Untitled Document

Dear Family,

What a glorious week.

Our UPS driver pulled another of his ring and run stunts, depositing a plain brown corrugated box on my front stoop.

Oh joy! It was filled with bright, shiny books. THE BOOK is fresh off the presses - even in time for Chanukah. It's so pretty. And I skimmed it all in just one night. Now, I've got to order lots more as gifts.

Today's issue contains an interesting donation scenario. It's one of those things that, once you start thinking about it, possiblities keep emerging. And I just know that several of you will have comments about it - especially the Pros. It's taking up two spots in today's issue. So, let's see how creative you all are.

Also, I'd love to hear from you if you were ever in a studio audience for a television show and they gave the audience members some wonderful prize - like a car - just for being there. I don't mean waiting in the audience hoping to get selected to be a contestant. If you want to be included in an upcoming article, speak up. mailto:taxmama@taxmama.com?Subject=AUDIENCE

Now, I'm off...and will be gone until Wednesday. So, hold off on your questions until then.

Meanwhile, to keep you occupied, there's information below about a free teleclass by The Principal and a new e-book by Merle.

Best wishes,

Eva Rosenberg, EA Your TaxMama is watching...out for you..

----------------------------------------------------------------- Donating Upwards ---------------------------------------------------------

From: Grand Rapids, MI

Hi Tax Mama, You have done a great job with your newsletter with your warmth and personableness. Fair market value is the value of an item when a buyer is not compelled to buy nor the seller compelled to sell. If the fair market value of an item is virtually always no more than what one paid for it (no matter how rare the "fire sale" deal), how is there ever a situation in which either buyer or seller are "compelled"?

Isn't going out of business being compelled? Or liquidating the last of an inventory that sells normally for much more, to make space for new production? Short of a gun to one's head, buying or selling seems never to be compelled if the fair market value is always what one paid for it or less (except in the rare case of something like an antique, etc.). Also, Don Morris is under the impression that one must pay capital gains tax on donated items that have appreciated in value. I have commonly seen touted as a tax strategy the giving of appreciated assets such as stocks or real estate precisely in order to avoid paying capital gains and maximizing the benefit to the charity. Is this not correct? I really do need to know this one, as I like to give and am committed to giving as a life activity. And finally, what if my cost basis is zero, as in someone gave the items to me? And do I need to keep track of every single garage sale purchase I make to show cost basis in case I should donate? Thanks, Sarah

Dear Eva,

"Fair market value is the value of an item when a buyer is not compelled to buy nor the seller compelled to sell."

Almost, but not quite. Fair Market Value (FMV) is defined as: "The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell." CIR v. Homer H. Marshman, 5 AFTR 2nd 1528, 60-2 USTC 9217 (6th Cir., 1960). See also Reg. Sec. 1.170A-1(c)(2) The operative word here is "willing" and I believe that compulsion could be read as coercion which would render the "willingness" null and void.

I can think of a few ways in which a buyer or seller could be compelled; blackmail, racketeering, and ransom leap to mind

[TaxMama interjects - unwilling sellers would include those whose properties have been condemned, or are forced to liquidate due to a lien or other threat.]

The selling below market value of inventory because the goods are shopworn, obsolete, or slow-moving does not constitute compulsion; it is reasonable and standard business practice. These are "transfers in the normal course of business". The transaction must be bone fide, at arms length, and free from donative intent. see Reg. Sec. 25.2512-8

Speaking of donating appreciated property, a charitable gift is one made to a qualified organization. Gifts to individuals, regardless how needy, are generally not deductible.

For purposes of charitable contributions capital gain property is defined as property held over one year on which a capital gain would be recognized if it were sold at its FMV on the date of the contribution. So, if the gift is made to a qualifying organization there is no gain recognized.

In the case of ordinary income property the rules are different. The charitable deduction is equal to the property's adjusted basis. Ordinary income property includes inventory, capital assets held for less than one year, and §1231 property to the extent that ordinary income would be recognized due to depreciation recapture.

"What if my cost basis is zero, as in someone gave the items to me?" The donation is its FMV.

Example: Your mother gave you publicly traded stock worth $10,000. You donate the stock a year later to the burn unit at your local hospital when the stock is worth $15,000. The contribution is $15,000. You pay no tax on the gain, and deduct the $15,000 as a charitable contribution.

"Do I need to keep track of every single garage sale purchase I make to show cost basis in case I should donate?"

You do not need to, but if you want to take a charitable deduction it is advisable.

Roger A. Adams, EA TaxOverseas.com (coming soon)

[TaxMama comments - donating appreciated assets or business asset to charities, always brings up all kinds of little complications. If the donation is large enough to require a formal appraisal ($5,000 or more), get a written appraissal from a well-qualified appraiser. Someone whose credentials IRS can readily verify. That will reduce your chance of being audited. Otherwise, those large donations will generally attract scrutiny. So be prepared to defend your donation.]

----------------------------------------------------------------- Radio Tour ----------------------------------------------------------------

Tune in to the Small Business Advocate, with Jim Blasingame on Friday morning, December 17th at 5:30 a.m. EST. We'll be kicking off the new book...and giving away free copies.

----------------------------------------------------------------- Expanding on the Donations -----------------------------------------------

Continued from above.

This is what Sarah really wants to do:

I have the opportunity to buy the overstock, through a liquidation distributor, from a manufacturer of name brand sweaters. I can buy 1000 beautiful purple long sleeve turtle neck sweaters, brand new, for $1750, a one time deal (up to about 1300 sweaters, after which there are no more). They retailed for $30.

According to the paperwork my CPA gave me, one such sweater donated, in excellent condition, is permitted valuation at $20. That would mean 1000 would be a $20,000, which is what another gentleman I met did by his CPA's instruction when he bought 10,000 pair of pants on a distress/liquidation sale for his son who sells at flea markets, but then his son didn't want them.

Roger addressed most of my questions, but...a donation valued over $5000 must be accompanied by a qualified appraisal for this specific purpose, and if you can believe it, I couldn't find an appraiser in Grand Rapids who was qualified to evaluate sweaters! I had planned to use purchases of merchandise at distress sales to raise money for the development of a Christian university in Haiti to invest in the professional and business infrastructure there. The idea was to donate the items to my favorite charities, and then use the tax money saved to send to this project in Haiti.

Thanks

Sarah

All right, Sarah,

This intrigues me.

So, do you know what I would be apt to do?

I would get some local organization involved. Put out press releases....inviter reporters...' and auction off the sweaters this way. Each buyer buys two.

They keep one - and they donate the other back to the local charity to give to a woman who could use it.

1) You'll be able to get a specific total for the value of the sweaters (i.e. the amount you raised).

2) You'll be able to get the charity a lot more money than if you just donate the sweaters.

3) You'll be able to get the charity a lot more visibility.

4) Some women will still be getting sweaters...others may be getting money to help with the cold. Or something.

5) Your contribution deduction is defined and protected, because you can get the local charity to confirm the amount raised.

6) You can still use the tax money you saved for your offshore charity - the university in Haiti.

In fact, if your Christian university is run through a US organization, you might even be able to get another charitable deduction for the money you donate to them.

You could really make those sweaters go a long way.

How's that for an idea....?

Best wishes,

Eva Rosenberg, MBA, EA

http://www.TaxMama.com Small Business Taxes Made Easy http://snipurl.com/74dv or from Amazon.com http://www.amazon.com/exec/obidos/tg/detail/-/0071441689/mywishlistA/

----------------------------------------------------------------- Pets Breed SBDC ---------------------------------------------------------

Last week, Logan from Lake Worth, FL asked about opening a pet store. http://www.taxmama.com/AskTaxMama/285/article3.html

Don't forget the SBDC. The Small Business Development Center, a partnership between the Small Business Administration and a local educational institution, offers many great courses on business management at a very low cost. http://sbdcnet.utsa.edu/

They also offer individual consulting and assistance with marketing products and services and applying for SBA loans. For many years I have taught the IRS Small Business Workshop at the local SBDC. This one is free.

Linda Dorfmont E.A., CFP, CSA Southern California

----------------------------------------------------------------- Civilians in War Zones -----------------------------------------------------

From: Hawaii

Aloha Eva,

I am a nine-year Dept. of the Army Civil Service civilian employee and considering a temporary position of either a six, 12 or 18 months duration in Iraq.

While looking over the information fact sheet regarding the position, I was surprised to learn that civilian employees are not entitled to the combat area tax exemption that is given to the military members.

Why?

Joseph

Dear Joseph,

That is a VERY good question.

I have asked that, too.

Don't our leglislators care about all those civilians in war zones?

Ask your Congressfolk to change that law!

http://taxmamma.com/Articles/calltoaction.html

I certainly hope you succeed.

After all, all civilians working in the combat areas are in as much danger as military forces. It takes a serious amount of courage to place yourself in harm's way just to do your job.

I wish you well.

Best wishes,

Eva Rosenberg, MBA, EA

http://www.TaxMama.com http://www.iHelpMate.com

---------------------------------------------------------------- Because We Care ----------------------------------------------------------

Don't let yourself or your friend feel helpless. Share the Power - SCHOLARSHIPS FOR SELF-DEFENSE TRAINING AVAILABLE SHARE THE POWER:SELF DEFENSE TRAINING is gaining POWER! visit Share The Power - http://www.sharethepower.com

==========

A.N.G.E.L.S. DAY

Helping Seniors keep their pets http://angelsday.org/ Talk to Linda Baker for more information (310) 680-0798 LBaker6343@aol.com

==========

The Jeremiah Society asks "Who Will Care for the Children?"

Today, many of these people outlive their parents. And therein lies the problem. Once their loving caregivers are gone, who will care for them? And will they be able to care for themselves?

The Jeremiah Society, is working to help enhance and enrich the lives of developmentally disabled teens and adults in the Jewish Community Please Call Rose Lacher, (714) 997-8193

http://www.jccoc.org/adults.html

----------------------------------------------------------------- MONEY FUNNIES ------------------------------------------------------

Her First Football Game

A guy took his blonde girl friend to her first football game. They had great seats right behind their team's bench.

After the game, he asked her how she liked the experience. "Oh, I really liked it," she replied, "especially the tight pants and all the big muscles, but I just couldn't understand why they were killing each other over 25 cents." Dumbfounded, her date asked, "What do you mean?"

"Well, I saw them flip a coin and one team got it and then for the rest of the game, all they kept screaming was: 'Get the quarterback! Get the quarterback!" Hel-LLLO! It's only 25 cents!

----

Courtesy of Blakely Sanford, EA San Diego

----------------------------------------------------------------- IRS NEWS ---------------------------------------------------------------

Courtesy of IRS

IRS Simplifies FUTA Deposit Rules

The Internal Revenue Service announced it will increase the minimum threshold for Federal Unemployment Tax Act (FUTA) deposits, a move that will reduce burden for more than 4 million small businesses.

Under the new rules effective Jan. 1, 2005, employers are required to make a quarterly deposit for unemployment taxes if the accumulated tax exceeds $500. The current threshold is $100.

"The IRS is committed to reducing burden on taxpayers whenever we can," said IRS Commissioner Mark W. Everson. "The new rules will help cut paperwork for millions of small businesses. The IRS Office of Taxpayer Burden is continually reviewing what other steps we might take that will save money and time for businesses."

The maximum amount the IRS collects from employers per employee is $56 per year, if the employer timely made state unemployment tax payments. The current $100 threshold requires most employers with two or more employees to make at least one federal tax deposit per year.

Raising the requirement to $500 will reduce burden for employers with eight employees or less by eliminating their requirement to make up to four FUTA tax deposits yearly. The $100 minimum deposit threshold was established in 1970.