The True Cost Of Christmas: Santa's Tax Bill

Kelly Philips Erb for Forbes writes:  It’s Christmas Eve and this year, as always, at my house, there’s a lot of anticipation. And by anticipation, I mean that the kids don’t want to go to sleep (I have a totally different idea). We’re tracking Santa’s progress via NORAD (North American Aerospace Defense Command, a United States and Canada bi-national organization charged with the missions of aerospace warning, aerospace control, and maritime warning for North America). If you’re curious, you can track Santa’s journey, too, via email to noradtrackssanta@outlook.com or phone by calling 1-877-HI-NORAD or 1-877-446-6723. They’re also on twitter @NoradSanta.

As of this writing, Santa was last spotted at La Paz, Bolivia, and was headed for Caracas, Venezuela. He still has a lot of ground to cover before hitting Pennsylvania.

As a result, we’ve had quite a few discussions in my household about how Santa manages, in one night, to get all of his work done. Clearly, he has help. And that has financial and tax consequences, right? So we had a little chat about Santa’s money and his tax bill. And here’s what we – a tax attorney and three kids – decided:

First, residency. Let’s go ahead and get this out of the way right now. My kids got letters from Santa again this year and they were postmarked North Pole, Alaska. So Santa clearly maintains his primary residence – and place of business – in the U.S. though we can’t be completely certain about his citizenship. There was zero additional discussion on this point.

Next, revenue. We’re not sure how Santa makes his money. My nine year has decided that Santa doesn’t need money since the elves make all of the toys (though the seven year old vehemently disagrees with this because he has seen toys also in the stores). As to how he pays for those associated expenses? He doesn’t have another job – my kids are very clear on this point – so we’re going on the theory that Santa is independently wealthy or has some additional forms of revenue (more on that later) because he must spend a lot.

Based on the numbers from 2012, there are 526,000,000 Christian kids under the age of 14 in the world who celebrate Christmas on December 25th. That works out to a delivery rate of almost 22 million kids an hour, every hour, on Christmas Eve (it’s worth noting that NORAD doesn’t make the distinction between Christian and non-Christian kids on Santa’s delivery route so they estimate many, many more deliveries).

In America (which, granted, is a bit more flush and commercial than many other countries), gifts per child are said to average $271 at Christmas. Assuming 526,000,000 children, that works out to $142,546,000,000 in fair market value of gifts.

Since Santa doesn’t sell the toys – he gifts them – his asset value dips considerably. He would not be subject to gift tax, however, since federal estate and gift tax laws allow taxpayers to gift $14,000 per person per year for 2013. That means that Santa can give away millions and millions of dollars worth of toys without federal gift tax consequences – so long as they’re to different kids. If Santa gives any child more than $14,000 in gifts (using the fair market value, since that’s what the IRS uses, elf-made or no), he would be subject to the federal gift tax and would need to file a form 709, federal gift tax return.

In exchange for making the toys, the elves are not paid in cash. My kids are convinced that Santa doesn’t pay the elves a wage for their work. Instead, he provides them with room and board and other perks. Even if he doesn’t pay cash – he pays expenses – that’s still considered compensation and it’s taxable to the elves. Fortunately, it’s also deductible to Santa.

Santa has, according to the nine year old, 500 elves. It’s a little more expensive to live in Alaska than the national average – about 34% more. The state’s per capita income is $49,436. I know that seems a bit high for an elf – but the work they do is quite important, right? So Santa clearly wouldn’t skimp. That works out to $24,718,000 in compensation for the 500 elves.

Compensation is taxed to the elves as income – but Santa has taxes to pay on their behalf. Payroll taxes – at the employer contribution rate of 7.65% – for the elves work out to $1,890,927.

Santa doesn’t pay income taxes on compensation paid to the elves but he does have to manage their withholding according to any forms W-4 provided to him. Fortunately for Santa, there is no withholding requirement for state taxes in Alaska. There is, however, an employer contribution to unemployment insurance (SUI). I can’t imagine that there are a lot of unemployed elves – so I’m guessing the rate is fairly low – but we’ll calculate those costs using the average rate of 4.43%. Applying that rate to the wage base for all of the elves results in $817,335 of employer contributions for SUI.

For 2013, Santa will have to report health care insurance costs paid by him for the elves on their form W-2. Fortunately for both Santa and the elves, there is no tax payable on those benefits. Other perks, however, may be taxable if they are not de minimis (meaning they are more than insignificant). For example, cell phones for the elves would be okay so long as there’s a business purpose – but tickets to reindeer games (the Super Bowl of the North Pole)? Probably not de minimis.

The kids are pretty sure – and I agree – that Santa doesn’t intend to operate as a for profit business. But he likely doesn’t meet the criteria to be tax exempt under section 501(c)(3) of the Internal Revenue Code. By default, that would make his venture for profit for purposes of IRS (whether he wants to make money or not) and therefore, taxable.

Even if Santa’s toy distribution scheme were to be classed as a non-profit, there may be other unrelated trade or business income… As noted earlier, my house isn’t sure where Santa gets his money. Clearly, he isn’t paid for his services though my kids question the value of cookies and milk left out for him (that is, as my seven year old noted, a LOT of cookies). Since we’ve seen a lot of Santa merchandise in stores, we’ve worked out that we think he gets some licensing revenue for his own image and also for Rudolph – kind of like Pixar does for Lightning McQueen and Buzz Lightyear. That income would be taxable to the extent that it’s not offset with expenses. So, assuming all of this, what’s deductible?

For an expense related to business to be deductible, it needs to be both “ordinary” and “necessary.” No matter what the industry, toymaker or no, that is the standard that the IRS will use. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. You don’t have to prove that you couldn’t be in business without the expense – more or less, it needs to make good business sense. So what does that mean for Santa?

Well, clearly compensation and related costs (as noted above) would be deductible. Santa can also deduct the cost of goods and the cost of materials to make the toys. He can also deduct the costs associated with keeping the workshop going including heat and electricity – the kids have decided that the heating costs alone would be massive.

What about clothing/uniform costs? Those are deductible only if you must wear them as a condition of your employment and the clothes are not suitable for everyday wear. The rule doesn’t hinge on whether you would wear those outside of your employment but whether you could. After a chat with the kiddos, we’ve decided that Santa pretty reliably wears those red suits (in fact, the six year old is adamant that’s all that he wears – except at night for bed). I don’t think, under the circumstances, they’re deductible. The elves are another story: the six year old is sure that they wear special elf clothes to deliver gifts at the request of Santa – otherwise, they wear street clothes. If that’s the case, the elf uniforms would be deductible (note to Vera Wang: as with NFL cheerleader uniforms, you should totally get in on a piece of the action here… Vera Wang elf uniforms for 2014? I could see it).

We can’t forget about transportation. According to Abogo, it costs about $2,000 per reindeer per year to stay healthy; that’s $18,000 for reindeer related costs (that’s for Rudolph, as well as Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner and Blitzen – and not Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Carter and Nixon, as my son thinks). Abogo also estimates that Santa spends $1,000 on sleigh maintenance per year and annual insurance premiums for the sleigh and reindeer at $42,000. All totaled, Santa will probably hit $60,000 in transportation costs. He can deduct the actual expenses but in his case, he’d be a lot better off using the mileage method. The IRS allowed 56.5 cents per mile for business use for 2013. At 75,500,000 miles (his estimated trip), he would be entitled to a generous $42,657,500 mileage deduction (though, let’s facing, he’s begging for an audit with those numbers).

And yes, Santa has a cell phone. The seven year old has informed me that Santa must have one because the teachers call him to report how good (or not) the kids have been. The nine year old also points out that he needs to keep in touch with the elves. I can’t imagine the number of minutes or roaming costs involved. Lucky for him, the costs of Santa’s cell service would be, we’ve decided, deductible as ordinary and necessary.

With all of those elves, Santa likely has a lot of health care costs. Lucky for Santa, the “Obamacare” employer mandate will be delayed until 2015. That means that Santa isn’t responsible for health care costs for its employees for another full year. So, for 2013, Santa didn’t have to worry about the penalty provisions. But come 2015, Santa will be subject to the requirement that all businesses with over 50 full-time equivalent (FTE) employees provide health insurance for their full-time employees, or pay a per month penalty.

We’ve also decided that Santa doesn’t attend any special classes or pursue any higher education – though he does offer toy making classes for the elves. If he pays for them (and we say he does), those would be deductible.

When all is said and done, Santa is probably doing okay. Thanks to Congress, in 2013, high-wage earners owed an additional 0.9% on earned income above $250,000 for those who file as married filing jointly. Assuming that the Clauses stay married (I haven’t heard anything, have you?), the threshold will kick in at $250,000. That means Santa will pay the normal 1.45% Medicare tax on the first $250,000 of his wages and then then 2.35% (1.45% plus 0.9%) on wages over $250,000.

If Santa has been business savvy (and let’s face it, how could he not be?) for 2013, he likely has a bit of a nest egg. If so, the Medicare surtax on net investment income will kick in on his net investment income. This means that amount by which modified adjusted gross income (MAGI) exceeds those $250,000.

With all of these considerations, Santa might need a lawyer – for advising on taxes (of course) and to deal with any pesky lawsuits related to damage to roofs or harm caused by misfit toys. There’s also that matter of Grandma getting run over by a reindeer (allegedly). Legal expenses would be deductible to Santa so long as they’re related to the business.

In total, we’re pretty sure that Santa won’t pay any federal income taxes this year (just payroll, as noted). His deductions appear to far outweigh his revenue, at least according to our mostly very unscientific surmisings. That said, Santa, if you’re reading, two quick things:

• One, I realize I’m not under age 14 but I’ve been really, really good this year. Just saying.
• Two, taxes can be confusing. It wouldn’t do to see Santa audited so call me with any questions. You have the number (my kids are sure of it).

As for everybody else, thank you for reading this year. Here’s wishing you and your family the merriest of holidays!

Year-End Tax Tips and Reporting Checklist for Accountants

MIKE TRABOLD for Accounting today writes: With the New Year right around the corner, business owners are likely scrambling to identify tax credits they can take advantage of or a tax professional to help them ensure they’re properly reporting their tax information for 2013.

Here are a few year-end tax tips and a checklist accountants can share with their clients to help them avoid late fees, fines and frustration in the New Year.

Tips vs. Service Charges
Businesses with tipped employees need to be aware of the Internal Revenue Service’s intent to enforce guidelines that clarify the taxability of tips and service charges. This enforcement effort is expected to begin in January 2014. Guidance from the IRS offers the following clarification regarding tips and service charges: a tip is subject to special withholding rules, while a service charge is treated as any other taxable wage. Service charges should be characterized as wages and not included with tips when calculating the FICA tip credit.

Transportation Benefits
The current levels for transportation fringe benefits are set to expire at the end of 2013. If this happens, the new transportation limits for 2014 would decrease from $245 to $130 for mass transit benefits and increase from $245 to $250 for qualified parking. However, it is possible that the issue could be addressed by Congress in the New Year, and current levels could be reinstated retroactively to January 1. Keeping an eye on legislative and regulatory changes in the coming weeks could prove valuable to your clients.

Retirement Plans
If a client is considering starting a retirement plan for his or her employees, doing so before the end of the year will enable them to write off some of the setup expenses, as well as enjoy the tax advantages of any plan contributions. Remember to advise your clients that they don’t have to start contributing until next year.

By offering year-end planning tips to clients, especially focused on payroll and tax changes, you are opening the door to a discussion focused on the year ahead and how you can best work together to ensure the growth and prosperity of their business.

Tax Reporting Checklist
One of the most important services accountants can provide their clients each year is to help them ensure the proper tax information has been reported and that it’s done on time.

The following is a checklist of items to reference when advising your clients:

Has this information been reported?

•    All in-house payroll
•    Voided checks
•    Employee pension information
•    Group term life adjustments
•    Tax deposits made for an amount other than the amount on the deposit notice
•    Tip allocations for TEFRA
•    Compensation adjustments paid to employees that need to be included on employee Form W-2 (i.e., charitable contributions, union dues)
•    Other amounts in Form W-2, Box 14
•    Any premiums for health and accident insurance paid by an S corporation on behalf of 2 percent shareholders/employees
•    Taxable cash and non-cash fringe benefits (i.e., personal use of a company car)
•    Third-party sick pay insurance benefits
•    Educational assistance reimbursements
•    Any dependent care services provided to employees under an employer-sponsored program
•    Identification numbers for every tax agency

Has this information been verified?

•    Employees’ names and addresses
•    Employees’ social security numbers (SSNs)
•    1099 payees’ SSNs or taxpayer ID numbers
•    Identification numbers for state and local agencies on each return

The items in these lists may seem basic, but year after year, we see that not reporting or providing inaccurate information for one or more of these items results in some of the most commonly made mistakes.

Going over these checklist items and tax tips with your clients can save them time, money, and headaches… and sends the message that you are there to help your clients navigate the maze of taxes and regulations that come with running a business.

SUBSTANTIATING CHARITABLE GIFTS—SPECIMEN LETTER TO CLIENT-DONORS

Conrad Teitell in Philanthropy Tax E-Letter for WealthManagement writes: Now is a good time to tell your clients how to substantiate their charitable gifts on their 2013 federal income tax returns—due by April 15, 2014.

Strict, detailed and overlapping substantiation requirements must be met for charitable deductions to be allowed. And, generally, there is no second chance if deadlines are missed or requirements aren’t satisfied.

Alert. The IRS points out in IRS Publication 557 (Revised October 2011)—Tax Exempt Status for Your Organization that: “The donor is responsible for requesting and obtaining the written acknowledgment from the donee.”

Crucial. When a receipt is required to substantiate a deduction, a donor must have it in his or her possession by the earlier of the actual filing of the return or the April 15, 2014 due date (or extended due date) for the return. It’s wise to alert and inform donors about the substantiation requirements as soon as possible. Otherwise, an early filer may lose the deduction because the return is filed before receiving a receipt from the donee. For example, the donor files her return on Jan. 7, 2014, but doesn’t get the receipt until Jan. 12.

Help is on the way. The following specimen letter informs client-donors of the reporting requirements and deadlines. You have my permission to adopt (or adapt) the letter.

Dear [clients]:

The federal government encourages your generosity by allowing you to deduct your gifts to charities on your income tax return if you itemize. However, you must follow the IRS’s reporting and substantiation rules to assure your charitable deduction. I hope that this letter highlighting the IRS’s requirements will be helpful to you when preparing your federal income tax return for the year 2013 (due by April 15, 2014).

The rules are numerous—and overlapping. This letter tells about: (1) reporting requirements for non-cash charitable contributions; (2) rules for hard-to-value property; and (3) receipts you need to substantiate cash and non-cash contributions.

For some non-cash charitable gifts, Form 8283 (Non-cash Charitable Contributions) must be filed. That form and its instructions are enclosed. The form is the latest available today. Before filing your income tax return, I suggest that you check the IRS’s latest forms and instructions for any last-minute changes.

If your non-cash gifts for the year total more than $500, you’ll have to include Form 8283 with your income tax return. Section A—the simpler part of the form—is used to report gifts valued at $5,000 or under. Section A can be completed by you or your tax return preparer.

When the property’s value is more than $5,000 ($10,000 for closely held stock), you’ll generally need to have it appraised. The appraiser’s findings are reported in Section B of Form 8283. Those rules also apply if you give “similar items of property” with a total value above $5,000—even if you gave the items to different charities. The IRS says that “similar items of property” are items of the same generic type, including stamps, coins, lithographs, paintings, books, non-publicly traded stock, land and buildings. So, for example, if you have six paintings worth $1,000 each and contribute each one to six different charities, the appraisal rules would apply.

Special rule for publicly traded securities. You don’t need an appraisal or Section B of Form 8283 for gifts of publicly traded securities, even if their total value exceeds $5,000. But you must report those gifts (when the value is more than $500) by completing Section A of Form 8283 and attaching it to your return.

Closely held stock. For gifts of non-publicly traded stock, an appraisal is not required as long as the value is not over $10,000, but part of Section B of Form 8283 must be completed if the value is over $5,000. And, if the gift is valued at over $10,000, then both an appraisal and Section B of Form 8283 are required.

If you need an appraisal, the gift must be made within 60 days after the date of the appraisal. The property can be appraised after the date of the gift (the appraisal to state the property’s value on the date of the gift). You must receive the appraisal by the due date (including extensions) of the return on which the deduction is first claimed.

Section B of Form 8283. It must be signed by the appraiser and by the charity that received your gift. It’s essential to complete Section B of Form 8283 and to attach that form to your tax return.

Qualified appraisal. A qualified appraisal is an appraisal document that is prepared by a qualified appraiser in accordance with generally accepted appraisal standards and otherwise complies with the qualified appraisal requirements.

Qualified appraiser. The requirements to be a “qualified appraiser” are stringent. The definition is critically important: no qualified appraiser, no deduction for property gifts valued over $5,000 (over $10,000 for closely held stock).

Under the current definition, a qualified appraiser is an individual who (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements (established by the IRS in regulations); (2) regularly performs appraisals for which he or she receives compensation; and (3) can demonstrate verifiable education and experience in valuing the type of property for which the appraisal is being performed. An individual has education and experience in valuing the relevant type of property, as of the date the individual signs the appraisal, if the individual has: successfully completed (for example, received a passing grade on a final examination) professional or college-level coursework in valuing the relevant type of property, and has two or more years of experience in valuing the relevant type of property; or earned a recognized appraisal designation for the relevant type of property.

Ifs, ands, buts. A qualified appraiser may not be related to—or regularly employed by—you or the charitable donee and may not be a party to the transaction by which you acquired the property being appraised, unless the property being appraised is donated within two months of the date of acquisition and its appraised value does not exceed the purchase price.

Appraisal fee. Generally, no part of the appraisal fee can be based on a percentage of the property’s appraised value. An appraisal fee isn’t a charitable gift. If you itemize, the appraisal fee is deductible on your income tax return as a miscellaneous deduction. But it’s only deductible if it—together with other miscellaneous deductions—exceeds a 2 percent of adjusted gross income floor.

Special rule for art gifts. If you donate artworks with a total value of $20,000 or more, your return has to include a copy of the signed appraisal itself, not just Section B of Form 8283. If any single artwork is worth $20,000 or more, IRS may ask you for an 8 × 10 color photo (or a 4 × 5 color slide) of the donated property. You don’t have to send the photo with your tax return, just have one ready.

Special rule for very large gifts. For gifts valued at over $500,000, the donor must attach the qualified appraisal—as well as Section B of Form 8283—to his or her tax return. For purposes of the dollar thresholds, property and all similar items of property donated to one or more charitable donees are treated as one property. As noted above, a copy of the appraisal must be attached to the tax return when an artwork is worth $20,000 or more.

Gifts of clothing or household items. No deduction is allowed for a contribution of clothing or a household item unless the item is in good condition or better at the time of the contribution and the donor meets the substantiation requirements. This rule doesn’t apply to a contribution of a single item of clothing or a household item for which a deduction of more than $500 is claimed if the donor submits with the return on which the deduction is claimed a qualified appraisal prepared by a qualified appraiser and a completed Form 8283 (Section B).

The term household items includes furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques and other objects of art, jewelry, gems, and collections are not household items.

Used car donations. The deduction for charitable contributions of autos, other motor vehicles, boats and airplanes exceeding $500 depends on the use of the vehicle by the charity. A deduction is not allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment by the charity.

If the charity sells the vehicle without any significant intervening use or material improvement of the vehicle, the deduction is the smaller of the gross proceeds from the sale or the vehicle’s fair market value on the date of the contribution. The acknowledgment, which is on IRS Form 1098-C (or a statement containing the same information), must contain the name and taxpayer identification number of the donor, and the vehicle identification (or similar) number. The acknowledgment must provide a certification that the vehicle was sold in an arm’s length transaction between unrelated parties, and state the gross proceeds from the sale.

If the charity makes a significant intervening use or makes a material improvement to the vehicle, the deduction is the fair market value at the time of the contribution. The  acknowledgment  must contain a certification of the use or material improvement of the vehicle and the duration of that use, and a certification that the vehicle will not be transferred in exchange for money, other property, or services before completion of that use or improvement.

If the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value in direct furtherance of a charity’s charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation, the deduction is the fair market value at the time of the contribution. You must obtain an acknowledgment from the charity and substantiate the fair market value.

Contemporaneous written acknowledgment. The charity must provide a written acknowledgment within 30 days of sale of a vehicle that is not significantly improved or materially used by the donee, or, in all other cases, within 30 days of the contribution.

Penalties. A charity will be penalized for knowingly furnishing a false or fraudulent acknowledgment, or knowingly failing to furnish a timely acknowledgment showing the required information.

You might want an appraisal (even if your gift doesn’t require one) in case you have to convince the IRS of the property’s worth. And Form 8283 asks how you valued your gift.

Generally, if a charity receives a gift that is subject to the appraisal rules (and it signed Form 8283), the charity must report on Form 8282 to both the IRS and the donor if it disposes of the gift within three years. However, the charity needn’t report its disposal of an item that you certify is worth $500 or less. Form 8283 has a section for that purpose (Section B, Part II).

Bank record or written communication required. No income tax charitable deduction is allowed for a gift in the form of cash, check, or other monetary gift unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the donee’s name, the contribution date, and the gift amount.

Monetary gift includes a transfer of a gift card redeemable for cash, and a payment made by credit card, electronic fund transfer, an online payment service, or payroll deduction.

Bank record includes a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement.

Written communication includes electronic mail correspondence.

Substantiation of charitable contributions of less than $250. An income tax charitable deduction isn’t allowed for non-cash charitable contributions of less than $250 unless the donor maintains for each contribution a receipt from the donee showing: (1) the name and address of the donee; (2) the date of the contribution; (3) a description of the property in sufficient detail under the circumstances (taking into account the value of the property) for a person who is not generally familiar with the type of property to ascertain that the described property is the contributed property; and (4) for securities, the name of the issuer, the type of security and whether the securities are publicly traded securities.

Substantiation requirements for contributions of $250 or more. To deduct any gift of $250 or more, you must have a written receipt from the charity describing (but not valuing) the gift. If any goods or services were given to you in exchange for your gift, the receipt must describe them and contain a good faith estimate of their value. If the charity provided no goods or services in consideration of your gift, the written receipt must so state. The receipt need not contain your Social Security number. Generally, separate payments are considered separate contributions for purposes of the $250-or-more threshold unless the payments are made on the same day.

Cash gifts. For cash gifts, regardless of the amount, record keeping requirements are satisfied only if the donor maintains as a record of the contribution, a bank record or a written communication from the donee showing the name of the donee and the date and amount of the contribution. A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date. The record keeping requirements will not be satisfied by maintaining other written records. Donations of money include those made in cash, by check, electronic funds transfer, credit card and payroll deduction.

Contributions made by payroll deduction. For a charitable contribution made by payroll deduction, a donor is treated as meeting the substantiation requirements if, no later than the date for receipt of substantiation, the donor obtains: (1) a pay stub, Form W-2, “Wage and Tax Statement,” or other employer-furnished document that sets forth the amount withheld during the taxable year for payment to a donee; and (2) a pledge card or other document prepared by or at the direction of the donee that shows the name of the donee.

Transfers to charitable remainder trusts. The above substantiation requirements don’t apply to a transfer of cash, check, or other monetary gift to a charitable remainder annuity trust or a charitable remainder unitrust. The requirements do apply, however, to a transfer to a pooled income fund. So it is necessary to get a timely receipt meeting the $250-or-more substantiation rules for a gift to a pooled income fund.

Transfers to gift annuities. When the gift portion of a gift annuity or a deferred payment gift annuity is $250 or more, a donor must have an acknowledgment from the charity stating whether any goods or services—in addition to the annuity—were provided to the donor. If no additional goods or services were provided, the acknowledgment must so state. The acknowledgment need not include a good faith estimate of the annuity’s value.

Charitable remainder gifts in personal residences and farms. Regulations don’t specifically deal with these gifts. However, to be safe, get a timely receipt meeting the $250-or-more substantiation rules.

Grantor charitable lead trusts for which an income tax charitable deduction is allowable. The regulations don’t specifically deal with these gifts. Charitable remainder trusts, as stated above, aren’t subject to the substantiation rules. Charitable lead trusts may also be exempt. Nevertheless get a timely receipt meeting the $250-or-more rules.

THE RECEIPT-IN-HAND RULE—THIS IS CRUCIAL: You must have the receipt in your possession beforeyou file your income tax return. If you file your return after the due date (or after an extended due date), the receipt must nevertheless have been in your hand by the due date (plus any extensions).

If you made a gift of $250 or more to a religious organization and received in return solely an intangible religious benefit that generally isn’t “sold in commercial transactions outside the donative context” (e.g., admission to a religious ceremony), the receipt must say so, but need not describe or value the benefit. But this exception doesn’t apply, for example, to tuition for education leading to a recognized degree, travel services, or consumer goods.

If a charity receives a gift of over $75 from you for which you received or were entitled to a benefit (other than solely an intangible religious benefit). The charity must, in connection with the solicitation or receipt of the gift, give you a written statement that: (1) informs you that the gift deduction is limited to the excess of any money (and the value of any property other than money) contributed by you over the value of the goods or services provided by the charity; and (2) provides you with a good faith estimate of the value of the goods or services.

However, both you and the charity may generally disregard token benefits you receive for a contribution. The IRS has ruled that a charitable gift is fully deductible if it is made in a fund-raising campaign in which the charity informs its donors how much of their payment is a deductible contribution and: (1) the donor receives benefits having a fair market value of $102 or 2 percent of the payment, whichever is less; or (2) the donor gives the charity at least $51 and receives a low-cost or token item (e.g., a bookmark, mug or T-shirt). The item must bear the charity’s name or logo and cost the distributing charity—or the charity on whose behalf the item is distributed—no more than $10.20.

Further, donors needn’t reduce their deductions when they receive unsolicited free items that cost the charity—or the charity on whose behalf the item is distributed-no more than $10.20.

Those token benefit amounts are for 2013 charitable gifts. The dollar figures are adjusted annually for inflation.

New York regulates tax preparers

Reuters  for Metro writes: New York this month became the fourth U.S. state to regulate unlicensed tax return preparers, at a time when consumer advocates are pushing for more state oversight as a federal crackdown stalled.

Nearly 80 million Americans pay someone to prepare their tax returns. While most of this work goes smoothly, some does not. 

Tax return preparation problems – some inadvertent and some deliberate – occur frequently among small, mom-and-pop tax return firms, according to government watchdogs.

About a third of the $9.4-billion tax preparation market is controlled by H&R Block Inc and three other large companies, with the remaining two-thirds split between licensed and unlicensed preparers, said research group IBISWorld Inc.

Seeking to regulate the business for the first time, the U.S. Internal Revenue Service earlier this year tried to impose new testing and continuing education requirements on the estimated 350,000 unlicensed preparers nationwide.

But that effort was blocked in January after a lawsuit was filed by a libertarian group opposed to the rules. The Obama administration has appealed. A decision is expected soon.

In the meantime, interest in state oversight is growing, said David Williams, chief tax officer at Intuit Inc, which sells tax preparation software.

“You’re seeing the advocacy community step up and shift focus from the federal government to getting the states to do this,” said Williams, former IRS tax preparer office director.

Joining California, Oregon and Maryland in imposing regulations, New York will require independent preparers to pass a competency test and take continuing education classes.

Among the new rules, New York tax preparers cannot charge “an unconscionable fee” and must adhere to “best practices” according to the New York Department of Taxation and Finance web site.

The state’s rules, which became effective December 11, carry possible criminal penalties.

Eventually, New Yorkers will be able to look up their tax preparer on the department’s web site to see if he or she is complying with the rules.

“We will be investigating complaints, assessing penalties seeking criminal prosecution,” among other disciplinary actions, said Geoffrey Gloak, a spokesman for the department.

The New York rules may face a court challenge, as well, from the Institute for Justice, the group that sued over the IRS rules, said a lawyer with the group.

Dan Alban, who is representing the institute in its case against the IRS, said: “We’re always concerned when states impose burdensome licensing schemes … These regulations certainly raise those same concerns.”

In November, The National Consumer Law Center, a consumer-advocacy group, reported on examples of unlicensed tax preparer problems and called for states to enact their own rules.

Chi Chi Wu, a lawyer and author of the NCLC report, said states lose tax revenue to fraudulent preparers. The institute’s attack on preparer rules is a threat to consumers, she said.

“We shouldn’t be sympathetic to a mom-and-pop shop if it’s making a lot of mistakes or committing fraud,” Wu said.

  

Seasonal tax tip: watch out for relatives!

Joe Kristan for RothCPA writes: When you are trying to close a deal or get a deduction before year-end, it can be tempting to get the family involved.  Paying a deductible expense to a relative or, better yet, a controlled corporation can seem like a way to have your deduction and eat it too.  

Be careful.  The tax law has lots of rules to keep people from gaming the system through related parties.  These rules can trip you up even when no trickery is involved or intended.

For example, Code Section 267 only allows a deduction to a related party “as of the day as of which such amount is includible in the gross income of the person to whom the payment is made.” That’s no problem if the “related party” is on the accrual method, because they will be accruing the income at the same time you accrue the expense. But if the related party is a cash-basis taxpayer, you have to pay this year to get a deduction this year.

Who is “related?” Most problems arise with closely-held accrual-method businesses and their cash basis owners. If you have a C corporation, only owners of more than 50% of the stock, and their families (siblings, spouses, ancestors and descendants) are related.  Families are usually considered as a single owner for the 50% test.   For pass-through entities — partnerships and S corporations — any owner is a related party, along with members of owners families and anybody related to the family members.

Accruing expenses isn’t the only way to run into problem with related parties, though, so if you are trying to make a tax move before year end involving relative or controlled entities, be sure to get your tax pro involved too.