New Tax Proposals Impacting Individuals and Businesses

From AICPA Tax News
President Obama’s FY2011 Budget includes a list of tax proposals that will impact individuals and businesses. Several proposals will appear familiar as they are just extensions from last year’s stimulus legislation while others are revisits to past proposals. Congress will shortly begin to review these proposals and probably add some of its own to this list. Following is a partial listing separated by whether they are tax reduction or tax increase proposals.

Business Proposals
 Tax Reductions:

• Extend Section 179 expensing limit of $250,000 one more year
• Extend 50% Bonus Depreciation one more year
• Remove cell phones and other similar devices from the definition of Listed Property
• Make the R&E credit permanent
• Extend COBRA Subsidy payments until Jan. 1, 2011
• Create a new Jobs Tax credit for hiring new employees

 Tax Increases:

• Tax Carried Interest as ordinary income
• Repeal Last in First Out (LIFO) inventory accounting method
• Repeal lower of cost or market inventory accounting method
• Codify the Economic Substance Doctrine
• Institute International Tax Reforms
• Rewrite the definition of “Independent Contractor”

Individual Proposals
 Tax Reductions:

• Extend AMT indexation permanently
• Extend Making Work Pay Credit for one year
• Extend Education Tax Credits permanently
• Extend Energy Tax Credits for one more year
• Extend Economic Recovery Payment for one more year

 Tax Increases:

• Allow 2001 Tax Rates to expire and continue current rates for taxpayers below $250,000 but increase rates for those above
• Reinstate 3% limitation on itemized deductions and on personal exemptions
• Limit the tax benefit of itemized deductions to 28%
• Increase Capital Gains Rates to 20% for those with incomes above $250,000, keep 15% rate for those below
• Estate Taxes- The President’s budget presumes that the 2009 estate tax rates and exemption levels will be reinstated for 2010 and 2011. It also proposes changes in valuation rules by limiting valuation discounts for minority interests and tightening rules on the use of grantor retained annuity trusts (GRATs).

In addition to these the list of expiring provisions proposed by the House of Representatives in December, would be extended for one year. The full FY 2011 Budget Proposal is available at the Department Of Treasury.

February 15, 2010 at 1:51 pm | Individuals, Legislation, Tax | No comment

Tax Credits for New Hires

During the State of the Union Address, President Obama announced his support for legislation to provide a tax credit for companies that hire additional employees.

The tax credit for new hires will likely focus on small businesses.  It is expected that there will be safeguards placed in the bill to prevent companies from hiring an employee and then laying the employee off after the employer receives the tax credit.  Similar legislation was discussed in 2009, but no action was taken by Congress. 

Sources say legislation currently being worked on by Senate Democrats is likely to provide a 20 percent tax credit for companies with fewer than 100 employees that hire a new employee, and a 15 percent tax credit for larger companies.  The amount of tax credits any one company could receive would be capped at $350,000.  The Senate could consider this proposal in the upcoming weeks. 

Another option being discussed is a proposal by Senators Charles Schumer (D-NY) and Orrin Hatch (R-UT) that would waive the Social Security payroll tax for any employer that hires a new employee in 2010, and offering an additional $1,000 tax credit in 2011 if the employee is kept on the payroll for 52 continuous weeks.  This proposal would apply to private sector employees only and any employer who had a lower total payroll in 2010 than it had in 2009 would have to forfeit the tax benefit.

February 8, 2010 at 10:30 am | BCG Resources, Tax, Tax Tips, Uncategorized | No comment

Senate passes bill to permit 2010 Haitian relief contributions to be deducted on 2009 returns

The Senate by voice vote approved H.R. 4462, a bill that would allow donors to accelerate the income tax benefits of charitable cash contributions for the relief of victims of the earthquake in Haiti. The bill had previously been passed by the House on January 20 by voice. Accordingly, the bill is now cleared for signature by the President, which is expected this week.

The bill would allow individuals who make charitable contributions to aid Haitian earthquake victims to elect to claim an itemized charitable deduction on their 2009 tax return (instead of having to wait until next year to claim the deductions on their 2010 tax return). The election would apply only to Haitian relief contributions made in cash after Jan. 11, 2010, and before Mar. 1, 2010. If the election is made, Haiti relief donations would be deductible on the 2009 return, not the 2010 return. The bill also would relieve recordkeeping requirements for Haitian relief contributions. For these contributions, a telephone bill would satisfy the Code Sec. 170(f)(17) recordkeeping requirements if it shows the name of the donee organization, the date of the contribution, and the amount of the contribution.

January 26, 2010 at 10:18 am | BCG&Co. General, Tax | No comment

Trust But Verify

By: Jim Keeslar, CPA

“Trust but verify.” Three simple words. Fourteen letters. Pretty basic, but oh, so important, especially in the times we find ourselves in. In the last five years we have seen greed topple some large corporations and some seemingly powerful individuals. Now during a prolonged recession, we at BCG & Co. have seen a significant uptick in fraud. And I am not talking about stories in the newspapers about someone somewhere else. I am talking about right here in Akron, Ohio! We have seen use of corporate credit cards for personal expenses, the altering of documents to support invalid expense reimbursements, checking account theft, the theft of corporate funds meant for retirement funding and fictitious numbers being reported to a bank. Five different fraud schemes in the last three months alone! Years ago, there was a time when we would go a year or two before investigating a potential fraud scheme. So why so much activity now? Well, the economy has put a great deal of additional pressure on individuals causing them to do things they wouldn’t have thought of before.

For more on this whole topic, I have to look no further than our own “fraud-buster”, Ray Dunkle, who is a Certified Fraud Examiner (Ray also provided me with the title for this article). Ray noted, “many people think, ‘it won’t happen to me.’ Then before you know it, you hear them saying, I can’t believe it! He has been a long-time employee, a great performer. I never thought he would steal from me!” Ray goes on to say, “you don’t hire people expecting them to steal from you. You have to have some trust, but you must also be skeptical”.

So as an employer or board member, what are you to do? Again, I turned to Ray. “First, and foremost, make sure the organization has adequate internal controls. Controls are not just for large companies and you can’t be too small for some form of controls. Proper internal controls can help deter and detect theft. An audit is helpful, but it doesn’t always detect fraud. We are seeing more companies that are implementing internal audit procedures—either themselves or contracting with firms such as ours. Controls are important, but you want to perform periodic tests of those controls to make sure they are functioning properly. Internal audit procedures will do just that.”

I asked Ray for a closing thought and he said, “You know, companies will spend money on fire insurance or general liability insurance hoping they will never need it. Companies need to understand that spending money to prevent fraud and to detect honest, but costly, mistakes is no different. Putting controls in place or having internal audit procedures performed on a periodic basis will have a cost associated with it. But just like a fire, if theft hits, it will be more costly than what you would pay to “insure” against it. I would also add, trust is not a control, but a feeling. It is ok to trust, but remember to verify!”

December 8, 2009 at 12:02 pm | Accounting and Assurance, Audit, BCG&Co. General | No comment

Effective Sales Strategies for Contractors

December 2, 2009 at 5:04 pm | Construction | 1 comment

Plug-in Electric Vehicle Credit

This new Internal Revenue Code authorizes a credit of up to $7,500 per vehicle for qualifying plug-in electric drive motor vehicles. This notice provides interim guidance, pending the issuance of regulations, on:

 (1) the certification rules for domestic manufacturers and domestic distributors of foreign manufacturers, and

(2) the circumstances when purchasers of qualified plug-in electric drive motor vehicles can rely on the certification in determining whether a credit is allowable with for a vehicle and the amount of the credit for the vehicle.

 See www.irs.gov/businesses/article/0,,id=214841,00.html for a list of manufacturers for vehicles acquired on or before 12/31/09 and complete guidelineson the new credit.

November 17, 2009 at 10:04 am | Tax | No comment

Worker, Homeownership, and Business Assistance Act of 2009

On November 6, the President signed into law H.R. 3548, the ”Worker, Homeownership, and Business Assistance Act of 2009.” The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home.  

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence’s purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one’s tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.   Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.  

Your guide to the revised homebuyer credit.
The new law makes four important changes to the homebuyer credit:

(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can’t close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents.” For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. There’s no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.
The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.  

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.  

(4) There’s a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It’s important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.   The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.  

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don’t qualify for it. The most important of these are as follows:

• Beginning with the 2010 tax return, the homebuyer credit can’t be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
• For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).
• For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can’t be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.
• Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn’t changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.  

Five-Year Carryback of NOLs Extended to Include 2009 NOLs and to Apply to Most Businesses

A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions. In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it’s allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward. Life insurance companies may carry back losses for three years.

If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an “excess interest loss” (i.e., interest allocable to the CERT) for a “loss limitation year,” the loss is an NOL. It’s subject to the regular NOL carryback and carryover rules, except that it can’t be carried back to a tax year before the year in which the CERT occurred. The “loss limitation year” is generally the tax year in which the CERT occurred (the “CERT year”) and each of the next two tax years.

For purposes of the alternative minimum tax (AMT), a taxpayer’s NOL deduction cannot reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90% of the AMTI.

For NOLs arising in tax years ending after Dec. 31, 2007, small businesses can elect to increase the NOL carryback period for an applicable 2008 NOL (the “applicable NOL”) from 2 years to 3, 4, or 5 years. A small business for this purpose is defined as a corporation or partnership that meets the gross receipts test of ) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (for the three-tax-year period (or shorter period of existence) ending with the tax year in which the loss arose are $15 million or less.

An applicable 2008 NOL is the taxpayer’s NOL for any tax year ending in 2008, or, at the taxpayer’s election, any tax year beginning in 2008. Any such election is irrevocable. Additionally, any carryback election may be made only with respect to one tax year. If an eligible small business makes an election to increase the carryback period for an applicable 2008 NOL, then (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.”

New law. The Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. An applicable NOL means the taxpayer’s NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.  Generally, an election may be made for only one tax year.However, an eligible small business that made or makes an election under the Code as in effect before Nov. 6, 2009 (the enactment date) may make an election for 2 tax years instead of just 1.

The amount of the NOL that can be carried back to the 5th tax year before the loss year may not be more than 50% of the taxpayer’s taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year.  The amount of the NOL otherwise carried to tax years after the 5th preceding tax year is adjusted to take into account that the NOL could offset only 50% of the taxable income for that 5th preceding tax year.

RIA illustration : Corp X, a taxpayer that is not a small business, has an NOL of $5 million for its tax year ending Aug. 31, 2009. In its tax year ending Aug. 31, 2004, it had taxable income of $6 million. If X elects to carry its NOL back to its 2004 tax year, then it will be able to apply only $3 million of that loss against its taxable income for 2004. In determining the amount of the NOL that can be carried forward to years ending after Aug. 31, 2004 by X, the NOL is reduced by only the $3 million that it offset for the 2004 tax year.

The 50% limitation does not apply to the applicable 2008 NOL of an eligible small business with respect to which an election is made under pre-Act law even if the election is made after Nov. 6, 2009.

As was the case for small businesses, if an eligible business makes an election to increase the carryback period for an applicable 2008 NOL, then (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.”

If you have questions please contact a tax expert at (330) 864-6661.

November 11, 2009 at 4:00 pm | Legislation, Tax, Tax Tips | No comment

Ohio Interest Rate on Underpayments and Overpayments Drop 1% in 2010

Each year on October 15, the Ohio Tax Commissioner is required to calculate the interest rate that applies in the following year. Currently, the rate is set at 5%. This will drop to 4% for calendar year 2010. This rate applies to underpayments and overpayments of the commercial activity tax, corporate, sales and use, personal and most other taxes. The monthly accrual rate is 0.33%. The rate on estate taxes and tangible personal property taxes will drop to 1% from the current 2%. The monthly accrual rate is 0.08%. ( Ohio Tax Commissioner Journal Entry 10-15-2009, 10/15/2009 .)

October 26, 2009 at 8:27 am | Tax | No comment

[Construction Industry] When Every Dollar Counts

The economic downturn has only heightened the need for contractors to look for ways to save money and increase revenues. A top-to-bottom review of your operations may reveal some surprising areas where significant savings can be found.

Manage Equipment
Use More Efficiently
Fuel is probably a major expense for you, especially if you are involved in road, bridge, and other types of heavy construction. You can reduce fuel consumption by monitoring equipment idle times and managing fuel efficiency.

Remote asset management technology uses GPS hardware attached to each piece of field equipment to send data via a server or cell tower to a desktop computer in your main office. Your office staff gets real-time data on the equipments precise location, run times, idle times, and speed. Armed with this information, you can see how much fuel is being used and take steps to establish procedures that reduce idling times. Reducing idle times for equipment not only saves fuel, it often translates into increased job site productivity.

Using remote asset management technology can also save money on maintenance. For example, the system can automate the process of monitoring equipment maintenance schedules and help in scheduling timely maintenance on heavy equipment. Better scheduling reduces wear and tear and helps prevent equipment breakdowns.

Charge for Every Change Order
Tracking and charging for every change order lowers your cost of doing business. For every change your customer asks for, break down the costs and present the estimate before you begin any work. For each change order, use a standardized cost template. Be sure to capture all extra costs, including:

• Additional time to process paperwork, supervise the work, and complete additional accounting
• Costs associated with the use of equipment, tools, utilities, and temporary protection, such as fencing and barricades
• Gas and oil
• Insurance
• Clean-up

Record every change order in a log created for this purpose. Change orders should be identified by serial number, subject, and date received. Obtain the signatures of all parties involved before work begins.

Improve Material Handling
You can improve productivity by reducing the unnecessary handling of materials on the job. Implementing a measurement program that allows you to determine how many times material is double handled on a job is a critical first step in this process. Once you have the data, specific situations and conditions that create a high likelihood that material, supplies, and equipment will be double handled should be easier to identify.

Consider preparing a map of your job sites and designating specific locations for storing materials where they will be safe from theft or damage. It makes sense to locate these sites as close as possible to where the bulk of the projects work is being done and only move materials and equipment from the storage locations to places on the site where they will be used immediately.

October 21, 2009 at 12:11 pm | BCG&Co. General, Construction | No comment

Jump Start Your Audit Committee

Serving the Need, Not Checking the Box
[This article is for individuals associated with organizations having audit committees.]

Frequently, Audit Committees are thrown together more in a check the box response to a required procedure and less in a desire for strong corporate governance. As a result, Audit Committees often gather once a year only to hear an often routine report from the outside accountants. With the growing understanding of the importance of appropriate corporate governance, we thought our readers would appreciate knowing practical areas that Audit Committees should be considering:

Awareness the Audit Committee should be challenging their own awareness of:

• Ethics and the opportunity for fraud within their own organization,
• Fraud and fraud fighting procedures…procedures that may also uncover honest but costly mistakes,
• Organizational controls, their appropriateness and their effectiveness, and
• The organization’s prior experience with the detection of errors and fraud and the organization’s response to it.

Oversight - the Audit Committee should be taking an active role in directing:

• The monitoring of managements financial activities,
• The guidance of the internal audit function,
• The implementation of error/fraud prevention and detection programs, and
• The reporting of such activities to the Board and/or ownership.

Self-Assessment the committee should ensure that it is functioning as an audit committee and not as a passive body of listeners to an outside auditors report. Tools such as self assessments, formal written surveys and feedback from management and auditors can help ensure that the Audit Committee is effective and engaged.

Ready for your revival? The most important part of jumpstarting your committee is having everyone make a commitment to embrace changes for the good of your organization, changes that will protect and ensure the longevity of the entity. A first step can be finding an experienced facilitator who will lead the group into uncovering and addressing some key areas for improvement and who can assess the current committees knowledge and commitment to the points above. Effective retreats will study hypothetical ethical dilemmas and evaluate the committee members responses to them. They will also provide an overview of fraud and common methods used to commit it, summarize error and fraud prevention and detection techniques, identify specific industry risks and exercise brainstorming to address a response to the days findings. For more information on how to jumpstart your Audit Committee or how to develop a retreat customized to your organization contact me via phone (330) 572-8046 or email.

September 22, 2009 at 10:15 am | Audit, BCG&Co. General | No comment

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