Stephenson and Warner, Inc

New 1099 questions on 2011 tax returns are a cause for concern

Mon, 13 Feb 2012 17:32:37 EST

The IRS is on a mission to find those individuals and businesses who are not reporting all of the income they receive. To increase their odds of finding the under-reporters, they are employing two techniques. First, they posted two new questions on every business or rental tax return/schedule that must be answered. The first question asks “Did you make any payments in 2011 that would require you to file Form(s) 1099?” The next question asks “If "Yes," did you or will you file all required Forms 1099? The second technique they are employing involves a dramatic increase in the number of audits they are performing on individuals and business owners.

You generally have to file Form 1099 information returns for certain payments of fees and other non-employee compensation (service providers) that are in excess of $ 600 in total over the course of a calendar year. 1099’s are most commonly issued to individuals who are not incorporated and provide services to a business or rental property owner.

Why is this important to you? Failing to answer these questions constitutes an incomplete tax return and the IRS can treat your return as never being filed. If your return was never filed, the statute of limitations never runs and the return itself could be subject to audit for an indefinite time period instead of the customary 3 years. If you answer the first question yes, that you did make payments to individuals or unincorporated businesses for services, and then answer no to the second question, the IRS can fine you for not filing the 1099’s and will most likely deny the deduction for the amounts you paid to the service provider.

If you did pay a service provider over $ 600 in 2011, we strongly suggest you file the 1099’s by the due date of 2/29/11 with the IRS. The recipient of the 1099 should have received their copy by 1/31/12 so time is of the essence. You will need the name, address and social security number or EIN of the service provider and it is best to obtain this by giving the service a provider a form W-9 for them to fill out and send back to you that will provide this information. We can prepare these 1099’s for you if you need assistance. Please contact us with any questions or concerns you may have

tags: 1099 business contractors

Tax changes for 2012: The Good, the Bad and the Ugly

Sun, 15 Jan 2012 09:39:31 EST

There are many important tax changes taking effect in 2012, as well as some that took effect late last year and thus are “new.” Here is a list of the more important changes separated by their effect on taxpayers.

The Good (or not so Bad)

Basis reporting requirements. Investment companies and brokers must now provide basis information on the tax reporting form 1099-B which will make tax reporting of stock or mutual fund sales easier….if the basis reported on the form is correct. The complex stock basis and character reporting rules under Code Sec. 6045(g) apply to shares in a regulated investment company (RIC, i.e., a mutual fund), or stock acquired in connection with a dividend reinvestment plan (DRP), if acquired after 2011.
Work opportunity tax credit (WOTC) not available except for hiring qualified veterans. The WOTC under Code Sec. 51 generally can't be claimed for an individual who begins work for the employer after Dec. 31, 2011. However, the WOTC is expanded and continues to be available for employers that hire qualified veterans who began work for the employer before Jan. 1, 2013.

The Bad

Longer writeoff period for certain property. For specialized realty assets (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) placed in service after 2011, a 39-year (up from 15-year) writeoff period generally applies.
Reduced bonus depreciation allowance for qualified property. For qualified property acquired and placed in service after 2011 and before 2013 (after 2012 and before 2014 for aircraft and certain long-production period property), a 50% (down from 100%) bonus first-year depreciation allowance applies under Code Sec. 168(k).
Reduced expensing. For a tax year beginning in 2012, the Code Sec. 179 expensing election is reduced to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years beginning after 2012, it will be further reduced to $25,000 with a $200,000 investment-based ceiling. Additionally for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property.
Reduced alternative minimum tax (AMT) exemption amounts. Absent another AMT “patch,” the AMT exemption amounts for tax years beginning after 2011 revert to the significantly lower “permanent” amounts of $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for marrieds filing separately.
Reduced adoption credit. For 2012, the total expenses that may be taken as a credit for all tax years with respect to the adoption of a child by the taxpayer will be limited to $12,650 (down from $13,360 for 2011), and the credit for the adoption of a special-needs child will also be $12,650 (down from $13,360 for 2011). Furthermore, the adoption credit will no longer be refundable.
Reporting foreign assets. Beginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to IRS on Form 8938, Statement of Specified Foreign Financial Assets, with their tax return.

The Ugly

Community health needs assessment mandatory. To qualify as tax-exempt, for tax years after Mar. 23, 2012, under Code Sec. 501(r)(3), charitable hospital organizations will need to (i) conduct a community health needs assessment during the tax year or in either of the two tax years immediately preceding the tax year, and (ii) adopt an implementation strategy to meet the community health needs identified therein.
New guidance on deduction vs. capitalization of tangible property costs. IRS has issued temporary regs, generally effective in tax years beginning after 2011, on whether an item purchased or produced should be capitalized and depreciated, or deducted in the year purchased or produced. These are very complex rules that are not very taxpayer friendly but do finally provide guidance.

Provisions that expired on Dec. 31, 2011. The following business and individual provisions expired at the end of last year. Note that Congress may retroactively reinstate some or all of these rules:

Election for itemizers to deduct State and local general sales taxes under Code Sec. 164(b)(5) in lieu of a state and local income taxes
Above-the-line deduction for qualified tuition and related expenses under Code Sec. 222
Treatment of mortgage insurance premiums as qualified residence interest under Code Sec. 163(h)(3)(E)
Above-the-line deduction for up to $250 of certain expenses of elementary and secondary school teachers under Code Sec. 62
Nonbusiness energy property credit under Code Sec. 25C
Adoption assistance programs under Code Sec. 137
Allowance of personal tax credits against regular tax and AMT under Code Sec. 26(a)(2)
Exclusion of 100% of gain on certain small business stock under Code Sec. 1202(a)(4)
Tax-free distributions (up to $100,000 annually for taxpayers 70- 1/2 and older) from individual retirement plans for charitable purposes under Code Sec. 408(d)(8)
Special rules to encourage contributions of capital gain real property for conservation purposes under Code Sec. 170(b)(1)(E) and Code Sec. 170(b)(2)(B)

With the national debt at an all-time high and the economy showing very slight signs of rebounding, there will be few changes in the “Good” category. Once the dust settles from the fall elections, look for more legislative activity.

tags: tax 2012 changes depreciation basis credit veteran adoption amt

Health Care Credit Available for Churches and Not-For-Profit Organizations

Sat, 10 Dec 2011 07:40:42 EST

The IRS sent millions of postcards to small businesses and tax-exempt organizations making them aware of the benefits of the small business health care tax credit. This credit, included in the Patient Protection and Affordable Care Act, is designed to encourage small employers to offer health care coverage for the first time or maintain coverage they already have.

Since this credit became available our firm has taken a close look at our small business clients’ eligibility, both for-profit businesses and non-profit organizations, and we have been able to claim this credit in several instances. Our on-going and long-term business relationships, the fact that we provide a multitude of services to our clients and handle our clients’ needs from accounting services, payroll services, to all tax related filings, to mention a few, made the preliminary testing of eligibility relatively easy. Some of our clients were very surprised that they qualified.

Churches, even though they may not need to file Form 990-T to report unrelated business income, qualify if they meet the eligibility requirements. A church organization which pays at least 50% of health care coverage for some of its employees under a “qualifying arrangement”, has fewer than 25 full-time equivalent employees, and whose average annual wages of its employees is less than $50,000, are eligible to claim and receive the credit.

The mechanics of calculating the credit can be intimidating and cumbersome. What does “full-time equivalent employee” mean? How do we calculate average annual wages? How do we factor in part-time employees or seasonal employees? What is and what’s meant by “the average state premium for the small group market”? The “what and how” may deter many eligible church organizations from claiming the credit.

Those churches which file Form 990-T and have a tax liability this credit offsets the tax liability. The churches which do not have to file at all, this credit is refundable, it is cash in the pocket. But, Form 990-T and Form 8941 need to be prepared and filed to claim the credit.

If you would like to discuss your organizations eligibility, please contact our non-profit tax specialist, Ritva Williamson, CPA, to help you with this particular topic and any other non-profit tax matter you may have.

tags: health insurace tax credit church not-for-profit

Accepting Credit Cards Will Pose Reporting Issues for Businesses

Sun, 13 Nov 2011 10:01:27 EST

In 2008 President Bush signed into law a bill known as The Housing Assistance Tax Act of 2008. This bill put into place billions in tax incentives, including the more highly published first-time homebuyer credit. In the middle of this bill was a new requirement for banks and credit card merchants to report certain payments to the IRS. While the law passed in 2008 the new reporting requirements didn’t kick in until this year.

This new Form 1099-K reporting is aimed to close the tax gap. The difference between what is reported and what is actually earned. The federal government estimates that it loses about $300 billion each year from the tax gap. So, the new 1099-K is designed to track down unreported income.

Starting in 2011, financial firms that process credit or debit card payments and third-party payment processors must send their clients and the IRS an annual form reporting the year’s transactions. The Form 1099-K is very similar to the Form 1099-DIVand 1099-INT given to accountants every year. If you receive a Form 1099-K from your credit card merchant, drop that 1099-K in your tax file because your accountant will be asking for it.

The Form 1099-K will report the gross amount paid out without any adjustments for fees, returns, or mistakes. For instance, Form 1065, US Return of Partnership Income, has been revised. The draft form has new line items. Line 1a requests “Merchant card, third-party payments, including amounts reported on Forms 1099-K. There appears to be a way to adjust the gross amount for returns, allowances, and cash-backs on line 1d. However, this means that there will be issues reconciling the forms against income actually received.

Accurate recordkeeping and separating credit cards and third-party network payments has become a must. Many businesses which take credit card payments may need to revise their bookkeeping practices to make the reconciliation easier. Also, those taxpayers who sell items through eBay and use PayPal may receive the Form 1099-K and need to file Schedule C.

There is currently an exception for the de minimis payments with respect to third party network transactions. 1099-K is required only when a merchant has at least 200 payment transactions a year or the aggregate payments exceed $20,000. As mentioned above, the goal is to catch income that is going unreported to the IRS.

According to IRS Commissioner Doug Shulman, “Better information reporting helps the tax system work better by ensuring that everyone pays what they owe. The new law gives us an important new tool closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”

If you suspect that you and your business will receive 1099-K(s) please contact us before the year end. We will be happy to start the reconciliation process with you and help you revise your bookkeeping before the tax filing season is in full bloom.

tags: credit cards business 1099-K revenue IRS

Big Depreciation Deductions-Take Them While You Can!

Mon, 24 Oct 2011 16:19:08 EST

Businesses in the know are enjoying unprecedented depreciation deductions for qualifying asset purchases. Unfortunately, these historic deductions are currently set to expire at the end of the 2011. We will highlight some planning ideas here, and would be glad to answer any questions these ideas might evoke or further explain the details of them.

First, let me say that this is not the final word on deductions for 2011. President Obama has sent the “American Jobs Act of 2011” to Congress and with two months left before yearend, there will surely be some additional changes.

If you have made qualifying asset purchases this year such as equipment, furniture, computers, etc., you will be able to write those assets off through depreciation much more rapidly in 2011 than 2012. If you are trying to decide whether to make asset purchases before yearend or not, this information may help with the decision. There is a 100% write-off, referred to as “bonus depreciation”, for qualified property placed in service before January 1, 2012 (Jan. 1, 2013 for certain aircraft and long-production-period property). This write-off percentage drops to 50% in 2012. The 100% bonus depreciation is allowed regardless of when during the year the asset is purchased. What this means is that you could make the purchase on December 27 and still depreciate the entire amount provided you placed the asset into service.

There are three qualifications for 100% bonus depreciation of an asset purchase. First, the asset, such as those listed above, must be fairly short lived and have an IRS determined life of 20 years or less. The asset may also be computer software other than customized computer software, qualified leasehold improvement property or certain water utility property. The second qualification is that the asset is placed in service after September 8, 2010 and before January 1, 2012 (Jan. 1, 2013 for certain aircraft and long-production-period property). And the final requirement is that the property’s original use begins with your business which generally means a new asset. Converted property can also satisfy the original use component if it was new to you as a personal use asset but then was converted to business use. An example of this would be your new pickup truck used for personal driving, that after a year you started using exclusively for your landscaping business. Reconditioned property can also satisfy the original use requirement if it is in the form of additional capital expenses to recondition or rebuild an asset you already own. If you purchase a reconditioned or rebuilt asset, it will not qualify for the 100% bonus depreciation. Qualified restaurant property and qualified retail improvement property are not qualified property for purposes of the 100% bonus depreciation deduction either.

For vehicles, heavy SUV’s are also included in the 100% bonus depreciation deduction, subject to certain qualifications. Heavy SUV’s are those built on a truck chassis and weighing more than 6,000 pounds, making them exempt from the luxury-auto dollar caps. The SUV must also be otherwise qualified property and business use must be greater than 50%.

One caution to taking the 100% bonus depreciation in 2011 has to do with net operating loss carryforwards from prior years. If you experienced losses in past years and elected to carry those forward to offset future taxable income, the 100% bonus depreciation may not be the best idea. This is because the depreciation could reduce your income to less than the available net operating loss carryforward and you would lose the balance of the net operating loss carryforward, while also not having any depreciation to use in 2012. You and your accountant should review all the options to help determine the best use of depreciation and/or net operating losses.

Before 100% bonus depreciation came into existence, we used code section 179 to fully write-off assets in one year. This is still available and most often used when used assets are bought and placed into service. For 2011, the maximum Sec. 179 expensing deduction is $500,000 and is reduced (phased-out) once you purchase over $2,000,000 in assets. The maximum deduction will drop to $125,000 for 2012, and the phase-out will begin at $500,000.

Section 179 expensing is limited to the taxable income from all your trades or businesses, so if the business for which the asset was purchased does not have net income or enough net income to absorb all the expense, but you have other business activities that do, it is possible that you will be able to use the expensing election in the current year. Also any unused amounts can be carried forward to be used in future years. You might consider taking advantage of 2011’s higher expensing allowance by electing to expense the asset in 2011 and having the larger amount available to carry forward for future years expensing.

The Small Business Act of 2008 carved out a limited time exception for 2010 and 2011 only, allowing for up to $250,000 of qualified real property to be expensed as Section 179 property. After 2011, the real property will have to be depreciated over a 39 year period, a return to prior treatment. Qualified real property as defined for this purpose is qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The property must be depreciable, be acquired for use in an active trade or business, and cannot be ineligible property. These rules get complicated so if you feel that you may have purchased property that could meet these requirements, please call us so that we can discuss the specific requirements for possibly expensing your property. Since this election is also a Sec. 179 expensing election, it will be combined with other assets purchased during 2011 in regards to the limit on expensing as well as the beginning phase-out amount. Lastly, there is no carryover to future years for an unused expensing deduction for real property

Depreciation is just one of the possible deductions available to businesses for 2011. There are many more deductions and credits which are not expiring in 2011 that may also be available to your business. Getting the full advantage of these deductions and credits may take some planning, but it can be well worth the time in current tax savings as well as increased future deductions.

tags: depreciation deductions business 2011