Thursday, March 13, 2014

DD in box 12 of your W-2?

What You Need to Know about the Amount of Health Insurance Reported on Form W-2
You may be wondering if you have to report the value of your employer-sponsored health insurance coverage, which may appear on your W-2, Wage and Tax Statement when you file your 2013 federal income tax return.
Here is what you need to know about the value shown on your W-2.
  • The health care law requires certain employers to report the cost of coverage under an employer-sponsored group health plan.
  • The amount of employer-sponsored health insurance coverage appears in Box 12 of the W-2, and has the code letters “DD” next to it.
  • Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable or that it needs to be reported on your tax return.
  • The amount is only for information, and shows the payments made by you and your employer and is not included in the amount shown in Box 1, which is the amount of taxable earnings.

Monday, March 10, 2014

Health Care Tax Credit for Small Businesses

Small Business Health Care Tax Credit
 
The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees.
A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. For example, two half-time employees equal one employee for purposes of the credit.
For 2013, the average annual wages of employees must be less than $50,000, and the employer must pay a uniform percentage for all employees that is equal to at least 50% of the premium cost of the insurance coverage.
The maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.
If you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years.
For small tax-exempt employers, the credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.

Friday, February 28, 2014

Ownership change in an S Corp

Steps to Buy Out a Partner in a 50/50 S Corp


 
S corporations typically represent a closely held business owned by a few individuals. This business type is similar to a partnership, but offers different benefits for the owners. A common issue is how to buy out a partner who wants to leave the company. S corporations can have shares of ownership stock, but the company doesn't usually sell them on the open market. During the buyout process, you can ensure an amicable process where each owner receives a fair share of the company's asset value.
       


    • 1
      Review the S corporation agreement. Like most businesses, an S corporation will have specific guidelines detailed in the starting business agreement. If no provision exists for the buyout process, the company should handle the process according to common business standards.
    • 2
      Obtain a third-party valuation of the company. This valuation provides both owners with a firm idea of the company's economic value. 
    • 3
      Apply the business's total value to each share in the company. For example, if a company's total value is $1.2 million and each partner has 100 shares, each share is worth $6,000. Therefore, the buyout amount for the partner is $600,000.
    • 4
      Set a schedule for paying off the partner. Partners may be willing to accept a scheduled buyout rather than a single one-time payment. This can help the company avoid a large decrease in capital at one time.

Wednesday, February 05, 2014

Gift Tax


Gift tax

Although there’s no income tax on gifts, there is such a thing as a gift tax. The gift tax is imposed on the donor. The person receiving the gift does not have to pay this tax.
Most people don’t have to worry about this tax because it generally doesn’t apply until you make gifts exceeding the annual exclusion amount to one person within a single year. And there are other exclusions that often prevent the gift tax from applying. There is an unlimited exclusion for gifts to your spouse. (An annual limit applies if your spouse is not a U.S. citizen.) And there’s an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.

The annual exclusion

The annual exclusion is adjusted for inflation and applies to each person every year. The amount is $14,000 as of 2014.
Example: On December 31 you give $14,000 to your son and $14,000 to your son’s wife. On January 1 (the next day) you give another $14,000 to your son and another $14,000 to your son’s wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion.
If you’re married, your spouse can also make the gifts described in the example. You and your spouse each have your own annual exclusion amount, even if you file joint federal income tax returns.

Giving more than the annual exclusion amount

If you give more than the annual exclusion amount to one person in a single year you’ll have to file a gift tax return. But you still won’t have to pay gift tax unless you gave a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2014 the amount is $5,340,000.
You don’t use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount described earlier. For example, if you make a $15,000 gift in 2014, you have used up only $1,000 of your lifetime limit.
Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is also $5,340,000 as of 2014. This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can pass through your estate free of the estate tax. So you shouldn’t ignore your lifetime limit even if you feel certain that your lifetime gifts will never add up to that amount. It pays to plan your gifts around the annual exclusion amount and the exclusions

Sunday, January 12, 2014

S Corps and Taxes!!!!

S Corporation Compensation and Medical Insurance Issues

When computing compensation for employees and shareholders, S corporations may run into a variety of issues. The information below may help to clarify some of these concerns.

Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes.
Authority to ReclassifyJoly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000)
Reinforced Employment Status of ShareholdersVeterinary Surgical Consultants, P.C. vs. Commissioner, 117 T.C. 141 (2001)
Joseph M. Grey Public Accountant, P.C. vs. Commissioner, 119 T.C. 121 (2002)
Reasonable Reimbursement for Services PerformedDavid E. Watson, PC vs. U.S., 668 F.3d 1008 (8th Cir. 2012)
The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation. As such, we need to look to the source of the S corporation's gross receipts.
The three major sources are:
  1. Services of shareholder,
  2. Services of non-shareholder employees, or
  3. Capital and equipment.
If the gross receipts and profits come from items 2 and 3, then that should not be associated with the shareholder-employee's personal services and it is reasonable that the shareholder would receive distributions along with compensations.
On the other hand, if most of the gross receipts and profits are associated with the shareholder's personal services, then most of the profit distribution should be allocated as compensation.
In addition to the shareholder-employee direct generation of gross receipts, the shareholder-employee should also be compensated for administrative work performed for the other income producing employees or assets. For example, a manager may not directly produce gross receipts, but he assists the other employees or assets which are producing the day-to-day gross receipts.
Some factors in determining reasonable compensation:
  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

Treating Medical Insurance Premiums as Wages

Heath and accident insurance premiums paid on behalf of the greater than two percent S corporation shareholder-employee are deductible and reportable by the S corporation as wages for income tax withholding purposes on the shareholder-employee’s Form W-2.
These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2.
A 2-percent shareholder-employee is eligible for a deduction in arriving at Adjusted Gross Income (AGI)  for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation and the shareholder meets the other self-employed medical insurance deduction requirements.  A deduction used to arrive at AGI is referred to as an above-the-line deduction. If, however, the shareholder or the  shareholder’s spouse is eligible to participate in any subsidized health care plan then the shareholder is not entitled to the above-the-line deduction.
A medical plan can be considered established by the S corporation if the S corporation paid or reimbursed the shareholder-employee for premiums and reported:
  • The premium payment
  • Reimbursement as wages on the shareholder-employee’s W-2

Health Insurance Purchased in Name of Shareholder

The insurance laws in some states do not allow a corporation to purchase group health insurance when the corporation only has one employee. Therefore, if the shareholder was the sole corporate employee, the shareholder had to purchase his health insurance in his own name.
The IRS issued Notice 2008-1 which ruled that under certain situations the shareholder would be allowed an above-the-line deduction even if the health insurance policy was purchased in the name of the shareholder. Notice 2008-1 provided four examples, three of the examples had the shareholder purchasing the health insurance and the other example had the S corporation purchasing the health insurance.
The Notice held that if the shareholder purchased the health insurance in his own name and paid for it with his own funds the shareholder would not be allowed an above-the-line deduction. On the other hand, if the shareholder purchased the health insurance in his own name but the S corporation either directly paid for the health insurance or reimbursed the shareholder for the health insurance and also included the premium payment in the shareholder’s W-2, the shareholder would be allowed an above-the-line deduction.
The bottom line is that in order for a shareholder to claim an above-the-line deduction, the health insurance premiums had to be paid by the S corporation and had to be included in the shareholder’s W-2.

Friday, January 03, 2014

Reinstatement of Tax-Exempt Status after Automative Revocation

IRS Provides Procedures for Reinstatement of Tax-Exempt Status After Automatic Revocation (Rev. Proc. 2014-11)

Also addressed is the procedure for applying for retroactive reinstatement more than 15 months after revocation, as well as reinstatement of exempt status from the postmark date of the application. The guidance sets forth details of the reasonable cause statement that must accompany the application for reinstatement, including factors that are weighed by the IRS to determine reasonable cause. Finally, the procedure addresses automatic revocations subsequent to reinstatement.
The new procedure is effective for applications submitted after January 2, 2014. Transition relief is provided. Notice 2011-44, I.R.B. 2011-25, 883, is modified and superseded.

Monday, December 30, 2013

Big changes in Depreciation, Section 179, and UOP (what is that? Read on)

Whenever you fix or replace something in a rental unit or building you need to decide whether the expense is a repair or improvement for tax purposes. Why is this important? Because you can deduct the cost of a repair in a single year, while you have to depreciate improvements over as many as 27.5 years.
For example, if you classify a $1,000 expense as a repair, you get to deduct $1,000 this year. If you classify it as an improvement, you'll likely have to depreciate it over 27.5 years and you'll get only a $35 deduction this year.
That's a big difference.
Unfortunately, telling the difference between a repair and an improvement can be difficult. In attempt to clarify matters, the IRS has issued lengthy regulations explaining how to tell the difference between repairs and improvements. Implementation of these rules has been delayed although anyone can opt to use them between now and their required effective date of January 1, 2014.
For more details on current vs. capital expenses refer to the article Current vs Capital Expenses.

If You are a Landlord

Maximize your tax deductions, including how to deduct repairs and losses, depreciate improvements.

What Is an Improvement under IRS Rules?

Under the new IRS regulations, property is improved whenever it undergoes a:
  • Betterment
  • Adaptation, or
  • Restoration.
Think of the acronym B A R = Improvement = Depreciate.
If the need for the expense was caused by a particular event--for example, a storm--you must compare the property's condition just before the event and just after the work was done to make your determination. On the other hand, if you’re correcting normal wear and tear to property, you must compare its condition after the last time you corrected normal wear and tear (whether maintenance or an improvement) with its condition after the latest work was done. If you’ve never had any work done on the property, use its condition when placed in service as your point of comparison.

Betterments

An expenditure is for a betterment if it:
  • ameliorates a “material condition or defect” in the property that existed before it was acquired or when it was produced--it makes no difference whether or not you were aware of the defect when you acquired the unit of property, or UOP (discussed below)
  • results in a “material addition” to the property--for example, physically enlarges, expands, or extends it, or
  • results in a “material increase” in the property's capacity, productivity, strength, or quality.

Restorations

An expenditure is for a restoration if it:
  • returns a property that has fallen into disrepair to its “ordinarily efficient operating condition”
  • rebuilds the property to a like-new condition after the end of its economic useful life, or
  • replaces a major component or substantial structural part of the property
  • replaces a component of a property for which the owner has taken a loss, or
  • repairs damage to a property for which the owner has taken a basis adjustment for a casualty loss.

Adaptations

You must also depreciate amounts you spend to adapt property to a new or different use. A use is “new or different” if it is not consistent with your “intended ordinary use” of the property when you originally placed it into service.

What Does the IRS Consider a Unit of Property (UOP)?

To determine whether you’ve improved your business or rental property, you must determine what the property consists of. The IRS calls this the “unit of property” (UOP). How the UOP is defined is crucial. The larger the UOP, the more likely will work done on a component be a deductible repair rather than an improvement that must be depreciated.
For example, if the UOP for an apartment building is defined as the entire building structure as a whole, you could plausibly claim that replacing the fire escapes is a repair since it doesn’t seem that significant when compared with the whole building. On the other hand, if the UOP consists of the fire protection system alone, replacing fire escapes would likely be an improvement.
New IRS regulations require that buildings be divided up into as many as nine different UOPs: the entire structure and up to eight separate building systems. An improvement to any of these UOPs must be depreciated. As a result, more costs will have to be classified as improvements, rather than repairs.

UOP #1: The Entire Building

The entire building and its structural components as a whole are a single UOP. A building’s structural components include:
  • walls, partitions, floors, and ceilings, and any permanent coverings on them such as paneling or tiling
  • windows and doors
  • all central air conditioning or heating system components
  • plumbing and plumbing fixtures, such as sinks and bathtubs
  • electric wiring and lighting fixtures
  • chimneys
  • stairs, escalators, and elevators
  • sprinkler systems
  • fire escapes
  • other components relating to the operation or maintenance of the building, and
  • roofs.
For example, replacement of a building’s roof is an improvement to the building UOP.

UOP #2-9: Building Systems

In addition, the following eight building systems are separate UOPs. An improvement to any one of these systems and must be depreciated:
  • Heating , ventilation, and air conditioning (“HVAC”) systems: This includes motors, compressors, boilers, furnace, chillers, pipes, ducts, and radiators.
  • Plumbing systems: This includes pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste.
  • Electrical systems: This includes wiring, outlets, junction boxes, lighting fixtures and connectors, and site utility equipment used to distribute electricity.
  • All escalators.
  • All elevators.
  • Fire-protection and alarm systems: These includes sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detectors, fire escapes, fire doors, emergency exit lighting and signage, and fire fighting equipment, such as extinguishers and hoses.
  • Security systems: These include window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit.
  • Gas distribution system: This includes pipes and equipment used to distribute gas to and from the property line and between buildings.
Example: A landlord purchased an apartment building five years ago for $750,000. This year he spends $5,000 to fix wiring in the electrical system. Under the old IRS rules, the $5,000 likely would be considered a repair because it is relatively small compared to the overall cost of the building, which was treated as a single UOP. Under the new rules, the electrical system is a separate UOP. This means that the $5,000 must be compared with the cost of the electrical system alone, not the cost of the whole building. This makes the expense seem much more significant and likely to constitute an improvement.
For the latest IRS rules on repairs and improvements, see IRS Bulletin 2012-14, Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property.
Thanks to , J.D. for pulling a lot of this together!

Monday, December 23, 2013

Tax items of interest for 2013 & 2014!

2013 1040 In Depth Manual:

  • 2014 Section 179. Use this table:

Section 179 Limits after The 2007, 2010 and 2012 Tax Acts
Description
2007
2008
2009
2010-2013
2014
Section 179 Limit
$125,000
$250,000
$250,000
$500,000
$25,000
Section 179 Phase-out
$500,000
$800,000
$800,000
$2,000,000
$200,000
  • High Income Earners  
The 39.6 percent marginal tax rate will affect single filers with annual income exceeding $406,750 ($457,600 for married couples filing jointly), up from $400,000 and $450,000, respectively, in tax year 2013. Changes to the other marginal tax brackets -- 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent -- are detailed in the release (Rev. Proc. 2013-35;IRS Revenue Procedures).

  • Standard Deduction
The standard deduction for singles and married couples filing separately in tax year 2014 will rise to $6,200 (from $6,100 in tax year 2013), and to $12,400 for married couples filing jointly (from $12,200 a year ago). The standard deduction for heads of household will rise to $9,100 from $8,950.
  • Limits on Itemized Deductions
The limit on itemized deductions claimed on tax year 2014 returns begins with incomes of $254,200 for singles and $302,050 for married couples filing jointly.
  • Personal Exemption
The personal exemption will rise to $3,950, from $3,900 in 2013. However, the exemption will begin phasing out at adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly), and phases out completely at $376,700 ($427,550 for married couples filing jointly).



  • AMT
The alternative minimum tax exemption for tax year 2014 will be $52,800 ($82,100 for married couples filing jointly), up from $51,900 and $80,800, respectively, last tax year.


  • Earned Income Credit
The maximum earned income tax credit will be $6,143 for taxpayers filing jointly who have three or more qualifying children. That's up from $6,044 in tax year 2013.


  • Foreign earned income exclusion
The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.

 

  • For filers who itemize
Schedule A
    IRS Notice 2013-80 gives 2014 mileage rates at 56 cents for business, 14 cents for charity and 23.5 cents for medical and moving.
  
 
  • New Depreciation measures being enactedCan not just expense replacements any longer....
  • Form 4562 Depreciation
    Example Repair and Capitalization Policy

    Note this policy is an annual irrevocable election and must be included with the timely filed Federal Tax Return upon adoption.

    "XYZ Company hereby adopts for book and Federal income tax purposes the following policy regarding capitalization expenses for the year beginning January 1, 2014. In accordance with Internal Revenue Code Sections 167 and 168 and related Regulations XYZ Company has determined that amounts whose individual cost (including tax, installation and delivery costs) does not exceed $500 will be deducted as incurred as an operating expense. Amounts exceeding this dollar limit will be examined individually to determine if their use or purpose requires capitalization under the betterment, adaptation or restoration rules used by the Internal Revenue Service and will be capitalized or expensed as incurred as a result of the application of those rules." (Companies with audited financial statements should replace $500 with $5,000.
        •  
        •  
    •  
  • Net Investment Tax
        •  Form 8960 Net Investment Income Tax
          On November 26, 2013 the IRS released final regulations at TD 9644 regarding the net investment income tax. The regulations included significant changes to the proposed regulations and addressed many concerns taxpayers had raised with the IRS, including rules on regrouping, self-rented property, self-charged interest income, trader's gains and losses, and real estate professionals. The new rules permit a single property to be a rental trade or business.
      •  
  • Regrouping
        •  Regrouping
          In the original proposed regulations the IRS allowed taxpayers whose income exceeded the threshold limits and who had NII the ability to regroup activities one time for 2013 and report the regrouping via a new grouping election. This rule was retained.

          In the final regulations, the IRS allows a taxpayer to regroup activities if the otherwise non-qualifying taxpayer becomes qualifying upon an amended return or as a result of an IRS examination. The taxpayer can apply the regroup to the year of the amended return (reg. section 1.469-11(b)(3)(iv)(C)(1)).

          Also, if a taxpayer correctly elects to regroup and upon amending the return no longer qualifies for regrouping, the regroup is considered void.
          The final regulations do not allow regrouping for partnerships and S corporations.
 
  1.  Self Rented Property
        • Self Rented Property
          Reg. section 1.1411-4(g) provides special rules for self-rented property and self-charged interest income. The final regulations provide that, in the case of rental income that is treated as non-passive by reason of § 1.469-2(f)(6) (which generally re-characterizes what otherwise would be passive rental income from a taxpayer's property as non-passive when the taxpayer rents the property for use in an activity in which the taxpayer materially participates) the gross rental income is treated as derived in the ordinary course of a trade or business, meaning that self-rental income is not subject to the surtax! If the gain or loss from the disposition of property is treated as non-passive gain or loss under some conditions, the gain or loss is deemed to be derived from property used in the ordinary course of business also meaning that the sale of the property is not subject to the surtax!
        •  
    •  
    • Interest of WC
        •  Interest On Working Capital
          Generally exempted if normally charged as a business policy on all account
        •  
    • Self Charge Interest
      •  Self Charged Interest
        The IRS added a special rule that permits taxpayers to exclude from net investment income the amount of interest income equal to the taxpayer's allocable share of the non-passive deduction for self charged interest expense. However, this special rule does not apply in situations when the interest deduction is taken into account in determining self-employment income that is subject to tax under section 1401(b).

      •  
    • R/E Professionals
      •  Real Estate Professionals
        The final regs also offer limited relief from net investment income tax in the form of a safe harbor for rental income of real estate professionals that is derived in the ordinary course of a trade or business.

        The safe harbor test provides that, if a real estate professional (within the meaning of section 469(c)(7)) participates in rental real estate activities for more than 500 hours per year, the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. Alternatively, if the taxpayer has participated in rental real estate activities for more than 500 hours per year in five of the last ten taxable years (one or more of which may be taxable years prior to the effective date of section 1411), then the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. This means that most real estate professionals will not be subject to the NII surtax.

        Interestingly the IRS recognizes that some real estate professionals with substantial rental activities may derive such rental income in the ordinary course of a trade or business, even though they fail to satisfy the 500 hour requirement in the safe harbor test. As a result, the final regulations specifically provide that such failure will not preclude a taxpayer from establishing that such gross rental income and gain or loss from the disposition of real property, as applicable, is not included in net investment income. Special new rules are also provided for the treatment of suspended passive losses once an activity becomes active. The approved approach allows suspended losses from former passive activities in calculation of net investment income but only to the extent of the non-passive income from such former passive activity that is included in net investment income in that year.
    •  
    • Penalty Relief 
        • Penalty Relief
          Although the surtax law was passed over three and 1/2 years ago, and the imposition of the tax began a year ago IRS failed to provide guidance on many surtax issues. They declined in these final regulations to provide penalty relief for late tax payments.

          The foreign tax credit is specifically not allowed to apply against the NII tax under 1.1411-1(e) of the Regulations.
        •  
      •  
    • Attack on the Clergy?
      • Clergy
        A U.S. district court held that section 107(2), which excludes the rental allowance paid to a minister from gross income, is an unconstitutional violation of the establishment clause and enjoined its enforcement, finding that it provides a benefit to religious persons that it does not give to others.

        The Freedom From Religion Foundation (FFRF) and its co-presidents filed a suit in U.S. district court challenging the availability of federal income tax exemptions for "ministers of the gospel" under section 107, arguing that the exemptions violate the Constitution's establishment and equal protection clauses.

        U.S. District Judge Barbara B. Crabb addressed the merits of the case and found that based on the Supreme Court's decision in Texas Monthly Inc. v. Bullock, 489 U.S. 1 (1989), the exemption in section 107(2) violates the establishment clause. In that decision, the Supreme Court held that a state sales tax exemption provided only to publishers of religious writings was unconstitutional. Crabb acknowledged that the withdrawal of the exemption would greatly affect ministers and their churches, but she said that only underscores the preferential treatment that she found to have violated the First Amendment. Crabb concluded her opinion by saying the government isn't powerless to provide exemptions to benefit religion and that Congress can rewrite the provision so that it complies with the principles established by the Supreme Court.

        The judge put a stay on enforcement of the case pending appeal. If the stay is lifted the case would apply in the 7th circuit of Illinois, Indiana and Wisconsin.
        •  
        •  
    • Fringe Benefits
      • Fringe Benefits
        The IRS announced October 31 that it is modifying the "use it or lose it" rule that applies to health flexible spending accounts (FSAs) under section 125's proposed regulations.

        The modification announced in Notice 2013-71, 2013-47 IRB 1 2013 TNT 212-10: Internal Revenue Bulletin permits employers to amend section 125 cafeteria plans to carry over up to $500 of unused amounts remaining in a health FSA at the end of the plan year. Before the change, any amount remaining in an employee's FSA at the end of the plan year was forfeited and returned to the employer.

        The $500 carryover does not limit an employee's ability to elect the maximum in salary reduction contributions under section 125(i), which limits employee salary reduction contributions to $2,500.

        The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.

        The change announced by the IRS is not automatic and will require employers to amend plans for the $500 carryover to apply to employee health FSAs. Any plan adopting a carryover provision is not also permitted to provide the 2 1/2-month grace period. A plan amendment adopting the carryover provision applies retroactively to the first day of the plan year. A plan may be amended to adopt the carryover provision for a plan year beginning in 2013 at any time on or before the last day of the plan year that begins in 2014.

 IRA,  Pensions
  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $17,500.
  •           The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $5,500.
The limit on annual contributions to an Individual  retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not                    subject to an annual cost-of-living adjustment and remains $1,000.
  •  
  •            The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  •           The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  •            The AGI limit for the saver's credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.



  • IRS info
    • IRS
      IRS Taxpayer Advocate, Nina Olson, announced that walk-in tax assistance at IRS offices will end December 31, 2013 due to budget cuts. At the same time, the IRS has been unable to regulate un-enrolled tax preparers due to litigation and the failure of Congress to pass applicable legislation. Ms. Olson also stated that the levels of tax return preparer fraud are "astonishing" and that much of it stems from un-enrolled preparers.
  • Social Security
  •  Social Security
    For 2014, maximum taxable earnings with respect to Social Security was increased from $113,700 to $117,000, and the tax rate for employees and self-employed individuals did not change, according to a fact sheet from the Social Security Administration.
I would like to thank my friend Jim Newland, CPA in Eastlake, Ohio for sharing this with us!

Wednesday, November 20, 2013

529 plans help for College and Taxes!

Benefits of 529 plans

Federal tax benefits

529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006.

Donor retains control of funds

You, the donor, stay in control of the account. The named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked.  Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA) and you will find the 529 plan gives you much more say in how the plan is used!

Low maintenance

Third, a 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager.

Simplified tax reporting

You won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.

Flexible

If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 12 months.

State tax benefits

Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment.  If you don't get any benefits from your state, you have the pick of every 529 plan on offer.

Substantial deposits allowed

Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself!

Health Savings Accounts now allow a $500 carryover

In the past, if you had a Health Savings Account with a balance at the end of the year, you surrendered the balance.  The IRS issued Notice 2013-71, which permits companies to amend their Sec. 125 cafeteria plans to allow participants in health flexible spending arrangements (FSAs) who do not use all of the money in a plan year to use up to $500 in the next plan year, in addition to the regular $2,500 limit during the succeeding year. Employers may amend their cafeteria plans to adopt the carryover provision for the current cafeteria plan year or any subsequent plan year.


The new carryover rule offers an alternative to the current grace period rule, and companies that adopt this new carryover rule are not permitted to also offer the grace period. Under the grace period rule, introduced in 2005, a cafeteria plan can allow participants to spend unused amounts in the first two months and fifteen days after the beginning of the next plan year.
Health FSAs in cafeteria plans permit employees to pay for qualified medical expenses such as co-pays and deductibles, eyeglasses, and hearing aids on a pretax basis. Once the plan year ends, employees lose any money left in the accounts under the use-it-or-lose-it rule (unless the employer offers the grace period). This new carryover rule helps employees by allowing them to make the election without worrying they will forfeit some of their money and to lessen the incentive to make wasteful purchases (such as for a third pair of eyeglasses) at the end of a year to exhaust the funds.
Employers are not required to allow the $500 carryover (and can also set a lower limit) or the grace period, but to participate, employers must amend their plans on or before the last day of the plan year for which amounts may be carried over, and may be effective retroactively, provided certain requirements are met.
 
 
 

 

Monday, November 18, 2013

Tax Credits for Hiring Military Veterans


An often overlooked employer benefit is  a tax return credit available to businesses who hire qualified vets before December 31, 2013.  The up to $9,600 credit is part of the Work Opportunity Tax Credit (WOTC) and is included with other business related credits on the Form 3800, General Business Credits.  Yes, you as an employer may get a tax credit up to almost ten thousand dollars for hiring some of the most qualified experienced workers in the market today.
Let’s take a look at the qualifications of the credit:
Hire a qualified veteran.  To be considered a qualified veteran the individual must:
  • Have served on active duty for more than 180 days or have been discharged or released from active duty for a service-connected disability, and
  • Not have a period of active duty of more than 90 days that ended during the 60-day period ending on the hiring date.
  • Be hired before December 31, 2013.
In addition, the veteran must be certified by the appropriate State Workforce Agency (SWA) as meeting one of the following:
  • A member of a family receiving assistance under SNAP (food stamps) for at least a 3-month period that ended during the 12-month period ending on the hiring date.
  • Unemployed for a total of at least 4 weeks but less than 6 months in the 1-year period ending on the hiring date.
  • Unemployed for a total of at least 6 months in the 1-year period ending on the hiring date.
  • Entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces.
  • Entitled to compensation for a service-connected disability and unemployed for at last 6 months in the 1-year period ending on the hiring date.
Finally, the veteran must not be any of the following:
  • Related to you, the employer
  • Have worked for you at any time in the past
  • Your dependent
  • Work less than 120 hours during the year
The vet must complete and sign Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, and provide you with the original. You must sign the Form 8850 and submit it to the appropriate (SWA) within 28 days of the hire date. The credit is 40 percent of the no more than $24,000 wages paid to a qualifying vet that works at least 400 hours for the 12-month period beginning with the hiring date. The credit is reduced to 25 percent of the wages paid to qualifying vets who work at least 120 hours, but less than 400 hours.
For individuals and also C Corporations electing the credit: Claim the credit using Form 5884, Work Opportunity Credit, and Form 3800, General Business Credits, for the year the wages are paid.  S corporations and LLC's can report straight from form 5884 to Schedule K.
 

Monday, November 11, 2013

Florida Minimum Wage to increase by 14 cents Jan. 1, 2014


The Florida Department of Economic Opportunity (DEO) has announced that as of January 1, 2014 minimum wage will increase by 14 cents. Currently minimum wage is 7.79 and it will go to 7.93. Employees whose wages are based on tip earnings will go from the current of 4.77 per hour to 4.91 per hour. 

 

Thursday, October 24, 2013

Window replacements are still deductible in 2013

2012–2013 Tax Credit for ENERGY STAR Qualified Windows, Doors and Skylights

Homeowners may claim a tax credit for the purchase of ENERGY STAR qualified windows, doors, and skylights in 2012 or 2013. The following guidance is not intended as legal advice. It is recommended that you visit www.irs.gov Exit ENERGY STAR or consult a tax professional with specific questions.
To be eligible for the credit, windows, doors, and skylight must:
Homeowners may receive a tax credit equal to 10% of the product cost (installation costs may NOT be included) up to:
  • $200 for eligible windows and skylights
  • $500 for eligible doors
Homeowners may receive no more than $500 total for all energy efficiency tax credits. If you claimed an energy efficiency credit in a previous taxable year, please consult a tax professional or visit www.irs.gov Exit ENERGY STAR to determine your remaining eligibility for this credit.
For more information about this credit or those from previous years, visit www.irs.gov Exit ENERGY STAR and see the instructions for Form 5695, Residential Energy Credits.

Wednesday, October 23, 2013

IRS delays the start of tax season, again...

This is getting to be a habit...

The IRS announced on Tuesday a delay of one or two weeks in the start of the 2014 filing season as a result of the 16-day government shutdown to allow adequate time for the IRS to prepare and test systems. The return filing start date was originally going to be Jan. 21, 2014, but the IRS said it will now start accepting 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4. The IRS says it hopes to shorten the delay and will announce the official start date in December.

The government shutdown came at an inopportune time of year. Most of the work the IRS does to program, test, and deploy its return processing systems is done in the fall. “The adjustment to the start of the filing season provides us the necessary time to program, test, and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers,” Danny Werfel, the acting IRS commissioner, said in a news release. “We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”

No paper returns will be processed before the IRS begins accepting electronic filings.

Despite the delay in the beginning of filing season, the IRS also reiterated that the April 15 tax return filing and payment deadline is statutory and cannot be changed by the IRS but that six-month extensions to file can be obtained by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, electronically or on paper.

The IRS is apparently struggling to catch up after the shutdown. It says it received 400,000 pieces of correspondence during the shutdown, on top of the 1 million items that were already being processed. The IRS is urging taxpayers who need to contact it to wait if it is not urgent or to try to use automated systems on its website.

The IRS announced on Oct. 17 that 2014 renewals of preparer tax identification numbers (PTINs) are also being delayed because of the government shutdown. The IRS will notify current PTIN holders when the renewal season will start.

This will be the second tax season in a row to have a delayed start. Last year’s filing season was significantly delayed because Congress passed the American Taxpayer Relief Act of 2012, P.L. 112-240, which contained many retroactive provisions, in January 2013 and the IRS needed time to update forms and program and test its processing systems.

Tuesday, October 22, 2013

Offer-In-Compromise and how to apply to make a Fresh Start!

The Internal Revenue Service's expansion of its "Fresh Start" program offers more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.

 Their are different reasons for attempting an OIC.  The IRS uses a financial analysis to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years.
In certain circumstances, the changes announced today include:
  • Revising the calculation for the taxpayer’s future income.
  • Allowing taxpayers to repay their student loans.
  • Allowing taxpayers to pay state and local delinquent taxes.
  • Expanding the Allowable Living Expense allowance category and amount.
An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.
The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place changes to the OIC program to more closely reflect real-world situations.

Payment Plans-
When the IRS calculates a taxpayer’s reasonable collection potential, it looks at only one year of future income for offers paid in five or fewer months and two years of future income for offers paid in six to 24 months. All offers must be fully paid within 24 months of the date the offer is accepted.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.
The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.
Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.
This is another in a series of steps to help struggling taxpayers under the Fresh Start initiative.
In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made changes to lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. And, last, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.

Wednesday, October 16, 2013

Business or Hobby?

Is it a business or a hobby? If the activity is not engaged in for profit, it is subject to the hobby loss rules, and its deductible expenses are limited to the amount of income it generates, further subject to a threshold of 2% of adjusted gross income (AGI) as a miscellaneous itemized deduction.

There are nine factors the IRS uses for determining whether a taxpayer engages in an activity for profit:

1. How the taxpayer carries on the activity.   Does one strive to sell their service or are they carefree in the results?

2. The taxpayer’s expertise. Is this something the owner knows about, or will take the time to learn the endeavor?

3. The taxpayer’s time and effort in carrying out the activity. Does the tax payer devote time to the endeavor, more than just  a passing interest.

4. An expectation that assets used in an activity, such as land, may appreciate in value. Appreciation may be considered in lieu of current profits.

5. The taxpayer’s success in other activities.  Does the taxpayer make revenue, are they paid?

6. The taxpayer’s history of income or losses from the activity. Track record in the endeavor?

7. The relative amounts of the profits and losses.  Is it a continuous deduction form ones taxes.

8. The taxpayer’s financial status. Is the person dependent on the results?

9. Whether the activity provides recreation or involves “personal motives.” Does one have to devote time and energy in the course of conducting the activity?

The answer to how these factors are evaluated will determine the tax treatment of an activity.