Masonry Magazine October 1988 Page. 11
TAX MATTERS
Irving L. Blackman is the most published CPA in the country and spreads his tax knowledge as a dynamic speaker. Mr. Blackman specializes in closely held businesses and will consult with readers of this column. He is a partner in Blackman Kallick Bartelstein, a Chicago-based accounting and business consulting firm. Direct your questions to 300 S. Riverside Plaza, Chicago, IL 60606, or call (312) 207-1040.
IRS Approves Deferred Salary Plan
Here's a tax shoe that will fit a large number of taxpayers. How would you like to defer the tax on all or selected portions of your compensation?... And with a blessing from the IRS? Tell your professional to read Letter Ruling 8703056.
The corporation set up a deferred compensation plan that allowed each of its four 25% stockholder/employees to participate. The plan was simple: Any stockholder on or before December 31 of any year could irrevocably elect to defer all or a portion of his compensation to be earned in the next 12-month period. The unpaid salary would be invested and together with the earnings identified in a special account. The total amount of the account (benefits) would be distributed on January 15 of the year following an employee's termination of employment.
The IRS clearly ruled that no portion of the benefits will be taxable to an employee until actually paid or made available under the plan.
In addition, the plan was unfunded, since title to the investments remained with the corporation. The corporation's obligation to pay benefits was an unsecured general obligation. No trust or fiduciary relationship was created. Benefits could not be assigned, transferred, pledged or encumbered. Let's summarize-A nonqualified, unfunded, deferred compensation plan, entered into before the work is done, will not create taxable income until the plan benefits are actually paid.
This ruling creates many planning opportunities for every employee/stockholder. What should you do? Adopt a plan like the one described in this article. If you, or other employees, never use it, nothing has been lost. Ah, but in any year when the tax-saving shoes fit, just slip them on. Your tax savings will start running immediately.
How To Defer Interest Income To Next Year
It is possible to earn interest income in 1988, yet not include that income for tax purposes until 1989? The answer is yes. Here are three ways to get the job done.
Bank certificates of deposit: Interest earned on a CD with a maturity of one year or less does not create taxable income until the interest is actually credited to your account. The trick is to buy a CD that does not credit interest until 1989. As long as you cannot withdraw interest in 1988 without a penalty, none of the interest is taxable until 1989. This means you can keep your tax dollars until you file your return in April 1990.
Treasury bills: You can buy T-bills that mature in three, six or twelve months. They are issued at a discount, which means you buy them at a price below face value and collect face value at maturity. The discount is your interest income. Just buy a T-bill in 1988 that matures in 1989.
Treasury notes and bonds: Some long-term government securities range in maturity from two to thirty years. Such notes and bonds are issued at face value and pay interest at six-month intervals from the date of issue. For example, if you buy a bond in 1988 but don't collect interest until 1989, the first interest check is not taxable until 1989.
What Are Your Chances of An IRS Audit?
The game goes on. You file. The IRS audits. During 1987, a total of 1,109,000 individual income tax returns were subjected to the displeasure of an IRS audit. Overall, this means that 109 returns out of 10,000 filed were examined in 1987; down a bit from the 112 per 10,000 in 1986.
But don't get overconfident that these low percentages apply to you. The higher your income, the greater the interest the IRS has in paying you a visit.
Here is a breakdown of the changes that your personal return will be audited, based on 1987 figures:
Total Positive Income | Chances in 10,000 of Being Audited
---|---
$10,000 to $25,000 (w/itemized deductions) | 130
$10,000 to $25,000 (w/out itemized deductions) | 64
$25,000 to $50,000 | 140
$50,000 and over | 224
To give you an idea of the massive task the IRS has each year in tracking down tax cheats, the Service received 101.8 million individual returns in 1987, plus millions more of corporation, partnership, and trust returns.
The chances of having your business or company audited decreased dramatically in 1987, compared with 1986, especially for corporations. However, your chances of hosting an examining agent in 1987 increased if you operated a small unincorporated business.
Here's the breakdown for noncorporate businesses and for corporations:
| Noncorporate Business Income-Schedule C | Chances in 10,000 of Being Audited 1987 | Chances in 10,000 of Being Audited 1986 |
|---|---|---|
| Under $25,000 | 141 | 134 |
| $25,000 to $100,000 | 201 | 227 |
| $100,000 and over | 386 | 474 |
| Corporations (in assets) | Chances in 10,000 of Being Audited 1987 | Chances in 10,000 of Being Audited 1986 |
|---|---|---|
| Under $100,000 | 67 | 107 |
| $100,000 to $1 million | 116 | 174 |
| $1 million to $10 million | 410 | 619 |
| $10 million to $100 million | 2,292 | 2,999 |
| $100 million and over | 6,908 | 7,451 |
And to each reader who ends up facing the dangers of an IRS tax audit, GOOD LUCK!!!!
Want to increase your chances of winning if you are audited? Send for these Special Reports-Year-Round PERSONAL TAX PLANNING... 191 Ways to Win AFTER TAX REFORM ($24); or Year-Round BUSINESS TAX continued on page 16
MASONRY-SEPTEMBER/OCTOBER, 1988 11