Forgot Something on Your Tax Return? It’s Not Too Late to Amend the Return

If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can include a number of issues:

• Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation.
• Overlooking an item of income or receiving a corrected 1099.
• Forgetting about a deducible expense.
• Forgetting about an expense that would qualify for a tax credit.

These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2011 return or prior year returns.

Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.

1. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Thus, with the exception of amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2009 through 2011. Some states have a longer statute.
2. Generally, you do not need to file an amended return to correct math errors. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms.
3. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
4. If you owe additional 2011 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
5. When amending multiple returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed.
6. If the changes involve another schedule or form, it must be completed and included with the amended return. In addition, it may be appropriate to include documentation to avoid subsequent correspondence from the IRS or state agency.
7. A detailed explanation of the changes must also be attached. This is required to explain to the processing staff the reason for the amendment. In insufficient explanation can lead to additional correspondence and delays.
8. Depending on why you file an amended federal return, you may be required to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, you will need to amend the state return as well as the federal.

An amended return can be more complicated than the original, so please contact our office for assistance in preparing your amended returns.

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How Business Website Expenses Are Deducted

With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. But some questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes.

Purchased Websites – If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the three-year period, beginning with the month in which the website is placed in service. For 2012, non-customized computer software placed in service during the year qualifies as Sec 179 property and can be written off in full up to the limits of this special expense deduction.

In-House Developed Websites - If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid, or accrued, depending on the taxpayer's overall accounting method. Or, as an alternative, the costs may be amortized under the three-year rule.

Non-Software Expenses – Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible.

Advertising Content – Advertising costs are generally currently deductible. Thus, the costs of website content that is advertising are generally, currently deductible.

Cost Before Business Starts – Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts.

As you can see, deducting the expenses of a website can be complicated. Please call our office if you have questions.

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Is Your Hobby a For-Profit Endeavor?

The tax treatment for a hobby is substantially different than it is for a business, which sometimes makes it difficult to distinguish one from the other. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby. Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

This article provides information that is helpful in determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.

Is your hobby really an activity engaged in for profit? In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Has the activity made a profit in past years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be for profit if it made a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses). If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts and S corporations. It does not apply to corporations other than S corporations.

Hobby deductions – If it is determined that your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A. They must be taken in the following order and only to the extent stated in each of three categories:

• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
• Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category.
• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories.

If you have questions related to your specific business or hobby circumstances, please give our office a call.

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Is Your Child a Full-Time Student?

If you have a qualified child you can claim an exemption for that child on your tax return, which results in a $3,800 deduction for 2012 (up from $3,700 in 2011). Depending upon your tax bracket, that deduction can produce a substantial tax savings. To be treated as a qualified child, a child must be under the age of 19 or a full-time student under the age of 24.

Generally, children under the age of 19 who have investment income, such as interest and dividends, are also subject to the so-called “kiddie tax,” which, except for small amounts, causes the child’s income to be taxed at the parent’s marginal rates. The “kiddie tax” was implemented several years ago to curtail parents from shifting income to a child to take advantage of the child’s lower tax rates. Full-time students under the age of 24 who are not self-supporting are also subject to the “kiddie tax” rules.

So what is the definition of a full-time student? Well, the tax law definition is more liberal than you might imagine. A full-time student is one enrolled for some part of five calendar months (whether or not consecutive) in a given year for the number of hours or courses considered full-time attendance by the school that the student is attending.

The enrollment in school needn't be for full months—or for five consecutive months. So, if the student is enrolled from mid-February to mid-June, the five-month qualification is met. On the other hand, if the student is enrolled from September to December or February to May, the student has been enrolled for only four months, and there must be full-time enrollment during at least one other month during the calendar year to meet the definition.

The full-time student designation also applies when claiming the lucrative American Opportunity Education Credit, which is based on payment of college tuition and related fees. For all but certain qualified children, claiming the credit only requires attendance for an academic period (semester, quarter, etc.). In order for parents to claim the credit for a qualified child who is over the age of 18 and under the age of 24, the qualified child must also be a full-time student.

If you have questions, please contact our office.

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Identity Theft and Tax Fraud Are Growing Problems

Cyber criminals have been using stolen identities to file tax returns and obtain fraudulent refunds. Tax preparers have reported an increase in e-file rejections because the taxpayers’ or their children’s SSNs have already been used in a previously e-filed return, which results in the e-filed return being rejected.

Generally, identity thieves use personal data to steal financial accounts and run up charges on the victim’s existing credit cards. However, identity theft can also affect your tax records as follows:

• Undocumented workers or other individuals use your Social Security number to get a job. The employer then reports W-2 wages the workers earned under your Social Security number to the IRS. When you file your return based on your real W-2 income, it appears that you failed to report part of your income on your return.
• An identity thief files a return using your Social Security number to claim refundable credits. This can be lucrative for cyber thieves who take advantage of the Earned Income Credit or the American Opportunity Education Credit, both of which are refundable credits. Generally, credits can only be used to offset a tax liability. However, these two credits are refundable even if the taxpayer has no tax liability.
• An identity thief may also use your Social Security number or your children’s SSN to claim additional tax return exemptions. Each exemption claimed on a return provides a deduction worth $3,800 (2012) and can be used to claim head of household status.

How do the thieves obtain this information? Some buy it from other thieves who collect identity information by hacking into firms that have those records or by using ingenious ways to trick you into disclosing the information. This is often done by sending you an e-mail disguised to look like an e-mail from a trusted source. This practice is referred to as “phishing.” An example of phishing is an e-mail with a fake IRS header claiming to have a refund for you and directing you to a site that requires you to enter your SSN and other information to verify your claim for the refund.

Don’t be a cyber-victim. Here are some tips you should know about phishing scams.

1. The IRS and legitimate businesses never ask for detailed personal and financial information such as Social Security numbers, PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

• Do not reply to the message.
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
• Do not click on any links.

If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides links to additional resources that can help. Visit the IRS website (www.irs.gov) and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is www.irs.gov. Do not be confused, misled or respond to sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS, but you suspect he or she is not an IRS employee, contact this office immediately. You should also call the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you receive a notice or letter from the IRS or state tax authorities, you should always contact our office. This is especially true if you believe someone may have used your Social Security number fraudulently or stolen your identity.

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Read This before Tossing Old Tax Records

Now that you’ve completed your taxes for 2011, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns; and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of the assets.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the record keeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25% of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

For example: Sue filed her 2011 tax return before the due date of April 17, 2012. She will be able to dispose of most of her records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category:

• Stock acquisition data — If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
• Stock and mutual fund statements — Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements at least four years after the final sale.
• Tangible property purchase and improvement records — Keep records of home, investment, rental property or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

Have questions about whether or not to retain certain records? Give our office a call first. It is better to be sure before discarding something that might be needed down the road.

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May 2012 Dates to Remember

May 2012 Individual Due Date Reminders

May 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 10. 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.

May 31 - Final Due Date for IRA Trustees to Issue Form 5498

Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2011. The FMV of an IRA on the last day of the prior year (Dec 31, 2011) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2012. If you are age 70½ or older during 2012 and need assistance determining your RMD for the year, please give this office a call. Otherwise, no other action is required and the Form 5498 can be filed away with your other tax documents for the year.

May 2012 Business Due Date Reminders

May 10 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the first quarter of 2012. This due date applies only if you deposited the tax for the quarter in full and on time.

May 15 - Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, May 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for April 2012. This is also the due date for the non-payroll withholding deposit for April 2012 if the monthly deposit rule applies.

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Charity Purchases and Auctions

A regular form of fundraising by charitable organizations consists of sales or auctions of property or services at a price in excess of value. These are referred to as “quid pro quo” contributions or dual payments made that consist partly of a charitable gift and partly of consideration for goods or services provided to the donor.

Quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, etc., and are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution.

Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the good or services purchased.

Example #1—A taxpayer purchases a cookbook from a charity for $100. The charity provides the taxpayer with a good faith estimate of $20 for the value of the book in a written disclosure statement. Thus, the taxpayer’s charitable deduction is $80 ($100 minus the $20 value of the book).

Example #2—A taxpayer attends a charity auction. The charity provides a catalog of the items for auction and a good-faith estimate of the value of each item. The taxpayer is the successful bidder for a vase valued at $100 in the catalog, for which the taxpayer bid and paid $500. The taxpayer’s charitable deduction is $400 ($500 minus the good-faith valuation of $100).

Example #3—A taxpayer pays $40 to see a special showing of a movie for the benefit of a qualified charity. The ticket read “Contribution $40”. If the regular price for the movie is $10, the contribution would be $30 ($40 minus the regular $10 ticket price).

If you made or are considering making a quid pro quo purchase from a charitable organization and have questions relating to the amount that will represent a charitable contribution, please give our office a call.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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