Year-End DOs & DON’Ts for Condominium and Homeowner Associations

DOs

1. Consider whether the budget should include any projected shortfall, or whether there should be a special assessment.
2. Consider the current expected delinquencies, and be conservative.  Otherwise it could be painful when subsequent years budgets are prepared.
3. Consider special projects that cannot be fully funded from reserves.
4. Consider increases in expenses, and be realistic about reduction of costs.
5. Anticipate contracts that expire, and contracts that automatically renew.
6. Include in every annual meeting a membership vote to approve a resolution for tax purposes (Revenue Ruling 70-604, allowing carryover of excess membership income, if any, to next year).
7. Be sure that the financial statements include the prior year’s audit adjustments.
8. Be sure that all reserve expenditures are ratified by the Board.
9. Follow the statutory procedures for budget approval.
10. Determine if the Association’s net worth (operating fund balance) is adequate.  Consider an assessment for additional working capital.
11. Review basic financial controls to minimize waste and any possibility of misappropriation of Association funds. 

DON’Ts

1. Don’t post any current year expenditures to the beginning fund balance.
2. Don’t just annualize every expense when preparing the budget.  Understand every category, and what needs to be included in next year’s budget.
3. Don’t be political in the budget process.  Sound fiduciary responsibility dictates working for the best interest of all owners.
4. Don’t let payables get delinquent.  Otherwise, this could result in a poor credit rating, and jeopardize basic services as well as insurable interests.

WHEN IN DOUBT, CALL KANE & COMPANY, P.A. !

Top Five 2010 New Year’s Eve Tax Tips

2009 ends on a far more hopeful note for the economy than it began.  And the advent of 2010 presents some unique tax planning opportunities for many individuals.   However, here is fair warning. Keep your hands on your wallets. Prospects are strong that Washington will pay for proposed health care reform and attempt to shrink the budget deficit by raising your taxes over the next few years.

Although middle income taxpayers may get a reprieve from these planned tax hikes, it is almost assured that the top income tax rates (paid by couples making more than $250,000, and singles with incomes over $200,000) will revert to Clinton Administration levels.  The tax cuts enacted by the Bush Administration are due to expire at the end of 2010.  If Congress does not change the law, the top income tax rate in 2011 is scheduled to rise from 36 to 39.6 percent – and –  the top 15 percent long-term capital gains rate will hit 20 percent. Also quite noteworthy, after 2010, all dividends will be taxed at ordinary income rates.  Yes, that means a potential tax increase from 15% to 39.6%.

Let’s not think tax doom and gloom.  This day promises a new year full of opportunity. So as 2009 quickly comes to a close, let’s focus on keeping your future taxes down in 2010 and beyond. 

Here are five top tax tips for tax year 2010.  The first two are great tax planning opportunities available tomorrow that may never be seen again after 2010.  Starting in January, anyone can convert a traditional IRA to a Roth IRA, whose eventual withdrawals will be tax-free. And some homeowners who trade up (or down) may get a $6,500 federal tax credit.

2010 Tax Tip #1. Consider converting your IRA to a Roth IRA

In the past, investors could contribute to a Roth IRA only if their income was under $100,000. But starting in 2010, this income restriction is gone. This is great news, since your Roth IRA earnings come back to you tax-free. And this could be especially smart if you plan to transfer money to heirs someday, since your heirs will get the Roth proceeds tax-free.

So if you have a traditional IRA, whose withdrawals will be taxed, seriously consider converting it into a Roth IRA to escape future taxes.  Investors who convert in 2010 can spread the tax impact over a 2 year period for 2011 and 2012. Plans that are converted to Roth IRAs in 2011 or 2012, or any time in the future after 2010, will get taxed on everything in the year of conversion.

Keep in mind that conversion is not right for everyone. For starters, when you convert, you will need to have enough in savings to pay the taxes on the IRA principal plus what your IRA has earned. Also, the younger you are, the bigger the benefit of converting, since your retirement account will have more time to grow tax-free.  Do have a long talk with your tax advisor to design the right strategy for you.

2010 Tax Tip #2. Act fast to grab the home-buyer tax credit

Although the $6,500 tax credit for home purchases ($8,000 for first-time buyers) is available through June 30, binding contracts must be signed by April 30. So if you want to get the credit, submit your offer very, very soon.

2010 Tax Tip #3. Fund your tax-deferred plans and elective salary reduction plans to the max.

Exactly how taxes might go up in 2010 and who will owe more may be a mystery, but one thing is certain: taxes are not going down. So you will want to reduce your taxable income as much as possible by funding your retirement plans to the max.  That means stuff as much as possible into your 401(k), IRA, or Keogh next year. In 2010, the maximum contribution amounts are unchanged.  They are $16,500 for 401(k) and 403(b) plans, $5,000 for IRAs and $6,000 for IRA account holders age 50 and above.

Pile cash into HSAs and FSAs.  If your employer offers a pre-tax health savings account — and you are signed up for it — in 2010 you may contribute up to $3,050 for yourself and $6,150 for your family. Flexible spending accounts are capped at $5,000. It is too late to designate FSA money for 2010, but make your open enrollment selections accordingly for 2011.

2010 Tax Tip #4. Consider selling appreciated stocks and funds

Odds are high that the long-term capital gains tax rate will rise in 2011, as planned, for anyone above the 15 percent tax bracket. So if you’re single with an income over $34,000 or you and your spouse make more than $68,000, you should count on a capital gains tax rate increase after 2010. While you should never sell an investment wholly for tax purposes, if you own appreciated stocks or equity funds and were planning to sell them, do it before the end of 2010 and avoid owing higher taxes on their gains. Plan to rebalance your portfolio in 2010.  Whatever you do, do not fall victim to procrastination and postpone considerations until 2011.  2010 is the year for action.  

2010 Tax Tip #5. Keep an eye on Washington

The abundant tax legislation experienced throughout 2009 is promised to continue well into 2010.  Two hot issues remain unresolved and on the front burners.  Keep your ears open for developments in Health Care Reform and the ongoing saga about 2010 and the uncertain Estate Tax. 

Although our legislators have taken a break for the holidays, heated debates about the vision for and path to Health Care Reform will continue.  The only certainty is that Health Care Reform will result in tax increases for businesses and individuals.   For that reason, refer to tips 1-4 again.

And, although it is unlikely that the planned estate-tax repeal for 2010 will actually happen, uncertainty still reins. 

Wait until the rules get set before making any estate-planning moves. But if Congress, as expected by many experts, reinstates the $3.5 million exclusion with the 45 percent inheritance tax on estates over $3.5 million – and you have an estate worth more than that amount – you should definitely meet with an estate attorney to craft a will with a bypass trust that documents your personal wishes and incorporates wise tax savings strategies.

If you want to start shrinking your estate in 2010, both you and your spouse can give your children, extended family and faithful friends up to $13,000 each tax-free. Hopefully, that will brighten their new year and yours.  

Those are our Five Top Tax Tips for 2010.

Best wishes to all for a joyous, healthy and prosperous New Year!

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Basis overstatement can trigger 6-year limitations period under new regs

T.D. 9466, 09/24/2009; Reg. § 301.6229(c)(2)-1T, Reg. § 301.6501(e)-1T; Preamble to Prop Reg 09/24/2009

IRS has issued temporary regs under which an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items.

RIA observation: Recently, IRS has lost many cases in the courts on the issue of whether a basis overstatement is an omission of income for purposes of the 6-year limitations periods. As explained below, IRS is seizing on language in one decision that it could issue clarifying guidance on this subject.

Background. Code Sec. 6501(a) generally provides that a valid assessment of income tax liability may not be made more than 3 years after the later of the date the tax return was filed or the due date of the tax return. However, under Code Sec. 6501(e), a 6-year period of limitations applies when a taxpayer omits from gross income an amount that’s greater than 25% of the amount of gross income stated in the return. For a trade or business, gross income, for this purpose, means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services. (Code Sec. 6501(e)(1)(A)(i))

Subject to the exceptions and special rules, the period for assessing tax attributable to a partnership item (or affected item), for a partnership tax year won’t expire before the date that is three years after the later of: (1) the date the partnership return was filed, or (2) the last day for filing the return for that year (without regard to extensions). (Code Sec. 6229(a)) The period is six years where the partnership omits from its gross income an amount which is more than 25% of the amount of gross income stated in its return. (Code Sec. 6229(c))

Omission definition applies for both provisions. The preamble notes that an omission from gross income is not further defined in Code Sec. 6229(c) as it is in Code Sec. 6501(e)(1)(A). However, it stresses that, having defined a phrase in Code Sec. 6501, Congress need not redefine the same phrase when it is later used to extend that same statute of limitations. Thus, the temporary regs confirm that Code Sec. 6501(e)(1)(A) defines an omission from gross income both for purposes of section Code Sec. 6501 and for any extension of Code Sec. 6501 under Code Sec. 6229. (Reg. § 301.6501(e)-1T(a)(1), Reg. § 1.6229(c)(2)-1T(a)(1), T.D. 9466, 09/24/2009)

Clarification in the regs. The temporary regs clarify that, outside of the trade or business context, gross income for purposes of Code Sec. 6501(e)(1)(A) and Code Sec. 6229(c)(2) has the same meaning as gross income as defined in Code Sec. 61(a). Under Code Sec. 61(a), gross income includes “gains derived from dealings in property” and its regs further explain that gain equals “the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged.” Accordingly, outside the context of a trade or business, any basis overstatement that leads to an understatement of gross income under Code Sec. 61(a) constitutes an omission from gross income for purposes of Code Sec. 6501(e)(1)(A) and Code Sec. 6229(c)(2). (Reg. § 301.6501(e)-1T(a)(1), Reg. § 1.6229(c)(2)-1T(a)(1), T.D. 9466, 09/24/2009)

Court interpretations behind the clarification. Different interpretations given by courts to Code Sec. 6501(e)(1)(A) were behind IRS’s decision to clarify the regs. Relying on the Supreme Court’s opinion in Colony Inc v. Com., (1958, S Ct) 1 AFTR 2d 1894, 357 US 28, which dealt with an omission from gross income in the context of a trade or business, the Ninth Circuit and Federal Circuit recently construed Code Sec. 6501(e)(1)(A) in cases outside the trade or business context contrary to the interpretation provided in the new temporary regs, holding that an “omission” does not occur by an overstatement of basis. See Bakersfield Energy Partners LP v. Com., (2009, CA9) 103 AFTR 2d 2009-2712 discussed in Federal Taxes Weekly Alert 06/25/2009 and Salman Ranch Ltd. v. U.S., (2009, CA Fed Cir) 104 AFTR 2d 2009-5640 discussed in Federal Taxes Weekly Alert ¶ 10 8/6/2009.

IRS says it disagrees with these courts that the Supreme Court’s reading of the predecessor to Code Sec. 6501(e) in Colony applies to Code Sec. 6501(e)(1)(A) and Code Sec. 6229(c). IRS takes the position that when Congress enacted the ’54 Code, it was aware of the disagreement among the courts that existed at the time regarding the proper scope of section 275(c) of the ’39 Code. The changes that Congress enacted as part of the ’54 Code predated the Supreme Court’s opinion in Colony and were intended to resolve the matter for the future. Therefore, by amending the Code, including the addition of a special definition of “gross income” with respect to a trade or business, Congress effectively limited what ultimately became the holding in Colony, to cases subject to section 275(c) of the ’39 Code. Moreover, under Code Sec. 6501(e)(1)(A) of the ’54 Code, which remains in effect under the ’86 Code, when outside of the trade or business context, the definition of “gross income” in Code Sec. 61 applies. In this regard, IRS says it agrees with the opinions in Home Concrete & Supply, LLC v. U.S. (DC NC 2008) 103 AFTR 2d 2009-465 and Brandon Ridge Partners v. U.S., (DC Fl 7/30/2007) 100 AFTR 2d ¶2007-5107 (see Federal Taxes Weekly Alert 8/9/2007), which held that an overstatement of basis can constitute an omission from gross income for purposes of the six-year period of limitations.

Consistent with the Ninth Circuit’s suggestion in Bakersfield, the temporary regs clarify what constitutes an “omission from gross income” under Code Sec. 6501(e)(1)(A) and Code Sec. 6229(c)(2) , as amended in connection with the enactment of the ’54 Code and continuing in effect under the ’86 Code. IRS says that the reasonable interpretation of these provisions provided in the temporary regs, acknowledged by both the Ninth and Federal Circuits to be ambiguous, is entitled to deference even if the agency’s interpretation may run contrary to the opinions in those decisions. (T.D. 9466, 09/24/2009)

Period of applicability. The regs apply to tax years with respect to which the applicable period for assessing tax did not expire before Sept. 24, 2009 (the date of filing of the regs with the Federal Register). (Reg. § 301.6501(e)-1T(b), Reg. § 1.6229(c)(2)-1T(b))

RIA observation: Thus, it appears that IRS will continue to litigate this issue in all jurisdictions, even those that held against it before the regs were clarified. Whether courts will give deference to IRS’s clarified position or find that IRS overstepped its bounds, remains to be seen.

RIA observation: The preamble also noted that Code Sec. 6501(e)(1)(A)(ii) provides that the amount omitted from gross income does not include any amount disclosed on the return, or in a statement attached to the return, in a manner adequate to apprise IRS of the nature and amount of the item. While the regs did not provide guidance on this, IRS stressed that this disclosure exception applies to omissions from gross income resulting from basis overstatements. Accordingly, the Preamble states that taxpayers who adequately disclose the nature and amount of the omissions from gross income resulting from dealings in property will not be subject to the extended six-year statute of limitations. Exactly what that would require is unclear.

RIA Research References: For the six-year assessment period, see FTC 2d/FIN ¶ T-4201; United States Tax Reporter ¶ 65,014.15; TaxDesk ¶ 838,016.

Source:  Federal Tax Updates on Checkpoint Newsstand tab 9/28/09

CIRCULAR 230 DISCLOSURE

To ensure compliance with requirements imposed by the IRS, we are required to inform you that any U.S. federal tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of 1) avoiding penalties under the Internal Revenue Code or 2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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• Laurie Baad, CPA
• Carl Gadinsky, CPA
• Candido Fernandez, CPA

Kane & Company, P.A.

Kane & Company, P.A., Certified Public Accountants and Advisors is a professional services firm with offices in South and Central Florida and Las Vegas, Nevada. More than just an accounting firm, Kane & Company, P.A. has a multilingual staff offering an array of services to meet your financial needs.

The Firm has developed a solid reputation among its clients for delivering high quality professional services on a timely basis at a fair and reasonable fee. Its unique approach to serving clients’ needs combines the knowledge and expertise of a large firm with the personalized service of a dedicated regional firm. Kane & Company, P.A. strives to assist its clients, identify and understand their specific challenges, and develop affordable and efficient solutions. The results provide practical solutions with winning strategies for addressing accounting, audit, tax and business consulting needs.