Accounting & Bookkeeping
Business Development & Consulting
Estate & Trust Planning
Financial Statements & Review
Forecast & Projection
Welcome to our October E-Newsletter!
Grand Prize includes winner's choice of:
Personal Financial Planning Advice
R.S.V.P. by Oct. 25
Just Out! President Signs Small Business Jobs Act of 2010 Into Law.
Congress has passed a small business jobs bill ( H.R. 5297) with valuable individual and business tax incentives. Many of the $12 billion tax incentives are temporary, with a short window to act. Others are permanent but require careful planning to maximize your tax benefits. This email highlights the tax incentives and revenue raisers in the new law. As always, please contact our office for more details. We can discuss how you can maximize your tax benefits from the new law.
Although the new law is labeled a "small business bill" and clearly helps small businesses in many ways, it actually is much more. The new law includes a number of provisions targeted to small businesses and investors in small businesses, such as 100 percent exclusion of gain on qualified small business stock, an increase in the amount allowed as a deduction for start-up expenditures, and more. Other provisions may benefit businesses of all sizes, such as extended bonus depreciation and extended and doubled Code Sec. 179 expensing. Many individuals will benefit from a new rule allowing retirement rollovers from elective deferral plans to Roth designated accounts, along with other retirement savings incentives.
Bonus depreciation. An additional first-year depreciation deduction equal to 50 percent of the adjusted basis was available for qualified property placed in service in 2008 and 2009 (2009 and 2010 for certain longer-lived property and transportation property). The new law extends bonus depreciation for qualified property acquired and placed in service during 2010 (or placed in service during 2011 for certain longer-lived property and transportation property). The new law also includes a special long-term accounting rule for bonus depreciation.
Code Sec. 280F. The limitation under Code Sec. 280Fon the amount of depreciation deductions allowed with respect to certain passenger vehicles is increased in the first year they are used in a business by $8,000 for vehicles that qualify and for which the taxpayer does not elect out of the additional first-year deduction. For 2010, therefore, maximum first-year depreciation is $11,060 for passenger automobiles ($11,160 for light trucks).
Code Sec. 179 expensing. The new law increases the maximum amount a taxpayer may expense under Code Sec. 179 to $500,000 and raises the phase-out threshold to $2 million. Enhanced Code Sec. 179expensing is available for tax years beginning in 2010 and 2011. The new law also allows taxpayers to expense qualified leasehold investment property, qualified restaurant property and qualified retail improvement property. However, the maximum amount with respect to real property that may be expensed is limited to $250,000.
Start-up expenditures. A certain amount of qualified business start-up expenses may be deductible in the tax year in which the active trade or business begins. The new law increases the amount of start-up expenditures that a taxpayer may elect to deduct from $5,000 to $10,000 for tax years beginning in 2010. The new law also increases the deduction phase-out threshold so that the $10,000 is reduced, but not below zero, by the amount by which the cumulative cost of qualified start-up expenses exceeds $60,000.
S corporation built-in gains tax. A C corporation that converts to an S corporation generally must hold any appreciated assets for 10 years following the conversion or, if disposed of earlier, pay tax on the appreciation at the highest corporate level rate (currently 35 percent). The American Recovery and Reinvestment Act of 2009 ( 2009 Recovery Act) temporarily shortened the usual 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010. The new law further shortens the holding period to five years in the case of any tax year beginning in 2011, if the fifth year in the recognition period precedes the tax year beginning in 2011.
Cell phones. For listed property, no deduction is allowed unless a taxpayer adequately substantiates the expense and business usage of the property. The new law removes cell phones and similar telecommunications devices from the definition of listed property for tax years beginning after December 31, 2009.
Small business stock. To encourage investment in small businesses, the 2009 Recovery Act temporarily increased the percentage exclusion for qualified small business stock acquired after February 17, 2009 and before January 1, 2011 to 75 percent. The new law raises the exclusion to 100 percent for qualified stock issued after the date of enactment (September 27, 2010) and before January 1, 2011. The stock must be acquired at original issue from a qualified small business and held for at least five years.
General business credit. The new law extends the carryback period for eligible small business credits from one to five years. An eligible small business is a corporation whose stock is not publicly traded, a partnership or a sole proprietorship. Additionally, the average annual gross receipts of the corporation, partnership, or sole proprietorship for the prior three tax year periods cannot exceed $50 million. The extended carryback provision is effective for credits determined in the taxpayer’s first tax year beginning after December 31, 2009.
Code Sec. 6707A penalty relief. The new law reforms the Code Sec. 6707Apenalty regime retroactively for taxpayers failing to disclose participation in reportable and listed transactions. Generally, the penalty would equal 75 percent of the reduction in tax reported on the participant’s return as a result of the transaction or that would result if the transaction was respected for federal tax purposes. Under the new law, the maximum penalty for an individual for failing to disclose a reportable transaction is $10,000 ($100,000 in the case of a listed transaction). The maximum penalty for all other taxpayers for failing to disclose a reportable transaction is $50,000 ($200,000 for all other persons). The new law also imposes minimum penalties.
Designated Roth accounts. Under the new law, if a Code Sec. 401(k), 403(b) or governmental 457(b) plan now sets up a qualified designated Roth contribution program, a qualifying distribution to an employee or surviving spouse from a non-designated Roth account under a plan may be rolled over to a designated Roth account within the same plan. The planning challenge in such a conversion to a designated Roth account is that the converted balance is considered taxable income at the time of conversion, requiring tax to be paid either from the proceeds themselves or from cash otherwise available to the taxpayer. If an amount is rolled over in 2010, however, the new law helps ease that tax liability by treating the taxable converted amount as included ratably in income in equal amounts for 2011 and 2012 unless the taxpayer elects otherwise. The designated Roth provisions in the new law are generally effective for distributions made after the date of enactment (September 27, 2010). Governmental 457(b) plans can start in 2011.
Annuitization. The new law allows partial annuitization of a nonqualified annuity contract. Holders of nonqualified annuities (annuity contracts held outside of a tax-qualified retirement plan or IRA) may elect to receive a portion of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis. Only a portion of an annuity, endowment or life insurance contract may be annuitized. Annuitization requires careful planning; please contact our office for details.
Self-employment. Individuals who are self-employed may claim a deduction for qualified health insurance costs for income tax purposes. For self-employment taxes, the self-employed individual cannot deduct any health insurance costs. The new law allows the income tax deduction for the cost of health insurance in calculating net earnings from self-employment for purposes of self-employment (FICA) taxes. The provision only applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.
Rental property expense payments. The new law imposes information reporting requirements on certain recipients of rental income from real estate. Rental income recipients making payments of $600 or more to a service provider in a tax year will file an information return with the IRS and the service provider. The new law permits the IRS to exclude individuals for whom reporting would be a hardship and individuals who receive only minimal amounts of rental income from the requirement. Certain members of the military and intelligence services are also excluded. The reporting provision applies to payments made after December 31, 2010.
Information return penalties. The Tax Code provides penalties for failing to file information returns. The penalty is tiered and capped. The maximum amount of the penalty varies depending when the information return is filed and if the taxpayer is a qualified small business. The new law increases the penalty generally across-the-board and imposes new maximum penalty amounts. The new law also revises the penalty for failing to furnish a payee statement to provide tiers and caps similar to the tiers and caps for failing to file the information return. The new penalty regime applies to information returns and payee statements required to be filed on or after January 1, 2011.
Cellulosic biofuel credit. The new law makes crude tall oil and certain other substances, which are largely generated as byproducts of paper manufacturing, ineligible for the cellulosic biofuel credit. The new limitations on the cellulosic biofuel credit are effective for fuels sold or used on or after January 1, 2010.
Guarantees. Congress was unhappy with the Tax Court’s decision in a case about source rules for income on guarantees ( Container Corp., 134 TC No. 5, CCH Dec. 58,131), which held that since the guarantee fees were treated as payments for services, the foreign parent was not subject to U.S. tax on them. The new law treats them prospectively as interest payments, whose source is determined by the position of the payor.
Levies. The new law allows the IRS to issue levies before a collection due process (CDP) hearing in the case of certain federal contractors. The provision is effective for levies issued after the date of enactment.
Corporate estimated tax payments. The new law increases the required payment of estimated tax by large corporations (with assets of at least $1 billion) by 36 percentage points for July, August, September 2015. The next required installment is proportionately reduced to reflect the increase.
As we have highlighted, the new law is much more than a small business bill, although many small businesses and their owners will benefit greatly from its provisions. Many provisions within the new law are broad-based and far-reaching. Please contact our office so we can help you design a tax strategy to maximize your benefits from the new law.
Important Deadline Approaching For
If you serve a nonprofit organization in some capacity, you need to be aware of this important tax filing requirement: All nonprofit organizations, except for churches and church-related groups, must file an annual return with the IRS. Failure to do so for three consecutive years will result in the loss of the organization's tax-exempt status. This annual filing requirement went into effect for small nonprofit groups (those with less than $25,000 in annual revenue) for the filing of their 2007 return, generally due on May 15, 2008. The filing deadline for the 2009 return was May 17, 2010. Thousands of small charities who hadn't filed for 2007, 2008, and 2009 hit the three-year failure to file point on that date.
The IRS has conducted an extensive notification program to remind charities of their filing obligation, but more than 300,000 still have not filed. Now the IRS is offering a one-time chance for these nonprofits to bring their filings up to date and avoid losing their tax-exempt status. Their three years of returns must be filed by October 15, 2010.
Organizations that do not meet the October 15, 2010, deadline will automatically have their exempt status revoked. Once the exempt status is revoked, the organization must apply for reinstatement. If you are responsible for a nonprofit organization and need details or filing assistance, please contact our office.
Small Businesses Might Benefit From New Tax Credit
When small business owners think about the recent health care reform, they may be thinking only of its long-term implications. But the legislation actually provides an immediate tax break for qualified small businesses and nonprofit organizations. Beginning this year, the Patient Protection and Affordable Care Act offers a tax credit of up to 35% of employer-paid health care costs. Does your business qualify?
The answer lies in a little math.
* First, you must have fewer than 25 full-time employees. Keep in mind that owners and their family members who draw a salary are not counted in the total. Neither are seasonal employees working 120 days or less per year. The term "full-time employee" is actually a bit of a misnomer; the IRS is really counting full-time equivalents, or FTEs. To figure your FTEs, add up the annual hours you paid to non-owner, nonseasonal employees (full-time or part-time) and divide by 2,080. If the result is less than 25, you’re ready to move to the next step.
* Next calculate your employees’ average wages. Just as in the calculation of full-time workers, you don’t count wages paid to owners, family members, or seasonal workers. After subtracting out the above pay, divide the net figure by the number of FTEs above, and if the result is less than $50,000, you are still in the running for the credit.
* To meet requirement number three, your business must cover at least 50% of the cost of employees’ health insurance. For 2010, you need only pay 50% or more of the single coverage premium even if the employee is enrolled in a family plan. Next year this special rule goes away.
From now through the year 2013, the maximum tax credit is 35% of the employer’s share of the premiums. But only businesses with 10 or fewer full-time employees and average wages of $25,000 or less actually get this rate. The percentage drops as the number of employees or the average pay increases. Another little wrinkle: Beginning in 2014, the maximum credit rises to 50%, but the tax break becomes available only to those businesses that purchase their health insurance through a state exchange. And even then, you can only claim the credit for two years.
Nonprofit organizations that meet the same qualifications mentioned above can receive a maximum credit this year of 25%.
If you’re a small business owner, look into this tax credit as soon as possible. For help in running the numbers, just give us a call.
Five Tax Moves to Consider Now!
1. Remember that required minimum distributions from retirement plans are back this year. If you're over 70½, your 2010 distribution must be taken by December 31 or a 50% penalty may apply. If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you'll have two taxable distributions for 2011.
2. With the $100,000 income limit dropped for converting a traditional IRA to a Roth, consider doing a conversion before year-end. You can elect to pay the tax over two years’ tax returns, 2011 and 2012, or pay in full on your 2010 return.
3. If your business is planning to add employees soon, do so before January 1, 2011. If you hire someone who has been unemployed for a while, you could qualify for an exemption from social security payroll taxes on the new hire’s wages. Keep the new worker for at least a year and you could also qualify for a tax credit of up to $1,000.
4. Start a pension plan for your small business. You may be entitled to a credit of up to $500 in each of the plan’s first three years.
5. Review your portfolio and start thinking about offsetting gains and losses for the year. You can deduct an excess of $3,000 of losses against ordinary income.
Is Your Computer Network Constantly Causing Problems?
One of your company's biggest investments will be your computer network and the technology that runs your business. When properly installed and maintained, computer technology can give your business considerable advantages over your competition. It can increase the efficiency and productivity of your whole business while making your work even easier. But in order for any technology to give you these kinds of results, it must be designed to support your specific business and what you need accomplished. That is where Rager, Lehman & Houck would like to step in. With our intimate knowledge of what your company's services are we can help customize and maintain your infrastructure to continue to meet and exceed your demands. How does your current computer support and network stack up to our list?
Information Technology Check List for Small Businesses
____ Productivity Enhancement
Every business should use software tools to enhance their productivity. These range from the very basic (email and spreadsheet) to much more robust systems.
____ Customer Database
Your business should have a solid, updated database of customer contact information and emails. This could easily be one of your most valuable assets.
____ Data Backup Systems
It is crucial for a business that users computers to have a data backup system and procedures to ensure backups are done regularly and consistently.
____ Business Email Account
Set up a business email account that ties in with your company's name or web domain name.
For technology replacement and recycling, a good technology plan can help keep your systems running so your business can too. Businesses need to remember to keep your computer hardware reliable and operational, and a three year replacement schedule is usually recommended.
Small business should have a reliable high speed wired and/or wireless internet connection. Add this to reliable networking hardware to make sure all workstations are consistently on-line.
___ Antivirus and Spyware Security
Ensure that your company has and follows proper security measures, such as maintaining an updated operating system and virus protection software, firewall, spyware protection and adware protection. Security is a process and a product.
___ Electronic Document Scanning
Businesses today still use quite of bit of paper, and the best way to secure that paper is to scan these and store them electronically.
___ Secure Remote Access
More and more small businesses are benefiting from being able to access their files and applications remotely - either from home or on the road.
___Trusted Technology Consultant and Training
Having access to a technology consultant will ensure that you can concentrate on your business - what you know best - while someone else spends time repairing, maintaining and securing technology solutions for your business - what they do best. They may even be able to train you on how to use the software that is best for your business.You can find additional information at www.rlhcpa.com/technology
RLH Team Members Celebrate 20 Years!
Please join us in congratulating the following Team Members on their 20 years of dedicated service to RLH!
Harriet L. Gillan, CPA (July 18th)
Michelle D. Adams (August 27th)
Harriet & Michelle were each honored at a breakfast celebration with their Team where they were presented with an engraved jewelry box recognizing their dedication and commitment to our Firm. Thanks and congratulations to both!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.
P.S. Also, thank you for recommending us to your family, friends, and associates.
We appreciate your referrals!
This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further detail on any article, please contact us.