PMA Advisors Blog

IRS Reverses Course on Credit and Debit Card Receipt Reporting

2012-02-10T08:26:00.000-08:00

Interesting article from Tax Analysts:

In an apparent change of course, the IRS will not require reconciliation of gross receipts and merchant card transactions on Forms 1120, "U.S. Corporate Income Tax Return," and other business income tax forms, according to a February 9 letter sent to the National Federation of Independent Business (NFIB).

In the letter, Steven Miller, IRS deputy commissioner for services and enforcement, confirms remarks he made to the trade group in a recent meeting that reconciliation would not be required on the 2012 form. "Nor do we intend to require reconciliation in future years," Miller wrote. (For the letter, see Doc 2012-2714 . For an NFIB release, see Doc 2012-2717 .)

Perhaps most important to retailers is the IRS's intention that "the reporting of gross receipts and sales on the 2012 income tax forms will be modeled on the 2010 income tax forms." No other changes to those forms related to payment card reporting are contemplated, Miller wrote.

Section 6050W, which was added to the code by the Housing Assistance Tax Act of 2008, requires information returns (Forms 1099-K) to be provided to some payers regarding payments made in settlement of payment card transactions and third-party network transactions. Section 3406(a)(1) requires some payers to perform backup withholding by deducting and withholding income tax from a reportable payment if a payee fails to furnish the payee's correct taxpayer identification number to the payer.

Regulations under section 3406 require that backup withholding apply to section 6050W payments made after December 31, 2011. That effective date was pushed back one year by the IRS in October 2011 in Notice 2011-88. Business groups decried the reporting provisions as onerous. (For Notice 2011-88, 2011-46 IRB 748, see Doc 2011-22669 or 2011 TNT 209-10 .)

The IRS recently added Line 1a-e on business tax returns requiring businesses that use third-party payers to reconcile their gross receipts with those reported by the third-party payers on their tax returns. However, on February 1, House Ways and Means Committee member Aaron Schock, R-Ill., introduced H.R. 3877, the 1099K Overreach Prevention Act, which would prevent Treasury from requiring taxpayers to reconcile reporting of payment transactions with amounts related to gross receipts or sales. (For the text of the bill, see Doc 2012-2253 or 2012 TNT 24-57 .)

In a January letter to the IRS and Treasury, Susan Eckerly, NFIB's senior vice president for public policy, wrote that the reporting requirement would increase compliance costs for small businesses and "could lead to a variety of transactions and payment plans that would make it harder to reconcile their actual gross sales with the gross receipts from the Form 1099-K."

Those transactions include cash-back transactions at the point of sale, returned merchandise reimbursing a customer with cash, charitable contributions made by a customer at the point of sale, and sales tax remittances to state and local governments, Eckerly wrote.

In a December 22 letter to the IRS and Treasury, Bill Hughes, senior vice president, government affairs, for the Retail Industry Leaders Association (RILA), expressed similar sentiments about problems related to reconciliation, especially for cash payments and reimbursements. (For the letter, see Doc 2012-27104 or 2011 TNT 249-11 .)

In an e-mail to Tax Analysts, Brian A. Dodge, RILA senior vice president, communications and state affairs, said that his group has been working behind the scenes with the IRS since last September to change the rule and that RILA received word today that the Service has "changed their policy and will no longer require merchants to track and report debit and credit card receipts."

In a statement, Dan Danner, NFIB's CEO, said, "This is a small, but important victory for small business and we appreciate the IRS working to alleviate the concerns of small business owners on this issue."

Employers Likely to Pay More Payroll Taxes in 2012

2012-01-31T20:05:00.000-08:00

Many employers likely to pay more unemployment taxes in 2012

Employers in many states are likely to pay more unemployment tax in 2012 than in previous years for a variety of reasons, including: (1) a higher federal unemployment tax (FUTA) rate because of outstanding federal loans; (2) a higher state taxable wage base; and/or (3) a higher state unemployment tax rate and new surcharges.

Alaska. The amount of wages subject to unemployment tax (i.e., the taxable wage base) has increased from $34,600 to $35,800. Unemployment tax rates have also increased.

Arkansas. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Arkansas' failure to repay its outstanding federal unemployment insurance (UI) loans for two consecutive years. Employers now pay an advance interest tax to help the State pay the interest on its federal UI loans.

Arizona. Unemployment tax rates have increased. Employers must pay a special assessment to help the State pay the interest on its federal UI loans.

California. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of California's failure to repay its outstanding federal UI loans for two consecutive years.

Colorado. The taxable wage base has increased from $34,600 to $35,800.

Connecticut. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Connecticut's failure to repay its outstanding federal UI loans for two consecutive years.

Florida. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Florida's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $7,000 to $8,500. Unemployment tax rates have also increased.

Georgia. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Georgia's failure to repay its outstanding federal UI loans for two consecutive years.

Hawaii. The taxable wage base has increased from $34,200 to $38,800. Unemployment tax rates have also increased, but could possibly be reduced by 2012 legislation.

Idaho. The taxable wage base has increased from $33,300 to $34,100.

Illinois. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Illinois' failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $12,740 to $13,560. The maximum unemployment tax rate has increased. The fund building rate has also increased.

Indiana. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.6% higher than it otherwise would have been because of Indiana's failure to repay its outstanding federal UI loans for three consecutive years. Employers now also pay a solvency surcharge because of the outstanding federal loans.

Iowa. The taxable wage base has increased from $24,700 to $25,300.

Kansas. Unemployment tax rates have increased for employers with negative reserve balances.

Kentucky. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Kentucky's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $8,000 to $9,000.

Maine. Unemployment tax rates have increased.

Michigan. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.9% higher than it otherwise would have been because of Michigan's failure to repay its outstanding federal UI loans for four consecutive years. Michigan has now repaid the federal UI loans, so employers will not pay a higher federal unemployment tax (FUTA) rate on their 2012 federal return (due in 2013). The taxable wage base has increased from $9,000 to $9,500.

Minnesota. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Minnesota's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $27,000 to $28,000. The new employer rate has increased. The federal loan interest assessment rate has increased.

Missouri. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Missouri's failure to repay its outstanding federal UI loans for two consecutive years.

Montana. The taxable wage base has increased from $26,300 to $27,000.

Nevada. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Nevada's failure to repay its outstanding federal UI loans for two consecutive years. A new tax rate schedule went into effect on Jan. 1, 2012 that revised the reserve ratio ranges in the 18 tax rate classes. Employers will pay more unemployment tax in 2012 even if their UI benefit experience is similar to what it was in 2011.

New Hampshire. The taxable wage base has increased from $12,000 to $14,000.

New Jersey. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of New Jersey's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $29,600 to $30,300. Unemployment tax rates increased beginning with the fiscal year that began on July 1, 2011.

New Mexico. The taxable wage base has increased from $21,900 to $22,400. Unemployment tax rates have also increased.

New York. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of New York's failure to repay its outstanding federal UI loans for two consecutive years.

North Carolina. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of North Carolina's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $19,700 to $20,400.

North Dakota. The taxable wage base has increased from $25,500 to $27,900.

Ohio. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Ohio's failure to repay its outstanding federal UI loans for two consecutive years.

Oklahoma. The taxable wage base has increased from $18,600 to $19,100.

Oregon. The taxable wage base has increased from $32,300 to $33,000.

Pennsylvania. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Pennsylvania's failure to repay its outstanding federal UI loans for two consecutive years.

Rhode Island. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Rhode Island's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $19,000 to $19,600 for most employers. It has increased to $21,100 for employers who are in the highest unemployment tax rate bracket.

South Carolina. The taxable wage base has increased from $10,000 to $12,000.

South Dakota. The taxable wage base has increased from $11,000 to $12,000.

Utah. The taxable wage base has increased from $28,600 to $29,500. Unemployment tax rates have also increased, but could possibly be reduced by 2012 legislation.

Vermont. The taxable wage base has increased from $13,000 to $16,000.

Virginia. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Virginia's failure to repay its outstanding federal UI loans for two consecutive years. Unemployment tax rates have also increased.

Virgin Islands. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of the Virgin Islands' failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $22,600 to $23,700.

Washington. The taxable wage base has increased from $37,300 to $38,200.

Wisconsin. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Wisconsin's failure to repay its outstanding federal UI loans for two consecutive years.

Wyoming. The taxable wage base has increased from $22,300 to $23,000.

Capital Gains Rates 2012 v. 2013

2012-01-25T21:17:00.000-08:00

The top tax rate on long-term capital gains is currently 15%. That’s why Mitt Romney is spending so much time talking about his tax returns.

That revelation has set off a familiar debate about whether that low rate is appropriate. Often overlooked in these discussions, however, is the fact that the days of the 15% tax rate are numbered. As of this posting, it has only 342 left.

On January 1, 2013, capital gains taxes are scheduled to go up sharply:

First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers.

And that’s not all. The health reform legislation enacted in 2010 imposed a new tax on the net investment income of high-income taxpayers, including capital gains. That adds another 3.8 percentage points to the tax rate.

Put it all together, and the top tax rate on capital gains is scheduled to increase from 15% today to 25% on January 1. That’s a big jump. If taxpayers really believe this will happen, expect a torrent of asset selling in November and December as wealthy taxpayers take final advantage of the lower rate.

Of course, the tax cuts might get extended for all Americans, including high-income taxpayers. That’s what happened in 2010. In that case, the increase in the capital gains rate will be smaller. Because of the health reform tax, the top capital gains tax rate will increase from 15% to 18.8%. That’s still a notable increase, but would likely set off much less tax-oriented selling this year.

The only way that the top capital gains tax rate remains at 15% will be if the tax cuts are extended for high-income taxpayers and the new health reform tax gets repealed. That’s a key distinction in the election: President Barack Obama opposes those steps, while the GOP presidential candidates favor them (and some candidates would cut the capital gains tax rate even further).

No 1099-MISC if Paid by Credit Card

2012-01-19T10:42:00.001-08:00

In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, or through any third-party payer, are not reported on Form 1099-MISC. These amounts are now reported on Form 1099-K. Thus, if a business pays a service-provider with a credit card, debit card, gift card, or electronically via a service like PayPal, the payment is not included on a 1099-MISC.

Form 1099-K is new for 2011. The form is issued by a credit card company or other third-party payer (such as PayPal) to payees if the payee has more than 200 transactions and more than $20,000 of gross income paid to them. The 1099-K is not issued by either the buyer or seller.

How Does Your 529 College-Savings Plan Stack Up?

2012-01-16T08:59:00.000-08:00

Now that the holidays are well behind us, it’s time to start to saving for college again.

If you resolved to save more consistently for your children’s college education this year, or you’re planning to deposit gifts from grandparents, here’s a handy new resource: Savingforcollege.com recently updated its 529 fee study to reflect fee and expense changes among what are called “direct-sold” 529 plans. Those are the ones that individuals can invest in on their own, rather than through investment advisers.

The study points out the lowest- and highest-cost investment options in each plan.

So-called 529 plans are state-sponsored accounts for college savers in which earnings are tax-free as long as they’re used to pay for qualified higher-education expenses. As of Sept. 30, the 529 industry managed almost $135 billion in assets, up 5% from almost $128 billion at the same time last year, according to Financial Research Corp. in Boston.

Of course, understanding the fees is only part of the picture. You’ll also want to consider performance.

Financial-data firm Morningstar tracks 529 plan performance with an annual ranking. In its latest one, released in late 2011, Plans in six states earned its analysts’ “top” rating, including five from the previous year—Alaska, Maryland, Nevada, Ohio and Virginia—and Utah.

Rhode Island’s Collegeboundfund was the only plan tagged with a “bottom” rating in 2010, but it moved up in 2011 to “below average” after adding low-cost index funds from Vanguard Group (though they are available only to state residents).

http://pmaadvisors.com/investment_advisory.php

IRS Releases Taxpayer Guide to Identity Theft

2012-01-11T13:59:00.000-08:00

What is identity theft?

Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes.

How do you know if your tax records have been affected?

Usually, an identity thief uses a legitimate taxpayer's identity to fraudulently file a tax return and claim a refund. Generally, the identity thief will use a stolen SSN to file a forged tax return and attempt to get a fraudulent refund early in the filing season.

You may be unaware that this has happened until you file your tax return later in the filing season and discover that two returns have been filed using the same SSN.

Be alert to possible identity theft if you receive an IRS notice or letter that states that:

More than one tax return for you was filed,
You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return, or
IRS records indicate you received wages from an employer unknown to you.

What to do if your tax records were affected by identity theft?

If you receive a notice from IRS, respond immediately. If you believe someone may have used your SSN fraudulently, please notify IRS immediately by responding to the name and number printed on the notice or letter. You will need to fill out the IRS Identity Theft Affidavit, Form 14039.

For victims of identity theft who have previously been in contact with the IRS and have not achieved a resolution,please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490

How can you protect your tax records?

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, etc., contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.

How can you minimize the chance of becoming a victim?

Don't carry your Social Security card or any document(s) with your SSN on it.
Don't give a business your SSN just because they ask -- only when required.
Protect your financial information.
Check your credit report every 12 months.
Secure personal information in your home.
Protect your personal computers by using firewalls, anti-spam/virus software, update security patches, and change passwords for Internet accounts.
Don't give personal information over the phone, by fax, through the mail or on the internet unless you have initiated the contact or you are sure you know who you are dealing with.

_____________________________________________________________________

ID Theft Tool Kit

Are you a victim of Identity Theft?
Contact the IRS at 1-800-908-4490

Please Fill out the IRS Identity Theft Affidavit:
Form 14039

Please write legibly and following the directions on the back
of the form that relate to your specific circumstances.

Credit Bureaus:

Equifax
www.equifax.com
1-800-525-6285

Experian
www.experian.com
1-888-397-3742

TransUnion
www.transunion.com
1-800-680-7289

Other Resources:

Federal Trade Commission
FTC toll-free identity theft helpline:
877-ID-THEFT (1-877-438-4338)

Visit the Internet Crime Complaint Center (IC3)
to learn more about their internet crime prevention tips.

Report Phishing:

Report suspicious online or emailed phishing scams to:
phishing@irs.gov
For phishing scams by phone, fax or mail call 1-800-366-4484

For more information, visit:
IRS.gov/identitytheft
IRS.gov/phishing

_____________________________________________________________________

The IRS does not initiate contact with taxpayers by email
to request personal or financial information.

California Governor's Budget Relies on Voters to Raise Taxes

2012-01-09T08:36:00.000-08:00

Taken from taxanalysts.com:

California Gov. Jerry Brown (D) on January 5 proposed a fiscal 2013 budget that relies on voters approving increases in the sales and individual income taxes to prevent $5.4 billion in cuts to education and public safety.
"Because we're going to assume that we're going to get the temporary income tax and the temporary sales tax, we have to put in some trigger cuts or the budget wouldn't be balanced, wouldn't be financeable," Brown said in a press conference.
On December 5, Brown filed a ballot initiative calling for a half-cent increase in the state sales tax rate and new individual income tax rates and brackets for those making more than $250,000.
Asked if he planned to cut the education funding levels required by Proposition 98 if voters reject his tax increase ballot initiative, Brown said that he wouldn't have to and that funding requirements decline with tax revenues. Proposition 98, approved by voters in 1988, requires the state to spend about 40 percent of the budget on K-12 education and community colleges.
Without the tax increases, the Proposition 98 funding mandate would decline by over $4.8 billion -- about the cost of three weeks of instruction -- according to budget summary documents. Brown's budget proposal includes other trigger cuts, such as $200 million each from the University of California and California State University, and $125 million from the courts, "the equivalent of court closures of three days per month."
Lawmakers may want to find other last-ditch cuts, according to a news story in The Sacramento Bee. The newspaper quoted Senate President Pro Tem Darrell Steinberg (D) as saying he agreed with the need for trigger cuts, but that his colleagues would want to "debate, discuss and analyze what those trigger cuts should be."

Contractors may now operate as LLCs

2012-01-07T16:36:00.001-08:00

The Contractor State License Board is now authorized to issue a contractor’s license to an LLC. (FTB Tax News, January 2012, SB 392 (Ch. 10-698))

Generally, LLCs are not allowed to be used for certain businesses subject to professional licensing requirements. However, as is now the case for contractors, amendments to the law allow specific businesses with licensing requirements to form and operate as LLCs.

Nearly 1 in 8 High-Income Taxpayers Audited, IRS Reports

2012-01-07T15:56:00.000-08:00

According to the IRS's annual enforcement and service results report released January 5, 12.48 percent of individuals with incomes of $1 million and higher were audited in fiscal 2011, compared with 8.36 percent in 2010.

That compares with 3.93 percent of individuals with incomes between $200,000 and $1 million who were audited in fiscal 2011 (3.1 percent in 2010) and 1.02 percent of individuals making less than $200,000 (1.04 percent in 2010).

Big corporations are under increased scrutiny as well. Corporations with assets of $10 million or more were audited 17.64 percent of the time in fiscal 2011, compared with 16.58 percent of the time in 2010. Corporations with assets of less than $10 million were audited 1.02 percent of the time in 2011, compared with 0.94 percent of the time in 2010.

Yet the IRS started 2012 with about 3,000 fewer enforcement personnel than it had a year earlier, mainly due to hundreds of millions of dollars in budget cuts, said Steven Miller, IRS deputy commissioner for services and enforcement, during a January 5 conference call announcing the report. Total enforcement staff is down from more than 52,000 in late 2010 to about 49,000 in 2012, Miller said.

The IRS enforcement budget was $55.2 billion in 2011, down from $57.6 billion in 2010. The drop was due in part to the expiration of the estate tax in 2010, Miller said.

Benson S. Goldstein, senior technical manager at the American Institute of Certified Public Accountants, said that increased enforcement revenues -- up from $33.8 billion in 2001 -- came with essentially flat or declining staff levels.

Goldstein said the IRS's increased use of correspondence audits (1.17 million in fiscal 2011 compared with 529,241 in 2001) highlights its more resource-efficient tools for capturing increased enforcement revenues.

Practitioners and taxpayers may have a rougher time with correspondence audits, because those audits typically run on tighter deadlines than field audits and collecting and mailing or transmitting IRS-requested documents takes time, Goldstein said, adding that the more labor-intensive field audits tend to be more time-efficient.

Constrained resources -- including a 2.5 percent overall cut included in Congress's last continuing budget resolution in December -- mean the IRS will have to further prioritize its activities. The budget will have an impact on enforcement efforts, Miller said, adding that the IRS "will continue to focus resources on the higher end of the income spectrum."

Return preparer training, competency testing, and continuing education will also get increased attention, along with refund fraud and identity protection efforts, Miller said. More than 740,000 individuals have registered under the IRS's return preparer program, he said.

The e-filing rate rose to 77 percent through fiscal 2011, compared with 69 percent the previous year. That's closing in on the Service's goal of 80 percent of returns being e-filed in fiscal 2012.

Court now grants John Doe summons sought in gift tax enforcement initiative

2012-01-03T09:39:00.000-08:00

After previously refusing to do so, a district court has now granted IRS permission to issue a John Doe summons to the California Board of Equalization (BOE) as part of a gift tax enforcement initiative to detect transfers of real property between nonspouse relatives that weren't reported on gift tax returns.

Observation: IRS will now get the information from California. Previously, it requested and received comparable information from Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Thus, individuals who transferred real property to nonspouse family members should make sure that required gift tax returns were filed and file amended returns if they weren't.

Gift tax background. The gift tax is imposed on the transfer of money or other property by gift. (Code Sec. 2501(a)) The first $13,000 of gifts of a present interest made annually by a donor to each donee is excluded from the amount of the donor's taxable gifts. (Code Sec. 2503(b))

For gifts made and decedents dying after 2010, the gift tax is integrated with the estate tax under a “unified” rate schedule that imposes a single tax on transfers during life and at death which effectively imposes no tax on gifts unless the total amount of taxable gifts for any such year and all prior years exceeds $5 million (indexed for inflation after 2011). This is achieved through a unified credit. For gifts made after 2012, the amount exempted from the gift tax will be $1 million. (Code Sec. 2505)

Any individual who makes gifts to any one donee during a calendar year which aren't fully excluded under the $13,000 annual exclusion must file a gift tax return. A return must be filed even if no tax is payable. (Reg. § 25.6019-1(f)) But, no return is required to report a qualified transfer for educational or medical costs, most charitable transfers, or a transfer that qualifies for the marital deduction, except that a return must be filed to make a qualified terminable interest property (QTIP) election. (Code Sec. 6019, Reg. § 25.6019-1(a))

The period of assessment doesn't close for a gift made in a calendar year ending after Aug. 5, '97, unless the gift is adequately disclosed on a gift tax return. (Code Sec. 6501(c)(9)) Transfers reported on a gift tax return as transfers of property by gift are considered adequately disclosed if the return (or a statement attached to it) provides certain information including:

A description of the transferred property and any consideration received by the transferor;

The identity of, and relationship between, the transferor and each transferee; and

Unless the donor submits an appraisal meeting the requirements of Reg. § 301.6501(c)-1(f)(3), a detailed description of the method used to determine the fair market value of the property transferred, including any financial data (for example, balance sheets, etc. with explanations of any adjustments) that was utilized in determining the value of the interest, any restrictions on the transferred property that were considered in determining the fair market value of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability, claimed in valuing the property. (Reg. § 301.6501(c)-1(f)(2))

Background on summonses. IRS may examine books, papers, records or other data for purposes of ascertaining the correctness of any return, making a return if none has been made, determining the tax liability of any person, and collecting that liability. (Code Sec. 7602(a)(1)) IRS may issue a summons to the taxpayer or other persons it feels may be able to assist in determining the taxpayer's tax liability. (Code Sec. 7602(a)(2))

IRS may serve a John Doe summons under Code Sec. 7609(f) after a court proceeding in which it establishes that:

the summons relates to the investigation of a particular person or ascertainable group or class of persons;
there is a reasonable basis for believing that the person, group, or class may fail or have failed to comply with any internal revenue provision; and
the information sought from the examination of records and testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

For more information, please contact us: http://pmaadvisors.com/contact_us.php

IRS to Implement New 2% 'Recapture Tax' in Two-Month Payroll Tax Cut Extension

2011-12-26T22:15:00.000-08:00

Payroll Tax Cut Temporarily Extended into 2012 (IR-2011-124):

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

Medical Deduction Allowed for Breast Pumps

2011-12-15T08:15:00.000-08:00

As a recent parent, I thought this information is important to share:

Medical Deduction for Breast Pumps: Breast pumps and supplies that assist lactation are considered to be medical care under IRC Sec. 213(d) because, like obstetric care, they affect a structure or function of a woman's body. If the remaining requirements of IRC Sec. 213(a) are met, expenses paid for breast pumps and supplies that assist lactation are deductible medical expenses. IRS Ann. 2011-14, 2011-9 IRB 532 .

IRS Offers Amnesty Program to Reclassify 1099 Contractors as Employees

2011-12-15T08:10:00.001-08:00

IRS Voluntary Settlement Program: A new Voluntary Classification Settlement Program (VCSP) allows taxpayers to reclassify workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. To be eligible, the taxpayer must (1) have consistently treated the workers in the past as nonemployees; (2) have filed all required Form 1099's for the workers for the previous three years; and (3) not be under audit by the IRS, the Dept. of Labor, or a state agency. [For more on the VCSP, see NTA-783 (10/4/11).] The IRS has posted a series of FAQs, which clarify that participating taxpayers will pay 10% of the employment taxes, calculated under the reduced rates of IRC Sec. 3509(a) , for the compensation paid to the workers being reclassified during the most recent tax year. But, they will not be liable for interest or penalties, and the IRS will not share information about them with other agencies.

Expiring Business and Individual Tax Provisions for 2011

2011-12-13T12:47:00.000-08:00

Business Tax Provisions: According to a Congressional Research Service report dated 12/1/11, the following will expire on 12/31/11: (1) the research and development and the work opportunity tax credits; (2) the enhanced charitable deductions for contributions of food, books, and computer technology; (3) the special S corporation built-in gains tax suspension period; and (4) the 15-year recovery period for leasehold improvements, restaurant property, and retail improvements. Furthermore, the 100% bonus depreciation deduction will be scaled back to 50% in 2012, and the Section 179 deduction limit will fall from $500,000 this year to an inflation-adjusted $139,000 in 2012.

Individual Tax Provisions: According to the same Congressional Research Service report, the following deductions will expire on 12/31/11: (1) elementary and secondary school teacher expenses, (2) state and local sales taxes, (3) mortgage insurance premiums, and (4) qualified tuition and related expenses. The 2010 Tax Relief Act allowed a taxpayer's nonrefundable personal credits to offset regular tax (net of any allowable foreign tax credit) and AMT for 2011, and also authorized a reduction in the employee's share of the Social Security payroll tax to 4.2% for 2011. Congress may extend the payroll tax break, and presumably will pass another (one year) AMT patch. Finally, the tax-free treatment of distributions from IRAs for charitable purposes will expire at the end of 2011.

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Tax Benefits fo 529 College Savings Plans

2011-12-12T19:47:00.000-08:00

The state-tax savings for families who invest in Section 529 college savings plans depend very much on where they live. WSJ.com provides a state-by-state breakdown:

For all the risks that come with investing in 529 college savings plans in a period of market tumult, investors in most states have one certainty: that they'll receive state tax benefits for their contributions to their home state's plan. But those tax savings are much richer in some states than in others, as these figures for one hypothetical family show.

Investors make roughly a third of their contributions to the state-sponsored 529 plans during the fourth quarter of each year, and most of that money comes rushing in during December as families look ahead to tax season, says Paul Curley, director of college-savings research at Financial Research Corp. in Boston.

Most states offer a tax deduction. For one child, a married couple's annual write-off is capped at levels ranging from $250 (in Maine) to $26,000 (in Pennsylvania), says Joe Hurley, founder of Savingforcollege.com, which tracks 529 plans. Four states—Colorado, New Mexico, South Carolina and West Virginia—don't have annual deduction limits, but cap total deductions over time for each child. The limit can be as much as $318,000 (in South Carolina).

For parents saving for two children's college education, the annual deduction caps in 10 states double. In Kansas, for example, it's $6,000 for one child or $12,000 for two.

Instead of deductions, three states—Indiana, Utah and Vermont—give tax credits for a portion of 529-plan contributions.

Sixteen states don't offer any tax benefits. To be sure, a few are states that don't have a personal income tax, such as Florida and Texas. But several of those states, including California, Hawaii and Minnesota, have high tax rates.

Beyond tax benefits, some states are offering free cash in their 529 plans. While most have income limits, some give money just for starting a 529 plan. For example, Maine and Rhode Island offer $500 and $100, respectively, for parents who start a 529 plan before their child's first birthday.

One drawback: Because the tax benefits are typically limited to plans sponsored by the taxpayer's state, that can stop people from choosing a different 529 plan with better-performing investments, says Deborah Fox, a San Diego-based financial planner and founder of Fox College Funding. The exceptions are Arizona, Kansas, Maine, Pennsylvania and Missouri, where residents can choose a 529 plan from any state while still receiving their own state's deduction.

IRS Releases Information on Estate and Gift Taxes

2011-12-12T09:36:00.000-08:00

On November 21, 2011, the IRS released its most recent publication on the topic of federal estate and gift taxes. The pub can be accessed at this link by clicking here. This updates the version released on December 14, 2009.

Most gifts are not subject to tax. Likewise, most estates are not subject to estate tax.

If you die during 2011, you can pass estate tax free up to $5,000,000. For those dying in 2012, add another $120,000. Gifts in amounts up to those figures may also be made tax free.

An extra tax free gift is permitted during any given year of up to $13,000.

For more information regarding our estate planning services, please visit http://pmaadvisors.com/estate_and_gift.php

IRS Issues Guidance for 2012 Milage Rate

2011-12-12T08:11:00.000-08:00

The IRS has issued guidance (Notice 2012-01) providing the 2012 standard mileage rates for taxpayers to use in determining the deductible costs of operating a car for business, charitable, medical, or moving expense purposes.

The rate for the business use of an automobile is 55.5 cents per mile, the rate for the charitable use of an automobile is 14 cents per mile, and the rate for using an automobile for medical or moving purposes is 23 cents per mile. The guidance also provides the amount taxpayers must use in calculating a basis reduction for depreciation taken under the business standard mileage rate and provides the maximum standard automobile cost that may be used in calculating the allowance under a fixed and variable rate plan. The guidance is effective for applicable expenses, allowances, or reimbursements that are paid or incurred after December 31, 2011.

The IRS requested comments in previous guidance (Notice 2010-88) on whether taxpayers should be allowed to use the business standard mileage rate for cars used in fleet operations. After considering one comment, and in light of the limited number of comments, the IRS won't change the current limitation on fleet operations.

Tax Increase Proposals Bubbling Up for California Ballot

2011-12-09T09:19:00.001-08:00

Fox & Hound blog summarizes the five tax increase initiatives potentially making it to California's 2012 ballot:

Governor Jerry Brown's (D) proposal to raise the sales tax by a half-cent and raise income taxes on high earners. Top rate would be 12.3 percent, up from the current 10.3 percent.
Teachers' union "Courage Campaign" proposal to impose higher income taxes on top earners. Top rate would be 15.3 percent.
Tom Steyer proposal to adopt single sales factor, taxing multistate companies based on their share of sales in California as opposed to their share of property or employees in the state.
"Think Long" proposal that broadens the sales tax, lowers rates, and raises a large amount of revenue. Services would be taxed at 5.5%, taxes on goods would drop a half-cent, the top income tax rate would be 8.5 percent, and the corporate rate would drop from 8.84 percent to 7 percent.
Molly Munger proposal to raise taxes across-the-board.

Much of this of course assumes that the problem is insufficient taxation. But California is not a low-tax state. Back in 2009 I pulled together some numbers. They might have changed slightly but the points are still relevant:

California is a high tax state. They are sixth highest in state-local tax burden as a percentage of state income. The sales tax is the highest state rate in the country even before the recent 1% increase, and numerous county rates keep them in the top 5 of state-local combined rates. Their individual income tax top rate is the second highest in the country, eclipsed only recently by Hawaii, and is sixth highest in the country in terms of collections. The corporate income tax is one of the highest in the country and sixth highest per capita in collections. Even the gas tax is the third highest in the countryand the state Lottery has the fifth highest implicit tax rate in the country. Only on property taxes is California "low": 28th highest in collections per capita.

The Tax Foundation's annual State Business Tax Climate Index evaluates tax structures for business-friendliness, and the 2009 edition ranked California 48th, or third worst. The individual income tax ranked second to last, corporate income tax ranked 45th, and sales tax ranked 43rd. (Property tax structure was a bright spot, ranking 15th in the country.)

With these comparisons, and the enormous growth in state spending, it's hard to say that California's problem is insufficient taxation. Ultimately, California voters need to decide whether they are willing to pay the taxes to fund the programs they want. The tax system prevents this from happening now, due to the state's overreliance on taxing capital gains, corporations, and high-income earners. Most Californians rightly think additional spending is a free lunch that they won't have to pay for.

Will we have Bonus Depreciation in 2012?

2011-12-08T08:12:00.001-08:00

Yet another incentive set to expire at the end of 2011 is 100 percent bonus depreciation. Projects are eligible for that form of accelerated depreciation if they are placed in service by December 31. It is unclear whether the provision will be extended, but Gimigliano said the possibility remains, pointing to President Obama's call to extend the provision as well as Republicans' belief that bonus depreciation is "the holy grail" of tax incentives.

Nonetheless, accelerated depreciation in general could be eliminated under comprehensive tax reform, and it remains uncertain how effective bonus depreciation has been in encouraging growth, he said.

FTB Offers Clarification on Deductibility of Property Taxes

2011-12-06T22:46:00.001-08:00

Legal Division Guidance 2011-12-01
(Real Property Tax Deductions)

Q: Does a real property tax need to be ad valorem in order to be deductible as an itemized deduction?

A: Yes. A real property tax needs to be ad valorem in order to be deductible under Internal Revenue Code section 164, to which California law is fully conformed.

The Internal Revenue Service's (IRS) well established official position, to which California law conforms, is that the only real property taxes deductible as an itemized deduction are those that are assessed on the basis of the value of the property, i.e., ad valorem. The federal position, supported by federal legal analyses (General Counsel Memoranda 37927 (1979); see also General Counsel Memorandum 36466 (1975)), rulings (Rev. Rul. 80-121, 1980-1 C.B. 44 (1980); see also Priv. Ltr. Rul. 8033022, May 20, 1980), regulation (Treas. Reg. sec. 1.164-4(a)), and case law (Sandy Lake Road Limited Partnership v. Commissioner (1997) TC Memo 1997-295), unquestionably limits the deduction for real property taxes to those that are assessed on the basis of the value of the property. Finally, the 2010 Instructions for Schedule A (Form 1040) provide, in part, as follows -- "Line 6 Real Estate taxes include taxes (state, local or foreign) you paid on real estate you own that was not used for business, but only if the taxes are based on the assessed value of the property assessed." (See also Publication 17 (2010), at p. 146, and Publication 530 (2010), at p. 2.)

Further, taxpayers may not deduct assessments (whether assessed on an ad valorem basis or otherwise) for local benefits (such as street, sidewalk, and other like improvements) of a kind tending to increase the value of the property assessed that are imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied. These nondeductible amounts may be added to the basis of the property in accordance with Internal Revenue Code section 1016 and the applicable regulations. Federal law does, however, provide that the portion of the above-discussed assessments for local benefits that are made for the purpose of maintenance or repair, or for the purpose of meeting interest charges with respect to those local benefits, are deductible. Federal regulations provide that the burden is on the taxpayer to show that a portion of the amount assessed is allocable to these purposes. If the allocation cannot be made, the federal regulations provide that none of the amount so paid is deductible.

Finally, a 2003 IRS Office of Chief Counsel Memorandum provides the apparent basis for a conclusion that assessments may be deductible as real property taxes even though they are not imposed on an ad valorem basis. However, this was an internal memorandum drafted by a local IRS attorney which is inconsistent with published federal guidance, should not be considered written advice, and, according to conversations with IRS Office of the Chief Counsel, does not reflect the official position of the IRS. This internal memorandum has never been released nor made available by the IRS and the conclusion expressed in it has never appeared in any IRS ruling, written advice, publication or guidance.

Tax Audits on the Rise as Governments Hunt for Additional Income

2011-11-18T10:59:00.001-08:00

If your firm recently has been visited by an IRS or state tax auditor, you’re not alone. More than three-fifths of corporate tax execs surveyed in October by KPMG LLP indicated that activities stemming from federal tax disputes had increased over the past year. In addition, 37 percent indicated that the number of state tax audits had jumped.

The IRS’ own numbers, as presented in its Fiscal Year 2012 Budget Request, confirm the increase. The Service increased the number of large corporation audits by 8.1 percent, and the number of foreign corporation audits by nearly 48 percent, between fiscal year 2009 and 2010. (Individuals didn’t get off any easier, as the number of individual returns examined rose 11 percent, to 1.58 million, between fiscal 2009 and 2010.)

From the IRS’ perspective, the heightened enforcement activity is working. In fiscal year 2010, revenue from enforcement sources topped $57 billion, up 18 percent from fiscal 2009.

At the state level, dropping tax collections appear to be prompting state tax officials to heighten the audit efforts. According to a March 2011 report from the U.S. Census Bureau, “State Government Tax Collections Summary Report: 2010,” the amount of money collected through taxes declined two percent between fiscal 2009 and 2010, dropping from $718.9 to $704.6 billion. Indeed, many state budgets are dropping as well. Of 32 states that had enacted 2012 budgets as of June, 2011, 24 included significant cuts, reports the Center for Budget and Policy Priorities.

The heightened audit activity is likely to continue or even intensify, the execs in the KPMG survey said. More than two-thirds expect the number of federal audits to increase, while more than half said they expected the same for state tax audits. Additionally, one-quarter of the respondents expect regulators from outside the U.S. to increase their audit efforts, as well.

Given that the focus on audit activity appears unlikely to settle down any time soon, corporate tax execs “should regularly review their accounting methods, tax returns, risk assessments, and other processes and take the time to identify the documents, people, time and resources that might be needed to handle a potential tax audit,” said Sharon Katz-Pearlman, principal-in-charge of KPMG LLP’s Tax Controversy Services practice, in a statement on the survey.

WSJ: Special Tax Deductions for Special Education

2011-11-12T12:36:00.001-08:00

Wall Street Journal Tax Report, Special Tax Deductions for Special Education, by Laura Saunders:

More than six million children in the U.S. fall into the "special needs" category, and their ranks are expanding. The number of those affected by one developmental disability alone—autism—grew more than 70% between 2005 and 2010.
The tax code can help—if you know where to look. There are numerous tax breaks for education, but the most important one for many special-needs students isn't an education break per se. Instead, it falls under the medical-expense category.

http://pmaadvisors.com/tax_planning.php

Credit Suisse tells U.S. clients it will disclose names

2011-11-08T12:27:00.000-08:00

Nov 7 (Reuters) - Credit Suisse AG, Switzerland's second-largest bank, has begun notifying certain U.S. clients suspected of offshore tax evasion that it intends to turn over their names to the U.S. Internal Revenue Service, with the help of Swiss tax authorities. Credit Suisse's notification by letter, a copy of which was obtained on Monday by Reuters, says the handover of names and account details will take place following a recent formal request for the information by the IRS.

The move by Credit Suisse to disclose American client names and account information is the latest twist in a showdown between Switzerland and the United States over the battered tradition of Swiss bank secrecy. U.S. authorities, who suspect tens of thousands of wealthy Americans of evading billions of dollars in taxes through Swiss private banks in recent years, are conducting a widening criminal investigation into scores of Swiss banks, including Credit Suisse.

The letter, on Credit Suisse letterhead, is dated Nov. 2, comes from the bank's Zurich headquarters and is signed by two senior Credit Suisse executives. It cites a formal request made by the IRS to the Swiss Federal Tax Administration, or SFTA, via a tax treaty between the two countries.

Seeking information. "The IRS is seeking information with regard to accounts of certain U.S. persons owned through a domiciliary company (as beneficial owners) that have been maintained with Credit Suisse AG," the letter said. It added that the recipient of the letter, whose name was redacted in the copy obtained by Reuters, fell into the category of clients sought by the IRS. Domiciliary companies are a type of shell company.

"In connection with the IRS treaty request, the SFTA has issued an order directing Credit Suisse to submit responsive account information to the SFTA," the letter said. "This order is immediately executable and Credit Suisse as an information holder has no right to appeal."

It was unclear how many U.S. clients had been sent the letter. David Walker, a spokesman for Credit Suisse, declined to comment on the matter. The letter says that the IRS request covers accounts maintained at any time over the period from Jan. 1, 2002, through Dec. 31, 2010. The letter was signed by Michel Ruffieux and Stephan Gussman, both managing directors at Credit Suisse.

Credit Suisse in July received a target letter from the U.S. Justice Department notifying it that it was the subject of a federal criminal investigation into its offshore private banking services. Switzerland is trying to craft a deal with the United States that would cover its entire banking industry of some 355 banks.

It is unclear how many American clients of Credit Suisse hold private banking accounts that have gone undeclared to U.S. tax authorities.

Two choices. The Credit Suisse letter gives the client two choices: either agree in writing to the turnover of the client's data to the Swiss tax authorities, which will then forward it to the IRS, or hire a lawyer in Switzerland and contest the process. Under U.S. law, contesting a handover requires the American client to inform the U.S. attorney general that he is doing so — a move that effectively discloses the identity of the suspected tax evader to U.S. authorities.

Switzerland has broadly interpreted its tax treaty with the United States to mean that the United States must generally already possess the names of suspected American tax evaders in order to gain further information on their Swiss bank accounts.

Switzerland recently showed signs of softening on that interpretation. In August, Swiss government officials said they would consider processing treaty requests based on "behavioral patterns," as opposed to concrete names. Many Swiss banks turned over broad statistical data, meaning behavioral patterns, for their American clients in September, following a request from the U.S. Justice Department's second in command, Assistant Attorney General James Cole, to do so.

Scott Michel, a tax lawyer with Caplin Drysdale in Washington, D.C., said that the letter could mean one of two things: either the United States was taking softer steps to bolster the thrust of its target letter to the bank, or Credit Suisse was in the process of reaching a settlement with U.S. authorities. Such a settlement, following the receipt of a target letter, would typically be a deferred-prosecution or non-prosecution agreement. He said the fact that the Swiss tax authorities had ordered Credit Suisse to provide it the data to hand over to the IRS represented "a further erosion of longstanding Swiss bank secrecy."

http://pmaadvisors.com/tax_planning.php

Roth IRA Conversion Planning in 2011 & 2012

2011-07-15T21:52:00.001-07:00

The online edition of the Wealth Strategies Journal provides a complete overview Roth IRA conversion opportunities:

Opportunistic Conversions
The key objective behind this type of Roth IRA conversion is to take advantage of short-term economic conditions that are expected to reverse over time. For example, a taxpayer whose traditional IRA contains stock that is expected to incur significant growth within the near future may benefit from converting to a Roth IRA. As opposed to holding the stock in a traditional IRA, holding the quickly-appreciating stock in a Roth IRA would allow the stock's growth to occur completely tax-free. The concept of converting by asset class to multiple Roth IRAs with the tactic of recharacterizing the underperforming asset classes is another example of an "opportunistic conversion".
Strategic Conversions
The key objective behind this type of IRA conversion is generally motivated by wealth transfer. Considering that Roth IRAs are not subject to "required minimum distributions" ("RMDs") when the IRA owner reaches age 70½, converting a traditional IRA to a Roth IRA will allow the IRA assets to continue to grow tax-free for a longer period of time, thus allowing greater wealth to accumulate for future generations. An ideal candidate for strategic conversion is one who (1) possesses "outside funds" (for example, nonqualified investment accounts) from which to pay the tax on the conversion, (2) anticipates being in the same or higher marginal income tax bracket in the future, (3) does not need to make withdrawals from the Roth IRA to meet his/her annual living needs, and (4) desires to leave a tax-free asset to his/her children or grandchildren.
Tactical Conversions
This type of Roth IRA conversion is executed to take advantage of unused, short-term, special tax attributes that the taxpayer may otherwise not be able to utilize. A non-exhaustive list of these types of tax attributes includes NOL carryovers, current year ordinary losses, unused charitable contribution carryovers, nonrefundable tax credits, as well as alternative minimum tax credit carryovers. By converting to a Roth IRA, the taxpayer generates enough taxable income to fully utilize these tax attributes. If done correctly, the taxpayer could pay little to no income tax on the conversion.
Hedging Conversions
This type of Roth IRA conversion is done as a "hedge" against a future tax increase. Hedging conversions can be further subdivided into two types of conversions: (a) income tax hedging conversions and (b) estate tax hedging conversions. Both types of hedging conversions are generally executed during the current time period so as to lower overall taxes in the future, taking into consideration the potential for higher income tax rates and/or estate tax rates that could be enacted by Congress.

Please feel free to contact us for more information.

PMA - Tax Planning and Advisory

Using S corporations to reduce self-employment income

2011-07-14T17:09:00.001-07:00

As most business owners are aware, income that you generate in your business that you are conducting as a sole proprietor (or through a wholly-owned limited liability company (LLC)) is subject to both income tax and self-employment tax. The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for social security up to the social security maximum ($106,800 for 2010) and a 2.9% rate for medicare, without any maximum. Similarly, if you conduct your business as a partnership in which you are a general partner, in addition to income tax you would be subject to the self-employment tax on your distributive share of the partnership's income. However, if you conduct your business as an S corporation you will be subject to income tax, but not self-employment tax, on your share of the S corporation's income.

An S corporation is not subject to tax at the corporate level. Instead, the corporation's items of income, gain, loss, and deduction are passed through to the shareholders. However, the income passed through to the shareholder is not treated as self-employment income. Thus, by using an S corporation, you can avoid self-employment income tax.

There is a problem, however, in that IRS requires that the S corporation pay you reasonable compensation for your services to the S corporation. The compensation is wages which is subject to employment tax (split evenly between the corporation and the employee) which is equivalent to the self-employment tax. If the S corporation does not pay you reasonable compensation for your services, IRS may treat a portion of the S corporation's distributions to you as wages and will impose social security taxes on the deemed wages. There is no simple formula regarding what is reasonable compensation. Presumably, reasonable compensation would be the amount that unrelated employers would pay for comparable services under like circumstances. There are many factors that would be taken into account in making this determination.

Please feel free to contact us if you would like to discuss the practical aspects of conducting your business through an S corporation and how much the S corporation would have to pay you as compensation. I look forward to hearing from you.

PMA - Tax Planning and Advisory

Classification of Gas Stations for Depreciation Purposes

2011-07-12T17:30:00.000-07:00

Gas Stations, oil change businesses, repair shops, car washes, and automobile dealerships owning such facilities, may benefit from a recent IRS clarification of the definition of real property eligible to be depreciated as a 15-year motor vehicle service station.

The Service recently issued informal guidance, in the form of a Chief Counsel Advice, to the effect that an industrial building containing office space, restrooms, work rooms, a mechanical room, truck service center, and a truck wash was depreciable over 15 years for federal income tax purposes. The site also consisted of a fuel island, paved lot with parking spaces, and billboards. At issue was whether the building was depreciable as 15-year property, pursuant to Rev. Proc. 87-56, Activity Class 57.1: Distributive Trades and Services - Billboards, Service Station Buildings and Petroleum Marketing Land Improvements. In reaching this conclusion, the Service stated that the primary use of the building, consisting of approximately 84% of its square footage, was as a service station building. Accordingly, the entire building was classified under Activity Class 57.1.

Further enhancing the tax benefit for this group of assets is the eligibility of 15-year property for bonus depreciation. For property acquired after September 8, 2010, and before January 1, 2012, and placed into service before January 1, 2012, the entire cost of the property or improvements may be deducted as an expense through the 100% bonus depreciation provisions in its first year of use as long as the property's original use also begins with the taxpayer. Additionally, for property or improvements for this group of assets placed in service after December 31, 2007, and prior to September 9, 2010, as well as all of 2012, 50% bonus depreciation may be available.

Nonresidential real property, typically depreciated over 39 years, is eligible to be depreciated over 15 years, allowing taxpayers to recover their costs more quickly. When that property is eligible for 100% bonus depreciation, its entire cost may be deducted in the year it is placed in service.

Even if service stations or car washes were originally depreciated over 39 years, steps may be taken to correct taken to correct the error. For more information, please contact us or visit our website dedicated to gas stations: www.gasstationaccounting.com

The New Rules of Estate Planning

2011-07-10T18:59:00.000-07:00

Smart Money, The New Rules of Estate Planning:

Best moves for getting your estate in order, after the Tax Relief Act of 2010:
Now that the hoopla has quieted somewhat, we're starting to get a clearer picture of who might benefit from [the 2010 Act]. When considering whether to fiddle with existing estate plans, there are two things to keep in mind: First, estate planning is sales-oriented. ... Second, the changes made in the 2010 legislation expire after the close of 2012, which means the window in which to act, if you choose to, is fairly limited. Given all that, here are several issues and strategies to consider, whatever the size of your holdings.
Asset Protection and Wealth Sharing
Formula Clauses
Trusts
State Taxes
If the Tax Relief Act motivates you to review your estate plan and consider any of these strategies, great. Have a chat with your attorney. Ideally, though, he or she will tell you that estate planning, at its heart, isn't about taxes; rather, it's about providing for your family, safeguarding their futures, anticipating your own financial needs -- and offering peace of mind.

PMA Estate and Gift Planning

WSJ: The 25 Documents You Need Before You Die

2011-07-05T08:41:00.000-07:00

Wall Street Journal, The 25 Documents You Need Before You Die:

Design your death dossier soon -- or you could be setting up your heirs for frustration and financial pain.
Marriage license
Divorce papers
Personal and family medical history
Durable health care power of attorney
Authorization to release health care information
Living will
Do-not-resuscitate order
Housing, land, and cemetery deeds
Escrow mortgage amounts
Proof of loans made and debts owed
Vehicle titles
Stock certificates, savings bonds, and brokerage accounts
Partnership and corporate operating agreements
Tax returns
Life insurance policies
IRAs
401(k) accounts
Pension documents
Annuity contracts
List of bank accounts
List of user names and passwords
List of safe deposit boxes
Will
Letter of instruction
Trust documents

For more information, please contact us: http://www.pmaadvisors.com/contact_us.php

Overview of Compensatory Stock Options

2011-06-28T09:21:00.000-07:00

Many employees receive stock options as part of their compensation packages. From a tax standpoint, there are two kinds of options—statutory and nonstatutory. “Incentive stock options,” or ISOs, as they are commonly known, are statutory options, because they are specifically provided for in the Internal Revenue Code and are subject to numerous qualification requirements. Options that don't meet these requirements are nonstatutory stock options or NSOs (also known as nonqualified stock options or NQSOs).

Both kinds of options have tax advantages, but there are quite a few differences between them. Here's some basic information on the taxation of compensatory stock options that may help you better understand how best to benefit from them.

Option grant: If you have ISOs, you are not taxed on option grant. The same is generally true of NSOs. An NSO is taxed at grant only if it has a “readily ascertainable” fair market value (FMV), which is seldom the case. IRS rules say that an option doesn't have a readily ascertainable value at grant unless: (1) the option is actively traded, or (2) (i) the option is immediately transferable; (ii) the option is fully exercisable; (iii) the option and the option stock are unrestricted; and (iv) the value of the “option privilege” is readily ascertainable. In the unlikely event that an NSO is taxable at grant, you have compensation income at that point.

The deferred compensation rules under Code Sec. 409A —which tax deferred compensation to the extent not subject to a “substantial risk of forfeiture” unless specific requirements are met—don't apply to the grant of an ISO. However, these rules can apply to the grant of an NSO, unless the exercise price can never be less than the underlying stock's FMV on the date the option is granted and certain other conditions are met.

Option exercise: No regular income tax is owed on the exercise of an ISO, but the alternative minimum tax (AMT) may apply. The bargain purchase element at exercise, which is the difference between the value of the ISO stock (i.e., stock acquired through the exercise of an ISO) at exercise and the lower price you pay for it, is considered to be income when figuring your AMT. Even if you're usually not subject to the AMT, exercising ISOs may push you into its range. (If you are subject to the AMT in the year you exercise ISOs, then you may be entitled to an AMT credit carryover for use in some later year.)

Any remuneration that arises when stock is transferred on the exercise of an ISO isn't subject to FICA or FUTA taxation.

When you exercise an NSO that wasn't taxed at grant, you're taxed at ordinary income rates on the difference between the value of the option stock at that time and the price you paid for it (plus any price you may have paid for the option, although generally that will be zero). This is compensation income that is subject to payroll taxes and income tax withholding. Taxes may be withheld from your salary or other compensation income, or you may have to sell some of the stock to cover the withholding or make some other arrangement with your employer.

However, if the option stock is nontransferable or subject to a substantial risk of forfeiture, then you aren't charged with compensation income until those restrictions no longer exist. In that case, you can choose to pay tax on exercise so that all gain from that point on would be capital gain.

Sale of option stock: When you sell ISO stock, you generally are taxed at favorable long-term capital gain rates on the difference between the price you paid for the stock and the amount you realize on its sale. However, if you sell the stock within two years of the option grant or within one year of the option exercise, you're hit with compensation income to the extent of your bargain element at exercise. The balance of your gain is capital gain, which will be taxed at favorable rates if you've held the stock for more than one year on the sale date.

It's important to know how long you need to hold the stock to qualify for long-term capital gain rates on the difference between the price you paid for the stock and the amount you realize on its sale or, if you don't hold the stock long enough for this favorable tax treatment, how much additional compensation income will be attributed to you. We can determine this from information on a statement from your employer. You should receive this statement by January 31 following the close of the year in which you exercised the ISO.

If the option was exercised after October 22, 2004, any income on disposition of the stock isn't subject to FICA or FUTA taxation. Additionally, any income resulting from a disqualifying disposition of stock acquired under an ISO isn't subject to withholding.

When you sell stock acquired by exercise of an NSO, you have capital gain if you were subject to tax either at option grant or exercise, or when restrictions on your option stock lapsed. Otherwise, you have compensation income at the time of the sale.

Gifts of options: Some people would like to give stock options to family members as part of their overall estate planning. Transferring property before it increases in value helps lower or eliminate estate and gift taxes.

This can't be done with ISOs, because they can't be transferred during the optionee's lifetime and can't be exercised by anyone but the optionee during his or her life.

NSOs have an edge here if the option plan allows options to be transferred to family members, as many plans now do. However, the IRS has ruled that an option transfer isn't complete for gift tax purposes until the option is no longer conditioned on the performance of future services. That usually means that the gift will be subject to gift tax at a time when the option's value has increased.

The IRS also has issued some complicated rules for valuing gifts of NSOs. For income tax purposes, a gift of NSOs to a family member isn't a disposition that triggers tax. Instead, the employee will be taxed when the transferee exercises the options.

As you can see, the tax rules for compensatory stock options are quite complex. Please call for an appointment if you have additional questions about your options, or if you would like to do some tax planning for them.

http://www.pmaadvisors.com/tax_planning.php

Complete Analysis 2010 Tax Relief Act

2010-12-20T23:26:00.000-08:00

After months of debate and compromise between President Obama and congressional leaders, a measure that extends tax cuts enacted by George W. Bush, introduces new tax incentives and extends jobless benefits cleared the House and Senate and is headed to the president for his signature. Under the deal, most Americans will pay lower taxes next year. Below is a summary of the items we feel are most relevant:

Extension of Bush Tax Cuts

- Long term capital gains and qualified dividend rates (15%) extended through December 31, 2012
- Lower individual income tax rates extended through December 31, 2012
- AMT Exemption "patch" extended through December 31, 2012
- The child tax credit will double from $500 to $1,000 per child

Estate Tax Relief

The new law brings back the estate tax through December 31, 2012.

- The top estate tax rate will be 35%
- For 2011, the lifetime exemption amount will be $5 million per individual (indexed for inflation after 2011)
- Heirs will, again, be allowed to inherit assets with a “stepped-up basis”

Incentives for Businesses to Invest in Machinery and Equipment

- 100% bonus depreciation write-off for the cost of property placed-in-service from September 9, 2010 through December 31, 2011
- 50% bonus depreciation write-off for the cost of property placed-in-service from January 1, 2012 through December 31, 2012
- Beginning January 1, 2012, the maximum Section 179 depreciation limit will be $125k.

Temporary Employee/Self-Employed Payroll Tax Cut for 2011

For the 2011 tax year, the 2010 Tax Reform Act gives a two percentage point payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the maximum threshold of $106,800.

Expired Business Tax Breaks Retroactively Reinstated and Extended Through 2011

- Research & Development tax credit
- New markets tax credit
- 15-year write-off for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements
- Special expensing rules for certain film and television products
- Empowerment zone tax credit
- Work opportunity tax credit

Expired Individual Tax Breaks Retroactively Reinstated and Extended Through 2011

- $250 above-the-line deduction for certain expenses of elementary and secondary school teachers
- Election to take an itemized deduction for State and local general sales taxes
- Above-the-line deduction for qualified tuition and related expenses
- Treatment of mortgage insurance premiums as deductible qualified residence interest
- Exclusion of 100% of gain on certain small business stock
- Energy efficient appliance tax credit
- Energy-efficient improvements to existing homes tax credit

http://www.pmaadvisors.com/tax_planning.php

A Wealth of Tax Breaks included in the Tax Relief Act of 2010

2010-12-10T22:14:00.000-08:00

Late on December 9, Senate Majority Leader Harry Reid (D-NV) introduced H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act). The Tax Relief Act contains a two-year extension of the Bush-era tax cuts that was negotiated by the President and Republicans, and significant estate tax relief. However, it also contains a trove of other tax breaks for businesses and individuals, including enhanced first-year depreciation deductions for businesses, a payroll tax cut of two percentage points for 2011 for employees and self-employed individuals, and a two-year alternative minimum tax (AMT) “patch.”

Here’s an overview of what’s in the Tax Relief Act, based on information released late on December 9.

EGTRRA Tax-Cut Rules Extended for Two Years

Under current law, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16), other than those made permanent or extended by subsequent legislation, sunset and won't apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA) H.R. 4853 would postpone the Sec. 901 EGTRRA sunset rule for two years. That is, under the Tax Relief Act, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16), other than those made permanent or extended by subsequent legislation, will sunset and will not apply to tax or limitation years beginning after 2012 (instead of 2010). Thus, all of the following favorable tax rules (among others) will remain in place through 2012:

(1) The income tax rates for individuals stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%).

(2) The size of the 15% tax bracket for joint filers & qualified surviving spouses remains at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.

(3) The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers. (The standard deduction for marrieds filing separately is half the joint filer amount.)

(4) Itemized deductions of higher-income taxpayers are not reduced (after 2010 they would have been reduced by 3% of AGI above an inflation-adjusted figure, but reduction couldn’t exceed 80%).

(5) A higher-income taxpayer's personal exemptions are not phased out when AGI exceeds an inflation-adjusted threshold (they would have been after 2010).

The current, favorable rules for the following tax provisions also will remain in place through 2012: Coverdell Education Saving Accounts (CESAs), formerly called education IRAs; exclusion for employer provided educational assistance under Code Sec. 127; exemption from the payments-for-services rule for amounts received under certain Government health professions scholarship programs; above-the-line student loan interest deduction; credit for employer-provided child care facilities; earned income tax credit (EITC); credit for household and dependent care; and child tax credit.

JGTRRA Rules for Capital Gains and Qualified Dividends Extended for Two Years

The bill defers for two years the sunset rule of Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, PL 108-27). Thus, through Dec. 31, 2012, long-term capital gain will continue to be taxed at a maximum rate of 15% (instead of 20% (18% for assets held more than five years)); and qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed at the same rates that apply to ordinary income).

Alternative Minimum Tax (AMT) “Patched” for Two Years

The AMT exemption amounts for 2010 will be $47,450 for individuals and $72,450 for married taxpayers filing jointly; for 2011, they will be $48,450 for individuals and $74,450 for married taxpayers filing jointly. The exemption amount for marrieds filing separately is half the amount for joint filers. (Without the “patch,” AMT exemption amounts would have plummeted to their pre-EGTRRA levels.) Also for 2010 and 2011, personal credits will be allowed against the AMT.

Estate Tax Relief Through 2012

The estate tax returns after 2010 and before 2012, but with the following changes:

· A $5 million unified and indexed exemption amount ($10 million for couples).

· The top tax rate will be 35% for estate, gift, and generation skipping transfer taxes.

· Reunification of estate and gift taxes, effective for gifts made after December 31, 2010.

· An election will allow the choice of no estate tax and modified carryover basis for estates arising on or after Jan. 1, 2010 and before Jan. 1, 2011. There will be a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

· Effective for estates of decedents dying after Dec. 31, 2010, the executor of a deceased spouse’s estate will be able to transfer any unused exemption to the surviving spouse.

Incentives for Businesses to Invest in Machinery and Equipment

The bill OKs the following major new incentives for businesses to invest in machinery and equipment:

1. A 100% bonus first-year depreciation allowance for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012;

2. A 50% bonus first-year depreciation allowance for property placed in service after Dec. 31, 2011 and before Jan. 1, 2013;

3. Extension through Dec. 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first year depreciation; and

4. For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount under Sec. 179 at $125,000 and the investment-based phaseout amount at $500,000 (under current law, the expensing figures drop from $500,000/$2 million for 2010 and 2011 to $25,000/$200,000 after 2011).

Temporary Employee Payroll Cut for 2011

Under current law employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4% Social Security self-employment taxes of on all their self-employment income up to the same threshold. The bill provides a payroll/self-employment tax holiday during 2011 of two percentage points. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

Host of Expired Business Tax Breaks Retroactively Reinstated and Extended Through 2011

A host of business tax breaks that expired at the end of 2009 will be retroactively reinstated and extended through 2011, including: the research credit; the new markets tax credit; employer wage credit for activated reservists; 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements; 7-year writeoff for motorsports entertainment facilities; enhanced charitable deductions for contributions of food inventory, for contributions of book inventories to public schools and for corporate contributions of computer equipment for educational purposes; expensing of environmental remediation costs; allowance of the Code Sec.199 domestic production activities deduction for activities in Puerto Rico; and the work opportunity tax credit.

Long List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011

Many tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011, including: the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes; increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes; the above-the-line deduction for qualified tuition and related expenses; the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010); the increase in the monthly exclusion for employer-provided transit and vanpool benefits to that of the exclusion for employer-provided parking benefits. In addition, the bill will extend for an additional year (i.e., through 2011), the rule allowing premiums for mortgage insurance to be deductible as interest that is qualified residence interest.

Other Provisions Extended Through 2011

The list of energy related provisions that will be extended through 2011 include: the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon; the $1.00 per gallon production tax credit for diesel fuel created from biomass; the placed-in-service deadline for qualifying refined coal facilities; the credit for manufacturers of energy-efficient residential homes; the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process); the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well; the Code Sec. 45M credit for US-based manufacture of energy-efficient clothes washers, dishwashers and refrigerators (with modified standards); the Code Sec. 25C credit for energy-efficient improvements to existing homes (reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for property eligible under 25C are updated to reflect improvements in energy efficiency); and the 30% investment tax credit for alternative vehicle refueling property.

Various disaster relief provisions also will be extended through 2011, including: the time for issuing New York Liberty Zone bonds, effective for bonds issued after Dec. 31, 2009; the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone; and the additional depreciation deduction claimed by businesses equal to 50% of the cost of new property investments made in the Gulf Opportunity Zone (expenditures in 2011 will be eligible if the property is placed in service by Dec. 31, 2011).

Excerpts taken from Thomson Reuters/RIA

IRS Issues Form and Instructions for Hire Act Retention Tax Credit

2010-12-10T21:42:00.000-08:00

The Hire Act retention credit was enacted by the Hiring Incentives to Restore Employment Act earlier this year. The Act carried two valuable incentives for employers that boost payroll this year:

(1) A payroll tax exemption for employers that hire unemployed workers

(2) An up-to-$1,000 tax credit for keeping such new hires on the payroll for at least one year

To qualify for these benefits, employers must hire individuals who satisfy the following criteria:

(1) Begins employment with the employer after Feb. 3, 2010, and before Jan. 1, 2011

(2) Certifies by signed affidavit, under penalties of perjury, that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date employment begins with the qualified employer (use Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, or its equivalent);

(3) Does not replace another employee of the employer

(4) Is not related to the qualified employer

The payroll tax exemption is taken on Form 941 for wages paid to qualified individuals from Mar. 19, 2010 and ending on Dec. 31, 2010.

In addition to the above stated requirements, to qualify for the $1,000 tax credit workers must:

(1) Be employed by the employer for a period of not less than 52 consecutive weeks

(2) Their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

The amount of the credit per eligible employee is the lesser of $1,000 or 6.2% of wages paid by the employer to the qualified employee during the 52-week consecutive period.

The new hire retention credit is claimed on the employer's income tax return.

New form. The new form requires employers to enter the worker's Social Security number, the date the worker began employment, the worker's wages during the first 26 weeks of consecutive employment, and the worker's wages during the second 26 weeks of consecutive employment. This information will be used to calculate the credit.

The draft Form 5884-B can be viewed on the IRS website at http://www.irs.gov/pub/irs-dft/f5884b--dft.pdf.

Source: Federal Tax Updates on Checkpoint Newsstand tab 12/10/2010

Overview of the tax provisions in the 2010 Small Business Jobs Act

2010-12-10T20:59:00.000-08:00

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business. Here's a brief overview of the tax changes in the new law.

Enhanced Section 179 Depreciation

The current law allows small businesses the ability to elect to write off the cost of capitalized expenses in the year paid rather than over a number of years. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000.

Extension of 50% bonus first-year depreciation

Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009, by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010.

No Gain on Sale of Small Business Stock

Before the 2010 Small Business Jobs Act law, individuals could exclude 75% of their gain on the sale of qualified small business stock (QSBS) held for at least five years. To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don't exceed $50 million, and the corporation must meet active business requirements). Under the new law, the amount of the exclusion is temporarily increased, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.

Expanded Usage of Small Business Credits

Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

In addition, the new law allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.

Boosted deduction for start-up expenditures

The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Deductibility of health insurance for the purpose of calculating self-employment tax

The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

1099 reporting required for Rental Real Estate

For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses.