Financial Reporting for Pension Plans - an amendment of GASB 25 

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Accounting and Financial Reporting for Pensions - an amendment of GASB 27

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The Regional CPA Firm: Your Trusted Business Adviser

Regional CPA firms are great business advisers to the companies in their communities.  CPAs have long been the trusted business advisers for their clients, providing services to meet a wide range of business needs. Their services might include not only audit, accounting and tax, but also information technology, strategic planning and business valuation, as well as personal financial planning, estate planning and general business consulting. For those reasons, companies have long turned to CPA firms to help them understand and address their most pressing business questions.  And regional CPA firms don't simply deliver services, they provide the kinds of customized, hands-on advice and insights that their clients need to achieve their business goals.

Would you would like to learn more about all a regional CPA firm has to offer?  If so, please contact:

McMahan and Associates, LLC

Committed A committed component of fund balance would have most likely been previously reported within unreserved, designated fund balance. They are resources whose use is constrained by a limitation that a government imposes upon itself at its highest decision making level (i.e., council/commissioners) and remains binding unless the constraint is removed in the same manner in which it was placed.  For these items, please have the ordinance/ resolution/ approval available during fieldwork to determine the proper amount.   As an example, previous unreserved designated fund balances that we feel would meet this category are “designated for housing loan programs”, “designated for encumbrances” (if governing approval required).

Assigned An assigned component of fund balance would have most likely been previously reported within unreserved, undesignated fund balance.  This amount would reflect a government’s “intended use of the resource”.  Therefore, remaining fund balances for capital projects and special revenue funds not constrained by the previous fund balance components would be reported here.

Unassigned If an amount does not fit any other component listed above, these amounts would be reported within this category but, usually only for the General Fund. This component may be reported in another governmental fund only if the fund is in a deficit situation.

We are asking each of our clients to review their current chart of accounts in order to update accounts used to currently track this information. Certain accounts may not be currently maintained within the chart of accounts (non-spendable); if this is the case, this data may only be captured within the drafted financial statements. For those instances, we will discuss during fieldwork whether it is necessary to add to the current chart of accounts or not.

As information, if any, arises that affects implementation, we will notify you as soon as possible.  Please feel free to contact us with any questions or concerns. During fieldwork, we will be spending some time to go over the specific needs of each of our clients.

Condominium associations, which may include property owner associations, and time-share or interval ownership associations, are responsible for maintaining and preserving the association’s common property.

Condominium associations, which may include property owner associations, and time-share or interval ownership associations, are responsible for maintaining and preserving the association’s common property.

Typically, associations are incorporated under state non-profit statutes, since these entities do not issue capital stock or have shareholders.  That is, the net income or losses of the association do not flow to the owner/members.  However, incorporation as a non-profit does not equate to exemption from income taxes, and all associations must file annual tax returns.  Most associations will be required to file either Form 1120 (U.S. Corporation Income Tax Return) or Form 1120-H (U.S. Income Tax Return for Homeowner Associations).

An association filing Form 1120 would be subject to regular graduated corporate tax rates (beginning at 15% of the first $50,000 of taxable income) on its net taxable income.  Taxable income is comprised of revenues earned from sources other than common assessments or from the provision of services for members/owners of the association (e.g., investment income, rentals, vending, or fees earned from parties other than the owner/members) reduced by expenses incurred in generating these revenues (e.g., investment account fees, management fees, professional fees, rental expenses, vending supplies, etc.).

Generally, time-share associations and associations which are considered “substantially residential” (based on IRS criteria) would file Form 1120-H.  Note that the IRS’ definition of “substantially residential” incorporates an evaluation of the percentage of units participating in short-term rentals.  Form 1120-H imposes a flat tax rate of 30% (32% for time-shares) on the association’s net taxable income, which is largely similar to the concept of taxable income discussed above.

Common misconceptions frequently encountered when discussing association income taxes include the following:

• “Our association reported a net income (loss) on our financial statements; therefore we will report the same amount as taxable income (loss) for the year.”  Taxable income for an association is calculated differently than net income for financial statement purposes.
• “Income earned from investments held in the Replacement Fund isn’t taxable”.  All interest income is considered taxable regardless of the fund in which it is reported.
• “Transferring Operating Fund net income to the Replacement Fund will minimize our association’s taxable liability.”  Transfers between funds do not have a direct impact on the amount of income taxes paid by the association.

Recent IRS scrutiny of association income tax returns has resulted in numerous court rulings, revenue procedures, and amendments to the Internal Revenue Code.  The tax professionals at McMahan and Associates work to ensure that your association’s tax return complies with applicable tax guidance, while minimizing your tax liability.  If you have questions regarding your association’s specific tax situation, please don’t hesitate to contact us.

The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The penalty relief applies only for tax years beginning after December 31, 2017, but before January 1, 2019.

The IRS will waive the penalty only if both of the following conditions are met:

• the partner Schedules K-1 are timely filed (including extensions) with the IRS, timely furnished to the partners, and contain all other required information; and
• the person or partnership required to file the Schedule K-1 or other applicable form or statement files with the IRS, no later than one year after the original, unextended due date of the form to which the Schedule K-1 or other applicable form or statement must be attached, a schedule setting forth the information listed below for each partner for which negative tax basis capital account information is required.

The required schedule must state:

1. the partnership’s name and Employee Identification Number, if any, and Reference ID Number, if any;
2. the partner’s name, address, and taxpayer identification number; and
3. the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue.

The schedule should be captioned "Filed Under Notice 2019-20" and should accord with instructions and additional guidance provided by the IRS. The schedule should be sent to: 1973 North Rulon White Blvd., Ogden, UT 84404-7843, MS 4700, Attn: Ogden PTE.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

Interaction Between 964 and 312

The rules in Code Sec. 964(a) provide that, with an exception for a depreciation rule in Code Sec. 312(k)(4), the earnings and profits of a foreign corporation are computed according to rules substantially similar to those that apply to domestic corporations, under regulations prescribed by the Secretary. The Tax Court found that regulations reasonably could be read to include regulations under Code Sec. 312.

The Code Sec. 964 regulations required the following steps be taken before the Code Sec. 312 rules could be applied:

• preparation of a profit and loss statement;
• U.S. accounting adjustments; and
• tax adjustments.

The general rules of subpart F and Code Sec. 312applied because there were no specific rules covering the treatment of a CFC’s distributive share of partnership income, or subpart F income inclusions, specifically. Subpart F required upper-tier CFC partners to compute gross income as if they were domestic corporations. As partners in a domestic partnership, they were required to include their distributive shares of the partnership’s income, including subpart F income inclusions, from lower-tier foreign corporations.

Under the Code Sec. 312 regulations, E&P is determined by taking into account all items includible in gross income under Code Sec. 61. Because the inclusions under subpart F were included in gross income, E&P was increased by those amounts.

Dissenting Opinion

A dissenting opinion disagreed with the Tax Court’s conclusion that Code Sec. 964 incorporated the rules of Code Sec. 312 based on the reference to the depreciation rule. The dissent also disagreed with the Tax Court’s statement that Code Sec. 964 provided that the same general rules apply to E&P computations for domestic and foreign corporations because the statute referred to rules "substantially similar" to those applicable to domestic corporations.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

Reportable Sales and Payments

New reporting requirements apply to reportable policy sales and payments of reportable death benefits occurring after December 31, 2017.

New Code Sec. 6050Y imposes information reporting obligations related to certain life insurance contract transactions, including reportable policy sales and payments of reportable death benefits. The proposed regulations specify how and when the information reporting obligations must be satisfied. They also provide definitions and rules governing the application of the information reporting obligations.

New Code Sec. 101(a)(3) defines "reportable policy sale" and provides rules for determining the amount of death benefits excluded from gross income following a reportable policy sale. The proposed regulations provide definitions and guidance for determining the amount of death benefits excluded.

Proposed Regulations

The proposed regulations respond to comments generated by the IRS’s pre-regulatory guidance in Notice 2018-41, I.R.B. 2018-20, 584, and provide clarifications.

Payments. The proposed regulations clarify that a reportable policy sale payment includes any amount of the recipient’s debt assumed by the acquirer in addition to cash and the fair market value of property. They also clarify that when an acquirer makes installments payments in more than one year, the acquirer reports the total amount of all payments in the year of the policy sale. The Treasury Department and the IRS are considering whether reportable policy sale payments should be defined to exclude payments of any ancillary costs and expenses. Comments are requested regarding the types of payments made by acquirers in reportable policy sales, the recipients of those payments, and existing reporting requirements applicable to those payments.

Reportable death benefits. Reporting requirements apply to any person that makes a payment of reportable death benefits during any tax year. The proposed regulations clarify that the amounts must be attributable to an interest in the life insurance contract that was transferred in a reportable policy sale. For instance, if the original policyholder of a life insurance contract transfers a 50 percent interest in the life insurance contract in a reportable policy sale, amounts paid due to the death of the insured that are attributable to the 50 percent interest retained by the original policyholder are not reportable death benefits.

Comments are requested as to whether reportable death benefits payment recipients should include, in addition to any person that receives reportable death benefits as a beneficiary under the life insurance contract, any person that receives reportable death benefits as the holder of an interest in the life insurance contract.

Payor. The proposed regulations define "payor" to mean any person making a payment of reportable death benefits, and "reportable death benefits payment recipient" to mean any person that receives reportable death benefits as a beneficiary under the life insurance contract or as the holder of an interest in the life insurance contract. However, comments are sought on whether "payor" should be defined the same as "issue," or should also include any holder of an interest in a life insurance contract that receives reportable death benefits attributable to that interest and is contractually obligated to pay part or all of the proceeds to the beneficial owner of the interest.

Unified reporting. The proposed regulations allow for unified reporting by the acquirers in a series of prearranged transfers of any interest in a life insurance contract. A series of prearranged transfers of an interest in a life insurance contract may include transfers in which one or more persons serve as intermediaries. Such intermediaries may acquire title or possession of an interest in a life insurance contract for state law purposes as nominee on behalf of another person or persons.

Deadlines. The proposed regulations provide that an acquirer must furnish any written statement required to be provided to a reportable policy sale payment recipient no later than February 15 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations adopt this deadline because a person may be both a reportable policy sale payment recipient and a seller regarding a reportable policy sale, and the deadline for an acquirer to furnish a written statement to a reportable policy sale payment recipient coordinates with the deadline for an issuer that receives a reportable policy sale statement (RPSS) to furnish a written statement to a seller. An acquirer must furnish an RPSS to the issuer by the later of (1) 20 days after the reportable policy sale, or (2) 5 days after the end of the applicable state law rescission period. However, if the later date is after January 15 of the year following the calendar year in which the reportable policy sale occurred, the RPSS must be furnished by January 15 of the year following the calendar year in which the reportable policy sale occurred.

A payor of reportable death benefits must furnish any written statement required to be provided to a reportable death benefits payment recipient no later than January 31 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations use January 31 because it is generally the deadline for furnishing copies of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to recipients.

Forms 1099-LS and 1099-SB. The proposed regulations provide guidance to sellers of life insurance contracts in reporting gain. IRS Form 1099-LS, Reportable Life Insurance Sales, and Form 1099-SB, Seller’s Investment in Life Insurance Contract, provide specific instructions on these reporting requirements. The proposed regulations also provide guidance to payors of reportable death benefits (reportable on Form 1099-R) and how to calculate the amount of death benefits excluded from gross income.

Transition Relief

Transition relief applies for reportable policy sales and payments of reportable death benefits occurring after December 31, 2017, and before the date final regulations are published in the Federal Register.

For reportable policy sales,

• statements required to be furnished to issuers under Code Sec. 6050Y(a)(2) must be furnished by the later of the applicable deadline in the final regulations or 60 days after the date final regulations are published in the Federal Register;
• returns required to be filed under Code Sec. 6050Y(a)(1) and (b)(1) and statements required to be furnished to payment recipients and sellers under Code Sec. 6050Y(a)(2) and (b)(2)must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register;

For payments of reportable death benefits, returns required to be filed under Code Sec. 6050Y(c)(1) and statements required to be furnished to payment recipients under Code Sec. 6050Y(c)(2) must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register.

Comments. The IRS is seeking comments on a range of issues connected with these proposed regulations. Written or electronic comments must be received by May 9, 2019. A public hearing has been scheduled for June 5, 2019, at 10:00 a.m., in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For more information about having your name placed on the building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of the preamble.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Olson will retire from the position of NTA on July 31, 2019, according to a recent NTA Blog post. "I am making the announcement now because I want to prepare the Taxpayer Advocate Service for a smooth transition, and I want to participate in the selection of my successor," Olson wrote.

Critical and Priority Items Lists

Olson outlined the following "critical items" she wants to accomplish before retiring:

• publish new IRM chapters on Taxpayer Assistance Orders and Taxpayer Advocate Directives;
• finalize a regulation governing the operations of Low Income Taxpayer Clinics (LITC); and
• regain the ability to hire attorney-advisors.

Additionally, Olson has created a list of "priority items" for the IRS, which IRS Commissioner Charles Rettig requested. The list includes:

• developing an automated economic hardship risk indicator;
• developing mandatory employee training on the Taxpayer Bill of Rights;
• developing guidance and training on the identification and public disclosure of Program Manager Technical Advice (PMTA) memoranda; and
• designing rights-based notices of deficiency, collection due process hearing notices, and math error notices.

"Underlying all my actions and plans as the National Taxpayer Advocate has been a recognition that the Taxpayer Advocate Service is more than an organization – however independent – within a bureaucratic federal agency," Olson wrote. "The Taxpayer Advocate Service is a concept – an idea. It represents the proposition that taxpayers have rights and protections before the awesome taxation powers of the United States."

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?

A. Because computers and peripheral equipment are viewed as more susceptible than other business property to unwarranted deductions for personal use, they are subject to special scrutiny under the tax law. This scrutiny comes from their classification as "listed property," which limits the amount that may be deducted each year.

A computer as listed property only becomes an issue if it is not used exclusively in business. If a computer is used exclusively at the taxpayer's regular business establishment or in the taxpayer's principal trade or business, the listed property limitations don't apply at all.

Any computer that you use predominately for pleasure may not be written-off over its life nearly as quickly as exclusive-use computers. If your business usage does not meet the predominant use test, you are relegated to using a much slower depreciation method (the ADS, straight-line method) over the longer-ADS recovery period.

Your computer will meet the predominant use test for any tax year if its qualified business use is more than 50% of its total use. You must review your computer's usage and determine the percentage usage for each of its various uses (business, investment, and personal). When computing the predominant use test, any investment use of your computer cannot be considered as part of the percentage of qualified business use. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property. It's up to you to prove business use to the IRS; the IRS does not need to prove personal use to reject your deductions.

In order to claim your computer expenses, you must meet the adequate records requirements by maintaining a "log" or other documentary evidence that sufficiently establishes the business/investment percentage claimed. The log should be similar to a log you would keep to track your auto expenses, indicating date, time of usage, business or nonbusiness, and business reason. Good documentation is always the key to success if your return is ever audited.

Finally, what about application of these rules to PDA's? The shorter the designated "life" of the property, the faster you can write-off its cost. Cell phones are generally considered 7-year property (the cost is depreciated over seven years). Computers are generally considered 5-year property, and computer-software normally is 3-year property. PDA's are generally classified as 5-year property, being considered wireless computers. If a PDA includes a cell phone feature, as long as that feature is not predominant and removable, it continues to fall under the 5-year property rule. Software that you may download to your PDA is 3-year property. Software that you buy already loaded into the PDA, however, is 5-year property. Monthly charges for a wireless service provider are deductible as paid each month, just as your business would deduct any phone or internet service bill.