Taxpayers who convert a traditional IRA to a Roth IRA must include the amount transferred in their gross income and pay tax accordingly. For the 2010 tax year, the IRS created spec...
Taxpayers whose employers provide company cars (or trucks and vans) for their personal use must factor that usage into their gross income. Personal use of a vehicle provided by an employer is consi...
The IRS audited one in eight individuals with incomes over $1 million in fiscal year (FY) 2011. While the overall audit coverage rate for individuals remained steady at just over one percent, the a...
Recent IRS regulations provide that damages received from a lawsuit or settlement as compensation for personal physical injuries or sickness may be excluded from gross income, even...
The "gross tax gap," or the amount of tax owed to the U.S. government that is not paid on time, climbed from $345 billion in Tax Year (TY) 2001 to $450 billion in TY 2006, the IRS has reported. (Be...
The Nevada Tax Commission has adopted regulations that revise the deductions used to determine the new proceeds of minerals tax. Effective January 1, 2012, the several deductions h...
The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.
These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.
The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.
Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.
The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.
The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.
Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.
To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.
The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.
Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.
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 fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.
Payroll tax cut
The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.
Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.
Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.
House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.
One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.
Extenders
The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.
President Obama’s FY 2013 proposals
President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.
Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.
On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.
If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.
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 IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
Previous disclosure programs
The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.
Reopened program
The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.
The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.
In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.
The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).
The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.
Quiet disclosures
One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.
Critics
The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.
If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.
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.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Dependency Exemption
In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.
Child Tax Credit
Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.
Child and Dependent Care Credit
If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.
Adoption Credit
Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.
Higher Education Credits
There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.
Extended Health Care Coverage
Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.
Child Care Assistance Credit (for businesses)
Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.
If you have any questions about these provisions and how they may benefit you, please contact our office.
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 Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.
Offset
If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.
A taxpayer’s refund may be reduced by FMS and offset to pay:
- Past-due child support
- Federal agency non-tax debts
- State income tax obligations, or
- Certain unemployment compensation debts owed a state.
FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.
Form 8379
If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.
The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.
The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).
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 February 2012.
February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.
February 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.
February 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.
February 10
Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.
February 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.
Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.
February 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.
February 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.
February 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.
February 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.
March 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.
March 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.
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.
For returns filed for 2011 or later, with Forms W-2, W-3 and 1099 included, stiffer penalties may be assessed for filing incorrect or incomplete information by stated due dates. It is critical for all businesses to understand the impact of this new IRS mandate.
Under the Small Business Jobs Act of 2010, increased penalties may apply for the failure to file information returns and/or failure to furnish correct payee statements on a timely basis, or for intentional disregard of the law. The penalty schedule for each information return filed with the IRS after the due date (typically 2/28) is as follows:
- $30 per return if filed correctly within 30 days after the due date;
- $60 per return if filed correctly more than 30 days after the due date, but before August 1;
- $100 per return if filed correctly, but after August 1.
Also, the penalty schedule for each payee/recipient statement after the due date (typically 2/28) is as follows:
- $30 per return if filed correctly within 30 days after the due date;
- $60 per return if filed correctly more than 30 days after the due date, but before August 1;
- $100 per return if filed correctly, but after August 1.
The maximum fines per year range from $250,000 to $1,500,000 for businesses with revenues over $5,000,000; and range from $75,000 to $500,000 for businesses revenues under $5,000,000.
Finally, the penalty for intentional disregard of this law is $250 per return for all filers, with no maximum penalty amount.
For U.S. citizens or residents of the U.S., any income earned on foreign financial accounts, whether located in the U.S. or located outside of the U.S., is required to be reported on your U.S. income tax returns. Foreign financial accounts include bank accounts, securities accounts, savings accounts, time deposits located in a foreign country, debit cards and prepaid cards charged to or backed by foreign financial accounts.
Additionally, Treasury Department Form TD F90-22.1 must be filed by June 30 each year following any calendar year in which you have foreign financial account ownership, or signature or other authority over, a financial account(s) located in a foreign country with an aggregate value exceeding $10,000 at any time during the calendar year. Form TD F 90-22.1 is filed separately from your tax returns, and the 2008 form was originally due by June 30, 2009.
The IRS recently announced that if you have reported all of your foreign income on your tax returns and paid the tax but failed to file the TD F 90-22.1 for any past year, penalties for the delinquent TD F 90-22.1 can be avoided if it is filed by September 23, 2009 with an explanation of why it was late. Should you have failed to file the form TD F 90-22.1 for any past year including 2008, please contact me immediately so that we can discuss issues related to this form.
There are very significant penalties (both civil and criminal) for failing to report offshore income and failing to file the reporting forms. These penalties can amount to tens of thousands of dollars on even a small account.
The IRS has announced a partial amnesty program that applies to prior tax years. There are two categories of amnesty filers.
1)If you were required to file Form TD F 90-22.1 for any year and have not filed it, but you did include all foreign account income in your U.S. tax return(s), then there may be no penalty for filing the prior year’s Form(s) TD F 90-22.1. However, in order to avoid any penalties you must file all delinquent Forms TD F 90-22.1 by September 23, 2009. See the earlier discussion on this issue. 2)If you did not include all of your foreign income in your U.S. tax return(s) from all sources, including income related to a foreign account, there is a special IRS amnesty procedure available to you regardless of whether or not you filed Form TD F 90-22.1 for that year(s). Entering this program could result in criminal penalties not being imposed for not fully reporting your offshore income, though the decision as to whether or not to enter into the VDP can be complex. You must decide whether to enter into the VDP and actually enter it by September 23, 2009. If this description fits your situation, you should immediately read the letter we have sent you addressing the VDP for unreported foreign income, which states the need to immediately consult with a criminal tax attorney concerning the VDP.
The IRS has warned that those who don't take part in the VDP amnesty filing by the September 23, 2009 date will potentially face far greater civil penalties and possible criminal charges than if they entered the VDP.
If you have a financial interest or signature authority in any foreign financial account, it is your responsibility to file the TD F 90-22.1. We will assist you in completing that form when you have provided us with the necessary information. It is also your responsibility to ensure that all income is reported on your tax return and all required foreign accounts are reported to the Treasury Department. Please also refer to the letter we have sent you addressing the IRS Voluntary Disclosure Program relating to unreported foreign income.
If you have any questions regarding these foreign financial account filing requirements, please contact us immediately.
This article has been created as a supplement to the various articles found on our web site offer summary comments on issues and topics not necessarily found in the available articles, but ones that we feel are of value to many of our business clients. Of course, always feel free to contact us with any questions about your personal circumstances. Please take the time to review the items below as they may directly affect your business:
INDEPENDENT CONTRACTORS CAN HELP LIMIT YOUR LIABILITY. One of the easiest ways for a business to limit liability is to use independent contractors instead of employees. Of course, merely calling employees "independent contractors" will not automatically make those individuals independent contractors.
NO BRIGHT LINE BETWEEN BUSINESS AND HOBBIES. Businesses benefit from many tax breaks. If you are in business with the objective of making a profit, you can generally claim all your business deductions. If your deductions exceed your income for the year, you can claim a loss for the year, up to the amount of your income from other activities. Remaining losses can be carried over into other years. Over the years, the IRS and the courts have developed a list of factors to determine if an activity has a for-profit motive or is a hobby.
"REASONABLE" COMPENSATION: HOT BUTTON FOR THE IRS. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.
SALES AND USE TAX. The Nevada Department of Taxation is aggressively auditing all businesses for not only Sales Tax compliance, but also Use Tax compliance as well. When a company purchases tangible personal property to use within their business, they are required to pay sales tax on that item. If the item is purchased with no sales tax paid (“ex-tax”), then the company is required to pay the State of Nevada a “Use” tax (the counterpart of Sales Tax) for that item. This sometimes happens when the item is purchased from another state or by mail order. The use tax rate is the same as the sales tax rate, which is currently 8.1%. Upon audit, many businesses get clipped for use tax (plus interest and penalties) on such items as computer equipment, office supplies, and furniture and fixtures that were purchased without tax. Also, audits are conducted on a “test basis.” This means that if the auditor found discrepancies in the months they were testing, they will then assume that the discrepancies also happened in the remaining months.
Sales Tax audits are usually conducted for a three-year period. If a business was not calculating and collecting the sales tax appropriately during those three years, audit results can be devastating! If you have any questions regarding the proper collection and reporting of sales tax, please give us a call.
CORPORATE OFFICERS. The Nevada Employment Security Department (NESD) is taking the position that Salaries and “other payments” made to Corporate Officers (including those of S Corporations) are considered wages. This includes S Corporation distributions and can even include dividends paid to an officer in lieu of a reasonable salary. If corporate officers are not taking a reasonable salary, the NESD, upon audit, is including “other payments” as a part of their wages that are taxable for state unemployment. Independent Contractors. NESD is also taking the position that many Independent Contractor payments are subject to state unemployment. There are three conditions that must be met to avoid this. The independent contractor needs to be free of your control and direction, the service must be either outside the usual course of business or the service is not performed at your place of business, and the service is performed in the course of an independently established trade, occupation, profession or business. Do not mistakenly believe that you can avoid state unemployment by converting your employees to independent contractors! If you cannot demonstrate the above conditions, NESD will consider them an employee; and they are looking for this within their audit. Make sure that your independent contractors are properly licensed and not under your control and direction. Take another Look at Electing “S” Status. Electing “S” status often saves a lot of tax because it avoids the double taxation experienced by many C corporations. However, S status is only available if the corporation meets several requirements, including a limit on the number of shareholders. Starting in 2005, some favorable changes to the number-of-shareholders limit may make an S election available to corporations that could not qualify in the past. First, the maximum number of eligible shareholders in an S corporation is increased from 75 to 100. Second, family members (up to six generations) can elect to be treated as one shareholder. Without the election, family members (other than husband and wife) are generally each counted as a shareholder. This election reduces the number of shareholders for the number-of-shareholders limitation.
NEW RELIEF FOR LATE “S” CORPORATIONS ELECTIONS. New IRS guidance provides an additional simplified method for taxpayers to request relief for late “S” corporation Elections. Specifically, it allows small businesses that missed filing Form 2553, ‘Election by a Small Business Corporation,’ before filing their first Form 1120S, US Income Tax Return for an S Corporation, to file both forms simultaneously, under certain circumstances. It also contains an additional simplified method to request relief for a late “S” corporation election and a late corporate classification election intended to be effective on the same date.
PAYING DIVIDENDS IN LIEU OF OWNER SALARIES. If for 2011 or 2012 you expect to personally be in a 28%+ tax bracket and own a corporation that you expect to be in the 15% income tax bracket (taxable income of $50,000 or less), you could net more after taxes by paying yourself some dividends in lieu of additional salary. This is because dividend income is subject to a maximum 15% tax rate, while your salary is subject to your 28% or higher rate, plus you and your corporation must pay payroll taxes on your salary.
Any dividends paid to you must be paid to other owners as well. Thus, if there are multiple shareholders, paying dividends could alter the bottom-line cash flow reaped by the various shareholders, which may make this strategy unworkable in some situations. However, in the context of family-owned C corporations, this may be a good thing—a family recipient who is in the 10% or 15% tax brackets (which many children are) may pay only 5% on this dividend income.
RETIREMENT PLANS. Much is happening in retirement plans as the American workers and IRS are both realizing that the need to save for retirement is an ever-increasing concern for virtually everyone. For those who have existing plans, the advice is simple – put as much away as you can afford. Your contributions are tax deductible and your earnings are tax deferred. For those intending to establish a plan, be aware of the deadlines for 2011: Profit Sharing, Defined Benefit Plans and 401(k) must be established by the end of the tax year; Simplified Employee Pension (SEP) Plans must be established by the due date of the tax return (including extensions); Traditional IRAs must be established and funded by April 17, 2012. Contribution limits vary widely depending on the type of plan, so contact us for details, particularly if you are facing a year-end establishment deadline. Contact us directly (and immediately) for plan funding strategies, setup and implementation.
2011 1099 REQUIREMENTS. As a reminder, businesses are required to issue 1099 Forms to recipients no later than January 31, 2012 (to the IRS by 2/29/11). Payments made to unincorporated vendors for rents, services and other income payments totaling $600 or more for the year, plus all payments to attorneys, are subject to this requirement. Interest or dividend payments made during the year also fall under this rule, but without the $600 floor. You should use Form W-9 to obtain the required information from your vendors prior to paying for services, if possible. Please call if you need a copy.
EMPLOYING YOUR CHILD(OR GRANDCHILD). Employing your children (or grandchildren) shifts income from you to them, which typically subjects the income to the child’s lower tax bracket and may actually avoid income taxes entirely (due to the child’s standard deduction, although Social Security taxes will typically be due on compensation). There are also payroll tax savings for “sole proprietors” who pay wages to their children that are 17 or younger and these wages are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA.
When employing a child or grandchild, keep in mind that the wages must be reasonable given the child’s’ age and work skills. Also, if the child is in college or entering soon, excessive earned income may have a detrimental impact on the student’s eligibility for financial aid.
PAYROLL TAX DEPOSIT REQUIREMENTS AND EFTPS. Most of you have recently received a one-page letter from the IRS that spells out your payroll tax deposit requirements for the upcoming year. DO NOT DISCARD THIS LETTER! If your business has grown in the last couple of years, then your deposit frequency requirements may have changed. There are prohibitive penalties for depositing incorrectly, so we strongly advise that you understand your current deposit requirements, which will become effective on January 1, 2012.
The Electronic Federal Tax Payment System (EFTPS) provides the employer with a convenient way of making tax payments (income or payroll) either through the Internet or by telephone. It only takes a few minutes to make a tax payment using EFTPS and it is much less burdensome than writing checks, getting signatures on checks and last minute trips to the bank. Your tax due date remains the same and no government agency has access to your account. Please take a moment to call our office so that we can help you to get enrolled, as we are sure you will enjoy the convenience of the EFTPS system.
LIMITED LIABILITY COMPANIES AND SELF-EMPLOYMENT ISSUES. There are many legal professionals who are suggesting, and ultimately forming, Limited Liability Companies (LLC’s) for many small businesses, both active and passive. We feel that the legal profession generally believes that there are additional asset protection attributes to the LLC versus a corporate structure. HOWEVER, business owners need to be aware that there are tax considerations as well. When an LLC member works in an “active” business (versus passive activities such as real estate rental and investments), generally all of the income derived from that business would be taxable for self-employment. There is much to consider when deciding on the proper type of entity for your business. We would be happy to meet with you and your attorney to discuss the legal and tax considerations.
CONSIDER NEW “C” CORPORATION STRATEGY. If you own a profitable “C” corporation (or an “S” Corporation with earnings and profits from earlier C Corporation years), the time-honored tax planning strategy has been to drain as much cash as possible from the corporation in the form of compensation, rents or any other payments that are not double-taxed dividends. However, the new 15% maximum federal tax rate on qualified dividends makes the idea of intentionally paying some double-taxed dividends worth considering. It is not certain how long the 15% rate will apply.
DISABILITY BENEFITS EXCLUDED FROM INCOME IF PREMIUMS ARE PAID ON AN AFTER-TAX BASIS. Amounts received through accident or health insurance for personal injuries or sickness generally are excluded from income, except to the extent they are attributable to medical expenses that were deducted in a previous year.
The taxability of amounts received from disability policies depends upon how you treat the payment of the related insurance premiums, i.e. if you take a tax deduction for the premium payments, then the proceeds are taxable income; conversely, if you do not deduct the insurance premiums, then the benefits are non-taxable. We generally advise clients to forgo the tax deduction under the assumption that the monthly disability benefit is likely to be less than your current income (the policies are very expensive and the insurers limit the amount of coverage available) and therefore it is important that the benefits are tax-free.
HEALTH INSURANCE. As we all are painfully aware, health insurance costs continue to soar. Legislation enacted in 2004 has perhaps offered some different ways to think about health insurance, its costs and coverage. One alternative is a Health Savings Account (HSA), which is a high deductible plan with savings feature. In effect, if you don’t use insurance benefits, or are able to manage costs, your paid-in premiums can accumulate for medical expenses in future years. What’s more, your unused premiums can earn money-market interest or even be invested in mutual funds – all with tax deferral on earnings. We will be happy to introduce you to this innovative method to manage your health care costs and benefits.
TIMING OF TRANSMISSION OF 401k DEFERRALS. The Department of Labor (DOL) and the Internal Revenue Service (IRS) are both monitoring 401k plans to ensure that sponsors remit 401k deferrals to the plan on a timely basis. The basic rule is that deferrals must be transmitted as soon as administratively possible, but no later than 7 business days following the payroll deduction for small plans and 15 business days for large plans. The 15th business day is an outside date as defined by the DOL for large plans. If a client can reasonably transmit deferrals more rapidly, they will be expected to do so. Failure to comply is considered a prohibited transaction, which must be corrected and also reported to the IRS. Corrective measures involve calculating and contributing the “lost earnings” the employees could have realized with the timely deposit of their deferrals. The plan sponsor is also responsible for any non-compliance.
DEPARTMENT OF LABOR OVERTIME CALCULATOR. The DOL has introduced a new e-laws advisor, called the “FLSA Overtime Calculator,” to help employers and workers understand and compute overtime. Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid overtime at the rate of 1.5 times their regular rate of pay for all hours worked over 40 in a single workweek. The DOL e-law advisors are Internet-based compliance tools designed to help both employers comply with federal employment laws and workers to understand their rights under these laws. There are also five additional e-law advisors that are available to address various aspects hourly employees, and can all be found at www.dol.gov./elaws/otcalculator.htm.
TAX-EFFECTIVE CORPORATE MINUTES. Most closely-held corporations view the required annual meeting as a necessary evil. The “boilerplate language” of minutes for such meetings often include little more than the fact that the meeting was held and that officers and directors were elected. While this is an important first step in making sure the corporation is respected as a separate legal entity, corporate minutes should also reflect decisions and discussions that support the tax positions taken by the client. In addition to the election of officers and directors, other actions that should be reflected include the accrual of bonuses, retirement plan contributions, and the ratification of key actions by corporate officers, including where complete corporate minutes can help the client ensure that the desired tax results are achieved. Examples are:
1. The corporate minutes shouldn’t refer specifically to accumulated earnings as IRS examiners typically review the minutes as part of routine exams. Don’t specifically point out issues the examiner might not raise on his/her own; 2. Dividends (even if minimal) should generally be paid each year, unless there’s a specific reason not to pay them. In which case, the reasons should be clearly documented; 3. Important – Confirm that your corporation or LLC is current with the Nevada Secretary of State.
The annual meeting date is typically set by the bylaws as twelve months after the date the business was incorporated. However, if this date doesn’t fall sometime near the corporation’s year-end, it might be helpful to reset the meeting date. By moving the date to within one or two months before the corporation’s tax year-end, the meeting can be used as a tax planning session. The current year’s business operations can be reviewed, the corporation’s legal and tax advisors can meet together, and any tax planning needed before year-end (such as establishing a qualified plan, setting up fringe benefit programs, etc.) can be completed.
COMPLYING WITH FEDERAL EMPLOYMENT TAX RECORDKEEPING REQUIREMENTS. The IRS is reminding employers about the importance of keeping good records. The Service notes that employment tax records must be kept for at least four (4) years after the later of the due date of the tax return period to which the records relate, or the date the tax is paid. A willful failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year. The list is extensive, so consult us for details should you have questions or concerns.
Don’t wait until it’s too late to cut your 2011 tax bill or initiate preventative measures for your business. Take time now to review your 2011 tax situation and consider planning strategies. We want to help. Please contact us to discuss any of the strategies mentioned here or others that fit your specific tax and financial situation. Also, please visit our web site for valuable links to various governmental web site informational links.
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill this year and possibly the next. Factors that compound the challenge include the stock market's swoon, the difficult economic climate we're in right now, and the strong possibility that there will be tax changes in the works next year. In fact, there might even be another economic stimulus package carrying tax changes enacted before the end of this year.
The indisputably good news we are certain of is that Congress has acted to “patch” the AMT problem for 2011, has extended a number of tax breaks (such as the option to deduct state and local general sales tax instead of state and local income tax and the above-the-line deduction for higher education expenses). Please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
1. If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.
2. If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year. Consider using a credit card to prepay expenses that can generate deductions for this year. Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.
3. If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
4. If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings. Depending on your particular situation, you may also want to consider deferring a debt-cancellation event to 2012, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
YOUR ESTATE. Although the federal estate tax was repealed in 2010, the repeal was for that one year. Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan. Your estate plan could need an update right now, because the federal estate tax exemption for 2011 and 2012 is $5 million. Please note that the gift tax exemption was also increased to $5 million for 2011 and 2012. Both limits are scheduled to be reduced to $1 million in 2013.
INSURANCE. Nobody really likes insurance, but it plays a critical role in securing your financial future. For individuals it can preserve your valuable estate assets; for businesses it will help assure that unexpected events don’t compromise your company’s operations, assets or business continuation. We can arrange for no-cost reviews of your individual life and disability policies, or your company’s “umbrella,” key-man and buy-sell agreement insurance policies.
WILLS AND TRUSTS. Nobody should be without a current will or trust – the financial repercussions can be devastating (i.e. the probate costs alone in Nevada generally start at 5% of the estate value). Living trusts, for example, can direct assets to beneficiaries and avoid probate, and are relatively inexpensive to create. Please take the time to at least understand what your options are through an introductory discussion with an estate planning professional.
LOWER TAX RATES ON CAPITAL GAINS. Long-term capital gains and qualifying dividend income are subject to a tax rate of only 15% for taxpayers in a regular tax bracket of 25% or higher and 5% for taxpayers in the lower regular tax brackets. Given tax rates as high as 35% for other types of income, this is quite a break. To be eligible for the lower 15% (or 5%) capital gain rate, a capital asset must be held for more than a year. So, when disposing of your appreciated stocks, bonds, investment real estate, and other capital assets, pay close attention to the holding period. If it’s less than one year, consider deferring the sale so that you can meet the greater-than-one-year period. While it’s generally not wise to let tax implications drive your investment decisions, you shouldn’t ignore them either. Tax rates are scheduled to increase in 2013.
HARVESTING CAPITAL LOSSES. It’s always a good idea to periodically review your investment portfolio to see if there are any losers you should sell. This is especially true as year-end approaches, since it’s the last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses. But, don’t forget the wash-sale rule. This rule defers your loss if you purchase a substantially identical security within the period beginning 30 days before and ending 30 days after the date of sale.
IRA PLANNING. Don’t forget to make your 2011 traditional or Roth IRA contributions as soon as possible, but definitely before the due date (4/17/11) of your tax return. Except in the case of the Roth IRA, the earnings in retirement accounts are technically tax-deferred, not tax-free. However, funding them as soon as possible allows you to defer more taxes for 2011. Thus, you benefit by keeping more funds invested for a longer period of time.
IRS FACT SHEET DISCUSSES DEFERRED LIKE-KIND EXCHANGES. Deferred like-kind exchanges are the subject of a new IRS fact sheet, the 21st in a series on the tax gap. The fact sheet offers additional guidance to taxpayers regarding the rules and regulations governing deferred like-kind exchanges. Whenever a taxpayer sells business or investment property and has a gain, the taxpayer generally has to pay tax on the gain at the time of sale. Code Sec. 1031 provides an exception and allows the taxpayer to postpone paying tax on the gain if the taxpayer reinvests the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under Code Sec. 1031 is tax-deferred, but it is not tax-free. The fact sheet contains a number of sections, including—who qualifies for an exchange, the different structures for an exchange, the property that qualifies for such an exchange, restrictions for deferred and reverse exchanges, computing the basis in the new property, and reporting exchanges to IRS. It also includes a warning regarding schemes promoting the improper use of like-kind exchanges. The fact sheet can be found at http://www.irs.gov/newsroom/article/0,,id=179801,00.html.
SUMMARY. Taking the time now to review your 2011 tax situation gives you a chance to take advantage of many year-end tax saving opportunities. This letter highlights selected strategies, but there are many others that might also apply to your particular situation.