TaxEsqBlog -by Ronald J. Cappuccio, J.D., LL.M.(Tax)

If your C corporation is thinking about electing S corp status, make sure you plan ahead or you may wind up owing a substantial tax on unrealized profits for the 10 years following the conversion. The built-in gains (BIG) tax, which can be quite onerous, equals the highest corporate tax rate (currently 35 percent). If your firm is liable, the tax is paid at the corporate level and the gain is taxable again at the shareholder level. The net built-in gain subject to tax during a year is limited to your firm’s taxable income for the year. You carry forward any excess to the next year.

College tuition deduction. You might be able to deduct qualified higher education expenses of up to $2,000 or $4,000 (depending on your income) paid on behalf of yourself, your spouse, or a dependent. The write-off is taken as an adjustment to income, which means taxpayers can claim it even if they do not itemize deductions. It can be advantageous for those who earn too much to claim the HOPE or Lifetime Learning tax credits because the income limits are higher. Previously set to expire, the Tax Relief and Health Care Act of 2006 extends this deduction through December 31, 2007.

The US Supreme Court denied converting a Bankruptcy when a man hid an Asset Protection Trust in his Bankruptcy. Be careful when trying asset protection. Click Here for the full article about the Marrama case.

How much of a tax break or hike would you see under the proposal? Figure out the difference between the total cost of your healthcare plan and the federal cap on your health tax benefit ($7,500 for single coverage; $15,000 for family coverage). Then multiply that difference by the sum of your top tax rate plus 7.65 percent (which is the portion of payroll taxes you pay for Social Security and Medicare). This will give you a ballpark idea of your tax savings or tax increase. So if your plan costs $12,000, the difference between your expense and the $15,000 family deduction is $3,000. If you're in the 25 percent tax bracket, you'd multiply $3,000 by 32.65% (25% + 7.65%), which would give you tax savings of about $980. Conversely, if you pay $3,000 more than the deduction cap for insurance, you'd pay an extra $980 in income tax and payroll tax.

Democrats push for more IRS Audits! January 17, 2007 -House Democrats are holding hearings on whether federal tax collectors are too quick to close audits of large companies, potentially leaving billions of dollars in taxes uncollected. Reps. Richard Neal, D-Mass., and Rahm Emanuel, D-Ill., said they were concerned about a recent story in the New York Times in which IRS employees said they were under pressure from superiors to quickly close audits with agreements to collect only a fraction of the taxes that are potentially owed. IRS officials told the Times that the complaints by the IRS employees were misguided. Debbie Nolan, the I.R.S. official in charge of auditing large and medium-size businesses, denied that audits were being closed over the objections of agents who had evidence that significant additional taxes were owed, the newspaper reported.

IRS to Target Schedule C Filers In a recent telephone conference, IRS commissioner Mark Everson said that they will be conducting more audits on individuals running unincorporated businesses (i.e. self-employed individuals). While Schedule C filers have long been audit targets for the IRS, they are now stepping up their audit efforts because they believe that self-employed individuals represent a large portion of those individual taxpayers underreporting their income. If you are self-employed and file Schedule C, always keep detailed and organized records, don't deduct your personal (non-business) expenses on your Schedule C and make sure you report all of your income. You are already on the IRS radar; there's no need to make their job easier.

Wide-Ranging Tax Gifts For Businesses and Individuals Before heading home for the holidays, Congress passed a long-awaited bill that retroactively extends several valuable tax breaks that expired last year. The law also includes a new deduction for certain taxpayers buying homes in 2007, and it contains several provisions that make Health Savings Accounts more attractive. Why Some IRS Forms Are Already Out of Date For the 2006 Tax Year The Tax Relief and Health Care Act of 2006 is filled with many provisions that can save taxpayers money. Unfortunately, it was passed after the IRS printed the tax forms and other materials it provides to taxpayers. In some cases, printed materials will not have a line for certain deductions, such as the one for state and local sales taxes. The tax agency is now scrambling to print new mailings, update information on its Web site and launch a media campaign to inform taxpayers about the new and extended tax breaks. Professional assistance in th...