What did CA do?

Effective January 1, 2012, California has a new law, Senate Bill 459 (SB 459), which significantly increases the penalties that can be assessed against employers who willfully misclassify as independent contractors individuals who should be treated as employees. If your business utilizes independent contractors, it is extremely important that you take the time now to understand the impact of this new law to your company and to take the necessary steps to ensure appropriate compliance with this law. The highlights of the law are summarized below for your reference, although they are not meant to be all-inclusive.

SB 459 makes it unlawful for any person or employer to engage in “willful misclassification” of an individual as an independent contractor. The law also prohibits charging individuals who have been misclassified as independent contractors a fee or making deductions (e.g., for space rental, goods, equipment maintenance) from compensation if those acts would have violated the law had the individuals not been misclassified.

This new law comes on the tail of the IRS’s recent announcement regarding its new settlement initiative, the Voluntary Classification Settlement Program (VCSP), allowing employers to: 1) come forward if they are not under audit, 2) reclassify independent contractors as employees, and 3) pay a significantly reduced employment tax.

Who has authority to assess compliance and penalties?

SB 459 authorizes the Labor and Workforce Development Agency, specifically the Labor Commissioner or a court, to assess specified civil penalties on persons or employers violating the law. SB 459 also requires the agency to take other specified disciplinary actions against these individuals.

What happens if I am found to have violated the law?

The law requires employers who are found to have engaged in a misclassification “to display prominently” for one year on their websites a notice to employees and the general public announcing, among other things, that the employer “has committed a serious violation of law by engaging in willful misclassification of employees.” The notice must be signed by a corporate officer.

What are the fines and penalties?

Violation of the new statute carries exposure for a civil penalty of between $5,000 and $15,000 for each violation. If the employer is found to have engaged “in a pattern or practice of violations,” the civil penalty is increased to $10,000 and $25,000 per violation. The law does not define the term “pattern or practice.”

Is there a “Safe Harbor” position?

Yes, treating the worker as an employee will cause you to avoid any of these potential penalties for misclassification.

Where should I go for assistance and additional information if I have independent contractors?

The IRS has a very helpful website addressing this issue http://www.irs.gov/businesses/small/article/0,,id=99921,00.html Since the Employee/Independent Contractor issue is decided based upon the preponderance of evidence, look carefully at all the factors being considered by the IRS.

Because the stakes are so high on this issue, we strongly encourage you to consult with legal counsel experienced in employment practice matters to review your independent contractor relationships, to determine the appropriateness of these classifications, and to assist you if re-classifications may be required to mitigate potential legal exposures to your business. We can point you to the pertinent IRS Guidelines, but we will not be responsible for advising you with respect to independent contractor status as part of our services.

Please call us if you have questions or would like a referral to a labor law attorney to discuss this matter further.

Federal Payroll Tax Deposits must follow the monthly or semi-weekly deposit method assigned to each employer by the IRS.  The IRS will send a notice if your status changed from 2011; however, the employer is ultimately responsible for determining which deposit schedule actually applies.  If you didn’t receive an IRS notice, you can make your own determination as shown below:

1.          An employer’s status as a monthly or semi-weekly depositor should be known before the beginning of each calendar year and is determined annually.  This determination is based on the amount of employment taxes the employer reported on the four quarterly reports for the 12-month period from July 1, 2010 through June 30, 2011. 

2.          Employers who accumulated less than $2,500 of employment taxes during a quarter are only required to make a deposit at the end of the quarter.  They can pay their payroll taxes with the quarterly form.

3.          Employers who report $50,000 or less of employment taxes (taxes withheld from the employee plus the employer portion) during the 12-month period from July 1, 2010 through June 30, 2011, and all new employers, will be monthly depositors.  The deposits will be due the 15th of the following month.  NOTE: In many cases these deposits will have to be made electronically (see below).

4.          Employers who reported more than $50,000 of employment taxes during the 12-month period from July 1, 2010 through June 30, 2011, will be semi-weekly depositors.  The deposits will be required on or before either Wednesday or Friday, depending on the timing of the payroll.  Semi-weekly depositors will still have at least three banking days after a payday to make the deposit.  NOTE: In many cases these deposits will have to be made electronically (see below).

Under the semi-weekly rule, the payroll taxes withheld plus the employer’s portion of the FICA/Medicare on payrolls which were paid on Wednesday, Thursday or Friday must be deposited by the following Wednesday.  Payroll taxes, accumulated for a payroll period, which were paid on Saturday through Tuesday must be deposited by the following Friday.  Remember, your deposit will be due either on a Wednesday or Friday.

5.          Employers who accumulate $100,000 of employment taxes during a monthly or semi-weekly period are required to deposit those taxes by the next banking day.  Once you make a next-banking-day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.

FEDERAL ELECTRONIC DEPOSIT REQUIREMENTS FOR 2012:

The IRS eliminated paper coupons for many tax payments, including employment taxes.  Employers are required to use the IRS’ EFTPS.  There is an exception for employers with a deposit liability of less than $2,500 for a return period.  These employers can remit employment taxes with their quarterly or annual return.

If you are required to use EFTPS for your Federal tax deposits and fail to do so, you may be subject to a 10% penalty.  For deposits made by EFTPS to be considered on time, you must initiate the transaction at least one business day before the date the deposit is due.

You may voluntarily participate in the Electronic Federal Tax Payment System even if you are not required to do so.

To get more information or to enroll in EFTPS, call 1-800-555-4477, or visit the EFTPS web site at www.eftps.gov.

EMPLOYER’S QUARTERLY FEDERAL TAX RETURN, FORM 941

Each quarter’s wages subject to income tax, social security and/or medicare taxes must be reported on Form 941.  Any employment taxes totaling less than $2,500 for the period and not previously deposited for the quarter can be paid with the report.

Due dates for 2012 employment tax deposits are April 30, July 31, and October 31, 2012 and January 31, 2013 for the previous quarter.  If all taxes have been deposited when due, and no tax is being paid with the return, an additional ten days is allowed to file the return.  Late returns are subject to penalties on any unpaid tax due with the return.

2012 STATE PAYROLL TAX DEPOSIT REQUIREMENTS:

These deposits are sent to the Employment Development Department with Deposit Form DE 88 which is a tear-out form from a coupon book, or paid electronically using EFT or Just Pay It, or paid by credit card using EZPAY.  EZPAY isn't considered an EFT method of payment, so it doesn't satisfy the EFT mandatory requirement.  The depositing requirements are described below:

1.          State deposit due dates are generally the same as federal deposit due dates.

2.          Employers who are required to make federal monthly deposits and have accumulated more than $350 of undeposited state income tax withholding, are required to deposit all State Income Tax and State Disability Insurance withholding using the federal monthly deposit schedule.

3.          Employers who deposit semi-weekly for federal purposes and have accumulated more than $500 of undeposited state income tax withholding are required to deposit all State Income Tax and State Disability Insurance withholding to the Employment Development Department using the federal semi-weekly deposit schedule.

4.          Employers, who accumulate $100,000 of federal employment taxes, and more than $500 of state withholding taxes, must deposit all State Income Tax and State Disability Insurance withholding by the next banking day.  Once you make a next banking day deposit, you automatically become a semi-weekly depositor for the remainder of that calendar year and the following calendar year.

5.          If you accumulate more than $350 of state withholding taxes in a month or in the cumulative of two or more months, but are not required to make a federal monthly deposit, you are still required to deposit all State Income Tax and State Disability Insurance withheld by the 15^th of the following month. Any withholding which is not required to be deposited based on the above will be due on April 30, July 31, October 31 or January 31 for the preceding quarter.

6.          State Unemployment Insurance (SUI) and Employment Training Tax (ETT) must also be deposited at least quarterly.

A penalty of 10% plus interest will be charged on late payroll tax payments.

CALIFORNIA ELECTRONIC DEPOSIT REQUIREMENTS:

California electronic funds transfer (EFT) requirements remain the same as in prior years.  If your average (per payment) deposit for SDI and PIT is $20,000 or more for the prior year look-back period (July 1 - June 30), you are required to remit payments of SDI and PIT by electronic funds transfer.  Employers, who have met the requirement for the first time, will be notified by October 31st, prior to the year of mandatory EFT participation.

You may voluntarily use the EFT program.  To register for EFT filing, contact the EFT Unit at 1-916-654-9130.  Information and forms can also be found on the EDD=s web site at https://eddservices.edd.ca.gov.

STATE WAGE AND WITHHOLDING REPORTS:

Employers file two quarterly reports, the DE 9 and DE 9C.  Registered employers will receive the forms by mail automatically.  These reports must be filed by April 30, July 31, October 31, and January 31 for the previous quarter, even if you don’t have payroll during a quarter.  A wage item penalty of $10.00 per employee will be charged for late or unreported employee wages.  On these reports, be sure to include the full first name, not just the first initial.

The DE 9 and DE 9C forms should be mailed to:

State of California

Employment Development Department

P.O. Box 989071

West Sacramento, CA 95798-9071

Payroll tax deposits which are mailed to the EDD, must be accompanied by a Payroll Tax Deposit Coupon (DE 88), and mailed to the DE 88 address.  The form DE 88 and payment must be mailed in a separate envelope from the DE 9.

STATE REPORTING REQUIREMENTS FOR NEW OR RE-HIRED EMPLOYEES:

All employers are required to report the full name, social security number, home address and start-of-work date of each employee within twenty days of the start-of-work date.

Form DE 34, Report of New Employees, is used to report new employees.  The information may be faxed to the EDD at 1-916-319-4400, filed online at https://eddservices.edd.ca.gov, filed magnetically or electronically, or mailed to:

Employment Development Department

Document Management Group, MIC 96

P.O. Box 997016

West Sacramento, CA 95799-7016

The reporting of new employees is required for all newly hired employees, employees rehired or returning to work from a furlough, separation, leave of absence without pay, or termination.  If a returning employee was not formally terminated or removed from payroll records, you don’t need to report the employee as a new hire.

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While we’ll try to inform you of any additional changes made during 2012, please be vigilant yourself, and also seek out information on changes from your payroll processors.  The areas most likely to experience mid-year changes are:

• Some reduction of the 6.2% employee FICA withholding rate for March through December.
• Reinstituting the .2% federal surtax for unemployment insurance, which would increase the FUTA rate.  (There has even been discussion of reinstituting this retroactively back to July 1, 2011.)
• Changes in the FUTA rate for California employers because of continued borrowing of federal unemployment reserve funds by California.

If you need assistance in preparing your payroll checks or have other questions relating to these taxes, please call.                                                 

                                                              Very truly yours,                                                                                            

                                                              Seeba & Associates, Inc.

                                                              Certified Public Accountants

For 2012, the standard rate for business mileage will remain at 55.5 cents per mile.  The previous rate was 51 cents per mile for January through June, 2011 and 55.5 cents per mile for July through December, 2011.

The standard rate for the use of a car when providing services to a charitable organization remains at 14 cents per mile.

The 2012 standard mileage rate for the use of your car for medical expenses or deductible moving expenses is 23 cents per mile.  The previous rate was 19 cents per mile for January through June, 2011 and 23.5 cents per mile for July through December, 2011

            Very truly yours,

            Seeba & Associates, Inc.

In an effort to get accurate 1099 forms filed, the Internal Revenue Service increased the penalties that can be imposed for failure to file the information returns with either the IRS or the payee.  There will be a penalty of up to $100 for each 1099 form which is not correctly completed and filed by the due date.  The amount of the penalty is based upon how long it takes to get a correct 1099 form filed.  A stiffer penalty of at least $250 per 1099 (with no maximum penalty) is imposed if you fail to file a 1099 form because of intentional disregard.

California may impose its own penalties when conducting an audit, the most severe of which is for failure to file 1099-MISC forms* to independent contractors.  In those cases, California can effectively negate the deduction for those expenses by imposition of its penalties.

WHAT IS A 1099 FORM?

A 1099 form is an informational return on which businesses report various sorts of payments they've made to partnerships, sole proprietorships, individuals and certain types of corporations during the calendar year.  Some of the most common types of 1099 forms are:

1099-DIV    Used to report dividend payments of $10 or more and liquidating distributions of $600 or more from a corporation.

1099-INT     Used to report interest payments of $10 or more, or when interest of $600 or more is paid by a trade or business.

1099-MISC*   Used to report royalty payments of $10 or more; rent, services (including parts and materials), commissions, prizes and awards, other forms of compensation of $600 or more, and direct sales of $5,000 or more of consumer goods for resale anywhere other than a permanent retail establishment.  (Employee travel or auto allowances must be reported on their W-2s, not on the 1099 MISC form.)

Medical and health care payments, legal fees, and gross proceeds of legal settlements paid to attorneys, over $600 are reportable on form 1099 MISC, even if paid to a corporation.

1099-R      Used to report distributions of $10 or more from retirement plans, profit-sharing plans, IRAs, charitable gift annuities, and insurance contracts, including certain direct rollovers and death benefit payments.                                                                                                                                                                                              

1099-OID   Used to report the original discount of $10 or more on the issuance of bond or notes.

1099-B       Used by brokers to report the proceeds of stocks, bonds, commodities, etc. sold or bartered for others.

1098          Used by businesses who received $600 or more from an individual on a mortgage to report the amount of interest received during the year, and to report certain mortgage insurance premiums.

1098-C         Used by charitable organizations to report donations of motor vehicles, boats and airplanes.

WHO SHOULD WE SEND A 1099 FORM TO?

They should be sent to partnerships, sole proprietorships, limited liability corporations (LLC), limited liability partnerships (LLP) and individuals you made payments to in the course of your business.  A 1099 should also be sent to any attorney, physician, or a supplier of medical services even if they are a corporation. Any payment on which you take backup withholding for Federal income taxes must be reported on the appropriate Form 1099, regardless of the amount of the payment. This means:

1)      Only send 1099s for payments you made related to the operation of your business.                

2)      You don't need to send 1099s for materials or products you purchased.

3)      You don't need to send 1099s to corporations (unless it is for medical or legal services).  However, the burden to find out if it's a corporation is on you.  If the name has "Incorporated", "Inc.", "Corporation", or "Corp." in it, you can assume it's a corporation.  Otherwise, you need to ask.

4)      You don't need to send 1099s to exempt organizations, retirement trusts, or IRA accounts.

FILING RETURNS WITH THE IRS

If you must file any Form 1098 or 1099 with the IRS and you are filing paper forms, you must send a Form 1096 with each type of form as the transmittal document.

For businesses located in California the government copies need to be mailed to:

                                                                                Department of the Treasury

                                                                                Internal Revenue Service Center

                                                                                Kansas City, MO 64999

CALIFORNIA REPORTING REQUIREMENTS

If you file IRS Forms 1099 series, Forms 5498, 1098 and W-2G with the IRS on paper, you are not required to file a paper copy of the same form with the Franchise Tax Board.  The IRS will forward the information to them.  When the Federal and State payment amounts differ, you may file information returns directly with the Franchise Tax Board.

WHAT INFORMATION DO WE NEED FOR THE 1099 FORM?

1)      Name and address of whom you paid.

2)      The amount you paid them during 2011.

3)      Their identification number.  For an individual this would be their social security number.  For a proprietorship, partnership, or corporation this would be their employer identification number which is a nine-digit number, usually beginning with "94-" or "77-".

         IMPORTANT:    It is extremely important that the name recorded on the 1099 agrees with the name listed on the Social Security Administration's records for the specified identification number.  Therefore, in the case where an individual is self-employed, care must be taken to make sure that the proper name is listed on the 1099.  Any "dba" name should be listed on the 1099 underneath the individual's legal name which agrees with the Social Security Administration's records.

 WHAT IF SOMEONE WON'T GIVE US THEIR IDENTIFICATION NUMBER?

If someone won't give you their identification number, you're not sure they're giving you the correct number, or you're not sure they're incorporated as they say, then you should send them a W-9 form (available at the IRS website) by certified mail, return receipt requested.  The receipt will document your request for their number and help you avoid the penalty for filing a 1099 form without an identification number.  If the W-9 form is completed and returned to you, it will take you off the hook for both the accuracy of the identification number used and as to whether they're really a corporation.

WHAT CAN SEEBA & ASSOCIATES DO TO HELP?

Please give us a call if you would like us to help in the preparation of these 1099 forms.  We can:

1)        Answer your questions regarding the issues discussed above,

2)        Prepare 1099 forms for you from information you've gathered, consisting of name, address, identification number, and amount paid in 2011, or

3)        Figure the amount you've paid for 2011 from your books and records.  Along with the address and identification number supplied by you, we'll prepare the 1099 forms.

*          *          *          *          *

                                                                                  IMPORTANT

You should be getting an identification number or completed W-9 form from anyone you pay for services, even if less than $600, before you pay them.  Otherwise, you are obligated to withhold 28% of their payment and remit it to the IRS.  Please call us if you run into problems where the 28% "backup withholding" may come into effect.

You should also keep in mind that you will need to maintain records of amounts paid to independent contractors as payments are made or contracts are signed in order to comply with the Employment Development Department reporting requirement for independent contractors.  If you have any questions regarding this requirement, feel free to contact us.

Please let us know as soon as possible how we can assist you since the 1099s are due to the payees by January 31st and to the government by February 28th.

 NOTE FOR PAYMENTS MADE IN 2011

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 eliminated new information reporting requirements that were created by previous legislation.  The Small Business Jobs Act of 2010, stated that landlords were subject to the reporting requirements related to the filing of 1099s.  This provision is repealed; you are not considered to be in a trade or business solely because you receive rental income.

                                                                               Very truly yours, 

                                                                                Seeba & Associates, Inc.

                                                                                Certified Public Accountants

Here is a brief summary on the issues related to charitable activity.

1. Tax-Free Distributions from IRAs for Charitable Purposes.

In general, if someone withdraws funds from a traditional or Roth individual retirement account (IRA) to make a charitable contribution, the transaction is subject to the regular tax rules. The individual is taxed on the withdrawal, unless it qualifies as a tax-free distribution, and may deduct the amount as a charitable contribution, subject to various limitations. Now, for individuals above 70 1/2 years old, Section 1201 of the Act now permits tax-free IRA withdrawals if the contribution is made directly to a qualifying charitable organization. The maximum withdrawal per year is $100,000. Tax-free distributions may not be deducted as a charitable contribution. In addition, they are not treated as includible in income for purposes of IRC § 72. No gifts to charitable vehicles are permitted, no quid pro quo can exist, and all substantiation rules apply if ANY of the rollover is to be excluded from gross income. The law’s definition of qualified charitable distribution excludes contributions to donor advised funds and supporting organizations. State and local taxes may be imposed. (See the Bill, Section 1201(a) at pages 780-82, and the Explanation at pages 263-68).

Effective date: tax years beginning after 12/31/2005

2. Split-Interest Trust Filing Penalties are Increased

For failure to file a return, failure to include information required on the return, or failure to show correct information, the penalty is raised from $10 per day (and a maximum of $5,000) for certain returns to $20 per day (and a maximum of $10,000) for ALL returns.

The penalty maximums are increased beyond these increases for split-interest trusts with gross income over $250,000 to $100 per day (and a maximum of $50,000). Many planned giving vehicles such as the charitable remainder trusts, charitable lead trusts, and pooled income funds are funded with large gifts. Thus the $250,000 hurdle will not be hard to reach. If a charity is trustee and fails to file, it could be liable for a fine of up to $50,000. This provision was initially passed as a response to a tax shelter known as the Accelerated CRT, which was popular with certain individuals outside the charitable community in 1993, who failed to report the creation of the CRT in order to avoid detection. (See the Bill, Section 1201(b) at pages 782-86 and the Explanation at pages 268-69.)

Effective date: for taxable years beginning after December 31, 2006

3. Food Inventory Contributions

The deduction for charitable donations of food inventory by non corporate taxpayers that are engaged in trade or business is extended for two years and is set to expire for contributions made after December 31, 2007. In general, donors of food inventory may claim a charitable deduction equal to their basis in the inventory (typically, its cost). C corporations, however, may claim an enhanced deduction equal to the lesser of basis plus 50% of the property's appreciated value or two times the donated items’s basis contributed to a qualified charity or private operating foundation for use in the care of the ill, the needy, or infants.

Effective dates: contributions made after 12/31/2005 and before 12/31/2007

4. S Stock Basis Adjustments for Contributed Property

Historically, when an S corporation makes a charitable donation, the benefits pass through to its shareholders and each claims a proportionate share of the deduction, which, for donations of certain property, equals the property's fair market value. Each shareholder then reduces his or her basis in the stock by the amount he or she claimed as a deduction. Since the shareholder did not recognize the appreciation, the stock basis would be reduced below the proper level. Section 1203 however, now allows shareholders to instead reduce their basis by the proportionate share of their adjusted basis, rather than the fair market value of the donated property. The purpose of this change in the law is to coordinate the rules regarding contributions by an S corporation with the prevailing rules regarding contributions by partnerships. (See the Bill, Section 1203 at page 787 and the Explanation at page 271.)

Effective dates: contributions made after 12/31/2005 and before 12/31/2007

5.Tax Treatment of Certain Payments to Controlling Exempt Organizations

Tax-exempt organizations are taxed on unrelated business income. Under section 1205, in situations where an exempt organization receives or accrues a specified payment from an entity that it controls, the payment is taxable as unrelated business taxable income (UBIT) to the extent it either reduces the controlled entity’s net unrelated income or increases its net unrelated loss. Certain types of income received from a controlled entity however, including interest, royalties, and rents, will generally not treated as such income, unless the payment is received from a subsidiary that is more than 50% controlled by the organization and the payment reduces the subsidiary's income. (e.g. This provision addresses situations where, for example, a controlled subsidiary might pay rent to its parent in excess of fair rental value, in an effort to avoid taxes for the subsidiary on unrelated business taxable income items). (See the Bill, Section 1205 at page 788-91 and the Explanation at page 273-74.)

Effective dates: contributions made after 12/31/2005 and before 12/31/2007

6. Contributions for Conservation Purposes.

Generally, individuals may not claim a charitable deduction that exceeds 50% of their “contribution base” (adjusted gross income with certain adjustments) and corporations may not claim a deduction that exceeds 10% of their taxable income with certain adjustments. For individuals, the 50% limitation is reduced to 30% for the donation of capital gain property. For both individuals and corporations, excess contributions may be carried forward for five years. Section 1206 increases the 30% limitation to 50% and the carryforward period to 15 years for qualified conservation contributions. For farmers and ranchers, including qualifying corporations, the limitation percentage is increased to 100%. (See the Bill, Section 1206 at page 791-97 and the Explanation at page 274-77.)

Effective date: tax years after 12/31/2005

7. Insurance Contract Reporting

Section 1211 imposes a new reporting requirement on some tax-exempt entities that acquire an interest in certain insurance contracts if the acquisition is part of a structured transaction involving a pool of contracts. The rule generally applies to any life insurance, annuity, or endowment contract in which the organization and another person have held, directly or indirectly, an interest.

Effective date: acquisitions occurring before August 17, 2008

8. Increase in Penalty Excise Taxes on Tax-Exempt Organizations.

The initial taxes and dollar limitations for the failure to correct self-dealing and excess benefit transactions are doubled:

(a)For acts of self-dealing, other than the payment of compensation by a private foundation to a disqualified person, the initial tax on the self dealer is doubled to 10 percent of the amount involved (Code Sec. 4941(a)(1), as amended by the PPA of 2006. (b)The initial tax on foundation managers is doubled to five percent of the amount involved (Code Sec. 4941(a)(2), as amended by the PPA of 2006.

(c)The dollar limitation on the amount of the initial and additional taxes on foundation managers per act of self-dealing is doubled to $20,000 per act (Code Sec. 4941(c)(2), as amended by the PPA of 2006.

(d)The dollar limitation on organization managers of public charities and social welfare organizations for participating in excess benefit transactions is doubled to $20,000 per transaction per act (Code Sec. 4941(d)(2), as amended by PPA 2006.

The new provisions also doubles the amounts of the initial taxes and the dollar limitations on foundation managers with respect to the private foundation excise taxes on the failure to distribute income (from 15% to 30% of the undistributed amount on a nonoperating foundation), excess business holdings (from 5% to 10% of the excess business holdings), jeopardizing investments (from 5% to 10% of the amount of the investment is imposed on the foundation and the foundation manager, with the maximum dollar limitation to the foundation manager on the initial tax doubled to $10,000 per investment and doubled to $20,000 per investment on the additional tax), and taxable expenditures (the initial tax goes from 10% to 20% of the amount of the expenditure on the foundation and from 5% to 10% of the amount of the expenditure on the foundation manager. The dollar limitation on the additional tax on foundation managers is doubled to $20,000).

Effective date: taxable years beginning after August 17, 2006.

9. Registered Historic Districts - Easements and Rehabilitation Credits

Taxpayers have been entitled to take charitable deductions for gifts of qualified conservation and facade easements under an exception to the partial interest rule of Code Section 170(f)(3). These provisions are designed to significantly tighten the deductibility of such gifts by requiring that no deduction is allowed unless the entire exterior of the building is kept intact and is not altered in a manner inconsistent with the historical character of the exterior. Further, this Bill would reduce the deduction if rehabilitation credits are taken. (See the Bill, Sec.1213 at page 811-15 and explanation at pgs. 291-96.)

Effective date: contributions made after 7/25/2006

10. Taxidermy

Taxpayers have been entitled to take charitable deductions for gifts of taxidermy property to the extent of fair market value. These provisions would limit the deduction to the lesser of basis or fair market value if the donor prepared, stuffed, or mounted the property themself. (See the Bill, Section 1214 at page 815-17 and the Explanation at page 296-98.)

Effective date: contributions made after 7/25/2006

11. Exempt Use Property – Recapture of Tax Benefits

Taxpayers have been entitled to take charitable deductions for gifts of tangible personal property to public charities to the extent of fair market value, if the donee charity used the property in a manner related to its exempt purpose. These provisions would cause the donor to treat as ordinary income the difference between fair market value and adjusted tax basis, if the donee charity sold the asset within three years of the date of the contribution of the property. Two exceptions apply: (i) if the charity certifies that the use of the property was related to the purpose or function constituting the basis for the charity’s exemption; or (ii) the donee charity explains the intended use of the property at the time of the gift and that the continued use of the property became impossible or infeasible to implement. A penalty of $10,000 applies to a person who knowingly makes a false statement in this regard. (Note: IRS Form 8282 and Code Section 6050L(a) formally required that a charity report a sale of contributed property (other than cash or marketable securities) if the sale occurred within 2 years of the date of the gift. Under this new provision, Form 8282 will now need to be filed for dispositions made within 3 years of the date of the gift. (See the Bill, Section 1215 at page 817-23 and the Explanation at page 298-301.)

Effective date: for contributions made and returns filed after September 1, 2006

12. Clothing & Household Contributions

Taxpayers have been entitled to take charitable deductions for gifts of clothing and household items to the extent of fair market value, if the donee charity used the property in a manner related to its exempt purpose. These provisions would deny a deduction altogether unless the clothing or household item was in good used condition or better. These provisions are effective with respect to contributions made after the date of enactment. (See the Bill, Section 1216 at page 823-25 and the Explanation at page 302-04.)

Effective date: for contributions made after August 17, 2006

13. Recordkeeping Requirements & Substantiation – Cash Gifts

Donors are required to keep reliable written records of their charitable contributions. For contributions of at least $250 in value, the donor must obtain a contemporaneous written acknowledgment from the organization. Additional requirements apply if the contribution is of high-value property. Section 1217 requires donors making cash donations, regardless of the amount, maintain a bank record or written communication from the organization showing its name and the date and amount of the contribution. (See the Bill, Section 1217 at page 825 and the Explanation at page 305-06.)

Effective date: contributions made in taxable years beginning after August 17, 2006

14. Fractional Interests in Tangible Personal Property

Under certain circumstances, donors may deduct a charitable contribution of a fractional interest in tangible personal property and later make additional deductible contributions of interests in the same property. Under section 1218, for income, estate, and gift tax purposes, the property's value for determining the additional contribution's deduction is the lesser of the value used for determining the initial deduction or the property's fair market value at the time of the additional contribution. The section also requires the Treasury Secretary to provide for the recapture of a deduction allowed for income or gift tax purposes if (1) the donor does not contribute the remaining interest to the donee within 10 years of the initial contribution or by the donor's death, whichever is earlier, or (2) the donee did not have substantial physical possession of the property and use it for an exempt purpose during the 10 years after the initial contribution or before the donor's death, whichever is earlier. There is a penalty equal to 10% of the recaptured amount. (See the Bill, Section 1218 at page 825-33 and the Explanation at page 306-08.)

Effective date: contributions, bequests, and gifts made after August 17, 2006.

15. Accuracy-Related Penalties.

Taxpayers are penalized for substantial valuation misstatements and substantial estate or gift tax valuation understatements. An increased penalty applies for gross valuation misstatements and gross estate or gift tax valuation understatements. Section 1219 redefines substantial and gross misstatements and understatements to make the penalties apply to more misstatements and understatements, and eliminates the reasonable cause exception for gross valuation misstatements. The section also defines “qualified appraiser” in IRC § 170, authorizes disciplinary actions against appraisers, and penalizes those knowingly involved in valuation misstatements. (See the Bill, Section 1219 at page 833-41 and the Explanation at page 308-12.)

Effective date: the section generally applies to returns filed after August 17, 2006.

16. Credit Counseling

The Bill basically supports the IRS in its establishment of standards as to the requirements to be a charitable, tax-exempt credit counseling organization. See the Bill, (Section 1220 at page 841-49 and the Explanation at page 312-20.)

17. Private Foundation Tax on Net Investment Income

Private foundations are subject to tax on their net investment income. Among other things, section 1221 expands the base used to compute the tax to include unrealized appreciation on investments held. ( See the Bill, Section 1221 at page 849-51 and the Explanation at page 320-24.)

Effective date: taxable years beginning after August 17, 2006.

18. Convention or Association of Churches

In a favorable twist, the definition of a “convention or association of churches” is now inserted in the Code for the first time, providing among other things that a convention or association of churches does not fail to qualify as such simply because the membership of the organization includes individuals as well as churches, or because individuals have voting rights in the organization. (See the Bill, Section 1222 at page 851 and the Explanation at page 324-25.)

Effective date: 7/25/2006

19. Notification Requirement

Under present law, tax-exempt organizations with annual gross income of less than $25,000 do not have to file Form 990. Under the Bill, such organizations would have to furnish the Secretary, annually, in electronic form: the legal name of the organization, any name under which the organization does business, mailing address, website address, taxpayer ID number, name and address of a principal officer, evidence of the organization’s continuing basis for its exemption, and notice of termination (if and when). Failure to provide notice for 3 consecutive years results in the organization’s loss of tax-exempt Status.

Tax-exempt organizations which are required to file Form 990 will likewise lose their tax-exempt status if they fail to file Form 990 for 3 consecutive years.

Revocation relates back to the last day the tax-exempt organization could have timely filed the 3rd such notice or return. If the charity reapplies for tax-exempt status, the Secretary can make such “new” tax-exemption retroactive to the earlier revocation date, assuming the applicant can show reasonable cause. (See the Bill, Section 1223 at page 852-56 and the Explanation at page 325-27.)

Effective date: Provisions are effective for notices and returns with respect to annual periods beginning after 2006.

20. Disclosure to State Officials

Under present law, returns and information of tax-exempts are confidential and may not be disclosed or inspected. Under the Bill, all of the above may be disclosed to state officials. (See the Bill, Section 1224 at page 856-62 and the Explanation at page 327-29).

Effective date: effective 7/25/2006 but do not apply to requests made by a state official before that date

21. Public Disclosure of UBIT

Under present law, Form 990 (but not the 990-T relating to UBIT) is available for inspection, along with Form 1023 relating to a charity’s application for tax-exempt status. A $20 per day penalty can be assessed, up to $10,000 total, for any one annual return, with no limit on the penalty for failing to make exemption materials available. A willful failure to comply can also result in a $5,000 penalty. Under the Bill, present law provisions will extend also to Form 990-T, where tax-exempts are required to report unrelated business income taxes. (See the Bill, Section 1225 at page 862 and the Explanation at page 329-30.)

Effective date: effective 7/25/2006

22. Donor Advised Funds

Normally, if donors can direct funds to a specific recipient, they are not entitled to a charitable contribution deduction. Donor advised funds (DAFs) are charitable accounts set up and sponsored by an organization to which donors contribute and provide advice on the account's distributions and investments, although the sponsoring organization must have final say on the actual distributions and investments. Previous to PPA 2006 there was no mention of DAFs in the tax code, but the IRS allowed the sponsoring organizations to qualify for exempt status under IRC § 501(c)(3). Section 1226 requires the Treasury Secretary to study DAFs and type III supporting organizations (discussed below) to look at whether it is appropriate to allow a charitable contribution deduction for contributions to the fund's sponsoring organization or the type III supporting organization.

Section 1231 now imposes a penalty tax on certain distributions from a DAF made to a natural person, made for a non-charitable purpose, or made without the sponsoring organization maintaining expenditure responsibility. The tax on the sponsoring organization is 20% of the distribution, and the fund manager may be subject to a 5% penalty, limited to $10,000. The section also imposes a tax if a person advises the sponsoring organization to make a distribution from a DAF and that person, or a related person or entity, receives more than an incidental benefit. The tax on the person who gave the advice or received the benefit is 125% of the benefit, and the fund manager may also be subject to a 10% tax, limited to $10,000. Section 1232 applies the penalty tax on excess benefit transactions to DAFs and adds DAF donors to the list of disqualified persons. Section 1233 subjects DAFs to the penalty tax on private foundations for excess business holdings. Section 1234 requires that for a contribution to a DAF to be deductible for income, estate, and gift tax purposes, the taxpayer must obtain a contemporaneous written acknowledgment from the sponsoring organization that certifies it has legal control over the contribution. Section 1235 requires the sponsoring organization to include information about the DAFs it owns on its annual information return. The section also requires that the sponsoring organization indicate on its application for tax-exempt status that it intends to maintain DAFs and how it plans to operate them. (See the Bill, Section 1226 at page 863-64 and the Explanation at page 330-34.)

Effective date: taxable years beginning after August 17, 2006.

23. Type III Supporting Organizations. Supporting organizations are a type of IRC § 501(c)(3) organization. They must (1) be organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of at least one public charity; (2) be operated, supervised, or controlled by or in connection with at least one public charity; and (3) not be controlled by a disqualified person. To satisfy the second test, the organization must be either (1) operated, supervised, or controlled by the supported organization (Type I); (2) supervised or controlled in connection with the supported organization (Type II); or (3) operated in connection with the supported organization (Type III).

Under section 1241, Type III Supporting Organizations may only support U.S. organizations and must provide information, as required by the IRS, to that organization to ensure that the Supporting Organization is responsive to its needs and demands. It also restricts Type I and III Supporting Organizations from accepting gifts or contributions from a person who controls the supported organization and related persons or entities.

Some Type III Supporting Organizations are not functionally integrated with their supported organization. The Tax Act requires the Treasury Secretary to promulgate regulations to require that Type III Supporting Organizations, that are not functionally integrated to the supported organization, to annually distribute a significant amount of assets or income to the supported organization.

Section 1242, among other things, imposes the tax on excess benefit transactions on certain payments made by a supporting organization to a substantial contributor or related person or entity. In this case, the first dollar going to a substantial contributor or related person or entity is considered an excess benefit. Section 1243 makes supporting organizations subject to the penalty tax on excess business holdings.

Section 1244 limits the circumstances in which a private foundation may treat a distribution to a supporting organization as counting toward the amount that the private foundation must distribute each year. Section 1245 requires that a supporting organization include on its annual information return what type they are, a list of supported organizations, and certification they are not controlled by a disqualified person.

Effective date: taxable years beginning after August 17, 2006. ______________________________________________________________________________

Relevant documents... * JCT Explanation of HR4.pdf * Congress 109, Bill H.R. 4 (pcs)

Note: To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we are required to inform you that any tax advice contained in any correspondence or other communication from Seeba & Associates, Inc, CPA’s is not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s.  This means that W-2s for 2011 need to include the value of the personal use of the vehicles from November 1, 2010 to October 31, 2011 and that this value can be calculated now.  Those clients using computerized payroll systems which prepare W-2s will have to inform the system of this fringe benefit value which needs to be included in payroll before the end of December.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

1. For non-office / shareholders: If commuting is the only personal use of a  business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employer.

2. For officers and shareholders: The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows:
     

   • A.   Annual leases value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November 2010 - October 2011.
   • B.   Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
   • C.   Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel.
   • D.   Next subtract any reimbursement that the employer receives from employee.
   • E.   The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.

                                                                                   or                                      
                                                                 (A x B) + (C - D) = E
   

3. It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle.  However, early action was required in order to avoid withholding income tax for 2011.  The employer must have notified the employee by January 31, 2011, in writing, that no income tax withholding would be deducted on the value of the personal use of their vehicle.  For next year 2012, the employee must be notified in writing by January 31, 2012 or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2.

4. 1.Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2.  However, there are some choices available on the timing of these withholdings.  The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis.  As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld.  If the employee will reach the maximum social security wages for the year by that time, without considering the fringe benefit, only medicare tax withholding would be necessary.

Please feel free to contact us if you need help in calculating the value of the personal usage of business-owned cars, but remember it must be done soon and included on the 2011 W-2 forms.

                                                            Very truly yours,

                                                            Seeba & Associates, Inc.

                                                            Certified Public Accountants



Please click here to view the Business Car Table

Under the new law compensatory time off in lieu of payment for hours worked by non-exempt employees in excess of the normal workday and workweek (as described above) is no longer permissible

Exceptions

Employees, who on July 1, 1999, were voluntarily working an alternate workweek schedule (adopted without an employee election), may continue to work that schedule, of not more than 10 hours work a day, and continue to be exempt from the overtime rules if the employer approves a written request by the employee to continue to work that schedule. In addition, employees affected by the new laws may elect, by two-thirds vote, to work an alternative workweek of up to 10-hour work days within a 40-hour workweek without being subject to the overtime rules.

Personal Time Off

Employees may make up lost time due to a personal obligation by giving a signed, written request to an employer to make up the work. Please note however that, if an employer approves an employee's written request to make up work time that is lost as a result of a personal obligation, the hours of that makeup work time, if performed in the same workweek in which the time was lost, should not be counted toward computing the total number of hours worked in a day for purposes of the overtime pay requirements. The only exception would be in the case of an employee who works more than 11 hours in one day or 40 hours in one workweek.

Only individuals working as independent contractors are to be reported. Thus, you don't need to report corporations or partnerships which you pay for services provided to your business. However, you must report all independent contractors you hire for $600 or more, regardless of whether the independent contractor lives or works in California or another state. You only need to report an independent contractor one time per each calendar year that you contract or pay the contractor $600 or more.

The completed DE 542 forms can be either mailed or faxed to the Employment Development Department. The mailing address is:Employment Development Department PO Box 997350 MIC 99 Sacramento, CA 95899-7350 And the fax number is: (916) 255-3211

The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frame. Also, a penalty of $490 may be assessed for the failure to report the required information due to an agreement between you and the independent contractor to disregard the filing requirements.

Money that participants (parents, grandparents, businesses, etc.) contribute to the Scholarshare Trust will grow while in the participant's account and be tax free for federal and California purposes upon disbursement to the beneficiary's school of choice. The funds disbursed can cover room and board, as well as tuition fees, books, supplies and equipment required for enrollment or attendance at a "qualified institution" (defined below). The participant retains ownership of his/her deposits in the trust until disbursement, at which time ownership is transferred to the beneficiary (student). Interest earnings disbursed from the trust are not included in the beneficiary's gross income (while attending college).

Qualified Institutions

Neither the beneficiary nor the participant will have to choose a college when opening a Scholarshare account. However, the type of college the beneficiary plans to attend will affect the maximum contribution allowed, i.e., community college, state university, private institution, etc. The student may use the funds to attend any qualified institution. A qualified institution is one that offers credit toward:

A bachelor's degree; An associate's degree; A graduate level or professional degree; and Another recognized post-secondary credential. Certain proprietary and post-secondary vocational schools are also eligible institutions.

At the time the beneficiary enrolls in college, the Scholarshare Program will transfer payments from the participant's Scholarshare account directly to the college to pay the beneficiary's qualified expenses.

Transferability

If the beneficiary dies or does not attend college, the contributor has the option of canceling the account or changing the beneficiary. Cancellation results in a refund equal to the then-current market value less a penalty of no less than 10 percent of the earnings. The penalty is waived in the event of the beneficiary's death.

Without cause and before the beneficiary's admission to college, the contributor may change the beneficiary designation to relatives of the original beneficiary or relatives of the beneficiary's spouse, including the contributor if the contributor is a relative of the original beneficiary or a relative of the original beneficiary's spouse.

Income Tax Issues

There are no income tax deductions to the contributor for placing funds into a Scholarshare program. Taxation is avoided on the earnings. Amounts paid for tuition will also be eligible for both the HOPE credit and Lifetime Learning credit, subject to the rules that regularly apply to each of those credits.

Gift Tax Issues

For gift tax purposes, deposits are completed gifts of present interests to the designated beneficiary and therefore qualify for the annual gift tax and generation-skipping transfer tax exclusion of $13,000 per year per donee as indexed. They do not qualify as excludable education expenses under the gift tax rules which allow education expenses to be paid in addition to the $13,000 annual exclusion. If the deposit exceeds the annual exclusion amount, the contributor may elect to take the balance into account ratably over a five-year period on their gift tax return.

So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s. This means that W-2s for 2008 need to include the value of the personal use of the vehicles from November 1, 2007 to October 31, 2008 and that this value can be calculated now. Those clients using computerized payroll systems which prepare W-2s will have to inform the system of this fringe benefit value which needs to be included in payroll before the end of December.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

1.For non-officer/shareholders: If commuting is the only personal use of a business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employee.

2.For officers and shareholders: The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows:

1. Annual lease value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November 2007 -October 2008.
2. Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
3. Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel.
4. Next subtract any reimbursement that the employer receives from employee.
5. The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.
   
   or
   
   

   (A x B) + (C - D) = E

3.It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle. However, early action was required in order to avoid withholding income tax for 2008. The employer must have notified the employee by January 31, 2008, in writing, that no income tax withholding would be deducted on the value of the personal use of their vehicle. For next year, 2009, the employee must be notified in writing by January 31, 2009, or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2.

4.Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2. However, there are some choices available on the timing of these withholdings. The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis. As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld. If the employee will reach the maximum social security wages for the year by that time, without considering the fringe benefit, only medicare tax withholding would be necessary.

Please feel free to contact us if you need help in calculating the value of the personal usage of business-owned cars, but remember it must be done soon and included on the 2008 W-2 forms.

TREASURY REGULATIONS SECTION 1.61-21(d)(2)(iii) ANNUAL LEASE VALUE TABLE

For vehicles having a fair market value in excess of $59,999, the Annual Lease Value is equal to: (.25 x Automobile Fair Market Value) + $500.

* At the time the employee is first given the car to use, and it is reevaluated on the first November 1 which follows the 48th month the employee has the same car.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition

The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself." 

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items.  Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable. 

The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.

Fair market value

You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it.  Therefore, its value is less than what you paid for it.  

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt

Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception

In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.

• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.