IRS
Avoid 1099 requirement
Thursday, February 10th, 2011 | consulting, tax | No Comments
The new credit card reporting rule has created a potential money-saving opportunity for businesses subject to 1099 reporting. Everyone engaged in a trade or business (including landlords beginning in 2011) must report payments of $600 or more to non-corporate service providers on Form 1099 to the payees and the IRS. Beginning January 1, 2011, banks and online payment networks are required to report credit card sales to participating merchants and the IRS on Form 1099-K.
The combination of these two rules created the specter of duplicate 1099s and a processing nightmare for payees receiving payments by credit card. The IRS has issued a regulation that exempts payments reported on Form 1099-K from duplicate reporting (e.g., on Form 1099-MISC). So if businesses and landlords pay their service providers by debit or credit card, they may be able to avoid the expense of issuing and filing Forms 1099.
If you are a service provider who normally receives Forms 1099 from your customers, you may see this new regulation as an opportunity to enhance your relationships and your cash flow by setting yourself up to accept debit and credit card payments. Payment networks charge a fee for processing transactions, but the process is easier than ever. Processing options even extend to smartphones, so you can process payments immediately at the work site. That sure beats the thirty- to sixty-day cycle of traditional invoicing and billing.
Landlord? Get ready for 1099
Monday, February 7th, 2011 | tax | 1 Comment
If you have property that you rent to others, the IRS says you are engaged in a trade or business beginning January 1, 2011. This means you become subject to Form 1099 rules. If you pay an individual or company (not a corporation) more than $600 in the calendar year, you must report these payments to the payee and the IRS (usually on Form 1099-MISC, the same form you may be receiving for your rental income). These individuals include, for example, your repairman, plumber, landscaper, accountant, and attorney.
Considering this, it’s a good idea to collect the information you will need as each service provider does the work for you. The IRS created Form W-9 for this purpose, but you’re not required to use it. Just make sure you get at least their name, address, and Social Security number or Employer Identification number. This will save you the hassle of tracking them down next year before the January 31 deadline.
There are exceptions to the new rule:
- An active member of the uniformed services or an employee of the intelligence community who rents your principal residence on a temporary basis;
- An individual who receives rental income below a minimal amount (the IRS has not yet established this amount);
- Any other individual for whom the requirement would cause hardship (the IRS has not yet established what would constitute hardship).
We will keep you posted as regulations are developed to more fully define this new rule, which was part of the 2010 Small Business Jobs Act. You may have heard news about repealing the 1099 reporting provision contained in the health care reform act. We have word that although Congress is considering repealing those requirements, the law’s application to landlords is likely to stand.
There may be a legitimate way to avoid the 1099 reporting rule (besides not collecting rent). We’ll tell you more about that in a future post.
IRS not ready for some 2010 tax returns
Tuesday, February 1st, 2011 | tax | 1 Comment
The Tax Relief Act extended several tax credits and deductions that expired at the end of 2009. As a result, the IRS has delayed processing of several 2010 tax returns. The delays impact these returns:
- Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
- Form 941 (First Quarter 2011), Employer’s Quarterly Federal Tax Return
- Form 709, Gift Tax Return
- Form 706, Estate (and Generation-Skipping Transfer) Tax Return
- Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return for non-resident
- Form 8849 Schedule 3 (Calendar year 2011), Certain Fuel Mixtures and the Alternative Fuel Credit
The delay affects both paper and electronic filers. We can prepare these returns and hold them until the IRS is ready to process them. The starting date for these returns will be announced in the future by the IRS.
We had previously posted that IRS processing of certain individual tax returns will begin on February 14. This date has not been changed, but it does not apply to the forms listed above. We will keep you posted as we learn of developments.
Itemizers may file Feb. 14
Friday, January 21st, 2011 | tax | 1 Comment
Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. As we explained in a prior post, the late passage of the Tax Relief Act in December gave the IRS too little time to reprogram their computers. While filing season started for most taxpayers on January 15, returns containing these deductions face the processing delay.
This does not mean that you must wait to have your return prepared. We are ramping up our tax prep season, and we can prepare your return and hold it until the IRS is ready to accept it for processing. We look forward to working on your return soon!
FSA and HRA debit card use revised
Thursday, January 13th, 2011 | tax | No Comments
You can use your FSA or HRA debit card to buy over-the-counter medicine with a prescription after January 15. As I mentioned in a previous post on this topic, the Affordable Care Act revised rules for HRA, medical FSA, and HSA plans regarding over-the-counter medicines. A prescription is required for these medicines (except insulin) to be reimbursable under the plans. That rule took effect on January 1, 2011, and is still in place.
Many of these plans issue debit cards for their participants to use to pay for medical costs allowed under the plans (check your plan documents for details). The IRS originally declared that debit cards could not be used to buy over-the-counter medicines even with a prescription. They have now relented. In essence, the new guidance says that pharmacies must handle prescriptions for over-the-counter meds the same way they handle all other prescriptions. In practical terms, this means you will need to get a prescription from your doctor for your over-the-counter meds and present the prescription to the pharmacist when you buy them. After January 15, 2011, you may pay for these meds with your FSA or HRA debit card.
Here’s an interesting point that we have not seen discussed yet: Under the rules for the itemized deduction for medical expenses, non-prescription medicine is not deductible. If you now have a prescription for over-the-counter medicine, does that make it deductible even though it is available without a prescription? We think probably so, and we’ll be monitoring guidance, as always.
Tax filing deadline extended, but don’t wait
Friday, January 7th, 2011 | tax | No Comments
We have an extra weekend for tax return preparation! Because April 15 is a holiday in Washington, D.C., the deadline for filing Forms 1040, 1065, and other returns normally due April 15 is Monday April 18, 2011.
If you’re working on your taxes that weekend, though, a smarter choice would be to request an automatic extension of time to file. You don’t want to rush through the return and risk making a mistake that could cost you higher taxes or, worse yet, penalties and interest. Better to gather your information and get it to us early, when we have more time to consider issues with your particular situation that may help reduce your tax bill.
We look forward to hearing from you soon.
Electronic federal tax deposits required
Thursday, January 6th, 2011 | tax | No Comments
Those tax deposit coupons are history. Beginning January 1, 2011, most businesses must make federal tax deposits electronically. If you have not yet set up your electronic deposit account, you should start the process right away, because the enrollment process can take a couple of weeks. Penalties for improper or late deposits can add up fast.
The Electronic Federal Tax Payment System (EFTPS) processes electronic funds transfers from your bank account to the U.S. Treasury. Although payroll taxes are most commonly deposited electronically, all types of taxes can be paid through the system. You can initiate a payment online or by phone. Transfers can be immediate or scheduled for a future date. Just remember to schedule the transfer at least one business day before the actual due date to ensure that the deposit is timely.
To start the enrollment process, go to www.eftps.gov or call 1-800-555-4477.
By the way, Publication 15, (Circular E) Employer’s Tax Guide is now fully updated and available. Have you updated your payroll processing for the reduction in employees’ Social Security tax? For 2011, employees pay only 4.2% instead of 6.2%, increasing their take-home pay. Employers still pay the normal 6.2% though.
If you have questions about these issues, we would be happy to help. Use the contact form, or call (865) 523-8700.
Tax filing delayed for some
Monday, December 27th, 2010 | tax | 1 Comment
The tax relief law enacted on December 17 extended current tax rates and other provisions for two years. It also retroactively extended several tax breaks that had expired at the end of 2009. As a result, the IRS must reprogram their processing systems before the agency can begin receiving tax returns that claim these breaks. The IRS will announce a specific date, which they expect to be in middle to late February. The delay affects both paper and electronic filing.
Taxpayers who fall into the following categories must wait to file:
- Those who claim itemized deductions on Form 1040 Schedule A. The tax relief law extended the deduction for state and local sales tax, which many Tennesseeans claim.
- Those who claim the Higher Education Tuition and Fees deduction, covering up to $4,000 of tuition and fees for post-secondary education. Taxpayers who claim other education credits, including the American Opportunity (modified Hope) credit and Lifetime Learning credit, are not affected by the delay.
- Educators who claim the $250 Educator Expense deduction on Form 1040 or 1040A for out-of-pocket classroom expenses.
For most taxpayers, who are not in these categories, tax filing season will begin on time in mid-January.
For answers to your questions about the tax relief law or other changes, please contact us from here, email us, or give us a call at (865) 523-8700.
Estate tax in the 2010 Tax Relief Act
Friday, December 17th, 2010 | consulting, tax | No Comments
The speculation is over now that the tax relief bill is ready for the President’s signature. The bill is wide-ranging, covering income tax rates, extending many temporary provisions, adding a payroll tax cut, and modifying estate tax law, among other things.
Estate planning has been particularly difficult in the past few years. With the repeal of the estate tax and generation-skipping tax for 2010 has come a complex set of rules covering basis issues that arise with the repeal. Before 2010, estates were valued at fair market value on the date of death (or six months after in certain cases). The heirs assumed this value as their basis in calculating gain or loss on anysubsequent sale of estate assets. Repeal of the estate tax also meant repeal of this basis rule, which means that the heirs must find not only the date-of death value, but each estate asset’s original cost (carryover basis). Except for an exemption amount, the heirs must use the carryover basis in calculating gain or loss on any sale of estate assets, which can substantially increase the tax liability when the heir sells an asset that was bought by the decedent many years ago whose value has appreciated.
The Tax Relief Act has created a special election to allow the estate of a decedent in 2010 to use the rules under the repeal provisions. If the executor chooses not to make the special election, the retroactive provisions of the new law, which effectively extend the 2009 provisions, apply:
- The estate tax exemption and generation-skipping (GST) tax exemption is $5 million in 2010, 2011, and 2012, subject to an inflation adjustment in 2012.
- The top estate and gift tax rate is 35% in 2010, 2011, and 2012.
- For dates of death after 2010, any exclusion amount unused by the decedent may be carried over to be used by the surviving spouse’s estate. (The GST exclusion is not portable.)
- Extensions of time for filing are allowed for most 2010 estate and GST returns to nine months after this law is enacted.
- Estate and GST tax changes that had been scheduled to sunset after 2010 are now scheduled to sunset after 2012.
Other details apply to specific circumstances, so you should consult with your tax adviser to learn more. Even though the new act is only temporary, we now have guidelines for the next two years that will enable us to effectively plan ahead to protect family assets.
IRS wants your QuickBooks file
Tuesday, December 14th, 2010 | tax | 2 Comments
The IRS recently announced that tax examiners across the nation are now trained in QuickBooks, and they are requesting taxpayers’ company files to conduct tax audits. Should you willingly hand over your company’s QuickBooks to an examiner? We think that’s an invitation to trouble.
If your company has been using QuickBooks for bookkeeping since it started, the working file contains the complete financial history of the company. Later versions of the software also contain an audit trail showing how, when, and by whom each transaction was entered, modified, or deleted.
Most tax audits question specific parts of the tax return and request documentation to support them. Our second rule of tax audits is to never give the IRS more information than they need to conduct the examination. Having access to the company’s complete books, the auditor would be tempted to look into other areas or other tax periods. This could lead to an increase in the scope of the audit, which we try to avoid by limiting the information the auditor receives.
What if the IRS requests your QuickBooks file? We find that we can provide the information the examiner needs by printing reports from QuickBooks and providing copies of supporting documents. By doing so, we deprive the auditor the opportunity to go on a “fishing expedition” and open up the examination to new areas.
What if they insist on the file? Karen Hellmund, our QuickBooks Pro Advisor, suggests one method. Using the ‘Clean Up Company Data’ utility, QuickBooks converts old transactions into monthly summary journal entries, making it impossible for a tax examiner to snoop through the individual entries in prior periods. To preserve your working file, run a backup, then restore the backup and run the cleanup utility. You might do this each year after “closing” the year, resulting in a series of files containing mostly transactions for the year. (The cleaned up file would also contain entries for the subsequent year up to the date the file is backed up.) Providing the cleaned up file to the auditor would provide only partial protection, because the file would still contain all entries for the year under examination. We consider providing the QuickBooks file to be a last resort.
Our first rule of tax audits? Tell the examiner one thing only: “I’ll have my representative call you.” Then call an experienced tax professional to represent you in the examination. We know the tactics of IRS personnel and the appropriate responses to achieve the best possible outcome under the circumstances.