Cash Basis for Small Businesses

February 28, 2002

IRS Gets an F

A recent General Accounting Office report says that taxpayers who call the Internal Revenue Service for advice wait a average of 4 minutes (15% longer) to speak to a representative who get the right answer only 75% of the time. Maybe the IRS will wait for payments 15% longer! New York Times 12/31/01 p.A9

More Can Use Cash

The IRS has proposed new rules that would now permit small businesses with average annual gross receipts of $10,000,000 or less to use the cash method of accounting. The previous limit was $1,000,000. Under the new rules, a small business is eligible to use the cash method of accounting if, in addition the gross receipts, test the business meets any one of the four safe harbors:

1) the principal business activity is not retailing,
manufacturing, mining, publishing or sound recording
2) the principal activity is the providing of services
3) the principal activity is custom manufacturing
4) an otherwise ineligible taxpayer operates a separate and distinct
trade or business that satisfies the other safe harbors.

The IRS has stated they will not challenge an otherwise qualifying small business for their use of the cash method for any taxable year ending on or before December 31, 2001.

If you have a business with gross receipts of more than $1,000,000 and you were wondering why you were probably put into the cash method by us, instead of the accrual method, it is because the accounting fee would have been less to be on the cash method and we did not see any substantial tax problem in doing so. IRS Notice 2001-76

Do You Still Need Life Insurance?

With a new estate tax structure which steadily lowers tax rates until 2010 when tax rates disappear altogether to be followed by 2011 when the tax rates of 2001 return, you might ask yourself, do I still need so much life insurance?

Because of the uncertainty, we, like many practitioners believe that many existing estate plans and those yet to be set up need to be fully or partially supported by insurance.

There are, of course, ongoing non-tax needs for life insurance. For example, buy-sell agreements and funds for income replacement and education planning in case a family member dies.

Cash Transactions are Reportable

to the Internal Revenue Service and to Treasury, under the recently enacted USA Patriot Act. Cash is defined as coin and currency of the U.S. or any foreign country, a cashier`s check, traveler`s check, or money order in a retail sale of a consumer durable, collectible or a travel or entertainment activity or where the recipient knows or has reason to know that a financial instrument is being used in an attempt to avoid being reported.

Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, may be used for reporting purposes, which is the same form which was already being used to report cash transactions. USA Patriot Act PL 107-56. TD 8974

Super Bowl Ad

The reason to watch the Super Bowl is for the advertisements. Between them is a game and time for rest breaks. It looks like AT & Ts Mlife wireless service got the kind of super jolt that Super Bowl dot.com advertisers have come to expect. Mlife.com registered its first 34,000 unique visitors the Saturday before the big game and spiked to 681,000 unique visitors on Super Bowl Sunday. Monster.com which became a household name after it debuted in Super Bowl ads three years ago virtually lost hits on game day. Informationweek.2/11/02 p.17

Required Distributions from IRAs and Keoghs

cannot be combined. The IRS privately advised a 73 year old who is tapping an IRA and a Keogh that he must withdraw his minimum payouts separately from each account. But, payouts from multiple IRAs can be juggled, according to the IRS. Payees can take the required withdrawals from whichever IRAs they choose. Kiplinger Tax Letter 1/18/02.

Security Conscious Taxpayers

cannot ask IRS agents for personal information before admitting them for audits, according to an IRS memorandum. The memo says the taxpayer cannot require IRS employees to provide personal private information (i.e. social security number, home address and telephone number) or consent to a background check before being granted access to an audit site. In the IRS`s view, a taxpayer that insists on seeing agents` personal data is acting in contravention of IRS`s authority under the Internal Revenue Code to set the time and place for an audit. The IRS does agree that the IRS team personnel can be asked to wear company provided identification badges but agents do not have to present a driver`s license before they access the building or parking facility. Agents need only supply their names and their IRS supplied unique identifying number. Additionally, agents are instructed not to leave their IRS credentials with security or any other personnel or to permit the credentials to be copied.

If the taxpayer insists on its own security policy, the IRS recommends the agents to move the examination to the local IRS office. IRS General Counsel Memorandum 00206054

Can You Imagine?

Ronald Reagan became 91 on February 6 and has become the longest living ex-president.

If you have any questions about these or any other tax or financial issues, please call us. Remember, We`re Here For You.

If you need to refer to any of our prior newsletters they are stored on our website at www.lisch.com under AOHL Newsletter Archives.