It's Just Business

Benefits of Year-end Income Tax Planning for Individuals and Businesses

2011-11-14T19:29:00Z

Year-end income tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping income tax reform that could have a major impact in 2012 and beyond. However, regardless of what Congress does later this year, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. Year-end income tax planning is not only about what is happening in Congress and at the IRS, it is also about addressing the changing circumstances in your life and acting upon them in a timely manner in order to lower your tax bill.

Year-End Income Tax Planning Moves For Individuals To Consider

Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. For example, it may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012. Also, accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Further, if you expect to owe state taxes when you file your return next year, consider asking your employer to increase withholding, or pay estimated tax payments, before year-end to pull the deduction of those taxes into 2011 if doing so will not create an alternative minimum tax (AMT) problem. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011; for example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.
Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions.
Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Do not forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids. 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.
Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or will not sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011.You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.
Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holdings invested in beaten-down stocks or mutual funds, and then buy back the same securities at least 31days later.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give up to $13,000 in 2011 to each of an unlimited number of individuals but you can not carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Keep in mind the annual limit applies to all gifts to each individual.
Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.
If you are a homeowner you may qualify for a tax credit if eligible energy saving improvements to the residence are installed in your home before 2012.
Consider using a credit card to prepay expenses that can generate deductions for this year.

Year-End Income Tax-Planning Moves for Businesses & Business Owners

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. Unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000 and the beginning-of-phaseout amount will drop to $560,000.
Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year writeoff won't be available next year unless Congress acts to extend it.
Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC will not be available for workers hired after this year.
Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.
If you are self-employed and have not done so yet, set up a self-employed retirement plan.
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.

These are just some of the year-end steps that can be taken to save on your taxes. Please consult with your tax advisor to determine the best strategies for your circumstances.

Required Disclaimer: Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purposes of avoiding penalties that may be imposed by the IRS on the taxpayer.

Corporate Stock Basis Reporting

2011-06-16T21:26:00Z

If you or your company is the issuer of any shares of stock, beginning in 2011 you may have new reporting requirements related to the basis of that stock.

Originally part of the Energy Improvement and Extension Act of 2008, IRC Section 6045B requires most corporations to file information returns with the IRS describing organizational actions taken (such as mergers, acquisitions, stock-splits) that affect the basis of stocks or "specified securities". In addition, statements must be provided to the holders of those securities or their nominees. The following provides additional information:

Section 6045B pertains to issuers of "specified securities": Specified securities include, but are not limited to, shares of stock in corporations, notes, bonds, debentures and other evidences of indebtedness. This includes stock in "closely held corporations". However, for 2011 reporting purposes only, specified securities are limited to stocks in corporations; additional reporting will be required in 2012 and 2013 for other securities.

Information to be reported: A corporation must file a return with the IRS describing action taken that affects the tax basis of any outstanding stock, along with the quantitative affect on the basis of the stock. Additionally, written statements must be provided to the holders of the securities and must include the information filed with the IRS along with contact information of the person filing the IRS returns.

Alternate filings: Issuers of stock may fulfill the requirements to file IRS returns and provide written holder statements by posting the required information in a readily accessible format on their primary website. The area of the website must be dedicated to meeting the reporting requirements of code section 6045B and the issuer must keep the returns accessible on the website for ten years. The deadlines for posting information on a website are the same as the required deadlines for filing reports with the IRS and written statements with holders of securities.

Reporting dates to the IRS: As prescribed by Internal Revenue Code section 6045B, the information returns must be filed with the IRS no later than the earlier of 45 days after the date of action or by January 15 of the following year. In effect, for reportable actions occurring after December 1, returns will have to be filed by January 15 of the next calendar year. The IRS has provided transitional relief from the 45 day reporting requirement for 2011 only and will not impose penalties on corporations that miss the 45 day deadline provided that issuers file the required return with the IRS by January 17, 2012. As of this writing, the IRS has not developed a form for filing the required information. Posting the return information by January 17, 2012 on a company website as provided in the regulations will also meet the requirements to avoid penalties for 2011.

Reporting dates to holders of securities: The annual deadline for providing written statements to holders of securities is January 15 of the year following the action requiring the statement. Unlike the return to be filed with the IRS, statements to holders of specified securities are not required to be provided within 45 days after the date of each action unless the action occurs within 45 days of January 15 of the following year.

Penalties: As a general matter, the IRS imposes a $100 penalty for each informational return that is not filed timely or does not include required information. For purposes of determining penalties, each statement required to be filed with holders of securities is considered one return. As such, issuers will want to insure that statements provided to holders are properly filed annually by January 15.

Please feel free to contact James Hade at james@calibercpas.com.

Tax Strategy Patents

2011-04-01T23:00:00Z

In the field of technology, patents are commonplace. What may surprise you is that a similar debate has been stirring in recent years regarding patents on tax reporting strategies. In 1998 the Federal Circuit Court of Appeals in State St. Bank & Trust v. Signature Fin. Group determined that tax strategies are patentable as a type of business method. Throughout the years, there have been many deliberations concerning the negative consequences caused by patentable tax strategies.

Since 1998, the U.S. Patent and Trademark Office has granted more than 130 patents on tax strategies and tax planning methods. The majority of the issued patents have been in the area of estate and gift taxation, but also include patents in the areas of charitable giving, pension plans, tax-deferred exchanges, and deferred compensation. These patents directly target average taxpayers through income tax minimization, alternative minimum tax (AMT) minimization, and income tax itemized deduction maximization.

For several years, the AICPA, which is the principal trade group in the accounting industry, has strongly opposed the issuing of patents for tax strategies saying that tax patents:

1. Limit the ability of taxpayers to fully utilize interpretations of tax law intended by Congress;

2. May cause some taxpayers to pay more tax than Congress intended, and may cause other taxpayers to pay more tax than others in similar situations;

3. Complicate the provision of tax advice by professionals;

4. Hinder compliance by taxpayers;

5. Could mislead taxpayers into believing that a patented strategy is valid under the tax law; and

6. Preclude tax professionals from challenging the validity of tax strategy patents.

On March 8, 2011, the senate passed “The America Invents Act”, formerly known as the Patent Reform Bill, by a vote of 95-5. This is the first time that the Senate has passed a piece of legislation that includes a provision addressing the problem of tax strategy patents. The bill would prevent individuals or firms from being able to receive patents on tax strategies.

The foundation of the campaign against tax strategy patents is the sole conviction that tax strategy patents are harmful to taxpayers. Tax strategy patents have put taxpayers in a position where they must choose to violate patent laws and pay royalties to a third-party, or pay higher federal tax than is legally required. Tax patents set an uneven playing field for taxpayers and tax professionals alike. A tax professional with a patented tax strategy will have the ability to charge higher fees while attracting more taxpayers. As a result, a monopoly on tax compliance will form. The AICPA does not agree that taxpayers should be punished for using the best legal means available to comply with the Federal Tax Code. This Act, if passed, would solve the tax strategy patent problem by giving all taxpayers and their advisors equal access to all tax laws.

With the America Invents Act moving to the House of Representatives, the AICPA urges members of the house to move forward with the patent reform legislation so that the negative impacts of tax patents can be resolved.

Please feel free to contact Eric Schwefler at eric@calibercpas.com.

Small Business Jobs Act of 2010 Tax Provisions

2011-03-02T21:31:00Z

As you prepare to file income tax returns for your business this year, do not forget about the Small Business Jobs Act of 2010. This legislation was enacted on September 27, 2010 and it contains some tax provisions that have an immediate impact on the 2010 tax year. The provisions of the Act are designed to encourage investment and provide access to capital for businesses. The following is list of some of those tax provisions which are now in effect.

· General business credits of eligible small businesses for 2010 carried back 5 years.

· General business credits of eligible small businesses in 2010 not subject to alternative minimum tax

· Increase in amount allowed as deduction for start-up expenditures in 2010

· Deduction for health insurance costs in computing self-employment taxes in 2010.

General business credits of eligible small businesses for 2010 carried back 5 years

The new law allows an eligible small business to carry back general business credits five years. Previously, the credits in excess of limitations could only be carried back one year and forward twenty years. The new carryback is effective for credits determined in the first taxable year beginning after December 31, 2009 and are unused. For purposes of this part of the legislation, an “eligible small business” is, with respect to any taxable year, a business that:

1. Is a corporation (C or S), the stock of which is not publicly traded, a partnership, or sole proprietorship; and

2. Has average annual gross receipts of $50,000,000 or less over the three preceding tax years.

This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009).

General business credits of eligible small businesses in 2010 not subject to alternative minimum tax

The Small Business Jobs Act allows general business credits to offset both regular income tax and alternative minimum tax of eligible small businesses. The provision is effective for any general business credits determined in the first taxable year beginning after December 31, 2009, and to any carryback of such credits.

The prior law did not allow general business credits to offset alternative minimum tax.

This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009).

Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increased the amount the taxpayer is allowed to elect as a deduction for start-up expenditures, under Internal Revenue Code section 195(b), for tax years beginning after December 31, 2009, from $5,000 to $10,000. In addition, the phase-out threshold was also increased from $50,000 to $60,000, meaning the law now requires a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000. The remainder of any start-up expenditures not deducted can be amortized ratably over a 180 month period beginning with the month in which the active trade or business began.

The deduction for “organizational expenses” is not affected by this change and remains at $5,000.

Deduction for health insurance costs in computing self-employment taxes in 2010

A self-employed individual can typically only deduct the cost of health insurance in calculating their adjusted gross income (AGI). However, in 2010 under the Small Business Jobs Act, business owners are able to deduct the cost of health insurance for themselves and their family in computing net earnings from self-employment when calculating their self-employment tax for 2010. “Their family” includes their spouses, dependents, and any children who have not attained age 27 as of the end of the taxable year (Internal Revenue Code Section 162).

The deduction is not available for any month which the small business owner is eligible to participate in an employer-subsidized health plan (maintained by the employer of the taxpayer or the employer of the taxpayer’s spouse).

Many of these tax incentives will not be available going forward so be sure to take advantage of them this year if you qualify.

Please feel free to contact James Hade at james@calibercpas.com.

SUBSTANTIATING YOUR DEDUCTIONS

2011-02-03T16:26:00Z

With the recent increased budget shortfalls, the taxing authorities are looking for more ways than ever to generate revenue. The IRS has hired more auditors and is increasing the number of audits done through the mail. Consequently, more business and individual returns are coming under closer examination as the IRS seeks substantiation of specific items. Certain categories of deductions such as charitable contributions, mileage, and meals and entertainment expenses require specific documentation. It is more important than ever to maintain proper records to substantiate these deductions should your return come under the scrutiny of the tax authorities.

CHARITABLE CONTRIBUTIONS

The IRS requires that all cash contributions be substantiated by a bank record or written communication documenting the name of the organization, the date and the amount of the contribution. A schedule or log of contributions is not enough to substantiate donations. Documentation required for non-cash contributions is expanded to include the location and a detailed description of the property. The value of the contribution is not required. Contributions of $250 or more must be substantiated with “contemporaneous written acknowledgement” of the donee, such as a receipt. If a taxpayer makes multiple donations each less than $250 during the year but which exceed the $250 threshold in aggregate, there is no increased substantiation requirement. This is also true for contributions directly withheld from an individual’s pay check as long as the deduction each pay period is under the $250 threshold.

Individuals claiming a non-cash contribution valued in excess of $500 are required to file Form 8283 – Noncash Charitable Contributions with their individual income tax return. Returns reporting non-cash contributions in excess of $5,000 must include an appraisal. There are additional requirements for donations of stock and works of art valued at $20,000 or more. Failure to acquire the necessary documentation may result in the IRS denying the deduction.

MILEAGE DEDUCTIONS

Businesses, sole-proprietors and individuals may be able to take advantage of a mileage deduction based on the number of miles driven during the year for specified purposes. Eligible taxpayers may elect to deduct the greater of actual expenses incurred or use the standard mileage rate multiplied by the number of miles driven during the year. In the case of a business seeking to deduct the greater of actual expenses or the standard rate, both must be tracked to determine which provides the greatest benefit at year end. Individuals may be eligible to take a deduction for miles driven for medical or moving purposes or during service to charitable organizations. To substantiate the miles driven a detailed mileage log must be maintained consistently throughout the year as the mileage is incurred. Worksheets prepared at the end of the year may assist your accountant in determining the appropriate deduction but are not considered adequate records should the deduction be challenged. Records should include the date, destination, business purposes or nature of the travel, and mileage or odometer readings for every business trip.

MEALS & ENTERTAINMENT

To be deductible, meals and entertainment expenses must be considered “ordinary and necessary”. This requirement is essentially a test of reasonableness. The IRS has denied deductions for meal and entertainment expenses deemed “lavish or extravagant”. In addition the expense must be “directly related” or “associated with” the business operations. This means those involved must actively discuss matters pertaining to the business immediately before, during, or immediately after the expense is incurred. Meals and entertainment expenses are also deductible if they are intended to bring in new business or foster an existing business relationship. Substantiating meal and entertainment expenses requires diligent record keeping. Records must identify those involved, the amount of the expense, the date incurred and a description of the business purpose. Receipts must be maintained for meal and entertainment expenses which exceed $75. It is important to note, once the expense is deemed deductible, it is limited for tax purposes to 50% of the total cost incurred.

Proper documentation is vital to substantiating your deductions should the IRS ever challenge your return. As discussed, items such as charitable contributions, mileage, and meals and entertainment require significant documentation. The IRS has denied deductions when one element of the records was incomplete. Therefore it is important that you maintain adequate records over the course of the year to ensure the deduction on your return. If you have questions regarding these requirements or substantiation for any other items, you are encouraged to contact your tax advisor.

Please feel free to contact James Hade at james@calibercpas.com.

New Tax Law Summary

2010-12-31T19:29:00Z

The recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) prevented a number of tax hikes that would have begun January 1, 2011. There are plenty of tax benefits in the bill for individuals and businesses, most of which are extensions of certain expiring provisions.

What follows are some of the key points in this legislation.

Tax rates, Dividends and Capital Gains rates. The 2010 income tax rate structure has been extended for two years through 2012. The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). Qualified dividends and long-term capital gains will also stay at a 0% tax rate for individuals in the 10% and 15% tax brackets and a 15% tax rate for other taxpayers.

Reduction of Social Security tax for 2011. All taxpayers regardless of income will receive a boost in take-home earnings for 2011. The Social Security tax on the employee share of wages is reduced from 6.2% to 4.2%, and from 12.4% to 10.4% for the self-employed for 2011. However, the employer's share of Social Security tax is not affected; it stays at 6.2%.

This 2% cut is a replacement for the “Making Work Pay” credit, which was part of the 2009 Recovery Act and was worth $400 to taxpayers making $75,000 or less ($800 to couples earning under $150,000). Compared to the Making Work Pay credit, for those who reach the maximum $106,800 Social Security earnings, this represents a savings of $2,136. To a $40,000 wage earner, the savings would be $800.

AMT. A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

Extension of “tax extenders” for 2010 and 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes; deductibility of mortgage insurance premiums for qualified residence; and the 30-percent credit for energy-efficiency improvements to the home.

The $1,000 per child tax credit stays through 2012 rather than reverting to $500 per child. The tax credit of up to $3,000 for dependent care for children under 13 also remains unchanged. The bill also extends the higher education tax credit (the $2,500 American Opportunity tax credit) and its partial refundability for two years.

Extension of Certain Expiring Provisions for Businesses through 2011. On the business side, the following business tax breaks that expired at the end of 2009 have been retroactively reinstated and extended through 2011 by the Tax Relief Act:

· The research and development credit.

· 15-year write-offs for qualified leasehold improvements, and restaurant buildings (and certain improvements to such restaurant buildings).

· 7-year write-offs for certain motorsports racetrack property.

· The employer wage credit for activated military reservists.

· The Indian employment credit.

· The new markets tax credit.

· Accelerated depreciation for business property on an Indian reservation.

· The railroad track maintenance credit.

· The special expensing rules for certain film and television productions.

· Expensing of environmental remediation costs.

· The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes.

· A liberal rule for S corporations making charitable donations.

· The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity.

· Empowerment zone tax incentives.

· Renewal community tax incentives.

· The work opportunity credit (extended for four months (through the end of 2011)).

· Qualified zone academy bonds.

In addition, the new law extends for an additional year (i.e., through 2011) the temporary exclusion of 100% of gain on the sale of certain small business stock.

Fixed Asset Expensing and Additional First-Year Depreciation. Generally, the cost of property placed in service in a trade or business can’t be fully deducted in that year if it will be used beyond that time period. Instead, it is depreciated over its useful life. Businesses can now write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. This means that the entire cost of qualifying property placed in service during that time can be written off, without limit. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.

Along with bonus depreciation, the new law also provides for enhanced Code Sec. 179 expensing for 2012. Under current law, the Code Sec. 179 dollar and investment limits are $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. Although reduced, the new law provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) into 2012 as well.

Please keep in mind that the above describes only the highlights of the most important changes in the new law and that most of these extensions end at midnight on December 31, 2012 without further legislation.

Should you like to discuss any of the above items or other tax planning strategies please consult your tax advisor.

Please feel free to contact Eric Schwefler at eric@calibercpas.com.

Repeal of Expansion of Form 1099 Filing Requirements - Update April 18, 2011

2010-12-02T14:59:00Z

UPDATE on April 18, 2011:

As explained in the blog posted in December, the Form 1099 information reporting rules had been expanded by legislation passed in 2010. The President has now signed the H.R.4 "Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011" which retroactively repeals the additional requirements that were included in the Small Business Jobs Act of 2010 and the Patient Protection and Affordable Care Act of 2010. The new legislation repeals the Form 1099 reporting requirements that would have begun in 2012 for payments to corporations and for payments made for goods or other property. Additionally, the Act repeals the provisions which expanded the Form 1099 requirements to include rental income recipients for payments made after December 31, 2010. Thus, under the H.R.4 Act, the requirements have returned to the way they were before the 2010 Form 1099 legislation.

UPDATE February 4, 2011:

As explained in the blog posted in December, the Form 1099 reporting requirements were expanded by both the Small Business Jobs Act of 2010 and the Patient Protection and Affordable Care Act of 2010. Recently, the Senate voted to repeal certain controversial new requirements that were included in the Patient Protection and Affordable Care Act. If passed, this legislation would repeal the Form 1099 reporting requirements that would begin in 2012 for payments of $600 or more to corporations and for payments made for goods.

The bill did not include a repeal of the changes included in the Small Business Jobs Act which made landlords or rental income recipients subject to the Form 1099 reporting requirements for payments made after December 31, 2010.

One should continue to monitor the requirements for any changes.

ORIGINAL BLOG:

Starting in 2012, all businesses will face an increased burden related to Form 1099 informational reporting requirements. Furthermore, beginning in 2011, any recipient of rental income (including individuals) will be considered to be engaged in a trade or business and will be subject to Form 1099 reporting rules.

Changes for 2011

The Small Business Jobs Act of 2010 included increased reporting requirements that will impact persons receiving rental income. Specifically, payments made after December 31, 2010 for rental property services totaling $600 or more to a single payee will need to be reported to that payee on a Form 1099 MISC. For example, if a rental property owner hires Jake to fix the bathroom sink in a rental property for $605 dollars, he will be required to issue Jake a Form 1099 MISC for 2011. For payments made in 2012, rental expenses will also be subject to the additional rules listed below.

Changes for 2012

The changes in reporting requirements for 2012 brought about by the 2010 Health Care Act will be more widely felt. Currently, Internal Revenue Code Sec. 6041 mandates that persons engaged in a trade or business file Form 1099s for payments totaling $600 or more in any taxable year to a single payee, excluding corporations. Payments include:

Forms of compensation for services such as commissions and fees
Interest, rents, and other fixed or determinable gains, profits and income

The new law adds to the types of payments subject to the requirements "amounts in consideration for property" as well as "other gross proceeds. " Additionally, the term person will include any corporation that is not an organization exempt from tax under section 501(a) . Thus, for payments made beginning in 2012, "payments" will include amounts paid for goods and tangible property as well as services to “persons” including corporations.

For example, if a landlord hires Jared in 2010 to paint the interior of a rental property for $1,500 and purchases the paint supplies for $600 from Hardware Co Inc, the landlord would not need to issue Form 1099s for these transactions as receiving rent income from real estate is not included as "trade or business income" for purposes of Sec. 6041 in 2010. If the landlord hires Jared in 2011, he will need to issue Jared a Form 1099 since the landlord will be treated as "in trade or business" and since Jared is providing a service. If landlord waits to hire Jared until 2012, he will need to send Forms1099 to both Jared and Hardware Co Inc. as Jared is providing a service and Hardware Co Inc. received payments for goods.

Furthermore, the penalties related to delinquent and omitted Form1099 filings have been increased.

However, there is one bright spot in the numerous changes discussed above. The IRS issued regulations that exempt payments made after December 31, 2010 by debit or credit cards from Form 1099 reporting requirements since these payments will already be reported under Sec. 6050W by the payment processors (Treas. Regs. 1.6041-1(a)(1)).

In summary, the impact of these changes will be significant as businesses may need to gather taxpayer information numbers from additional vendors/service providers, maintain more detailed records, and issue a greater number of Forms 1099. It is worth noting that there have been proposals in Congress to reverse or reduce all or a portion of the additional reporting requirements. Thus, one should continue to monitor the requirements for any changes.

Should you have any questions regarding the new Form1099 requirements please consult your tax advisor.

Please feel free to contact Eric Schwefler at eric@calibercpas.com.

New Incentives to HIRE during 2010

2010-11-02T21:30:00Z

As the economy starts to improve and you are thinking about hiring some help in the near future, you may have some extra tax incentive. On March 18^th 2010, the President signed the Hiring Incentives to Restore Employment Act of 2010 (the 2010 HIRE Act). The mainstay of the act is a payroll tax break and up to a $1,000 tax credit for businesses that hire unemployed workers.

To promote the hiring of unemployed workers, the new law exempts any employer that hires a qualifying individual after February 3, 2010 from paying the employer's 6.2% share of the Social Security payroll tax after March 18, 2010 through December 31, 2010. In addition, for any qualifying individual hired after February 3, 2010 and before January 1, 2011 the employer can receive up to a $1,000 tax credit.

Now, as with any tax legislation, the devil is in the details, so we better discuss some of the specifics.

A qualifying individual is one who has not been employed for more than 40 hours during the 60-day period prior to their start date; is not hired to replace another employee unless the employee left voluntarily or were let go for cause; and finally, is not a relative of the employer.

To be eligible for the up to a $1,000 tax credit, the qualifying individual must be a "retained worker." A retained worker is one who is employed for a continuous period of at least 52 weeks, and whose wages for the last 26 weeks of the period are at least 80% of the wages for the first 26 weeks of the period. There is no minimum weekly number of hours the new employee must work. However, the credit is the lesser of $1,000 or 6.2% of the wages during the 52 week period. So for any wages exceeding $16,129.03, the credit will be limited to $1,000.

The credit is claimed once the continuous 52 week period is first satisfied, so for businesses on a calendar year, the credit will be claimed on their 2011 tax return. If your tax liability that year is not sufficient to take full advantage of the credit, don't worry, it can be carried forward for up to 20 years and applied to future tax liabilities until it is fully utilized.

Should you have any questions regarding the new tax incentives please consult your tax advisor.

Please feel free to contact Eric Schwefler at eric@calibercpas.com

New Incentive Stock Option and Employee Stock Purchase Plan Reporting Requirements for 2010

2010-02-05T22:20:00Z

Technology companies commonly use equity-based compensation tools to attract and retain top talent. Two often used tools include incentive stock options (ISOs) and employee stock purchase plans (ESPPs). If your company offers ISOs or has an ESPP, be aware that the Treasury has created a new reporting requirement for 2010.

Internal Revenue Code (IRC) §6039 has long required an employer corporation to provide an employee specified information about the transfer of stock as a result of the exercise of an ISO or the bargain purchase of stock under an ESPP. In 2006, Congress passed the Tax Relief and Health Care Act which required an employer corporation to also provide such information to the IRS. The Treasury has waived the requirement to report such information to the IRS – until now that is. The IRS recently issued final regulations requiring the information reporting for stock transfers occurring in 2010 and thereafter.

Two new forms will be released in the near future: Form 3921 – Exercise of an Incentive Stock Option Under Section 422(b) and Form 3922 – Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c). In general, the new forms will report the identifying information of the employer corporation issuing the stock, the identifying information of the employee receiving the stock, and the date, quantity and amount information regarding the grant, exercise and/or transfer of the stock.

Employer corporations with ISOs or ESPPs should consider whether their accounting or other information systems capture and track the required information to be reported. If the systems do not, steps should be taken to modify or supplement the systems to ensure that the reporting requirements can be met.

Should you have any questions regarding the new reporting requirement or equity-based compensation methods in general, please consult your tax advisor.

Please feel free to contact Eric Schwefler at eric@calibercpas.com.

Required Disclaimer: Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer.

Is a Limited Partnership right for you?

2010-01-24T20:03:00Z

There are many decisions to make when forming a business, one being the choice of entity. There are many choices available including C Corporations, S Corporations, Limited Liability Corporations, Partnerships, and Limited Partnerships, to name the more popular ones. I recently engaged in a conversation with an entrepreneur who has raised substantial capital from private investors. In the end, the Limited Partnership was the most suitable entity for the new business venture because it allowed them to raise capital from private investors, while providing the investors with limited liability protection.

If one of the major goals is to raise capital to fund the venture without giving up control of the business and without being saddled with considerable start-up debt, a limited partnership will allow the entreprenuer, as the general partner, to manage and operate the business with little intervention from the other partners. In addition, it will enable the entrepreneur to raise equity capital from investors who receive limited partnership interests in exchange for their contributions. As limited partners, they will be able to share in the entity's financial results without having to manage the business or risk personal liability for it.

Care must be exercised to ensure that the limited partners do not inadvertently lose the protection of limited liability by participating in the management of the business. If the limited partner merely consults with you it will probably not result in personal liability as long as you, the general partner, remain the ultimate decision-maker. A limited partner may become personally liable because of his own acts such as guaranteeing a partnership debt.

One drawback to a partnership is that the general partner will be personally liable for the entity's debts. This is the "price" a general partner must pay in exchange for the right to operate and manage the enterprise. The risk of this liability can be minimized somewhat by: (i) creating a corporation to manage the partnership and serve as general partner, and (ii) procuring adequate insurance to cover potential liabilities arising from operation of the business.

Since the partnership is a pass-through entity for tax purposes, each partner must include his share of partnership income, deduction, credit, and loss, on his individual tax return. You should note, however, had we decided to use a "regular" corporation rather than a partnership, the earnings would be taxed at a higher effective tax rate. This is because they would be taxed once when earned by the corporation and again when distributed to shareholders.

With proper planning, the limited partnership can be structured to provide special allocations of various tax benefits that make the venture more attractive to prospective investors. For this reason, a limited partnership is a better choice for your new venture than an S corporation. Special allocations, in order to be respected by the IRS, must have what is known as "substantial economic effect." This is a discussion point that should be addressed by the entrepreneur and the other partners before entering into business together.

Although the formation of a limited partnership generally only requires the filing of a certificate of limited partnership with the state, it is normally a good idea to negotiate and execute a written partnership agreement. As always, check with your CPA on the impact of such decisions as they relate to your personal circumstances.

Required Disclaimer: Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer.