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.
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.
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!
Second, welcome to the wild and wooly world of entrepreneurship. As someone who has been there, I know how exhilarating and, honestly, downright frightening. I hope you will read back through the archives here at Chamber Notes and continue to come back because small business is near and dear to my heart so I’m always on the hunt for good (or sometimes, just “interesting”) information to pass on to you.
Today is a guest article from our friends at Hawkins, Ash, Baptie & Co. on the critically important area of taxes and the self-employed.
Tax Aspects of Becoming Self-employed
Individual taxpayers are opting to start their own businesses for myriad reasons. Regardless of why you’re contemplating self-employment, you should consider several basic tax-related issues before and immediately after actually leaving your current job. Following are some tax issues to consider.
Know the Rules for Rolling over Retirement Plan Funds. Upon leaving your job, you generally will be entitled to immediately receive vested amounts in your qualified retirement plan accounts. Most distributions from qualified retirement programs [pension plan, 401(k) plan, etc.] can be rolled over tax-free into an IRA account. However, you must arrange for a “direct rollover,” or the plan administrator is required to withhold 20% of your distribution for federal income tax. Direct rollovers involve having the funds transferred directly from your former employer’s retirement plan into your designated IRA account. Failure to arrange a direct rollover means you will have to replace the 20% withheld to accomplish a totally tax-free rollover.
Use All Your Flexible Spending Account (FSA) Funds before You Quit. If you have an FSA (or cafeteria plan reimbursement account) for uninsured medical expenses and/or childcare expenses, make sure you incur sufficient qualifying expenses to use up the funds in your account before you leave your job. Otherwise, that money will be left behind.
Open a Separate Business Bank Account. Segregate your business and personal financial matters by keeping separate bank accounts. Deposit all business income into the business account and pay all business expenses out of that account. If you pay business expenses in cash or out of your personal account, reimburse yourself with checks drawn on your business account and document this with receipts. This will make your year-end recordkeeping easier. Keeping separate accounts shows you are serious about running things in a businesslike manner, and IRS examiners like to see that.
Keep Tax Records. In addition to maintaining a separate business bank account, you need to keep documentation of your business income and expenses.
Keep Good Auto Records. Personal auto expenses used for business are deductible, but only if you document the date, number of miles, and business purpose for each business use of the car. Mileage not properly substantiated is considered personal use, and the related expenses are not deductible. You should also record the car’s mileage at the beginning of the year or when you first start your business. Unless the standard mileage rate is used, receipts or invoices and cancelled checks should be retained documenting the car’s purchase price, fuel costs, repairs, taxes, insurance, and other out-of-pocket costs. Auto logbooks for recording mileage and expenses are available at local discount and office product stores.
Set up Your Own Retirement Plan. If you work for yourself, you are on your own when it comes to retirement planning. A retirement plan set up for your benefit accomplishes two goals: it is a way to save money for your later years, and it saves taxes now. Using a defined contribution Keogh plan, you can contribute and deduct up to 25% of your net self-employment (SE) income (maybe more if you set up a defined benefit Keogh plan), but Keogh plans must be in existence before the end of this year for you to take a deduction. If it is a 401(k) plan, you may also make elective deferrals. A simplified employee pension (SEP) plan can be set up in the following year-as late as the extended due date for your return-and still provide a current-year tax deduction. SEPs are simpler and cheaper to administer, and you can contribute and deduct up to approximately 20% of your net SE income. SIMPLE retirement plans are another option available to self-employed persons. A possible disadvantage of these qualified retirement plans is that you may have to make contributions for your employees.
From our friends at Hawkins, Ash, Baptie & Co!
June is known traditionally as a popular month for weddings, so they thought the June issue of “Tax and Business Alert” would be a good place to mention a tax-saving opportunity available to newlyweds as well as other taxpayers.
Home Sales by Newlyweds
One of the most common large-scale financial transactions most of us encounter is the sale of our home, and newlyweds have a unique opportunity to exclude home sale gains. As background, taxpayers are allowed to exclude from federal taxation up to $250,000 ($500,000 if married filing jointly) of gain realized on the sale or exchange of a principal personal residence. Gain is computed based on the selling price less the adjusted cost basis of the residence plus any selling expenses.
Married taxpayers filing a joint return for the year of sale may exclude up to $500,000 of gain if (a) either spouse owned the home at least two of the five years prior to the sale, (b) both spouses used the home as a principal residence for at least two of the five years prior to the sale, and (c) neither spouse is ineligible for the exclusion because he or she had sold another home within the two-year period ending on the sale date to which the exclusion applied.
If only one spouse meets the qualifications of items (b) and (c), that spouse may still be entitled to exclude up to $250,000 of gain on the joint return. When only one individual entering a marriage owns a principal residence, close attention to the calendar and to usage by the nonowning spouse can make the difference between a completely tax-free and partially taxed gain.
If both parties entering a marriage intend to move into a new (to them) principal residence after their marriage, each can sell his or her former residence and exclude up to $250,000 of gain if they each meet the three qualifications. The provision limiting the exclusion to only one sale every two years by the taxpayer does not prevent a husband and wife from filing a joint return and each excluding up to $250,000 of gain from the sale or exchange of each spouse’s principal residence owned at the time of marriage. However, this is only the case when each spouse would be permitted to exclude up to $250,000 of gain if they filed separate returns.
Home sale gain exclusion qualifications can be mystifying, so please contact us to discuss the technical and tax-saving aspects of excluding a home sale gain.
There is more great info in this month’s newsletter: Grandchildren College Costs, Home Loan Interest, Taxable Gifts and Employee Benefit Plans. Click HERE
… until tax day! Wow, how time flies when there is a major deadline looming! But, wait! There are 3 extra days this year.
From the IRS.gov website, “taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns. ”
I made a commitment this year to get my family’s taxes done early so as not to stress; not only am I done, but my money is here (well, federal in electronic transit)! Yes, I’m excited. However, my taxes are pretty simply as I’m no longer running a business. For those of you who still have the 800 pound gorilla in the room, I’m not only NOT a tax accountant, I don’t play one on TV and I did not stay at a Holiday Inn Express last night … fortunately, our friends at Hawkins, Ash, Baptie & Co. have the following advice, tips and news:
New Law Provides Tax Relief for Individuals and Businesses
The recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act) includes many taxpayer-friendly provisions for individuals and businesses. Listed below is information on several of them.
- Lower Tax Rates. The Act extends the 10%, 15%, 25%, 28%, 33%, and 35% federal income tax rates on ordinary income through 2012. It also extends the 0% and 15% federal income tax rates on most long-term capital gains and dividends through 2012. Without the new law, most long-term capital gains would have been taxed at 10% or 20%, and dividends would have been taxed at ordinary rates of up to 39.6%.
- Marriage Penalty Relief. Getting married can cause a couple’s combined federal income tax bill to be higher than if they were single. Tax reduction legislation in 2001 eased this marriage penalty by tweaking the lowest two tax brackets for married couples and giving them bigger standard deductions. The Act extends this relief through 2012.
- Social Security Tax Reduction. The Act cuts the Social Security tax withholding rate on employee salaries from 6.2% to 4.2% for 2011. This temporary change affects the first $106,800 of 2011 wages. The maximum savings are $2,136 for unmarried individuals and $4,272 for couples. The Social Security tax component of the self-employment tax is cut from 12.4% to 10.4% for 2011, so self-employed folks will benefit, too.
- Alternative Minimum Tax (AMT). As you may know, it has become an annual ritual for Congress to “patch” the AMT rules to prevent millions of additional households from getting socked with this add-on tax. The patch primarily consists of allowing bigger AMT exemptions and allowing personal tax credits to offset the AMT. The Act provides an AMT patch for 2010 and 2011.
- American Opportunity Education Credit. The American Opportunity credit can be worth up to $2,500, be claimed for up to four years of undergraduate education, and is 40% refundable. It was scheduled to expire at the end of 2010. The Act extends this credit through 2012.
- College Tuition Deduction. This write-off, which can be as much as $4,000, or $2,000 at higher income levels, expired at the end of 2009. The Act retroactively restores the deduction for 2010 and extends it through 2011.
- More Generous Student Loan Interest Deduction. This write-off, which can be as much as $2,500 (whether you itemize or not), was scheduled to fall under less favorable rules in 2011 and beyond. The Act extends through 2012 the more favorable rules established by 2001 legislation.
- Education Savings Accounts (ESAs). For 2011, the maximum contribution to federal-income-tax-free ESAs was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married joint-filing couples. The Act extends through 2012 the more generous contribution rules established by 2001 legislation.
- State and Local Sales Taxes. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local general sales taxes. The sales tax deduction option expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.
- Smaller Tax Credit for 2011 Energy-efficient Home Improvements. The 2009 Stimulus Act provided that 30% of 2009 and 2010 expenditures for energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences could qualify for a credit, up to a maximum credit amount of $1,500, over the two years combined. The Act extends the credit through 2011, but the credit percentage is scaled back to only 10%, and the lifetime credit limit is only $500. The $500 credit cap is reduced by any credits claimed in 2006-2010.
- First-year Bonus Depreciation. The Act generally allows 100% first-year bonus depreciation for qualifying new assets that are acquired and placed in service after September 8, 2010, through December 31, 2011. It also allows 50% first-year bonus depreciation for qualifying new assets that are placed in service in calendar year 2012. For a new passenger auto or light truck that is used for business and is subject to the luxury auto depreciation limitation, the bonus depreciation breaks increase the maximum first-year depreciation deduction by $8,000 for vehicles acquired and placed in service by December 31, 2012.
- 15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements. The 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements is retroactively restored for property placed in service in 2010 and extended to cover property placed in service in 2011. (Without the favorable 15-year depreciation rule, these assets would have to be depreciated straight-line over 39 years.)
- 100% Gain Exclusion for Qualified Small Business Stock (QSBS). The Small Business Jobs Act of 2010 (enacted last September) created temporary 100% gain exclusion (within limits) for sales of QSBS issued after September 27, 2010, through December 31, 2010. The Act extends the window for taking advantage of this change by one year to cover QSBS shares issued after September 27, 2010, through December 31, 2011.
New Estate and Gift Tax Rules
- Estate tax legislation has been debated in Congress for several years. The recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act) includes estate tax provisions for individuals who died in 2010, as well as those who die in 2011 and 2012. Here is a brief summary.
- $5 Million Estate Tax Exemption and 35% Rate. For estates of individuals who die in 2010 through 2012, the Act establishes a $5 million federal estate tax exemption with the 2012 amount indexed for inflation. Big estates are taxed at 35% above the $5 million threshold.
- Electing out of the Estate Tax in 2010. For estates of decedents who died in 2010, executors are permitted to elect out of the estate tax rules (the default rules), and instead choose the modified carryover basis rules for property transferred at death. Although no estate tax will be due, assets transferred at death will not get the step-up in basis to date of death fair market value, and the transferees will owe income tax on the appreciation on those assets. Determining whether to follow the default rules or elect out of the estate tax will depend on many factors that will require professional guidance.
- Unused Estate Tax Exemption. For the first time, married individuals who do not use up their estate tax exemptions will be able to pass along unused amounts to surviving spouses. In other words, unused exemptions of individuals who die in 2011 or 2012 (but not 2010) will be “portable.”
- Unlimited Basis Step-ups for Inherited Assets. For heirs of decedents who die in 2011 and beyond, the rule is reinstated that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect fair market value on the date of death. This favorable rule is also reinstated for decedents who died in 2010, unless the estate elects to instead use the modified carryover basis rule. With the restoration of the unlimited basis step-up rule, heirs will not owe any federal capital gains taxes on appreciation that occurs through the date of death-as long as that date is after 2010 or, for decedents who died in 2010, if their estate does not elect to use the modified carryover basis rules.
- Estate and Gift Tax Exemptions and Rates Are Equalized. The Act sets the lifetime federal gift tax exemption for 2011 and 2012 at $5 million-with the 2012 amount indexed for inflation (likewise for the generation-skipping transfer tax exemption). Thus, the gift and estate tax exemptions are equalized for 2011 and 2012. This is a huge improvement over the previous $1 million gift tax exemption (which continued to apply for 2010). An unmarried person can now give away up to $5 million while alive without paying any gift tax, and a married couple can give away up to $10 million. However, to the extent you dip into your gift tax exemption, your estate tax exemption is reduced dollar-for-dollar. The tax rate on 2011 and 2012 gifts in excess of the $5 million exemption is 35%, the same as the estate tax rate. Again, due to sunset provisions, the gift tax exclusion reverts back to $1 million after 2012.
Minimizing estate and gift taxes is a complex process. So, please contact experts for help.
*Note: not ME … the experts!
Thank heavens for our good friends at Hawkins, Ash, Baptie & Co. who keep us informed and educated about all things taxing!
From them (and hot off the presses) is the following information on the Small Business Jobs Act of 2010.
On September 27, 2010, the President signed into law the Small Business Jobs Act of 2010. The following are some of the key parts of this new law.
Extension of bonus depreciation. The new law extends the 50% bonus depreciation through December 31, 2010. Prior bonus depreciation expired on December 31, 2009. This bonus depreciation is available on the purchase of most new equipment and other tangible personal property as long as the business is the first to use the item. The enhanced depreciation under the “luxury auto rules” have also been extended through December 31, 2010. (looking to take advantage and haven’t made purchases yet you now will seek to do? We have DPACC Members who can assist you with those – click HERE )
Extension of enhanced small business expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenditures, small business taxpayers may elect to write off the cost of these purchases in the year of acquisition in lieu of recovering these costs over time through depreciation. The new law for tax years beginning in 2010 and 2011 has increased the direct write-off to $500,000 as long as the total new assets purchased does not exceed $2,000,000. If the $2,000,000 is exceeded, the $500,000 will be phased out to zero as the total assets purchases for the year reached $2,500,000. Prior to this change the direct write-off was $250,000 with a phase-out beginning at $800,000.
Section 179 expensing and qualified real property. The new law also expands, on a temporary basis (2010 and 2011), the assets allowed for the Section 179 expensing to include qualified real property. This property includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The limit for this type of property is $250,000. (looking to take advantage and haven’t made purchases yet you now will seek to do? We have DPACC Members who can assist you with those – click HERE )
Expanded carryback of certain credits for small businesses. Unused business credits that were created after 2009 can now be carried back up to five tax years. Those credits that cannot be carried back can also be carried forward for 25 tax years. Prior to this law, unused business credits could only be carried back to offset taxes paid in the previous year with the remaining credit carried forward for a period of 20 years. Small businesses are defined as businesses that are not publicly traded and have average gross receipts of less than $50 million over the last three years.
Qualified small business stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 75% to 100% for stock issued after the enactment date and before 2011.
S corporation holding period.When an existing corporation elects to be taxed as an s-corporation, there may be a negative tax consequence to the sale of certain assets held at the election date. This is known as the “built in gains tax.” The tax consequence generally lasts 10 years. Over recent years this period has been decreased to seven years. The new law further decreases the holding period of asset sales from seven years to five years beginning with the 2011 tax year.
Start up expenses for new businesses. The law allows a new business to deduct up to $10,000 of qualified trade or business start-up expenses. This amount is reduced by the amount of total start-up expenses over $60,000. This is applicable for 2010 only and will revert back to the $5,000 limit with the phase-out beginning at $50,000 in 2011.
Self employed health insurance deduction. Beginning for tax years after December 31, 2009, a self-employed individual is allowed a deduction against their self-employment income for the cost of health insurance for the individual or his/her family. This deduction has been allowed for income tax purposes, but has been expanded to include self-employment tax purposes. (finally!!)
Section 457(b) plan deferrals for state and local government retirement plans. Beginning in 2011, this type of plan will allow participants to contribute after tax deferred amounts to Roth accounts. This is similar to what is currently allowed for 401(k) retirement plans.
Retirement plan rollovers to Roth accounts. The new law allows 401(k), 403(b) and 457(b) retirement plan participants to roll over pre-tax account balances into a Roth account within their plan. The rollover is not tax free, but will be included in income in equal amounts for 2011 and 2012, unless the taxpayer elects otherwise