III. BENEFITS OF AN S CORPORATION

Q. I own 50% of the stock in a temp agency that was established as a "C" corporation but switched to "S" corporation status. Now my accountant says we can't provide fringe benefit to myself and the other owner. Is that true? 
A. Not exactly. As a general rule, you can receive fringe benefits, the same as your other employees. But any benefits provided to an owner-employee of an S Corporation with an interest of 2% or more are not tax free to you.

IV. PLAYING WITH THE KIDDIE TAX

Q. I've placed several stocks in the name of my daughter Maria. If I sell shares that I've held for several years, will the long-term capital gain be subject to the kiddie tax? 
A. Possibly, as long as Maria has not turned age 14. Under the so-called kiddie tax, unearned income above an annual amount ($1,500 for 2002, and 2003) that's received by a child under 14 is taxed at the highest marginal tax rate of the child's parents. However, for long-term capital gains, the rate still will be no higher than 20%. And if Maria's total unearned income, including the capital gains, is under the $1,500 threshold, the kiddie tax won't apply at all. 

V. EMPLOYEE, EMPLOYER QUESTIONS

Q. Our employer has begun offering catch-up contributions to eligible employees. One of our employees will turn 50 on December 15, 2003. Does he have to wait until he turns 50 to begin making the catch-up contributions or can he begin in January?
A. Catch-up contributions may be made by eligible employees who turn 50 or older at any time during the calendar year. So, an employee who does not turn 50 until December 15, may still begin making catch-up contributions as of January of the birthday year.
(Source:ResearchRecommendations)

LESSONS FROM THE TAX COURT

•  Avoid vague contracts, spell out every detail. The IRS challenged a doctor, saying payments he received from a hospital were taxable income. The doctor said they were loans. The doctor eventually won in court and then tried to recover his attorney fees and court costs by suing the IRS. He lost. Reason: He couldn't show that the IRS was not substantially justified in making the challenge, one of the requirements for recovering costs. The court said the IRS' argument was reasonable because language in the contract between the doctor and the hospital was unclear. (Rosario, TC Memo 2002-247) IRS can interview your customers and suppliers. If the IRS is investigating you, it may have the option of asking your clients and suppliers for information. In a recent case, a taxpayer argued to no avail that the IRS interviews with these third parties caused clients to terminate contracts with her company. (Turley, et al, 2002-2 USTC 50,) 
• Don't edit an IRS form. A taxpayer wrote "Estimated Return" on the top of his form 1040 and sent it to the IRS along with a letter explaining that his records weren't yet complete for the year. The IRS refused to process it and penalized him for failing to file a valid return. (IRS FSA 200235002)Advice: If you're lacking enough information to file a complete return, ask for an extension. If you're out of extensions, file the return with the information you have and then file an amended return later. 
•  Meet "half-support" rule to win dependency exemption. The IRS (and possibly a court) may want proof that you provided at least half a qualifying person's support. Example: The Tax Court recently yanked a dependency exemption away from a woman Reason: Her son was in jail for that time and the state provided much more support than she did. (Haywood, TC Memo 2002-258)

IRS UPDATE

• Playing "Lets Make a Deal" with the IRS? It'll cost you. If you can't possibly pay your tax bill, the IRS lets you make an offer through its Offer in Compromise program. The IRS figures its better to collect part of a tax bill than none. Making an offer has always been free, but now the IRS plans to charge taxpayers $150. Reason: The agency hopes to deter frivolous compromise offers being filed simply "as a vehicle to delay the collection process". The IRS is accepting comments on the planned fee until Feb. 4, 2003. For details go to www.irs.gov/pub/irs-news/ir02-118.pdf
• IRS issues cost-of-living adjustments for 2003. How much is the adoption tax credit worth? What amount of your long-term care insurance deductible? Some tax breaks like this change each year, as do the thresholds for income tax rates. To read the 2003 adjustments for these topics, plus others like the child tax credit, qualified transportation fringe benefit and medical savings accounts, visit www.irs.gov/pub/irs-drop/rp-02-70.pdf
• Tap into free IRS tax help. Phone hotlines. The Internet. Fax services. Face to face assistance.The IRS offers taxpayers various options for free help. For an explanation of the resources, get a copy of IRS Publication 2053, Quick and Easy Access to IRS Tax Help and Tax Products by going to www.irs.gov/pub/irs-pdf/p2053.pdf or calling (800) 829-1040
(Source: Research Recommendations)