President to Sign Bill for One-Year Tax Extenders Package

While it took nearly the entire calendar year for taxpayers to have certainty regarding the tax rules for 2014, it appears we now will have many of the tax incentives which expired on December 31, 2013 extended through 2014. Yesterday, the Senate passed a bill, which was also recently passed by the House, to extend numerous tax incentives for one year. The White House has indicated that the President will sign the bill.

Some key provision of the bill affecting business are as follows:

  1. Section 179 – Generally, the maximum deduction a company can make under section 179 would remain at $500,000 for 2014, with a dollar-for- dollar investment phase-out beginning at $2,000,000. This allows a taxpayer to immediately expense the cost of an investment (like equipment or software) in the year of purchase, instead of writing off the cost over the course of 3 to 15 years. This deduction can  be limited in certain circumstances. Consult with BiggsKofford on how this limitation will apply in your situation.
  2. 50 percent bonus depreciation – Bonus depreciation allows for immediate expensing of 50 percent of the cost of new equipment.
  3. Research and Development tax credit for business -the bill would extend this credit through the end of 2014. In general, the credit is equal to a percentage of wages paid for the performance of qualified research, supplies used in development efforts and payments made to third parties for design and testing.

Additionally, among the key individual incentives, for 2014 taxpayers can donate an individual retirement plan distribution to charity, up $100,000, without paying tax on the distribution.

For more information, contact BiggsKofford at (719) 579-9090

In the United States, the most traditional tool for conserving private land, a conservation easement (also known as a conservation restriction), is a legal agreement between a landowner and a land trust or government agency that permanently limits uses of the land in order to protect its conservation values. The purposes of the easement will vary depending on the character of the particular property, the goals of the land trust or government unit, and the needs of the landowners. Some purposes for a conservation easement include maintaining water quality, improving wildlife habitat, fostering forest growth, sustainable agriculture and/or protecting scenic landscapes.

Landowners who donate a qualifying conservation easement to a qualified land protection organization may be eligible for a federal income tax deduction equal to the value of their donation. The value of the easement donation, as determined after an appraisal of the land is completed, equals the difference between the fair market value of the property before and after the easement takes effect.

This year, Colorado passed a bill that establishes an improved application and review process for conservation easement donations made on or after January 1, 2014. Because Colorado’s former process had numerous abuses surrounding individuals claiming the tax credit for unacceptable purposes, this new process was put in motion. The Division of Real Estate is now responsible to review each credit application to determine the credibility of the appraisal while the Conservation Easement Oversight Commission (CEOC) is tasked to determine whether the donation is a qualified contribution. Either organization may deny an application that fails to meet the requirements falling under their rules.

The goal of the new procedures is to move the review to the beginning of the process. That way, if the Division of Real Estate finds issues with the contribution, the taxpayer will have an opportunity to resolve shortcomings prior to seeking a tax credit. The new streamlined application and review process are a direct result of a performance audit. The assessment found that the Department of Revenue’s review process did not ensure that the easement would be used explicitly for conservation purposes.

The new legislation replaces the credit program, streamlining the process by getting the program into the hands of the agency with the appropriate level of expertise. The Department of Revenue gives the final say on tax-related aspects of the program and the Division of Real Estate gives the final say for the transactions, which are essentially real estate transactions.

Starting in 2014, all new credits can be carried forward. Accountants will no longer need to predict a client’s tax liability a year in advance and buyers won’t need to worry about wasting their money having to waive credits if they couldn’t use them all. This means that it will be easier than ever to buy credits early in the year when they are being sold at lower rates.

Although there is increased ease in the process, there are still risks that buyers and their consultants should be aware of. The Department of Revenue still has jurisdiction over tax forms, which seem to be the trigger of the majority of recent audits. It is still very important to keep a close eye on all the due diligence involved in a donation and tax credit transaction.

For more information, please contact BiggsKofford at 719-579-9090.

(Accounting Today, By Michael Cohn; Published January 21, 2014)

A taxpayer undergoing an audit at an Internal Revenue Service office on Long Island successfully sued the IRS for $862,000 after he was injured by tripping over a phone cord.

William Berroyer claimed in his lawsuit that he could no longer play golf or have sex with his wife more than once a month after he fell during a 2008 audit at an IRS office in Hauppauge, N.Y., according to the New York Post. He had visited the offices to work out a payment agreement for a $60,000 tax bill when he tripped on the phone cord and fell against a cabinet.

After leaving the office, he telephoned the IRS auditor from the parking lot to inform him that he had lost the sense of feeling in his leg and was suffering from shoulder pain. He then spent 17 days in hospitals and rehabilitation centers recovering from his injury.

The number of audits performed this year by the Internal Revenue Service continued to decline in 2013 as it did in the previous year. Although revenue for the IRS has increased by a reported 6.3 percent, annual funding and staffing have decreased tremendously. According to data released in January, the agency, which has lost $1 billion in annual funding and 8,000 employees, over the last three years, collected $53 billion in revenue last year. The reduced audits resulted in $9.83 billion in revenue generated, which is the lowest figure since 2003.

In 2013, most income groups declined in the number of audits.  Less than one percent of taxpayers with incomes up to $1 million were audited last year; however, nearly 11 percent of taxpayers with incomes exceeding $1 million were reviewed, which is more than double the rate of audits done in 2006. This trend is proving to be very consistent for taxpayers who have surpassed the $1 million threshold.

Even though taxpayers are having difficulty reaching an IRS employee –only about 60 percent of toll-free callers were able to speak with a representative—the IRS is facing more potential budget cuts. With a proposed $1.8 billion cut by House Republicans, the agency may have additional internal losses. The 2014 financial budget is due to be set over the next two weeks.

If you have questions about how this may affect your business, call BiggsKofford at (719) 579-9090.

Deborah Helton

Deborah Helton

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Michael McDevitt

Michael McDevitt

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The health care legislation, commonly known as “Obamacare,” creates additional Medicare taxes for high-income taxpayers. There are two new Medicare tax increases: (1) a 3.8% tax on “net investment income,” and (2) a 0.9% Medicare tax on earned income. Generally, if your income exceeds $200,000 (single filing), or $250,000 (joint filing), you are at risk for these new taxes.

Net Investment Tax of 3.8 percent

Beginning in 2013, higher income individuals with “net investment income” will be subject to an additional 3.8% tax of the lesser of two amounts:

  • Your “net investment income,” or
  • the excess of the taxpayer’s modified adjusted gross income over a $200,000 (single) or $250,000 (joint filers) threshold amount.

If the taxpayer’s adjusted gross income is greater than the $200,000/$250,000 threshold, the excess becomes a limitation on the amount of net investment income exposed to the surtax. For example, if a joint return has a modified adjusted gross income of $260,000, the $10,000 excess becomes the limitation.

Net investment income includes three broad categories:

  • Interest, dividends, annuities, royalties, and rents
  • Income from a business in which the taxpayer does not personally, materially participate, and business income from trading and financial instruments or commodities
  • Capital gains and other net gains from the sale of property

Exclusions

Most investment income categories are exempt from the tax if they are derived from a business activity in which the taxpayer materially participates (other than trading in financial instruments and commodities).

Any income subject to the self-employed Social Security tax is excluded, as is tax-exempt interest income, retirement plan distributions, and tax-free gains from a principal residence.

Medicare surcharge tax on earned income

Presently, the Medicare tax applies to all wages and self-employment income. For wage earners, both the employer and the employee pay 1.45%, whereas a self-employed taxpayer pays the entire 2.9%.

Beginning in 2013, the health care legislation imposes an additional 0.9% surtax — but only on higher income households. The tax applies to income in excess of:

  • A single person’s wage and self-employment income over $200,000, or
  • the combined wage and self-employment income of a married couple exceeding $250,000.

While both taxes only impact high income earners, the threshold for the 3.8% tax focuses on total income in the tax return (technically “modified adjusted gross income,” which is generally the total income on page 1 of Form 1040). On the other hand, the 0.9% Medicare surcharge focuses only on the wage and self-employment earned income of the taxpayer. In both cases, the new taxes only apply to the investment income or earned income that is in excess of the thresholds.

Net investment income tax of 3.8% Planning

The more complex planning challenges come into play with the net investment income portion of the new tax. But with careful execution of a well-designed plan, there may be ways you can potentially reduce net investment income and, thus, the potential impact of this new tax.

If your income is at or near these thresholds, the focus will be on maintaining a consistency in reportable income from year to year so as to stay beneath the thresholds. Spikes in income from large IRA withdrawals, bonuses, and substantial capital gain recognition, can trigger these taxes.

Using an installment sale to shift a large capital gain from an investment into multiple tax years could help you stay beneath the threshold of the 3.8% tax.  Similarly, a lump sum distribution from a retirement account could trigger the 3.8% tax, so consider taking payments out over a number of years.

An owner occupied commercial building could utilize a strategy to manage the income in the LLC entity by modifying rents.  This strategy should take into consideration practical cashflow concerns of covering building expenses as well as ensuring the rent still represents a fair market value.  Consult with your tax advisor to implement a strategy that benefits you while ensuring you are within the regulatory boundaries.

One possible strategy would be to shift some of your investments with taxable earnings into municipal bonds and municipal bond funds, whose earnings are excluded from the MAGI and the net investment income calculation. They also provide a double potential benefit of not triggering the surtax on other investment income and are also excluded from the Medicare surtax. Additionally, investments that produce taxable interest or that pay dividends could be held in a tax-deferred account like an IRA or possibly a tax-deferred annuity.

You may also consider owning a form of permanent life insurance, as the cash value of these polices when withdrawn is not considered net investment income.

Medicare Surtax of 0.9% Planning

Be prepared. If you’re married, filing jointly, and your combined wages will exceed the $250,000 income threshold for couples, you’ll want to make sure that your joint Medicare surtax for the year isn’t significantly higher than you anticipated.

Your employer won’t take your spouse’s income into consideration when figuring your Medicare tax withholding, but you can use IRS Form W-4 to have an additional amount deducted from your pay to cover the extra 0.9% tax on the amount by which you and your spouse exceed the combined income threshold.

Reducing MAGI is difficult for those who are still working. One strategy would be to maximize your contributions to pretax retirement plans like traditional 401(k)s or 403(b)s.

If you have control over the level of wages paid to you (i.e., you are the owner of your company), consider whether the wages you pay yourself are too high for the services rendered to the company.  If so, you may want to consider reducing your wages and paying the difference in distributions.  Be careful though – if you need to maintain a high wage to justify large pretax retirement contributions, this strategy make backfire.  Careful consultation with your tax expert is required.

All in all, a tax-smart investment plan is more important than ever. Talk to your tax adviser to help ensure your tax planning matches your investment and income needs.

For questions, contact Deborah Helton, CPA, at dhelton@biggskofford.com.

Greg Gandy

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Michael McDevitt

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Deborah Helton

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(Thompson Reuters) The IRS has issued its annual data book, which provides statistical data on its fiscal year 2012 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2011 and audited in FY 2012 to returns filed in calendar year 2010 and audited in FY 2011.

What are the chances of being audited?

Of the 143,399,737 individual tax returns filed in calendar year 2011, 1,481,966 were audited. This works out to roughly 1.0%, down slightly from 1.1% the previous year. Of the total number of individual income tax returns audited in FY 2012, 487,408 (32.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 483,574 (30.9%) of all audited returns for FY 2011.Only 24.3% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That’s slightly down than the 25% figure for the previous year. The 75.7% balance of the audits were correspondence audits, slightly up from 75% for the previous year.

Following are selected audit rates for individuals not claiming the EITC:

  • For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 3.6% of returns were audited in FY 2012, down from 4.3% in FY 2011.
  • For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.4% of returns were audited in FY 2012, a decrease from 3.8% in FY 2011.
  • Of the returns showing farm (Schedule F) income, .5% were audited in FY 2012 versus .6% in FY 2011.
  • For returns showing total positive income of $200,000 to $1 million, 2.8% of returns not showing business activity were audited, and 3.7% of returns showing business activity were audited. The audit rates for such returns were 3.2% and 3.6%, respectively, for the previous year.
  • For FY 2012, the audit rate for returns with total positive income of $1 million or more was 12.1%, slightly down from the 12.5% rate for FY 2011.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 0.85% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from 1% for FY 2011), and 1.96% for those with $200,000 to $500,000 of AGI (down from 2.66% for FY 2011). Exam coverage increased to 8.9% for those with at least $1 million but less than $5 million of AGI (down from 11.8% for FY 2011). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

  • For all corporate returns other than Form 1120S, 1.5%, same as the year before.
  • For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.7%; $1-$5 million, 2.1%; and $5-10 million, 2.6%. For FY 2011, the percentages were, respectively, 1.6%, 1.9%; and 2.6%.
  • For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.8%, up slightly from 17.6% for FY 2011. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 10.5% for those with total assets of $10-$50 million (down from 13.4% for FY 2011); 22.7% for those with $250-$500 million (up from 17.4% for FY 2011); 45.4% for those with $5-20 billion (down from 50.5% for FY 2011), and 93% for those with $20 billion or more (down from 95.6% for FY 2011).
  • For partnership and S corporation returns, the audit rate was 0.5%, as compared to 0.4% for the year before.
  • IRS’s activity on other fronts.

Here’s a roundup of some of the other valuable information carried in the new IRS Data Book.

Number of returns filed.

The number of partnership returns filed (Form 1065) increased by 1.5%, and the number of S corporation returns (Form 1120S) grew by .8%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 2.2%.The number of individual income tax returns (e.g., Forms 1040, 1040A, 1040EZ) increased by 1.8%, reflecting the second consecutive increase (likely due to improvement in economic activity) after the 2% drop exhibited in FY 2010 and the 6.7% drop shown in FY 2009.

The number of estate tax returns filed in FY 2012 increased by 145.5%, following last year’s 62.1% plunge (which was attributable to the temporary repeal of the tax for deaths in calendar year 2010 before being reinstated retroactively with a $5-million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010).

Math errors on individual returns.

IRS sent out roughly 2.7 million math error notices relating to the 2011 return.Of the total math error notices, 23.9% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 15.3% related to exemption number/amount, 13.4% related to the EITC, 10.6% related to the standard/itemized deduction(s), 5.3% related to the child tax credit, and 5.2% related to the first-time homebuyer credit.

Penalties.

In FY 2012, IRS assessed 28.5 million civil penalties against individual taxpayers, slightly down from 28.75 million assessed in the previous year. Of the FY 2012 assessments, the “top three” penalties in percentage terms were 60.2% for failure to pay, 24.8% for underpayment of estimated tax, and 11.5% for delinquency. On the business side, there were a total of 995,533 civil penalty assessments (down from 1,080,027 for the year before), and the “top three” penalties in percentage terms were 51.4% for delinquency, 25.8% for failure to pay, and 20% for estimated tax.

Offers-in-compromise.
In FY 2012, 64,000 offers-in-compromise were received by IRS (versus 59,000 for FY 2011), and 24,000 were accepted (up from 20,000 for the year before).

Criminal cases.

IRS initiated 5,125 criminal investigations in FY 2012. There were 3,701 referrals for prosecution and 2,634 convictions. Of those sentenced, 81.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2011, IRS initiated 4,720 criminal investigations, there were 3,410 referrals for prosecution, and there were 2,350 convictions. Of those sentenced, 81.7% were incarcerated.

If you have any questions about this, please contact Gregory L. Gandy, CPA, Deborah Helton, CPA, or Michael E. McDevitt, CPA, for more information.

The Internal Revenue Service said last week that it was expanding its Voluntary Classification Settlement Program (VCSP). The reasoning for this expansion is to give more businesses the opportunity to reclassify workers as employees, as opposed to independent contractors, for future tax periods, offering them relief from their past payroll tax obligations.

The IRS is modifying several eligibility requirements, making it possible for many more interested employers, especially larger ones, to apply for the program. Applying for this program gives a partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court. Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement.

If you have questions on how to navigate this program, please e-mail Michael E. McDevitt, CPA, or Greg L. Gandy, CPA.

Recently, Jeff Ahrendsen at HUB International, passed on this great presentation about how Health Care Reform can affect your business.  Check it out here.

If you have questions about how this tax law might be affecting your business, please e-mail Greg Gandy, Deborah Helton or Michael McDevitt.

President Obama recently signed into law the American Taxpayer Relief Act, in which there are many new tax provisions that were enacted to avoid the impending Fiscal Cliff. Below are some of the main tax features of the Act. We will send out more information, as we get it in regard to the Act.

Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold as described above. The current 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

If you have any questions about how this will affect you and your business, please feel free to contact Greg Gandy, CPA, Mike McDevitt, CPA, or Deborah Helton, CPA.

As the end of the year approaches, here are a few things that you will want to be aware of:

2013 Inflation-adjusted Amounts: The IRS released a number of inflation-adjusted tax amounts for 2013 including, for example: (1) the amount used to reduce the net unearned income reported on a child’s return that is subject to the “kiddie tax” increases from $950 to $1,000; (2) the annual exclusion for gifts rises from $13,000 to $14,000; and (3) the foreign earned income exclusion goes from $95,100 to $97,600.

2013 Pension Plan Amounts: The IRS published cost-of-living adjustments to various pension plans and related amounts for 2013. For instance, the (1) benefit limit for defined benefit plans increases from $200,000 to $205,000; (2) defined contribution plan limit goes from $50,000 to $51,000; (3) compensation limit for determining benefits and contributions increases from $250,000 to $255,000; (4) definition of a highly-compensated employee is unchanged at $115,000; (5) elective deferral limit for employees who participate in 401(k), 403(b), and most 457 plans goes from $17,000 to $17,500; and (6) limit on contributions to SIMPLE accounts increases from $11,500 to $12,000.

Closing Agreements: The IRS explained in Chief Counsel Advice that if subsequently effective regulations change or modify the law regarding an issue covered in a closing agreement, the agreement will no longer be binding for that issue. The IRS can require the taxpayer to comply with the changed or modified law, and an IRC Sec. 481 adjustment would be calculated to take into account the taxpayer’s prior position with regard to the issue in earlier years.

Private Sector PTIN Directories: The IRS Issue Management Resolution System (IMRS) captures, develops, and responds to significant stakeholder issues. In a recent IMRS Hot Issue, the IRS noted that directories have been set up on the Internet using Preparer Tax Identification Numbers (PTINs) obtained from the IRS through the Freedom of Information Act (FOIA). Businesses have the right to obtain the listing via FOIA “and attempt to monetize it through business ventures.” The IRS cannot restrict these activities. The IRS is creating a publicly searchable database that will allow taxpayers to see if their tax preparer meets IRS standards or to find a tax preparer in their zip code area. This database will have a listing of all valid PTIN holders who have professional credentials (CPAs, enrolled agents, attorneys, and registered tax return preparers) and will be available around May 2013.

Social Security Wage Base for 2013: In 2013, the first $113,700 of wages or SE income (up from $110,100 in 2012) will be subject to the Social Security component of the FICA tax. Once again, there will be no limit on the wages or SE income subject to the Medicare component of the tax. Assuming that the Social Security payroll tax cut in effect during 2011 and 2012 is not extended, employees and employers will each pay a FICA tax rate of 7.65% in 2013 (Social Security tax rate of 6.2% plus the Medicare tax rate of 1.45%) while the self-employed will face a combined tax rate of 15.3%. To add another layer of complexity, beginning in 2013, the employee portion of the Medicare tax increases from 1.45% to 2.35% on wages (and SE income) in excess of $200,000 ($250,000 for MFJ and $125,000 for MFS).

Estate Tax—Statistics for 2010: According to a recent IRS Tax Stats Dispatch, less than half the estates that filed an estate tax return for 2010 owed tax with roughly 20% of estates claiming a charitable bequest deduction. Due primarily to increases in the filing threshold, the number of estate tax return filings decreased from more than 108,000 in 2001 to just over 15,000 in 2010.

Income Tax—Bankruptcy Exemption for Retirement Account: A state divorce court awarded an ex-wife 50 percent of her ex-husband’s 401(k) account and ordered him to pay her $43,500 of the equity in one of the houses they owned. His failure to pay the home equity amount on time resulted in that money also being removed from his 401(k). The ex-wife placed the funds in a newly established IRA. A month after opening the IRA, she filed for Chapter 7 bankruptcy. The District Court denied a bankruptcy exemption for the home equity payment because the money had been seized from a 401(k) and used to pay a debt the husband owed; thus, it no longer constituted retirement funds. 

Income Tax—Business Sale: The taxpayer owned and operated an insurance business in Harvey, North Dakota, a town of a couple thousand residents where fewer people moved in during a given year than died or moved away. The insurance market was very competitive with several independent agents in the area, but the taxpayer was the most well known. Eventually, he sold his business and began employment with a local bank that wanted to revive its insurance business. In addition to six annual installment payments of $20,000 for files, customer lists, and goodwill, the employment agreement specified a six-year deal with annual wages and deferred compensation. The Tax Court held that the wages paid were not disguised purchase-price payments because the two parties were genuinely interested in creating an employment relationship and not simply affecting tax consequences. The bank needed an experienced manager, and the taxpayer wanted guaranteed employment.

Income Tax—Deductible Restitution Payments: Taxpayers who repay embezzled funds are ordinarily entitled to a deduction in the year in which the funds are repaid. In a Private Letter Ruling, the IRS allowed a doctor to deduct restitution payments made to an insurance company in a criminal lawsuit for insurance fraud. In addition, restitution payments made to the state of New Jersey, in exchange for the dismissal of charges in its suit against the taxpayer, were deductible if no contributions from another party (i.e., the other doctor and practices that had been sued) were received and the amounts had been included in gross income in prior years.

Income Tax—ESOP’s Exempt Status Revoked: A highly-compensated employee must include, in gross income, an amount equal to his vested accrued benefit (other than the investment in the contract) in the taxable year an ESOP ends if the trust fails to remain tax-exempt because it no longer meets certain coverage and eligibility tests. In this case, the taxpayer’s S corporation sponsored an ESOP in which the taxpayer had an accrued benefit of $2.4 million. When the ESOP terminated, taxpayer’s entire account balance was transferred to an IRA. The IRS retroactively disqualified the ESOP as tax-exempt as a result of its failure to meet certain coverage and participation requirements. The limitations period for assessment had expired for all years except the year the ESOP was terminated. The Tax Court held that the entire amount of the taxpayer’s vested accrued benefit had to be included in income and not just the annual increase in the final year of the ESOP.

Income Tax—End of Filing Season Considerations: With the end of another filing season, the IRS has included a timely link entitled “After You’ve Filed” as one of the five scrolling topics on the homepage of www.irs.gov. In the information provided, the IRS reminds taxpayers that (1) the refund status of an e-filed return can be checked 72 hours after the IRS acknowledges receipt, (2) those who moved after filing their return should send Form 8822 (Change of Address) to the IRS, (3) the IRS’s online withholding calculator is a useful tool to assist employees in completing or adjusting Form W-4 (Employee’s Withholding Allowance Certificate), and (4) copies of prior year tax returns or transcripts, which include most of the line-items of a return, are available by filing Form 4506.

Income Tax—Filing Guidance for Same-sex Couples: Although the Obama administration no longer defends the Defense of Marriage Act (DOMA) and several courts have struck down key provisions, the IRS continues to defer to DOMA in its guidance to same-sex couples. The most recent guidance is provided in question and answer format. The guidance states, in part, that (1) same-sex couples, who are legally married for state law purposes, may not file as MFJ or MFS; (2) a taxpayer cannot file as HOH based solely on his or her same-sex partner; (3) either parent, but not both, may claim a dependency deduction for a qualifying child; (4) if a same-sex couple adopts a child together, each partner may claim the adoption credit in an amount equal to the qualified expenses paid, but both may not claim a credit for the same expenses or claim more than the amount he or she actually paid; and (5) if a taxpayer adopts the child of his or her same-sex partner, the taxpayer may claim an adoption credit for the qualifying expenses.

Income Tax—Involuntary Conversions: The taxpayer’s principal residence was destroyed in a presidentially declared disaster. Upon acquiring a new principal residence the next year, he failed to notify the IRS of the replacement property, as required under Reg. 1.1033(a)-2(c)(2) . He received insurance proceeds in the year of the disaster and in the following two years. In the second year, the taxpayer realized gain when the insurance proceeds exceeded his basis in the former residence, but he did not report any gain recognition. The IRS held that under the regulations, the taxpayer was deemed to have made the election to defer gain under IRC Sec. 1033 when he did not recognize gain on his tax return in the year he received insurance proceeds.

Income Tax—IRA Rollover Waiver: The taxpayer and his investment partner purchased a residential building with a mortgage and promissory note. Years later, they entered into an agreement to sell the property. But, in order to complete the sale, the promissory note had to be paid off. Unable to find a lender and faced with foreclosure if the note was not paid off by a certain date, the taxpayers withdrew money from their IRAs to pay off the note. Although delays in closing the sale extended repayment of the withdrawn funds for several months, the IRS declined to waive the 60-day rollover requirement under IRC Sec. 408(d)(3) . Taxpayers did not show that the failure resulted from (1) errors committed by a financial institution, (2) death, (3) hospitalization, (4) postal error, (5) incarceration, and/or (6) disability.

Income Tax—SIFL Rates for Employer-provided Aircraft: Under Reg. 1.61-21(g), employers can use a special computation rule to value employees’ flights on an employer-provided aircraft. The employer multiplies the Standard Industry Fare Level (SIFL) cents-per-mile rate in effect at the time of the flight by the appropriate aircraft multiple provided then adds the applicable terminal charge. For flights taken from 7/1/12–12/31/12, the SIFL rate will be $.2569 per mile for trips up to 500 miles, $.1959 per mile for trips from 501 to 1,500 miles, and $.1884 per mile for trips over 1,500 miles. The terminal charge will be $46.97.

Procedure—Penalty Abatement: It is common for the IRS to waive Failure to File (FTF) and Failure to Pay (FTP) penalties for taxpayers who have demonstrated full compliance over the prior three years. This waiver, called a First-Time Abate (FTA) is to reward past tax compliance and promote future tax compliance. A report by the Treasury Inspector General for Tax Administration (TIGTA) found that most taxpayers with compliant tax histories are not offered and do not receive the FTA waiver. For the 2010 tax year, approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief even though they qualified for the FTA waiver. In addition, taxpayer requests for penalty abatements were not always processed accurately.

Procedure—Tax Return Preparer E-file Requirement: According to a posting to the IRS Issue Management Resolution System (IMRS) Hot Issue webpage, any tax return preparer who anticipates preparing and filing 11 or more Form 1040, 1040A, 1040EZ and 1041 returns during a calendar year must use IRS e-file (unless the preparer or return is administratively exempt from the e-file requirement or the return is filed by a preparer with an approved hardship waiver). Effective 10/1/12, applications to become an IRS e-file provider must be submitted online. The IRS will no longer accept paper e-file applications.

For more information on the business implications, please contact Greg Gandy or Mike McDevitt.

(All information provided by Thomson Reuters/PPC.)

Greg Gandy

Greg Gandy

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Michael McDevitt

Michael McDevitt

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Deborah Helton

Deborah Helton

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If you aren’t able to join us at tomorrow’s event with HUB International, covering the updated information for the Healthcare law, please see both (BiggsKofford’s Tax Update and HUB’s Insurance Update) presentations here.

If you’d like to be included in BiggsKofford’s events in the future, e-mail Stephanie Johnson here. For questions about tax-related business issues, feel free to reach out to one of our tax experts (listed to the right).

September’s breakfast will cover any changes that are coming from the healthcare law and things you need to prepare your company with, in both tax and health insurance areas. 

To view the invitation, click here or RSVP here.

Michael McDevitt

Michael McDevitt

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Just about any owner of a “small” business that acquired a significant amount of assets in the last few years has noticed the IRS rules for writing them off have become very favorable.  In fact, in almost all cases for 2011, these rules allow a tax write off of either half or the entire purchase amount in the year the assets are acquired. 

Congress’ intent in loosening these rules a few years ago was to stimulate the economy and get people back to work.  The practical benefit to businesses is the corresponding reduction in the owner’s federal and state income taxes related to these business write offs can be as high as 40% of the cost of the asset!  Thus, many businesses like yours have been taking advantage of the current rules and significantly reducing the cost of the acquisition of needed business equipment.

Unfortunately, this generous write off benefit for businesses may soon be over.  Although bonus first-year depreciation and more-generous expensing limits have been extended by Congress before, another lease on life for these tax breaks is not certain this time around.  With the current election cycle in full swing it is unlikely Congress will agree to any extension of these tax breaks until the new Congress is seated early next year – if at all!  Unless Congress acts, these business tax breaks won’t be available or are severely limited next year.  

If your business plans include the possibility of purchasing machinery and equipment during the remainder of this year or early the next year, you should consider completing such purchases by year end. By doing so, you may be able to lock in these tax breaks by buying qualifying assets this year versus next year.

Like anything else in our tax laws, navigating these tax breaks effectively takes some planning and understanding of the rules.  For those that want to learn a little more about the 2011 rules, some details are provided below.  You are also invited to contact your BiggsKofford representative, or our Tax Director, Michael McDevitt, to discuss if you qualify for these tax breaks. 

Summary of Generous Asset Write Offs for 2012

Until the end of the year, current law allows two great ways for a business to write off some or all of the purchase amount of business assets acquired this year. 

Section 179 – 100% Write Off

Section 179 of the IRS Tax Code allows a business to deduct in the current year, the full purchase price of most business assets.  The assets may be either new or used.  That all sounds great, but there are a few limitations.  Four of the most important limitations are as follows:

  1. A business is cannot take more than $139,000 of Section 179 write offs for 2012.
  2. If a business acquires more than $560,000 of assets during 2012, the amount of Section 179 deduction it can claim is reduced.
  3. A business cannot use Section 179 deductions if it has a Net Operating Loss for 2012.
  4. Some types of assets don’t qualify (example – passenger cars).

Starting in 2013, the tax law will reduce the amount that can be written off under Section 179 to $25,000, versus the $139,000 limit for 2012!

Bonus Depreciation – 50% Write Off

During 2012, if a business asset doesn’t qualify under Section 179 rules, the bonus depreciation rules allow you to write off half of the purchase amount.  As with Section 179, there are several hurdles you must pass to qualify under the bonus depreciation rules:

  1. It is a “qualified asset.”  Most tangible property qualifies (no real estate or most intangible property).
  2. It is placed in service (bought) by the end of 2012.
  3. Its original use commences with the taxpayer (new asset, not used).

Starting in 2013, bonus depreciation will be gone, unless Congress acts to extend it.

Greg Gandy

Greg Gandy

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Michael McDevitt

Michael McDevitt

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Is your business paying too much in sales tax?  In many venues, products and services purchased as part of a manufacturing or production process aren’t subject to sales tax. 

For example, one company found that its propane purchases should have been tax exempt.  The correction saved about $5,000 per year. 

Tips:

  • Get an opinion. Talk to your trusted tax advisor if the law isn’t clear.
  • Contact suppliers. They may offer advice or knowledge and may be able to credit your account.  Issue resale certificates to suppliers if neccessary.

For more information about sales tax for your business, please contact us.

Greg Gandy

Greg Gandy

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Michael McDevitt

Michael McDevitt

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The IRS has expanded the use of correspondence examinations of individual income tax returns. The IRS initiates a correspondence examination by mailing either Letter 566 (CG), often termed an initial contact letter, advising the taxpayer that a return has been selected and listing the items to be verified, or a CP 2000 notice, which contains proposed adjustments based on information documents issued by third parties, such as Forms W-2, Wage and Tax Statement; 1099-MISC, Miscellaneous Income; and 1098, Mortgage Interest Statement. The examinations are handled at an IRS Service Center or campus.

Please notify us if you receive correspondence from the IRS. Do not assume the change(s) proposed in any IRS correspondence is correct. Often, it is not! Let us review the correspondence and respond on your behalf.

When the IRS receives returns, it compares them against norms for similar types of returns. The IRS develops the norms from audits of statistical random samples of returns that are selected as part of the National Research Program, which the IRS conducts to update return selection information.
The IRS typically selects returns for correspondence examinations based on data indicating that the taxpayer has not reported income, claimed improper deductions, or claimed erroneous tax credits. Some typical items for which the IRS requests verification include alimony, moving expenses, various itemized deductions, casualty losses, employee expenses, Schedule C receipts and expenses, foreign tax credits, earned income credits and education credits.

Unlike a field examination, a correspondence audit is not assigned to a specific examiner. When the IRS receives correspondence, the file is assigned to an auditor. If there is no response from the taxpayer, the process moves through an automated system. After a certain period of time, the IRS issues a second notice, and if there is no reply, it will issue a statutory notice of deficiency or a 90-day letter.

The IRS has been having workload problems in timely responding to taxpayer or practitioner letters that provide the requested information or express disagreement with proposed adjustments. Often correspondence is not assigned to the auditor who reviewed earlier documents. Correspondence tends to not be reviewed for several months, resulting in the IRS sending letters advising the taxpayer that it needs additional time to review the correspondence. When the IRS finally issues reports, in some cases the proposed adjustments are not correct because proper consideration and evaluation have not been given to the documents and substantiation furnished by the taxpayer or his or her representatives.

If you have any questions, please call your contact at BiggsKofford at (719) 579-9090.

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