed to take…

In the “Are you kidding me?” department, yesterday I wrote about the Use Tax reporting requirements we are supposed to comply with. Recently the BOE has provided more guidance on sales taxes collected by different districts within California and how to handle it.Because of voted indebtedness, different areas within California have different sales tax rates. Example: South Gate’s combined rate is 10.75%, while Huntington Beach has a rate of only 8.75%. Question: What happens if someone who lives in South Gate goes shopping in Huntington Beach? Do they pocket the savings?Not according to Sacramento. If you buy goods subject to…