November 2004 Online Newsletter

What's New in Taxes

Another Tax Bill Is Passed

In October Congress passed a second piece of tax legislation, this one called the American Jobs Creation Act of 2004. The law's primary purpose is the repeal of the foreign sales corporation/extraterritorial income (FSC/ETI) tax regime. Congress used the bill as a vehicle for a number of other unrelated tax provisions, among them the following:

* Extending through 2007 the $100,000 first-year expensing deduction for the purchase of business equipment.

* Limiting the first-year expensing allowed for sport utility vehicles purchased for business use to $25,000.

* Allowing taxpayers who itemize deductions to deduct state and local sales tax in lieu of state and local income tax in 2004 and 2005.

* Extending the depreciation period from 39 years to 15 years for qualified leasehold improvements made to nonresidential real property and qualified restaurant property.

* Changing the S corporation rules to allow 100 shareholders and to treat family members as one shareholder.

* Tightening the deduction rules for charitable donations of vehicles and intellectual property.

Does Selling On EBay Interest The IRS?

You've set your price, uploaded a photo, and established an account so you can accept online payment. Now you're ready to sell the antique clock you inherited from your mother's sister. If you're successful, tomorrow you might just auction off those power tools that are cluttering up the garage. You're a "social" seller, making a few dollars disposing of unused personal property via an Internet marketplace. No need for the IRS to get involved. Or is there?

While the common perception is that casual transactions taking place in cyberspace are not taxable, as a general rule of thumb, if you have income, the IRS wants to know. The rule, which pertains to all types of income and has no minimum limit, usually applies even if you aren't planning to make money. Additionally, when the activity you're engaged in is not for profit, related expenses are deductible only if you itemize, and then only to the extent they exceed 2% of your adjusted gross income.

You can, however, reduce the selling price by your tax basis in the items you sell. For example, suppose the antique clock was valued at $1,000 when you inherited it from your aunt. That's your basis. You'd subtract the $1,000, along with any selling expenses, to arrive at the net profit, which is the amount you'll pay tax on. Because antiques fall into a special category of capital gains the IRS calls "collectibles," you'd be taxed at a maximum rate of 28%. Note: If you're in a lower tax bracket, the maximum rate may not apply.

What happens if you sell those power tools for less than you paid for them — meaning you have a loss? Since your selling activities are a hobby, the loss is not deductible for tax purposes. In this case, you can't deduct the selling expenses either. You have no taxable gain and no tax deduction.

Keep in mind that if you choose to turn your occasional sales into a real business, different rules apply and other tax issues may affect you. If you have questions about how to report Internet sales you've made or are planning to make, give us a call.

What's New in Financial Strategies

"Check 21" Makes Changes You Need To Know

Check 21. Sounds like a winning chess move, but in reality it's a new law that took effect October 28, 2004. More properly known as the Check Clearing for the 21st Century Act, the legislation may change your banking habits.

Here's how: In the past, checks you wrote were physically shipped through the monetary system, eventually ending up back at your bank. The process could take a few days, resulting in "float," which is the length of time between payment and processing.

Now, Check 21 allows banks to create and exchange electronic reproductions of checks. Instead of days, payment might be deducted from your account in a matter of hours.

* Rethinking your account. You may need to increase your minimum balance to maintain an adequate buffer. In addition, review your bank's policy for placing holds on deposits. Selecting a direct deposit option for regular receipts like your paychecks might help avoid bounced checks and the related charges. A third alternative is to activate overdraft protection.

Another change: Check 21 authorizes use of a "substitute check" — a special paper reproduction created from the electronic copy.

Because banks using the new substitute check are allowed to destroy your original check, the reproduction is intended to be the legal equivalent. That means you can use substitute checks as proof of payment.

Note: Since original checks may no longer exist, your monthly statement won't include them. In their place, your bank might offer alternatives, or the choice of receiving no enclosures.

*A new awareness. You still have the right to challenge unauthorized transactions and to have money re-credited to your account. However, settling disputes will require a substitute check, which you'll need to request. Your bank may provide these online.

Be aware that the "images" some banks return with your statement are generally not the same as substitute checks.

Many financial institutions have already sent the required notification of the Check 21 law. If you have questions about how the new rules will affect you, see your bank for details.

Chuckle of the Month

Murphy would agree with these laws

You're familiar with Murphy's Law: If anything can go wrong, it will. Here are some other laws Murphy could have written.

* The spouse who snores louder always falls asleep first.
* When weeding, the best way to make sure you're picking a weed and not a valuable plant is to pull on it. If it comes out of the ground easily, it is a valuable plant.
* The heavier the package and the farther you have to carry it, the more your nose itches.
* The easiest way to find something lost around the house is to buy a replacement.
* The bar code in the checkout line won't work on items you're embarrassed to be buying.

The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.