Category Archives: Business

Tax Reform Proposals Released From White House, Congress; Next Steps Uncertain

Michael Blitstein

Michael Blitstein

by Michael W. Blitstein, CPA

Shortly before President Obama unveiled his proposed fiscal year 2015 Federal budget on March 4th, House Ways and Means Chair Dave Camp (R-Mich.), introduced a sweeping tax reform bill. While President Obama did not call for such a mammoth overhaul of the Tax Code as Camp did, the President did include many tax proposals in his budget, affecting individuals, businesses and tax administration.

In Camp’s bill, two greatly affected groups are taxpayers in high-tax states, who would be impacted by elimination of the deduction for state and local taxes, and corporations, which would benefit from a corporate tax cut, but one that would be partially paid for by higher taxes on small and mid-size businesses that are generally structured as pass-through entities.

Both the President and Camp quickly took to social media to promote their proposals. At a news conference, House Speaker John Boehner (R-Ohio), indicated it was unlikely Camp’s bill would come before the House for a vote. Republican support for many of the President’s proposals remains even less likely before mid-term elections.

Obama’s proposals

As in past budgets, President Obama proposed tax incentives for manufacturing, research, energy, and job creation. The President called for Congress to make permanent the research tax credit and expand incentives for employers to hire veterans. Carried interest would taxed as ordinary income and payroll taxes would be extended to cover distributions from certain pass-through entities engaged in a professional service business.

President Obama signaled a willingness to reduce the corporate tax rate but would require the elimination of some business incentives, particularly tax preferences for fossil fuels, in exchange. The President also proposed a number of international and insurance taxation reforms.

For individuals, President Obama proposed to enhance the earned income credit (EIC) for individuals without children and noncustodial parents, and make permanent the American Opportunity Tax Credit. The President also proposed to reduce the value of certain tax expenditures for higher income individuals.

Camp’s bill

Camp’s bill would replace the current seven individual income tax rate brackets (10, 15, 25, 28, 33, 35, and 39.6 percent) with three rates: 10, 25 and 35 percent. In addition, many incentives for individuals would be repealed, including the state and local tax deduction, the itemized deduction for medical expenses, the adoption credit, deduction for alimony payments, the deduction for higher education tuition, and residential energy credits. A few incentives would be enhanced, such as the child tax credit.

Two popular individual incentives—the home mortgage interest deduction and the charitable contribution deduction—would survive under Camp’s plan but in modified form.

Camp’s bill would gradually reduce the corporate tax rate to 25 percent. Few targeted business tax incentives would survive. Camp’s plan eliminates the Work Opportunity Tax Credit, many energy-related incentives, the rules for like-kind exchanges, and more. However, Code Section 179 small business expensing would be enhanced. The research tax credit would be retained but modified.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Payroll Tax Services – Who is Responsible to the IRS?

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

As a Forensic CPA, I often hear stories about clients or their partners, employees, or spouses who have stolen or have hidden assets. But there’s one scam which you don’t hear about very often and which should scare every business owner: what happens when your trusted payroll service fails to make your tax payments to the IRS?

Just today a small business owner confessed to me that his payroll service stole $7 million from him and other businesses. The payroll service collected tax monies from their clients, and instead of making the payments to the IRS, the owners of the service simply pocketed the money. The trusting small business owner was required to pay the IRS nearly $40,000; in effect paying the payroll tax obligation twice.

Who is responsible?

More and more we hear about trusted people and businesses stealing from their clients and associates. Violation of fiduciary responsibility inevitably escalates during periods of economic hardship, but the potential to be a victim of ‘white collar crime’ is always present. As a business owner, it is important to continually verify that employees and business partners are doing what is expected of them.

Who is responsible in the case of non-payment of payroll taxes when a payroll service has been engaged? The Internal Revenue Service regulations state quite clearly:

  • The employer is ultimately responsible for the deposit of Federal tax liabilities.
  • The employer is liable even if a third party payer fails to make the payroll tax deposits in a timely manner.
  • It is the employer, not the payroll service, who is liable for unpaid taxes, penalties and interest.
  • The employer has a duty to review their EFTPS account to verify that the third party payer actually paid the taxes.

An ounce of prevention is always worth the proverbial pound of cure.  To avoid the headaches and financial distress of misplaced trust, CJBS recommends that business owners follow this Five Step Anti-Swindle procedure:

  1. Examine checks clearing the bank accounts monthly.
  2. Have someone verify payroll tax deposit credits on-line.
  3. Examine customer credit memos regularly.
  4. Examine delinquent accounts receivable.
  5. Spot check cash payments.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

IRS Expands Its Fresh Start Initiative; Provides Penalty and Installment Payment Relief

by Michael W. Blitstein, CPA 

The IRS announced enhancements to its “Fresh Start” initiative by providing higher dollar thresholds for using the streamlined application process for installment agreements and new penalty relief for qualified individuals affected by the economy in 2011. The IRS doubled the dollar threshold amount and increased the maximum term for streamlined installment agreements. Unemployed taxpayers, if they file their returns after April 17th, and the self-employed may be eligible for late payment penalty relief. The agency has updated its online materials about the Fresh Start initiative to reflect the new relief.

Fresh Start

The IRS launched its Fresh Start initiative in early 2011 to help taxpayers affected by the economic slowdown. The IRS modified its lien policies by increasing the lien-filing threshold to $10,000 from $5,000 and by creating a process in which a lien will be released if the taxpayer qualifies for a direct-debit installment agreement. Additionally, it eased and streamlined installment agreements to make them available to more small businesses. Small businesses with an outstanding tax liability balance of $25,000 or less are able to apply for an installment agreement without providing a financial statement and financial verification. Additionally, they could apply for up to 60 months to pay off their outstanding tax liability.

Installment Agreements

Effective immediately, the IRS has raised the threshold amount for using the streamlined installment agreement without having to provide a financial statement or verification from an outstanding tax liability of $25,000 or less to a balance due of $50,000 or less. The agency also increased the maximum term for streamlined installment agreements from the current 60 months to 72 months.

Taxpayers must agree to direct-debit payments. Under the Direct Debit Installment Agreement (DDIA) system, funds are automatically debited from a taxpayer’s bank account for the agreed upon installment amount.

Taxpayers should file Form 9465-F, Installment Agreement Request, but do not need to provide a financial statement, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement. Taxpayers seeking installment agreements exceeding $50,000 will still need to furnish a financial statement. Taxpayers must also pay down their balance due if over $50,000 to take advantage of the expanded streamlined program.

Penalty Relief

Taxpayers normally have until April 17, 2012, to file their 2011 tax returns and pay any tax due. Taxpayers requesting an extension of time to file have until October 15, 2012, to file their 2011 returns. This year, certain unemployed and self-employed taxpayers may be eligible for a six-month grace period on failure-to-pay penalties. Penalty relief is available to the following two groups of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17th deadline for filing a Federal tax return this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

The taxpayer’s 2011 calendar year balance must not exceed $50,000. Additionally, the taxpayer’s income must not exceed $200,000 if he or she files a joint return or $100,000 if he or she files as single or head of household.

The request for relief from the failure to pay penalty is only available for tax year 2011 and only if all taxes, interest and any other penalties are paid in full by October 15, 2012.

Generally, taxpayers who fail to pay taxes owed by the original due date are subject to a failure to pay penalty of 0.5 percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The penalty can reach 25 percent of the unpaid taxes. Thus, under this program, taxpayers will have until October 15, 2012, to avoid the penalty.

The IRS is legally required to continue to charge interest at the current annual rate of three percent on the unpaid tax liability. It does not have the authority to waive statutorily imposed interest. Taxpayers should note that the failure to file penalty remains in effect at 5 percent a month with a 25 percent cap.

Offers in Compromise

The IRS also reminded taxpayers that the expanded streamline Offer in Compromise (OIC) program, one of the first Fresh Start Initiative, is still available. The streamlined OIC application is available to more taxpayers, has fewer financial document requirements, and, most importantly to struggling taxpayers, a greater flexibility and more common-sense approach to determining feasibility of collection.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Lawmakers Set Stage for Tax Reform Debate After April Recess

by Michael W. Blitstein, CPA 

Democrats and Republicans have begun a two week recess with lawmakers returning home to promote very different visions of tax reform. Before recessing, the House passed a Republican budget blueprint calling for individual and business rate cuts, the Ways and Means Committee approved a GOP small business tax package, and the Senate prepared to debate the so-called “Buffett Rule.” Congress also approved a short-term extension of Federal transportation excise taxes and funding.

The small employer incentive in the Senate bill appears to be a good and targeted expansion of the employer credit in the HIRE Act, Adam Lambert, CPA, managing director, Employment Tax Services, Grant Thornton, LLP, New York, told CCH: “The proposed credit has less limitations and hurdles for small businesses to jump.”

GOP budget

The House voted to approve the GOP budget blueprint on March 29th. The GOP budget proposes to cut the corporate tax rate to 25 percent, reduce the individual tax rates to 10 and 25 percent and eliminate unspecified tax preferences.

Senator Rob Portman, R-Ohio, recently said that he is developing a bipartisan legislative proposal to overhaul corporate taxation and reduce the U.S. corporate tax rate to 25 percent. Portman said his proposal would be revenue-neutral by reducing tax preferences.

Buffett Rule

Democratic leaders have indicated that the Senate will vote on the Buffett Rule after the two week recess. The vote is expected to be on April 16th on the Paying a Fair Share Act, which would subject taxpayers earning over $2 million to a 30 percent minimum federal tax rate. The tax would be phased-in for taxpayers with incomes between $1 million and $2 million.

 Small Businesses

On March 28th, the Ways and Means Committee approved the Small Business Tax Cut Act along party lines. The GOP bill would allow a deduction for 20 percent of qualified domestic business income of the taxpayer for the tax year, or taxable income for the tax year, whichever is less. However, a taxpayer’s deduction for any tax year could not exceed 50 percent of certain W-2 wages of the qualified small business.

In the Senate, the Democratic bill would provide a 10 percent income tax credit on new payroll (through either hiring or increased wages) added in 2012. The maximum increase in eligible wages would be capped at $5 million per employer and the amount of the credit would be capped at $500,000. The bill would also extend 100 percent bonus depreciation through the end of 2012.

Transportation

Before recessing, the House and Senate approved an extension of Federal transportation excise taxes and funding, which President Obama signed on March 30th. The extension was necessary because Congress failed to pass a comprehensive transportation bill before the expiration of transportation tax authority and funding.

The Senate-passed transportation bill has become bogged down in the House. Some House members are opposed to its non-transportation tax provisions

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

IRS Issues Guidance on Expanded Work Opportunity Tax Credit

by Michael W. Blitstein, CPA 

The IRS has released guidance and posted online Frequently Asked Questions (FAQs) for employers planning to claim the enhanced Work Opportunity Tax Credit (“WOTC”) for hiring qualified military veterans.  The guidance contains transition relief, describes electronic submission of the form used to claim the credit and describes the procedures for tax-exempt organizations to claim the credit.

The WOTC was enhanced as part of the VOW to Hire Heroes Act, passed by Congress at the end of November 2011. Employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit.

For military veterans, the VOW to Hire Heroes Act expanded the WOTC, which rewards employers with a tax credit for hiring individuals from targeted groups. The “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit” are intended to encourage employers to hire unemployed military veterans.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a maximum $5,600 credit per employee (Returning Heroes Tax Credit); employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee. Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a credit of up to $9,600 per employee (Wounded Warriors Tax Credit).

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work for the employer. The credit applies in the case of qualified veterans who begin work prior to 2013.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after November 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised form to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit. Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit.

The FAQs on the IRS website address topics such as how employers claim the enhanced WOTC for hiring qualified veterans, how a non-profit organization can claim the credit, and more.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Court Upholds Treatment of S Corporation Dividends as Compensation

by Michael W. Blitstein, CPA 

The Eighth Circuit Court of Appeals has affirmed a Federal district court decision holding that a portion of the dividends paid to an employee-owner of professional services firm was compensation for services. As a result, the taxpayer earned additional wages and owed additional Social Security taxes.

Taxpayers and the IRS frequently spar over the amount of compensation, and, subsequently, the amount of FICA (Social Security) taxes owed, by a closely-held corporation where the same person owns the company and is its employee. Unlike a partnership, where a general partner’s share of profits is subject to self-employment taxes, distributions to an S corporation stockholder are not subject to FICA taxes.

Background

The taxpayer was working for his own professional corporation (“P.C.”). The P.C. owned 25 percent of a professional services firm that was an S corporation. His P.C. entered into an employment agreement with the S corporation, and he exclusively worked for the firm.

The P.C. paid the taxpayer $24,000 a year as compensation and paid Social Security taxes on that amount. The P.C. received substantial distributions from the firm, which had gross earnings of $2–3 million each year. After the P.C. paid the taxpayer’s salary and other expenses, it distributed the remaining cash to the taxpayer as dividends, amounting to $203,000 in year one and $175,000 in year two.

The IRS determined that the P.C. underpaid employment taxes. A Federal district court agreed, determining (based on the testimony of IRS’s expert) that the taxpayer’s compensation should have been $91,000 a year.

Substance Over Form

To determine the appropriate amount of FICA taxes, the court found that the inquiry was whether payments at issue were remuneration for services performed. Because the corporation was controlled by the employees to whom the compensation was paid, the court gave special scrutiny to the salary amount, since there was a lack of arm’s-length bargaining.

A reasonable compensation determination is usually appropriate to determine the amount of an income tax deduction, but it also applies to FICA tax cases. In an old regulation ruling, the IRS concluded that it could recharacterize S corporation dividend payments because the dividends were paid to stockholders in lieu of reasonable compensation. Courts looking at the FICA issue have also evaluated the economic substance of a transaction.

Reasonable Compensation

The Eighth Circuit agreed with the district court’s conclusion that the value of the taxpayer’s services was $91,000 and that the P.C. owed additional FICA taxes. The P.C.’s purported intent to pay $24,000 as compensation was not relevant, the court concluded. Even if intent mattered, it was not credible that the P.C. intended to pay a mere $24,000 in compensation.

The appeals court said that it was appropriate to determine whether the taxpayer’s compensation was reasonable. Based on the following factors, the appeals court concluded that the district court properly determined the fair market value of the taxpayer’s services: the taxpayer was a qualified professional; the taxpayer worked 35 to 45 hours per week as a primary earner of the firm; the $24,000 supposedly paid was unreasonably low compared to similar professionals; the firm had substantial gross earnings; and the firm made substantial distributions to the taxpayer, especially when compared to the claimed salary.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

IRS Issues 2012 Vehicle Depreciation Dollar Limits

by Michael W. Blitstein, CPA 

The IRS has issued limitations on depreciation deductions for owners of passenger automobiles, light trucks, and vans first placed in service during calendar year 2012.  Generally, depreciation deduction limits for calendar year 2012 are $100 more than the limits for calendar year 2011. For 2012, the depreciation dollar limits also reflect 50 percent bonus depreciation under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

The Internal Revenue Code (“The Code”) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service within its business and for each succeeding year. The IRS adjusts the amounts allowable as depreciation deductions for inflation.

The 2010 Tax Relief Act generally extended the 50 percent additional first year depreciation deduction to qualified property acquired and placed in service before January 1, 2013. The Code increases the first year depreciation allowed for vehicles subject to the luxury vehicle limits, unless the taxpayer elects out, by $8,000, to which the additional first year depreciation deduction applies. The $8,000 amount is not adjusted for inflation.

Passenger Automobiles

The maximum depreciation limits for passenger automobiles first placed in service by the taxpayer during the 2012 calendar year are:

  • $11,160 for the first tax year ($3,160 if bonus depreciation is not taken);
  • $5,100 for the second tax year;
  • $3,050 for the third tax year; and
  • $1,875 for each tax year thereafter.

Trucks and Vans

The maximum depreciation limits for trucks and vans first placed in service during the 2012 calendar year are:

  • $11,360 for the first tax year ($3,360 if bonus depreciation is not taken);
  • $5,300 for the second tax year;
  • $3,150 for the third tax year; and
  • $1,875 for each tax year thereafter.

Sport utility vehicles and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds are exempt from the luxury vehicle depreciation caps.

Leases

Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicle’s business use. However, lessees must include a certain amount in income during the year the vehicle is leased to partially offset the amounts by which lease payments exceed the luxury automobile limits.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

IRS Releases New Deductible Mileage Rates

Matt Bergman, CPA

by Matthew Bergman, CPA

The IRS has released the 2012 optional standard mileage rates that employees, self-employed individuals, and other taxpayers can use to compute deductible costs of operating automobiles (including vans, pickups and panel trucks) for business, medical, moving and charitable purposes.

The 2012 standard mileage rate remains at 55.5 cents per mile for business uses, is reduced to 23 cents per mile for medical and moving uses, and remains at 14 cents per mile for charitable uses. For purposes of computing the allowance under an FAVR plan, the standard automobile cost may not exceed $28,200 ($29,300 for trucks and vans). The updated rates are effective for deductible transportation expenses paid or incurred on or after January 1, 2012, and for mileage allowances or reimbursements paid to, or transportation expenses paid or incurred by, an employee or a charitable volunteer on or after January 1, 2012.

www.cjbs.com

A Look at Student Loans: Who Pays the Price of Higher Education?

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

Speaking at the University of Colorado in Denver recently, President Obama announced new executive actions to lower student loan payments. The initiative accelerates an income-based repayment plan that reduces the maximum required payment on student loans to 10% of annual income.

The measure was supposed to go into effect in 2014, but the president now wants it to start next year. The president says by lowering loan payments, people will feel more confident buying houses and making other purchases that will give the economy a much needed boost.

This sounds great, right? Student loans are the No. 2 source of household debt, and who can argue with lower loan payments? But I am concerned that many Americans fail to understand the whole picture.

Two years ago, the president took student loans out of the private sector and decreased bank profits. Banks are bad and they do not vote.

The net result was more Pell grants and more students going to college. As an economics major  (or even an English major who understands the principle of supply and demand) you could have predicted this would lead to a substantial increase in tuition, making it harder for middle income families to send their kids to college.

People in my income bracket do not generally qualify for need-based grants and scholarships and we also generally do not have the income after taxes to pay for college without loans,

Nationally, student loan debt is greater than credit card debt because without the involvement of private companies, we now have higher school costs and increased debt defaults.

With Obama’s recent actions there will be greater loan forgiveness by the government which means that this entitlement program will be a casualty increasing the American debt. As I am part of the 50% of Americans who pay taxes, why should my burden be greater than others?

Now you may say that college education creates the future of our country, which is true. And there are students who will have their dreams of a better life realized in this way. But is the country to serve a few or are we the people to serve the country? Or is the middle class to serve the majority and suffer a greater share of the financial burden?

Our country’s challenges require complete and considered programs, not patchwork solutions. The current student loan programs are an example of policies that sound good to the masses, yet create a greater debt crisis and future problem. And you don’t even need a college degree to see that one, right?

It’s a Great Time to Make a Deal with the IRS

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

Just a brief note to let people know that this is an excellent time to work out unpaid tax obligations with the Internal Revenue Service.  I recently negotiated what I think are excellent settlements for two clients:

1. A real estate developer and contractor with $1,000,000 of payroll tax trust fund tax obligations settled for $20,000.
2. A real estate owner of apartment buildings had $400,000 of unpaid income tax obligations settled for $100,000.

My experience with the IRS program and the willingness of the IRS to accept reasonable offers and compromises make this a great time to settle tax disputes and unpaid tax obligations. Obviously, this will not work for everyone, but as you can see, the strong possibility of an advantageous settlement offers hope to many.

Feel free to call (847-945-2888) or email me if you have questions regarding your tax situation, or are backed up with the IRS and are considering your alternatives.

Larry Goldsmith