When you pay for business meals and entertainment, keep in mind that generally only half of otherwise allowable meal and entertainment expenses are deductible on your federal tax return. This includes 50% of all business meal and entertainment expenses, including those incurred while attending professional seminars and traveling away from home. If a hotel includes meals in its room charge, a reasonable allocation must be made to determine the portion of the expenditure subject to the 50% disallowance.
Taxes and tips related to meals or entertainment are included in the amount that is subject to the 50% limit. Also subject are expenses for cover charges to clubs, room rental for a dinner or cocktail party, and amounts paid for parking at an entertainment location. However, transportation costs incurred getting to and from the entertainment activity are not subject to the 50% disallowance. In addition, when a self-employed taxpayer uses a per diem method for travel expenses, the federal meal and incidental expense rate is treated as an expense for food and beverages and, thus, is subject to the 50% disallowance.
If an employee adequately accounts for these expenses and the employer properly reimburses the expenses under an accountable plan arrangement, the employer is also subject to the 50% limitation on its reimbursement. An ac-countable plan is a reimbursement or other expense allowance arrangement that requires employees to substantiate covered expenses and return unsubstantiated advances. The employee has nothing to report since the reimbursement offsets the expenses incurred.
Conversely, an employer gets a 100% deduction if meal expense reimbursements or allowances paid for or to an employee under a nonaccountable plan are treated as compensation to the employee. Of course, the employer must then pay FICA taxes and the income is subject to normal withholding, but this rule basically allows employers to shift the 50% disallowance to employees. Similarly, meal reimbursements and allowances that are included in the taxable income of independent contractors are also 100% deductible by the service recipient.
Besides being the last day to file (or extend) your 2011 personal return and pay any tax that is due, 2012 first quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today. So are 2011 returns for trusts and calendar-year estates, partnerships, and LLCs, plus any final contribution you plan to make to an IRA or Education Savings Account for 2011. SEP and Keogh contributions are also due today if your return is not being extended.
If you need to file a 2011 gift tax return, it also must be filed or extended by this date.
If you paid cash wages of $1,700 or more in 2011 to a household employee, you must file Schedule H by this date. You may also have to report any federal unemployment tax paid and any income tax you withheld for your household employees.
My taxes are filed (I know, show-off, right?) but I know my parents never file theirs until last, last minute. Literally, I sat in line at the post office handing them to the postal employee dressed in the Uncle Sam costume as midnight neared! Clearly, that was pre-online tax filings, but they are still filing as late as legally possible.
If you haven’t filed yet, today I bring two interesting sections of information from Hawkins, Ash, Baptie & Co., one business and one personal:
Which is Best for Your Business: Section 179 or 100% Bonus Depreciation:
Taxpayers who acquire assets for use in their trade or business activity have a very good chance of writing off the entire cost, thanks to 100% bonus depreciation plus very generous Section 179 deduction limits. If there is a choice between them, this article will help determine which of these options is most beneficial. First, let’s go over the basic rules for asset purchases.
The Section 179 deduction limit is $500,000. This limit is reduced dollar for dollar (but not below zero) by the cost of qualifying property over $2 million. So, no Section 179 deduction is available if the total cost of qualifying property placed in service during the year is $2.5 million or more.
The 100% bonus depreciation provision effectively allows taxpayers to write off the entire cost of qualified assets placed in service during the year. However, specific deduction limitations apply for qualifying vehicles.
If both bonus depreciation and the Section 179 deduction are available, the taxpayer will have to choose one or the other. If that is the case, the following are some considerations to keep in mind.
The use of 100% bonus depreciation is mandatory. However, a business can elect not to deduct bonus depreciation for any class of property placed in service during the tax year. This election applies to all additions within a class placed in service that year. On the other hand, the Section 179 election is much more flexible. Not only is it available on an asset-by-asset basis, but taxpayers can also elect to expense less than the full amount of an asset’s basis. In addition, the Section 179 deduction can be used for both new and used equipment; 100% bonus depreciation only applies for new equipment.
There is no limit on the amount of 100% bonus depreciation a business can claim for the year, nor is there a taxable income limit. This means that by claiming bonus depreciation, the taxpayer can create or increase a net operating loss (NOL) that can be carried back and possibly used immediately. On the other hand, the Section 179 deduction is limited to $500,000 (reduced dollar for dollar by qualifying asset purchases exceeding $2 million). It is also limited to the taxpayer’s net trade or business income for the year, with any excess generally carried over to the following year.
The Section 179 deduction claimed on qualified real property cannot be carried over past the 2011 tax year (unless this provision is extended). Disallowed deductions remaining at the end of the 2011 tax year are treated as if no Section 179 expensing election had been made for them. Amounts not carried over past the 2011 tax year are depreciated under the normal rules for real property.
To be eligible for the Section 179 deduction, the asset must be used more than 50% of the time for business. If the business usage later falls to 50% or less, the Section 179 deduction must be recaptured. Except in the case of listed property (e.g., passenger automobiles and computers), greater than 50% business usage is not a requirement for bonus depreciation. Therefore, bonus depreciation may be a better choice for an asset (other than listed property) currently used more than 50% for business if there’s a chance that the business usage may later fall to 50% or less.
Finally, for taxpayers subject to alternative minimum tax, there is no adjustment for either bonus depreciation or Section 179 deductions.
Taxable or Nontaxable Income:
|Most of the income we receive is taxable, but certain types of income are only partially taxed or not taxed at all. The following are some of the more common types of income that individuals receive and an indication of how they are treated for federal income tax purposes.
Adoption Expense Reimbursements: Taxpayers adopting a child can exclude from taxable income adoption expenses paid by their employer under the employer’s adoption assistance program. The exclusion is limited to a maximum amount, and also by adjusted gross income.
Alimony: Payments properly classified as alimony must generally be included in taxable income by the recipient.
Cash Rebates: Cash rebates from a dealer or manufacturer on an item you purchase are not taxable income. However, the basis of the property must be reduced by the amount of the rebate.
Child Support Payments: Child support payments are generally not taxable to the recipient.
Gambling Winnings: You must include gambling winnings in income. If you itemize your deductions, you can deduct gambling losses you had during the year, but only up to the amount of your winnings.
Life Insurance: Life insurance proceeds you receive as a beneficiary because of an insured person’s death generally are not taxable. However, if you surrender a life insurance policy for cash, any proceeds received in excess of the premiums paid for the policy are taxable.
Lotteries and Raffles: Winnings from lotteries and raffles are gambling winnings (see above). In addition to cash winnings, the fair market value of noncash prizes is considered to be taxable income.
Noncash Income: Taxable income may be received in a form other than cash. A good example of this is bartering income where property or services are exchanged.
Property Damage: Payments you received for property damage are not taxable if the payments are not more than your adjusted basis in the property. If the payments are more than your adjusted basis, you will realize a taxable gain.
Scholarships and Fellowships: Degree candidates can exclude amounts received as scholarships or fellowships from taxable income. However, amounts received for room and board generally do not qualify for exclusion.
Utility Rebates: If you participate in an electric utility’s energy conservation program, you may receive a rate reduction or a refundable credit towards the purchase of electricity. The amount of the rate reduction or nonrefundable credit is not includable in taxable income.
Worker’s Compensation Benefits: Amounts received by an employee as compensation under state or federal worker’s compensation acts for personal injuries or sickness incurred on the job are not generally taxable, unless the amounts received offset previously deducted medical expenses.
I know, I know.. yes! They are going up! We are not going into that today. But, if you are interested, let me know and we can!
Today, we tackle making sure you, as a non-profit employer are getting the full benefit of credits for the health insurance premiums you are paying. Brought to you from our friends at Hawkins, Ash, Baptie, & Co.
How to Get Credit for Paid Health Insurance Premiums
As healthcare insurance premiums continue to rise, the small employer health insurance premium credit allows many nonprofit organizations to provide the benefits that draw talented employees. This credit can provide nonprofit employers a credit for up to 25 percent of the health insurance premiums they pay in a year, and is available through 2013. After 2013, the credit will increase up to 50 percent, but is only available to employers who purchase insurance through a state-run insurance exchange.
To qualify for the full credit, employers need to fulfill three requirements:
- The employer must pay at least 50 percent of the insurance premium for the year.
- The employer must have 10 or fewer full-time equivalent employees.
- The employer must pay less than $25,000 in average annual wages per full-time equivalent employees.
Employers that don’t meet the requirements to receive the full credit may still be eligible for a reduced credit. The reduced credit is available to employers with more than 10 but fewer than 25 full-time equivalent employees. In addition, average annual wages of more than $25,000 but less than $50,000 will also qualify for a reduced credit. However, if the employer exceeds either 25 employees or $50,000 in average annual wages no credit is available.
How to File for Credit
The small employer health insurance premium credit is claimed as a refundable credit on Form 990-T. The worksheets included in Form 8941 will help figure the total credit. These worksheets help organizations factor average annual wages and how many employees are full-time.
We are available to assist you with getting the best possible credit for paid health insurance premiums.
Information to help your business from our friends at Hawkins, Ash, Baptie & Co. with regard to employing your under-age children in your business.
This tax-saving idea could help certain taxpayers reduce their federal taxes. If you operate a business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a husband-wife partnership, or a husband-wife LLC treated as a partnership for tax purposes, consider hiring your under-age-18 child, either full-time or part-time, as a legitimate employee of your business.
Your under-age-18 child’s wages are exempt from Social Security, Medicare, and federal unemployment taxes. In addition, your child can use his or her standard deduction to shelter up to $5,950 of 2012 wages from federal income tax. Under this arrangement, your child will probably owe little or no federal income tax on the first $5,950 of wages. He or she can set aside some or all of the wages and invest the money. Hopefully, the cash stash will eventually be used to help pay for college, which means less stress for you.
Meanwhile, as the employer, you can deduct the wages paid to your child as a business expense, as long as they are reasonable for the work performed. The write-off will cut your income tax liability and your self-employment tax bill (if applicable). The write-off will also lower your adjusted gross income, which will decrease the odds of getting hit with the unfavorable phase-out rules that can reduce or eliminate various tax breaks.
After your child reaches age 18, Social Security and Medicare taxes will kick in; however, federal unemployment tax will not apply until age 21. The child’s standard deduction will still shelter up to $5,950 (for 2012) from federal income tax. And, you can still deduct the wages and related employment taxes as business expenses.
Even if your business is incorporated, hiring your child can still make tax-saving sense. In this scenario, the child’s wages are subject to Social Security, Medicare, and federal unemployment taxes regardless of his or her age. The good news is the child’s standard deduction still provides an income tax shelter for the child, and the corporation can claim business deductions for the wages and the employer’s share of the employment taxes.
A good number of people will find this guest column from our friends at Hawkins, Ash, Baptie & Co. to be very helpful! Please share with your employees or even your family members!
Many taxpayers are applying for social security retirement benefits earlier than they previously planned to supplement their income. But, continuing to work while receiving social security benefits may cause the benefit to be reduced below the anticipated amount. If you are a social security beneficiary under the full retirement age (currently 66), an earnings test determines whether your social security retirement benefits will be reduced because you earned more from a job or business than an annual exempt amount (discussed below). A different earnings test applies for individuals entitled to disability benefits.
As a general rule, the earnings test is based on income earned during the year as a whole, without regard to the amount you earned each month. However, in the first year, benefits you receive are not reduced for any month in which you earn less than one-twelfth of the annual exempt amount.
The social security retirement earnings test is eliminated after you reach your full benefit retirement age for the month of, and months after, such attainment. In other words, once you reach your full benefit retirement age, there is no longer an earnings test to reduce your social security retirement benefits. However, the earnings test still applies for the years and months before the month you reach the full benefit retirement age.
Social security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1 reduction in benefits for each $2 earned over the exempt amount (currently $14,640) for each year before the year during which they reach the full benefit retirement age (see the example). However, in the year beneficiaries reach their full benefit retirement age, earnings above a different annual exempt amount ($38,880 in 2012) are subject to a $1 reduction in benefits for each $3 earned over the exempt amount. Social security benefits are not affected by earned income beginning with the month the beneficiary reaches full benefit retirement age.
Example: Applying the annual earnings test.
Edward, age 62, currently averages $2,000 per month in commissions ($24,000 per year). He has recently experienced a decrease in his income due to lower sales and is considering applying for social security benefits to supplement his reduced income. Edward’s social security retirement benefit will be $1,400 per month, so he expects to receive benefits totaling $16,800 per year. However, since he will earn $9,360 over the $14,640 exempt amount ($24,000 – $14,640), his benefits will initially be reduced by half that amount, or $4,680. Therefore, he will receive only $12,120 in social security benefits ($16,800 – $4,680). The results would be the same if Edward was self-employed, rather than an employee.
As you plan your retirement, be mindful that, as the previous example indicates, working during retirement and prior to your full retirement age may reduce your anticipated social security benefits. This, in turn, could have a negative impact on your overall financial plans.
From our good friends at Hawkins, Ash, Baptie & Co.
When selling a corporate business, there are several ways to minimize the resulting tax bill. This article summarizes some of the more important tax and business considerations.
Existing corporate businesses can basically be sold in two ways: by selling either the business assets or the corporate stock. Buyers often prefer to purchase the assets of an existing business to have some protection from acquiring unknown or contingent liabilities, while sellers normally prefer to sell the stock of the corporation that conducts the business. A sale of stock by noncorporate shareholders (e.g., individuals) generally results in long-term capital gain that is taxed at a current maximum rate of 15%. (This long-term capital gain rate is currently scheduled to increase to 20% in 2013.) Because of the single level of taxation associated with a taxable stock sale, sellers usually prefer it to an asset sale followed by liquidation of the corporation, which may result in a greater tax liability.
The tax results of an asset sale are generally less favorable to the sellers since the corporation is generally liquidated to get the sales proceeds into the sellers hands. Thus, a C corporation is taxed on the gain from the asset sale. Then, the shareholders are taxed on the liquidation proceeds as if they had sold their stock for the cash and any property distributed in complete liquidation of their stock, resulting in double taxation.
While sellers generally favor stock transactions, they may prefer an asset sale in the following circumstances:
- The selling corporation may have unused net operating loss or capital loss carryforwards that can offset any corporate-level gain on the sale of its assets.
- If the assets to be sold have a high basis, there may be no corporate-level gain from the sale. If the shareholders stock basis exceeds the value of the liquidation proceeds, gain at their level could also be avoided.
- An asset sale by a C corporation should be more acceptable to sellers who plan to use the proceeds to acquire a new business that will be operated in the same corporate shell as the old business (thus avoiding the second level of tax on the sale because the proceeds are not distributed to the shareholders).
As you can see from this discussion, a stock transaction often results in the best tax and business answer for the seller, so please contact us and we will be glad to work with you to structure any disposition transaction in the most favorable way, considering all tax and general business issues.
From our friends at Hawkins, Ash, Baptie & Co. an article near and dear to my-parent-of-a-college-student-and-another-high-school-senior heart!
College Financial Aide Changes for 2011-2012
The Department of Education recently announced numerous adjustments to the Federal Need Analysis Formula. This is the calculation that takes information from the Free Application for Federal Student Aid (FAFSA) and determines the expected family contribution (EFC). The EFC is the amount each college uses to award federal need-based financial aid.
For 2011-2012, the Income Protection Allowance for a dependent student has jumped from $4,500 (for 2010-2011) to $5,250 (for 2011-2012). This is the amount of income a dependent student may earn in the 2010 calendar year before excess income impacts the EFC. Parents of a dependent student are also permitted an Income Protection Allowance based on the family size and the number of dependents in college.
Certain students qualify for a zero EFC, meaning their families are not expected to contribute anything toward the cost of higher education, and thus they are eligible for more financial aid. For the 2011-2012 award year, the income threshold to be eligible for a zero EFC is $31,000, up from $30,000 in 2010-2011.
Back to Cheryl here: wow! a whole $1,000 increase on the EFC (estimated family contribution and $750 whole dollars in student income??? Have these people been to the grocery store or gas station lately? How about writing a check for the water or power or phone bill??? Seriously?!
Preserving Tax Deductions for Business Travel
If a taxpayer’s trip is undertaken solely for business reasons, reasonable and necessary travel expenses, including travel fares, lodging, meals, and incidental expenses in getting to and from the destination are generally deductible on federal tax returns (subject to the 50% disallowance for meals and entertainment). Transportation, lodging, meals, and incidental expenses incurred while at the destination should also qualify as federal tax deductions. However, if the taxpayer’s trip involves both business and personal activities, a portion of the travel expenses may actually be nondeductible personal expenses rather than deductible business expenses.
If a taxpayer travels on business in the United States and while at the business destination extends his or her stay for a vacation, makes a nonbusiness side trip, or has other nonbusiness activities, the proper treatment of the taxpayer’s travel expenses depends on how much of the trip was business-related. The following guidelines generally apply:
a. If the trip was primarily for business, the deductible travel expenses include the costs of getting to and from the business destination and any business-related expenses while at the business destination. Personal (vacation) costs incurred while at the destination are not tax-deductible.
b. If the trip was primarily for personal reasons, such as a vacation, the costs of getting to and from the destination are personal (nondeductible) travel costs. Personal costs incurred while at the destination are also nondeductible. However, any business costs incurred while at the destination are tax-deductible expenses.
Whether a trip is primarily business or personal depends on the facts and circumstances of each case. The amount of time spent on business activities compared to the time spent on personal activities is an important factor. It is essential to note that time spent is only one factor to consider and may not be the dominant factor given the facts and circumstances. If the taxpayer would not have taken the trip except to achieve the business purpose, a strong argument can be made that the trip was primarily for business.
The proper allocation of travel expenses between business and nonbusiness categories is often difficult to determine. Please contact us to discuss specific travel expense allocation issues or any other tax planning or compliance matter.
More great info brought to you by our friends at Hawkins, Ash, Baptie, Co. – thanks so much!!
No, not THAT scary one. I won’t ask your weight. This is the other scary number (according to my Grandma anyway), your age.
From our friends at Hawkins, Ash, Baptie & Co., (because I wouldn’t bring this up!) Age-related Planning Milestones -
In an era filled with uncertainty, you can count on one thing for sure: time marches on! Listed below are some important age-related tax and financial planning milestones that you should keep in mind. Many of these milestones present tax-saving opportunities.
Age 0-23: The so-called Kiddie Tax rules can potentially apply to your child’s or grandchild’s investment income above a specified amount until the year he or she reaches age 24. For 2011, the investment income threshold is $1,900.
Age 50: If you’re age 50 or older as of the end of the year, you can make an additional catch-up contribution of up to $5,500 for 2011 to your 401(k), Section 403(b), or Section 457 plan, or up to $2,500 for 2011 to your SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution of up to $1,000 for 2011 to your traditional or Roth IRA.
Age 55: If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plan(s) without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that the taxable portion of qualified retirement plan distributions received before age 59½ are subject to the 10% penalty tax.
Age 59½: You can receive distributions from all types of tax-favored retirement plans and accounts [e.g., IRAs, 401(k) accounts, pensions] and from tax-deferred annuities without incurring the 10% premature withdrawal penalty tax. Before age 59½, the 10% penalty tax will hit the taxable portion of distributions unless an exception to the penalty tax applies.
Age 62: You can choose to start receiving social security retirement benefits; however, your benefits will be lower than if you wait until reaching full retirement age, which is age 66 for those born between 1943 and 1954. If you also work before reaching full retirement age, your 2011 social security retirement benefits will be further reduced if your income from working exceeds $14,160 for 2011.
Age 66: You can start receiving full social security retirement benefits at age 66 if you were born between 1943 and 1954. You won’t lose any benefits if you work in years after the year you reach age 66, regardless of how much money you make in those years. However, if you will reach age 66 this year, your 2011 benefits will be reduced if this year’s earnings exceed $37,680.
Age 70: You can choose to postpone receiving social security retirement benefits until you reach age 70. If you make this choice, your benefits will be higher than if you started earlier.
Age 70½: You generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts [e.g., traditional IRAs, SEP accounts, 401(k) accounts] and pay the resulting income taxes. (However, you need not take any RMDs from Roth IRAs set up in your name.) The initial RMD is for the year you turn 70½, but you can postpone taking that one until as late as April 1 of the following year. If you choose that option, however, you must take two RMDs in that year: one by the April 1 deadline (the RMD for the previous year), plus another by December 31 (the RMD for the current year). For each subsequent year, you must take another RMD by December 31. There’s one more exception: if you’re still working after reaching age 70½ and you don’t own over 5% of the employer, you can postpone taking any RMDs from the employer’s plan(s) until after you’ve actually retired.
If you or a loved one is, or is about to be, affected by any of these age-related milestones, check with your financial planner or accountant to make sure you are protected!