taxation law services

Depreciation Deductions: Passenger Cars & Light Trucks, Vans and SUVs

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Assuming that a taxpayer does not use the IRS standard mileage deduction, for qualifying vehicles used for business purposes and placed in service in 2009 or 2010, taxpayers may deduct various costs including depreciation, registration fees, insurance, and many others under the actual expense method. This article will examine depreciation deductions for certain categories of vehicles.

Passenger Cars

For purposes of calculating depreciation, a car is defined to be any four-wheeled vehicle for use on public roadways, with a gross vehicle weight of 6,000 pounds or less (subject to certain exceptions). Under the American Recovery and Reinvestment Act of 2009, taxpayers may generally take bonus depreciation of $8,000 for newly purchased cars placed in service for business use in 2009 (Congress has extended the bonus depreciation for 2010, as well). Taxpayers may take an additional $2,960 maximum depreciation deduction for 2009 ($3,060 for cars purchased and placed in service in 2010). The 2009 depreciation rates for subsequent years are as follows: $4,800 for the second year; $2,850 for the third year; and $1,775 for each tax year thereafter. Depreciation limits are periodically adjusted for inflation.

Note that the above depreciation amounts assume 100% business use. Depreciation amounts must be reduced proportionately by any personal use percentage that is less than 100% business use and more than 50%. If business use is less than 50%, straight-line depreciation must be used (also reduced proportionately by personal use percentages) and the bonus depreciation amount is not available. Bonus depreciation is also not available for purchases of used cars.

Light Trucks, Vans and SUVs

A light truck, van or SUV that has a gross vehicle weight of 6,000 pounds or less may also qualify for certain depreciation deductions. As with passenger cars, an $8,000 bonus depreciation allowance is available for newly purchased vehicles in this category placed in service in 2009 or 2010. For 100% business use, taxpayers may generally take an additional $3,060 maximum depreciation deduction for 2009 ($3,160 for 2010). 2009 Depreciation rates for vehicles in this category for subsequent years are as follows: $4,900 for the second tax year; $2,950 for the third tax year; and $1,775 for each tax year thereafter.

As with passenger cars, depreciation amounts must be reduced proportionately by any personal use percentage that is less than 100% business use and more than 50%. If business use is less than 50%, straight-line depreciation must be used (also reduced proportionately by personal use percentages) and the bonus depreciation amount is not available. Bonus depreciation is also not available for purchases of used vehicles in this category.

Do you have questions about maximizing your tax savings on newly purchased business vehicles or equipment? Sherayzen Law Office can assist you with your tax needs.

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Business Tax Planning Lawyers: When to Schedule a Review with Your Business Tax Lawyer

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While the exact schedule of your business tax planning reviews may often depend on the exact nature of your business, I want to point out in this article certain events which should trigger a review of your tax strategies by a Minnesota business tax lawyer.

A. Business Formation

A review of your business tax strategies should be scheduled during business formation or at least within several months of your company’s existence. Unfortunately, a lot of business owners neglect obtaining the advice of a business tax attorney during the first year of the existence of their businesses. The anxiety over what the future might bring and the desire to cut costs are usually proffered as the explanation of this tendency.

Yet, this is a mistaken view. In reality, it often leads to a completely opposite result: more money is being spent inefficiently, higher tax costs are incurred, and there is a higher likelihood of creating huge legal and tax liabilities down the road. A company may even go out of business due to its neglect of legal and tax planning.

One of the main functions of a business tax lawyer is to structure business transactions in such a way as to fully comply with U.S. tax laws (and the laws of other relevant tax jurisdictions where appropriate) while making sure that full advantage is taken of these laws to reduce and even eliminate business tax waste. For example, where appropriate, a business tax attorney may advise to hasten a purchase order in order to reduce tax liability in this tax year. If the purchase is being made in a foreign country, this business tax lawyer may advise that the contract is signed in that foreign country in order to offset foreign income that the company received from the sales of its product in that country. This may further favorably impact the situation with respect to the foreign tax credit.

B. One Month Prior to the End of a Fiscal Year

The next tax planning session should be scheduled about a month prior to the end of each fiscal year. By this time, sufficient economic data about the performance of the business should be collected by the company’s accountant. This will allow your business tax lawyer to review the assumptions about income and expenses that were made at the beginning of the fiscal year. Based on this review, the business tax attorney may revise the tax planning strategies and give advice on what to do during this last month of the fiscal year to make sure that full advantage is taken of the Internal Revenue Code provisions.

C. Business Tax Filing

In order to maximize its benefits, business tax filing should consist of three steps. First, the accountant prepares a tax return for the business. If you use your tax attorney to prepare the tax return, then you can skip this step. Second, prior to filing the tax return, submit it for a review to your business tax lawyer. Following this step may bring two important benefits: a.) you get a “second opinion” on the tax return, and b.) the tax lawyer may modify the tax return in order to harmonize it with the rest of the business and tax planning strategies (which may sacrifice short-term benefits in order to achieve your company’s long-term business goals or reduce overall long-term tax liability). Finally, the third step is to use the already filed tax return in conjunction with the economic analysis and projections for the next fiscal year in order to formulate a new business tax plan. This new tax plan will later be reviewed at the end of the year as indicated in Section “B” above.

Thus, in reality, your business tax planning strategies should be reviewed at least twice a year by your tax attorney: while filing the tax return and at the end of the year. This holds true unless there is a material change of your company’s circumstances.

D. Material Change of Circumstances

Every time an event occurs that may materially modify the tax situation of your business, it is necessary to immediately contact your business tax lawyer to review the tax situation and tax strategies of the business. Moreover, it is important to remember that such situations are likely to give rise to additional tax compliance and legal liability issues which may be identified only by a tax professional.

E. Conclusion

Business tax planning should become a natural and routine practice of your overall business planning. In the long run, the benefits of tax planning are likely to far outweigh whatever immediate legal expenses your business may incur, not to mention the protection it offers against future legal liability. At the very least, two reviews of your business tax strategies should be scheduled during a fiscal year: when you file your business taxes and about a month before the end of the year. If an event occurs that may materially change the tax situation of your company, then an emergency tax and legal liability session with your business tax lawyer should be scheduled.

Sherayzen Law Office can help you throughout this process. We can help you properly analyze your business tax situation, identify the problems and opportunities, and adopt the right business and tax strategies to take full advantage of the U.S. tax laws while reducing potential future liabilities.

Call to discuss your tax situation with Mr. Sherayzen an experienced business tax lawyer!

Section 179 Deduction for SUVs and Certain Other Vehicles

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Section 179 of the Internal Revenue Code allows taxpayers to purchase certain types of vehicles for business purposes and write off the cost. Specifically, taxpayers may expense up to $25,000 of the cost of any “heavy” SUV, pickup or van placed into service during the tax year, and used for over 50% for business purposes. Both new and used vehicles may qualify for the deduction.

A heavy vehicle for the purpose of the statute is generally any 4-wheeled vehicle with a gross vehicle weight above 6,000 pounds and not more than 14,000 pounds. Certain other specified vehicles are not subject to the $25,000 limit. For qualifying heavy vehicles, taxpayers may take regular depreciation (20% for the first year) in addition to the $25,000 write-off. However any percentage of non-business use below 100% must be reduced accordingly by the same percentage.

Call NOW to get help with your business tax return!

Sherayzen Law Office Offers Skype-Enabled Video Conferences

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Using Technology to Improve Delivery of Legal Services

At Sherayzen Law Office, we are always thinking about how to use new technology to improve the delivery of legal services to our clients. For this reason, we have been investing in the acquisition of new technologies and finding better ways to use the existing ones.

Starting October 1, 2010, Sherayzen Law Office announced that it will offer Skype-enabled video conferences to its clients throughout the United States. We foresaw that the benefits of such conferences to our clients are enormous because such conferences constitute a low-cost communication tool which is one of the closest approximations to a regular meeting. Due to this almost “face-to-face” effect, the online video conferences allows for an immediate build-up of trust between our attorneys and our clients which is commonly associated with in-person consultations.

How to Set-Up a Video Conference

Setting up a Skype-enabled video conference is easy. First, you either contact Sherayzen Law Office by phone or e-mail to schedule the consultation. Second, you pay online an invoice emailed by Sherayzen Law Office through the Paypal system. This is it! The consultation will be held at the time convenient for you.

International Business and Tax Services as well as Federal Tax Services Can Be Delivered By Out-of-State Attorneys

There is a mistaken view that your attorney always has to be in your town to help you with any legal issues. In reality, the issue is much more complex. Most states allow out-of-state attorneys to deliver international business and contract services as well as federal tax services to clients in their states. Virtually all states, however, severely restrict (often prohibit) an attorney’s ability to help his clients with respect to state-regulated issues and especially litigation matters.

Sherayzen Law Office offers its international contract and business services as well as federal and international tax services to its clients throughout the United States and the world. In fact, on November 18, 2010, Sherayzen Law Office announced that it will expand its Skype-enabled video conferences to its clients throughout the world. This provides our clients with an opportunity to obtain high-quality legal services at reasonable prices.

Call or e-mail us NOW  to set-up a Skype-enabled video conference with an experienced lawyer to discuss your international business, contract or tax issues!

International Tax Lawyers | Passive Foreign Investment Company

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Congress enacted the Passive Foreign Investment Company provisions (PFIC) as part of the Tax Reform Act of 1986 in order to deter U.S. investors from deferring or avoiding payment of U.S. taxes by investing in offshore entities. The PFIC rules are structured to provide a disincentive for U.S. investors to defer investment income taxes by owning passive investments in foreign companies that do not regularly distribute their earnings. If it is determined that a U.S. investor is a PFIC shareholder, there can be severe tax implications for the taxpayer.

U.S. taxpayers who are shareholders of PFIC are likely to pay a significant additional tax on realized gains from sales of PFIC shares, and on PFIC dividends that meet the definition of “excess distributions” (an “excess distribution” applies to gains or distributions that exceeds 125% of the average distributions for the previous three years, or less if applicable). In both cases, the tax is applied at the taxpayer’s ordinary income tax rate, regardless of whether capital gains rates would typically apply. Further, an interest charge may be imposed, to offset the years of tax deferral in holding the offshore investment. As an additional disincentive, PFIC shares may not receive a stepped-up cost basis at the shareholder’s death.

Definition of a PFIC and Two-Part Test

In general, a foreign corporation that is determined to be neither a “controlled foreign corporation” (CFC) as defined in IRC section 957, nor a “foreign personal holding company” (FPHC) as defined in IRC section 552, will be determined to be a PFIC if it includes at least one U.S. shareholder and meets either one of the two tests found in IRC section 1297. If at least 75% or more of its gross income is passive income (based upon investments as opposed to operating income), or if at least 50% of the average percentage of its assets are investments that produce, or are held for the production of passive income, the foreign corporation will meet the definition of a PFIC. Passive income generally includes interest, dividends, rents, capital gains, and similar items. There is no requirement of ownership of a certain minimum percentage of shares, as there is with CFCs or FPHCs. Thus, if the test is met, PFIC status will apply, even if a shareholder owns a minimal percentage of shares with no ability to influence the business decisions of the company.

The PFIC rules apply to each U.S. person (the precise definition of who constitutes U.S. person is beyond the scope of this article, but it may become an issue in many situations) regarding who a shareholder of a PFIC is. PFIC rules, however, do not apply to foreign shareholders or the foreign corporation itself. PFICs may include different types of entities such as various investment vehicles and foreign-based mutual funds.

Two options are commonly suggested by the U.S. tax lawyers to the shareholders in order to avoid PFIC taxation burden: Qualified Election Fund and Mark-to-Market. Both of these options, however, have their own peculiar characteristics and impose different types of tax obligations on the shareholders.

Qualified Electing Fund

In general, U.S. shareholders who own shares either directly or indirectly in a PFIC may be able to avoid the burdensome standard PFIC taxation provisions by electing to treat the PFIC as a Qualified Electing Fund (QEF) on Form 8621. Shareholders making this annual election are taxed on their pro rata share of the PFIC’s ordinary earnings as ordinary income, and their pro rata share of the net capital gains as long-term capital gain. A shareholder’s basis in the stock of a QEF is increased by the earnings included in gross income and decreased by a distribution from the QEF to the extent of previously taxed amounts. Finally, U.S. shareholders interested in making this election must also be able to obtain the required information from the PFIC.

While treating a PFIC as a QEF may be beneficial in that it allows taxpayers to opt out of the standard PFIC tax and interest rules, it also forces shareholders to pay taxes currently on undistributed income earned by a foreign corporation. Thus, QEF may be of limited use to taxpayers who lack adequate liquidity to pay taxes. Another important point about a QEF is that, due to the complexity of the rules and possible additional tax amounts, if the decision is made to elect QEF treatment of PFIC, it may be advisable to elect a QEF in the first year of holding an offshore investment.

Mark-to-Market

Another option for U.S. shareholders of a PFIC (who do not elect to treat a PFIC as a QEF), is to elect the mark-to-market method. This election is only available if the shares are considered “marketable stock”. Marketable stock is regularly traded stock with an ascertainable value on recognized exchanges as defined in the IRC regulations. If the shareholder elects to mark the stock to market, he will annually report, as ordinary income, the amount equal to any excess of the fair market value (FMV) of the PFIC stock as of the close of the taxable year over the adjusted basis of the shares (i.e. as if the shares had actually been sold at FMV). If the adjusted basis of the PFIC shares exceeds its FMV as of the close of the taxable year, the shareholder may generally deduct an ordinary loss (subject to certain statutory limitations).

Shareholders who directly own shares in a PFIC electing the mark-to-market method may increase their adjusted basis in PFIC shares through income recognized, and decrease the adjusted basis through deductions taken.

Conclusion

The tax issues surrounding PFICs are very complex and should be handled by a tax professional. Sherayzen Law Office can help you analyze your tax situation, determine whether PFIC rules apply, identify the alternatives in light of your whole tax situation, and implement the tax strategy most suited to your business and investment needs.

Contact Sherayzen Law Office to discuss your tax situation with an experienced tax lawyer!