1099-K Business Return Reconciliation Eliminated

The Housing and Economic Recovery Act of 2008 required third-party payment entities, such as credit card companies, to begin filing informational returns with the IRS reporting merchant card transactions, such as credit and debit card payments. The purpose was to give the IRS the ability to match a business’s credit and debit card sales with the amount the business reported on their tax return.

This reporting requirement began for the 2011 tax year using the new IRS Form 1099-K. In addition, the IRS added a line to the various 2011 business returns to separately report income from credit and debit transactions. However, for the 2011 tax year, the IRS instructed businesses to leave that line blank, allowing a one-year grace period to modify their bookkeeping and recordkeeping to enable them to reconcile their income between credit and debit card income and other sources of income, such as checks and cash, for 2012.

This reconciliation requirement added a substantial bookkeeping burden to businesses—especially small businesses—and many trade and business associations across the nation have been lobbying the government to drop the 1099-K reconciliation requirement.

On February 9, in a letter to the National Federation of Independent Businesses, Steven Miller, Deputy IRS Commissioner, stated that the 1099-K entry line will be dropped from the 2012 and all future business returns, eliminating the need for businesses to reconcile their incomes with the 1099-K informational reporting.

Even though the reconciliation requirement is being eliminated, a business owner must recognize that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. The IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at an estimated gross income for the various types business. This will help them select their audit targets.

If you have any questions, please give our office a call.

Read More

Reporting Stock Transactions Becomes More Complicated

Beginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired in 2011 and subsequent years and to include that information on the information-reporting document 1099-B.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

This new system of reporting is not a solve-all solution for the IRS because it does not have the cost or basis information for securities acquired prior to 2011 or for securities acquired by gift or inheritance. Special adjustments are required for wash sales and when sales can be attributed to a prior purchase of the same security. Some brokers also may report on Form 1099-B the cost information, if known, for stocks purchased prior to 2011.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included on the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):

• Long-term sales where the broker IS reporting the cost of the security
• Short-term sales where the broker IS reporting the cost of the security
• Long-term sales where the broker IS NOT reporting the cost of the security
• Short-term sales where the broker IS NOT reporting the cost of the security
• Long-term sales for which no 1099-B is issued
• Short-term sales for which no 1099-B is issued

To accommodate separating the transaction into the six categories, the IRS has provided a new Form 8949. A separate 8949 must be used for each category. This will allow the IRS to match and verify transactions where the brokerage firm supplied the cost basis.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call our office if you have questions relating to reporting your security sales this year.

Read More

Good News – Payroll Tax Cut Extended through 2012!

Congress gave all wage earners a short-lived 2012 reprieve by temporarily extending the 2% payroll tax cut though February of 2012.

The payroll tax, frequently referred to as FICA or OASDI on your paycheck, has historically been 6.2%. This is the tax that funds the Social Security Administration. For 2011, as an economic stimulus measure, Congress temporarily reduced the rate to 4.2%. They also provided self-employed individuals with a corresponding two percentage point reduction by lowering the Social Security portion of the SE tax from 12.4% to 10.4%.

Congress had previously extended this 2% tax cut and now has decided to continue this reduction in payroll tax through the end of 2012.

If you have any questions, please give our office a call.

Read More

Recently Enacted Tax Breaks for Small Businesses

Keeping track of tax changes these days is quite a task. Congress is constantly tweaking the tax laws in an effort to stimulate the economy and deal with the budget deficit. The following is a compilation of recent changes to keep you up date.

• Cell Phones No Longer Listed Property – This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property. This is effective for tax years beginning after Dec. 31, 2009.
• Business Owners’ Health Insurance Deduction – A one-year law change allowed 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. For years before and after 2010, the deduction is used only as an above-the-line deduction from gross income on the self-employed individual’s income tax return and does not affect the SE tax.
• Medicare B as an SE Health Insurance Deduction – The IRS very quietly reversed its position related to the deductibility of Medicare B premiums as an SE health insurance deduction. The 2009 Form 1040 instructions indicated that it was not deductible, while the 2010 instructions reversed that position to indicate that it is. The 2011 instructions also permit voluntarily paid Medicare premiums to be treated as SE health insurance premiums.
• Payment Card and Third-Party Payment Transactions – Beginning in 2012 (for 2011 returns), payment settlement entities (e.g., a bank) will have to make an annual information report in settlement of reportable payment transactions (e.g., a credit or debit card transaction) and transactions settled through third-party payment networks (e.g., PayPal) that settle online transactions. The report is made to the merchant and the IRS stating the gross amount paid to the merchant during the previous calendar year. Form 1099-K will be used for this reporting.

The IRS had intended to require business owners to reconcile credit and debit card income with the gross income reported on business returns beginning with 2012 returns filed in 2013. However, in February of 2012, the IRS announced that they were dropping that requirement.

Even though the reconciliation requirement is being dropped, business owners should be aware that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. On a cautionary note, the IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at the estimated gross income for various types of businesses. This will help them select their audit targets.

• Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000). The $5,000/$50,000 amounts return for tax years beginning in 2011.
• Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation.

For tax years beginning in 2010 and 2011, a taxpayer is allowed to expense (under Section 179) up to $500,000 (up from $250,000 under prior law) of the cost of qualifying business property, which includes machinery, equipment, and certain software placed in service during the year. For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit. The maximum Sec. 179 deduction and investment cap amounts for 2012 are $139,000 and $560,000, respectively.

• Certain Real Property Can Be Expensed – Generally, real property is not eligible for Sec 179 expensing. However, for property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of expensed property can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
• Bonus First-Year Depreciation Extended and Expanded – Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years. Congress extended the 50% rate for qualifying property purchased through September 8, 2010 and doubled the first-year bonus rate to 100% for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain property). The bonus rate for 2012 (through 2013 for certain property) will again be 50%.
• Lower SE Tax Rate – Beginning in 2011, Congress authorized a 2 percentage-point reduction in the employee’s portion of the payroll tax (OASDI) and a corresponding reduction in the SE tax for self-employed individuals. Thus, the overall SE tax rate dropped from 15.3% to 13.3% for 2011. The reduction was subsequently extended to apply to all of 2012.
• Research Credit – The research tax credit expired at the end of 2009. As part of the 2010 Tax Relief Act, Congress reinstated the credit for 2010 and extended it through 2011.
• Small Employer Health Insurance Credit – The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for their employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.
• Credit for Hiring Veterans – The VOW to Hire Heroes Act of 2011 added two new categories to the existing qualified veteran targeted group for the Work Opportunity Credit (WOTC). Employers may claim the WOTC for veterans certified as qualified veterans and who begin work before January 1, 2013. The credit can be as high as $9,600 per qualified veteran, but the amount of the credit will depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. Non-profit organizations are also eligible to claim this credit. All employers must obtain certification from their respective state workforce agency that an individual is a member of the targeted group before the employer may claim the credit.
• Other Provisions with Limited Application – Calculations of the built-in gains tax on C-corporations converted to S-corporations, special rules for long-term contract accounting, the extension of certain business energy credits, and the limitation of the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

If you have questions related to any of these tax benefits or wish to schedule a tax planning appointment to see how your business might benefit, please give our office a call.

Read More

The Latest Scam—Don’t be a Victim!

Last month, we cautioned you about Internet scams aimed at tricking you into divulging information that will compromise your identity. That article described how Internet crooks disguise themselves as the IRS in an attempt to steal your identity.

The IRS is not the only disguise these scammers use. They pretend to be attorneys representing estates, lottery payouts, and other such deception to draw you into their web.

Here are some good rules to follow:

1. If it’s too good to be true, it probably isn’t true.
2. If you receive a request for financial information via the Internet, it is probably a scam.
3. Never give your financial information over the Internet except when you are absolutely sure with whom you are dealing.

Take this example of how clever scammers can be. The latest scam is an e-mail requesting individuals to update their Intuit accounts. The e-mails claiming to be from Intuit ask recipients go to what is supposed to be an Intuit web site and update their tax return information. The e-mail includes an Intuit logo in the header. The scammer selected Intuit as the bait because so many individuals and small businesses use their Quicken and Quickbooks products.

So do not be fooled by this scam or any others that do not make sense. Do not be hasty; stop and carefully consider what you are doing before you click on a link to a potentially dangerous web site. These people are clever and can disguise their scams well.

If you ever have questions related to suspect e-mails, please call our office before responding to them.

Read More

Using Direct Deposit is a Smarter Option for your Refund

Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 79 million people had their tax refunds deposited directly into their bank accounts in 2011. It’s a secure and convenient way to get your money in your pocket faster.

• Speed—When combining e-file with direct deposit, the IRS will likely issue your refund in as few as 10 days.
• Security—Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail.
• Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen.
• Convenience—There’s no special trip to the bank to deposit a check!
• Options—You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions.
• Fund Your IRA—You can even direct a refund into your IRAS account.

To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have them available at your appointment.

If you have questions, please give our office a call.

Read More

March 2012 Due Date Reminders

March 2012 Due Date Reminders – Individual

March 12 Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 12.

Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

March 15 Time to Call For Your Tax Appointment

It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.

Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.

Even if you think you might need to go on extension, it is best to prepare the return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.

We look forward to hearing from you.

March 2012 Due Date Reminders - Business

March 15 Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in February.

March 15 Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in February.

March 15 Corporations

File a 2011 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.

March 15 S-Corporation Election

File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2012. If Form 2553 is filed late, S treatment will begin with calendar year 2013.

March 15 Electing Large Partnerships

Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date is effective for the first March 15 following the close of the partnership’s tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.

Read More