NEWS FROM BPS

New Employee

Karen A. Ginnett, CPA, joined Bauknight, Pietras & Stormer in November. Karen has over 18 years of experience in public accounting and will provide tax compliance and planning services for individuals, corporations and partnerships. Karen has experience working as an auditor in a state tax agency and has extensive experience with state income tax issues. She received her B.S. degree in accounting from the University of Maryland and received her Masters in Taxation from Golden Gate University in Seattle, Washington.

Karen and her husband, Roger, recently moved to South Carolina from Boise, Idaho and are looking forward to warmer weather and a longer golf season.

Speeches and Seminars

Tom Pietras will speak at the Beacon Group’s Winter CPE & CLE seminar on December 2, 2005. Tom will be covering “Ethics and Rule 101-3” and “Internal Controls and Fraud Prevention”.

On December 13, 2005, Chris Stormer will be speaking to the Information Technology Council. The topic of his speech is “Lessons Learned From a High-Tech Flameout”.

TECHNICAL ISSUES

’Tis the season - Year-end charitable and family gift giving

Over the past year, Americans have shown a virtually unparalleled spirit of generosity in response to a series of natural disasters. There are still a great many needs created by these calamities as yet unmet. As the seasons progress from fall to winter, we move into the time of year most closely associated with giving to others: to those less fortunate, to causes and organizations, and to family members. The fact that this season coincides with the end of the tax year gives taxpayers the opportunity to take advantage of charitable giving provisions in the Tax Code while ensuring that they do not run afoul of the gift tax laws.

Charitable giving
In response to several natural disasters over the past year, Congress has responded with several temporary measures designed to encourage charitable giving. In the aftermath of the tsunami that struck December 26, 2004, the deadline for making contributions to the relief effort deductible in the 2004 tax year was extended to January 31, 2005. Ordinarily, charitable contributions are deductible in the year made, but those contributions made in January of 2005 may be deducted in either year. Taxpayers may wish to amend their 2004 returns to maximize the benefits of this deduction.

In the Katrina Emergency Tax Relief Act (KETRA), Congress again expanded the charitable contributions rules, this time removing the 50% adjusted gross income (AGI) limitation on cash contributions made between August 28 and December 31, 2005 and the AGI-based phase-out of itemized deductions. This provision applies to all contributions made to charitable organizations during this period, not just those to hurricane relief. Therefore, during this short window of opportunity cash (or check) contributions to your church or alma mater qualify for this no-cap limit. Although this provision typically will only affect those with a large amount of disposable income, it is a provision for many more to look into if they have been planning a one-time large gift to their favorite charity. Senate Finance Committee Chairman Charles Grassley explained that Congress was concerned that other organizations relying on donations would suffer, as they did following September 11, 2001. Excess contributions may still be carried forward as many as five tax years.
 
In addition, KETRA also included expansion of the provision for donated food inventory to include all business entities, not only C corporations, and for donation of book inventories to schools. Finally, a tax credit is available to individuals who open their principal residences to persons displaced by Hurricane Katrina. The credit is $500 for each person who is given free lodging for at least 60 days in either 2005 or 2006. The maximum amount of the credit is $2000 total over both tax years.

Not all of the recent changes in the tax law have made it easier for individuals to claim tax benefits from charitable contributions. The American Jobs Creation Act of 2004 made it more difficult to deduct the "Blue Book" value of donated automobiles, in most cases limiting the deduction to the value realized by the donee organization. Donors must obtain statements from the donee organization stating the expected use for the donated vehicle, whether for resale, organizational use or distribution to a needy individual. If the vehicle is to be resold within 30 days of the donation, the deduction is limited to the amount realized in the sale by the organization. As with all noncash donations over $250, the donor must also receive written substantiation of the contribution.
Some taxpayers may find it advantageous to donate appreciated stock or a vacation home rather than selling stock and donating cash. A donor of stock is entitled to deduct the fair market value of the stock and does not have to recognize capital gains. While there is a capital gains exclusion for a principal residence if you were to sell it, this does not apply to vacation homes. A taxpayer may even donate a partial interest in a vacation home and reserve the right to its use for part of the year. This effectively provides a double tax savings by avoiding the capital gains and reducing taxable income by the value of the stock.

Family giving
When making gifts other than to charitable organizations, it is important to be aware of potential gift tax consequences. For the 2005 tax year, the annual gift tax exclusion amount is $11,000 per recipient; it increases to $12,000 for 2006. A taxpayer is permitted to give to an unlimited number of recipients, and provided the value of all money and property given to each individual is $11,000 or less, no tax will be owed and no return need be filed.

There are several exceptions to the general rule on taxable gifts. Married couples can effectively double their nontaxable gifts to individuals by electing to split the gifts. However, a gift tax return must be filed by April 15 of the following year to make the election. Direct payments of medical and educational expenses are not included in taxable gifts, so rather than giving a relative money for college, it may be preferable to make a tuition payment directly to the educational institution. Gifts to spouses are also not included in taxable gifts.

Even if a gift exceeds the annual exclusion amount, it may not be subject to tax. That is because in addition to the exclusion, a portion of the estate and gift tax credit may also be applied to lifetime gifts. The amount of the credit is $345,800, which means that up to $1 million in otherwise taxable gifts is not subject to tax. To apply the gift tax credit to lifetime gifts, a taxpayer must file Form 709, U.S. Gift and Generation-Skipping Tax Return, and indicate that the credit is being used.

Business gifts
Business owners may wish to give gifts to their employees, suppliers or clients. In these instances, it is possible to be too generous. In order to avoid tax consequences, gifts must be of a de minimis nature, which the IRS has interpreted to mean not in excess of $25. Larger gifts to employees must be reported as taxable compensation, which means withholding taxes. Businesses may give larger gifts to clients, but will not be able to deduct more than $25 as business expenses. In some cases, gifts of food and drink, tickets to cultural or sporting events and the like may also be treated as meals and entertainment expenses, but are then subject to the 50 percent limitation. Naturally, a business owner who recharacterizes a gift as some particular type of deductible expense because of its cost will want to make certain the characterization can be substantiated.

While we are at times reminded that the true spirit of generosity impels us to give without thinking of the cost, it is important to remember that with some foresight and planning, it is possible to avoid being generous at tax time, leaving more for gifts in the days to come.

Job Tax Credit

South Carolina Code Section 12-6-3360 provides a job tax credit against South Carolina income tax or insurance premium tax for a taxpayer creating new jobs in South Carolina. Sole proprietorships, partnerships, corporations, S corporations, and limited liability companies are eligible for the credit. During the 2005 legislative session, the job tax credit was expanded to make it available to most types of small businesses (i.e., a business with 99 or fewer employees) who create and maintain a required minimum monthly average number of new, full time jobs by reducing the required monthly average increase of new, full time jobs from 10 jobs to 2 jobs for most types of qualifying businesses.

The job tax credit statute rules and requirements can be complex. For additional guidance or to determine whether you may be eligible for this credit, please call Ken Bauknight (803-771-8943) or e-mail Ken.

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