2010 year end tax planning

The Holidays are fast approaching and you know what that means …..

Time for Year-End Tax Planning

Tax planning for year-end 2010 brings with it many new challenges. With the anticipation of tax legislation that may be put to a vote in Congress before year’s end, recent changes in legislation and tax laws and the complicated context of effective dates for many tax planning incentives, it is important to stay on top of the game!

New legislation that has been passed includes the Patient Protection and Affordable Care (PPAC) Act. This was designed to effectuate fundamental reforms to the U.S health care system. The PPAC brings with it tax credits for employers providing health insurance to their employees, certain medical care tax benefits to children under the age of 27 and small employers cafeteria plans.

Congress also passed the Hiring Incentives Restore Employment (HIRE) Act which provides tax breaks for businesses to encourage hiring and imposes a number of potential burdens with respect to reporting and disclosure of foreign assets. The Small Business Act of 2010 was also passed by Congress and was designed to increase lending to small businesses and create incentives for small business investment.

As new laws take over others are set to expire. Unless Congress acts to extend favorable tax benefits provided under the Jobs and Growth Tax Relief Reconciliation Act of 2003, 2010 will offer some unique opportunities which will not be available next year.

This is the sales pitch...

DKB can help whip away the confusion of the changing tax scene.  With the significant changes in the tax law that have happened in 2010 and the expected changes that will happen in 2011 and after, planning is a must.  Don't miss opportunities that might not be there on January 1, 2011. 

White House Gives In On Bush Tax Cuts

White House Gives In On Bush Tax Cuts

This story in the Huffington Post is the first indication of what might happen with the expiring
Bush tax cuts. It looks like they may not be expiring. Who would have thought this would happen 6 months ago?

An indication from the President that current ordinary income and capital gains tax rates might be extended will lend some greater clarity to individual taxpayers 2010 year end planning issues. We have spent time wrestling with the idea of accelerating capital gains into 2010 to take advantage of the 15% long term capital gains rates. The wrestling may be over?

Small Business Health Care Tax Credit

The IRS has published questions and answers to help taxpayers to understand if they are eligible to claim the Small Employer Health Care Tax Credit.

Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement”.

IRS Q&A's are at http://www.irs.gov/newsroom/article/0,,id=220839,00.html.  The IRS has also posted a video that provides a high level summary of the new credit at http://www.youtube.com/watch?v=85i1kzIG57k.

New Law Allows In-Plan Rollovers to Designated Roth Accounts

New Law Allows In-Plan Rollovers to Designated Roth Accounts

The IRS provides some initial guidance on "in plan" rollovers to designated Roth accounts in this item. New law provisions included in the Small Business Jobs Act of 2010 provided for this new planning opportunity. The new law provides plan participant with an opportunity to complete a Roth conversion within a 401(k), 403(b) or 457 plan. The plan needs to include an option for Roth accounts. Any amounts rolled over are treated as a taxable distribution that is included in taxable income.

Mark, Where Do I Find Section 179?

Ed, right after section 178 and just before section 180...duh!

Seriously, if you want to enjoy some enhanced tax benefits in 2010 and 2011 TeamDKB can help you to figure this out.

Generally, section 179 permits a business that satisfies limitations on annual investment to elect to deduct (or “expense”) the cost of qualifying property rather than depreciate the cost over time. For tax years beginning in 2010 and 2011, the 2010 Jobs Act amendments permit taxpayers to expense up to $500,000 of the cost of qualifying property under Code Sec. 179, reduced by the amount by which the qualified investment exceeds $2,000,000.

Qualifying property includes depreciable tangible personal property purchased for use in the active conduct of a trade or business. Off the shelf computer software placed in service in tax years beginning before 2011 is treated as qualifying property. 

The 2010 Jobs Act incentive provisions also temporarily expand the definition of qualifying property to include certain real property used in business, specifically, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.  Up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property ("qualified real property") may be applied to the Code Sec. 179 limit for tax years beginning in 2010 and 2011. However, any amount expensed with respect to qualified real property that is disallowed under the income limitation may be carried forward only to 2011 but not to later years. Taxpayers are permitted to elect to exclude real property from the definition of section 179 property.

What's in the Small Business Jobs Act of 2010 for you?

President Obama pulled out his pens on September 27, 2010 and signed into law the Small Business Jobs Act of 2010 (the Act).  It is scored as providing $12 billion of tax incentives.  Let's see what you might get.

Extension of Bonus Depreciation

Bonus depreciation is extended until December 31, 2010.  Originally scheduled to expire on December 31, 2009 provisions allowing for the expensing of 50% of qualifying asset purchases have been added back to the law.  Essentially the extension is retroactive to qualifying assets purchased after January 1, 2010.  When will bonus become permanent?

Asset expensing under IRC section 179

Under current law the maximum deduction for tax years beginning in 2010 is $250,000.  This dollar limit is reduced by the amount of additions in excess of $800,000.  The Act increases the maximum deduction to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.

The Act also temporarily expands the definition of qualifying property to include qualified real property.  Qualified real property is defined as qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.  Taxpayers are limited to expensing $250,000 on these types of improvements.

S corporation built in gains

S corporation that were previously C corporations can be subject to a tax on built in gains.  Previous law applied the built in gains tax for a period of 10 years and for some taxpayers 7 years after a C corporation made an S corporation election.

The holding period to avoid built in gains has been shortened to 5 years under the Act for any tax year beginning in 2011, if the fifth year in the recognition period precedes the tax year beginning in 2011.

Presumably this provides a new window for many S corporations to sell assets with built in gains and avoid the built in gains tax.

Cell phones

The law removes cell phones and similar communication devices from the definition of listed property.  Listed property is subject to limitations on the depreciation deductions.  Now cell phone will no longer be subject to those limitations.  If a tree falls in the woods and no one is there to hear it does it make a noise?

Extended Carryback of General Business Credits and AMT offset of credits

The new law extends the carryback period for eligible small business credits to five years. Eligible small business credits are the sum of the general business credits determined for the tax year with respect to an eligible small business. The extended carryback provision is effective for credits determined in the taxpayer’s first tax year beginning after December 31, 2009.  Also under the new law, an eligible small business credit may offset both regular and AMT liability.

Qualified Small Business Stock

The Act temporarily increases the excludable gain on the sale of qualified small business stock from 50% to 75%.  This is effective for stock acquired after February 17, 2009 and before January 1, 2011.  Pretty short planning window for anyone to take advantage of this.

Start up expenses

Taxpayers have been able to currently deduct $5,000 of trade or business start up expenses that are normally required to be capitalized.  The Act increases the expensing limit to $10,000 for 2010.  It also increases the phase out limitation on this expensing option to $60,000 of start up expenses.

Self-employment income

A self-employed individual can take a deduction for health insurance costs paid for the individual and his or her immediate family for income tax purposes. However, in determining the self-employment income subject to self-employment taxes, the self-employed individual cannot deduct any health insurance costs. Under the Act, the deduction for income tax purposes for the cost of health insurance is allowed in calculating net earnings from self-employment for purposes of self-employment taxes. The provision only applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.

Retirement savings

The Act allows certain IRC section 457 plans to allow participants to contribute deferred amount to designated Roth accounts.  The Act also authorizes 401(k), 403(b) and 457 plans to allow participants to roll over pre-tax account balances to designated Roth account within the plan.  The rollover will be taxable much like an IRA to Roth IRA conversion.

1099 information reporting for Rental Property Expense Payments

The new law requires individuals receiving rental income from real property to file information returns with the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses.  This change is effective for payments made after December 31, 2010.

Other stuff

There are many additional provisions in the Act that address foreign income and sourcing issues that potentially impact foreign tax credits.  Some changes also apply to bio fuel producer tax credits.

More to come...

Expect after election day to see action on rate changes related to expiring Bush tax cuts and tax extenders like past year's alternative minimum tax "patches"

Senate Passes Small Business Tax Relief

Senate Passes Small Business Tax Relief

It will be interesting to see how this bill is reconciled with the House version. Many business changes in the bill are retroactive to January 1, 2010 including increased asset expensing under IRC section 179 and extension of bonus depreciation.

Some provisions would also increase the burden on taxpayers to report payments on form 1099. Congress and the IRS apparently believe that more third party reporting will lead to increased taxpayer compliance.

Taxpayers should follow this closely as year end tax planning begins. More to come...

Path to converting traditional IRAs to Roths full of 'ifs'

Path to converting traditional IRAs to Roths full of 'ifs'

Discussion of the pro's and con's of Regular IRA to Roth IRA conversions for the balance of 2010 is heating up. This article provides additional thoughts and insight into the tax aspects of a 2010 conversion.

Talking Out of All Sides of His Mouth?

Obama Against a Compromise on Extension of Bush Tax Cuts - NYTimes.com

President Obama is going back to Ohio. He says that the Bush tax cuts should be allowed to expire for the wealthiest Americans (those married couples making over $250,000 per year). This would allow the top federal tax bracket for these wealthy individuals to climb to 39.6% from the current 35%.

At the same time, he intends to propose that businesses be allowed more aggressive capital asset expensing options. Essentially, many businesses would be allowed to write off 100% of the cost of certain assets in the year placed in service under proposals he intends to outline today in Cleveland. Essentially, this represents an extension of bonus depreciation rules that have allowed for accelerated depreciation deductions in prior years.

He also intends to outline proposals extending the research and experimentation tax credit for many businesses. The research and experimentation credit has expired for 2010. The research and experimentation credit has been labeled by the administration as the cornerstone of restoring the United States' competitive stance in the world. Unfortunately, Congress and past administrations have not made the credit permanent in the law. This means the credit has frequently expired and requires legislative action to put it back into law after each expiration. That does not sound like the cornerstone of anything.

Many believe the credit would have been reinstated retroactive to January 1, 2010 under an "extenders" package that may be passed by Congress before the end of 2010 in any event. President Obama just beat Congress to the microphone.

Aren't these proposals tax cuts? Many small business people who make more than $250,000 will benefit from 100% bonus depreciation and research and experimentation tax credits.

So...do we have a tax rate increase that might be offset by additional deductions and credits? Same as it ever was...

Taxpayers' Boxing Match with the States

At the beginning of a boxing match announcers will often discuss the "tale of the tape"  This usually outlines which boxer has a longer reach (longer arms) and therefore may have an advantage in the bout.  States are extending their reach in an effort to create an advantage in the bout and to raise revenues.

Many states are beginning to push harder on the concept of "economic nexus".  Generally states can only tax businesses that have nexus in their state.  This typically means that a taxpayer has property located in or employees that work within a state. 

In our "virtual business world" physical presence is often not needed to derive sales or earning from a particular state.  Therefore, states are pushing the concept of economic nexus and redefining the terms "doing business" and "active solicitation". The Tax Adviser has a great article outlining some states' efforts in this regard.

New York State recently passed legislation that intends to require that non-residents include additional income on a NYS non-resident tax return.  2010 changes to the NYS tax law change the rules related to trade or business income of non-residents and the treatment of certain S corporation income of non-residents.(Non-resident trade or business income and Non-resident income of S corporation stockholders)

Expect the states to keep pounding away...