The Internet and instant global communications have made international banking very easy. You can sit comfortably in your home and deal online with a bank anywhere in the world. Some unscrupulous promoters even advertised the "tax-free" benefits of using foreign banks. That is wrong and criminal. Recently, Congress and the IRS have taken steps to end abuses.  The IRS is actively reminding taxpayers of their filing responsibilities under the Bank Secrecy Act and the Foreign Account Tax Compliance Act. The IRS has also reopened its voluntary offshore disclosure program.

The Internet and instant global communications have made international banking very easy. You can sit comfortably in your home and deal online with a bank anywhere in the world. Some unscrupulous promoters even advertised the "tax-free" benefits of using foreign banks. That is wrong and criminal. Recently, Congress and the IRS have taken steps to end abuses.  The IRS is actively reminding taxpayers of their filing responsibilities under the Bank Secrecy Act and the Foreign Account Tax Compliance Act. The IRS has also reopened its voluntary offshore disclosure program.

Bank Secrecy Act

The Bank Secrecy Act requires taxpayers to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”) if they have:

1. A financial interest in, signature authority or other authority over one or more accounts in a foreign country, and
2. The value of the account exceeds $10,000 at any time during the calendar year.

The Bank Secrecy Act does not prohibit taxpayers from owning a foreign bank account. It just requires reporting and disclosure. The rules apply to all citizens and residents of the U.S. as well as domestic corporations, estates, partnerships, and trusts.

A financial account for purposes of the FBAR is defined very broadly and includes any bank, securities, securities derivatives or other financial instruments accounts. The IRS has explained that the term includes any savings, demand, checking, deposit or any other account maintained with a financial institution or other person engaged in the business of a financial institution.

The FBAR must be received by the Treasury Department on or before June 30 of the year following the calendar year being reported. The FBAR is not filed with your federal income tax return.  Instead, it is mailed to the Treasury Department or filed electronically with the Treasury Department. Failure to file an FBAR may potentially result in civil penalties, criminal penalties or both.

There are exceptions to reporting under the Bank Secrecy Act. One of the most important covers accounts in U.S. military banking facilities operated by U.S. financial institutions overseas. These accounts, which serve military personnel, are not treated as foreign bank accounts for reporting purposes.

Foreign Account Tax Compliance Act

In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA).  FATCA imposes additional reporting requirements on taxpayers separate and distinct from the Bank Secrecy Act and FBAR reporting.   Since passage of FATCA, the IRS has been issuing guidance.  Because FATCA is so complex, the guidance has been issued piece-meal and additional guidance is in the pipeline.

Under FATCA, certain U.S. taxpayers holding “specified foreign financial assets” outside the U.S. must report those assets to the IRS.   Generally, reporting applies to specified individuals holding specified foreign financial assets with an aggregate value exceeding certain thresholds.  The threshold amounts vary if the taxpayer is single, married filing jointly, married filing separately, or the taxpayer is living abroad.   

The IRS has explained that specified foreign financial assets include (not an exhaustive list) foreign financial accounts, and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-US persons, and interests in foreign entities.  More details about specified foreign financial assets are expected to be available when the IRS issues additional guidance.

Individuals subject to the new disclosure rules will file new Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in tax years starting after March 18, 2010.  For most individual taxpayers, the IRS has explained that this means they will start filing Form 8938 with their 2011 income tax return.  At this time, the IRS is only requiring “specified individuals” to file Form 8938. The IRS has indicated that it may require reporting by “specified domestic entities” when more regulations are issued.

As with FBAR reporting, there are some exceptions to FATCA reporting.  Please contact our office for more details about these exceptions.

Offshore voluntary disclosure programs

In early 2012, the IRS announced it was reopening its offshore voluntary disclosure program.  Previously, the IRS had launched two temporary programs (in 2009 and 2011) to encourage taxpayers to disclose unreported foreign accounts.  In exchange for their voluntary disclosures, the IRS offered taxpayers a reduced penalty framework.

The reopened, third offshore voluntary disclosure program is similar to the 2009 and 2011 programs. However, there are some important differences.  The highest penalty in the reopened program is 27.5 percent compared to 25 percent in the 2011 program.  In certain cases, taxpayers may qualify for reduced penalties of 12.5 percent or five percent.  The reopened program has no set closing date.  However, the IRS reserved the right to end the program at any time.  The IRS also indicated that the terms of the program could change at any time.

International agreements

Recently, the IRS has met with success in negotiating agreements with many "bank secrecy" countries to disclose tax evasion. The IRS is also working closing with international organizations, such as the Organisation for Economic Co-operation and Development (OECD) to curb tax evasion.  The IRS has warned that if it finds out about a taxpayer's offshore account through any of these agreements (or elsewhere) rather than through voluntary disclosure initiative, it intends to assess every penalty at its disposal under the law.

If you have any questions about foreign bank accounts, FBAR and FATCA reporting, or the reopened, third offshore voluntary disclosure program, please give our office a call today.

How would you like to squeeze more time out of your busy week, cut down on record-keeping duties, and reduce piles of paperwork and old receipts? The optional standard mileage rates for business vehicles can help you do just that. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of depreciation, gas, and repairs.

The business standard mileage rate for 2012 is 55.5 cents-per-mile (the same as for the second half of 2011 and up from 51 cents-per-mile for the first half of 2011). The business rate reflects, among other things, gasoline, depreciation and maintenance costs each year.

Four or more vehicles

Businesses using no more than four vehicles for business purposes can use the business standard mileage rate. Generally, the IRS prohibits taxpayers from using the business standard mileage rate to compute the deductible expenses of five or more vehicles the taxpayer owns or leases and uses simultaneously, such as in a fleet operation.

Heavy vehicles and large SUVs

For many years, SUV owners enjoyed a special tax break, often referred to as the "SUV loophole." The "luxury car" rules in Code Sec. 280F place strict limits on the maximum amount of depreciation that may be claimed on passenger automobiles, including trucks and vans, during each year of a vehicle's recovery (depreciation) period. Generally, the luxury vehicle limits apply to vehicles primarily used on public streets with an unloaded gross weight of 6,000 pounds or less. However, a light truck or van, including an SUV built on a truck chassis, is not subject to the annual vehicle depreciation limitations if its gross vehicle weight rating (maximum loaded weight) is in excess of 6,000 pounds. This treatment allowed many taxpayers who purchased an SUV with a gross weight in excess of 6,000 pounds to write off the entire cost in the year of purchase under the Code Sec. 179 expensing deduction.

Congress cracked down on the "SUV loophole" in 2004. It was successful only in part, depending upon the type of SUV that is purchased.  The American Jobs Creation Act of 2004 put the brakes on the cost of any SUV that may be expensed under Code Sec. 179 to $25,000. If the SUV is not built on a truck chassis or if it does not have a gross vehicle weight of more than 6,000 pounds, however, the "luxury vehicle" limit is the even lower.

An additional factor is bonus depreciation. The IRS has developed a safe harbor method of accounting for businesses that are nominally entitled to 100 percent bonus depreciation but still limited by the maximum luxury vehicle depreciation first-year caps. The effect of the safe harbor for most vehicles (those that are not fully depreciated in their first-year after applying the cap) is to allow the taxpayer under the 100 percent bonus depreciation regime to claim exactly the same amount of depreciation during each year of the vehicle’s recovery period as would have been allowed if a 50 percent bonus depreciation rate had originally applied. The safe harbor method may be used for qualifying new vehicles placed in service after September 8, 2010 and before January 1, 2012 for which a 100 percent rate applies.

Personal and business use

If you use your business vehicle for personal trips (including commuting back and forth from home and your principle business location) you must pro-rate your deduction to exclude the percentage of personal use. The magic number here is 50 percent. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction.

If you have any questions about how to maximize tax deductions for your business vehicles please call this office.

The Patient Protection and Affordable Care Act of 2010 (PPACA) created a valuable tax break for small businesses: the small business health insurance tax credit (also known as the Code Sec. 45R credit). Qualified small employers, including nonprofit employers, may reduce the cost of providing health insurance to their employees during the course of the year through use of the credit. However, the credit is complex and there are important limitations, especially when calculating the number of employees and other provisions. Don't let the complexity of the credit discourage you from exploring its benefits.

The Patient Protection and Affordable Care Act of 2010 (PPACA) created a valuable tax break for small businesses: the small business health insurance tax credit (also known as the Code Sec. 45R credit). Qualified small employers, including nonprofit employers, may reduce the cost of providing health insurance to their employees during the course of the year through use of the credit. However, the credit is complex and there are important limitations, especially when calculating the number of employees and other provisions. Don't let the complexity of the credit discourage you from exploring its benefits. This letter provides a high-level description of the credit; please contact our office so we can explain in detail how the credit may help cut your health insurance costs.

Small employers. The small business health insurance tax credit is targeted to employers that have no more than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 for each employee per year. The credit is claimed on IRS Form 8941, Credit for Small Employer Health Insurance Premiums, which must be attached to your return.

The credit has been available since 2010. For tax years beginning in 2010 through 2013, the maximum credit reaches 35 percent of qualified premium costs paid by for-profit employers (25 percent for tax-exempt employers). For tax years beginning in 2014 through 2015, the maximum credit climbs to 50 percent of qualified premium costs paid by for-profit employers (35 percent for tax-exempt employers). However, an employer may claim the credit after 2013 only if it offers one or more qualified health plans through a state insurance exchange. The PPACA generally requires states to operate insurance exchanges by after 2013.

Let's look at an example of how the credit works in 2012. A small manufacturer employs nine individuals with average annual wages of $23,000 for each employee in 2012. The manufacturer pays $72,000 in health care premiums for its employees. Assuming that the manufacturer meets all the other requirements, its credit for 2012 is $25,200 (35 percent x $72,000).

Employees. To determine eligibility for the credit, employers have to calculate their number of FTEs. The number of an employer's FTEs is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. The result, if not a whole number, is rounded to the next lowest whole number. Lawmakers selected 2,080 hours because 2,080 hours comprise the number of hours in a 52-week assuming a 40-hour work week. Any hours beyond 2,080, such as overtime hours, are not taken into account when calculating FTEs.

Average annual wages. Employers also need to calculate average annual wages. The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer's tax year by the number of the employer's FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).

Additional requirements. Congress imposed some important limitations on the credit. Employers must exclude certain individuals from the calculation of FTEs and average annual wages. These individuals include a sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses. Certain family members of these individuals are also excluded from the calculation of FTEs and average annual wages. These include a child, a parent, a sibling, and others. This list is not exhaustive. Please contact our office for more details about who is excluded from these calculations.

Additionally, the credit applies only to premiums paid by the employer under a qualifying plan. An employer's contribution is also linked to the average cost of health insurance in its state or part of a state. Our office can review your plan and determine if it meets the criteria for the credit.

The credit also affects an employer's deduction for the cost of health insurance premiums paid on behalf of employees. The amount of premiums that an employer may deduct is reduced by the amount of the small employer health care tax credit.

Please contact our office if you have any questions about the small employer health insurance tax credit.

The Temporary Payroll Tax Cut Continuation Act of 2011 (2011 Tax Cut Act) temporarily extends the two percent payroll and self-employment tax cut that was scheduled to expire at the end of 2011. The 2011 Tax Cut Act reduces the Social Security tax withholding rate from 6.2 percent to 4.2 percent on wages paid through Feb. 29, 2012, and reduces the self-employment tax from 12.4 percent to 10.4 percent through calendar year 2012. This reduced Social Security tax will have no effect on future Social Security benefits.

The Temporary Payroll Tax Cut Continuation Act of 2011 (2011 Tax Cut Act) temporarily extends the two percent payroll and self-employment tax cut that was scheduled to expire at the end of 2011. The 2011 Tax Cut Act reduces the Social Security tax withholding rate from 6.2 percent to 4.2 percent on wages paid through Feb. 29, 2012, and reduces the self-employment tax from 12.4 percent to 10.4 percent through calendar year 2012. This reduced Social Security tax will have no effect on future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees (or the self-employed who also earn wages) who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).    

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

During the fourth quarter of 2011, there were many important federal tax developments that now have a direct impact on 2012. This letter highlights some of the more important federal tax developments for you. As always, please give our office a call or send us an email if you have any questions about these developments.

During the fourth quarter of 2011, there were many important federal tax developments that now have a direct impact on 2012. This letter highlights some of the more important federal tax developments for you. As always, please give our office a call or send us an email if you have any questions about these developments.

 Tax legislation

President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011, extending the employee-side payroll tax cut through the end of February 2012. In November, President Obama signed the 3% Withholding Repeal and Job Creation Act of 2011, which repeals three percent government withholding, enhances the Work Opportunity Tax Credit (WOTC) to cover more military veterans, expands the IRS's continuous levy authority, and more. In October, President Obama signed the Trade Adjustment Assistance Extension Act, enhancing the health care tax credit (HCTC) for qualified individuals. 

In related news, the IRS advised employers to implement the reduced employee-side payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees' pay as soon as possible but no later than March 31, 2012, the IRS instructed. 

Foreign accounts

The Foreign Account Tax Compliance Act (FATCA) generally requires certain U.S. taxpayers holding specified financial assets outside the United States to report them to the IRS. FATCA also requires foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The IRS posted a final version of Form 8938, Statement of Specified Foreign Financial Assets, and Instructions on its website in December. 

The IRS also issued a Fact Sheet alerting dual citizenship taxpayers, as well as U.S. citizens who reside abroad, to their obligation to file U.S. income tax returns and, if appropriate, a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The IRS described possible penalties for failure to file, and grounds for avoiding the penalties.

Mileage rates

The IRS announced in December that the business standard mileage rate for 2012 will be 55.5 cents-per-mile, which is unchanged from the second half of 2011. The standard mileage rate for medical and moving expenses will be 23 cents-per-mile, reflecting a 0.5 cents-per-mile reduction from 2011. The statutorily-determined rate for the charitable deduction remains unchanged at 14 cents-per-mile for 2012.

Capitalization of tangibles

Just before year-end 2011, the IRS issued much-anticipated revised regulations on the capitalization of tangible assets. The IRS withdrew proposed regulations issued in 2008 and issued temporary and proposed regulations. The new guidance, the IRS explained, is intended to clarify existing standards and provide certain bright-line tests for applying the standards. The text of the temporary regulations serves as the text of the proposed regulations. The temporary regulations are binding on both taxpayers and the government. 

Worker classification

A new IRS program - the Voluntary Classification Settlement Program (VCSP) - will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied. 

Inflation adjusted amounts

The IRS issued cost of living adjustments (COLAs) for various provisions in the Tax Code for 2012. Because of inflation, many provisions are adjusted upward for 2012. For example, the standard deduction for single taxpayers increases from $5,800 for tax years beginning in 2011 to $5,950 for tax years beginning in 2012, and the standard deduction for married couples filing a joint return increases from $11,600 for 2011 to $11,900 for 2012.

Social Security wage base

The Social Security Administration (SSA) announced that the maximum amount of earnings subject to Social Security will be $110,100 for 2012, up from $106,800 for 2011. SSA also reported that the so-called "nanny tax" threshold will increase to $1,800 for 2012.  

Qualified plans

Many retirement plan contribution and benefit limits will increase in 2012, the IRS announced. The 2012 cost of living adjustments (COLAs) affect a variety of retirement savings vehicles, including defined contribution plans, defined benefit plans, employee stock ownership plans (ESOPs), and individual retirement arrangements (IRAs).  

Decedents' estates

The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, and its Instructions. Executors will use Form 8939 to make a "Section 1022 Election" to opt out of the 2010 estate tax and apply modified carryover basis. 

IRS basis regulations

The U.S. Supreme Court agreed to resolve the split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis. The government asked the Supreme Court to decide whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the extended six-year assessment period; and whether a final Treasury regulation, which reflects the IRS's view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference. 

"Hot Stock" rule

The IRS finalized temporary regulations, which the agency described as mitigating the impact of the "hot stock" rule on Code Sec. 355 spinoffs if the controlled corporation is a member of the distributing corporation's separate affiliated group (SAG). The final regs generally adopt the substantive rules of the temporary regs without change.

Per diem rates

The IRS issued the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2011, retaining the high-low method. The simplified high-low per diems have increased for 2012 to $242 for high-cost localities and to $163 for all other localities, an increase from $233 and $160, respectively, for 2011. The IRS also announced it will not discontinue use of the "high-low" method for substantiating travel expenses. 

Whistleblowers

A whistleblower who reported her employer's significant tax underpayment to the IRS would be entitled to anonymity, the Tax Court held in December. However, the court found the whistleblower was not entitled to an award because the IRS had been unable to collect any additional tax from the employer. 

IRS operations

The Treasury Inspector General for Tax Administration (TIGTA) highlighted some of the management and performance challenges confronting the IRS for fiscal year (FY) 2012 in November. According to TIGTA, the challenges include: keeping taxpayer data secure; tax compliance initiatives; modernization; implementing major tax law changes; fraudulent claims and improper payments; providing quality taxpayer service operations; human capital; globalization; taxpayer protection and rights; and achieving program efficiencies and cost savings. 

Identity theft

A top IRS official told Congress that the IRS intends to take additional measures to combat identity theft during the 2012 filing season. In 2011, the IRS began issuing Identity Protection Personal Identification Numbers (IP PINs) to victims of identity theft under a pilot program The IRS intends to expand the IP PIN program. 

Ponzi schemes

The IRS modified guidance issued in 2009 that allows investors to take losses in certain Ponzi schemes. The new guidance, the IRS explained, ensures that investors will still be able to deduct their losses if the lead figure in the Ponzi scheme has died.  

If you have any questions about these or any federal tax developments, please contact our office.

Taxpayers who use the standard mileage rate method to calculate their business miles driven have some good news for 2012.  The IRS has set the 2012 business standard mileage rate at 55.5 cents-per-mile for 2012, which is unchanged from the second half of 2011.  The IRS also announced that the medical/moving mileage rate is 23 cents-per-mile for 2012. The charitable mileage rate, which is set by statute, remains at 14 cents-per-mile for 2012.

Taxpayers who use the standard mileage rate method to calculate their business miles driven have some good news for 2012. The IRS has set the 2012 business standard mileage rate at 55.5 cents-per-mile for 2012, which is unchanged from the second half of 2011.  The IRS also announced that the medical/moving mileage rate is 23 cents-per-mile for 2012. The charitable mileage rate, which is set by statute, remains at 14 cents-per-mile for 2012.

Many taxpayers use the business standard mileage rate to help simplify their recordkeeping. Using the business standard mileage rate takes the place of deducting almost all of the costs of your vehicle. The business standard mileage rate takes into account costs such as maintenance and repairs, gas and oil, insurance, and license and registration fees.

If you choose to use the actual expense method to calculate your vehicle deduction for business miles driven, you must maintain very careful records.  You must keep track of the actual costs during the year to calculate your deductible vehicle expenses.  One of the most important tools is a mileage log book.   Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

Business standard mileage rate.  In June 2011, the IRS announced a mid-year adjustment to the business standard mileage rate to reflect rising gasoline prices. The business standard mileage rate climbed from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011.  The same 55.5 cents-per-mile rate will apply for 2012, the IRS announced.

Medical/moving standard mileage rate.  The medical/moving standard mileage rate also increased for the second half of 2011, from 19 cents-per-mile to 23.5 cents-per-mile. However, the IRS announced that the medical/moving rate will not remain at 23.5 cents-per-mile for 2012. Instead, the medical/moving rate is 23 cents-per-mile for 2012.

Charitable standard mileage rate. Taxpayers may be able to claim a deduction for miles driven in service of a charitable organization.   The standard mileage rate for charitable miles is determined by Congress.  The rate for 2012 is 14 cents-per-mile (the same rate as in 2011).

If you have any questions about the business, medical/moving or charitable standard mileage rates, please contact our office.

As the end of the year approaches, individual investors should take a look at year-end moves that can improve their tax situation for 2011.  Year-end strategies can have a significant impact on what you owe for 2011 as it draws to a close.  

Some of these strategies could be applied to any year.  Others are based on the particulars of the economy and the current tax situation.  While the current low tax rates will continue through 2012, rates for higher-income taxpayers could increase substantially beginning in 2013.

As the end of the year approaches, individual investors should take a look at year-end moves that can improve their tax situation for 2011.  Year-end strategies can have a significant impact on what you owe for 2011 as it draws to a close.   

Some of these strategies could be applied to any year.  Others are based on the particulars of the economy and the current tax situation.  While the current low tax rates will continue through 2012, rates for higher-income taxpayers could increase substantially beginning in 2013.  

Capital gains

Long-term capital gains and qualified dividends continue to be taxed at favorable rates through 2012. For middle- and higher-income investors, these items are taxed at a maximum rate of 15 percent, a much lower rate than ordinary income. Taxpayers in the 10 and 15 percent ordinary income brackets do not pay any taxes on long-term gains and qualified dividends. Short-term gains are taxed at ordinary income rates.   

To obtain long-term rates, investors must hold the asset (such as stock and most other property) for more than one year. The holding period begins on the day after you acquire the asset and ends on the day you dispose of the asset.

Example.  If you bought stock on November 30, 2010 and sold it November 30, 2011, your holding period is exactly one year, and any gain (or loss) is short-term.  If you instead sold the stock on December 1, 2011, your holding period is more than one year, and gains (or losses) are long-term.

Rates on long-term gains may increase dramatically after 2012, depending on the status of the Bush-era tax rates. Long-term rates will increase to 20 percent if Congress takes no further action. The Obama administration has proposed to reinstate the 20 percent rate, but only for individual taxpayers with income of $200,000 and married taxpayers with income of $250,000.  To ensure that you can take advantage of long-term rates in 2012, you may want to make particular stock purchases before the end of 2011.  For 2011, December 30 is the last day on which stock exchanges are open, since December 31, 2011 is a Saturday.

Capital losses

If the value of your investment has dropped, you may want to sell the item and realize the loss.  (If you believe the investment will increase in value, it may still be worthwhile to hold on to it.)  Capital losses are netted against capital gains. Net capital losses (both long-term and short-term) can be deducted against ordinary income, up to $3,000 a year.  Any excess capital losses above $3,000 cannot be used and have to be carried over to the succeeding tax year.   

Wash sales. For stock that has dropped in value, it may be tempting to sell the stock, realize the loss, and then repurchase the same stock, so that you can benefit from any improvements in the market.  However, if you purchase the shares within 30 days before or after you sell the stock, the wash sale rules deny the loss.  The disallowed loss is then added to the cost of the new stock, and the loss is not recognized until the new shares are sold.  To avoid this treatment, one solution is to wait at least 31 days and then purchase the stock.

Timing

Stock is generally treated as sold on the trade date, the date the taxpayer enters into a contract to sell the stock. The trade date should be distinguished from the settlement date, the date that the investor delivers the stock certificate and receives payment. The settlement date may be 3-5 days after the trade date.  The trade date also determines (and ends) the holding period for the seller.

Example. You bought stock on December 28, 2010 and sold it on December 29, 2011. The settlement date is January 3, 2012. The treated is treated as sold on December 29; any gains or losses are recognized on your 2011 tax return.

Short sales.  The rules are different for a short sale, where the taxpayer initially sells shares and then must obtain shares to close out the transaction. If the stock price falls, so that the investor will realize a gain, the gain is realized on the trade date, when the seller directs the broker to purchase shares.  If the price rises, so that the investor will realize a loss, the loss is realized when the stock is delivered on the settlement date.

FIFO rule

If the investor sells identical blocks of shares that were purchased at different times, the basis and holding period of the shares sold are determined on a first-in, first-out (FIFO) method, unless the shares are specifically identified. If the investor does not identify the shares that are sold, the broker has the option to specifically identify the shares.

These identification rules are particularly important, because, brokers must report not only the proceeds from a stock sale but the basis and holding period of the stock, if the stock was originally purchased on or after January 1, 2011. If the stock was purchased before 2011, the broker does not need to report the basis.  The basis reporting rules will be extended in 2012 to shares in a mutual fund and shares obtained through a dividend reinvestment plan.

As you can see, investors have a lot to consider as the year-end approaches.  If you have any questions or would like to discuss these matters further, please contact our office.

Business taxpayers, like all taxpayers this year, are confronted with uncertainty in year-end tax planning as 2011 ends.  A number of business tax incentives are scheduled to expire after December 31, 2011 unless extended by Congress.  These incentives include widely-popular and utilized ones, such as 100 percent bonus depreciation, enhanced small business expensing, real property expensing, and many more.  Other provisions, such as the small business health insurance credit and the Code Sec. 199 domestic production activities deduction, while not expiring, appear to be under-utilized.  As 2011 draws to a close, it is a valuable time to review some of these tax incentives and how they may be able to help your business’ bottom line.

Business taxpayers, like all taxpayers this year, are confronted with uncertainty in year-end tax planning as 2011 ends.  A number of business tax incentives are scheduled to expire after December 31, 2011 unless extended by Congress.  These incentives include widely-popular and utilized ones, such as 100 percent bonus depreciation, enhanced small business expensing, real property expensing, and many more.  Other provisions, such as the small business health insurance credit and the Code Sec. 199 domestic production activities deduction, while not expiring, appear to be under-utilized.  As 2011 draws to a close, it is a valuable time to review some of these tax incentives and how they may be able to help your business’ bottom line.

Bonus depreciation

Taxpayers are allowed to recover the cost of certain property used in a trade or business or for the production of income through annual depreciation deductions. The amount of the allowable depreciation deduction for a tax year is generally determined under the modified accelerated cost recovery system (MACRS), which assigns applicable recovery periods and depreciation methods to different types of property.

An additional first-year depreciation deduction equal to 100 percent of the adjusted basis of the property is available for qualified property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013 for certain longer-lived and transportation property).  This additional depreciation deduction, known as “100 percent bonus depreciation” is temporary (unless extended by Congress). As a result, 2011 year-end tax planning should take into account 100 percent bonus depreciation as well as its scheduled drop to 50 percent for qualified property acquired after December 31, 2011 and before January 1, 2013 (or before January 1, 2014 for certain longer-lived and transportation property.

These dates are important in year-end planning.  Let’s look at an example. ABC Co. acquires a qualified asset on November 1, 2011 and places it in service on December 1, 2011. The 100 percent rate of bonus depreciation applies. However, if ABC Co. acquires a qualified asset on November 1, 2011 and places it in service on January 1, 2012, the 50 percent rate of bonus depreciation applies.  The rules for determining the acquisition date of an asset are different for the 100 percent and 50 percent rates. Special rules apply to self-constructed property.

Taxpayers may elect out of bonus depreciation. An election out of 100 percent bonus depreciation in 2011 will spread the depreciation deductions for the cost of an asset into future years measured by the asset’s depreciation period. Electing out of 100 percent bonus depreciation may be a valuable strategy for certain taxpayers. Our office can help you determine the best strategy for applying bonus depreciation.

Business vehicles

Special consideration should be paid to the interaction of 100 percent bonus depreciation and the so-called “luxury vehicle” caps. In Rev. Proc. 2011-26, the IRS set out a safe harbor method of accounting for businesses nominally entitled to 100 percent bonus depreciation but still limited by the maximum luxury vehicle depreciation caps ($11,060 for passenger autos for 2011 and $11,160 for light trucks in 2011). The effect of the safe harbor is generally to allow the taxpayer under the 100 percent bonus depreciation regime to claim exactly the same amount of depreciation during each year of the vehicle’s recovery period as would have been allowed if a 50 percent bonus depreciation rate had originally applied.  The safe harbor method may be used for qualifying new vehicles placed in service after September 8, 2010 and before January 1, 2012 for which a 100 percent bonus depreciation rate applies.

Code Sec. 179 expensing  

Business taxpayers are allowed to expense up to a certain dollar amount in annual investment expenditures for qualified property. The maximum amount that can be expensed is reduced by the amount by which the taxpayer’s cost of qualified property exceeds a certain investment limit.  For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar limit is $500,000 and the investment limit is $2 million.  The dollar limit is scheduled to fall to $125,000 (indexed for inflation at $139,000) and the investment limit is scheduled to fall to $500,000 ($560,000 indexed for inflation) after 2011.  As a result, business taxpayers contemplating qualified purchases should weigh the benefits of accelerating those purchases into 2011. Keep in mind that Code Sec. 179 expensing is also allowed for off-the-shelf computer software placed in service in tax years beginning before 2012.

Some targeted special expensing provisions are scheduled to expire after December 31, 2011 (unless extended by Congress). Expiring for qualified property placed in service after December 31, 2011 are special expensing rules for film and television production costs; brownfields remediation costs; and qualified advanced mine safety equipment.

Real property expensing   

Real property generally is excluded from Code Sec. 179 expensing.  However, tax legislation in 2010 provided that qualified leasehold property, qualified restaurant property, and qualified retail improvement property placed in service before January 1, 2012 are eligible for special expensing rules.  However, the special expensing provision is temporary and is scheduled to expire after 2011 (unless extended by Congress).

A taxpayer that places qualified leasehold improvement property, qualified restaurant property or qualified retail improvement property in service in a tax year that begins in 2010 or 2011 may elect to treat the property as Code Sec. 179 property and expense up to $250,000 of the cost of the property.  There are some important limitations. While qualified leasehold improvement property is eligible for bonus depreciation, qualified restaurant property and qualified retail improvement property are generally ineligible for bonus depreciation unless they meet the definition of qualified leasehold improvement property. Additionally, current law does not provide for a carryover of an unused real property expensing election for qualified property placed in service in 2011. If you are considering a real property improvement, please contact our office before the window of opportunity for this special expensing rule closes.

Work Opportunity Tax Credit (WOTC)

Employers that have taken advantage of the popular Work Opportunity Tax Credit (WOTC) in past years may be surprised to learn the credit is scheduled to expire after December 31, 2011 (unless extended by Congress). The WOTC is designed as an incentive to encourage employers to hire individuals from nine targeted groups, which have historically, experienced higher than average unemployment rates and other barriers to employment. The WOTC generally is 40 percent of the qualified worker’s first-year wages up to $6,000 (with higher and lower amounts for certain groups). Under current law, the WOTC applies to wages paid to qualified individuals who begin work for the employer before January 1, 2012. Wages paid to qualified individuals who begin work for the employer after December 31, 2011 (under current law) are ineligible for the WOTC.

Payroll taxes

Employers should remind employees that effective January 1, 2012, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent (unless the 2011 payroll tax holiday is extended by Congress).  Under the 2011 payroll tax holiday, employees paid OASDI taxes at a rate of 4.2 percent rather than 6.2 percent.  A similar benefit was provided to self-employed individuals.  The employer-share of OASDI taxes for 2011, however, remains at 6.2 percent.

An employer’s FUTA tax liability did change mid-year in 2011.  The 0.2 percent FUTA surtax expired after June 30, 2011. As a result, the FUTA tax rate falls to 6.0 percent for the remaining six months of 2011 before any state unemployment tax credits are taken into account.  The IRS has indicated it will provide guidance for employers. Our office will keep you posted of developments.

Small business health insurance tax credit

According to the IRS, many small businesses are overlooking the Code Sec. 45R small employer health insurance tax credit. Small employers that provide health care coverage to their employees and that meet certain requirements ("qualified employers") generally are eligible for the Code Sec. 45R tax credit for health insurance premiums they pay for certain employees. The employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year; average annual wages of its employees for the year must be less than $50,000 per FTE; and the employer must pay the premiums under a qualifying arrangement. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer's premium expenses that count towards the credit (25 percent for tax-exempt employers). If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced until it phases-out.

Code Sec. 199 deduction

Another under-used tax incentive, according to the IRS, is the Code Sec. 199 domestic production activities deduction.  The Code Sec. 199 deduction generally allows taxpayers to receive a deduction based on qualified production activities income (QPAI) resulting from domestic production. The deduction effectively reduces the income tax rate on domestic production activities. Qualifying domestic production includes the manufacture of tangible personal property; the production of computer software, sound recordings and certain films; the production of electricity, natural gas, or water; and construction, engineering, and architectural services. One deterrent to greater use of the deduction is its complexity. Our office can help you navigate the deduction’s rules and calculations.

Energy tax incentives

Energy tax incentives are a mixed bag for businesses. A number of tax credits for alcohol fuels and biodiesel/renewable diesel will expire after December 31, 2011 (unless extended by Congress). Tax credits for construction of new energy efficient homes and manufacture of energy efficient appliances will also expire after December 31, 2011 (unless extended by Congress).  Other energy tax incentives, including the deduction for energy efficient commercial buildings, do expire until after 2013 or subsequent years.

If you have any questions about the business tax incentives we have discussed and year-end planning for 2011, please contact our office.

Recently, a Congressional committee held a hearing on the federal tax deduction for contributions to qualified charitable organizations.  The lawmakers heard from a variety of speakers, individuals from community service, educational and religious groups. All of the speakers told Congress that the tax deduction for charitable giving encourages individuals to make donations. Many of the lawmakers agreed, noting that the deduction is charitable giving is one of the most widely used. As 2011 draws to a close, it is a good time to examine how charitable giving can impact your year-end tax planning and review the often complex rules making sure your donation is tax-deductible.

Recently, a Congressional committee held a hearing on the federal tax deduction for contributions to qualified charitable organizations.  The lawmakers heard from a variety of speakers, individuals from community service, educational and religious groups. All of the speakers told Congress that the tax deduction for charitable giving encourages individuals to make donations. Many of the lawmakers agreed, noting that the deduction is charitable giving is one of the most widely used. As 2011 draws to a close, it is a good time to examine how charitable giving can impact your year-end tax planning and review the often complex rules making sure your donation is tax-deductible. 

Cash donations

 Many times, a donation is made in response to an appeal, for example to help victims recover after a natural disaster. At that time, getting an acknowledgement or keeping a bank record probably is not on your mind. However, the tax law imposes strict substantiation requirements on donations to qualify for deduction.  Unless a contribution is properly substantiated, the IRS may deny your deduction.

 To deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction record or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. Bank records may include a canceled check, a bank or credit union statement, or a credit card statement.  For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed.

In response to changing technology, the IRS will allow a telephone bill to acknowledge a donation made by text message. The telephone bill must show the name of the receiving organization, the date of the contribution, and the amount given.

The IRS has described the criteria for an acknowledgment of a cash gift. First, an acknowledgment must be in writing. The acknowledgment must note the amount of the cash contribution; whether the qualified organization gave you any goods or services as a result of your contribution; a description and good faith estimate of the value of any goods or services; and a statement that the only benefit you received was an intangible religious benefit, if that was the case. Additionally, you must obtain the acknowledgment before the earlier of the date you file your return for the year you make the contribution; or the due date, including extensions, for filing the return.

Remember, the rules for substantiating cash contributions apply to all cash contributions, even contributions of small monetary amounts.  Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction.

Noncash donations

For many individuals, contributions of clothing and household items are the most common noncash donations. The first thing to keep in mind with donations of clothing and household items is to ask if they are in good used or better condition. Generally, clothing and household items must be in good used or better condition to be tax-deductible. However, you can take a deduction for a contribution of an item of clothing or a household item that is not in good used condition or better if you deduct more than $500 for it and include a qualified appraisal of it with your return.

If your donation of clothing or household items is less than $250, there are acknowledgment rules but the rules are fairly straightforward. You must get and keep a receipt from the charitable organization showing he name of the charitable organization, the date and location of the charitable contribution, and a reasonably detailed description of the property.

Donations of clothing or household items of at least $250 but not more than $500 have special acknowledgment rules. The acknowledgment must describe the contributed property; whether the qualified organization gave you any goods or services as a result of your contribution; a description and good faith estimate of the value of any goods or services; and a statement that the only benefit you received was an intangible religious benefit, if that was the case. Additionally, you must obtain the acknowledgment before the earlier of the date you file your return for the year you make the contribution; or the due date, including extensions, for filing the return.

Additionally, there are rules for substantiating noncash gifts valued at more than $500.  Finally, special rules apply for donations valued at more than $5,000. These donations generally require an appraisal and you must advise the IRS of that appraisal by filing a special form. If you are considering making a donation of more than $500 to a charitable organization, please contact our office so we can discuss the substantiation requirements.

Motor vehicles

A popular year-end donation is a contribution of a car or truck. Motor vehicle donations (and donations of boats and airplanes) are governed by special rules.

If you donate a qualified vehicle to a qualified organization and you claim a deduction of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization; or the vehicle's fair market value on the date of the contribution. Additionally, you must attach Copy B of Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, (or other statement containing the same information as Form 1098-C) you received from the charitable organization to your return

However, there are some exceptions. If the charitable organization makes a significant intervening use of or material improvement to the vehicle before transferring it, and you claim a deduction of more than $500, you generally can deduct the vehicle's fair market value at the time of the contribution.  If the charitable organization will give the vehicle, or sell it for a price well below fair market value, to a needy individual to further the organization's charitable purpose, and you claim a deduction of more than $500, you generally can deduct the vehicle's fair market value at the time of the contribution. This exception does not apply if the charitable organization sells the vehicle at auction.

Tax incentives scheduled to expire

After December 31, 2011, a number of tax incentives related to charitable giving are scheduled to expire (unless extended by Congress).  One expiring incentive allows certain IRA owners to directly transfer tax-free, up to $100,000 annually from the IRA to a qualified charitable organization.  The IRA owner must be age 70 ½ or older. Additionally, the contribution does not qualify for the deduction for charitable donations. To qualify, the IRA funds must be contributed directly by the IRA trustee to the qualified charitable organization. You can also take advantage of this tax incentive if you itemize or do not itemize deductions.  

Several other enhanced charitable giving incentives are also scheduled to expire at the end of 2011. They include special rules for contributions of food inventory, contributions of computer equipment to schools by corporations, and other special rules for corporations.

Timing considerations

Generally, contributions to charitable organizations must be made before January 1, 2012 to be tax-deductible in 2011.  If you make a contribution by credit card, for example, the contribution is deductible in the year you make the charge.  If you mail a check to a charity, the check is considered delivered on the date you mail it, as long as it is cashed in due course.  

If you have any questions about the substantiation rules, the expiring tax incentives or how charitable giving can be part of your year-end tax planning, please contact our office.

Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.

Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.

 A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year, some certainty for planning purposes is provided due to the extension of the reduced individual income tax rates through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010).

 In addition to the reduced tax rates, the Tax Relief Act of 2010 also extended numerous other tax benefits, including:

          Marriage penalty relief

          Repeal of the itemized deduction and personal exemption phaseouts

          Itemized deduction for state and local general sales taxes in lieu of state and local income taxes

          Mortgage insurance premium deduction

          Above-the-line deduction for certain out-of-pocket classroom expenses

          Above-the-line higher education tuition deduction and other education-related incentives

          Alternative minimum tax (AMT) patch

          Nonrefundable tax credit offset of entire regular and AMT tax liability

          Tax-free IRA distributions to charity

 However, the additional standard deductions for state and local real property tax, motor vehicle sales tax, and net disaster losses are no longer available.

 Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. However, the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012 by the Tax Relief Act of 2010. The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The Tax Relief Act of 2010 increased the AMT exemptions amounts for the 2010 and 2011 tax years, which provides some relief from this tax burden.

 Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at your earliest convenience to make an appointment to discuss your tax planning options.

As you know, the alternative minimum tax (AMT) is trapping more middle income taxpayers. If government forecasts are correct, about one-fifth of all taxpayers will be affected by the AMT in 2011, many of them middle income taxpayers. At a tax rate of at least 26 percent imposed on AMT items, in addition to your regular tax bill, your AMT could be substantial. In view of the serious risk of AMT exposure, careful planning to reduce your overall tax bill is critical.

As you know, the alternative minimum tax (AMT) is trapping more middle income taxpayers. If government forecasts are correct, about one-fifth of all taxpayers will be affected by the AMT in 2011, many of them middle income taxpayers. At a tax rate of at least 26 percent imposed on AMT items, in addition to your regular tax bill, your AMT could be substantial. In view of the serious risk of AMT exposure, careful planning to reduce your overall tax bill is critical. 

Although the AMT is a significant concern, tax planning should not focus solely on eliminating AMT liability. Due to the complexity of the interrelationship of the AMT and regular tax systems, concentration on lowering minimum tax liability alone could easily result in an unwanted increase in your regular income tax liability.  

In general, the best way to handle AMT liability is careful planning involving coordination of future regular income tax and AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability.  

We believe that a thorough analysis of your current and projected tax situation could minimize or eliminate your exposure to AMT liability. Please contact our office to make an appointment to discuss this important tax planning opportunity.

During the third quarter of 2011, there were many important federal tax developments. This letter highlights some of the more important federal tax developments for you. As always, please give our office a call or send us an email if you have any questions about these developments.

During the third quarter of 2011, there were many important federal tax developments. This letter highlights some of the more important federal tax developments for you. As always, please give our office a call or send us an email if you have any questions about these developments. 

Federal taxes. President Obama unveiled a number of tax proposals and revenue raisers in September as part of his proposed American Jobs Act and in recommendations to Congress’ Joint Select Committee on Deficit Reduction. In his American Jobs Act, President Obama proposed, among other measures, to extend and enhance the 2011 employee-side payroll tax cut, expand tax credits for hiring military veterans, and extend 100 percent bonus depreciation. President Obama also urged the joint committee to take a balanced approach to deficit reduction. Among other revenue raisers in his recommendations to the joint committee, President Obama proposed not to extend the Bush-era tax cuts for higher income taxpayers.  

Foreign accounts.The IRS touted the success of its offshore voluntary disclosure initiative (OVDI) in September. The IRS reported that 12,000 new applications came in from the 2011 OVDI. The OVDI offered taxpayers a reduced penalty framework in exchange for full disclosure of unreported foreign accounts.  Previously, because of Hurricane Irene on the east coast, the IRS had extended the deadline to request participation in the OVDI to September 9, 2011. In related news, the IRS announced in July that it will provide for a phased implementation timeline of certain provisions in the Foreign Account Tax Compliance Act (FATCA). The phased implementation generally applies to requirements imposed by FACTA on foreign financial institutions.  In August, the Court of Appeals for the Ninth Circuit found that a taxpayer had to produce records of his foreign bank accounts (In re Grand Jury Investigation M.H., CA-9, August 19, 2011). The court held that the Fifth Amendment right against self-incrimination did not protect the taxpayer from having to provide the records.  

Worker classification.The IRS unveiled the Voluntary Classification Settlement Program (VCSP) in September. The VCSP is open to employers that currently treat their workers as independent contractors and that want to prospectively treat the workers as employees. The VCSP provides a reduced penalty framework and audit protection to qualified employers. In related news, the IRS and the U.S. Department of Labor (DOL) signed a memorandum of understanding in September. The two agencies pledged to cooperate and share resources to curb worker misclassification.  Additionally, the Tax Court held that an adjunct professor of economics who taught online courses was an employee and not an independent contractor.  

Hurricane Irene.The IRS announced relief from certain tax filing and payment deadlines for taxpayers recovering from Hurricane Irene. The late summer hurricane caused damage along the east coast. Affected taxpayers have additional time to file returns and make certain payments.  

FUTA surtax.In 1976, Congress enacted a 0.2 percent Federal Unemployment Tax Act (FUTA) surtax. The surtax was regularly extended in subsequent years; the most recent extension expired after June 30, 2011. As a result of the expiration of the surtax, the FUTA tax rate falls from 6.2 percent to 6.0 percent for periods after June 30, 2011 before any state unemployment tax credits are taken into account. The IRS has indicated it intends to issue guidance on the mid-year expiration of the FUTA surtax.  

Cell phones. The IRS announced that employer-provided cell phones, provided primarily for non-compensatory business reasons, will not be treated as taxable compensation to employees and that personal use is nontaxable. Likewise, employer reimbursements to employees who use their personal cell phones for business will not be taxable.   

Employee reimbursements.The IRS issued its annual update of the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2011. The simplified high-low per diems have increased for 2012 to $242 for high-cost localities and to $163 for all other localities, an increase from $233 and $160, respectively, for 2011. At the same time, the IRS reported that it abandoned plans to discontinue the high-low method. 

6707A penalty.The IRS issued final regulations on the reportable transaction penalty under Code Sec. 6707A. The final regulations reflect changes made to the penalty by the Small Business Jobs Act of 2010. The IRS also identified various factors it will consider in deciding whether to rescind a penalty.  

Innocent spouse relief.  In July, the IRS announced it was abandoning its controversial regulation imposing a two-year limitations period on taxpayers requesting equitable innocent spouse relief. The announcement came after a number of court decisions, some of which upheld the IRS’s regulations; others which did not. The IRS also provided transition rules pending modification of the equitable innocent spouse regulations. 

Fringe benefits. The IRS revoked a prior letter ruling that had allowed certain employer-provided clothing and accessories to be excluded from employees’ gross incomes as de minimis fringe benefits. The IRS explained that additional information, received after its initial taxpayer-friendly decision, caused it to revoke its prior ruling. 

 Gift tax examinations. The IRS announced in July that it will not pursue gift tax examinations of contributions to Code Sec. 501(c)(4)organizations while the agency reviews the need for additional guidance or legislation. In recent months, some members of Congress have questioned the applicability of the federal gift tax to contributions to Code Sec. 501(c)(4)organizations.  

Economic substance doctrine. The IRS gave its examiners new instructions about how to apply the codified economic substance doctrine in July. The Health Care and Education Reconciliation Act of 2010 (HCERA) codified the economic substance doctrine. The IRS described various factors examiners should consider when reviewing cases where the economic substance doctrine may be applied.  

Advance pricing agreements.In August, the IRS realigned its Advance Pricing Agreement (APA) and Mutual Agreement Program (MAP) initiatives. The APA program allows taxpayers to obtain an agreement covering prospective determination and application of transfer pricing methods. A new office will be created in the IRS Large and International Business Division to consolidate the two initiatives.  

Annuity contracts. The IRS issued guidance in July intending to ease the requirements for treating a direct transfer of a portion of an existing annuity contract for a second annuity contract as a tax-free exchange under Code Sec. 1035. Under the new guidance, the portion of the existing contract representing the contract’s cash surrender value may be converted tax free into another annuity.   

Exempt organizations. The IRS issued final regulations to implement redesigned Form 990, Return of Organization Exempt From Income Tax. The final regulations reflect proposed regulations and provide for the elimination of the advance ruling process for new Code Sec. 501(c)(3) organizations. 

Health care reform. The Sixth Circuit Court of Appeals upheld the constitutionality of the individual coverage mandate in the Patient Protection and Affordable Care Act (PPACA). The Sixth Circuit found the health care reform law was a reasonable exercise of Congress’ authority to regulate commerce.  However, the Eleventh Circuit Court of Appeals struck down the individual mandate in the PPACA in August. The Eleventh Circuit found that Congress cannot require individuals to enter into contracts with insurance providers.  

Tax collection.The IRS increased its enforcement revenue in fiscal year (FY) 2010, the Treasury Inspector General for Tax Administration (TIGTA) reported in August. FY 2010 gross collections included approximately $1.2 trillion from individual taxes, $800 billion from employment taxes and $300 billion from corporate taxes.   

If you have any questions about these or any federal tax developments, please contact our office.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.