The Florida Department of Revenue has issued an emergency rule, which replaces a similar expired rule, regarding additions and subtractions required to compute the corporate income...
Under the Small Business Jobs Act of 2010 (SBJA) for purposes of the $600 or more general information reporting requirement for payments made in the course of a trade or business, a person receiving rental income from real estate is considered to be engaged in a trade or business of renting property, although certain exceptions apply. An information return is generally required under Code Sec. 6041(a) to be made by any person engaged in a trade or business (payor) who makes certain payments aggregating $600 or more in any tax year to another person (payee) in the course of the payor's trade or business. Effective for payments made after December 31, 2010, rental income recipients making payments of $600 or more to a service provider (e.g., a plumber, painter, or accountant) in the course of earning rental income now will have to provide a Form 1099-MISC to the IRS and to the service provider. The IRS will issue regulations providing exceptions to the reporting requirement for (1) members of the military or employees of the intelligence community who rent their principal residence on a temporary basis; (2) individuals receiving only minimal amounts of rental income; and (3) individuals for whom the requirements would cause a hardship.
Failure to comply with these rules may result in the imposition of penalties, which could include a penalty for failure to file the information return (Code Sec. 6721), a penalty for failure to furnish payee statements (Code Sec. 6722) or a penalty for failure to comply with other various reporting requirements (Code Sec. 6723).
Information Reporting Effective for Payments Beginning in 2012
Under provisions made by the Patient Protection and Affordable Care Act (PPACA), the exception for paymetns of $600 or more made to a corporation in the course of a trade or business, has been eliminated, other than for corporations exempt from tax under Code Sec. 501(a). Undoubtedly, this law will increase the paperwork and filing burdens of all businesses. The general business community has been calling for the repeal of this expanded reporting requirement, but to date there have been no recent legislative efforts made to repeal this provision. The American Institute of Certfied Public Accountants (AICPA) has written a letter to Congress recommending the repeal of this new reporting requirement.
The law change would require information returns from every person who makes paymetns totaling $600 or more to a single payee i nthe course of a payor's trade or business during the taxable year. The class of payments subject to the new reporting requirements has been expanded to all amounts paid in consideration for property, as well as gross proceeds for services. This means that payments to vendors such as Staples, airlines, hotels, car rental companies, etc. will be subject to this reporting requirement as well as payments for capital expenditures.
Failure to comply with these rules may result in the imposition of penalties, which could include a penalty for failure to file the information return (Code Sec. 6721), a penalty for failure to furnish payee statements (Code Sec. 6722) or a penalty for failure to comply with other various reporting requirements (Code SEc. 6723).
A grantor retained annuity trust (GRAT) is a powerful tool for reducing gift and estate taxes. It lets you generate income for yourself while potentially removing significant amounts of wealth from your estate at a relatively low gift-tax cost. And you may even be able to use a “zeroed-out” GRAT to eliminate gift taxes altogether.
How do GRATs save estate tax?
To take advantage of a GRAT, you make a one-time contribution of assets to an irrevocable trust. The trust pays you an annuity for a specified term, and at the term’s end any remaining assets are transferred tax-free to your children or other beneficiaries. The annuity can be stated as a fixed percentage of your initial contribution’s value or a fixed dollar amount.
GRATs allow you to avoid estate taxes by removing assets from your estate if you outlive the GRAT’s term. (Note that, although an estate tax repeal went into effect Jan. 1, 2010, the estate tax is scheduled to return in 2011. Congress may even take action to repeal the repeal, perhaps retroactively to Jan. 1. Check with your tax advisor for the latest information.)
A GRAT can be particularly effective for assets that you expect to appreciate rapidly or that produce substantial amounts of income. Why? Because future earnings and appreciation on GRAT assets in excess of the IRS’s assumed rate of return (the Section 7520 rate) are shielded from gift and estate taxes. (You’ll be responsible for reporting the trust’s income on your individual income tax return, though.)
How do GRATs save gift tax?
While the initial transfer of assets to a GRAT is a taxable gift, you can minimize or even eliminate gift taxes depending on how you structure the trust. For gift tax purposes, the gift to your beneficiaries is the residual assets they’re expected to receive at the end of the trust term.
To calculate the gift’s value, the fair market value of the assets you contribute to the GRAT is reduced by the actuarial value of the annuity, which is based on IRS tables that incorporate the Sec. 7520 rate. If the trust assets outperform the Sec. 7520 rate, the beneficiaries enjoy a tax-free windfall.
By increasing the trust term or the annuity payments, you can shrink the residual value, thereby reducing the gift tax. But selecting a trust term that is too long can backfire because the assets will be included in your taxable estate if you don’t outlive the trust.
For example, Monica is 55. She transferred $1 million in assets to a GRAT that paid her an annuity of $100,000 per year for the shorter of her life or 10 years. At the end of the 10-year term, the residual assets go to Monica’s son, Billy. The Sec. 7520 rate in effect when Monica established the GRAT was 4.6%, but the trust’s assets earn an actual return of 8%.
According to IRS tables, the value of Monica’s gift to Billy was approximately $248,400. But Billy’s actual residual interest, based on the 8% rate of return, is $710,269. Monica received annuity payments totaling $1 million over 10 years, while removing more than $700,000 from her estate. Assuming Monica has at least $250,000 of her $1 million lifetime gift tax exemption still available, the entire transaction is gift-tax free.
When should you consider a zeroed-out GRAT?
If your estate is relatively small and you haven’t used up your lifetime gift tax exemption, an ordinary GRAT is likely your best bet. It may allow you to transfer substantial amounts of wealth to your family free of gift and estate taxes, while retaining a healthy income stream. But in so doing, you’ll be required to use all or a portion of your gift tax exemption.
If you’ve already used up your gift tax exemption, a zeroed-out GRAT may be an attractive option. Why? Because it may allow you to achieve the same tax benefits as afforded by an ordinary GRAT, but without any gift tax consequences.
Suppose that, in our example, Monica received annuity payments of $127,000 per year, and the GRAT was designed so that, if Monica failed to survive the trust term, the remaining annuity payments would be made to her estate (a requirement for a zeroed-out GRAT to work). Based on the IRS tables, the annuity’s present value was $999,998, resulting in a taxable gift of only $2.
Keep in mind that zeroed-out GRATs have a downside: Boosting the annuity payments reduces the amount of wealth you remove from your estate. In our example, shifting to a zeroed-out GRAT lowers the amount Billy receives from the trust to about $320,000.
Which GRAT is right for you?
To determine the appropriate structure for a GRAT, you need to review your estate planning goals and circumstances. Then strike a balance between your interest in reducing gift and estate taxes and your interest in making lifetime transfers to beneficiaries.
A valuable depreciation-related tax break was extended by the Hiring Incentives to Restore Employment (HIRE) Act of 2010: higher Section 179 expensing limits. The break can make purchasing needed equipment more affordable. But you need to act soon to ensure you benefit — the HIRE Act extended the higher limits only for 2010, and it’s uncertain whether they’ll be extended again for 2011.
Depreciation 101
Ordinarily when you buy equipment and other assets for your business, you’re required to depreciate the costs over several years for tax purposes. Sec. 179 allows you to “expense” — in other words, deduct immediately — as much as 100% of the cost of a qualified asset in the year you place it in service.
To qualify for depreciation or expensing, an asset must be “placed in service.” That means the asset is ready and available for use in your business — in other words, it’s operational and at the work site. But you don’t necessarily have to be using the asset. Backup equipment and replacement parts, for example, are placed in service when they’re available for use.
The Sec. 179 election is available for most equipment, “off-the-shelf” computer software, machinery, furniture and other tangible personal property purchased for use in an active trade or business.
The amount you can expense under Sec. 179 is subject to an annual limit, which is phased out on a dollar-for-dollar basis when your total investment in Sec. 179 property exceeds the phaseout threshold. Under the HIRE Act, for 2010 the expensing limit has been increased to $250,000 and the phaseout threshold to $800,000. The $250,000 limit is reduced by $1 for every dollar of 2010 qualified purchases exceeding $800,000. So, for example, if you spend $900,000 on qualified property this year, the most you can expense is $150,000.
Meeting the income limit
Sec. 179 limits expensing to a taxpayer’s taxable income from all sources, so you can’t use the election to generate a loss. If the taxable income limit prevents you from deducting all of your Sec. 179 expenses this year, you can carry over the unused deductions to future years. However, you may be better off forgoing some or all of the election this year and using ordinary depreciation deductions to generate a loss.
If you’re a sole proprietor for federal tax purposes, taxable income includes any wages you earn as an employee plus your spouse’s wages or self-employment income if you file a joint return. And you can carry over and deduct in future tax years expenses you’re unable to deduct because of the income limit.
Let’s say, for example, John invests $100,000 in equipment for a startup business. The company has no taxable income for the year, but John’s wife, Mary, has $110,000 in taxable income from her job. John and Mary can deduct the entire $100,000 investment on their tax return. (The rules are more complicated for pass-through entities, such as partnerships and S corporations.)
Timing purchases
The higher Sec. 179 expensing limits apply for calendar year 2010 or a business’s fiscal year that begins in 2010. If Congress doesn’t extend the higher amounts, the limits for 2011 will drop to $125,000 and $500,000, respectively — though both limits will be indexed for inflation.
A tax rule of thumb advises that you should take as many deductions as possible this year and defer as much income as possible to later years. So if you can afford it, accelerating purchases into 2010 can make sense.
But like all rules, there are exceptions. For example, if you anticipate being in a higher income tax bracket in future years, you may be better off holding off on asset purchases — even if it means you’ll be subject to lower Sec. 179 expensing limits. Why? Because deductions save more tax dollars when you’re paying tax at a higher rate. For example, a $10,000 deduction saves $2,800 in taxes if you’re being taxed at the 28% rate, but it saves $3,500 if you’re being taxed at the 35% rate.
No more bonus depreciation?
As of this writing, the 50% bonus depreciation that was available in 2009 hasn’t been extended to 2010. Bonus depreciation allowed you to accelerate your depreciation deduction for a qualified asset by taking more of it for the year of purchase, in this case 50% of an eligible asset’s adjusted basis.
Bonus depreciation wasn’t subject to any asset purchase limits, so businesses ineligible for Sec. 179 expensing could take advantage of it. And businesses that qualified for Sec. 179 expensing could take bonus depreciation on asset purchases in excess of the $250,000 Sec. 179 limit. (Of course, they had to keep in mind the $800,000 Sec. 179 phaseout threshold.)
Because bonus depreciation could save you considerable taxes, keep an eye out to see if Congress extends this break. Your tax advisor can provide the latest information.
Getting the best result
To get the best tax result from your asset purchases and depreciation-related deductions, examine your overall tax situation with your tax advisor — before year end, so you still have time to make asset purchases and benefit from the 2010 tax breaks if appropriate.
Sidebar: How to avoid recapture
Be sure that property you expense under Section 179 is used more than 50% of the time for business. If business use drops below 50%, you’ll have to recapture a portion of the Section 179 deduction and pay taxes and interest on that amount. Penalties may apply.
The recaptured amount is the excess amount you expensed minus the amount you would have deducted under regular depreciation rules.
It’s common business knowledge that the key to getting, and keeping, good employees is to offer a benefit package they’ll appreciate. But you also want to make sure that you — as the owner — get all the tax breaks you’re entitled to.
A retirement plan is a good place to start. Whether yours is a new business just starting out or an existing business now ready to set up a plan, many of the considerations are the same.
Not one-size-fits-all
Retirement plans aren’t a one-size-fits-all proposition. Most small to midsize businesses implement 401(k) plans, Savings Incentive Match Plans for Employees (SIMPLEs), and Simplified Employee Pension (SEP) IRAs for their employees. Regardless of the plan, employer contributions are deductible, employee contributions are pretax and plan funds grow tax-deferred.
To determine which plan is best for your business, you’ll need to consider a variety of factors. Tax treatment and contribution limits are obvious concerns. But other factors also matter: company size and employee limits, employee age and turnover, employee compensation and company profits, flexibility of contribution amounts, treatment for owners and other highly compensated employees, reporting requirements, and administrative costs.
401(k) plans top the list
401(k)s are by far the most popular form of retirement plan. They are contributory plans — meaning the employee makes contributions through redirected salary. You can choose to match the employee’s contribution, up to certain limits.
401(k)s have a higher employee contribution limit than either SIMPLEs or SEP-IRAs — for 2010, contribution limits are $16,500, plus $5,500 for the age 50 and over catch-up amount.
Although the 401(k) has the advantage of higher employee contribution limits, it also has the most reporting requirements, making it more costly to create and maintain. Because annual requirements include filing a tax return (Form 5500) and compliance testing, most businesses turn over plan administration to an outside professional.
Employees are always 100% vested in their contributions to their account. Although amounts redirected to a 401(k) aren’t currently subject to income tax, the earnings are subject to FICA and Medicare tax.
You have some flexibility in determining whether to match your employees’ contributions. Employer contributions can vest over time, based on plan schedules. If the plan is top-heavy (favoring highly compensated employees), employer contribution matching and vesting become subject to IRS requirements. To maximize your own contributions — as the owner — you’ll need to monitor and encourage employee contributions, perhaps by providing an employer match.
Roths may be the way to go
If your plan is set up to accommodate a Roth 401(k), participants in a 401(k) or 403(b) plan may designate some, or all, of their elective contributions as a Roth contribution. Roth contributions will be taxed (not tax-deferred as in a traditional 401(k)), but all qualified withdrawals will be tax free, which means participants may never have to pay tax on growth in the plans. Plus, there are no required distributions.
To have a qualifying Roth contribution program, your retirement plan must establish a separate designated Roth account for each employee and maintain separate recordkeeping for each account.
SIMPLEs not just a runner-up
There are two types of SIMPLEs: a SIMPLE IRA and a SIMPLE 401(k). Both are contributory plans allowing employee contributions for 2010 of up to $11,500, indexed for inflation, and an additional $2,500 for employees age 50 and older.
With a SIMPLE, you’re required to match employee contributions up to 3% of pay, or you can choose to contribute 2% of pay for each employee. This matching is mandatory, unlike with the traditional 401(k). All contributions vest immediately.
SIMPLEs have a major advantage over 401(k)s in that they are, in fact, simple. With no annual tax return filing, and minimal documentation requirements, SIMPLEs are easier to handle, and you may avoid administration fees altogether. However, due to their lower contribution limit, SIMPLE plans may not be a good choice for owners who are seeking to maximize their retirement plan contributions.
SEP-IRAs funded entirely by employer
Unlike the SIMPLE and 401(k) plans, the SEP-IRA is a noncontributory plan — meaning no employee contributions are allowed. The SEP-IRA is entirely funded by employer contributions. Contributions are discretionary, but can’t exceed a specified limit — 25% of an eligible employee’s compensation up to a maximum of $49,000 in 2010. Participants are immediately vested.
SEP-IRAs are easy and inexpensive to set up and administer. No annual tax return is required, and you have until the due date of the company tax return (including extensions) to make your contribution. The company must include all eligible employees, but, because employer contributions are optional, contributions can be lower (or skipped) in a year in which your company is strapped for cash.
A business owner who’s self-employed, or employs primarily family members, may find that a SEP-IRA provides significant retirement funding benefits. When there are other employees who must be covered, the employer contribution may be viewed as too expensive.
You may get a credit for plan startup
If you’re ready to take the plunge and implement a retirement plan, Uncle Sam may help with some of the costs. Small employers — those with 100 or fewer employees — may be eligible for a credit of up to 50% of the first $1,000 spent on retirement plan administration and education for employees. This credit is available for the first three years of the plan — amounting to a maximum of $500 credit for each year.
We’ve covered only a few retirement plans. Other possibilities include defined benefit plans and other profit sharing or defined contribution plans. The greatest benefits may result from a mix-and-match approach. Combining plans could increase the allowable contributions for owners. You may also want to evaluate nonqualified deferred compensation arrangements to meet your retirement funding goals.
After a series of adverse rulings by the World Trade Organization (WTO), Congress curtailed its efforts to benefit exporters and instead provided a tax deduction for all manufacturers — whether they export or not.
The American Jobs Creation Act of 2004 (AJCA) repealed the extraterritorial income (ETI) exclusion and established the manufacturers’ deduction — also commonly referred to as the Section 199 or domestic production activities deduction. And the deduction isn’t just for traditional manufacturers. It’s also available to eligible construction contractors, engineers, architects, software developers, film producers, energy producers, farmers and agricultural processors. After a five-year phase-in period, the deduction reaches its maximum amount in 2010.
How the deduction works
The manufacturers’ deduction permits eligible taxpayers to deduct a specified percentage of the lesser of: 1) their income from “qualified production activities,” or 2) their taxable income for the year. The deduction may not exceed 50% of the W-2 wages a taxpayer pays during the year. Wages not allocable to domestic production gross receipts are excluded from W-2 wages for the purposes of the deduction.
The specified percentage phased in from 2005 through 2009 and reaches its maximum amount in 2010, going up from 6% in 2009 to 9% in 2010 and thereafter. As a result, in 2010 the deduction will lower the maximum effective marginal tax rate on qualifying income from 35% to 31.85%.
Qualified income is calculated by taking gross receipts from domestic production and subtracting the cost of goods sold and other allocable costs, deductions, expenses and losses. Domestic production gross receipts are those derived from any lease, rental, license, sale, exchange or other disposition of:
•Qualifying production property (including tangible personal property, computer software and certain sound recordings) manufactured, produced, grown or extracted by the taxpayer in whole or in significant part in the United States,
•Qualified films produced by the taxpayer, or
•Electricity, natural gas or potable water produced by the taxpayer in the United States.
Domestic production gross receipts also include receipts from construction and engineering or architectural services performed in the United States.
Two significant exceptions are receipts from the sale of food and beverages prepared by taxpayers at retail establishments and the transmission or distribution of electricity, natural gas and potable water.
Additionally, the deduction isn’t allowed in determining net earnings from self-employment and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax (AMT).
Looking more closely
The manufacturers’ deduction provides many companies with a potentially significant tax break. But the rules are complex, so be sure to take a closer look at whether you might qualify and what you need to do to maximize your tax savings.
Lending money to family members may be personal, but it pays to treat loans like business. If you don’t, you could owe taxes on income you never received and gifts you never intended to make.
Structured properly, however, an intrafamily loan can be a great way to help your kids or other family members buy a home, start a business or meet any number of financial needs. It can also be an effective estate planning tool for you.
The importance of documentation
Regardless of your loan’s terms, it’s important to put it in writing. The IRS is likely to view an undocumented loan to a family member as a gift, which may eat up some of your lifetime gift tax exemption (currently $1 million) or create a taxable gift if you’ve already used your lifetime exemption.
To avoid this result, document the loan with a promissory note. It should outline the terms of repayment, including when payments are due, and the interest rate for the loan.
A higher rate’s advantage
It may be tempting to offer your loved ones low-interest or even no-interest loans, but there can be significant tax advantages to charging a higher rate. If you lend money to family members at less than the applicable federal rate (AFR), the shortfall will be imputed to you.
In other words, you’ll be treated as if you’d charged the borrower the AFR, and that amount will be included in your taxable income — whether or not you collect it. What’s more, this forgone interest will be treated as a taxable gift to the borrower. The borrower may be able to deduct the interest, depending on the purpose of the loan.
2 loan options
Two exceptions allow you to make no-interest or low-interest intrafamily loans without generating imputed interest:
1. The $10,000 exception. You can lend a family member up to $10,000 without negative tax consequences, provided the money isn’t invested in income-producing assets. For example, you could make a $10,000 interest-free loan to your daughter for a down payment on a condo. But the exception won’t apply if she puts the money in a savings account.
2. The $100,000 exception. Imputed interest on family loans up to $100,000 is limited to the borrower’s net investment income and is eliminated if net investment income is $1,000 or less. Thus, in such situations, there is no taxable gift for the forgone interest.
Gift calculations
Gifts are calculated differently depending on the type of loan. If the loan is a term loan, for instance, you can calculate the gift as the difference between the present value of the forgone interest for the life of the loan and the present value of the loan’s stated interest. For a demand loan, the gift is recalculated annually based on the forgone interest for that year.
With a demand loan, there is the opportunity to take advantage of the annual gift tax exclusion each year. (The annual gift tax exclusion allows you to give up to $13,000 annually to a relative or friend gift-tax free.) On the other hand, if you exceed your annual gift tax exclusion in the year of a term loan, you’ll have to use some of your lifetime gift tax exemption, which is $1 million in 2010.
Estate tax benefits
In addition to helping out your loved ones, an intrafamily loan can also be a tax-efficient tool for removing wealth from your estate.
(Note that, although an estate tax repeal went into effect Jan. 1, 2010, the estate tax is scheduled to return in 2011. Congress may even take action to repeal the repeal, perhaps retroactively to Jan. 1. Check with your tax advisor for the latest information.)
Let’s look at an example.
David lends $200,000 to his daughter, Mary, charging 5% interest (the long-term AFR for the month he made the loan). Because the interest rate is equal to the AFR, there is no imputed interest for income or gift tax purposes. The note provides for payments of interest for 20 years, with the principal due at the end of the term. Mary invests the money in mutual funds that yield an 8% annual return.
At the end of the term, the funds have grown to more than $930,000. Mary pays David the $200,000 principal, which is included in his estate. But the remaining $730,000 passes to Mary outside David’s estate, generating substantial tax savings.
To further assist Mary, David could forgive some or all of her $10,000 interest payments. Although he would still have to include the interest in his income, the forgiven payments would qualify as tax-free gifts under the annual gift tax exclusion.
Complex rules, costly missteps
Intrafamily loans provide many benefits for both lenders and borrowers. But the imputed interest rules are complex, and missteps can be costly. Plan carefully to structure a loan that meets your needs and avoids unintended consequences.
Sidebar: Pay more than lip service
Documenting a loan is one thing. Actually adhering to its terms is another. To make sure the IRS doesn’t characterize a loan as a disguised gift, treat it as a legitimate transaction: Require regular payments and make a genuine effort to collect if the borrower defaults. Also, be sure to document receipt of payments and collection efforts.
Should you ever want to write off the loan as a bad debt, this evidence will help you demonstrate that the transaction was a bona fide loan gone bad and not a gift.
Millions of American families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ domestic workers, be sure you understand the tax rules — it can pay off for you and your employees.
Household employee qualifications
Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.
Let’s say, for example, you hire a nanny to care for your child and do light housework 30 hours a week. She performs her duties according to your instructions and uses your supplies. The nanny is considered a household employee.
On the other hand, suppose you hire a gardener to mow your lawn and provide other landscaping services twice a month. Because he furnishes his own equipment and supplies, pays other workers as needed, sets his own schedule and offers his services to others, the gardener is classified as an independent contractor.
Social Security and Medicare taxes
If a household worker’s cash wages exceed the domestic employee coverage threshold of $1,700 in 2010, you must pay Social Security and Medicare taxes —15.3% of cash wages, which you can pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.)
But don’t count wages you pay to:
•Your spouse,
•Your children under age 21,
•Your parents (with some exceptions), and
•Household workers under age 18 (unless working for you is their principal occupation).
The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($106,800 for 2010, adjusted annually for inflation).
Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.
Unemployment and federal income taxes
If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.
The tax is 6.2% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.
You don’t have to withhold federal income tax — or, usually, state income tax — unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).
Tax payment
You can pay federal employment taxes, including amounts withheld from employees’ wages, by filing Schedule H, Household Employment Taxes, with your Form 1040. You may also submit payroll tax forms for your workers (Form 941).
Although you’re not required to make quarterly deposits, you may face penalties unless you cover these amounts. You can do so by making estimated tax payments or increasing withholding from your own paychecks.
If you own a sole proprietorship, you can piggyback household employment taxes onto the deposits or payments you make for your business employees.
Other obligations
As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 and I-9, which document that they’re eligible to work in the United States.
After year end, you must also file Form W-2 for each household employee to whom you paid more than $1,700 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements.
In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.
A time saver
Running a household is a lot like running a business. Many companies outsource their tax and other administrative functions so they can concentrate on their core business activities. Similarly, if you have household employees, getting help with your tax responsibilities frees up your time to focus on the things that really matter, such as your loved ones and your work.
Sidebar: A spoonful of compliance …
With many tax and administrative headaches, it’s not surprising that people often pay their household employees “under the table.” But compliance isn’t just the right thing to do; it also offers a number of advantages for both employers and workers.
For starters, you avoid huge penalties and interest — not to mention potential negative publicity. Plus, you may qualify for tax breaks such as flexible spending account reimbursements for child care and the Child and Dependent Care credits. In some cases, these tax savings outweigh the additional tax liability of employment taxes.
Meanwhile, your workers are building an employment history, which helps them qualify for car loans, mortgages and other types of credit. They also benefit from unemployment insurance coverage, Social Security and Medicare benefits, and the Earned Income Tax credit (if eligible).
Entertainment and recreation have always played an important role in business. And while the IRS and courts pore over tax deductions for these activities, they also recognize that businesspeople conduct legitimate business over lunch or on the golf course.
The scrutiny isn’t surprising. After all, entertainment is an area that’s ripe for abuse. But if you follow the rules, you can successfully mix business and pleasure without giving up the tax benefits.
Supporting your entertainment expenses
Generally, your company can deduct “ordinary and necessary” business expenses. But the tax code imposes additional requirements on entertainment expenses.
To support an entertainment expense deduction, you must be able to show:
•The expense is directly related to or associated with the active conduct of your business — an expense may be “associated” with your company if the entertainment directly precedes or follows a “substantial and bona fide business discussion,” •The deduction is adequately substantiated by records (or other evidence) that establish the amount, time, place and business purpose of the expense, as well as the business relationship of the parties involved, •You had “more than a general expectation” of gaining a business benefit from the entertainment, •You engaged in some business activity, other than the entertainment, such as a meeting, negotiation, discussion or other bona fide business transaction, •The “principal character or aspect” of the combined business and entertainment was business, and •The expense was attributable to you, your employees or others involved in conducting business.
Keep in mind, otherwise allowable deductions for meals and entertainment are generally reduced by 50%. (See the sidebar “In pursuit of a free lunch.”)
Hunting — and fishing — for tax deductions
The case of Townsend Industries Inc. v. United States provides some important lessons for businesses deducting entertainment expenses. In this case, the Eighth U.S. Circuit Court of Appeals reversed a district court and held that the cost of a company’s annual fishing trip was both deductible as a business expense and excludible from employee compensation as a working-condition fringe benefit.
Townsend was an Iowa-based manufacturer of printing equipment. Each summer the company gathered all its independent sales representatives for a two-day meeting at its headquarters. Following the meeting, Townsend sponsored a four-day, expense-paid fishing trip for its sales reps and factory employees at an upscale Ontario resort. Employees were encouraged, but not required, to attend. Although business discussions were conducted on an ongoing basis and one dinner meeting was held, workers were generally free to do as they pleased during the trip.
The IRS challenged Townsend’s treatment of the trip expenses, contending they constituted wages that were subject to employment and income taxes. The district court agreed, finding: 1) the “fishing trips were not an ordinary and necessary business expense in light of the lax attendance policy for the trip,” 2) there was “a disconnect between the sales meeting and the fishing trip,” and 3) the company had no more than a general expectation to derive uncertain future benefits from the trips.
The court also found Townsend failed to meet substantiation requirements, citing the company’s lack of contemporaneous, written records — details on why the expense is business related — and its reliance instead on employee testimony.
The Eighth Circuit disagreed, ruling that, despite the lack of contemporaneous records, trial testimony clearly established the fishing trips had a legitimate business purpose. Even though the trips were voluntary, employees “felt an obligation to attend, and some felt it was part of their job.” Moreover, there was “extensive trial testimony” regarding specific business issues discussed and problems solved during the trips.
Although Townsend confirms the deductibility of travel and entertainment expenses that serve legitimate business purposes, the case also highlights the importance of substantiating these expenses with detailed, contemporaneous records. Even though the employer in Townsend ultimately prevailed without this information, the litigation cost was great.
Tax considerations not the only concern
In the current environment, companies also need to keep in mind that, even if an entertainment expense passes muster as a business deduction, it may not leave a good impression with others. While public companies may receive the greatest scrutiny, even private companies can harm their reputation in the community if it appears they’re spending excessive amounts on unnecessary entertainment, especially if it benefits only the owners or other top management.
So before incurring entertainment expenses, consider both their potential deductibility and whether they could have any other negative impact on your business. And if you determine an expense is worthwhile, be sure to substantiate it.
Sidebar: In pursuit of a free lunch
Businesses are generally limited to deducting 50% of otherwise allowable meal and entertainment (M&E) expenses, but there are several exceptions, such as expenses:
•Treated as compensation to employees, •Excludible from employees’ income as de minimis fringe benefits, •Paid or incurred under a reimbursement or similar arrangement in connection with the performance of services, and •For employee recreational or social activities — for example, picnics and holiday parties.
Unfortunately, separately identifying and reporting items that are 100% deductible can be complicated and time consuming. But if you spend a great deal on M&E expenses, it may pay to do so. Fortunately, the IRS now allows statistical sampling methods to be used to estimate the portion of M&E expenses that are fully deductible, which can ease the accounting burden.
The right combination of lifetime donations and charitable bequests can help you reduce your income taxes, minimize gift and estate taxes, and support the organizations you care about.
When you make charitable gifts during your life, the federal government rewards your generosity by allowing you to deduct the gifts on your income tax return (up to certain limits and provided you itemize). And it allows an estate tax deduction for charitable bequests. But the government isn’t so generous when it comes to inadequate documentation of these donations.
If you fail to properly substantiate a donation, you can lose the deduction. To help you protect your charitable deductions, it’s worth your while to become familiar with the substantiation rules.
Cash gifts
You can substantiate cash donations of less than $250 with a canceled check, a receipt from the charity or other reliable written record that shows the name of the charity and the date and amount of your contribution. Separate contributions of less than $250 to a single charity aren’t combined in determining whether you exceeded the $250 threshold. So, for example, if you donate $200 a month to a charitable organization, you can substantiate each donation with a canceled check.
Donations of $250 or more require a contemporaneous written acknowledgment from the charity describing the amount of your contribution and any goods or services you received from the charity in exchange for the donation.
An acknowledgment is contemporaneous if you receive it on or before the earlier of either your tax return due date, including extensions, for the tax year the contribution is made or the date you actually file your return. It’s critical to make sure you obtain all necessary acknowledgments before you file your return. If you don’t, you can lose the deduction, even if you receive a valid acknowledgment later.
Noncash gifts
For noncash gifts under $250, obtain a receipt that shows the charity’s name, the date and location of the contribution, and a description of the property. Although the property’s fair market value should be considered in determining the amount of detail included in the receipt, that value need not be stated on the receipt.
Noncash gifts of $250 or more require a contemporaneous written acknowledgment from the charity containing the information described above for cash gifts as well as a description (but not necessarily the value) of the property.
If you donate noncash property worth more than $500, then, in addition to the substantiation requirements described above, you also must maintain written records that document:
•The date you acquired the property,
•The manner in which you acquired the property (for example, via purchase, gift or inheritance), and
•Your adjusted basis in the property (except for publicly traded securities).
If your noncash gifts for the taxable year exceed $500, you also must prepare and file Form 8283 (“Noncash Charitable Contributions”). Note that the $500 threshold is an aggregate of all noncash contributions; it’s not an entity-by-entity calculation.
Qualified appraisal for large noncash gifts
If you donate property valued at more than $5,000 ($10,000 for closely held stock), you must acquire a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, on Form 8283. You can meet the $5,000 threshold by donating a single item or a group of similar items, even if you give them to different charities.
You don’t need an appraisal for publicly traded securities. For closely held stock worth more than $5,000 but less than $10,000, an appraisal isn’t required, but you need to complete a portion of the appraisal summary form.
For noncash contributions exceeding $500,000 or gifts of art worth $20,000 or more, include a copy of the signed appraisal with your return, not just the appraisal summary.
Your appraisal must be prepared, signed and dated by a qualified appraiser, as defined by IRS regulations, and must include specific information required by the regulations. The appraisal can’t involve a prohibited appraisal fee and has to be prepared no earlier than 60 days before the property is contributed and no later than the tax return due date, including extensions.
Get the deductions you deserve
The requirements for substantiating donations aren’t difficult to meet, but they do require close attention. Be sure you have your documentation in order before you file your return. If you don’t, you can lose the deductions, even if they’re completely legitimate and supportable.
After years of hard work, you’ve managed to accumulate a large balance in your retirement plan accounts. Now you’re concerned about how to best plan for the disposition of the assets, both during your life and after your death. The good news is that you have options available to you with respect to your IRA, 401(k) and other retirement funds.
Distribution rules
Starting at age 591/2, and even sooner in certain circumstances, you may withdraw funds from your retirement plans without being subject to the penalty for early distributions. Once you reach age 701/2, you generally must start taking annual required minimum distributions (RMDs) from your traditional IRA and employer-sponsored retirement plans such as 401(k)s. You aren’t, however, required to take distributions from your Roth IRA. If you have a Roth 401(k), you may be able to roll it over into a Roth IRA to avoid RMDs.
In limited circumstances, you won’t be required to withdraw funds from your 401(k) account. If you continue to work after age 701/2, and you own less than 5% of your company, you aren’t required to take any distributions until after you retire. And, you’re still eligible to contribute to your 401(k) for as long as you continue to meet this exception.
This can be a tremendous benefit: You may be able to accumulate significant additional funds tax-deferred. The more you accumulate, the more opportunities you’ll have for planning with the funds.
Lifetime distribution options
During your life, you basically have two options for the funds in your retirement accounts:
1. Start withdrawing after age 59½ and/or take more than the RMD after age 70½. Generally, this is the less palatable option because you lose the benefit of tax-deferred growth on whatever you withdraw, paying tax sooner than necessary. Depending on your circumstances, though, it might actually be better for you to take distributions sooner (but still after age 59½ to avoid penalties) or take a larger distribution to draw down your retirement plan balance.
If, for instance, you’re currently in a low marginal income tax bracket but you expect to be in a higher tax bracket in future years or you expect tax rates will go up, it may make sense to pull out more money now at a lower tax rate. Also keep in mind that having to take larger RMDs in the future could push you into a higher bracket.
2. Defer distributions until age 70½ and then take only the RMD. If you don’t have a need for the funds, this may be the better course of action. After all, the longer you can defer distribution, the more funds that can continue to grow tax-deferred — or, in the case of a Roth account, tax free. Plus, you won’t have to pay tax sooner than necessary.
Estate planning options
Any funds remaining in your IRA and other retirement plans generally will be includible in your taxable estate and subject to estate taxes if your estate exceeds the estate tax exemption. But if your surviving U.S. citizen spouse receives the funds, the transfer will qualify for the unlimited marital estate tax deduction and, thus, only what remains at your spouse’s death could be subject to estate tax.
(Note that, although an estate tax repeal went into effect Jan. 1, 2010, the estate tax is scheduled to return in 2011. Congress may even take action to repeal the repeal, perhaps retroactively to Jan. 1. Check with your tax advisor for the latest information.)
Estate tax isn’t the only concern. When retirement funds are distributed, they’re subject to income tax — unless the funds are from a Roth account or the beneficiary is a qualified charity.
The combined estate and income tax rate can be rather high, especially if the beneficiary immediately withdraws the funds. If, however, your beneficiary can defer distributions, the effect of the income tax bite is dramatically reduced. And, rather than allowing the funds to be treated as a “throwaway” asset subject to an oppressive tax rate, you may actually be helping your beneficiary to build his or her own retirement nest egg, especially if your beneficiary is young — such as a grandchild or great-grandchild.
You may even wish to discuss with your heirs their needs. You might decide to allocate all of your IRA to your child who doesn’t have an immediate need for funds, for instance, and other assets to another child who has an immediate need. That way the bulk of the assets can continue to grow tax-deferred.
If you’ve started taking your RMDs, your beneficiary will be required to continue to take distributions on the schedule you’ve been using. If you haven’t taken any distributions because you haven’t reached your required beginning date, your beneficiary will be able to take distributions over his or her life expectancy. If you have a Roth IRA, distributions also will be based on your beneficiary’s life expectancy. The Roth distributions are income-tax free.
You’re also permitted to name a trust as beneficiary. But before doing so, be sure to consult an expert because there are numerous rules to which you must adhere, and, thus, there are multiple traps into which you could fall.
Another popular use for retirement plan money, particularly in light of the potentially burdensome combined estate and income tax rate, is charitable bequests. Let’s say, for instance, that you wish to make a substantial gift at your death to your favorite charity. All you need to do is change your IRA’s beneficiary designation. Plus, it’s just as simple to make a change if you decide to allocate a different amount to your charity.
If you’re concerned that the charity might get a bigger percentage of your estate than you want, you may be able to put other restrictions on the beneficiary designation form, such as limiting the dollar amount that goes to the charity.
Consider your options
The bottom line is that you have many choices with respect to your IRA and other retirement plan money. Knowing your options can help you find the best solution for your estate plan.
You couldn’t live without your car, crossover, SUV or pickup truck — but do you really understand how it can be a tax-reduction vehicle? Tax breaks aren’t limited to hybrids and electric vehicles.
For example, do you know that the amount of vehicle-related expenses you can write off depends not only on operating costs, but also on how much you use your vehicle and where you drive? So slow down to understand the rules and avoid passing by a significant tax-saving opportunity.
What expenses are deductible
You may deduct expenses for any business use of your vehicle or if it’s used in connection with an income-producing activity, such as an investment or rental activity. You cannot deduct the portion attributable to personal use, however.
Most of the time, commuting to and from a regular job doesn’t count as business use. But if your home office is your primary place of business, or you’re going to a temporary job site or the second business location of the day, you may escape the commuting label.
To compute your deduction for vehicle expenses, you have two options: the actual-cost method and the mileage-rate method.
Actual-cost method
The deduction can be computed under the actual-cost method simply by multiplying the total amount of your actual expenses by the business use percentage. So, if you have $8,000 of expenses in 2010 for things like lease payments, gas, oil, repairs, insurance and tires, and you drive the vehicle 80% of the time for business purposes, you could deduct $6,400 as business vehicle expenses in 2010.
Things get a little complicated if you own the vehicle, because you can’t just deduct any monthly payments you’re making; you must depreciate the purchase cost. To claim accelerated depreciation, you must have more than 50% business use. And the “luxury” vehicle rules limit annual depreciation to an amount specified by the IRS. Keep in mind that the term “luxury” is a misnomer because these limits are primarily based on the vehicle’s weight.
For vehicles purchased in 2010 and used 100% for business, depreciation is limited under these rules to $3,060 in this first year ($3,160 for vans and light trucks; $25,000 for an SUV or truck that weighs more than 6,000 pounds but no more than 14,000 pounds). The normal Sec. 179 expensing limits generally apply to vehicles weighing more than 14,000 pounds.
Mileage-rate method
To compute the allowable deduction under the second method — called the “optional” or “standard” mileage-rate method — you multiply the number of business miles driven by the standard mileage rate.
For 2010, the mileage rate is 50 cents per mile (down from 55 cents per mile for 2009) for business miles. So if you drove 11,000 business miles in 2010, your deduction would be $5,500. The mileage rate is in lieu of operating and fixed costs, including depreciation, repairs, tires, gas, oil and insurance. You may, however, deduct parking fees and tolls in addition to mileage.
Leased vehicles have even more restrictions. If you use the mileage-rate method, you must use it for the entire lease period (including renewals).
The standard mileage-rate method may not be used in certain situations, such as when:
•An accelerated depreciation method was used on the vehicle in any prior year,
•A business is operating a fleet of vehicles at the same time, or
•The vehicle is for hire (such as a cab or limousine).
Moreover, if you use the mileage-rate method in the first year of business use, you can use only straight-line depreciation if you switch to the actual-cost method in a later year. And, before calculating that depreciation, you must reduce the basis by the depreciation component of the standard mileage rate, which is 23 cents for miles claimed for 2010.
More speed bumps
Other rules also conspire to limit your vehicle-related deductions. For example, employees usually must deduct unreimbursed vehicle expenses as miscellaneous itemized deductions, which are subject to the 2% limit. Employees who are reimbursed for vehicle expenses by their employers may or may not see a tax impact on their tax return, depending on the type of business expense reimbursement plan established by the company.
Determining whether you’re eligible and the amount you can deduct is complicated and can’t be done at high speed. But these tax breaks are worth braking for.
The rates for business, medical and moving purposes are slightly lower than last year's rates, reflecting generally lower transportation costs.
Beginning on January 1, 2010, the standard mileage rates for the use of a car, van, pickup truck or panel truck will be:
* 50 cents per mile for business purposes; * 16.5 cents per mile for medical or moving purposes; and, * 14 cents per mile in service of charitable organizations.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Revenue Procedure 2009-54 contains additional details on the standard mileage rates.
The first-time homebuyer credit is a refundable tax credit available to taxpayers buying a principal residence for the first time. Under the law in effect before the enactment of the 2009 WHBAA, the credit phases out for individuals with incomes between $75,000 and $95,000 and for joint filers with incomes between $150,000 and $170,000. Generally, for purchases made on or after January 1, 2009 and before December 1, 2009, the tax credit is $8,000. If the principal residence is disposed of within 36 months of purchase however, a portion of the credit must be repaid. For purchases made on or after April 9, 2008 and before January 1, 2009, the tax credit is generally $7,500. Taxpayers purchasing homes in 2008 are required to repay the credit over 15 years.
The 2009 WHBAA extends the expiration date for taxpayers who enter into a written binding contract to purchase a home before May 1, 2010 and to close before July 1, 2010. Thus, you have until April 30, 2010 to sign a purchase agreement and until June 30, 2010 to close on that purchase agreement in order to receive the first-time homebuyer credit. In addition, the income phase outs are increased to $125,000 (complete phase out at $145,000) for individuals and $225,000 (complete phase out at $245,000) for joint filers. Please keep in mind that if you closed prior to November 6, 2009 the old income limitations will apply. The $8,000 credit amount continues to apply to all first-time homebuyers. You can still elect to treat your home purchase as having occurred in the year prior to the year of purchase in order to expedite your refund.
The 2009 WHBAA also expanded the first-time homebuyer definition to include homebuyers who are long-time residents of the same principal residence. A $6,500 ($3,250 for married filing separately) credit is available to homebuyers who have been in their current residence for five consecutive years out of the last eight years and who purchase another residence. Home purchases of over $800,000, closing after November 6, 2009, do not qualify for either the first-time homebuyer credit or its expanded version for long-time residents.
In order to curb some of the reported abuses with respect to the first-time homebuyer credit, the Act places certain limitations which apply to purchases made after November 6, 2009.
Individuals who can be claimed as a dependent of another taxpayer for the taxable year that the credit is claimed are ineligible for the credit. Also, the taxpayer or the taxpayer's spouse must be 18 or over to claim the credit.
The 2009 WHBAA provides several tax relief provisions for members of the military. First, it eliminates the recapture requirement for military personnel, including members of the Foreign Service and intelligence community, who are forced to sell their principal residence as a result of an official extended duty of service. Also, it allows military personnel (including Foreign Service members and intelligence community members) serving outside the United States for at least 90 days in 2009 or before May 1, 2010 one additional year to qualify for the credit. Thus, if you or your spouse are a member of military, intelligence community, or Foreign Service, you have until May 1, 2011 to purchase a house and until July 1, 2011 to close on that purchase agreement.
You may remember that the 2009 ARRA expanded the HAP program which provides tax-exempt payments to military personnel who sell homes that declined in value due to a base closure. While the 2009 ARRA expanded the program to include payments made due to permanent reassignments and certain other purposes, it did not provide that those payments are tax-exempt. The 2009 WHBAA makes all HAP payments tax-exempt.
The 2009 WHBBA contains several tax provisions with respect to businesses. Most importantly, it extends the NOL carry-back period. You will recall that the 2009 ARRA extended the NOL carry-back period from two to up to five years for tax years beginning in or ending in 2008. However, the 2009 ARRA extension only applied to small businesses with gross receipts of $15 million or less.
The 2009 WHBBA allows all businesses to carry-back an NOL for up to five years for losses incurred either in 2008 or 2009, but not both (at the election of the taxpayer). Businesses are able to offset 50% of the available income from the fifth taxable year preceding the loss and 100% of all income in the remaining four carry-back years. However, eligible small businesses that previously elected (or will elect) to carry-back an “applicable 2008 NOL” (which could be for a 2008 or 2009 loss year) under 2009 ARRA are allowed to elect to carry-back losses from 2009 or 2010. Further, these eligible small businesses are not limited to the 50% limitation applicable to the fifth taxable year preceding the loss for the “applicable 2008 NOL.”
To pay for the Act, the 2009 WHBBA: (1) increases the penalties for failure to file a partnership or S Corporation return from $89 to $195 per partner/shareholder; (2) delays by six-years the implementation of a tax break on worldwide interest allocation slated for use by multinational firms; (3) increases corporate estimated tax payments due July-September 2014 by 33 percentage
points for businesses with assets of at least $1 billion; and (4) requires tax return preparers who reasonably expect to file more than 10 returns to use electronic filing on the individual income tax returns they prepare, but would not require that taxpayers also e-pay.
Feel free to call us to discuss how the specific provisions of this latest tax act may benefit you.
Your 2011 tax return has been filed, or you have properly filed for an extension. In either case, now it’s time to start thinking about important post-filing season activities to save you tax in 2012 and beyond. A few loose ends may pay dividends if you take care of them sooner instead of later.
Successful filing season
The IRS reported that the 2012 filing season moved along without significant problems. The IRS continued to upgrade its return processing programs and systems. Early in the filing season, some filers experienced a short delay in receiving refunds but the delay was quickly resolved. The IRS reported just before the end of the filing season that it had processed nearly 100 million returns and issued 75 million refunds.
Extensions
Individuals are eligible for an automatic six-month extension until October 15 to file a return. To get the extension, taxpayers must estimate their tax liability and pay any amount due. When a taxpayer properly files for an extension, he or she avoids the late-filing penalty, generally five percent per month based on the unpaid balance, which applies to returns filed after the April 17 deadline. Any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 17. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.
Installment agreements
Installment agreements generally can be set up quickly with the IRS and help to spread out payments to make them more manageable. In 2012, the IRS increased the threshold for a streamlined installment agreement from $25,000 to $50,000. Installment agreements however, come with some costs. The IRS charges a fee to set up an installment agreement. If you cannot pay the full amount within 120 days, the fee for setting up an agreement is:
- $52 for a direct debit agreement;
- $105 for a standard agreement or payroll deduction agreement; or
- $43 for qualified lower income taxpayers.
It’s important to make your scheduled payments timely and in full. The IRS expects you to pay the minimum amount agreed on; you can always pay more if you are able. If your installment agreement goes into default, the IRS can charge a reinstatement fee.
An installment agreement does not reduce the amount of the taxes, interest, or penalties owed, and penalties and interest will continue to accrue. In determining the amount of the penalty for failure to pay tax, the penalty is reduced from 0.5 percent per month to 0.25 percent per month during any month that an installment agreement for the unpaid tax is in effect.
You must specify the amount you can pay and the day of the month (1st-28th) on which you wish to make your payment each month. The IRS expects to receive your payment on the date you select. The IRS will respond to your request, usually within 30 days, to advise you as to whether your request has been approved or denied, or if more information is needed.
Amended returns
Taxpayers can file an amended return if they find an error, uncover unreported income or discover an item that will generate a deduction. Amended returns are filed on Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, Form 1040A, Form 1040EZ, Form 1040NR, or Form 1040NR-EZ. If you are filing to claim an additional refund, wait until you have received your original refund. If you owe additional tax for a tax year for which the filing date has not passed, file Form 1040X and pay the tax by the filing date for that year to avoid penalties and interest.
Generally, to claim a refund, Form 1040X must be filed within 3 years from the date of your original return or within two years from the date you paid the tax, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date. Taxpayers must file a separate Form 1040X for each year they are amending.
Targeted penalty relief
This year – for the first time – the IRS offered penalty relief to qualified individuals who were unable to pay their taxes by the April 17 deadline. Unemployed filers and self-employed individuals whose business income dropped substantially can apply for a six-month extension of time to pay, the IRS explained. Eligible taxpayers will not be charged a late-payment penalty if they pay any tax, penalty and interest due by October 15, 2012. Taxpayers qualify if they were unemployed for any 30-day period between January 1, 2011 and April 17, 2012. Self-employed people qualify if their business income declined 25 percent or more in 2011, due to the economy. However, income limits apply, which excluded many taxpayers from the program.
Records
The IRS advises that taxpayers maintain tax records for three years. In many cases, especially for individuals with complex returns, records should be kept longer. Our office maintains taxpayer records with the utmost care and confidentiality.
We encourage you to contact us if you have any questions about the end of the 2011 filing season and how your 2011 return can provide a roadmap to tax savings in 2012.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
After three days of oral arguments in March, the Supreme Court is deciding the fate of the Pension Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). Not only do the new laws impact health care, they contain numerous tax provisions, many of which have yet to take effect. The Supreme Court may uphold the laws, strike them down in whole or in part, or decide that the case is premature. The Supreme Court is expected to render its decision in June. In the meantime, a quick checklist of the tax provisions in the two laws reveals how extensively they impact individuals, businesses and taxpayers of all types.
Challenges
Congress passed, and President Obama signed, the PPACA and HCERA in 2010. Almost immediately, several states and taxpayers challenged the laws in court. The lawsuits generally argued that Congress had exceeded its authority by requiring individuals to obtain health insurance.
The cases made their way from federal district courts to the various federal courts of appeal, which reached different conclusions. One circuit court invalidated the individual mandate; two circuit courts upheld the individual mandate and another circuit court dismissed the challenge on procedural grounds.
Supreme Court grants review
On November 14, 2011, the United States Supreme Court agreed to review the Eleventh Circuit Court’s decision in Florida v. U.S. Department of Health and Human Services. The Supreme Court stated it would examine four issues: (1) the Constitutionality of the individual mandate; (2) whether the individual mandate is severable from the PPACA; (3) whether the challenge to the individual mandate is barred by the Anti-Injunction Act; and (4) whether PPACA’s expansion of Medicaid exceeded Congress's authority. The Supreme Court heard oral arguments in the case on March 26-28 in Washington, D.C.
Individual mandate and penalty
The individual mandate generally requires individuals to maintain minimum essential coverage for themselves and their dependents after 2013. Individuals will be required to pay a penalty for each month of noncompliance, unless they are exempt (such as individuals covered by Medicaid and Medicare). The PPACA also provides tax incentives to help individuals obtain minimum essential coverage. Beginning in 2014, individuals with incomes within certain federal poverty thresholds may qualify for a refundable health insurance premium assistance tax credit. The PPACA also provides for advance payment of the credit.
In Florida v. HHS, the Eleventh Circuit struck down the individual health insurance mandate but did not declare the entire PPACA unconstitutional. In contrast, the Sixth Circuit held that the individual mandate was a valid exercise of Congress’ power to regulate commerce (Thomas More Law Center v. Obama). The Court of Appeals for the District of Columbia Circuit also upheld the individual mandate (Mead v. Holder). The Supreme Court could find the entire PPACA unconstitutional or could find that the individual mandate is severable, thereby preserving other parts of the statute, including various tax provisions.
Tax provisions
While much attention has focused on the individual mandate, the Supreme Court may also decide the fate of many tax provisions in the PPACA and the HCERA. Among the tax provisions potentially affected by the Supreme Court’s decision are:
- Code Sec. 45R small employer health insurance tax credit;
- 3.8 percent Medicare contribution tax on unearned income for higher income taxpayers after 2012;
- Additional 0.9 percent Medicare tax on wages and self-employment income of higher income taxpayers after 2012;
- Increased itemized deduction for unreimbursed medical expenses after 2012;
- Prohibition on over-the-counter medicines being eligible for health flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), and Archer Medical Savings Account (MSA) dollars.
- Additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses;
- Excise tax on high-dollar health plans after 2017;
- Tax credit for therapeutic discovery projects;
- Annual fees on manufacturers and importers of branded prescription drugs;
- Reporting of employer-provided health coverage on Form W-2;
- Codification of the economic substance doctrine.
Anti-Injunction Act
The Supreme Court could decide that the challenge to the PPACA is premature. Under the Anti-Injunction Act, a taxpayer must wait to oppose a tax until after it is collected. The PPACA’s individual mandate and its related penalty do not take effect until 2014. The Fourth Circuit Court of Appeals found that the penalty amounted to a tax and taxpayers could not challenge the tax until it took effect (Liberty University v. Geithner).
If you have any questions about the tax provisions in the health care reform laws, please contact our office. We will be following developments as they ensue after the Supreme Court issues its decision in June.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee. Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers. Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.
Testimony
The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. “This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.
An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.
Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.
JCT report
In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, “Present Law and Background Relating to the Tax Treatment of Retirement Savings” (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:
Automatic enrollment payroll deduction IRA. President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs. An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.
Expand the saver's credit. The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver’s credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.
Consolidate plans. The JCT also reviewed two retirement proposals from the Bush administration: Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).
The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. ”Consolidating all types of defined-contribution type plans into one type of plan would not be simplification,” the ASPPA cautioned. “It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures.”
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Code Sec. 1231 applies to gains and losses from property used in the trade or business and from involuntary conversions. Normally, you have to determine whether property is a capital asset or is ordinary income property. Property generally can’t be both. However, Code Sec. 1231 allows you to “have it” both ways. Any gains are taxed at low capital gains rates (generally 15 percent for 2012), and any losses are treated as ordinary losses, taxable at more favorable ordinary loss rates, and available (without limit) to offset other ordinary income.
Who qualifies?
Code Sec. 1231 gains include:
--Recognized gains on the sale or exchange of property used in the trade or business; and
--Recognized gains from the involuntary or compulsory conversion (into money or other property) of property used in a trade or business, or of property held for more than one year and either used in the trade or business or used in a transaction entered into for profit.
Property used in a trade or business is property that is subject to depreciation and held by the taxpayer for more than one year.
Code Sec. 1231 losses are any recognized loss from a sale, exchange, or conversion of the same categories of property.
A win-win equation
Gains and losses from these transactions are referred to as Code Sec. 1231 gains and Code Sec. 1231 losses. The character of the gain or loss depends on whether Code Sec. 1231 gains exceed Code Sec. 1231 losses for the tax year. If the Code Sec. 1231 gains exceed the Code Sec. 1231 losses, then all of the Code Sec. 1231 gains and losses are treated as long-term capital gains and losses. The result is a net long-term capital gain. This amount can then be netted with other capital gains and losses.
Code Sec. 1231 does not apply to depreciation that must be recaptured as ordinary income under either Code Sec. 1245 (depreciable personal property and certain real property) or Code Sec. 1250 (depreciable real property that is not Code Sec. 1245 property).
If, however, the Code Sec. 1231 losses equal or exceed the Code Sec. 1231 gains, then all of the Code Sec. 1231 gains and losses are treated as ordinary income and losses. The net result is an ordinary loss, which can offset other ordinary income.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.
Interfamily gifts
Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.
Capital or services
The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.
If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.
Investment partnerships
The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).
If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2012.
May 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 25–27.
May 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 28–May 1.
May 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 2–4.
May 10
Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070.
May 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 5–8.
May 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 9–11.
May 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 12–15.
May 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 16–18.
May 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 19–22.
May 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 23–25.
June 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26–29.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.