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Can You Support Your Charitable Deductions?
Strict recordkeeping rules for 2011 returns

Year in and year out, charitable donations often provide big deductions for high-income individuals at tax return time. Deductions for charitable gifts may be claimed only by taxpayers who itemize their returns. But even itemizers are at risk if they do not have the requisite proof to back up their claims.

If you don't measure up, you could be forced to forfeit all or part of your charitable deduction for 2011. Here is an overview of the most important rules.

Cash contributions: Under a recent tax law change, de­ductions for all monetary gifts, regardless of the amount, may be disallowed if the donor does not maintain either a bank record—including a canceled check, bank statement or credit card statement—or a written communication—from the charity indicating the donor's name, contribution amount and date of the contribution. Technically, this covers everything from million dollar grants made to a college or hospital to the spare change donated during the holiday season.

Contributions of $250 or more: The IRS also requires charitable donors to obtain a written acknowledgement from a charitable organization for gifts of $250 or more. The acknowl­edgement must be obtained by the time you file your tax return. It should include the amount of the check or cash donated, a detailed description of any property that was donated and the value of the benefit received if any goods or services were pro­vided. Key exception: You do not have to establish a value for "intangible religious benefits."

Contributions made through payroll deductions may be substantiated by pay stubs or a W-2 form. Note: Substantiation is not required if the donee organization files a return with the IRS providing the information to be included in an acknowledgement.

Quid pro quo contributions: If you make a "quid pro quo" contribution (i.e., a contribution made partially or fully in exchange for goods or services) for an amount more than $75, you must obtain a good faith estimate from the charity detailing the value of the benefit received. For example, say you attend a fund-raising dinner where the tickets cost $100 apiece and the dinner is value at $40. The charity must provide a written statement limiting the deductible amount to $60 per ticket. However, a written statement from a charity is not required if you receive token goods, minimal services or intangible religious benefits in exchange for your donation.

There are a few other points to keep in mind. For example, if you gave charitable gifts of property exceeding $500 in 2011, additional information must be attached to your tax return.

If your donation for noncash property exceeds $5,000, you are also required to provide an independent appraisal of the property's value. Note: The cost of the appraisal is deductible as a miscellaneous itemized deduction (subject to the usual tax law limits for miscellaneous expenses).

In summary: These recordkeeping rules will keep you on your toes. However, as long as you have the proper documenta­tion, you should be able to claim legitimate deductions for charitable donations on your 2011 return. Seek assistance from a tax professional.

Mapping Out Business Travel in 2012
IRS announces higher per diem rates

The IRS pays extra-close attention to deductions claimed for business travel expenses. As a result, both employers and employees must meet strict recordkeeping require­ments or face the consequences. Fortunately, you can obtain some relief by using IRS-approved per diem allowances in lieu of ac­counting for every expense.

The per diems are actually the allowances approved for travel by U.S. government employees. But a business owner cannot use either type of per diem allowance if he or she owns 10% or more of the company.

There are two basic per diem rates. The first is based separately on the employee's travel destination. The sec­ond depends on the annual "high–low" rates established each year for certain areas.

Starting point: As long as employees properly account for their business travel expenses, including the cost of meals and lodging, employer-paid reimbursements are tax-free to the employees and deductible by the company. But this can leadto a recordkeeping nightmare. With a per diem allowance, employees do not have to keep receipts for all of their travel expenses. The employer simply pays the government-approved allowance—without any questions.

Employees do not even have to report the payments on their tax return. However, they still must substantiate the time, place and business purpose of their business travel.

In addition to adjusting the allow­ances for each specific travel desti­nation, the government establishes a flat rate for certain high-cost areas. The list of high-cost areas includes business centers such as New York City and San Francisco. In addition, other areas may be included on a sea­sonal basis such as Vail in the winter or Nantucket in the summer. All the locations that are not listed as high-cost areas automatically fall into the low-cost category.

New rates: The IRS recently announced new per diem rates for the government's 2012 fiscal year. (The fiscal year runs from October 1, 2011, through September 30, 2012, but these rates may be used throughout 2012.) Following a recent trend, the increases were relatively small. The IRS-approved per diem rate for the 2012 fiscal year ranges from $123 (the same rate that was used in 2011) to $367.

For employers using the high–low method, the per diem rate for high-cost areas is $242, up $9 from 2011. The rate for low-cost areas increased by $3 to $163. Note: The government initially intended to discontinue the high–low rates this year but subsequently relented due to public response.

To reduce the paperwork burden, you might use the high–low method for employees who travel extensively, especially if they generally travel to major cities. On the other hand, you can require other employees to use the specific-location method if they frequently travel to low-cost areas. Finally, you can have those employees who travel infrequently keep detailed records of their actual expenses.

Finally, remember that this is just an overview of the basic rules. Consult a professional tax adviser concerning your situation.

Eight Key Requirements for 401(k) Loans
Follow rules for borrowing from account

A 401(k) plan is a well-established retirement savings vehicle. But can an employee tap into the 401(k) plan account if he or she needs to do so before retire­ment? It depends.

A typical plan may permit employees to make hardship withdrawals. However, IRS regulations allow hardship withdrawals only if a participant has an immediate and heavy financial need and lacks other resources. In addi­tion, such distributions may be subject to income tax and a 10% early withdrawal penalty.

Possible solution: A plan can address these shortcom­ings by including a loan feature. If it is warranted, an employee may borrow the greater of (a) $10,000 or (b) up to one-half of the first $100,000 in the account without paying any tax or penalty.

As with other retirement plan features, loan programs must meet regulatory requirements of the Department of Labor and the IRS. The eight key requirements are:

• Availability: Loans must be available to all partici­pants on a reasonably equivalent basis. To satisfy this requirement, loans must be available without regard to race, color, religion, sex or national origin. Also, when considering whether to make loans, plans can consider only such factors as commercial lenders would take into account, such as creditworthiness and financial need.

• Nondiscrimination rules: A loan cannot be made avail­able to highly compensated employees, officers or share‑ holders in amounts greater than those made available to other employees. This condition will not be violated merely because the loans do not exceed a maximum amount or a maximum percentage of a participant's vested account balance.

•  Specific plan provisions: Loans must-be made under specific provisions contained in the plan. The plan must state the procedure to apply for loans, the basis on which loans are approved or denied, the limitations on types and amounts of loans, the procedure to determine a reasonable rate of interest, the collateral that may secure loans, and an explanation of default and how the plan will deal with it.

• Reasonable rate of interest: A loan must bear a reason­able rate of interest. This test is met if the rate charged is similar to what banks or other commercial lenders would charge under similar circumstances.

• Adequate security: Loans must be adequately secured. In other words, you need more than just a promise to pay—there must be security that could be sold so that the plan would suffer no loss of interest or principal. The regulations allow plans to permit the participant to use up to one-half of his or her account balance to secure loans. In other words, if loans are limited to 50% of a participant's account balance, the plan can avoid the need to acquire additional security.

• Amortization: There must be level amortization.

• Length of term: Loans must be repayable within five years, except where the loan is used to acquire the prin­cipal residence of the participant.

• Frequency of payments: Payments must be made in quarterly installments or at more frequent intervals (e.g., monthly, weekly, etc.).

Remember, however, that 401(k) plans are intended for retirement saving. Typically, borrowing from the ac­count should not be the first option to examine.

This is a technical area of the law. Whether you are an employer or an employee, obtain expert assistance.

IRS Approves Healthy Deduction

In a newprivate letter ruling, the IRS approved a medi­cal expense deduction for the cost of food for some taxpayers.

The IRS said that special diet food may qualify for the medical deduction to the extent the cost exceeds that of regular meals. To qualify, the special diet must be pre­scribed by a physician for a specific medical purpose. In other words, it cannot simply be used to improve your general health.

Reminder: The medical expense de­duction is currently limited to the amount of your qualified expenses exceeding 7.5% of adjusted gross income.

What to Do About Disruptive Employees
Proactive steps to address the problem

Even if you thoroughly vet new hires before you bring them into the fold, it is likely that one or two "bad seeds" will manage to slip through the cracks. Disruptive employees can cause major distractions, slow down pro­ductivity and ultimately affect the bottom line. Here are several practical suggestions for handling the situation:

• Develop a company-wide policy on workplace behav­ior before any incidents occur. Spell out which types of disruptive behaviors will not be tolerated. This might include acts such as hostility, bullying, shouting, intimi­dation, accusations or just an overall negative attitude. Distribute the policy to all employees in writing. Request their signatures to ensure that your employees under­stand the rules and consequences of their behavior.

• Identify those employees who have been disruptive in the past. But do not focus on occasional outbursts or otherwise innocent comments that are made casually at the water cooler or in the lunchroom. Remember that almost everyone has a bad day now and then. Problematic employees usually demonstrate a habitual pattern of disruptive behavior that interferes with the job on a regular basis. Be careful to single out only the worst offenders.

• Hold one-on-one meetings with these disruptive employees. (Do not be surprised if an employee is taken aback when you request a get-together for this purpose.)

Try to keep the chat informal, but address the critical issues head-on. Inform the worker that his or her behavior is affecting the workplace. Find out if there are any valid reasons for the disruptions. If a legitimate problem is presented, investigate the matter promptly and, when warranted, take appropriate action. Again, refer to the company manual for guidance.

• Monitor employees' progress. If you have talked with an employee about disruptive behavior and have agreed on a solution, you must provide him or her with enough time and opportunity to make good on the adjustments. Keep a close watch on new developments. Note in your files if an employee shows signs of improvement or recur­ring insubordination.

• Institute formal disciplinary proceedings if disruptive behavior continues. Do not allow these actions to slow down productivity or lower company morale. Follow the procedures outlined in your company policy. This may reflect a system that establishes verbal warnings, written warnings and, finally, suspensions or termination.

All too often, business managers allow problems to persist without confronting employees. Before you know it, the entire workplace is affected. It is usually better to be proactive than reactive. Although it may raise some sensitive issues in the short term, your business is not as likely to suffer over the long run.

Facts and Figures
Timely points of particular interest

New Retirement Plan Limits—The IRS recently an­nounced adjustments in retirement plan limits for 2012. Although some thresholds were bumped up from 2011, others remain the same. For instance, the limit for elec­tive deferrals to a 401(k) plan increased from $16,500 to $17,000 (from $22,000 to $22,500 for taxpayers age 50 or older), but the limit for IRA contributions stays at $5,000 ($6,000 for taxpayers age 50 or older).

Being on Time—The IRS generally has three years to review federal tax returns, but this period is increased to six years for a substantial understatement of income. The IRS defines a "substantial understatement" as an omission of 25% or more of tax liability. After several lower-court conflicts over the statute of limitations for adjustments involving the "basis" of property, the U.S. Supreme Court will now decide the matter.