Our firm has represented many of our business clients in MN Sales and Use Tax audits, with more sure to come since the state's goal is to audit every MN business.

The good news is that when we work with our clients in their businesses, we always want to consider their sales and use tax obligations so that when the eventual audit comes up, our clients are well-prepared and there is minimal pain involved.

Unfortunately, I think there is one area where clients may surprised by their sales/use tax liability and it is this:  If you have inventory which you purchased for resale and exempt from sales tax and you later donate any of that inventory to a tax-exempt organization, you must self-assess the sales/use tax and pay the tax to the state of Minnesota. 

The situation that unfortunately arose with a client is that they had obsolete inventory they were taking off their books.  They could have trashed it, but they found a school that could use it as instructional materials and donated it.  They owe tax on the donation but would not owe tax if they had trashed it. 

This was confirmed by a state auditor who offered another solution:  The company making the donation can sell the goods to the donee for a nominal amount, say $1.  Then the tax is avoided.

Oh these taxing times!

Click here to see The Kiplinger Tax Letter's list of common audit triggers at www.kiplinger.com/letterlinds/audittriggers

There were two versions of the first-time homebuyer credit.  Before determining what, if any, your requirement is for repaying the credit you need to first determine which version of the credit you received.

The first version of the credit applied to homes purchased from April 9 to December 31, 2008*.  It was claimed on the 2008 tax return and essentially was an interest-free loan received in the form of a tax refund of up to a maximum of $7,500.

This version of the "credit/loan" is required to be repaid in 15 equal installments beginning on your 2010 federal individual income tax return.  However, if you sell your home before the end of the 15 years, any remaining credit is repaid in the year you sell the home but is limited to the gain on the sale determined after reducing the home's basis by the unrepaid credit.  If you sell to a related person, however, this limitation does not apply.

If a sole homeowner dies before the "credit/loan" is repaid, the debt is forgiven including the installment in the year of the death.  If the "credit/loan" was claimed on a joint return, the deceased's unpaid portion is forgiven and the surviving spouse is only obligated to repay his or her half of the unpaid balance.

The debt is also discontinued if the home is involuntarily converted during the repayment period and the taxpayer/homeowner acquires a new principal residence within two years of the conversion.

In the case of a divorce in which a home to which the "credit/loan" applied is transferred between spouses, the obligation to repay the "credit/loan" is also transferred.  Therefore, the person remaining in the home is obligated to repay the full remaining balance over the installment period.

The repayment installments cannot be offset by the taxpayer's nonrefundable personal credits.

The second version applied to two groups of homebuyers with each group having its own qualifying purchase dates:  First-time homebuyers who received the credit up to a maximum credit of $8,000 on homes purchased from January 1, 2009 to September 30, 2010 (if under contract by April 30), and "long-time" homebuyers who received a credit of up to a maximum of $6,500 on homes purchased from November 7, 2009, to September 30, 2010 (if under contract by April 30).

The credits received by these two groups are true credits requiring NO repayment as long as the taxpayer continues to own and live in the home for 36 months from the date of purchase.  However, if the taxpayer sells, converts to business or rental use, or loses to foreclosure, the home within the 36 months, the taxpayer must repay the credit (limited to the gain on the property if sold to an unrelated party).  If the taxpayer loses the house due to condemnation or destruction withing 36 months and does not acquire another principal residence within two years of the loss, the taxpayer must repay the credit in the year the two-year replacement period ends.

Please note that there are additional exceptions for Servicemembers on qualified extended duty--contact us or go to http://www.irs.gov/ for additional help.

If your business owns vehicles used by an owner, employee or company director, you need to determine if you have a personal-use payroll reporting requirement.  Generally, nonbusiness use of a company vehicle is taxable compensation to the employee which is subject to payroll taxes.  Therefore, you need to include this in your payroll processing before your deadline for making a timely tax deposit for 2011 passes.

Since this payroll reporting must be done before the end of the year, November and December usage can be reported next year.

For your convenience, we have the 2011 Worksheet and the  IRS Annual Lease Value Table available for your use in calculating the benefit to be included in your payroll reporting. 

In order to have the employee cover the employee's share of the payroll taxes, this compensation needs to be reported when you are processing a payroll with wages.

If you miss reporting the taxable benefit with a payroll run, you will need to gross up the taxable benefit to include the employee's share of the payroll taxes resulting in a net zero check.

For those of you using a payroll service, please contact your payroll representative regarding this taxable benefit and any others that need to be included in your year-end reporting.  If you need a payroll-service referral, we would be happy to help you make that connection.  Or if you prefer, we will be happy to assist you with this reporting requirement for those of you with do-it-yourself payrolls.

With the holidays and end of the year coming, now is the time to go through your home and pack up those items that you would like to donate to charity and deduct on this year's tax return.

The items that you donate must be in "good" or better condition to qualify as a deduction.

When you donate your items, remember to get a receipt from the donee organization.  Unfortunately, however, they will not itemize it for you.  That is your task and responsibility in substantiating the charitable deduction.

For your convenience we have a download available for your use in itemizing and valuing your donated items.  Or if you prefer, you can click on the following Salvation Army link for their valuation guide: http://www.satruck.org/donation-value-guide. 

As your tax preparer, the federal government requires us to review the receipts for your charitable donations, so please file them in your current year tax documents to bring with you to your tax appointment.

If your non-cash charitable donations exceed $500, Form 8283 must be filed with your tax return.  This form lists the name and address of the charitable organization, along with date of the contribution, the description of the items and their thrift store value. 

For any single donation that exceeds $500, the method of acquisition and cost basis for the goods must also be reported.

For donations exceeding $5,000, your are required to have an appraisal of the goods by a qualified appraiser.

A few final tips: 
-Only deduct donations made to qualified organizations.
-Raffle tickets are not deductible.
-There is no deduction for donating your time; any out-of-pocket costs, however, are deductible including mileage at 14 cents per mile.

(Click on the following link to go to this IRS tax topic http://www.irs.gov/taxtopics/tc506.html.)