Health Care Reform

November 14th, 2010 by ShannonPopeCPA

In March of 2010, Congress enacted the Health Care and Education Reconciliation Act of 2010 – arguably the largest reorganization of the U.S. health care system in our country’s history. Many of these provisions will be phased in over time and, in light of the mid-term elections, some may be revised or repealed before they can go into effect. Even so, business owners, employers, and individuals need to plan ahead for the tax impacts of this legislation. Below is a summary of its key provisions.

Short-Term Impacts (Tax Years 2010 and 2011)

  • Small business tax credit. An important provision of the health care bill is a tax credit targeted specifically to small employers, to cover a portion of their employer-provided insurance costs. The credit will be phased out over time. For tax years 2010 – 2013, a small business will eligible for a credit of 35% of total premium contributions if they:
    • Employ no more than 25 full-time equivalent employees (FTEs) for the tax year
    • Pay no more than $50,000 in average wages per employee
    • Contribute at least 50% of the premiums for employee health care.
    • Dependent coverage age limit. Another key part of the legislation extends health insurance coverage to children 26 or under, unless they are covered under their own employer’s health plan. Health insurance costs & co-pays for dependents and eligible children (up to age 27) will be tax-exempt up to this new age limit.
    • Adoption tax credit. For tax years 2010 and 2011, the adoption tax credit has been raised to $13,170 and if that amount exceeds the taxpayer’s total tax for the year, the difference becomes refundable.
    • Health coverage disclosure. Beginning on the 2011 W-2 (issued in 2012), businesses have the option to disclose health coverage information on employees.  The information will have no impact on the employee’s taxable income and starting in a future tax year (yet to be released as of publication), this information will be required.
    • Penalties on misuse of HSAs. Also in 2011, the penalty for non-qualified expenditures from Health Savings Accounts (HSAs) rises from 10% to 20%.
    • Non-prescription medications. Likewise, costs for over-the-counter medications not prescribed by a physician will no longer be reimbursable after December 31, 2010 through Flexible Spending Accounts (FSAs).

Longer-Term Impacts (Tax Years 2012 and Beyond)

Over time, the more significant requirements of health care legislation begin to kick in.

  • Individual mandate. Beginning in 2014, individuals must have health coverage or suffer a tax penalty, the greater of:
    • $695 per year, up to a maximum of $2,085 per family; or
    • 2.5% of household income over the amount of income required for income tax filing.

This penalty will be phased in over time, up to 2.5% of taxable income in 2016, after which the penalty will be subject to annual cost-of-living adjustments. Certain exemptions will apply.

  • 1099 requirement for vendors and contractors. Though not pertaining to health care per se, this somewhat overlooked provision of the health care bill (which takes effect January 1, 2012 for payments made after December 31, 2011) would require all companies to issue 1099 tax forms for every corporation or individual to whom they pay more than $600 per year. This provision, more than most, is gathering considerable scrutiny and comment, making it a likely early target for repeal.
  • Premium assistance. Low and middle-income taxpayers, beginning in 2014, will be eligible for a “premium assistance credit” to assist in purchasing health insurance through an Exchange. This credit is refundable and payable in advance directly to the Insurer. It will be available – on a sliding scale — for individuals and families with incomes up to 400% of the federal poverty level who are not eligible for Medicaid, employer-sponsored insurance or other appropriate coverage.
  • Limits on health flexible spending arrangements (FSAs). Under current law, there is no limit on the amount of pre-tax earnings an employee (under a company’s cafeteria coverage plan) can set aside through a health-related FSA. Beginning in 2013, FSAs will be capped at $2,500 per year, adjustable for inflation.
  • Medicare taxes on high-income taxpayers. Higher income taxpayers will be subject to higher Medicare payroll taxes and a new Medicare payroll tax on investment income.
    • Presently, wages are subject to a 2.9% Medicare payroll tax: workers and employers pay 1.45% each; self-employed individuals pay both halves of the tax (but can deduct half of it for income tax purposes). Beginning in 2013, the Medicare payroll tax will rise to 3.8% for high income tax payers. Most taxpayers will continue to pay 1.45%; but for singles earning $200,000 or more, couples earning over $250,000, the payroll tax will rise to 2.35%. Self-employed taxpayers will pay 3.8% on earnings over the threshold, some of which will be deductible.
    • Also beginning in 2013, the Medicare payroll tax on wages will be extended to investment income as well: 3.8% on income of single taxpayers with adjusted gross income over $200,000, and for joint filers on income exceeding $250,000. Taxpayers with investment income less than the $200,000/$250,000 threshold will not be subject to this provision. Retirement account income – such as from 401(k) accounts – is also excluded
    • Unreimbursed medical expenses. The medical expense deduction (currently set at 7.5% of AGI) will rise to 10% for tax years beginning after 31 December 2012. Individuals age 65 and over may continue to deduct expenses over 7.5% for an additional four years, through 2016.
    • “Cadillac” health plans. Beginning in 2018, the new health care legislation will impose a 40% nondeductible tax on insurance companies or plan administrators for any health plan – not counting dental or vision coverage –  with annual premiums exceeding $10,200 for individuals or $27,500 for families (adjustable for inflation). A higher premium limit is available for employers in certain high-risk professions: $11,850 for individual and $30,950 family coverage. Non-Medicare retirees age 55 and older are also eligible for higher thresholds.

About the Author

Shannon Pope is a CPA serving the Houston market with two convenient locations for our clients: Uptown/Galleria and The Woodlands. For more information on her background and services offered, please visit the website www.shannonpopecpa.com.

If you would like to discuss any of the material in the article above and how it pertains to your new business, please contact us at spope@shannonpopecpa.com or by calling 281.367.7070.
 

The information contained herein is general in nature and provided for informational purposes only. It is not intended or provided to constitute tax or legal advice or to be used for (a) avoiding any tax related penalties that may be imposed on you or any other person/entity under the Internal Revenue Code, or (b). promoting, marketing or recommending to another person any transaction or matter addressed in this communication. Please consult with your CPA and/or attorney regarding your specific legal or tax situation. Please contact us if you with to have formal written advice on this or any other matter.

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2010 Year End Tax Planning Tips: Volume 2

November 11th, 2010 by ShannonPopeCPA

As the end of the year approaches, now is the time for any professionals and business owners to implement changes that can cut taxes in 2010 and 2011.  In Volume 2 of the 2010 Year End Tax Planning Tips, we will look at different employee benefits small business owners can take advantage of to reduce their tax bill.  Here is our top 10:

  1. Increase tax-free income by making sure that the practice is paying all medical insurance premiums for the professional and his or her family. Medical insurance premiums are 100 percent deductible if associated with a trade or business, but please note that there are special considerations for S Corporations and CPA should be consulted for guidance).
  2. Separate fully-deductible travel, lodging and continuing-education expenses from meal and entertainment expenses for tax-reporting purposes. In addition, make sure that all meal expenses for staff meetings, functions, and outings are classified as “employee benefits” since they remain fully deductible under Section 274(n) of the Internal Revenue Code.
  3. Consider paying all operating expenses for your business automobile through your practice and deduct the actual cost of operation, rather than the 50 cent per mile rate. The auto expenses that should be paid through the practice include gas, oil, maintenance, repairs, taxes, tags, licenses, and insurance. Keep a mileage log and show any personal usage as income on your W-2.  You may want to consult with a CPA in order to analyze the cost benefit. 
  4. If you do not have a business retirement plan, set one up on or before December 31 to qualify for a 2010 tax deduction. You do have until April 15, 2011, to establish a SEP and still deduct contributions on your 2010 return. 
  5. Are you a sole owner of a business taxed as a Corporation (either C or S)?  Consider setting up a 401(K) plan versus a SEP in order to contribute (and match) freely instead of having to calculate contributions based on W-2 income.  Take full advantage of the IRS’s annual contribution limit for a defined contribution plan which is $49,000 for 2010.
  6. Contribute the maximum “catch up” contribution to your 401(k) profit-sharing plan ($5,500 for 2010 and 2011) for each spouse age 50 or older.
  7. Fund nondeductible IRA contributions for the business owner and spouse in the amount of $5,000 per spouse, or $10,000 total for 2010, and on January 1 of each year thereafter, from amounts otherwise available for personal savings. Establish these as tax-free Roth IRA accounts for qualifying taxpayers (less than $167,000 of AGI, if married). If you exceed this income level, establish these as regular nondeductible IRA accounts.
  8. Contribute the maximum “catch-up” contributions to your IRA in 2010 and on January 1 of each year thereafter, in the amount of $1,000 for each spouse age 50 or older. 
  9. Consider funding a Section 529 college-savings plan to shelter additional investment earnings for tax-free payouts to cover future college and/or private school costs.
  10. Establish and fund the maximum annual contribution of $2,000 per year to a Coverdell Savings Account (formerly known as Education IRAs) for each child to shelter investment earnings for future tax-free payouts to cover college and/or private school costs.  The amount of the contribution is phased out based on income so consult with a CPA first.

We are committed to helping you create an effective tax strategy to minimize your tax bill and are on top of the ever changing tax laws.  If you would like to discuss any of the material above, please feel free to contact us at 281.367.7070 or by e-mail at spope@shannonpopecpa.com.

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2010 Year End Tax Tips: Volume 1

November 2nd, 2010 by ShannonPopeCPA

As the end of the year approaches, now is the time for any professionals and business owners to implement changes that can cut taxes in 2010 and 2011. Over the course of the next several weeks (leading into December), we are going to write a series of articles with different tax planning tips.  They will be broken up into the following categories:

  • Tax Law Change and General Tax Planning,
  • Employee Benefits,
  • Keeping it in the Family, and
  • Squeezing Every Penny from your Tax Bill.

This first article is devoted to Tax Law Change and General Tax Planning.  Listed below are some of our top tax planning tips to be considered before the end of the year:

  1. Normally, a significant tax planning strategy is to defer income until the next tax year and increase expenses.  As of right now, the strategy is exactly the opposite.  Due to the sunset provision on the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) and the fact that some items have yet to be extended by Congress, the individual tax rates are set to increase in 2011.  There is discussion to keep the lower tax rates the same at 10, 15, 25, and 28 percent (though, these have not been extended to date), but Congress is standing pretty firm on letting the highest two tax brackets, currently at 33 and 35 percent, rise to their pre-2001 levels of 36 and 39.6 respectively.
  2. Another 2010 anomaly is to maximize long term capital gains versus maximize stock losses.  With the long term capital gains rate set to increase in 2011 (from 0% and 15% to 10% and 20%).  There is a tiny bright side in that the “super-long term” capital gains rate of 18% will be back on investments held longer than 60 months.  With that being said, your lowest taxes realized will still be to take advantage of the 2010 rates.
  3. Utilize the annual Section 179 expensing election as much as possible to immediately write off new or used equipment purchases made during the current tax year. This expensing election amount has been increased due to the signing of the Small Business Jobs Act and now eligible businesses can write off up to $500,000, beginning this year and through 2011.  This write-off starts phasing out when capital expenditures reach $2 million.  Prior to the passage of this bill, the Section 179 expensing limit would have been $250,000 this year and $25,000 next year.
  4. If you are over $2 million in capital expenditures, you can still increase efficiency and slash your taxes when replacing labor with technology by taking advantage of the extended 50 percent bonus depreciation put in place by the Recovery Act and extended through 2010 by the Small Business Jobs Act.
  5. Consider converting your regular IRAs into Roth IRAs with the elimination of the conversion income limits in 2010. While you will owe current federal and state income taxes on the amount converted, the amounts transferred into the Roth IRA will grow tax-free in the future.  You may be a candidate if you expect a higher tax bracket in the future or your investments are at an all time low, you have a long investment time frame, and you can pay the taxes on the conversion without dipping into your converted retirement account.
  6. Contact a CPA to determine the tax savings available from electing Subchapter S corporation status for your practice, effective January 1, 2011. Professionals will be able to reduce payroll taxes (sometimes significantly) by taking a lower yet reasonable salary (with the remaining profit distributed as a distribution not subject to payroll taxes), reduce income and payroll taxes on their practice sale, and lower their IRS audit risk and exposure.  However, please be aware that the IRS requires the professional to take a “reasonable” salary.  Contact your CPA for advice.
  7. Consider utilizing a cost-segregation study if you purchased or constructed your office building after 1986, in order to reclassify some costs as nonstructural for faster depreciation write-offs.
  8. Check with a CPA to make sure the withholding on your corporate salary drawn thus far (or federal estimated income tax payments, if unincorporated) is sufficient to meet your expected federal income tax liability. If not, make an additional withholding on salary taken in order to assure that you will not be liable for any underpayment penalties, or increase your final federal estimated payments, if unincorporated.  Also this will help ensure that you are not withholding too much and giving an interest free loan to the government.  Contact us if you would like an evaluation.
  9. Starting a business?  The Small Business Jobs Act has a provision to allow taxpayers to deduct up to $10,000 of startup costs immediately in the current tax year.  Please note that the maximum amount is reduced if start up costs exceed $60,000 (any expenses not immediately deductible can be amortized over a 15 year period).
  10. If you plan on making some energy efficient home repairs, now would be the time.  The energy efficient home improvement credit expires at the end of 2010.  Replacing windows, doors, HVAC systems and installing energy-efficient insulation all count towards this credit.

We are committed to helping you create an effective tax strategy to minimize your tax bill and are on top of the ever changing tax laws.  If you would like to discuss any of the material above including income acceleration/expense deferral strategies pertaining to your business, please feel free to contact us at 281.367.7070 or by e-mail at spope@shannonpopecpa.com.

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Increased Audit Activity Looming: Meals & Entertainment and Business Mileage

December 12th, 2009 by ShannonPopeCPA

If you deduct Meals (as a form of entertainment) expenses (“M&E”) or Business Mileage on your tax return (either for a business you operate or as an un-reimbursed employee expense), you might want to pay close attention: The IRS is beefing up their audit activity of “low hanging” fruit in an effort to raise some revenue.  M&E expenses and business mileage have made it to the short list of low hanging fruit.  The IRS is requesting backup documentation/substantiation from taxpayers to support the deductions claimed and, unfortunately, if the support given does not meet the IRS standard, the entire deduction is often disallowed.  The purpose of this article is not to say that just because you deduct these expenses, you are going to be audited and/or the expenses will be disallowed.  What I want to do is alert you to the possibility of an examination or request for records so you have time to ensure your records are in order. 

So, what does the IRS require in terms of documentation to claim a deduction?  Let’s first discuss M&E expenses and a little background related to the expense.

M&E Expenses:  

In IRS Publication 463 (“Travel, Entertainment, Gift, and Car Expenses”), the IRS discusses that you can deduct entertainment expenses as long as they are both (1). Ordinary and necessary and (2) Directly related or associated.  Directly related means that the main purpose of the expense was to conduct business, you engage in business with the person you are entertaining at some point during the meal, and you have more than a general expectation of generating income from them in the future.  If the expense doesn’t qualify as directly related then it may meet the “associated” definition which means it would need to be associated with the conduct of your business and take place immediately before or after a substantial business discussion.  What does the IRS require you keep in order to support the expense?  You must have documentary evidence such as receipts, cancelled checks, or bills (don’t think you can pull out your monthly credit card statement with a bunch of charges highlighted and expect the IRS to agree with the deduction).  Documentary evidence will normally be considered adequate by IRS standards as long as it shows the amount, date, place and essential character of the expense (the IRS goes on to say that a restaurant receipt also must have the number of people served listed).  This is where most people stop their recordkeeping, but please be informed that in addition to the receipt, the taxpayer must list (and I’m quoting this straight from the IRS):

  • Purpose: Business purpose for the expense or the business benefit gained or expected to be gained.  For entertainment, the nature of the business discussion or activity.  If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity.
  • Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationships to you.  You must also show that you or your employee was present at the meal.

If you don’t normally list the purpose and relationship on your receipts, I suggest you start immediately going forward (and you may want to document this for prior receipts).  

TAX TIP: I tend to do this at time of the meal when I am signing the receipt by listing the information on the back of the receipt.  It takes a couple of seconds and my documentation is now complete.  Generally, I also keep an envelope with me (you can keep it in your car, purse or briefcase) where I place the receipt immediately (and any other business receipts I may accumulate when running errands).  This way, all of my business related receipts are together and, once I get back to my office, I can pull the envelope out to place in my files.

Business Mileage:

Let’s now discuss business mileage.  In order to deduct business miles, you must be using your car for a valid business purpose (sorry – commuting to/from work doesn’t count).  IRS Publication 463 goes into great detail on what qualifies as business purpose (the discussion starts on page 15 of the 463 dated 2/04/2009 if you are interested).  Also worth noting, the IRS has strict guidelines on how to determine your business miles (i.e.: estimating your mileage based on a percentage of total miles driven for the year will not fly).  It’s fairly simple (so to speak): you must record your mileage in some sort of “log” with the business purpose (don’t forget to capture the mileage on January 1st which will serve as your beginning mileage and the mileage on December 31st which will serve as your ending mileage).  If you are ever audited or reviewed, the IRS will request your mileage logs (I would suggest that if you don’t have a log book for 2009 or any prior open tax year, you create one!).

TAX TIP: I record my mileage in the calendar function on my PDA phone (blackberry, iPhone, etc).  When I get in my car, I log the odometer reading, where I’m going and, if applicable, why I’m going there (i.e.: the client name, function, store name and intended purchase, etc).  Once I get to my destination, I type in the ending mileage.  I have my PDA set up to automatically sync with my outlook so I can print it out each month.  For those not comfortable using technology, I used to keep a calendar in my car (just one of the month-at-a-glance calendars).  I would perform the same steps as listed above, but just by writing them in the day “box”.  For the record, you do not need the starting and ending mileage of each trip.  You could mapquest the points to determine your mileage (keep the mapquest printout for your records).  This method is helpful if there is a place you drive to frequently.

 In summary, I want to point out that just because you can produce the above substantiated records doesn’t mean that, if audited, the IRS will accept them.  Remember: they still have to pass the reasonableness test (i.e.: the IRS may raise a flag if your business/occupation is computer programming and you are trying to deduct mileage comparable to that of a trucker).  Unfortunately, there is not a concrete definition of reasonable.  That will be between you and your CPA!

About the author: Shannon Pope is a CPA serving North Houston from The Woodlands, TX to Kingwood, TX.  For more information on her background and services offered, please visit the website www.shannonpopecpa.com.

The information contained herein is general in nature and provided for informational purposes only.  It is not intended or provided to constitute tax or legal advice or to be used for (a) avoiding any tax related penalties that may be imposed on you or any other person/entity under the Internal Revenue Code, or (b). promoting, marketing or recommending to another person any transaction or matter addressed in this communication. Please consult with your CPA and/or attorney regarding your specific legal or tax situation. Please contact us if you with to have formal written advice on this or any other matter.

 

 

      

 

 

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If your Business is Audited, what will the Auditor look for?

November 27th, 2009 by ShannonPopeCPA

It’s something Businesses try to avoid (at all costs!), but sooner or later somebody pulls the unlucky proverbial straw and is selected for an IRS audit.  Your records may be impeccable, but the auditor is still sitting across the table with a “guilty until proven innocent” look on their face (or, at least, that’s your perception!).

So what might an auditor be looking for?  Be aware that not only will the IRS be looking at your books and supporting records, they will also be looking at YOU and assessing whether or not you match up to the income reported on your return.

According to Frederick W. Daily, tax attorney and author of Stand Up To the IRS, the IRS will most likely look into the following if your business is audited:

Can the income reported on your return support your current lifestyle?

If available, the auditor will look at your clothes, jewelry, car, home, furnishings to see if you are living in the lap of luxury while your income tax returns look more like you should be living in a cardboard box.  If there is a discrepancy, be prepared to offer up an explanation.

Does a lot of cash flow through your business?

If so, an auditor may suspect skimming right out of the gate.

Did you write off auto expenses for your only car?

Using a business vehicle for personal use is quite common and an auditor will most likely expect to find it.  However, taking an unreasonably high percentage of business deduction for your only car will probably end in an adjustment to your return by the IRS. 

It’s best to keep adequate records such as a mileage log to prove the deduction taken.  As a suggestion, keep either a monthly calendar in your car or use the calendar on your PDA to track mileage and business purpose.  This will be a win-win solution as your records will be detailed enough to support the deduction AND it will be easy to calculate with your mileage deduction come tax time.

Did you claim personal entertainment, meals or vacation costs as business expenses?

This is another area to expect the IRS to spend a fair amount of time examining the validity of the deductions claimed.  They will want to find out if you are trying to write off dinners with friends, vacations with the family, etc.  Again, keep detailed, accurate records. 

At a minimum, you should be prepared to produce the receipt and documentation supporting who was at the function, the business purpose, their relationship to your business and what was discussed (this is all documented in the IRS Publication 463 relating to Travel, Entertainment, Gift and Car Expenses).  I recommend that you log this on the back of the receipt at the end of the meal and then place that receipt in a dedicated file and/or envelope which can be pulled out when preparing the tax return.  This way, all of the required information is there and you don’t have to recreate anything if asked for backup by the IRS.

Did you “forget” to report all of your business sales or receipts?

If you failed to report $10,000 or more of your business income and it looks intentional to the auditor, the IRS may call in their criminal investigations team. 

Are you filing your payroll tax returns and making tax payments for your employees?

This is a routine part of every audit so be prepared to supply the returns to the auditor.

Are your independent contractors really employees?

It’s easier (and cheaper) to pay people who do work for you as independent contractors but be very careful.  There are strict guidelines as to who qualifies as an independent contractor and who is really an employee. 

Among many other things, the IRS will look at the following to provide evidence of the degree and control of independence:

  • Behavioral – Does the Company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial – Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  • Type of Relationship – Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

 If you do have independent contractors working for your business, you will want to ensure that you are collecting W-9s from them (Request for Taxpayer Identification Number and Certification) and filing any applicable 1099 at year end for monies paid.

 Hopefully, this has helped to give you a little more insight to what auditors look for and the best way to be proactive in providing the information to them (or, at least, help you and your CPA in your recordkeeping).  If you have any questions about anything listed above or are in need of a CPA, please feel free to give me a call. 

About the author: Shannon Pope is a CPA serving North Houston from The Woodlands, TX to Kingwood, TX.  For more information on her background and services offered, please visit the website www.shannonpopecpa.com.

The information contained herein is general in nature and provided for informational purposes only.  It is not intended or provided to constitute tax or legal advice or to be used for (a) avoiding any tax related penalties that may be imposed on you or any other person/entity under the Internal Revenue Code, or (b). promoting, marketing or recommending to another person any transaction or matter addressed in this communication. Please consult with your CPA and/or attorney regarding your specific legal or tax situation. Please contact us if you with to have formal written advice on this or any other matter.

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