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• Thanks for a great tax season!
• The time to start planning your 2002 tax situation is now.
• Congratulations to JoAnn Gould, Esq.
• Goodbye, "Mom".
• A tax deduction for weight loss programs.
• IRS rules the cost of certain items are deductible.
• New method to determine deductions for tire costs.
• IRS allows significant benefit for accounting method changes.
• New depreciation forms issued for changes.
• Required retirement plan minimum distribution rules liberalized.
• California passes tax law to conform to federal.
• Questions and Answers

  Are there tax implications to renting out our home?

  Can I declare my mother a dependent?

  Do you have a corporation tax organizer?

  Can I deduct my moving expenses?

• If you have employee stock options...
• Visit our new articles.
• Subscribe/Unsubscribe from our newsletter.
• PS Marché Aux Fleurs

Thanks for a great tax season!

April 15 has come and gone. Thanks to all of you who made an effort to get your information to us early. We had fewer extensions this year than last year, and I was able to go home a little early, after finishing my own extension!

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The time to start planning your 2002 tax situation is now.

There are often planning opportunities that can be exploited if you know your situation early. You can also avoid making cash management errors, like spending funds that should be earmarked for paying taxes next April 15. Our rates will be increasing, effective June 1, 2002. These are all excellent reasons to make a tax planning appointment during May 2002.

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Congratulations to JoAnn Gould, Esq.

Jo is the winner of our tax season referral promotion. She will receive a gift certificate for a weekend at the Heritage House, just south of Mendocino. Enjoy! And thanks again to all those who referred new clients to us during tax season this year.

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Goodbye, "Mom".

My wife's mother, Norrine Bowers, passed away on April 19, after a long battle with cancer. I have never been able to understand mother-in-law jokes, because mine always treated me like a king. She was surrounded by loved ones at the end. We will all remember her for her distinctive laugh, occasionally playing Santa Claus, and always dressing up as the Easter Bunny to hide eggs. Norrine left a lifetime of warm memories that are treasured by her family and friends.

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A tax deduction for weight loss programs.

In the past, the IRS has ruled that weight loss programs were only deductible as medical expenses when prescribed by a doctor for a specific medical condition. Obesity was not considered to be a medical condition justifying the deduction. In Rev. Rul. 2002-19, the IRS changed its position. Obesity is now considered to be a medical condition that will justify the deduction. If you intend to claim the deduction, be sure to get a doctor's prescription for the weight loss program to support it.

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IRS rules the cost of items with a useful life of 12 months or less are deductible.

An industrial laundry incurred costs for garments, linens, shop towels, continuous roll towels, and mops with an expected useful life of 12 months or less. In TAM 200213004, the IRS ruled the taxpayer may currently deduct these costs.

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New method to determine deductions for tire costs.

In the past, the IRS has not allowed a current tax deduction for truck, trailer and tractor tires used in a business when the average useful life of the tires exceeded one year. The tires were depreciable over five years. Under Rev. Proc 2002-27, the IRS has said taxpayers should depreciate the tires that originally came with the vehicle as part of the vehicle cost. The cost of replacement tires may be deducted in the year they are installed.

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IRS allows significant benefit for favorable accounting method changes.

There are formal procedures that are required when a business taxpayer wants to change how it accounts for certain items. An example would be how a business accounts for its inventory costs. The IRS must consent for these accounting method changes to be made. The IRS has specified certain accounting method changes for which it will automatically grant its consent. In the past, adjustments favorable to a taxpayer from these changes were subtracted from income over a four-year period.

On March 14, 2002, the IRS issued Rev. Proc. 2002-19, which allows taxpayers to reduce their taxable income for the entire amount of a negative (taxpayer favorable) adjustment from certain automatically approved changes of accounting method in the year of change. The revenue procedure is effective for 2001, and can be used for amended returns. LIFO Systems in Texas, a service provider to auto dealers, has been promoting assistance to motor vehicle dealers to restate their inventories for income tax purposes and reduce them for factory discounts that most dealers have been reporting as other income. They have estimated a tax benefit for one of my clients exceeding $100,000. Be sure to consult with your tax advisor to determine whether you can receive a benefit from making a change in accounting method under this new revenue procedure on an extended or amended return for your business. To contact LIFO Systems, email Stanton Williams, President of LIFO Systems, L.P. A SOURCECORP Company fax him at 1-509-752-5971, email him at stanton.williams@lifosystems.com, or call him at 1-817-732-5494 ext. 117.

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New depreciation forms issued for Jobs Creation and Worker Assistance Act changes.

Tax legislation enacted on March 9, 2002 included a 30% "bonus" depreciation allowance in the year of acquisition for assets acquired after September 10, 2001 and before September 11, 2004. The amount allowed for luxury vehicles was also increased by $4,600 to a total of $7,160 for vehicles placed in service during 2001 after September 10. The IRS has issued new depreciation forms incorporating these changes. You can get the forms at the IRS web site (www.irs.gov). For our clients, Prosystem has just released an upgrade of their software incorporating the changes. We will be claiming the additional deductions on extended returns and reviewing returns already filed to see if amended returns should be prepared.

The IRS hasn't issued new forms for net operating losses yet. Stand by.

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Required minimum distribution rules for qualified retirement plans and IRAs further liberalized in final regulations.

The IRS has issued final regulations clarifying how required minimum distributions should be made from qualified retirement plans, IRAs and 403(b) contracts. You or your tax advisor should consult these new rules when determining your plan distribution for 2002.

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California passes tax law to conform to federal changes - will be challenged.

The California legislature has passed identical bills AB 1122 in the Assembly and SB 657 in the Senate. Governor Gray Davis has indicated he will approve the new tax law. This is critical tax legislation, adopting retirement plan contribution limitations enacted as part of the federal Economic Growth and Tax Relief Reconciliation Act of 2001.

In order to make the California law revenue-neutral, revenue-raising measures were included that also conform to federal tax laws, such as eliminating deductions for lobbying and club dues, and limiting deductions for executive compensation. The legislation also increases the amount of California estimated tax payments that must be made from 80% to 90% of the final tax liability.

Taxpayer groups, including the Howard Jarvis Taxpayer Association, claim the revenue raising measures are a tax increase, requiring a more than two-thirds approval by the legislature under the California constitution. They intend to challenge the new law as invalid.

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Questions and Answers

Question

My husband and I just purchased our first home four months ago. As luck would have it, we both received job offers to move overseas temporarily. Our work assignments would take us out of the country for 2.5 years.

Due to this, we are considering renting our home. I understand there are several things we would need to do. Would you recommend a checklist of items we should consider? I'm wondering if we need to change our homeowners insurance, mortgage terms, etc. Also are there special tax implications if we turn this back into our primary residence at the end of our 2.5 year assignment? What if we decide to sell upon our return?

Answer

Obviously, I can't give you a complete answer in this space. I recommend that you meet with a tax advisor. Here are a few references and items that might help. (Get IRS publications from the IRS web site at www.irs.gov.)

• Call your insurance agent about insurance requirements.
• In California, there is a small property tax reduction for owner-occupied property. You should consider notifying the county assessor if your property is no longer eligible.
• Your mortgage probably will be unaffected. You might need to consult with a real estate lawyer about this.
• Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad
• Publication 523, Selling Your Home
• Publication 527, Residential Rental Property
• Publication 925, Passive Activity and At Risk Rules

Going abroad is exciting, but tax-wise, it's a mess. Be sure to find a tax consultant who is familiar with the rules. Your employer may help out with this. The Big Five firms have departments devoted to international tax practice.

Question

My Mother is on NJ welfare. I was living with her all of last year. Until 2 years ago, her boyfriend covered her remaining bills. I took over when he stopped paying.

One stipulation to her getting welfare is that somebody has to cover bills. I pay the remaining rent, buy all household odds and ends, and take care of her phone and G & E bills.

Her welfare check is $210 per month, or $2,520 per year, and she gets $110 per month in food stamps, or $1,320 per year.

My contributions to her are:

• $180 per month for rent, or $2,160 per year
• $90 per month for G & E in summer months, or $270 per year
• $50 per month for household needs, or $600 per year
• $30 per month for telephone, or $360 per year
• Total per year = $3,390

I lived with her for all of last year. I now live away from her, but I'm still paying the bills.

Can I claim an exemption for her for last year? Can I claim an exemption for her for this year, even though I'm not living with her?

Answer

Even though they are tax exempt as social welfare payments, the payments received by your mother from government agencies and spent for her support are counted as amounts spent by her. They total $3,840, which exceeds the amount you spent. In order to claim her as a dependent, you must provide more than one-half her support. Therefore, it appears you may not claim her as a dependent under the scenario you describe.

If she did qualify, you could claim an exemption for her even when you didn't live in the same home.

Question

Do you have a Sole Proprietor Corporation Tax Organizer?

I am in the real estate business and have incorporated myself.

Can I just use the organizer you have on your web site?

Can you do corporate taxes on a personal and business tax filing or does the corporation file a separate tax form?

Answer

You really need to find a good tax return preparer to work with.

A separate income tax return must be prepared for a corporation. Even when there is a single shareholder and the corporation has elected under Subchapter S to have its income taxed to the shareholder, the corporation must still file its own income tax return.

Preparing a corporate income tax return is quite different from preparing the income tax return of an individual, so using the tax organizer for an individual income tax return is not appropriate.

Question

I started my first job after graduation in January, 2000 and I moved to a temporary location (apartment) in March 2000. Then I moved to a house in October, 2001 and my company paid my moving expenses. Can I deduct the amount I paid for moving during October, 2001?

Answer

Maybe. Since the expenses were incurred within one year of starting employment, they may qualify as moving expenses.

If your expenses were reimbursed by employer and excluded from your wages, they will not be deductible. You have already received the tax benefit.

To get more details about qualifying moving expenses, see IRS publication 521 and Form 3903 and the related instructions.

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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If you have employee stock options, have you subscribed to the ESOAA Option Alert?

To subscribe, go to http://www.stockoptionadvisors.com. You can review past issues at http://www.stockoptionadvisors.com/optionalert/.

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Visit our new articles!

• "Your Employees - Ambassadors For Your Business"
• "The New Psycho-Cybernetics" Book Review

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P.S.

My daughter and her husband, Holly and Dan Baker, have opened a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs. For the best meal of your life, call 415-925-9200 for a reservation and give them a try soon! For directions, visit our website at http://www.taxtrimmers.com/directions.shtml.

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P.P.S.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.