The timing of taxable income and deductions for federal income tax purposes is relatively straightforward. Generally, income is taxable in the year it is earned and received. Likewise, deductible expenses incurred and paid this year can offset taxable income on this year’s return. The Internal Revenue Code is riddled with exceptions, but these basic rules usually apply, especially for calendar-year taxpayers.
The tax law also includes several provisions commonly referred to as “carrybacks” and “carryforwards” (or “carryovers”). As their names imply, the tax item can be carried back to a prior year or carried forward to a succeeding year.
Two items that are often carried forward by individuals are capital losses and excess charitable deductions. For instance, capital losses realized in 2012 offset capital gains plus up to $3,000 of ordinary income for the year. If you have an excess capital loss of $10,000, you can carry forward $7,000 to 2013 after offsetting $3,000 of ordinary income in 2012.
Similarly, your current deduction for charitable donations may be limited by one or more percentage thresholds in the law. For example, donations of appreciated property are generally limited to 30% of your adjusted gross income (AGI). If you exceed the 30%-of-AGI limit this year, you may carry over the excess for up to five years.
Carrybacks aren’t as common, but may also be available in certain situations. Take a “net operating loss” (NOL) sustained by your small business. If you have an NOL in 2012, you can carry back the loss for two years. Thus, you’re effectively able to reduce your tax liability for one or two of the previous years for a refund of taxes already paid. Then you can carry forward any remaining NOL for up to 20 years. If it suits your purposes, you can elect to waive the NOL carryback. For more information on carrybacks and carryforwards, give us a call. We can help you make the best tax return choices for your situation.
Thank you for selecting our firm for your tax and accounting needs. We appreciate the confidence you have shown in us, and we remain ready to assist you at any time. Also, thank you for recommending us to your family, friends, and associates. We appreciate your referrals.
Warmest wishes for a happy holiday season and a prosperous new year!
The IRS announced several areas it is focusing on for audits of small businesses
The announcement comes as the IRS said it is increasing its oversight of small businesses and the reporting of taxes. The IRS believes that small businesses routinely under-report, and that this under-reporting is responsible for 84% of the $450 billion tax gap, reports the Examiner
Below are eight areas the IRS is targeting, as compiled by the Examiner
- Fringe benefits. The IRS believes that employers are not reporting employee fringe benefits like personal use of company vehicles.
- High income taxpayers. The IRS will focus on taxpayers with a total positive income of more than $1 million. Last year, the IRS audited 12.5% of all individuals with incomes of more than $1 million.
- Small business employee health insurance credit. This credit was first made available in 2010 and is now coming under IRS scrutiny. The IRS will look for compliance with eligibility requirements.
- International transactions. The IRS will focus on the international tax gap, individuals who hide assets overseas, and offshore transactions for large and small businesses.
- S corporations. The focus will be on deducting losses from S corporations and the use of S corporation distributions to avoid payment of Social Security taxes.
- Worker reclassification. Businesses may have an incentive to misclassify workers as independent contractors rather than employees, and the IRS believes that there is significant noncompliance in this area.
- Partnerships. This is a new area the IRS is targeting and the agency may take a look at large loss partnerships.
- Form 1099-K matching. The IRS announced that it will start Form 1099-K matching in late 2013. The IRS provided a reprieve from merchant card reporting on business returns for 2011 Schedule C and Forms 1065, 1120S and 1120; however, the IRS plans to change its approach after 2012 returns are filed. The IRS has indicated that it plans to pilot a business-matching program that can address a large amount of small business noncompliance.
September 17 – Third quarter installment of 2012 individual estimated income tax is due.
September 17 – Filing deadline for 2011 tax returns for calendar-year corporations that received an automatic extension of the March 15 filing deadline.
September 17 – Filing deadline for 2011 partnership tax returns that received an extension of the April 17 filing deadline.
October 1 – Generally, the deadline for businesses to adopt a SIMPLE retirement plan for 2012.
October 15 – Deadline for filing 2011 individual tax returns on extension.
Minimizing taxes is never easy. But in times of legislative and economic uncertainty, it can be a real challenge. As of this writing, the lower tax rates currently in effect are scheduled to expire at the end of 2012. Whether they’ll be extended, raised or changed in some other way is anyone’s guess.
This means you’ll need to base your tax plan on the way things are now but be ready to revise it in a flash if Congress makes significant tax law changes before year end. The more you know about the areas subject to change, and the more familiar you are with various tax planning strategies, the easier it will be to determine your best course of action. Our 2012-2013 Tax Planning Guide is intended to help you do exactly that, and it is now available for your review (click for pdf).
Please contact us soon for a year-end tax planning review.
With the recent economic downturn experienced by many taxpayers, there is a tax concept that is very important: cancellation of debt. You would think that the cancellation of debt by a credit card company or mortgage company would be a good thing for the taxpayer. And it can be, but it can also be considered taxable income by the IRS. Here is a quick review of various debt cancellation situations.
Consumer debt. If you have gone through some type of credit “workout” program on consumer debt, it’s likely that some of your debt has been cancelled. If that is the case, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return. The exception is if you file for bankruptcy. With bankruptcy, generally the debt cancelled is not taxable.
Even if you are not legally bankrupt, you might be technically insolvent (where your liabilities exceed your assets). If this is the case, you can exclude your debt cancellation income by reporting your financial condition and filing IRS Form 982 with your tax return.
Primary home. If your home is “short” sold or foreclosed and the lender receives less than the total amount of the outstanding loan, you can also expect that amount of debt cancellation to be reported to you and the IRS. But special rules allow you to exclude up to $2 million in cancellation income in many circumstances. You will again need to complete IRS Form 982, but the exclusion from taxable income brought about by the debt cancellation on your primary residence is incredibly liberal. So make sure to take advantage of these rules should they apply to you.
Second home, rental property, investment property, business property. The rules for debt cancellation on second homes, rental property, and investment or business property can be extremely complicated. Generally speaking, the new laws that cover debt cancellation don’t apply to these properties, and the IRS considers any debt cancellation income taxable. Nevertheless, given your cost of these properties, your financial condition, and the amount of debt cancelled, it’s still possible to have this debt cancellation income taxed at a preferred capital gains rate, or even considered not taxable at all.
Be aware that many of the special debt cancellation provisions are set to expire at the end of 2012. If you’re unsure as to how debt cancellation affects you, contact our office to review your situation and determine how much, if any, cancelled debt will be taxable income to you.
You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.
Do you know the tax status of other types of income? Here’s a short quiz to test your knowledge.
You tell your son he’ll be the sole beneficiary of your estate, and that you’ve decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he’ll have to pay in taxes. What do you tell him?
Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.
You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you’re not of retirement age. Do you have a taxable event?
Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it’s not included in your income and you can withdraw it penalty- and tax-free.
In 2008, Pennsylvania lawmakers passed Act 32, which completely restructured and significantly changed the withholding, reporting and collection of local earned income taxes. Act 32 goes into full effect on January 1, 2012 and will have an impact on all business taxpayers.
Prior to passage of the Act, the earned income tax collection process was complex and confusing. The provisions of Act 32 will streamline this process by standardizing forms and definitions and by consolidating tax collectors. All individual taxpayers in Pennsylvania will file the same local earned income tax return at the end of each year and all business taxpayers will file the same local earned income tax withholding returns each quarter or month, no matter where they or their employees reside. In addition, each county will have one designated earned income tax collector. This will decrease the number of tax collectors from about 560 to about 21! The tax collector in each county will be responsible for forwarding tax payments received by each business to the appropriate municipalities.
All employers will be required to withhold and remit local earned income taxes for all employees. Each employee will be required to complete a certificate of residency form. The tax rate that each employer will use to withhold tax for each employee will also change. The employer will use the higher of 1) the rate for the municipality in which the business is located or 2) the rate for the municipality in which the employee lives.
Pennsylvania’s Department of Community and Economic Development (DCED) oversees the implementation of the changes required by Act 32. To obtain more information from the DCED, including access to the newly required Residency Certification Form, visit http://www.newpa.com/get-local-gov-support/tax-information/dceds-act-32-eit-collection-system
If you have questions or would like assistance with the implementation of these changes in your business, please contact our office and we will be glad to help.