under which the tax ends in 2010 but returns the following year with an exemption
of $1 million and a 55% maximum tax rate. Contrast that with the levels scheduled
to go into effect for 2009: A $3.5-million exemption amount and 45% maximum rate.
Lawmakers and estate planning professionals agree that this situation is untenable,
and that Congress has to pass estate tax reform legislation by the end of next year.
                And they’re close on the exemption. Obama would keep it at $3.5 million.
McCain favors $5 million. The key difference is where they would set the top rate:
McCain would cut the maximum tax rate to 15%, while Obama would set it at 45%.
Figure on a rate closer to 45%, since Democrats will keep hold of Congress in 2009.

                Both candidates support making the exemption portable for spouses.
                Such a change would greatly simplify estate planning for surviving spouses
by eliminating the need for taxpayers to set up trusts in their wills solely to save
on estate taxes. Couples also wouldn’t be forced to retitle assets to equalize estates.
Thus, when the first spouse dies, the unused exemption would simply pass through
to the survivor and be available for use when that spouse dies. With portability,
Obama’s proposal would effectively allow for a $7-million estate tax exemption
for couples and McCain’s plan would make it $10 million. Currently, if a spouse dies
without having fully used his or her exemption, the remaining exemption is wasted.

                A number of other issues would remain for lawmakers to resolve:
                The tax break for estate taxes paid to states. States are pushing Congress
to convert the current-law deduction back to a credit, which existed prior to 2005.
But Congress will balk at doing so because the change would lose too much revenue.
                The gift tax. The lifetime gift tax exemption is $1 million, significantly less
than the estate tax exemption. So, taxwriters are mulling combining the two again.
That change would allow taxpayers to make larger lifetime gifts tax free to heirs.

                And carryover basis for assets. Lawmakers will take action to prevent rules
from taking effect in 2010 that require heirs to use the decedent’s income tax basis
when figuring gain or loss on sales of inherited assets. Instead, taxwriters will act
to keep the current rules that set the tax basis for inherited assets as their value
on the date of the owner’s death. Lawmakers realize that being forced to value assets
under a carryover basis rule would create a tax planning nightmare for heirs.

 Time to claim the business tax breaks in the stimulus law is growing short.
 Firms need to plan now in order to maximize the available tax benefits.
The bulk of the relief expires at the end of 2008, and Congress will not extend it.
So make sure that your business will be able to act in time to take full advantage.
                Start with bonus depreciation. Companies can write off 50% of the cost
of new assets placed in service in 2008. The remaining 50% of the cost is recovered
via depreciation under the normal rules. Used assets do not qualify for this break.
                Most assets are eligible...those that are depreciated over 20 years or less.
That includes machinery, equipment, land improvements and farm buildings...
even leasehold improvements that are made to the interior of commercial realty.

                Businesses can expense up to $250,000 of assets that are placed in use
during the 2008 tax year, nearly twice the previous ceiling. The full $250,000
can be claimed until $800,000 of assets are put in use in the 2008 tax year. Firms
squeezed by this cap still can use 50% bonus depreciation. For fiscal year companies,
the higher limit applies only to assets placed in service in the 2008/2009 fiscal year.
So for firms on a July to June year, only assets in use after June 30, 2008 qualify.

                2008 is also a good time to buy a car for business. The maximum write-off
in the first year is $10,960, nearly $8,000 more than in 2007. The limit is higher
for new SUVs with loaded weights over 6,000 pounds. For ones in use by Dec. 31,
$25,000 of the cost can be expensed, half of the remaining balance can be claimed
as bonus depreciation, then 20% of what’s left can be taken as regular depreciation.
On a $50,000 new heavy SUV put in use this year, $40,000 can be written off,
assuming 100% business use. Used heavy SUVs do not get bonus depreciation.
And for pickup trucks put in use in the 2008 tax year with loaded vehicle weights
over 6,000 pounds, the entire cost can be expensed if two requirements are met:
Their truck beds must be at least six feet long and must be separate from the cab.

 The IRS reverses itself on loan forgiveness programs for law students.
 Such assistance is tax free when it is granted under law school programs
to reduce the outstanding debt of graduates who take low paying public service jobs,
such as public defenders or prosecutors. Earlier, IRS said lawyers couldn’t get relief
because the law applied only to doctors, nurses and teachers (Rev. Rul. 2008-34).

                Good news for soldiers who terminate auto leases when they are deployed:
                They don’t owe income tax on the forgiven debt or on early termination fees
waived by car leasing companies, the IRS privately rules. By law, lessors are barred
from charging the fee if the soldier voiding the lease is deployed for at least 180 days.

 Bush’s OK of tax relief for soldiers starts the clock on several tax breaks:
 Disabled retired veterans get some tax relief when their retirement pay
is reclassified as tax free disability benefits. Refund claims for reclassifications
that were made after Dec. 31, 2000 can be filed with the IRS before June 18, 2009.
                Small firms get a 20% credit on makeup wages paid to called-up reservists
after June 17, 2008 and before Jan. 1, 2010. The top credit is $4,000 per worker.
Only companies employing an average of fewer than 50 workers a year can qualify.

                Military death gratuities are eligible to be rolled over into Roth IRAs
or Coverdell education savings accounts. Rollovers of sums for death from injuries
after October 6, 2001 and before June 17, 2008 must be made by June 17, 2009.
                And flex plan balances can be paid to workers called to active duty.
Payouts can begin after June 17 if the plan is amended to allow such distributions.
This allows reservists to avoid forfeiting unused amounts in their health flex plans.
But there’s nothing in the law that requires companies to permit the withdrawals.

 If the IRS reclassifies your contractors as employees after an audit...
 You can get relief on the extra Social Security taxes and withholding
that you owe to the Revenue Service, as a recent private letter ruling points out.
                Reduced penalties apply when the misclassification is unintentional.
Income tax withholding is only 1.5% of wages, which is far below the normal level.
And the tax rate for the employees’ share of FICA tax is 1.53% instead of 7.65%.
These percentages are doubled if 1099 forms were not filed for the workers.
There is no relief for the employers’ share of FICA. That rate remains 7.65%.
                And no interest is due on the reduced penalties for income tax withholding
and the employees’ share of FICA tax. Interest is owed on the firm’s share of FICA.

                Special withholding rules apply to severance pay, the Service says.
Severance pay is treated as a payment of supplemental wages, so firms get a choice:
They can withhold a flat 25% of each payment or they can aggregate severance pay
with any regular wages and compute withholding on the total (Rev. Rul. 2008-29).

 The Service continues to accept excuses for late-filed S elections.
 Normally, firms that want to be S companies have to file Form 2553
with the Revenue Service no more than 2½ months after the tax year has started.
But IRS will approve a late election if the corporation can show reasonable cause,
such as relying on a tax pro to file the election and later finding it wasn’t sent in.
Ditto for late-filed elections to treat a trust as a permitted S company shareholder.
                And IRS will excuse inadvertent terminations of S status. One example:
An S firm made distributions to shareholders disproportionate to their ownership,
causing the corporation to have two classes of stock, a no-no for S companies.
IRS let the firm make remedial payments to shareholders to resolve the slipup.

 Quickly buying back stock given to charity won’t taint a charitable write-off,
 as long as the charity isn’t obligated to sell back the shares, the IRS says
in a private ruling. It had OK’d a gift of closely held stock to a donor-advised fund,
which had a policy of selling such stock. The fund quickly sold the stock to a trust
that the donor had set up for his wife. Although the donor was aware beforehand
that the fund intended to sell the stock right away, he still avoids paying tax
on the stock’s appreciation because he couldn’t force the fund to sell the shares.
It doesn’t matter that the donor’s own trust ended up repurchasing the stock.

 An accrual method company can’t deduct expected returns from customers,
 the Tax Court says to a firm that sells remanufactured automotive parts.
Customers are allowed to return the used parts for a store credit, but the firm
doesn’t know when or if they will. The court said that the company is required
to include the full sales price in its gross receipts (Bigler, TC Memo. 2008-133).

                Even a brief stint as a CEO nixes later status as an outside director
for tax purposes. An outside director who filled in for a CEO who quit is considered
to be a former corporate officer and thus does not qualify as an outside director
in determining if compensation is performance based. Performance-based pay
is exempt from the $1-million cap on deductible compensation (Rev. Rul. 2008-32).

                Elections of the simplified R&D credit cannot be made on amended returns,
IRS says in new regulations. The election must be made on an original tax return.
Companies that have consistently increased their spending on R&D from year to year
usually will benefit from using the simplified R&D credit. The credit is equal to 12%
of the difference between the current year’s research costs and half of the average
of research costs for the prior three years. If the business has not been in existence
for the requisite three years, the credit is 6% of the current year’s R&D expenses.

 The IRS drives up the standard mileage rate for business usage.
 The rate will be 58.5¢ per mile for the final six months of this year,
an 8¢ hike. With fuel prices at record highs, the Service decided to act in midyear.
The mileage rate that will apply for next year will be officially announced in the fall.
                The mileage rate for medical and moving expenses also increases by 8¢
to 27¢ a mile. But the rate used for when driving for charity stays at 14¢ a mile.
This rate is set by law, so only Congress can change it. Lawmakers have no plans
to do so. Congress last raised this rate in 2005 and 2006 for Katrina-related driving.

                Note that firms needn’t pay the higher rate in reimbursing workers
for using their own vehicles. Many employers will continue to pay 50.5¢ per mile.
Employees who itemize deductions can take the shortfall as a business expense
on Form 2106 but only to the extent that the total tops 2% of adjusted gross income.
Thus, a lot of workers will get no benefit if their employers stick with the old rate.

 IRS gives preparers a break on the new tighter reporting standards.
 Required disclosures need to be made only to clients, not to the Service,
IRS says in proposed rules. The rules flesh out a 2007 law that requires preparers
to disclose when a position that’s taken on a tax return has a less than 50% chance
of being correct. Tax pros had complained that making disclosures to the Service
would mean tattling on clients. The rules also caution preparers to keep documents
that substantiate any such disclosures. That way, when IRS agents come calling,
the preparer can show that he or she has the records to rebut an IRS penalty.
                Congress will provide more relief this year or next by requiring disclosure
only in situations where there is a less than 40% chance that the position taken
will be upheld by the Service. That’s the same standard that taxpayers must meet.

 Watch out if you reimburse traveling employees for gym fees they incur.
 The payments are taxable and hit with payroll taxes, IRS officials say.
The cost of using a health club while away on business is a personal expense
because the facility is not located on the business premises of the employer.

 Medicare providers owing back taxes will soon be under the gun.
 In October, IRS will begin to slap levies on Medicare payments to hospitals,
doctors, nursing homes, hospices and others in arrears on income and payroll taxes.
A recent report by Congress’ watchdog agency, the Government Accountability Office,
says more than 27,000 Medicare providers receive payments but stiff the tax man.

 Return to the presidential candidates’ tax positions for just a moment.
 Look where else they share common ground: Corporate tax rate cuts.
Obama now looks more amenable to reducing corporate taxes, after hiring advisers
who advocate cutting the 35% top rate to 30.5% while scrapping other tax breaks.
To Obama, it’s a way of creating a simpler and fairer corporate tax system. McCain
proposes to slash the top rate to 25% to help U.S. firms compete with foreign ones.
                Would a Democratic Congress go along? There’s at least a fair chance:
House Ways and Means Chairman Charles Rangel (D-NY) favors a corporate tax cut
that’s paired with tax hikes, such as ending the deduction for domestic production
and LIFO inventory valuation. That would help some companies and hurt others.
So no matter who wins the election, a corporate rate cut is not out of the question.

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©2008 The Kiplinger Washington Editors