The 2025 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2025 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

WASHINGTON–With Congress in its lame duck session to close out the remainder of 2024 and with Republicans taking control over both chambers of Congress in the just completed election cycle, no major tax legislation is expected, although there is potential for minor legislation before the year ends.

The IRS reminded individual retirement arrangement (IRA) owners aged 70½ and older that they can make tax-free charitable donations of up to $105,000 in 2024 through qualified charitable distributions (QCDs), up from $100,000 in past years. 

The IRS reminded individual retirement arrangement (IRA) owners aged 70½ and older that they can make tax-free charitable donations of up to $105,000 in 2024 through qualified charitable distributions (QCDs), up from $100,000 in past years. For those aged 73 or older, QCDs also count toward the year's required minimum distribution (RMD). Following are the steps for reporting and documenting QCDs for 2024:

• IRA trustees issue Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in early 2025 documenting IRA distributions.
• Record the full amount of any IRA distribution on Line 4a of Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors.
• Enter "0" on Line 4b if the entire amount qualifies as a QCD, marking it accordingly.
• Obtain a written acknowledgment from the charity, confirming the contribution date, amount, and that no goods or services were received.

Additionally, to ensure QCDs for 2024 are processed by year-end, IRA owners should contact their trustee soon. Each eligible IRA owner can exclude up to $105,000 in QCDs from taxable income. Married couples, if both meet qualifications and have separate IRAs, can donate up to $210,000 combined. QCDs did not require itemizing deductions. New this year, the QCD limit was subject to annual adjustments based on inflation. For 2025, the limit rises to $108,000.

Further, for more details, see Publication 526, Charitable Contributions, and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

IR-2024-289

The Treasury Department and IRS have issued final regulations allowing certain unincorporated organizations owned by applicable entities to elect to be excluded from subchapter K, as well as proposed regulations that would provide administrative requirements for organizations taking advantage of the final rules.

The Treasury Department and IRS have issued final regulations allowing certain unincorporated organizations owned by applicable entities to elect to be excluded from subchapter K, as well as proposed regulations that would provide administrative requirements for organizations taking advantage of the final rules.

Background

Code Sec. 6417, applicable to tax years beginning after 2022, was added by the Inflation Reduction Act of 2022 (IRA), P.L. 117-169, to allow “applicable entities” to elect to treat certain tax credits as payments against income tax. “Applicable entities” include tax-exempt organizations, the District of Columbia, state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives. Code Sec. 6417 also contains rules specific to partnerships and directs the Treasury Secretary to issue regulations on making the election (“elective payment election”).

Reg. §1.6417-2(a)(1), issued under T.D. 9988 in March 2024, provides that partnerships are not applicable entities for Code Sec. 6417 purposes. The 2024 regulations permit a taxpayer that is not an applicable entity to make an election to be treated as an applicable entity, but only with respect to certain credits. The only credits for which a partnership could make an elective payment election were those under Code Secs. 45Q, 45V, and 45X.

However, Reg. §1.6417-2(a)(1) of the March 2024 final regulations also provides that if an applicable entity co-owns Reg. §1.6417-1(e) “applicable credit property” through an organization that has made Code Sec. 761(a) election to be excluded from application of the rules of subchapter K, then the applicable entity’s undivided ownership share of the applicable credit property is treated as (i) separate applicable credit property that is (ii) owned by the applicable entity. The applicable entity in that case may make an elective payment election for the applicable credit related to that property.

At the same time as they issued final regulations under T.D. 9988, the Treasury and IRS published proposed regulations (REG-101552-24, the “March 2024 proposed regulations”) under Code Sec. 761(a) permitting unincorporated organizations that meet certain requirements to make modifications (called “exceptions”) to the then-existing requirements for a Code Sec. 761(a) election in light of Code Sec. 6417.

Code Sec. 761(a) authorizes the Treasury Secretary to issue regulations permitting an unincorporated organization to exclude itself from application of subchapter K if all the organization’s members so elect. The organization must be “availed of”: (1) for investment purposes rather than for the active conduct of a business; (2) for the joint production, extraction, or use of property but not for the sale of services or property; or (3) by dealers in securities, for a short period, to underwrite, sell, or distribute a particular issue of securities. In any of these three cases, the members’ income must be adequately determinable without computation of partnership taxable income. The IRS believes that most unincorporated organizations seeking exclusion from subchapter K so that their members can make Code Sec. 6417 elections are likely to be availed of for one of the three purposes listed in Code Sec. 761(a).

Reg. §1.761-2(a)(3) before amendment by T.D. 10012 required that participants in the joint production, extraction, or use of property (i) own that property as co-owners in a form granting exclusive ownership rights, (ii) reserve the right separately to take in kind or dispose of their shares of any such property, and (iii) not jointly sell services or the property (subject to exceptions). The March 2024 proposed regulations would have modified some of these Reg. §1.761-2(a)(3) requirements.

The regulations under T.D. 10012 finalize some of the March 2024 proposed regulations. Concurrently with the publication of these final regulations, the Treasury and IRS are issuing proposed regulations (REG-116017-24) that would make additional amendments to Reg. §1.761-2.

The Final Regulations

The final regulations issued under T.D. 10012 revise the definition in the March 2024 proposed regulations of “applicable unincorporated organization” to include organizations existing exclusively to own and operate “applicable credit property” as defined in Reg. §1.6417-1(e). The IRS cautions, however, that this definition should not be read to imply that any particular arrangement permits a Code Sec. 761(a) election.

The final regulations also add examples to Reg. §1.761-2(a)(5), not found in the March 2024 proposed regulations, to illustrate (1) a rule that the determination of the members’ shares of property produced, extracted, or used be based on their ownership interests as if they co-owned the underlying properties, and (2) details of a rule regarding “agent delegation agreements.”

In addition, the final regulations clarify that renewable energy certificates (RECs) produced through the generation of clean energy are included in “renewable energy credits or similar credits,” with the result that each member of an unincorporated organization must reserve the right separately to take in or dispose of that member’s proportionate share of any RECs generated.

The Treasury and IRS also clarify in T.D. 10012 that “partnership flip structures,” in which allocations of income, gains, losses, deductions, or credits change at some after the partnership is formed, violate existing statutory requirements for electing out of subchapter K and, thus, are by existing definition not eligible to make a Code Sec. 761(a) election.

The Proposed Regulations

The preamble to the March 2024 proposed regulations noted that the Treasury and IRS were considering rules to prevent abuse of the Reg. §1.761-2(a)(4)(iii) modifications. For instance, a rule mentioned in the preamble would have prevented the deemed-election rule in prior Reg. §1.761-2(b)(2)(ii) from applying to any unincorporated organization that relies on a modification in then-proposed Reg. §1.761-2(a)(4)(iii). The final regulations under T.D. 10012 do not contain any rules on deemed elections, but the Treasury and the IRS believe that more guidance is needed under Code Sec. 761(a) to implement Code Sec. 6417. Therefore, proposed rules (REG-116017-24, the “November 2024 proposed regulations”) are published concurrently with the final regulations to address the validity of Code Sec. 761(a) elections by applicable unincorporated organizations with elections that would not be valid without application of revised Reg. §1.761-2(a)(4)(iii).

Specifically, Proposed Reg. §1.761-2(a)(4)(iv)(A) would provide that a specified applicable unincorporated organization’s Code Sec. 761(a) election terminates as a result of the acquisition or disposition of an interest in a specified applicable unincorporated organization, other than as the result of a transfer between a disregarded entity (as defined in Reg. §1.6417-1(f)) and its owner.

Such an acquisition or disposition would not, however, terminate an applicable unincorporated organization’s Code Sec. 761(a) election if the organization (a) met the requirements for making a new Code Sec. 761(a) election and (b) in fact made such an election no later than the time in Reg. §1.6031(a)-1(e) (including extensions) for filing a partnership return with respect to the period of time that would have been the organization’s tax year if, after the tax year for which the organization first made the election, the organization continued to have tax years and those tax years were determined by reference to the tax year in which the organization made the election (“hypothetical partnership tax year”).

Such an election would protect the organization’s Code Sec. 761(a) election against all terminating acquisitions and dispositions in a hypothetical year only if it contained, in addition to the information required by Reg. §1.761-2(b), information about every terminating transaction that occurred in the hypothetical partnership tax year. If a new election was not timely made, the Code Sec. 761(a) election would terminate on the first day of the tax year beginning after the hypothetical partnership taxable year in which one or more terminating transactions occurred. Proposed Reg. §1.761-2(a)(5)(iv) would add an example to illustrate this new rule.

These provisions would not apply to an organization that is no longer eligible to elect to be excluded from subchapter K. Such an organization’s Code Sec. 761(a) election automatically terminates, and the organization must begin complying with the requirements of subchapter K.

The proposed regulations would also clarify that the deemed election rule in Reg. §1.761-2(b)(2)(ii) does not apply to specified applicable unincorporated organizations. The purpose of this rule, according to the IRS, is to prevent an unincorporated organization from benefiting from the modifications in revised Reg. §1.761-2(a)(4)(iii) without providing written information to the IRS about its members, and to prevent a specified applicable unincorporated organization terminating as the result of a terminating transaction from having its election restored without making a new election in writing.

In addition, the proposed regulations would require an applicable unincorporated organization making a Code Sec. 761(a) election to submit all information listed in the instructions to Form 1065, U.S. Return of Partnership Income, for making a Code Sec. 761(a) election. The IRS explains that this requirement is intended to ensure that the organization provides all the information necessary for the IRS to properly administer Code Sec. 6417 with respect to applicable unincorporated organizations making Code Sec. 761(a) elections.

The proposed regulations would also clarify the procedure for obtaining permission to revoke a Code Sec. 761(a) election. An application for permission to revoke would need to be made in a letter ruling request meeting the requirements of Rev. Proc. 2024-1 or successor guidance. The IRS indicates that taxpayers may continue to submit applications for permission to revoke an election by requesting a private letter ruling and can rely on Rev. Proc. 2024-1 or successor guidance before the proposed regulations are finalized.

Applicability Dates

The final regulations under T.D. apply to tax years ending on or after March 11, 2024 (i.e., the date on which the March 2024 proposed regulations were published). The IRS states that an applicable unincorporated organization that made a Code Sec. 761(a) election meeting the requirements of the final regulations for an earlier tax year will be treated as if it had made a valid Code Sec. 761(a) election.

The proposed regulations (REG-116017-24) would apply to tax years ending on or after the date on which they are published as final.

T.D. 10012

NPRM REG-116017-24

IR-2024-292

National Taxpayer Advocate Erin Collins is criticizing the Internal Revenue Service for proposing changed to how it contacts third parties in an effort to assess or collect a tax on a taxpayer.

Current rules call for the IRS to provide a 45-day notice when it intends to contact a third party with three exceptions, including when the taxpayer authorizes the contact; the IRS determines that notice would jeopardize tax collection or involve reprisal; or if the contact involves criminal investigations.

The agency is proposing to shorten the length of proposing to shorten the statutory 45-day notice to 10 days when the when there is a year or less remaining on the statute of limitations for collection or certain other circumstances exist.

"The IRS’s proposed regulations … erode an important taxpayer protection and could punish taxpayers for IRS delays," Collins wrote in a November 7, 2024, blog post. The agency generally has three years to assess additional tax and ten years to collect unpaid tax. By shortening the timeframe, it could cause personal embarrassment, damage a business’s reputation, or otherwise put unreasonable pressure on a taxpayer to extend the statute of limitations to avoid embarrassment.

"Furthermore, the ten-day timeframe is so short, it is possible that some taxpayers may not receive the notice with enough time to reply," Collins wrote. "As a result, those taxpayers may incur the embarrassment and reputational damage caused by having their sensitive tax information shared with a third party on an expedited basis without adequate time to respond."

"The statute of limitations is an important component of the right to finality because it sets forth clear and certain boundaries for the IRS to act to assess or collect taxes," she wrote, adding that the agency "should reconsider these proposed regulations and Congress should consider enacting additional taxpayer protections for third-party contacts."

By Gregory Twachtman, Washington News Editor

The IRS has amended Reg. §30.6335-1 to modernize the rules regarding the sale of a taxpayer’s property that the IRS seizes by levy. The amendments allow the IRS to maximize sale proceeds for both the benefit of the taxpayer whose property the IRS has seized and the public fisc, and affects all sales of property the IRS seizes by levy. The final regulation, as amended, adopts the text of the proposed amendments (REG-127391-16, Oct. 15, 2023) with only minor, nonsubstantive changes.

The IRS has amended Reg. §30.6335-1 to modernize the rules regarding the sale of a taxpayer’s property that the IRS seizes by levy. The amendments allow the IRS to maximize sale proceeds for both the benefit of the taxpayer whose property the IRS has seized and the public fisc, and affects all sales of property the IRS seizes by levy. The final regulation, as amended, adopts the text of the proposed amendments (REG-127391-16, Oct. 15, 2023) with only minor, nonsubstantive changes.

Code Sec. 6335 governs how the IRS sells seized property and requires the Secretary of the Treasury or her delegate, as soon as practicable after a seizure, to give written notice of the seizure to the owner of the property that was seized. The amended regulation updates the prescribed manner and conditions of sales of seized property to match modern practices. Further, the regulation as updated will benefit taxpayers by making the sales process both more efficient and more likely to produce higher sales prices.

The final regulation provides that the sale will be held at the time and place stated in the notice of sale. Further, the place of an in-person sale must be within the county in which the property is seized. For online sales, Reg. §301.6335-1(d)(1) provides that the place of sale will generally be within the county in which the property is seized. so that a special order is not needed. Additionally, Reg. §301.6335-1(d)(5) provides that the IRS will choose the method of grouping property selling that will likely produce that highest overall sale amount and is most feasible.

The final regulation, as amended, removes the previous requirement that (on a sale of more than $200) the bidder make an initial payment of $200 or 20 percent of the purchase price, whichever is greater. Instead, it provides that the public notice of sale, or the instructions referenced in the notice, will specify the amount of the initial payment that must be made when full payment is not required upon acceptance of the bid. Additionally, Reg. §301.6335-1 updates details regarding permissible methods of sale and personnel involved in sale.

T.D. 10011

The Financial Crimes Enforcement Network (FinCEN) has announced that certain victims of Hurricane Milton, Hurricane Helene, Hurricane Debby, Hurricane Beryl, and Hurricane Francine will receive an additional six months to submit beneficial ownership information (BOI) reports, including updates and corrections to prior reports.

The Financial Crimes Enforcement Network (FinCEN) has announced that certain victims of Hurricane Milton, Hurricane Helene, Hurricane Debby, Hurricane Beryl, and Hurricane Francine will receive an additional six months to submit beneficial ownership information (BOI) reports, including updates and corrections to prior reports.

The relief extends the BOI filing deadlines for reporting companies that (1) have an original reporting deadline beginning one day before the date the specified disaster began and ending 90 days after that date, and (2) are located in an area that is designated both by the Federal Emergency Management Agency as qualifying for individual or public assistance and by the IRS as eligible for tax filing relief.

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Beryl; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC7)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Debby; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC8)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Francine; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC9)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Helene; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC10)

FinCEN Provides Beneficial Ownership Information Reporting Relief to Victims of Hurricane Milton; Certain Filing Deadlines in Affected Areas Extended Six Months (FIN-2024-NTC11)

National Taxpayer Advocate Erin Collins offered her support for recent changes the Internal Revenue Service made to inheritance filing and foreign gifts filing penalties.

National Taxpayer Advocate Erin Collins offered her support for recent changes the Internal Revenue Service made to inheritance filing and foreign gifts filing penalties.

In an October 24, 2024, blog post, Collins noted that the IRS has "ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3250, Part IV, which deal with reporting foreign gifts and bequests."

She continued: "By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code Sec. 6677 penalty."

Collins said this change will "reduce unwarranted assessments and relieve burden on taxpayers" by giving them an opportunity to explain the circumstances for a late file to be considered before the agency takes any punitive action.

She noted this has been a change the Taxpayer Advocate Service has recommended for years and the agency finally made the change. The change is an important one as Collins suggests it will encourage more taxpayers to file corrected returns voluntarily if they can fix a discovered error or mistake voluntarily without being penalized.

"Our tax system should reward taxpayers’ efforts to do the right thing," she wrote. "We all benefit when taxpayers willingly come into the system by filing or correcting their returns."

Collins also noted that there are "numerous examples of taxpayers who received a once-in-a-lifetime tax-free gift or inheritance and were unaware of their reporting requirement. Upon learning of the filing requirement, these taxpayers did the right thing and filed a late information return only to be greeted with substantial penalties, which were automatically assessed by the IRS upon the late filing of the form 3520," which could have penalized taxpayers up to 25 percent of their gift or inheritance despite having no tax obligation related to the gift or inheritance.

She wrote that the abatement rate of these penalties was 67 percent between 2018 and 2021, with an abatement rate of 78 percent of the $179 million in penalties assessed.

"The significant abetment rate illustrates how often these penalties were erroneously assessed," she wrote. "The automatic assessment of the penalties causes undue hardship, burdens taxpayers, and creates unnecessary work for the IRS. Stopping this practice will benefit everyone."

By Gregory Twachtman, Washington News Editor

The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.

The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.

PPP Loans
The CARES Act expanded the Small Business Administration’s (SBA’s) existing Section 7(a) loan program to include certain PPP loans. The PPP is made available from the SBA to provide small businesses with loans to help pay payroll costs, mortgages, rent, and utilities during the COVID-19 (coronavirus) crisis. All payments of principal, interest, and fees under the loans are deferred for at least 6 months. The loans are also forgiven for amounts payroll costs, mortgage or rent obligations, and certain utility payments incurred between February 15 and June 30. The loans are 100 percent guaranteed by the SBA.

Deductions Prohibited
If the SBA forgives a taxpayer’s PPP loan pursuant to Act. Sec. 1106(b) of the CARES Act, the amount of the loan is excluded from gross income. Under Reg. §1.265-1 taxpayers cannot deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes. This rule exists in order to prevent double tax benefits. Thus, the IRS has determined that taxpayers who have their PPP loans forgiven may not deduct any business or interest expenses related to the income associated with the loan.

Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.

Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.

Additionally, SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities, according to Treasury.

Measures included in the application and instructions intended to reduce compliance burdens and simplify the process for borrowers include:

• options to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers’ regular payroll cycles;
• flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
• step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
• borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
• the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.

Although you may want your traditional individual retirement accounts (IRAs) to keep accumulating tax-free well into your old age, the IRS sets certain deadlines. The price for getting an upfront deduction when contributing to a traditional IRA (or having a rollover IRA) is that Uncle Sam eventually starts taxing it once you reach 70½. The required minimum distribution (RMD) rules under the Internal Revenue Code accomplish that.

If distributions do not meet the strict minimum requirements for any one year once you reach 70½, you must pay an excise tax equal to 50 percent, even if you kept the money in the account by mistake.

Required minimum distribution

The traditional IRA owner must begin receiving a minimum amount of distributions (the RMD) from his or her IRA by April 1 of the year following the year in which he or she reaches age 70½. That first deadline is referred to as the required beginning date.

If, in any year, you as a traditional IRA owner receive more than the RMD for that year, you will not receive credit for the additional amount when determining the RMD for future years. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year. The RMD for any year after the year you turn 70½ must be made by December 31 of that year.

Distribution period

The distribution period is the maximum number of years over which you are allowed to take distributions from the IRA. You calculate your RMD for each year by dividing the amount in the IRA as of the close of business on December 31 of the preceding year by your life expectancy at that time as set by special IRS tables. Those tables are found in IRS Publication 590, "IRAs Appendix C."

Example: Say you were born on November 1, 1936, are unmarried, and have a traditional IRA. Since you have reached age 70½ in 2007 (on May 1 to be exact), your required beginning date is April 1, 2008. Assume further that as of December 31, 2006, your account balance was $26,500. Using Table III, the applicable distribution period for someone your age as of December 31, 2007 (when you will be age 71) is 26.5 years. Your RMD for 2007 is $1,000 ($26,500 ÷ 26.5). That amount must be distributed to you by April 1, 2008.

The RMD rules do not apply to Roth IRAs; they only apply to traditional IRAs. That is one of the principal estate planning reasons for setting up a Roth IRA or rolling over a traditional IRA into a Roth IRA. The downside of a Roth IRA, of course, is not getting an upfront deduction for contributions, or having to pay tax on the balance when rolled over from a traditional IRA into a Roth IRA.

Please contact this office if you need any help in determining a RMD or in deciding whether a rollover to a Roth IRA now to avoid RMD issues later might make sense for you.

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.

Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.

What can be done?

Keeping lots of receipts is one answer! Remember, it will be the gain on your home that is potentially taxable, not full sale price. Gain is equal to net sales price minus an amount equal to the price you paid for your house (including mortgage debt) plus the cost of any improvements made over the years. Bottom line: If your residence has gain that will otherwise be taxed, you will get around 30 percent back on the cost of the improvements (assume your tax bracket is about 30 percent when you sell), simply by keeping good records of those improvements.

The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements cannot be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio. It doesn't need to be a big project, however, just relatively permanent. For example, putting in a skylight or a new kitchen sink qualifies.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales before 1998.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale).