Free eNewsletter & Special Promotions

Volume 5, Issue 3, March 2007

If the images in this newsletter don't appear, make sure you are connected
to the Internet and click here.

It Is Possible to Realize Tax Benefits from
Investing in a Failed Business...

If you want to invest in a business, consider making that investment via Section 1244 stock rather than cash. Why? You could realize tax benefits if the business ultimately fails.

The benefits of Section 1244 stock over cash investments involve being able to claim any losses associated with the stock investments as ‘ordinary’ losses as opposed to ‘capital’ losses on your tax return.

Ordinary losses are more attractive from a tax standpoint, because you can deduct up to $50,000 in losses of Section 1244 stock if you are a single filer, or $100,000 in losses if you are married and jointly file. The maximum excess capital loss that an individual taxpayer may deduct in one year is $3,000. Capital loss amounts in excess of $3,000 are carried forward to offset capital gains in future years.

An example: A married filing jointly taxpayer with $25,000 in capital gains (who is in the 35% tax bracket) invests $75,000 in a company that fails. If the $75,000 investment in the failed business was not made as a Section 1244 stock purchase, the loss is viewed as a capital loss. Therefore, $25,000 of the $75,000 loss will be deducted against the $25,000 in capital gains. An additional $3,000 can also be deducted against other ordinary income for a total deduction of $28,000. The remaining $47,000 must be carried forward to future tax years. This results in a current year tax savings of $4,800 computed as follows:

$25,000 * 15% (capital gain rate) + $3,000 * 35% (ordinary income rate)

If that $75,000 investment in the failed business was made as a Section 1244 stock purchase, this person could then deduct the full $75,000 as an ordinary loss in the year the company actually failed, resulting in a tax savings of $26,250 computed as follows:

$75,000 * 35% (ordinary income rate)

Therefore, this taxpayer saves $21,450 ($26,250 less $4,800) if the investment is in Section 1244 stock.

There are very specific requirements regarding the company in which the investment was made and how the Section 1244 stock was issued. Proper planning is extremely important with these kinds of investments to ensure that you receive all of the tax benefits available to you. Your friendly Kemper professional can assist you with tax advice, planning, and preparation of your return. Contact us today!

Back to the Top

Tax Scams: New in 2007

With tax season now in full swing, tax scams and illegal schemes abound – don’t take chances with an unlicensed tax preparer. The IRS warns taxpayers to use caution and hire only reputable tax preparers in order to steer clear of the illegal practices touted by unlicensed preparers and scam artists.

In addition to the scams that circulate each year during tax season, the IRS has identified several new scams for this year.

Telephone excise tax refund abuse: In what is identified as the number one scam by the IRS, some taxpayers have been requesting excessively large telephone excise tax refunds – some as much as the total amount of their phone bills. Only the 3% excise tax is includable in the refund request, however, and the IRS is actively investigating potential telephone excise tax refund abuse.

Roth IRA abuse: Taxpayers cannot shift under-valued property to a Roth IRA account – to bypass the maximum contribution limit or avoid taxation on taxable income, for example.

Disguising corporate ownership: The IRS is working to identify owners of domestic shell corporations set up exclusively to underreport income, avoid filing tax returns, facilitate money laundering, commit financial crimes, and harbor possible terrorist finances by masking the ownership of the business or financial activity.

American Indian Employment Credit misuse: The Indian Employment Credit available for businesses that employ Native Americans or their spouses is not available to employees. Taxpayers have been submitting returns claiming reduced taxable income based upon the credit. Further, some preparers are advising Native Americans that they are not subject to federal taxes, which is not the case.

Structured entity credits: Partnerships set up exclusively to own and sell credits, such as state conservation easement credits and federal rehabilitation credits, are not viable businesses. In this popular scam, the credits are the only assets owned by the partnership. After all of the credits are used, investors receive a K-1 that states that the initial investment was a total loss, and the loss is deducted on the individual’s tax return. However, the investments are not valid, and the losses are not deductible.

The IRS reminds you that you are responsible for the information reported on your tax return, and you risk penalties and possible prosecution if you report false information. To read the full “Dirty Dozen” list of tax schemes identified by the IRS for the 2007 tax season, click here. Additional information is also available on the IRS’s “Tax Scams” Page.

Please be wary of these schemes and any tax preparer who suggests that you participate. The certified public accountants and consultants at Kemper CPA Group LLP are available to help you with all of your tax preparation needs. Contact us today!

Back to the Top

Running Out of Time?

Only about a month remains until the tax filing deadline – what to do? You may be able to file an extension, which would allow you to wait until October 15, 2007 to file; however, it is important to remember that an extension only extends the amount of time you have to file your return, not the amount of time you have before you must pay any taxes due. The IRS charges interest on unpaid taxes, regardless of whether you have filed an extension.

If you wish to file an automatic extension, you must use Form 4868, Application For Automatic Extension of Time To File U.S. Individual Tax Return. Your tax preparer can help you file electronically, using E-File, and you can make tax payments using an electronic funds withdrawal. Additionally, for a convenience fee, you can use a credit card to pay your estimate of income tax due using one of the service providers recommended by the IRS. You can also fill out Form 4868 and mail it, along with a check or money order for taxes due, to the address shown on the last page of the form.

Additional rules may apply for individuals who are living outside the United States, are out of the country when the six-month extension expires, or are serving in a combat zone or hazardous duty area.

The deadline for filing your taxes and for filing for an automatic, six-month extension is April 17, so it is important to discuss matters with your tax preparer right away. The tax preparers at Kemper CPA Group LLP can help you file an extension – contact us today!

Back to the Top

Tax Audits: What's the Risk?

Increased tax audits by the IRS resulted in the collection of a record $48.7 billion in enforcement revenues in 2006. For most tax return categories, the number of audits increased over the previous year. While there is a three-year window of time during which the IRS can make tax assessments, the IRS can extend that timeframe when there is a suspicion of underreported income.

IRS Commissioner Mark W. Everson recently released the latest IRS audit statistics. For fiscal year 2006, which ended September 30:

Nobody wants to be audited, but not all audits result in face-to-face contact with an IRS agent – some discrepancies can be cleared up through correspondence with the IRS. The IRS allows taxpayers to appeal its findings, and the Taxpayer Advocate Service can help taxpayers settle problems and disputes.

Submitting an accurate return can reduce the risk of an audit. The certified public accountants and consultants at  Kemper CPA Group LLP can help you with all of your tax preparation needs. Our professionals provide quality tax preparation services and can assist you in the event that you are audited. Contact Kemper CPA Group LLP for additional information.

Back to the Top

New Virus Strains Attack Business Networks

Recent variants of the RINBOT or DELBOT virus, which first circulated in March of 2005, began spreading in mid-February and have been targeting vulnerable business networks.

The virus, which takes advantage of security flaws in popular anti-virus software, has been targeting MS sequel servers (SQL), where it exploits weaknesses in networks running the Windows operating system. Once the virus has infiltrated the network, it spreads quickly, turning the network into a zombie network, used for any number of malicious activities.

A well-protected network includes protection at the level of the individual workstation, the mail server, and the Web server. As always, Kemper Technology Consulting reminds you to protect your workstations and servers by:

Additionally, you should not use simple or default passwords or rely on “out of the box” settings on software and hardware. You can better safeguard your Web server by utilizing an Intrusion Detection System, which protects your server from both Denial of Service attacks and virus attacks.

Should you have any questions about protecting your network from RINBOT or DELBOT and other malicious viruses, contact Kemper Technology Consulting today. Our consultants can provide you with the solutions for all of your network security needs.

Kemper Technology Consulting
Robinson, IL
618-546-5633
www.kempertc.com

Evansville, IN  •  Indianapolis, IN  •  Paducah, KY  •  Effingham, IL

Back to the Top

Please be advised that, based upon current Internal Revenue Service (IRS) rules and standards, the advice herein is not intended to be used, nor can it be used, as the sole basis for decisions. Additional issues may exist that could affect the treatment of the individual transactions, and this narrative does not provide a conclusion with respect to all such issues.

You are currently subscribed as: EMAIL_ADDRESS