ASPA NEWSLETTER

February 2001

The Arkansas Public Accountant is the monthly publication of the Arkansas Society of Public Accountants. The society is a professional organization composed of Licensed Public Accountants, Enrolled agents and persons holding out to be accountants or tax preparers with their services available to the public. This organization is dedicated to helping our members give the best possible service to their clients. We are happy to accept articles and/or advertising that would be of interest to our members and ask that you submit any thing for publication by the 25^th of the month to be included in the next month’s publication. Please send to:

LaVERNE LONG, Editor
P.O. BOX 758
NEWPORT, AR 72112-0758
llonga@ipa.net

BACK ISSUES ARCHIVE

The Arkansas Public Accountant

PRESIDENT...................................SHELLY RUSSELL
PRESIDENT ELECT........................JAMES C. HODGE
1ST VICE PRESIDENT...................DONNY J. WOODS
2ND VICE PRESIDENT..................BRIAN THOMPSON

GOVERNOR DISTRICT I....................SUZANNE BALTZ
GOVERNOR DISTRICT II....................DONNA GOWAN
GOVERNOR DISTRICT III...................LONNIE TAYLOR
GOVERNOR DISTRICT IV.............GEORGE SIMPSON
GOVERNOR DISTRICT V..........CARL DALRYMPLE JR.
GOVERNOR DISTRICT VI....................TOM SIMMONS

End of the year reports, W-2 forms (along with calls wanting to know how soon you’re going to be able to get those out), taxpayers anxious to get their returns filed as soon as possible (then coming in after you’ve finished them up with another piece of information they forgot about), the “grocery sack” clients coming in with their years worth of receipts, computer program glitches – these are among the things that make January so much fun! I’m not sure who wrote the following quote, but it describes the members of our profession pretty well.

Even though we’ll all be pretty well “buried” in taxes for the next few months, your Board is working behind the scenes to try to make sure we will be able to bring you some quality seminars after tax season. We will be having “Business Entities” during our Annual Convention next October, but we are also considering seminars on Form 1041, Compilations & Reviews, and Quickbooks. However we are having some difficulty coordinating our available dates with available time for the seminar presenters, as well as trying to make them cost-effective. We would be poor managers of ASPA funds if we spent $3,000 plus to bring a seminar that only sixty or so of you were interested in.

We would appreciate some feedback from you. Please let us know which two (2) seminars you would be most likely to attend (Form 1041, Compilations & Reviews, or Quickbooks) by e-mailing LaVerne at llonga@ipa.net, faxing to 870-217-0154 or mailing to Post Office Box 758, Newport, AR 72112.

Many people aim at nothing – and hit if with remarkable precision.

It is all right to be Goliath, but always act like David.

Wise people learn when they can. Fools learn when they must.

THREE HAPPY WORDS - Paid in Full

Some fellows pay a compliment like they expect a receipt.

A feeling comes and it may go.

Sometimes the only sense you can make out of life is a sense of humor.

The largest room in the world is the room for improvement.

There’s more to life than crossing things off your to-do-list.

CORRECTIONS TO ROSTER LISTINGS

Jerry Duncan Phone - 870-424-2002 Fax - 870-424-4808
George Qualls Phone 870-867-3220
Debbie Hicks - Name shown as: Kebbie should be Debbie
Robin Clatworthy - email address should be robclat@hnb.com
Jim Hodge - fax number should be: 870-642-7866
Diana L. Sellers - fax number should be: 501-834-7739 Email should be: sellersdl@aol.com
LaVerne Long - fax number should be:870-217-0154
Carl Jones - Dia State Member Phone & Fax same: 580-353-2455
Jarvis Windom - Dia State Member City should be: Wheatland; Fax is: 307-322-3333 email is: wcgm@aol.com
Brenda Browns phone number should be: 870-535-6891
Susie Anthony’s fax number is: 501-321-9989
Beth Stout fax number is shown as her phone number: her phone is: 870-425-6060 and her email is: stout_pa@yahoo.com
Warren Doss PostOffice Box is #365
Laurie Lovetts correct address is: 2038 Franklin, Hot Springs, 71913

Tax Package Introduced

On January 22, 2001 Republican Phil Gramm and Democrat Zell Miller introduced a $1.6 trillion tax package. This bill is expected to have support from leaders of both parties. Here are just a few highlights from the original bill. No telling what the one that gets passed will have in it. Just remember as you read this that none of it is law! Yet.

This bill would repeal estate and gift taxes for persons dying after 2008, with a phase out beginning in 2002. It would cut marginal income tax rates; allow a deduction for two-earner married couples; allow taxpayers 591/2 to make tax-free distributions from IRA’s to charities; expand education savings accounts by expanding the definition of qualified education expenses (including expenses for home schooling) and increasing the annual contribution limit to $5,000 in 2006; create a charitable contribution for non-itemizers; and permanently extend the research and experimentation credit.

Tax deposit rules eased for one million small businesses. Starting in 2001, businesses owing less than $2,500 in quarterly employment taxes may make tax payments once every three months. Before, firms owing $1,000 or more had to make payments monthly. IRS: This change will ease tax fillings and paperwork for one million businesses that deposit $6.6 billion in taxes annually - 13% of all employment tax deposits. The number of IRS notices sent to small businesses will decrease by 70%.

The right to practice Committee of NSA completed it’s proposed revision of the Legislative Policy Statement and is soliciting comments from Affiliated State Organizations and members of NSA.

The draft statement was taken to the Board of Governors in November, 2000, and is now in its exposure period. After receiving and reviewing comments and making modifications deemed appropriate, the Committee will take the finished product back to the Board for consideration in May, 2001. If Board support is given, the Statement will be acted upon by the House of Delegates at the Annual Convention in August, 2001.

Once approved by the membership through its elected Delegates, the Legislative Policy Statement will become the standard for NSA legislative activities. It will provide direction and to those officers and committees working in the areas of legislation and regulation and produce continuity and consistency of activities.

Remarks may be addressed to Michael A. Conners, 86 Washington Street, Poughkeepsie, NY 12601-2302 or can be e-mailed to taxstore@juno.com. Copies should be forwarded to me at P O Box 50068, Denton, TX 76206-0068 or e-mailed to samek@gte.net. The comment period ends March 31, 2001.

The Internal Revenue Service will offer a new, daily series of Tax Tips for the 2001 filing season and it began on January 2, 2001.

These tips will offer concise, useful information on topics affecting millions of taxpayers. These easy to read tips will cover a wide range of topics, from child credits and higher education benefits to Individual Retirement Accounts and Social Security issues.

More than 70 Tax Tips will be available, a new one for each business day until the April tax deadline, which this year will be April 16^th, since the 15^th falls on a Sunday.

On December 28, 2000 President Clinton signed a bill correcting the Installment Sale rule that prohibited accrual tax payers from using the Installment Method when selling property. It was to be retroactive therefore making the original bill null and void. This entitles those who filed returns using this rule to file amended returns and possibly receive refunds, depending on individual situations that are affected by this change.

Few investments today offer shelter from taxes. Still fewer provide genuine profit potential.

These tax sheltered investments are attractive to socially conscious investors, too, because they provide housing to low-income tenants.

The tax shelter comes from federal housing tax credits, which were created in 1986.

Tax credits are more valuable than tax deductions because they reduce your tax bill, dollar for dollar, no matter how much you earn. Deductions cut the amount you pay the IRS no more than 39.6 cents on the dollar. For most investors, deductions are worth .28, .31, or .36 cents per dollar.

Example: If you’re in the 31% tax bracket, a $3,000 deduction saves you $930.... while a $3,000 credit saves you $3,000.

Federal housing tax credits permit investors to lock in 10 years’ worth of tax reduction. You earn them by putting money into residential properties that are rented to tenants earning less than the local median income level.

You can earn the credits by investing on your own, but that may be difficult and the rules are complicated. Instead, you can join a partnership that will own many properties.

Note: Corporations won’t work because federal housing tax credits can’t be passed through to corporate investors.

Over a 10-year period, you may break even from the tax savings. Every $10,000 invested likely will generate about $1,000 per year in tax credits. (Although the credits run for 10 years, it may actually be 12 years before they’re all used because of the time it takes to develop some properties and rent them out.)

Tax credits probably will provide your only returns for 10 years or more. You are not likely to receive cash flow from rents, which are held below market levels for low income tenants.

Eventually, though, you may receive additional returns from the properties in the partnership....

..... Your partnership may be able to refinance its properties, paying out the borrowed funds as tax-free cash to investors.

Potential buyers include nonprofit housing groups eager to maintain affordable rent levels.

The demand for these properties far exceeds the supply. Even if the real estate is ultimately sold for only half of the original values, you likely would earn around 70%, after tax, from all sources, over the entire holding period.

Even better: If the properties hold their value or appreciate, your return will be higher.

Federal housing credits are not recaptured at the end of the deal, so there is no payback to the IRS.

Because such deals are so attractive, there are limits to the use of federal housing credits.

Caution: These credits can’t be used to offset AMT. You can carry forward unused credits for 15 years, but deferred tax breaks are less valuable.

Working with your tax pro, you determine that you’d trigger the AMT if you reduce your tax bill below $4,000.

Result: You can use up to $5,000 worth of these credits per year to reduce your tax bill from $9,000 to $4,000. Assuming a tax-credit “yield” of 10%, the maximum amount you can effectively invest would be $50,000. This would generate about $5,000 in credits per year.

You can invest in several different years as long as the total investment doesn’t exceed the recommended maximum for your tax situation.

You don’t have to invest $50,000. Federal Housing partnerships usually have minimum investments of $5,000.

Partnerships from companies such as Boston Capital and WNC & Associates are sold by many brokers and financial planners.

Before investing, read the sponsor’s reports to investors in other partnerships to see if they contain warnings about the properties or the tax consequences. Check that the sponsor will provide materials to help your tax preparer handle the necessary tax return schedules.

A few ounces of caution up front can prevent you from taking a pounding in the future.

Shirley Zipkin suffers from multiple chemical sensitivity syndrome, and heeding her doctors advice, built a specially designed home to accommodate her needs.

When the home was finished and she moved into it, she took a medical expense deduction of $775,000 for the cost of medically related home features that did not add to the home’s market value.

Snag: The Internal Revenue Service said only medical expenses incurred in the current year are deductible. It disallowed almost all the deductions because they were for costs paid in prior years while the home was being designed and built.

Court: Shirley could not deduct the medical costs until she received a medical benefit from them. Thus, none of the costs were deductible in earlier years, and they all became deductible when she moved into the home.

Thus, Shirley was entitled to deduct the entire $775,000 when she moved into the home – and to receive a housewarming refund from the IRS.

If you always do what you’ve always done, you’ll always get what you’ve always got.

This past July a new program, the Federal Payment Levy Program, created by the Taxpayer Relief Act of 1997 went into effect.

This gives IRS to right to levy on money due the taxpayer from the federal government. This is how it works:

Certain individuals and businesses with unpaid tax bills from whom the IRS has been unable to collect may be subject to a continuous 15 percent levy on money due them from the federal government.

In its initial phase, the program will reduce federal retirement benefits paid to individuals though the Office of Personnel Management and payments to vendors doing business with the government. Later, the program will expand to include federal employees salaries, some Social Security benefits and other federal payments.

When fully implemented, the program is projected to bring in an additional $478 million in revenues annually.

Just a reminder to most of you to remember the depreciation change that is in effect for like kind exchanges and involuntary conversions on or after January 3, 2000. We heard about this at the 1040 seminar in December.

The old asset, which was traded to acquire the new asset, will not be removed from the depreciation schedule and will continue to be depreciated. The status code will remain the same and a full year of depreciation will be taken in the year of exchange.

The primary tax effect of the new rules is to allow more rapid cost recovery, at least in the year of trade. However, the depreciation schedule for an individual who trades machinery and equipment frequently will be much more complicated. For Section 179 expensing, only the boot portion on a like-kind trade is eligible for to be expensed. Furthermore, only the boot portion is considered in determining whether more than $200,000 of qualifying Section 179 property was purchased and placed in service during the tax year.

Under the old tax rules, for trades and involuntary conversions before 1/3/00, the adjusted tax basis of the old asset was added to the boot paid for the new asset, and the entire amount was depreciated over the life of the new asset.

Under the new IRS rules, to the extent that the basis of the old asset transfers, the new asset is depreciated over the recovery period of the asset used the same method and convention. The additional basis, the boot, is treated as newly purchased MACRS property. In other words, the old asset continues to be depreciated as if it had not been traded.

PLEASE REMEMBER TO REPLY TO THE SURVEY QUESTION IN THE PRESIDENT’S MESSAGE. This is very important. Thanks, LaVerne