Nonprofit Agendas June/July 2013
- How To Take the Stress Out of an Independent Audit
- Setting the Salaries & Benefits of Your Executives
- Litigation Protection: Be Safe, Not Sorry
President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.
President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.
All of the proposals have one common goal: reduce the federal government's approximate $16 trillion federal budget deficit. To reduce the budget deficit, many of the plans propose to cut spending and raise revenues. Lawmakers and the White House also want to replace sequestration (across-the-board spending cuts for many federal agencies) for FY 2014 and beyond. Replacing sequestration will require spending cuts, new revenue or a combination of both. Let's take a look at how some of the tax proposals would affect individuals, businesses and others.
Individuals
The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013, set the individual tax rates at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond. The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10 percent with the goal of a top rate of 25 percent. The Simpson-Bowles plan also calls for lower rates but does not specify the amounts; however, lower rates would be contingent on eliminating certain tax credits and deductions, possibly some popular ones such as the home mortgage interest deduction. President Obama has not proposed any changes to the current individual income tax rates.
President Obama has, however, proposed a minimum 30 percent tax on individuals with incomes over $1 million (full phase in at $2 million). This was known as the "Buffett Rule" (now called the Fair Share Tax). President Obama would also limit the tax rate at which higher income individuals can reduce their tax liability to a maximum of 28 percent. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions. Another proposal would limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities, and deferred compensation plans.
The budget blueprint put forward by Senate Democrats makes similar proposals. The Senate plan would impose across-the-board limits on itemized deductions claimed by the top two percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap, or a specific dollar cap. The Senate plan also proposes to change, without giving details, unspecified itemized deductions into tax credits.
Not surprisingly, the House plan, written by the GOP, does not include these proposals. Along with consolidating the individual tax rates, the House blueprint would repeal the 3.8 percent net investment income (NII) surtax and the 0.9 percent Additional Medicare Tax, both of which took effect in 2013. The House plan also calls for repealing the alternative minimum tax (AMT). The House plan also calls for tax simplification but does not give details.
Another proposal endorsed by the President but which will be a difficult sale in Congress is to increase the federal estate tax. ATRA "permanently" extended the estate tax at a maximum rate of 35 percent with a $5 million exclusion (indexed for inflation). President Obama wants to raise the maximum rate to 45 percent with a $3.5 million exclusion (not indexed for inflation) after 2017.
Businesses
Reducing the U.S. corporate tax rate is a common goal of many of the tax reform proposals but they take different approaches. President Obama has said he would support lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House blueprint would reduce the top corporate tax rate to 25 percent, paid for by tax savings elsewhere. The Simpson-Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences.
President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation. These include:
- Enhanced small business expensing (Obama and House but at different amounts);
- Permanent research tax credit (Obama, House and Senate);
- Temporary tax credit for increasing payrolls (Obama); and
- Special incentives for manufacturing in the U.S. (Obama).
Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax, and more. The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act.
Internet sales tax
In May, the Senate is expected to approve the Marketplace Fairness Act (H.R. 743). The bill gives states the authority to compel online merchants, no matter where they are located, to collect sales tax at the time of a transaction. However, states would be able to compel collection of sales tax only after they have simplified their sales tax laws, such as by adopting the Streamlined Sales and Use Tax Agreement. The bill has the support of President Obama. However, the bill may not pass in the House, where many lawmakers view it as a tax increase.
Discussion drafts
The two Congressional tax writing committees – House Ways and Means and Senate Finance – are engaged in discussions among their members over tax reform. Ways and Means has produced three detailed discussion drafts exploring possible approaches to reforming the taxation of financial products, the taxation of small businesses and moving the U.S. to a territorial system of taxation. Ways and Means Chair Dave Camp, R-Mich., has promised to introduce tax reform legislation this year. Senate Finance has also produced four discussion drafts, less detailed than the House drafts, on simplifying the Tax Code, business taxation and education, and infrastructure, energy and natural resources. Senate Finance Committee Chair Max Baucus, D-Mont., has pledged his commitment to seeing tax reform through before his retirement, which he announced would start at the end of 2014.
Looking ahead
Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform.
Our office will keep you posted of developments. Please contact our office if you have any questions about the tax reform proposals we have reviewed.
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.
Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.
Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.
Federal withholding
If you received a large tax refund, it might be time for you to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. You would want to do this in cases where your adjustments to income, exemptions, and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.
If you do not change your withholding allowances, the government essentially is holding your money for a year without paying any interest on it. You may lose some potential investment opportunity or, at the very least, the ability to increase your monthly discretionary income. On the other hand, many taxpayers prefer to receive the large refund check after tax filing season because it is a no-hassle way to ensure large savings at the end of the year.
Conversely, many taxpayers may want to change their withholding allowances because they owe the government a significant amount of money at the end of the year. Taxpayers who expect to owe at least $1,000 in tax for the 2013 tax year, after subtracting withholding and any refundable credits, and who also expect their 2013 withholding and credits to be significantly less than the projected tax owed for 2013, may need to file estimated taxes. Failure to do so could result in penalties. Alternatively, taxpayers should consider making quarterly estimated tax payments, especially if they anticipate a significant amount of investment gains for the year or other income unrelated to wage compensation.
State withholding
Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund which they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed, which would exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses, and more because of certain AGI caps on these benefits.
Tax rates and adjusted gross income
As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6-percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.
In addition, for tax years beginning in 2013, the 33-percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households, and single individuals. If you were hovering near the bottom of the 35-percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33-percent category.
Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8-percent surtax on net investment income and a .9-percent Additional Medicare Tax. Look at your adjusted gross income for last year. Does it approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.
Investments
At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.
Reviewing the Schedule D and Form 8949, which cover Capital Gains and Losses from last year's return and from the past three or four years, can be an eye-opener for many. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. You may want to put that knowledge to work in your investment strategy.
Medical costs
Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.
Retirement planning
Don't forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.
When you are reviewing last year's tax return, it may help to review some of what you've learned from it. This could foster an important conversation with your tax advisor about how to establish or modify your plan for your financial future. If you would like to review last year's completed tax return with future planning in mind, please feel free to give us a call and set up a time when we can meet and discuss this matter.
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.
Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax. Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.
Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax. Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.
A public hearing on the existing regulations, held at IRS headquarters in Washington, D.C., in early April 2013, only confirmed how the application of the NII Tax to certain categories of income—particularly income arising from "passive activities"—is challenging even the experts. Nevertheless, taxpayers are not getting a reprieve from the immediate application of this new tax. The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. Current confusion over exactly how the 3.8 percent operates can impact on tax strategies that should be put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII Tax liability.
NII Tax Thresholds
For tax years beginning after December 31, 2012, the NII surtax on individuals equals 3.8 percent of the lesser of: net investment income for the tax year, or the excess, if any, of:
- the individual's modified adjusted gross income (MAGI) for the tax year, over
- the threshold amount.
The threshold amount in turn is equal to:
- $250,000 in the case of a taxpayer making a joint return or a surviving spouse,
- $125,000 in the case of a married taxpayer filing a separate return, and
- $200,000 in any other case.
Trusts and estates are also subject to the NII surtax, to the extent of the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins (which, for 2013, is $11,950).
Net Investment Income
The primary confusion over application of the 3.8 percent NII Tax revolves around finding a precise definition of "net investment income" as enacted by Congress. To appreciate the complexity of the task, just look at the applicable Internal Revenue Code provision. Code Sec. 1411(c)(1) defines net investment income as the sum of:
- Category (i) income: Gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in Code Sec. 1411(c)(2);
- Category (ii) income: Other gross income derived from a trade or business described in Code Sec. 1411(c)(2); and
- Category (iii) income: Net gain attributable to the disposition of property, other than property held in a trade or business not described in Code Sec. 1411(c)(2); over
Deductions properly allocable to such gross income or net gain.
A Code Sec. 1411(c)(2) trade or business includes a passive activity under Code Sec. 469 with respect to the taxpayer or trading in financial instruments or commodities.
Comment. Code Sec 1411 effectively creates a new tax and a new tax base, on top of the income tax, alternative minimum tax, self-employment tax and payroll taxes. Nevertheless the Preamble to the proposed regs states that, except as otherwise provided, the income tax rules should apply to Code Sec. 1411 unless good cause otherwise exists. Practitioners have asked the IRS that the final regulations give greater reassurance of this general rule.
Complexity
The IRS has stated that the principal purpose of Code Sec. 1411 is "to impose a tax on unearned income or investments of certain individuals, estates, and trusts." Unfortunately, Code Sec. 1411 is not so direct and simple, with its three categories of income (that is, (i), (ii) and (iii), above), complicating matters, albeit in an effort to close every door to those who try to "game the system."
Application of the 3.8 percent NII Tax to capital gains and dividends from a personal stock portfolio is clear under this rule of thumb. But clarity breaks down when a "trade or business" is thrown into the mix and the concept of "passive activity" is added to it.
If gain or other income is the result of an active business activity, it generally escapes NII Tax. However, when the "active" business is a passive activity (for example, a rental business), it may be deemed to generate income that is subject to the NII Tax. Furthermore, when a passive activity is not merely incidental to a business however otherwise active that business should be, the NII Tax also becomes an issue.
Passive Activity
Any revised or additional rules from the IRS on the application of the NII Tax on passive activities should be made more user friendly to the broad middle range of taxpayers and their advisors, one expert at the hearing recommended. The IRS should err on the side of explaining things clearly and simply, even at the expense of not covering every possible nuance of interpretation.
At the same time, however, other experts are asking for more detail, at least in the way of clarification. For example, the IRS has stated that passive activity for NII Tax purposes should be applied within a narrower scope than the passive activity loss rules under Code 469. Those Code Sec. 469 rules restrict "passive losses" from reducing income that is not "passive income." Experts want the IRS to explain exactly what they mean by a "narrower scope."
Self-Rental Activities/Grouping
The self-rental recharacterization rule under Code Sec. 469 affects taxpayers who rent property to a trade or business in which they materially participate. Concern has been expressed over the possibility of interpreting net investment income under Code Sec. 1411 to include rental income from a self-rental activity grouped with a trade or business activity in which the taxpayer materially participates.
The material participation and trade or business requirements should be tested on the grouped activity as a whole rather than on a component basis, one expert in particular stressed at the hearing. If that test is passed, he argued, the trade or business income and rental income from the grouped activity should be excluded from the reach of the NII Tax. For example, the owners of self-rental properties should not have that rent considered as separate from their overall business activity and subject to the net investment tax simply because properties are held in a separate LLC to avoid tort liability.
Regrouping deadline
The proposed regulations permit businesses subject to the NII Tax to elect to regroup their activities for passive-loss purposes in 2013 or 2014. This regrouping election allows taxpayers with a fresh start to accommodate the new NII surtax. Without permitting regroupings, taxpayers would be bound by their original grouping decisions, some of which may have been made as many as 20 years ago, only for purpose of Code Sec. 469 passive loss rules and not the NII Tax. Some small business representatives are also concerned that, because of the complexity of the rules, the final regulations should extend the deadline for a regrouping election through 2015.
Application of the net investment income tax is particularly difficult to get a handle on in a variety of situations. Unfortunately, however, at 3.8 percent, it is costly enough not to be ignored.
If you have any questions about how the NII Tax may apply to your business, rental operations, or overall investment strategy, please do not hesitate to call 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.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.
Small employers
Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.
The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.
To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.
Other requirements
Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.
In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.
Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.
If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.
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.
A business that manufactures products to be sold, or purchases products for resale, must value its product inventory at the beginning and the end of each tax year to determine the cost of goods sold (COGS) during the year. The business determines its gross profits by deducting COGS from its gross receipts for the year. The business then deducts its other business expenses from gross profits, to determine its net (taxable) income for the year.
A business that manufactures products to be sold, or purchases products for resale, must value its product inventory at the beginning and the end of each tax year to determine the cost of goods sold (COGS) during the year. The business determines its gross profits by deducting COGS from its gross receipts for the year. The business then deducts its other business expenses from gross profits, to determine its net (taxable) income for the year.
Certain expenses are included in COGS. Expenses that are included in COGS cannot be deducted again as a business expense. COGS expenses include:
- The cost of products or raw materials, including freight or shipping charges;
- The cost of storing products the business sells;
- Direct labor costs for workers who produce the products; and
- Factory overhead expenses.
Purchased inventory
If the business purchases its inventory for resale, its inventory costs are the invoice price plus transportation and other necessary expenses, less discounts. Discounts that must be deducted from the costs of purchased inventory include trade discounts, manufacturer's rebates, and cash discounts.
Trade discounts are a reduction in the price of goods that a manufacturer or wholesaler provides to a retailer. It includes a discount that is always allowed, regardless of the time of payment. A manufacturer's rebate is based on the dealer's purchases during the year. A cash discount is a reduction in the invoice price that the seller provides if the dealer pays immediately or within a specified time. The cash discount may reduce COGS, or it may be treated separately as gross income. Certain excise tax reimbursements may reduce the value of ending inventory and therefore reduce COGS.
Methods of accounting
It is usually impractical to associate items of intermingled or fungible inventory with specific invoices and costs. Instead, taxpayers use certain assumptions or methods of accounting to identify the goods on hand and their costs. The traditional assumptions include FIFO (first-in, first-out) and LIFO (last-in, first-out). In some cases, specific identification is used. The courts have approved the average cost method, although the IRS disagrees with its use. The IRS will permit taxpayers to use other inventory cost assumptions, such as the rolling-average method, if they are reasonable for the taxpayer's trade or business and clearly reflect income.
Under the FIFO, the taxpayer is presumed to sell the oldest goods in inventory and to retain the most-recently produced or purchased items. If production (inventory) costs are rising, the use of FIFO reduces COGS and increases the taxpayer's income. Under LIFO, the taxpayer is presumed to sell the most recently obtained goods and to retain the oldest goods in inventory. Assuming that inventory costs are rising, the LIFO method will increase COGS and decrease the taxpayer's income. Under the average cost method, all units purchased during the year are averaged with the cost of beginning inventory, to determine an average cost.
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 2013.
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 2013.
May 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 24-26.
May 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 27-30.
May 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 1-3.
May 10
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 4-7.
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 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 8-10.
May 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 11-14.
May 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 15-17.
May 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 18-21.
May 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 22-24.
May 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 25-28.
June 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 29-31.
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 new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return. The IRS expects to receive and process more than 140 million returns during the 2012 filing season. Early planning can help avoid any delays in the filing and processing of your return.
The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return. The IRS expects to receive and process more than 140 million returns during the 2012 filing season. Early planning can help avoid any delays in the filing and processing of your return.
Records
Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly. Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.
If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript. A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed.
If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.
Forms W-2
Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement. If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS. You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.
Filing deadline
April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012. If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due. To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Casualty losses
Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011. For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.
Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010). If you have any questions about a casualty loss, please contact our office.
Retirement savings
Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible. Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum. Different rules apply to other types of retirement savings plans. Our office can review these rules in detail with you.
IRS Fresh Start Initiative
In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program. Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.
If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.
Tax law changes
Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return. Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return. In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.
If you have any questions about preparing for the 2012 filing season, 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.
As 2012 gets underway, Congress has extended the employee-side payroll tax cut but a laundry list of tax incentives have expired and their renewal is in doubt. The fate of these incentives, along with the Bush-era tax cuts, will dominate debate in Washington D.C. in 2012. At the same time, tax planning in a time of uncertainty appears to have become the new normal.
As 2012 gets underway, Congress has extended the employee-side payroll tax cut but a laundry list of tax incentives have expired and their renewal is in doubt. The fate of these incentives, along with the Bush-era tax cuts, will dominate debate in Washington D.C. in 2012. At the same time, tax planning in a time of uncertainty appears to have become the new normal.
Payroll tax cut
The Temporary Payroll Tax Cut Continuation Act of 2011, approved by Congress on December 23 and signed by President Obama the same day, extends the 2011 payroll tax holiday through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the period January 1, 2012 through February 29, 2012 (10.4 percent for self-employment income). The new law also includes a recapture provision for certain individuals. However, the House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012. Lawmakers are expected to extend the employee-side payroll tax cut through the end of 2012, although not before difficult negotiations.
One speed bump to extending the payroll tax cut through the end of 2012 is its cost. The two-month extension is paid for by increasing certain fees charged to mortgage lenders. A full-year extension will require additional offsets (unless Congress decides not to offset an extension). Lawmakers are reportedly discussing additional revenue raisers, such as unspecified changes to the S corporation rules and the closing of a loophole for corporate jets. Other revenue raisers reportedly under consideration are repeal of certain oil and gas preferences and repeal of the last-in, first-out (LIFO) method of accounting. A variety of spending cuts are also on the table.
Extenders
After December 31, 2011, many popular but temporary tax breaks expire. The incentives, which are known as “extenders,” impact individuals and businesses. Some of the more popular individual extenders are the state and local sales tax deduction, the higher education tuition deduction, and the teachers’ classroom expense deduction. For businesses, the research tax credit is one of the most important extenders.
One immediate change that many taxpayers will notice is a drop in transit benefits. In 2011, commuters benefitted from more generous transit benefits. The 2011 monthly limit on the tax benefit for transit and vanpools of $230 per month reverts to $125 per month in 2012. However, the monthly limit for qualified parking provided by an employer to its employees for 2012 will increase to $240, up $10 from the limit in 2011.
Several bills have been introduced in Congress to extend the expiring incentives. However, the bills have languished in committee. One reason for the lack of movement is that Congress can extend the incentives in 2012 and make them retroactive to January 1, 2012. The extenders are also separate from the temporary Bush-era tax cuts, which are scheduled to expire after December 31, 2012. Many lawmakers do not want to link the extenders to the more-controversial Bush-era tax cuts.
IRS budget
One bill that did pass Congress at year-end 2011 was a fiscal year 2012 budget for the IRS. Congress voted to cut $305 million from the IRS’s FY 2012 budget. How this cut will impact IRS operations is unknown. In November 2011, the IRS offered buyouts and early outs to back-office employees to reduce its greatest expense: employee payroll. The IRS could also delay some business systems modernizations to save money. The IRS will likely keep customer service as close as possible to full funding, especially during the busy 2012 filing season.
Tax planning
One of the most significant challenges to long-term tax planning is the on-again, off-again nature of many tax incentives. Temporary incentives, such as the research tax credit and the state and local sales tax deduction, have become de facto permanent incentives because they are regularly extended. Nonetheless, they are temporary. Because of their temporary nature, taxpayers must have two tax plans: one that takes into account an extension of the incentives, and a second plan that does not.
If you have any questions about tax planning and tax legislation in 2012, 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.
Looking back over 2011, the IRS, Congress and the courts made many tax decisions impacting taxpayers of all types. Some tax developments were taxpayer-friendly; others imposed new requirements on taxpayers. Here is a brief rundown of the top 10 federal tax developments of 2011.
Looking back over 2011, the IRS, Congress and the courts made many tax decisions impacting taxpayers of all types. Some tax developments were taxpayer-friendly; others imposed new requirements on taxpayers. Here is a brief rundown of the top 10 federal tax developments of 2011.
1. Bush-era tax cuts unresolved
Reduced individual income tax rates, marriage penalty relief, an enhanced child tax credit, and much more are part of a package of tax breaks known as the “Bush-era tax cuts.” All of these incentives were renewed in 2010 and are scheduled to expire after 2012. President Obama wants to allow the Bush-era tax cuts to expire for higher income individuals, which the White House broadly defines as single persons with incomes over $200,000 and families with incomes over $250,000. In the summer of 2011, the White House and the GOP reportedly came close to an agreement but nothing materialized. The fate of the Bush-era tax cuts will likely be one of the major issues in the 2012 presidential election.
2. Foreign account reporting oversight increases
Since passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, the Treasury Department and the IRS have ratcheted-up their oversight of foreign accounts. In December 2011, the IRS issued final Form 8938, Statement of Specified Foreign Assets, which taxpayers will file to report foreign accounts (if they meet certain requirements). The IRS also issued guidance in 2011 for foreign financial institutions about their reporting obligations under FATCA. In related news, the Treasury Department issued final rules on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) in February 2011. Lastly, the IRS launched a new campaign in 2011 to encourage taxpayers to voluntarily disclose unreported offshore accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) rewarded taxpayers who came forward voluntarily with a reduced penalty framework (although not as generous as a similar program in 2009).
3. Payroll tax cut extended two months
President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 in December 2011. The new law extends the employee-side payroll tax cut through the end of February 2012. The two-month extension is intended to give Congress additional time to negotiate a longer-term extension of the payroll tax cut to cover all of calendar year 2012.
4. Cell phones removed from listed property category
The Small Business Jobs Act of 2010 removed cell phones from the definition of “listed property.” That category generally requires additional recordkeeping by taxpayers. In September 2011, the IRS issued guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee and the IRS will not require recordkeeping of business use to receive this tax-free treatment.
5. IRS launches Voluntary Classification Settlement Program
In September 2011, the IRS launched a new program to enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty framework. The Voluntary Classification Settlement Program (VCSP) is open to employers currently treating their workers as independent contractors and who want to prospectively treat the workers as employees. The employer must not be under audit and satisfy other requirements. The IRS has not announced an end-date to the VCSP.
6. IRS makes mid-year 2011 adjustment to business standard mileage rate
For the third time in six years, the IRS announced a mid-year adjustment to the business standard mileage rate because of rising gasoline prices. The business standard mileage rate increased from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011. The medical/moving standard mileage rate increased from 19 cents-per-mile to 23.5 cents-per-mile for the second half of 2011. Congress did not make a mid-year adjustment to the charitable standard mileage rate, which remained at 14 cents-per-mile for the second half of 2011. For 2012, the business standard mileage rate is 55.5 cents-per-mile and the medical/moving standard mileage rate is 23 cents-per-mile. The statutorily-determined charitable standard mileage rate remains at 14 cents-per-mile for 2012.
7. FUTA surtax expires
In 1976, Congress enacted the 0.2 percent FUTA surtax to help repay federal revenues paid in unemployment benefits. The Worker, Homeownership and Business Assistance Act of 2009 extended the surtax through 2010 and the first six months of 2011.The 0.2-percent FUTA surtax expired after June 30, 2011. In December 2011, the IRS released Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and accompanying schedules, for 2011. Form 940 for 2011 reflects the mid-year expiration of the FUTA surtax.
8. IRS continues Fresh Start Initiative
During 2011, the IRS continued its Fresh Start Initiative, which the agency explains is its response to the economic slowdown. The Fresh Start Initiative allows lien withdrawals for taxpayers entering into direct debit installment agreements (and for taxpayers who convert from a regular installment agreement to a direct debit agreement). The IRS also announced it would make streamlined installment agreements available to more small businesses. Qualified small businesses with $25,000 or less in unpaid taxes can participate in the streamlined installment agreement program.
9. Basis overstatement regs
The Supreme Court agreed in September 2011 to resolve a split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis. The IRS asked the Supreme Court to decide, among other questions, whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the six-year assessment period.
10. Congress bans tax strategy patents
In September 2011, President Obama signed the America Invents Act. The new law is a comprehensive overhaul of the nation’s patent laws. The new law treats any strategy for reducing, avoiding or deferring tax liability as prior art under patent law and therefore not patentable.
If you have any questions about these or any tax developments in 2011, 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.
Claiming a charitable deduction for a cash contribution is straightforward. The taxpayer claims the amount paid, whether by cash, check, credit card or some other method, if the proper records are maintained. For contributions of property, the rules can be more complex.
Claiming a charitable deduction for a cash contribution is straightforward. The taxpayer claims the amount paid, whether by cash, check, credit card or some other method, if the proper records are maintained. For contributions of property, the rules can be more complex.
Contributions of property
A taxpayer that contributes property can deduct the property's fair market value at the time of the contribution. For example, contributions of clothing and household items are not deductible unless the items are in good used condition or better. An exception to this rule allows a deduction for items that are not in at least good used condition, if the taxpayer claims a deduction of more than $500 and includes an appraisal with the taxpayer's income tax return.
Household items include furniture and furnishings, electronics, appliances, linens, and similar items. Household items do not include food, antiques and art, jewelry, and collections (such as coins).
To value used clothing, the IRS suggests using the price that buyers of used items pay in second-hand shops. However, there is no fixed formula or method for determining the value of clothing. Similarly, the value of used household items is usually much lower than the price paid for a new item, the IRS instructs. Formulas (such as a percentage of cost) are not accepted by the IRS.
Vehicles
The rules are different for "qualified vehicles," which are cars, boats and airplanes. If the taxpayer claims a deduction of more than $500, the taxpayer is allowed to deduct the smaller of the vehicle’s fair market value on the date of the contribution, or the proceeds from the sale of the vehicle by the organization.
There are two exceptions to this rule. If the organization uses or improves the vehicle before transferring it, the taxpayer can deduct the vehicle’s fair market value when the contribution was made. If the organization gives the vehicle away, or sells it far well below fair market value, to a needy individual to further the organization’s purpose, the taxpayer can claim a fair market value deduction. This latter exception does not apply to a vehicle sold at auction.
To determine the value of a car, the IRS instructs that "blue book" prices may be used as "clues" for comparison with current sales and offerings. Taxpayers should use the price listed in a used car guide for a private party sale, not the dealer retail value. To use the listed price, the taxpayer’s vehicle must be the same make, model and year and be in the same condition.
Most items of property that a person owns and uses for personal purposes or investment are capital assets. If the value of a capital asset is greater than the basis of the item, the taxpayer generally can deduct the fair market value of the item. The taxpayer must have held the property for longer than one year.
Please contact our office for more information about the tax treatment of charitable contributions.
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 term "sick pay" can refer to a variety of payments. Some of these payments are nontaxable, while others are treated as taxable income. Some of the taxable payments are treated as compensation, subject to income tax withholding and employment taxes; others are exempt from some employment taxes.
The term "sick pay" can refer to a variety of payments. Some of these payments are nontaxable, while others are treated as taxable income. Some of the taxable payments are treated as compensation, subject to income tax withholding and employment taxes; others are exempt from some employment taxes.
Amounts received for personal injury or sickness through an accident or health plan are taxable income if the employer paid for the plan. If the coverage is provided through a cafeteria plan, the employer, not the employee, is considered to have paid the premiums; thus, the benefits are included in income. If, on the other hand, the employee paid the entire cost of the premiums (or included the premiums in income), then any amounts paid under the plan for personal injury or sickness are not included in income.
An employee who is injured on the job may receive workers' compensation under a workers’ compensation act. These amounts are fully exempt from income and employment taxes. However, the exemption does not apply to retirement plan benefits that are based on age, length of service, or prior contributions, even if retirement was triggered by occupational sickness or injury. The exemption also does not apply to amounts that exceed the amount provided in the worker’s compensation act. There is no exemption under these plans for amounts received as compensation for a nonoccupational injury or sickness.
Compensatory damages paid for physical injury or physical sickness are not taxable, whether paid in a lump sum or as periodic payments. This applies to amounts received through prosecution of a legal suit or action or through a settlement agreement in lieu of prosecution. Other nontaxable benefits include disability benefits paid for loss of income or earning capacity as a result of injuries under a no-fault automobile insurance policy.
Payments for permanent injury or loss of a bodily function under an employer-financed accident or health plan are excludible. The payments must be based on the nature of the injury rather than on the length of time the employee is absent from work.
Disability income plans are employer plans that provide full or partial income replacement for employees who become disabled. Employer-provided disability income benefits generally are taxable to employees. Similarly, sick pay that is a continuation of some or all of an employee’s compensation is subject to income tax withholding if paid by the employer. The first six months of payments for sickness or disability, when the employee is off work, are subject to employment taxes, but payments made after the expiration of six months are not subject to FICA (Social Security) and FUTA (unemployment) taxes.
Reimbursements from an employer’s plan for medical expenses are not includible in income and are not subject to income tax withholding. If the employer has no plan or system and pays medical expenses for sickness or disability, the payments are subject to FICA and FUTA for the first six months. Of course, reimbursements of amounts deducted in a prior year must be included in income. Medical reimbursements provided under a self-insured employer plan are not subject to income tax withholding, even if the amounts are included in income.
Payments for sick leave or accumulated sick leave are taxable compensation.
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.
Depreciation is a reasonable allowance for wear and tear on property used in a trade or business or for the production of income. Property is depreciable if it has a useful life greater than one year and depreciates in value. Property that appreciates in value may also depreciate if subject to wear and tear. Depreciation ends in the tax year that the asset is retired from service (by sale, exchange, abandonment or destruction) or that the asset is fully depreciated.
Depreciation is a reasonable allowance for wear and tear on property used in a trade or business or for the production of income. Property is depreciable if it has a useful life greater than one year and depreciates in value. Property that appreciates in value may also depreciate if subject to wear and tear. Depreciation ends in the tax year that the asset is retired from service (by sale, exchange, abandonment or destruction) or that the asset is fully depreciated.
Assets with useful lives of one year or less can be deducted as current expenses in the year of their costs. Depreciation cannot be claimed on an asset that is acquired and disposed of in the same year.
Depreciation begins in the tax year that the property is placed in service for either the production of income or for use in a trade or business. Property generally is considered placed in service when it is in a condition or state of readiness to be used on a regular, ongoing basis. The property must be available for a specifically assigned function in a trade or business (or for the production of income).
An asset actually put to use in a trade or business is clearly considered placed in service. If, on the other hand, an asset is not actually put to use, it is generally not considered placed in service unless the taxpayer has done everything he or she can to put the asset to use. For example, a barge was considered placed in service in the year it was acquired, even though it could not be actually used because the body of water was frozen. For a building that is intended to house machinery and equipment, the building's state of readiness is determined without regard to whether the machinery and equipment has been placed in service. Leased property is placed in service by the lessor when the property is held out for lease.
Generally, the year property is placed in service is the tax year of acquisition, but it could be a later time. An asset cannot be placed in service any sooner than the time that the business actually begins to operate.
In the case of agriculture, livestock cannot be depreciated until it reaches maturity and can be used; orchards cannot be depreciated until the trees produce marketable quantities of crops. Prior to those times, costs must be capitalized and cannot be written off.
Especially at year-end, placing an asset in service before the new year can mean the difference between claiming a substantial amount of depreciation on this year's return instead of waiting a full year. If you have any questions on how to qualify a business asset under this deadline, please contact this 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.
In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program. It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.
In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program. It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.
The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.
If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.
“All the facts and circumstances”
The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.
Examples of behavioral and financial factors that tend to indicate a worker is an employee include:
- The worker is required to comply with instructions about when, where, and how to work;
- The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
- The worker’s hours are set by the employer;
- The worker must submit regular oral or written reports to the employer;
- The worker is paid by the hour, week, or month;
- The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
- The worker has the right to end the employment relationship at any time without incurring liability.
In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.
Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.
Conclusion
Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.
Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.
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.
Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.
Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.
Use-it or lose-it
The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.
Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800.
Grace period
Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.
Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year. On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.
Exceptions
There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services.
Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.
If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this 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.
Job-hunting expenses are generally deductible as long as you are not searching for a job in a new field. This tax benefit can be particularly useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.
Job-hunting expenses are generally deductible as long as you are not searching for a job in a new field. This tax benefit can be particularly useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.
Expenses directly connected with a job search are deductible as a miscellaneous itemized deduction. You can deduct job-hunting expenses if the amount of all your so-called miscellaneous itemized deductions exceeds two percent of your adjusted gross income. However, if you claim the standard deduction, you cannot deduct job-hunting expenses. Therefore, as a practical matter for many job seekers, job hunting expenses do not materialize as a tax deduction.
For those who are able to use job seeking expenses as a deduction, it can be difficult to determine what a new field is. A professional photographer who pursues a job in the retail industry clearly is searching in a new field and cannot deduct any of his or her job-hunting expenses. But there are exceptions. The IRS has allowed persons who retired from the military to search for jobs in new fields and claim their job-hunting expenses. Taking a temporary job while searching for permanent employment in your current field will not be considered a job change that disqualifies your job-hunting expenses.
Persons entering the job market for the first time, such as college students, and persons who have been out of the job market for a long period of time, such as parents of young children, cannot deduct their job-hunting expenses. However, a college student who worked in a particular field while in school may be able to deduct job-hunting expenses.
Deductible expenses include typing, printing and mailing a resume. Long-distance phone calls are also deductible. You can deduct travel costs for going on a job search or an interview, including air transportation, railroad, or car expenses. The standard rate for car expenses for business is 55 cents per mile for 2012. Amounts you pay to a job counselor, employment agency or job referral service are all deductible.
It is important to keep records of your costs. While your individual expenses may not be substantial, your total expenses can add up to a significant amount.
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 can request a copy of their federal income tax return and all attachments from the IRS. In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.
Taxpayers can request a copy of their federal income tax return and all attachments from the IRS. In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.
Tax return copy
A copy of your tax return is exactly that: a copy of the return you filed with the IRS. According to the IRS, copies of individual tax returns are generally available for returns filed in the current year and the past six years. The IRS charges a fee of $57 to send taxpayers a copy of their return.
Requests for copies of tax returns should be filed on Form 4506, Request for Copy of Tax Return. The IRS has advised on its website that taxpayers should allow 60 days to receive a copy of their tax return.
Tax return transcript
A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax transcript does not show any changes the taxpayer or the IRS made after the return was filed. According to the IRS, a tax return transcript is generally available for the current and past three years.
Taxpayers can request transcripts online at the IRS web site, telephoning the IRS, or filing Form 4506T-EZ, Short Form Request for Individual Tax Return Transcripts. Businesses that need business-related information should file Form 4506-T, Request for Transcript of Tax Return. Taxpayers can request that the IRS send the transcript to their tax representative. The IRS reported on its website that transcript requests made online or by telephone generally will be processed within five to 10 days; transcript requests made by filing a paper form take longer to process.
Tax account transcript
The IRS also can provide a tax account transcript. This document shows basic data from the individual’s return and includes any adjustments the taxpayer or the IRS made after the return was filed. A tax account transcript is generally available for the current and past three years, according to the IRS and is provided at no-cost.
If you have any questions about the types of tax records available from the IRS, 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.
