YEAR-END BUSINESS TAX NEWSLETTER
Dear Valued Client and Colleagues: January 24, 2012
2011-2012 The year of ???? Last year we started this letter with so much uncertainty—this year, very little has changed from the prior year…We asked the question—“1099s for everyone? What is that?” You may have heard that there was enough of an outcry on that it did go away! VERY GOOD! We also stated “Bush tax cuts expiring?” As I am certain you are aware, that was extended for 2011 and 2012—but, we will face that issue again a year from now! How long has it been since you have heard anyone referring to the “new, kinder, gentler IRS”? The only way that is said now is in a sarcastic tone!
Minimizing future tax bills will require a balancing act, but could also be a planning opportunity for taxpayers who have the ability to control the timing and/or nature of their income. Expect the rates to increase in 2013. With that in mind, you may want to accelerate income into 2012. Your wisest move is to talk to your CPA as soon as possible to develop your best tax plan. We, also, encourage you to share this letter with others so they, too, will be informed on the most recent tax developments. If you would like further information, please contact our office at (904) 880-3200 or through our website, www.dkbrierycpa.com.
IRS TARGET ISSUES
Shareholder compensation for Subchapter S Corporations—The IRS continues to examine S Corporation returns that reflect no or unreasonably low compensation to the shareholders. IRS computers now have been programmed to check for officer compensation on the appropriate line. If you have concerns in this area, please contact me immediately.
Co-mingling of Funds—Do you pay your personal bills from your corporation? A corporation must keep its funds separate from its owners’—corporate money deposited to the corporate account, corporate bills paid from the corporate account; personal bills paid from the personal account and personal money deposited into the personal account. DO NOT CO-MINGLE! Same goes for charge card! Deposit ALL business revenue into the business account. In the event of an IRS audit or a lawsuit (personal or corporate), failure to act as a corporation could cause the corporate walls to be collapsed (NOT treated as a corporation). This could substantially increase liability to you, the owner—whether it is tax liability or personal damages! It is good business practice to always keep the personal and business separate, regardless of the type of entity!
All Income Reported?—During an audit, the IRS attempts to verify that ALL income was reported. This can be done by requiring identification of the source of ALL deposits. They may open a personal audit to identify your source of funds.
Independent Contractor vs. Employee—The crackdown by the IRS continues on misclassified workers—i.e. workers classified as contract labor rather than correctly classified as employees. During 2011, the IRS came out with a “Voluntary Classification Settlement Program (VCSP) to assist employers in beginning proper classification. Under certain conditions, an employer may be able to apply under the VCSP, pay a substantially reduced tax, and begin treating those workers as employees. In 2010, the IRS commenced its “employment tax audit initiative” to audit up to 2,000 random employers per year for a 3-year period. The program is expected to lead to additional employment tax audits in the future. Misclassification of workers can lead to SUBSANTIAL tax bills! If you have concerns in this area, you may want to consider the VCSP as it will not be available once you receive notification for audit.
Focus on Payroll Tax Audits—Focus is on 4 primary areas, in addition to worker classification:
a) Fringe Benefits—Determination whether exclusion of the benefit is proper, or if it should have been included in wages—thus, increasing payroll taxes..
b) Officer compensation—Determination of reasonableness—may be too high or too low! (see pg 1).
c) Employee Expense Reimbursement Plans—To be excluded from compensation, reimbursements must satisfy the law’s exclusion from employee compensation—otherwise, the company could be required to treat as wages—thus, increasing payroll tax. They MUST 1) be under an accountable reimbursement plan, 2) be connected with the business (not personal in nature), and 3) have adequate substantiation of the expense. Excess reimbursements must be repaid.
d) Failure to File—including not filing due to paying employees in cash with no reporting!
Travel, Meals & Entertainment, Gifts, and Automobile Expense—Always have been target areas, but are now coming under extra scrutiny! These deductions require very detailed support. Failure to do so can result in the deduction being disallowed.
Travel—Only the business portion is allowed (personal travel expenses must be omitted). Expenses for an accompanying non-employee spouse are not permitted.
Meals & Entertainment—Maintain all receipts, documenting dates, attendees, and business purpose. It would be helpful to enter a memo of the same on your books or check stub.
Gifts—Maintain receipts, documenting the recipient and the business purpose on each. Gifts in excess of $25 are not deductible.
Automobile Expense—The standard 2012 mileage rate for business purposes is 55.5¢ per mile. In addition to the standard mileage reimbursement, a taxpayer can also deduct parking, fees, and tolls incurred due to business. One may also deduct the business % of interest and taxes relating to the purchase of the automobile.
Shareholder Loans & Minutes of Annual Meetings—Document all major transactions and business decisions in the minutes of the annual meeting of the shareholders. Examples include 1) shareholder compensation,2) retirement plan contributions, 3) payment of health insurance for employees (including shareholders), 4) adoption of cafeteria (Section 125) plans, retirement plan, or high deductible insurance plan, 5) shareholder loans, 6) large asset purchases (buildings, vehicles, etc.), 7) long-term contracts, and 8. any other major event. A signed promissory note with reasonable interest rate and terms of repayment must document a loan to the corporation. If assistance is needed, please contact our office.
Record Retention—Generally, keep all business receipts, invoices, bank statements, charge card statements and business records for a minimum of 7 years. A return can generally be audited for 3 years after the later of the due date (including extensions) or date filed. The IRS can sometimes go back further. Tax returns, receipts for fixed assets (items on the depreciation schedule), real estate purchases, corporate and business formation documents, Subchapter S approval letters, federal and state identification numbers, etc. should be held permanently (or at least as long as it could be applicable) . Any record for any item that may affect a future tax returns should be retained for a minimum of 5 years past the filing of the tax return that is affected (i.e. any credit carryforward).
IRS Enforcement—Random line-by-line audits of small corporations will start soon. The IRS will be looking at companies with assets of less than $250,000 to find pockets of noncompliance.
PENALTIES ON TAXPAYERS AND PREPARERS
Accuracy Penalty—A 20% accuracy penalty may be assessed on both individuals and corporations for substantially understated tax where there is (or was) no substantial authority. This is defined as exceeding the greater of $5,000 or 10% of the tax required to be shown on the return for that year.
Preparer Penalty—will be assessed on preparers for any return resulting in an understatement of liability due to a position that the preparer knew or reasonably should have known).
Informational Reporting Penalties—A penalty may be imposed for failing to file correct and timely Forms 1099. The penalty is $30 per form if less than 30 days late, $60 if filed before August 1, and $100 per form if later.
Penalty for Late Filing of Forms 1120 & 1065—$195 per month, per partner or shareholder
IDENTITY THEFT RED FLAGS, and E-MAIL SCAMS, ETC.
Identity Theft Red Flags and Notices of Address Discrepancy—If you bill monthly or quarterly, this would be considered to be an extension of credit that requires you to have an internal program subject to inspection and review, designed to detect, prevent and mitigate client identify theft. Please contact us if you need assistance in this area.
Email, Phone and Preparer Scams—Scams that are becoming more common include:
1) Companies masquerading as Florida agencies are e-mailing Florida companies requiring annual minutes and a $125 fee. Annual minutes are not filed with any state agency.
2) An entity called the “FL Online Corporate Annual Report Filings” is e-mailing businesses, inviting them to file their annual reports on their website. Businesses should only use www.sunbiz.org to file their annual reports.
3) BEWARE OF PHISHING—E-mails, tweets, faxes, phone calls claiming to be from the Internal Revenue Service are often a “phishing” tactic used to trick unsuspecting victims into revealing personal information. Often a phony website is used. The correct IRS site is www.irs.gov. Currently, the IRS does not contact taxpayers by e-mail, tweet or fax, and rarely by phone. If you receive a phone call, do not release any information or agree to an appointment. Instead, request written correspondence. Take their name, phone number, and agent number and contact us.
4) The IRS has issued a warning about a fraudulent scheme targeting EFTPS (Electronic Federal Tax Payment System) users. The scheme sends an e-mail claiming that the user’s tax payment was rejected and directs the user to a website for additional information. The website contains malware that will attempt to infect the user’s computer. The IRS does NOT initiate communication through e-mail. If you receive a message claiming to be from the IRS or EFTPS, do NOT reply to sender, access links on the site or submit any information to them. To report this or other phishing, email scams or bogus IRS websites, forward the email or URL information to the IRS at phishing@IRS.gov.
5) Dishonest return preparers derive financial gain by skimming a portion or all of a client’s refund, charging fees based on the amount of refund, promising a given result, and/or creating phony deductions. This type of fraud often begins with a small business’s return—whether a Schedule C, a partnership, or corporate return. A dishonest preparer may also create false information and submit your return without your knowledge. Often, the refund from the false return will go directly to the preparer’s account. It is your responsibility to know what is on your return. Maintain a copy of your return, review your return before signing, and then sign either your return or authorization for electronic filing.
HEALTH CARE REFORM (A few current-year issues)
HealthcareTax Credit—For 2010-2013, a credit is available to small employers that contribute at least ½ the cost of single coverage towards buying health insurance for their regular employees (one that works more than 120 days). The calculation is complex. If you think you may qualify, please contact us for more information.
Reporting of Employer Paid Health Insurance—The requirement to report the amount of an employee’s health insurance on the W2 was optional for 2011. This is mandatory for 2012 to be reported as a nontaxable employer fringe benefit
Penalties on Non-Qualified Distributions from HSAs and MSAs Double to 20% in 2011
PAYROLL and PAYROLL TAX ISSUES
Payroll Tax Holiday You are most likely aware that the 2% reduction of Social Security Withholding from 6.2% to 4.2% was extended for 2 months (through February 29). This extension also provides for a recapture of any benefit a taxpayer may have received from the reduction during the first two months of 2012 on compensation in excess of $18,350. This recapture provision would apply only if the temporary payroll tax cut ends on February 29, 2012.
FUTA Increase Florida is one of 20 states that have outstanding loans that have not been repaid to the federal government. Employers in these states will be subject to an increase of .3% for federal unemployment taxes. This equates to $21 for each employee being paid $7,000 or more.
Form 1099K—For 2011, Form 1099K may be sent to those accepting credit & debit card payments through merchant services, as well as other third-party payment processors such as E-Bay or PayPal. The Form 1099K will show credit and debit sales total by month and annually. These amounts may be used to verify reported revenue on income tax returns, sales tax returns, etc. Your books will need to be reconciled to the Form 1099K, therefore, accounting changes need to be made. Payments made through a third-party settlement network, such as PayPal or eBay, will be reported only if the payee receives more than $20,000 in aggregate and the total number of payment transactions exceeds 200. Watch for requests for W-9 forms from your credit card vendors as the card processing company may be required to do backup withholding on your credit card transactions if you do not provide them with a correct taxpayer identification number. The IRS has delayed this requirement until after 2012.
Health Insurance—Although all fringe benefits are under scrutiny by the IRS, a key issue with Subchapter S corporations is the proper treatment of shareholder health insurance. If an S Corporation pays the health insurance of a 2% or greater shareholder, this must be reported in box 1 (gross income) of the W2. It is NOT taxable for Social Security or Medicare, but it is for federal withholding. The shareholder can then take the deduction on his personal tax return as an adjustment of income before adjusted gross income, thereby, netting out the W2 income.
Hire Act—a tax credit for each formerly unemployed worker hired between March 19, 2010 and December 31, 2010, that remained employed at least one year is available on the 2011 return.
Credit for Hiring Unemployed Veterans—Hiring unemployed veterans after November 11, 2011 and before January 1, 2013, could possibly yield a credit.
Other Tax Provisions
Dividends—As of January 1, 2013, qualified dividends will be subject to ordinary income tax rates. Accordingly, corporations with excess earnings and profits should consider making dividend distributions in 2012.
Start Up and Organizational Costs—Costs to start a business are generally amortizable over fifteen years. However, in 2011, you may elect to deduct up to $5,000 with the remainder amortized over 180 months. There is a $1 for $1 phase out of the $5,000 in 2011 if costs are greater than $50,000. Organizational costs (legal fees) follow the same rules.
Self-Employment Tax and Self Employed Health Insurance For 2011, self-employment tax was temporarily decreased by 2%–which has now been extended through February 2012. For 2010, when you determined your net earnings from self-employment, you could deduct health insurance costs. For 2011, these costs are only deductible from income tax—not self-employment tax.
Retirement Plans—Except for a SEP, a retirement plan must have been put in place prior to 1/1/2012 for it to be effective for 2011. A SEP can be elected through the due date of your return, including extensions. However, a retirement plan for 2012 can be put into place at any point during 2012 and funding can begin soon after set up.
IRS Examinations and QuickBooks
The IRS has begun requesting the electronic QuickBooks file on various business examinations. Currently, this is being contested by many sources. When they receive the electronic file, they often can obtain information on years not under examination. In addition, with proper examination, the Service would be able to obtain much information that should not be available for IRS examination, as well as determine any deletions. You would not be able to delete or make any changes once the file was called for audit. Therefore, we have developed methods of minimizing your risk in this. Because of this, we request that you send us your books soon after completion of December 2011.
Potentially, 2013 could be a momentous year for tax. Planning for it should begin in 2012. First, in addition to the normal Medicare tax, a NEW Medicare tax of .9% will apply to certain wages. Second, a new Medicare tax of 3.8% will apply to certain investment income, including pass-through from a passive trade or business such as a partnership or S corporation. These 2 Medicare taxes will only apply to amounts in excess of $200,000—although this limit is increased to $250,000 for joint returns and is decreased to $125,000 in the case of married filing separate.
As mentioned earlier, the Bush era tax cuts are scheduled to expire—increasing tax rates on regular income, capital gains & dividends and increasing the number of individuals subject to the Alternative Minimum Tax.
Three takeaways—1) remember your CPA can be your valuable partner when helping to keep your tax bill to a minimum; 2) don’t be afraid to ask questions to be certain you understand; and 3) Don’t wait until the end of 2012 to implement these and other tax planning strategies!
We look forward to seeing you soon for your 2011 and 2012 accounting and tax needs.
Contact our office at (904) 880-3200.