Tax: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
December 17th, 2010

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Tax Relief Act) is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses.  Click here to read the complete article on the Tax Relief Act. 

Posted by Laurie Marson   |  0 Comment(s)  |  Leave a Comment

Tax: Reporting of 'Specified Foreign Financial Assets'
December 17th, 2010

Before year end, calendar year taxpayers need to evaluate their foreign investments and consider the potential increased compliance costs and related U.S. compliance risks where they have holdings in foreign investment type assets.  Any specified foreign financial assets held during any date in 20ll will be subject to the disclosure requirements.

• WHO is subject:  individuals (but may be expanded to entities by regulations).
• WHAT is subject:  any "specified foreign financial asset" which includes foreign bank or securities. accounts, any stock or security issued by a non-US person, any financial instrument or contract held for investment where the issuer or counterparty is a non-US person and any interest in a foreign entity with total value of all accounts of $50,000 or more.
• WHEN is effective date:  Tax filing year 2011 for most individuals.
• WHERE is this reported:  Form 1040 package.
• WHY should taxpayers comply:  potential penalties are substantial and statute of limitations may be involuntarily extended.

In summary, the Internal Revenue Service is continuing increased international tax compliance and enforcement activities and FATCA is another tool that it can use where individuals are purposely attempting to evade U.S. tax.  Unfortunately, a very large number of honest taxpayers who are trying to comply with increasingly complex tax regulations have even more opportunities to make a mistake and be harshly penalized.  If you have foreign investments, now more than ever it is important that you seek the advice of a qualified tax professional to make sure that you are providing all the required information with your annual tax return.

To read the complete article regarding this topic please click here.

The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals. 

Posted by Laurie Marson   |  0 Comment(s)  |  Leave a Comment

Tax: Year-End Tax Tips for Business Owners
December 9th, 2010

Hire a worker who has been unemployed for at least 60 days before year-end if you are thinking of adding to payroll soon. Your business will be exempt from paying the employer's 6.2% share of the Social Security payroll tax on the formerly unemployed new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire on the payroll for a continuous 52 weeks, your business will be eligible for a nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This credit will be taken on the business's 2011 tax return. In order to be eligible, the formerly unemployed new-hire's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowance.

Make expenses qualifying for the $500,000 business property expensing option. The maximum amount you can expense for a tax year beginning in 2010 is $500,000 of the cost of qualifying property placed in service for that tax year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2010 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). Note that at tax return time, you can choose not to use expensing (or bonus depreciation) for 2010 assets. This is something to consider if tax rates go up for 2011 and/or future years, and you would rather have more deductions after 2010.

Set up a self-employed retirement plan if you are self-employed and have not done so yet.

Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation's losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

Consider whether to defer cancellation of debt (COD) income from the reacquisition of an applicable debt instrument in 2010. The business can elect to have the COD income included in gross income ratably over five tax years beginning with the fourth tax year following the tax year in which the repurchase occurs (i.e., beginning with 2014).

These are just some of the year-end steps that can be taken to save taxes. If you are interested in implementing any of these ideas or if you have questions about your specific situation, please call your Decosimo tax professional as soon as possible.  If you do not currently have a tax advisor, we would love to introduce ourselves.  Give our office a call. 

Posted by Laurie Marson   |  0 Comment(s)  |  Leave a Comment

Tax: Year-End Tax Tips for Individuals
December 9th, 2010

Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Do not forget that you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids (2010 is the last year that FSAs can be used for nonprescription drugs).

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities more than 30 days later, otherwise the loss will not be recognized for tax purposes. It may be advisable for us to meet to discuss year-end trades you should consider making.

Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2010 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or will not sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2010. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2010, but the withheld tax will be applied pro rata over the full 2010 tax year to reduce previous underpayments of estimated tax.

Make energy saving improvements to your main home, such as putting in extra insulation or installing energy saving windows or buying and installing an energy efficient furnace, and qualify for a 30% tax credit. The total (aggregate) credit for energy efficient improvements to the home in 2009 and 2010 is $1,500. Additionally, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.

Convert your traditional IRA into a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free, but the conversion will increase your adjusted gross income for 2010. However, you will have the choice of when to pay the tax on the conversion. You can either (1) pay the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax on the conversion when you file your 2011 return in 2012, and the other half when you file your 2012 return in 2013.

Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2011, and (2) held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. One of our Decosimo tax professionals can provide more details if you are interested.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. A temporary tax law change waived the RMD requirement for 2009 only, but the usual withdrawal rules apply in full force for 2010. So, individuals age 70 1/2 or older generally must take the required distribution amount out of their retirement account before the end of 2010 to avoid the penalty. If you turned age 70 1/2 in 2010, you can delay the required distribution to 2011, but if you do, you will have to take a double distribution in 2011—the amount required for 2010 plus the amount required for 2011. Think twice before delaying 2010 distributions to 2011—bunching income into 2011 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.

Make annual exclusion gifts before year-end to save gift tax (and estate tax if it is reinstated). You can give $13,000 in 2010 or 2011 to an unlimited number of individuals free of gift tax. However, you cannot carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to save taxes. If you are interested in implementing any of these ideas or if you have questions about your specific situation, please call your Decosimo tax professional as soon as possible.  If you do not currently have a tax advisor, we would love to introduce ourselves.  Give our office a call. 

Posted by Laurie Marson   |  0 Comment(s)  |  Leave a Comment

Tax: Employees vs. Independent Contractors
December 2nd, 2010

One of the most important tax decisions and employer must make is determining whether a worker is an employee or an independent contractor. The answer affects who remits employment taxes, the amount of the taxes, benefits to which the worker is entitled, and other administrative requirements.

For employees, employers must withhold federal income tax and the employee's share of FICA and Medicare, as well as pay unemployment tax and the employer's share of FICA and Medicare. For independent contractors, employers are not required to remit any taxes on wages paid because independent contractors are liable for federal income tax withholding, FICA, and Medicare.

Common Law Test

For federal payroll tax purposes, the Common Law Test determines if individuals are classified as employees or independent contractors by examining the amount of control exercised over the workers. The following factors are analyzed:

1. Behavioral control: Who directs the work? Does the employer provide training and instructions?
2. Financial control: How much is invested in the workers? Are workers reimbursed for out-of-pocket expenses? Are workers guaranteed a regular wage amount? Do workers make decisions that affect their own profit or loss?
3. Type of relationship: What is the intent of the parties? Are there employment contracts? Are workers hired for a definite time? What benefits are available to workers?

By using these tests, the employer will consider what must be done (results) and how it is to be done (method). Independent contractors have the legal right to control the method but not the results. Employees have discretion over what tasks are performed and how the tasks are to be completed but do not have the legal right to control either.

Misclassification

The IRS recently increased efforts to ensure workers are properly classified and that employment taxes are correctly remitted. An employer may have several incentives to misclassify employees as independent contractors. The most overwhelming motivator is reduced costs since independent contractors do not require:

1. FICA & Medicare payments (7.65% wage savings)
2. Income tax withholding (independent contractors pay their own income taxes)
3. Federal & State Unemployment Tax payments
4. Verification of citizenship/proper work visas
5. Health insurance, retirement benefits and other fringe benefits

Section 530 Safe Harbor

Section 530 of the 1978 Revenue Act protects employers from liability for past due federal employment taxes that would result if independent contractors are reclassified as employees by the IRS. Section 530 will control how a worker is classified for federal payroll purposes, even if the worker is an employee under the common law test.  In order to have this protection, the employer must have all of the following:

1. Reasonable basis: Includes a prior IRS audit, court case, or standard industry practice as reason for treating the individual as an independent contractor.
2. Substantive consistency: The worker and individuals in substantially similar positions must never be treated as employees.
3. Reporting consistency: All required 1099s filed. Filing W-2s will automatically bar Section 530 relief.

Eligibility for Section 530 protection is evaluated annually. If all criteria are met, the Section 530 safe harbor applies automatically.

Employee Test under the Fair Labor Standards Act (FLSA)

Also known as the "Wages and Hours Bill", this legislation sets standards for minimum wage and overtime hours based on U.S. Supreme Court precedent. The employee test has a control factor similar to the common law test, and also examines the worker's dependence on the payor, the extent to which the worker's services are an integral part of the employer's business operations, the amount of skill required for the job, and the permanency of the job. Under this test, a worker can be an employee of more than one employer. It is also possible that a worker could be an employee under FLSA rules but an independent contractor under the common law rules.

State Classification Tests

Generally, state employee classification tests are broader than the common law test. Usually, an individual is an employee unless one of the following apply:

1. The employer does not direct or control how the services are performed
2. Services are performed outside the usual course of business or away from other business locations
3. The individual is customarily engaged in an independent trade, business, or profession

Georgia defines an employee as a person who performs services under the direction and control of an entity which controls the wages and terms of employment (O.C.G.A. Sec. 48-7-100).

Tennessee follows the common law test and lists specific capacities in which a worker is considered an employee (T.C.A.  Sec. 50-7-207(b)). 

Posted by Audra Jones in Tax   |  0 Comment(s)  |  Leave a Comment