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Small Business Tax Strategies

Have you heard about the new, "creative" way to shift assets from your business to a Roth IRA to skirt the IRA contribution limits? Well, forget that advice and heed this:

The IRS came out swinging last month, issuing formal notice that such transactions would be listed as "abusive tax shelters" and trigger stiff penalties. (IRS Notice 2004-8)

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With the stock market heating up, you may have borrowed cash in 2003 for investment purposes or to buy stock on margin.

Of course, you’ll want to maximize the write-off for your investment interest. But usually your investment interest deduction is capped at the amount of your total investment income.

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Q: In a recent item in your newsletter, you said that sole proprietors, partners and LLC members can use the per-diem method for reimbursing meals and incidental expenses on business travel. (See 11/3/03 issue.) Shouldn’t that list also include S corporation shareholder/employees? P.D., CPA, Englewood, Colo.

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You can file Form 4506, but it could take up to 60 days to receive a photocopy and cost you $39. Better option: Call the IRS to order a transcript that lists line items from your original return (only 1040s) for up to three previous years.

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Q: My elderly father lives in Spain and plans to give large financial gifts to our family this year. Are there any special IRS requirements we must meet? T.D., Vero Beach, Fla.

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Q: We own a vacation home in Vermont that we are leaving to our adult son in our wills. The home cost $95,000 and is now worth around $300,000. We’ve made about $15,000 in improvements over the years. Will our son owe any income tax if he inherits the home in the next few years? M.M., Stamford, Conn.

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Q: My brother borrowed $20,000 from me back in 2000. We set up a payment plan with 7 percent interest payments. But he only paid back $2,700 before he died last year without any real assets. Can I deduct the unpaid balance on my 2003 return? K.R., Newburgh, N.Y.

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After 12 years with the same company, I am losing my job due to a merger. I have no other job lined up. Should I elect COBRA health and dental coverage? Are there any tax benefits?

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If your business pays nonemployees for services, you’re responsible for providing that information to the IRS each year.
The timing is critical, and the clock is running down.

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C corporations offer better tax treatment for fringe benefits than S corporations. But don’t avoid an S corporation election simply because of fringe benefits.

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