Tax Tip Digest

HRA plans have great value in Delaware - Part 3

noreply@blogger.com (First State CPAs LLC) — Thu, 02 Aug 2012 13:44:00 +0000

A few other details about health reimbursement accounts:

Similar to pension plans, some options are available for limiting participation eligibility to after a certain period of employment, etc.
Reimbursements for the former year may be sought until the due date of the tax return, however, time must be allowed for the admin to prepare and mail the annual report before the tax return is filed.
Former employees are not eligible for reimbursement of expenses incurred while an employee but not submitted for reimbursement until after employment ends.
An HRA is NOT the same as a HSA (health savings acct). A HRA is totally employer funded, nothing may be withheld from employee pay. A HSA only functions in conjunction with the presence of a high deductible health insurance plan. An employee does not have to have any health insurance to participate in a HRA.
The reimbursements are not taxable as compensation to the employee but are fully deductible by the employer as a fringe benefit as long as a qualified plan is established and annually renewed.
Unused allowances may carry forward for one year only and then they are forfeited.
Most states do not allow payment for major medical insurance premiums with an HRA although dental and vision premiums are normally ok. DE now allows reimbursements of health insurance premiums

HRA plans have great value in Delaware - Part 2

noreply@blogger.com (First State CPAs LLC) — Wed, 01 Aug 2012 13:28:00 +0000

Health reimbursement accounts are great for certain self-employed persons in Delaware who meet the following criteria:

No employees
Have no insurance or significant out of pocket medical expenses in spite of insurance

A health reimbursement account can be set up to enable 100% above the line deductions of medical costs which would otherwise be deducted oin schedule A to they extent they exceed 7.5% of AGI - if you can itemize. Depending on your federal and state tax rates, the break even point for covering the nominal annual admin fee may be as low as $1000 in costs.

Sole-proprietors/partnerships/LLCs will need to initiate employment of a non-owner spouse/s in order to take advantage of this program. Adding the hassles of payroll filings to the mix may negate the benefits of this plan unless medical and medical insurance expenses exceed $3000-$4000/year.

S-corp owner/operators are required to pay themselves wages so payroll will already exist in most cases. Reimbursements are deducted by the corp in the same manner as health insurance premiums - as wages not subject to FICA taxes. The above the line deduction on the 1040 washes out the income at the personal level.

HRA plans have great value in Delaware - Part 1

noreply@blogger.com (First State CPAs LLC) — Tue, 31 Jul 2012 18:12:00 +0000

Health reimbursement accounts are an often overlooked fringe benefit option. Effective 2012, Delaware participants may use their HRA to pay medical insurance premiums as well as for out of pocket medical costs. These plans are especially helpfully for employers who wish to offer some type of medical benefits but can't risk being at the mercy of unknown, rising insurance costs.

Typically as an employer you would offer a lump sum of HRA monies - for example $2000 - per employee per year. Employees will submit a vague list of eligible expenses for reimbursement up to the annual limit. The employee is responsible for maintaining evidence of expenses and any repercussions for illegitimate reimbursements would be faced by the employee.
A 3rd party service such as BASE can be retained to assist with annual reporting requirements for a nominal annual fee.

Here is a link to generally allowable expenses:

http://www.4thdistricthealthfund.com/blog/hra-eligible-expenses

SE and S-Corp owner Medicare premium above the line deduction

noreply@blogger.com (First State CPAs LLC) — Mon, 30 Jul 2012 13:50:00 +0000

The IRS has stated that Medicare premiums withheld from SS can be treated as self-employed health insurance for the purpose of obtaining an above the line (100%) deduction in some cases. This is more advantageous than deducting the premiums as a part of itemized deductions since A) you have to be able to benefit from itemizing and B) only medical expenses in excess of 7.5% of AGI (10% for years 2013 and beyond if not 65+ years old) may be deducted.

The taxpayer must get reimbursed by the business for premiums paid personally/directly. In the case of S-corp owners, the premiums must be included as wages for federal and state tax purposes in accordance with standard procedures for deducting owner health insurance premiums above the line. Constructive ownership rules apply. (Spouse and some other relations' premiums treated as your own.)

Impact of carry forwards on new 2013 taxes

noreply@blogger.com (First State CPAs LLC) — Thu, 19 Jul 2012 12:00:00 +0000

Although IRS guidance is still in the making, it would appear from what we currently know that carried forward net operating losses from a business will not offset current year earned income for purposes of calculating the .9% earned income tax. Likewise, carried forward passive losses/capital losses will not offset current-year passive income or capital gains for the purpose of calculating the 3.8% net investment income tax.

Congress did not include in this bill any income averaging options. Even if you generally earn well below $200/$250 these additional taxes may take a bite out of you on the occasion of a once in a lifetime sale of property or real estate. Like kind exchanges (1031 transactions) and installment sales may come back into vogue. Taxpayers currently in the midst of reporting an installment sale may want to elect out of this treatment and pick up the remainder of the gain in 2012.

Additional 3.8% tax on 'net investment income' effective 2013

noreply@blogger.com (First State CPAs LLC) — Wed, 18 Jul 2012 12:00:00 +0000

Part of the health care reform bill is a new 3.8% tax on the net investment income of taxpayers with AGI of $200k single/$250k MFJ. Net investment income includes interest, dividends, capital gains net of losses (not adjusted for investment expenses), net rental income, and net passive business income. This tax will be collected via the tax return but must be considered when determining withholdings and estimates as of 2014 to avoid penalties.

With higher capital gains rates already expected effective 2013 plus this tax, 2012 seems to be the best year to sell capital assets with a gain if at all possible. Some people may want to sell and repurchase the same assets just to recognize the gain at the lower rate. Losses will be more valuable to offset gains in future years.

It may be best to sell sooner rather than later as many could rush to sell assets later in the year bringing values down.

Additional .9% tax on earned income effective 2013

noreply@blogger.com (First State CPAs LLC) — Tue, 17 Jul 2012 12:00:00 +0000

Part of the health care reform bill is a new .9% tax for households with AGI of $250k for MFJ/$200k for single. This tax will be withheld and remitted by employers in situations where an individual's wages exceed $250k in the year. In many cases, it will be the combination of income from a variety of sources which will push the income up to this level.

The .9% tax due but not withheld by an employer will be calculated on/added to tax due on the tax return. Some taxpayers will need to ask to have extra federal tax withheld or make quarterly estimated tax payments to avoid penalties and interest related to not paying in enough tax throughout the year. This new requirement will really hit home in 2014 after people have paid the .9% with their 2013 return. Each year taxpayers at this level must remit 110% of the total previous year tax to avoid penalties.

Taxes which are withheld but not due - perhaps due to business losses of a spouse - will be refunded with the return.

New medical expensing rules effective 2013

noreply@blogger.com (First State CPAs LLC) — Mon, 16 Jul 2012 12:00:00 +0000

Part of the health care reform bill is a change in the floor for deducting health care expenses. For quite some time, taxpayers who are able to itemize have been able to deduct medical expenses in excess of 7.5% of their AGI, however, as of 2013 this floor will be 10%.

For 2012 taxpayers will have to evaluate whether it would be better to put off expenses (where possible) until 2013 when tax rates are likely to be higher for many people or go ahead and get the expense in before the floor is raised.

Ltd extension of ability to obtain refund for 2006 tax yr

noreply@blogger.com (First State CPAs LLC) — Thu, 28 Jun 2012 12:58:00 +0000

In general, a taxpayer only has three years to receive a refund due to them from the IRS. For example a 2006 tax return due 4/15/2007 would need to have been filed no later than 4/15/2010 in order to receive the refund. (Note: A taxpayer should still file a delinquent return even if he/she cannot receive a refund because the 3 year statute for audit begins when the return is filed or the due date, whichever is later.) The IRS has announced it will accept refund requests for the telephone excise tax only through 7/27/12. This was only about $60 for most individual taxpayers but some businesses with many phone lines were due a significant amount. Such requests should be filed on a 2006 return.

Economic Substance

noreply@blogger.com (First State CPAs LLC) — Wed, 27 Jun 2012 12:40:00 +0000

What is economic substance?

1) the transaction must change in a meaningful way the taxpayer's economic position and

2) the taxpayer must have a substantial business purpose for the transaction.

Neither the change in economic position or the business purpose may be saving taxes! This legal doctrine allows the IRS to unravel more complicated/tiered business structures, many times disregarding a tier. It is not allowed t o devlop such structured simply to save taxes. A lack of economic substance can result in an additional 20% or 40% penalty.

Supreme Court deliberates the constitutionality of health care reform bill

noreply@blogger.com (First State CPAs LLC) — Tue, 26 Jun 2012 12:37:00 +0000

So what will be impacted if health care refirm is repealed?

Among others:

The penalty on individual taxpayers for any months during which they or their dependents lack minimum essential health coverage;

The premium assistance credit;

The ability of individuals to add children age 27 or under as dependents for employer-provided health coverage;

The reimbursement of qualified health plan premiums as a qualified benefit excludable from wages;

The penalty on large employers that do not offer affordable health care coverage for their full-time employees; and

The small employer health insurance credit.

The 10-percent tax on indoor tanning services.

The new taxes effective 2013 (3.8 on net investment income and .9 on earned income on those with AGI of $200k or more single $250k or more MFJ)

Since a few of these have already been in effect for a couple of years, it may get messy if repealed retroactively. Additionally, some items may be allowed to stand individually although others are nixed. It may not be all or nothing.

IRS form 3115

noreply@blogger.com (First State CPAs LLC) — Mon, 25 Jun 2012 12:23:00 +0000

Form 3115 (change in accounting method) may be required to implement what you are required to implement! These include changes to the treatment of repair and maintenance costs; materials and supplies; rotable and temporary spare parts; de minimis amounts; facilitative costs; acquisition, production or improvement costs; depreciation; dispositions of buildings or their components; and general asset accounts. January 1, 2012 is the effective date of the repair regs. When a taxpayer changes its accounting method, it must ensure the change does not result in the duplication or omission of tax items. However, taxpayers then get audit protection for the prior years.

Penalties waived for certain farmers/fisherman

noreply@blogger.com (First State CPAs LLC) — Thu, 21 Jun 2012 12:18:00 +0000

The IRS has waived estimated tax penalties for farmers and fisherman who were not able to file by the March 1, 2012 due to failure to receive a 1099 from MF Global. (Farmers and fisherman are exempt form making estimated tax payments as long as they file and pay 100% of the tax due by March 1.)

To request a waiver of the estimated tax penalty, complete Form 2210-F, Underpayment of Estimated Tax by Farmers and Fisherman. As stated in the instructions to Form 2210-F, a short statement should be attached to the form stating that you received a late 1099 from MF Global. At the top of your Form 2210-F, write “MF Global”. Taxpayers should be aware that the Form 2210-F and accompanying Form 1040 cannot be submitted electronically. In the case of farmers who have filed their tax returns and an estimated tax penalty is assessed, please contact the IRS, identify this relief and the penalty will be abated.

IRS mail audits increase

noreply@blogger.com (First State CPAs LLC) — Tue, 19 Jun 2012 12:12:00 +0000

The IRS is conducting more and more audits via the mail – 78% in 2010 compared with 54% in 2000.
The average labor cost for a field audit is $2834 compared with $135 for a correspondence audit. These audits are initiated by a notice for proposed tax return changes. Taxpayers must respond with proof that the change is not appropriate within 30 days. In the case of no response, the IRS is assumed to be correct so don’t procrastinate.
The benefits of retaining a CPA to handle any audit can't be overstated. We may be able to anticipate the analysis that will be performed by the auditor upon receipt of the requested materials. We can pre-perform the calculations to find discrepencies in advance. This allows for research on the cause of differences so an explanation can be provided to the IRS with the documents.

New IRS software targets unscrupulous preparers

noreply@blogger.com (First State CPAs LLC) — Mon, 18 Jun 2012 11:58:00 +0000

The IRS claims to be targeting 'unscrupulous' preparers by identifying patterns of suspicious returns with computer programs. The IRS wills seek an initial injunction barring the individual from preparing returns, requiring him/her to send a letter to current clients notifying them that their return may contain fraud, and demanding a list of all current/past clients.

What = unscrupulous? One example:

*Former tax preparer Cruz admitted that he engaged in results-based tax return preparation, where the goal is to maximize refunds rather than accurately report his customers’ actual income and allowable credits and deductions. Although many of Cruz’s customers would bring copies of their tax documents, such as Forms W-2 and 1099 and receipts for potentially deductible expenses, Cruz often ignored them and instead reported unsupported amounts on customers’ federal income tax returns. Cruz admitted that he prepared more than 7,000 federal income tax returns for tax years 2004 to 2008.

I am sure all of these 7000 clients had been bragging to their friends about their great preparer. The honeymoon is likely over! We have SEVERAL Delaware preparers who practice in this manner. I certainly hope their days our numbered. Keep in mind that 'the favors' your preparer does for you (making up charitable and business deductions that are 'acceptable') he/she may do for many people making it easy for the new IRS computers to catch them. Every return has $5000 in charitable deductions, etc. Duh!

New installment agreement eligibility parameters

noreply@blogger.com (First State CPAs LLC) — Fri, 15 Jun 2012 12:28:00 +0000

The IRS has raised eligibility thresholds for obtaining an installment agreement.

1) The total tax due has been raised from $25,000 to $50,000.

2) Taxpayers must prove ability to repay their debt in full with penalties & interest within 72 months - vs. the previous term of 60 months.

Taxpayers must be able to remain current on new taxes in addition to making installment payments. (In some cases the taxpayer must prove to the IRS they have this ability in order to be granted an installment agreement.) Taxpayers who either owe more than $50k or don’t have the ability to pay within 72 months while also paying current year taxes must engage in the much more tedious process of seeking an offer in compromise. This can take years to accomplish.

Remaining current on an installment agreement will prevent the IRS from levying your wages, 1099 income, bank account, etc. However, penalties and interest are not abated or reduced by an installment agreement so if you have any other source of funds with which to pay your taxes (family loan, credit card low interest advance, home equity, sell things...) that will probably be a less costly option. Keep in mind the IRS may still secure its debt with a notice of federal tax lien until you are paid in full, even with an installment agreement in place.

An installment agreement can be requested on line here:

http://www.irs.gov/individuals/article/0,,id=149373,00.html

First time home buyer credit audit statistics

noreply@blogger.com (First State CPAs LLC) — Thu, 14 Jun 2012 12:17:00 +0000

The IRS examined 500,000 returns containing the first time home buyer credit and disallowed nearly 1.6 million in such credits. That works out to only 200 adjustments out of 500,000 returns examined, or .04% success. By my math, taxpayers probably paid a lot more in examiner wages, benefits, and pension funding than what was collected.

It turns out the IRS used outdated methodology for selecting returns to examine. They selected based on criteria indicating a likelihood of math errors instead of the (now preferred) method which selects returns with highest risk indicators for claiming credits which should be disallowed. Chances are quite a few people received credits for which they were not eligible, despite the 500,000 examinations.

I'd like to add that the notices requesting additional information to support the credit were infuriatingly vague. They simply stated 'supply information to support the credit.' We had already attached to the tax return the records called for in the instructions so this left us scratching our heads. Did these documents not reach the correct person? Did they want some other document? Finding the answer ate up our time and the IRS agent's time as we had to seek clarification by phone in each and every case. Totally avoidable!

IRS Tax Fraud Alerts

noreply@blogger.com (First State CPAs LLC) — Wed, 13 Jun 2012 12:03:00 +0000

The IRS reports an upsurge in fraudulent income tax refund claims targeted at senior citizens and others with low or no income. The scam artists lure in victims with promises of nonexistent refunds.

Also, keep in mind that although you may recieve an email from your CPA letting you know that your e-filed return has been accepted, the IRS will NEVER contact you directly via email!!

See the below link for more IRS tax fraud alerts:

http://www.irs.gov/compliance/enforcement/article/0,,id=121259,00.html

Self-employment tax primer

noreply@blogger.com (First State CPAs LLC) — Tue, 12 Jun 2012 11:57:00 +0000

The tax court has affirmed that a net operating loss carry forward or carry back cannot offset self-employment income in the year in which it is utilized even though the loss may have been produced from an activity that would have resulted in self-employment tax if there had been income instead of a loss.

I have found that many people don't know what self-employment tax is - even those who pay it! Employers pay half of the social security and Medicare taxes for W-2 employees and 1/2 is withheld from wages. Self-employed individuals must pay in all the tax themselves. In 2012 this amounts to a 13.3% SE tax on business/farm profits. So self-employment tax is a simply social security and Medicare for those who do not receive a W-2 for earned income. Note: Self-employment income can be reported on a business or a farm tax form as well as passed through from a partnership. (Rental income, interest, dividends, pensions = not 'earned' from a tax perspective, not subject to SE tax.)

This tax is assessed on the individual tax return against the profits from self-employment (in other words after business expenses have offset business income). Itemized deductions and AGI adjustments do not offset self-employment income - only the expenses directly related to the business. Half of the SE tax does reduce AGI. Self-employment income is then also subject to federal and state income taxes at the same rate as your other household income. With all taxes combined, profits from an unincorporated business can be taxed at over 50% depending on your federal tax bracket and state's tax rate.

TE entities must make application & other info public once status is granted

noreply@blogger.com (First State CPAs LLC) — Fri, 08 Jun 2012 14:29:00 +0000

The IRS has reiterated that applications/supporting documents submitted to obtain tax exempt status as well as the determination letter and any subsequent letters or documents related to the tax exempt status must be made available for public inspection as soon as the status has been granted. This remains the case even after tax exempt status has been rescinded, when such circumstance applies.

2012 first year depreciation for non heavy duty vehicles

noreply@blogger.com (First State CPAs LLC) — Thu, 07 Jun 2012 14:26:00 +0000

First year depreciation for passenger automobiles, light truck, and vans (over 6000# plus misc. other requirements = not considered light) is more strictly limited than that of other vehicles. For automobiles placed in service during 2012 the maximum for new vehicles is $11,160, used $3160. For light trucks and vans $11,360 if new and $3360 if used. The IRS requires a small inclusion in income for leased vehicles. The 2012 lease inclusion tables may be found here:

http://www.irs.gov/pub/irs-drop/rp-12-23.pdf

CPA did not take a reasonable salary

noreply@blogger.com (First State CPAs LLC) — Wed, 06 Jun 2012 14:20:00 +0000

Appeals upheld a circuit court ruling that s corp dividend distributions were additional wages subject to social security and Medicare taxes for a CPA that brought home $24k in wages and $200k+ in dividends. The IRS determined that a reasonable salary would have been $91k per year. This case provides some insight that should be heeded by many taxpayers. In this instance, the CPA worked full time and was the primary revenue producer in the firm.

Don't forget to file your FBAR by 6/30

noreply@blogger.com (First State CPAs LLC) — Tue, 05 Jun 2012 14:19:00 +0000

A US person who has signature authority over any foreign financial account must file a form called an FBAR by June 30 if the value of such account is $10k at any time during the previous year.

A “foreign country” includes all geographical areas outside the United States, the commonwealth of Puerto Rico, the commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

“United States person” includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, and a domestic estate or trust. the tax rules concerning disregarded entities do not apply with respect to the FBAR reporting requirement so single member LLCs are not disregarded for this purpose.

A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.

Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both.

FBAR forms are available:

Online via IRS.gov in PDF.

Online via Department of the Treasury’s Financial Crimes Enforcement Network Web site in PDF.

By calling the IRS at 800-829-3676.

New audit technigue guide for artists

noreply@blogger.com (First State CPAs LLC) — Mon, 04 Jun 2012 14:12:00 +0000

The IRS must make available to teh general public all guides they give to their examiners for use while conducting audits. Audit technique guides which have been around for awhile include:construction industry, cash intensive businesses, wine industry, retail industry, business consultants, attorney, veterinary, minister, new vehicle dealership - nd many more! Now at long last we have an ATG for Artists and Art Galleries.

http://www.irs.gov/businesses/small/article/0,,id=254019,00.html

Tax change proposals still focus in pass through entities

noreply@blogger.com (First State CPAs LLC) — Sat, 02 Jun 2012 14:04:00 +0000

The Congressional Research Service reports that most recent proposals for tax change focus on increasing taxes on high income recipients of pass-through income. Taxpayers with AGI over $250k receive 62% of pass-through income.

A recent Joint Committee on Taxation report focuses on pass through entities. They recommended a uniform pass-through entity utilizing a combination of partnership and S corp rules and doing away with both entities as they are now. Businesses would simply elect pass through or not pass through. Something to keep an eye on!