The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

Under the “No Tax on Tips” provision, employees and self-employed individuals may deduct up to $25,000 in voluntary cash or charged tips received in IRS-designated tip-based occupations. Tips must be reported on Form W-2, Form 1099 or directly on Form 4137. The deduction phases out above $150,000 in modified adjusted gross income ($300,000 for joint filers). Self-employed individuals engaged in a Specified Service Trade or Business under Code Sec. 199A and employees of SSTBs are ineligible.

The “No Tax on Overtime” provision permits workers to deduct the premium portion of overtime pay required under the Fair Labor Standards Act. The deduction is capped at $12,500 ($25,000 for joint filers), with a similar income-based phaseout.

The “No Tax on Car Loan Interest” rule allows individuals to deduct up to $10,000 in interest on loans used to purchase new, personal-use vehicles assembled in the U.S. Qualifying loans must originate after December 31, 2024, and be secured by the vehicle. Used and leased vehicles do not qualify. The deduction phases out for income above $100,000 ($200,000 for joint filers).

Finally, taxpayers aged 65 or older can claim a new $6,000 deduction per person in addition to the current senior standard deduction. The deduction phases out above $75,000 ($150,000 for joint filers).

All deductions are available to itemizing and non-itemizing taxpayers. Transition relief for tax year 2025 will be provided.

FS-2025-3

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

A July Government Accountability Office report highlighted three specific challenges that the agency is facing as it works to improve the taxpayer experience.

GAO noted that "uncertainty about stable multiyear funding hinders efforts to modernize IRS computer systems and offer digital services to quickly resolve taxpayer issues. "

IRS had been using the supplemental funding provided by the Inflation Reduction Act to help address these issues, but those fundings have been a constant target for Republicans in Congress as well as the current Trump Administration, despite regular calls for stable and adequate funding.

The second challenge GAO reported was that "complicated and changing tax laws limit IRS’s ability to offer timely guidance to taxpayers," the report states, though agency officials said it had plans in place to ensure the guidance flowing from the IRS is provided in a manner that is accurate, up-to-date, and available in a user-friendly format.

Staffing was highlighted as the third challenge.

GAO reported that "being unable to hire enough staff trained to help taxpayers can undercut the ability to optimally improve taxpayer experiences. IRS officials said IRS had efforts to boost hiring and training as well as improved systems to enable staff to improve taxpayer experiences."

However, in March 2025, "IRS officials said it was unclear how reductions to the IRA funding and to its staffing will affect these efforts to address the challenges," GAO reported.

The government watchdog also noted that IRS has not established key practices to:

• Define taxpayer experience goals related to service improvements;

• Generate new evidence from measures, analytical tools, and dashboards to track progress with the taxpayer experience goals;

• Involve external stakeholders to help assess the affects of its service improvements on the taxpayer experience; and

• Promote accountability for achieving the taxpayer experience goals.

"IRS officials said establishing an evidence-based approach using these and other key practices has been delayed," GAO reports. "The IRS offices that had been coordinating IRA and taxpayer experience initiatives were disbanded in March 2025 and April 2025, respectively, according to IRS officials."

GAO recommends that the agency "fully establish an evidence-based approach to determine the effects of service improvements on the taxpayer experience."

By Gregory Twachtman, Washington News Editor

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

In a report on trends in compliance activities through fiscal year 2023 dated July 10, 2025, examination starts for partnerships increased 63 percent from FY 2020 (4,106 starts) to FY 2023 (6,709 starts), while examination starts decreased 18 percent in the same time frame from 1,700 to 1,400.

For individuals, the overall combined number of examinations open and closed from FY 2020 through 2023 decreased from 466,921 to 400,446. For individuals with income tax returns of $400,000 or less, the percentage of examinations opened and closed dropped from 94.8 percent to 91.2 percent (442,856 to 365,229) while the percentage of examinations opened and closed for individual income tax returns more than $400,000 increased from 5.2 percent to 8.8 percent (24,065 to 35,217).

"The IRS planned to increase enforcement activities to help ensure tax compliance among high-income and high-wealth individuals," TIGTA reported, adding that it planned to use the supplemental funding provided by the Inflation Reduction Act and that the IRS as of May 2024, the agency plans to audit twice the number of individual returns with more than $400,000 in FY 2024 compared to FY 2023.

However, whether the IRS will be able to meet any compliance goals for both individuals as well as partnerships and corporations is questionable, with agency’s "ability to move forward with hiring efforts in these complex audit areas of corporations, partnerships and high-income individuals is uncertain considering the decreased enforcement funding and recent government staffing cuts."

To that end, the agency’s Field Collection, Campus Collection, and Examination staff is already on a downward trend.

TIGTA reported that the staff decreased from 18,472 employees in FY 2020 to 17,475 in 2023 due to attrition. The Collection staff slightly increased from 7,246 to 7,371 and the Examination staff decreased from 11,226 to 10,104.

"The status of the IRS’s IRA plan, other IRA transformational initiatives, along with the IRS’s hiring plans is uncertain, at best," TIGTA reported. "Although the IRS made substantial progress with hiring 4,048 revenue officers and revenue agents in FY 2024, the recissions of IRA funding, the hiring freeze, early retirement incentives, and future reductions in force present a challenge to improving taxpayer service and enforcing the nation’s tax laws."

The report also noted that in FY 2023, $10.1 billion in enforcement revenue was collected by the Automated Collection System. Field Collection collected a total of $5.9 billion.

In a separate report dated July 10, 2025, TIGTA reported the IRS planned to increase examinations across individuals, partnerships and businesses reporting total positive income of more than $400,000 in FY 2024. The average starts from FY 2019-2023 was 29,466 and the IRS planned to increase that to 70,812. At the same time, the number of returns with a total positive income reported of less and $400,000 is planned to decrease from an average of 452,051 from FY 2019-2023 to 354,792 in FY 2024. But it is not clear whether the agency will be able to meet these targets even though it was on track to meet these goals.

The agency "has not defined key terminology or aspects of its methodology for compliance to meet with these goals as outlined in the 2022 Treasury Directive that higher income earners would be targeted for audit," TIGTA reported. "The IRS stated that the FY 2024 plan was created with the assumptions available at the time. Any subsequent decisions about these issues could affect the effectiveness of future examination plans in meeting compliance requirements."

TIGTA did not make any recommendations in either report and the IRS did not make any comments on them.

By Gregory Twachtman, Washington News Editor

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

In the scenario addressed, a plan administrator issued an $800 designated distribution to a former employee, withheld the correct amount of federal income tax under Code Sec. 3405, and sent the remaining balance by check. When that check went uncashed and was subsequently voided, a second check was mailed. Because the original withholding amount was correct and fully remitted, the IRS has concluded that no refund or adjustment is available under Code Secs. 6413 or 6414, as there was no overpayment involved.

For the second check, the IRS has stated that no further withholding is required if the amount reissued is equal to or less than the original distribution. However, if the new amount exceeds the prior distribution—due, for example, to accumulated earnings—the excess portion is treated as a separate designated distribution subject to new withholding under Code Sec. 3405.

With respect to reporting obligations, the IRS noted that Code Sec. 6047(d) requires a Form 1099-R to be filed for designated distributions of $10 or more. For the first check, the $800 distribution must be reported for the applicable year, with the full amount listed in Boxes 1 and 2a, and the tax withheld in Box 4. No additional reporting is required for the second check if the amount is equal to or less than the original. However, if the second check includes an excess of $10 or more, that additional amount must be reported on a separate Form 1099-R for the year in which the second distribution occurs.

Rev. Rul. 2025-15

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The proposed rules were Reg. §1.382-1, proposed on September 10, 2019 (84 FR 47455), and Reg. §§1.382-1, 1.382-2 and 1.382-7, proposed on January 14, 2020 (85 FR 2061). The proposed regulations would have adopted as mandatory, with certain modifications, (a) the safe harbor net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL) computation provided in Notice 2003-65, 2003-40 I.R.B. 747, based on the principles of Code Sec. 1374, and (b) the “1374 approach,” (as described in Notice 2003-65) for the identification of recognized built-in gain and recognized built-in loss. The IRS considered that the 1374 approach would make it easier for taxpayers to calculate built-in gains and built-in losses and comply with Code Sec. 382(h).

The IRS received critical comments from practitioners on the proposed rules, leading the agency to conclude that further study is needed before issuing any new proposed regulations.

The proposed regulations are withdrawn. Taxpayers may continue to rely on Notice 2003-65 for applying Code Sec. 382(h) to an ownership change before the effective date of any temporary or final regulations under Code Sec. 382(h).

Proposed Regulations, NPRM REG-125710-18

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales.

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales. The agencies reverted the relevant text of the CFR back to the text that was in effect immediately prior to the effective date of this final rule.

Congress passed a joint resolution disapproving the final rule titled “Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales.” The Treasury Department and the IRS were not soliciting comments on this action, nor delaying the effective date.

Effective Date

This final rule is effective on July 11, 2025.

T.D. 10021

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

In the "Fiscal Year 2026 Objectives Report to Congress," National Taxpayer Advocate Erin Collins noted that the 2025 filing season marked the IRS’ "third consecutive year of delivering a generally successful filing season, and by some measures, it was the smoothest yet. Most taxpayers filed their returns and paid their taxes or received their refunds without any delays or intervention from the IRS."

The report highlights that more than 95 percent of individual returns were filed electronically and more than 60 percent of taxpayers received refunds, "the majority within standard processing timeframes."

Despite having a successful season, the agency has reduced its workforce by more than 25 percent since the federal government under President Trump began cutting the federal workforce.

In analyzing what agency functions are affected by this workforce reduction, the report states that "many functions are more visible to taxpayers and directly impact service delivery, while other functions play vital supporting roles in providing taxpayer service and delivering on the IRS’s mission."

Collins in the report when on to encourage Congress ignore requests to cut the IRS budget and ensure the agency is properly staffed and financed.

"The Administration’s budget proposal envisions a 20 percent reduction in appropriated IRS funding next year and an overall reduction of 37 percent after taking into account after taking into account the decrease in supplemental funding from the Inflation Reduction Act. A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected."

The issues of the workforce reduction could be compounded by the expected permanent extension of the Tax Cuts and Jobs Act.

Collins stated that most of the changes related to the extension won’t take effect until January 1, 2026, "but several provisions impacting tens of millions of taxpayers will likely be effective during the 2025. This suggests additional complexity with taxpayers file their 2025 tax returns during the 2026 filing season and more complexity the following year. In addition, the reduction of more than 25 percent in the IRS workforce has the potential to reduce taxpayer services."

The report also echoed ongoing calls it has made in the past, as well as calls by other stakeholders, to continue to improve its information technology modernization strategy. Collins notes that in recent years, "the agency has made notable strides in modernizing its systems. … If this momentum continues, the IRS will be well positioned to deliver high quality service, enhance the taxpayer experience, and perhaps improve tax compliance at a reduced cost."

She highlighted the improvements that were made possible through the supplemental funding from the Inflation Reduction Act, but added that the Trump Administration has paused indefinitely or cancelled projects and replaced them with nine distinct modernization "’vertical,’ which are technology projects designed to meet specified technology demands."

"While these initiatives are promising, the IRS must provide clear and detailed communication to Congress and the public regarding the objectives, scope, business value, milestones, projected timelines, costs, and anticipated impacts of these nine vertical projects on taxpayer service," the report stated. "Without such transparency, there is a real risk these initiatives could stall or deviate from their intended outcomes."

Collins also made a case for sustained funding for IT improvements, recalling a 2023 blog post where she highlighted that large U.S. banks "spend between $10 billion and $14 billion a year on technology, often more than half on new technology systems. Yet in fiscal year (FY) 2022, Congress appropriated just $275 million for the IRS’s Business Systems Modernization (BSM) account. That’s less than five percent of what the largest banks are spending on new technology each year, and the IRS services far more people and entities than any bank."

By Gregory Twachtman, Washington News Editor

IR-2025-71

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. 

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. ETAAC operates under the Federal Advisory Committee Act and collaborates with the Security Summit, a joint initiative established in 2015 by the IRS, state tax agencies and the tax industry to address identity theft and cybercrime.

ETAAC recommended that the IRS update tax return forms to strengthen security and reduce fraud and identity theft. It also advised the agency to revise Modernized e-File reject codes and explanations, expand information sharing with state and industry partners, and continue transitioning taxpayers toward fully digital interactions.

Congress was urged to support tax simplification aligned with policy objectives, grant the IRS authority to regulate non-credentialed tax return preparers, ensure stable funding for taxpayer services and operations, and prioritize sustained technology modernization. For more information, visit the Electronic Tax Administration Advisory Committee (ETAAC) page.

IR-2025-72

As gasoline prices have climbed in 2011, many taxpayers who use a vehicle for business purposes are looking for the IRS to make a mid-year adjustment to the standard mileage rate. In the meantime, taxpayers should review the benefits of using the actual expense method to calculate their deduction. The actual expense method, while requiring careful recordkeeping, may help offset the cost of high gas prices if the IRS does not make a mid-year change to the standard mileage rate. Even if it does, you might still find yourself better off using the actual expense method, especially if your vehicle also qualifies for bonus depreciation.

Two methods

Taxpayers can calculate the amount of a deductible vehicle expense using one of two methods:

• Standard mileage rate
• Actual expense method

Under the standard mileage rate, taxpayers calculate the amount of the allowable deduction by multiplying all business miles driven during the year by the standard mileage rate. One of the chief attractions of the standard mileage rate is its ease of use. Taxpayers do not have to substantiate expense amounts; however, they must substantiate business purpose and other items. There are also limitations on use of the business standard mileage rate.

The standard mileage rate for 2011 for business use of a car (van, pickup or panel truck) is 51 cents-per-mile. The IRS calculates the standard mileage rate on an annual study of the fixed and variable costs of operating an automobile. The IRS set the standard mileage rate for 2011 in late 2010 when gasoline prices were lower than today. It is a flat amount, whether or not your vehicle is fuel efficient, operates on premium grade fuel, is brand new or ten years old, or is subject to high repair bills.

During past spikes in gasoline prices, the IRS has made a mid-year change to the standard mileage rate for business use of a vehicle. In 2008, the IRS increased the business standard mileage rate from 50.5 cents-per-mile to 58.5 cents-per-mile for last six months of 2008 because of high gasoline prices. The IRS made a similar mid-year adjustment in 2005 when it increased the business standard mileage rate after Hurricane Katrina.

At this time, it is unclear if the IRS will make a similar mid-year adjustment in 2011. IRS officials generally have declined to make any predictions. If the IRS does make a mid-year change, it will likely do so in late June, so the higher rate can apply to the last six months of 2011.

Actual expense method

Rather than rely on a mid-year adjustment from the IRS, which might not come, it's a good idea to compare the actual vehicle costs versus the business standard mileage rate. Taxpayers who use the actual expense method must keep track of all costs related to the vehicle during the year. The cost of operating a vehicle includes these expenses:

• Gasoline
• Repair and maintenance costs
• Cleaning
• Tires
• Depreciation
• Lease payments (if the taxpayer leases the vehicle)
• Interest on a vehicle loan
• Insurance
• Personal property taxes on the vehicle

"Doing the math" this year in weighing whether to take the actual expense method not only should factor in the cost of gasoline but also what depreciation or expensing deductions you will be gaining by using the actual expense method. Enhanced bonus depreciation and enhanced "section 179" expensing for 2011 can increase your deduction for a newly-purchased vehicle in its first year tremendously if the actual expense method is elected.

Certain other costs are deductible whether you take the actual expense method or the standard mileage rate. This group includes parking charges, garage fees and tolls. Expenses incurred for the personal use of your vehicle are generally not deductible. An allocation must be made when the vehicle is used partly for personal purposes

Switching methods

Once actual depreciation in excess of straight-line has been claimed on a vehicle, the standard mileage rate cannot be used for the vehicle in any future year. Absent that prohibition (which usually is triggered if depreciation is taken), a business can switch between the standard mileage rate and actual expense methods from year to year. Businesses that switch methods now cannot make change methods effective in mid-year; you must apply one method retroactively from January 1.

Recordkeeping

The actual expense method requires taxpayers to substantiate every expense. This recordkeeping requirement can be challenging. For example, taxpayers who fill-up often at the gas pump need to keep a record of every purchase. The same is true for tune-ups and other maintenance and repair activity. One way to simplify recordkeeping is to charge all vehicle related expenses to one credit card.

The IRS's streamlined offer-in-compromise (OIC) program is intended to speed up the processing of OICs for qualified taxpayers. Having started in 2010, the streamlined OIC program is relatively new. The IRS recently issued instructions to its examiners, urging them to process streamlined OICs as expeditiously as possible. One recent survey estimates that one in 15 taxpayers is now in arrears on tax payments to the IRS to at least some degree.  Because of continuing fallout from the economic downturn, however, the IRS has tried to speed up its compromise process to the advantage of both hard-pressed taxpayers and its collection numbers.

OIC program

The IRS OIC program on its face can appear very attractive to taxpayers with unpaid liabilities. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Keep in mind that taxpayers do not automatically qualify for an OIC. The IRS has cautioned that, absent special circumstances, if you have the ability to fully pay your tax liability in a lump sum or via an installment agreement, an OIC will not be accepted.

The IRS may accept an offer in compromise based on three grounds:

• Doubt as to collectibility
• Doubt as to liability
• Effective tax administration

The decision whether to accept or reject an OIC is entirely within the discretion of the IRS. Sometimes, but very rarely, an OIC will be deemed accepted because the IRS failed to reject it within 24 months of receiving the offer.

Streamlined OICs

The low acceptance rate of OICs has some lawmakers in Congress and taxpayer groups upset. One of the most vocal critics has been National Taxpayer Advocate Nina Olson who has urged the IRS to bring more taxpayers into the OIC program. Partly in response to this criticism, the IRS launched the streamlined OIC in 2010. The streamlined OIC program is intended to cut through much of the red tape that surrounds OICs. The IRS promised, among other things, to process streamlined OICs more quickly.

In February 2011, the IRS announced some changes to streamlined OICs. Streamlined OICs may be offered to taxpayers with total household incomes of $100,000 or less and who have a total tax liability of less than $50,000. Taxpayers who do not meet these requirements may apply for a traditional OIC.

Procedures

The streamlined procedures do not necessarily mean that the IRS will accept more OICs; merely that it will process the offers it receives more quickly. Since the streamlined OIC program is relatively new, the IRS has not yet reported how many streamlined offers it has accepted.

Before accepting or rejecting a streamlined OIC, IRS examiners must verify that the information provided by the taxpayer is correct. The IRS instructed examiners reviewing streamlined OICs to verify taxpayer information through internal research. Examiners will verify ownership of items such as real estate, motor vehicles and other property.

Examiners also will be able to communicate directly with taxpayers or their representatives. The IRS instructed examiners to contact taxpayers or their representatives by telephone whenever possible; rather than sending written notices. Three phone attempts should be made over two business days to contact the taxpayer or his/her representative. If the examiner reaches the taxpayer's voicemail, the examiners should request a call-back within two business days.

The streamlined OIC program is not for everyone. Indeed, the acceptance rate for all OICs (just about 13,000 in fiscal year (FY) 2010) means that relatively few taxpayers will make an offer that the IRS will accept. Nonetheless, the OIC program is one tool that may be used by taxpayers with unpaid liabilities. If you have any questions about the IRS's streamlined OIC or traditional OIC, please contact our office.

Most people are familiar with tax withholding, which most commonly takes place when an employer deducts and withholds income and other taxes from an employee's wages. However, many taxpayers are unaware that the IRS also requires payors to withhold income tax from certain reportable payments, such as interest and dividends, when a payee's taxpayer identification number (TIN) is missing or incorrect. This is known as "backup withholding."

Backup Withholding in General

A payor must deduct, withhold, and pay over to the IRS a backup withholding tax on any reportable payments that are not otherwise subject to withholding if:

• the payee fails to furnish a TIN to the payor in the manner required;
• the IRS or a broker notifies the payor that the TIN provided by the payee is incorrect;
• the IRS notifies the payor that the payee failed to report or underreported the prior year's interest or dividends; or
• the payee fails to certify on Form W-9, Request for Taxpayer Identification Number and Certification, that he or she is not subject to withholding for previous underreporting of interest or dividend payments.

The backup withholding rate is equal to the fourth lowest income tax rate under the income tax rate brackets for unmarried individuals, which is currently 28 percent.

Only reportable payments are subject to backup withholding. Backup withholding is not required if the payee is a tax-exempt, governmental, or international organization. Similarly, payments of interest made to foreign persons are generally not subject to information reporting; therefore, these payees are not subject to backup withholding. Additionally, a payor is not required to backup withhold on reportable payments for which there is documentary evidence, under the rules on interest payments, that the payee is a foreign person, unless the payor has actual knowledge that the payee is a U.S. person. Furthermore, backup withholding is not required on payments for which a 30 percent amount was withheld by another payor under the rules on foreign withholding.

Reportable Payments

Reportable payments generally include the following types of payments of more than $10:

• Interest;
• Dividends;
• Patronage dividends (payments from farmers' cooperatives) paid in money;
• Payments of $600 or more made in the course of a trade or business;
• Payments for a nonemployee's services provided in the course of a trade or business;
• Gross proceeds from transactions reported by a broker or barter exchange;
• Cash payments from certain fishing boat operators to crew members that represent a share of the proceeds of the catch; and
• Royalties.

Reportable payments also include payments made after December 31, 2011, in settlement of payment card transactions.

Failure to Furnish TIN

Payees receiving reportable payments through interest, dividend, patronage dividend, or brokerage accounts must provide their TIN to the payor in writing and certify under penalties of perjury that the TIN is correct. Payees receiving other reportable payments must still provide their TIN to the payor, but they may do so orally or in writing, and they are not required to certify under penalties of perjury that the TIN is correct.

A payee who does not provide a correct taxpayer identification number (TIN) to the payer is subject to backup withholding. A person is treated as failing to provide a correct TIN if the TIN provided does not contain the proper number of digits --nine --or if the number is otherwise obviously incorrect, for example, because it contains a letter as one of its digits.

The IRS compares TINs provided by taxpayers with records of the Social Security Administration to check for discrepancies and notifies the bank or the payer of any problem accounts. The IRS has requested banks and other payers to notify their customers of these discrepancies so that correct TINs can be provided and the need for backup withholding avoided.

Taxpayers that place new business assets other than real property in service through 2012 may claim a "bonus" depreciation deduction. Although the bonus depreciation deduction is generally equal to 50 percent of the cost of qualified property, the rate has been increased by recent legislation to 100 percent for new business assets acquired after September 8, 2010 and placed in service before January 1, 2012. Thus, the entire cost of such 100 percent rate property is deducted in a single tax year rather than over the three- to 20-year depreciation period that is normally assigned to the property based on its type or the business activity in which it is used.

Every business should consider taking advantage of 100 percent bonus depreciation while it is available this year. Ironically, the benefits of 100 percent bonus depreciation are so favorable that some of the regular tax rules standing guard under normal circumstances to prevent abuses are being unintentionally triggered. The IRS has now come to the rescue with a few clarifications, elections and workarounds, in the form of Rev. Proc. 2011-26.

The most important clarifications/elections provide:

--A taxpayer is deemed to acquire qualified property when it pays or incurs the cost of the property.

--Bonus depreciation may be claimed at the 100 percent rate even though a pre-September 9, 2010 binding acquisition contract was in effect provided the contract was not in effect before January 1, 2008.

--Qualified property that a taxpayer manufactures, constructs, or produces is considered acquired by the taxpayer when the taxpayer begins constructing, manufacturing, or producing that property.

--A taxpayer may elect to claim 100 percent bonus depreciation on a component of a larger property if the component is acquired after September 8, 2010 even though manufacture, construction, or production of the larger property began before September 9, 2010.

--A taxpayer may elect the 50 percent rate in place of the 100 percent rate but only in a tax year that includes September 9, 2010.

Election Procedures for 2009/2010 FY Taxpayers

Special procedures that mainly affect fiscal-year (FY) 2009-2010 taxpayers who filed returns prior to the reinstatement of bonus depreciation for the 2010 calendar year explain how to claim or not claim the bonus deduction on property placed in service in 2010.

"Safe Harbor" Enhances Bonus Depreciation for Cars

The guidance also provides an important benefit to taxpayers who purchase a new automobile in 2010 or 2011 that is eligible for the 100 percent bonus rate but which is subject to annual depreciation caps because the vehicle has a gross vehicle weight rating of 6000 pounds or less. The benefit comes in the form of a "safe harbor method of accounting," which allows a taxpayer to claim depreciation deductions in each year of the vehicle's depreciation period.

If this safe harbor method of accounting is not adopted, a taxpayer may only claim a depreciation deduction in the tax year that the vehicle is purchased and that deduction is limited to the amount of the first-year depreciation cap ($11,060 for cars and $11,160 for trucks and vans placed in service in 2010).

If the safe harbor method is adopted, a taxpayer may claim the amount of the first-year depreciation cap in the year the vehicle is purchased plus additional amounts in each of the next five tax years of the vehicle's regular depreciation period.

In most cases, the amount of depreciation allowed in each year of a vehicle's recovery period under the safe harbor method is the same amount that could have been claimed if the 50 percent bonus rate applied.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

• Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
• Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
• Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
• Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
• Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
• Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
• Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
• Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
• Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
• Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
• Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

• Proof of medical and dental expenses;
• Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
• Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
• Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
• Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
• Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

A business with a significant amount of receivables should evaluate whether some of them may be written off as business bad debts. A business taxpayer may deduct business bad debts if the receivable becomes partially or completely worthless during the tax year.

In general, most business taxpayers must use the specific charge-off method to account for bad debts. The deduction in any case is limited to the taxpayer's adjusted basis in the receivable.

The deduction allowed for bad debts is an ordinary deduction, which can serve to offset regular business income dollar for dollar. If the taxpayer holds a security, which is a capital asset, and the security becomes worthless during the tax year, the tax law only allows a deduction for a capital loss. However, notes receivable obtained in the ordinary course of business are not capital assets. Therefore, if such notes become partially or completely worthless during the tax year, the taxpayer may claim an ordinary deduction for bad debts.

For a taxpayer to sustain a bad debt deduction, the debt must be bona fide. The IRS looks carefully at a bad debt of a family member.

To be entitled to a business debt write off, the taxpayer must also make a reasonable attempt to collect the debt. However, in a nod to reality, the IRS does not request the taxpayer to turn the debt over to a collection agency or file a lawsuit in an attempt to collect the debt if doing so has little probability of success.

Deadlines for claiming a write off for any past business bad debt must be watched. Taxpayers have until the later of (1) seven years from the date they timely filed their tax return or (2) two years from the time they paid the tax, to claim a refund for a deduction for a wholly worthless debt not deducted on the original return.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Basic rules

The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:

Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:

• 100 percent of the tax shown on the corporation's current year's tax return (or of the actual tax, if no return is filed); or
• 100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.

A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.

Individuals. For individuals (including sole proprietors, partners, self-employeds, and/or S corporation shareholders who expect to owe tax of more than $1,000), quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:

• 90 percent of the tax ultimately shown on your return for the 2015 tax year, or 90 percent of the tax due for the year if no return is filed;
• 100 percent of the tax shown on your return for the preceding (2014) tax year if that year was not for a short period of less than 12 months; or
• The annualized income installment.

For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2014 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2015), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Adjusting estimated tax payments

If you expect an uneven income stream for 2015, your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.

For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.

Refiguring tax payments due

There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.

If you would like further information about changing your estimated tax payments, please contact our office.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

Often, timing is everything or so the adage goes. From medicine to sports and cooking, timing can make all the difference in the outcome. What about with taxes? What are your chances of being audited? Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS's decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don't think timing matters at all.

What your return says is key

If it's not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession--not when you file--are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you're self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS's interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn't match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS's "hit list" for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e. you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven't complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, weigh the risk carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.

President Obama unveiled his fiscal year (FY) 2012 federal budget recommendations in February, proposing to increase taxes on higher-income individuals, repeal some business tax preferences, reform international taxation, and make a host of other changes to the nation's tax laws. The president's FY 2012 budget touches almost every taxpayer in what it proposes, and in some cases, what is left out.

Roadmap

Every federal budget proposal is just that: a proposal, or a list of recommendations from the White House to Congress. Ultimately, it is for Congress to decide whether to fund a particular government program and at what level. The same is true for tax cuts and tax increases. The final budget for FY 2012 will be a compromise. Nonetheless, President Obama's FY 2012 budget is a helpful tool to predict in what direction federal tax policy may move.

Individuals

In his FY 2012 budget, President Obama repeats his call for Congress to end the Bush-era tax cuts for higher-income individuals (which the president generally defines as single individuals with incomes over $200,000 and married couples with incomes over $250,000). The top individual income tax rates would increase to 36 percent and 39.6 percent, respectively, after 2012. For 2011 and 2012, the top two individual income tax rates are 33 percent and 35 percent, respectively. The president also proposes to limit the deductions of higher income individuals.

Additionally, the president wants Congress to extend the reduced tax rates on capital gains and dividends, but not for higher-income individuals. Single individuals with incomes above $200,000 and married couples with incomes above $250,000 would pay capital gains and dividend taxes at 20 percent rather than at 15 percent after 2012.

The president's FY 2012 budget, among other things, also proposes:

• An AMT patch (higher exemption amounts and other targeted relief) after 2011;
• A permanent American Opportunity Tax Credit (enhanced Hope education tax credit) after 2012;
• A permanent enhanced earned income credit;
• A new exclusion from income for certain higher education student loan forgiveness;
• One-time payments of $250 to Social Security beneficiaries, disabled veterans and others with a corresponding tax credit for retirees who do not receive Social Security; and
• A temporary extension of certain tax incentives, such as the state and local sales tax deduction and the higher education tuition deduction, for one year.

Some of the proposals in the president's FY 2012 budget impact how individuals interact with the IRS. Many taxpayers complain that when they call the IRS, the wait times to speak to an IRS representative are so long they hang up. The president proposes to increase the IRS's budget to hire more customer service representatives. The president also proposes to allow the IRS to accept debit and credit card payments directly, thereby enabling taxpayers to avoid third party processing fees.

Businesses

The tax incentives for businesses in the president's FY 2012 budget are generally targeted to specific industries. One popular but temporary business tax incentive would be made permanent. President Obama proposes to extend permanently the research tax credit. The president also proposes to permanently abolish capital gains tax on investments in certain small businesses.

Other business proposals include:

1. Employer tax credits for creating jobs in newly designated Growth Zones;
2. Additional tax breaks for investments in energy-efficient property;
3. More funds for grants in lieu of tax credits for specified energy property;
4. One-year extensions of some temporary business tax incentives, such as the Indian employment credit and environmental remediation expensing;
5. Modifying Form 1099 business information reporting; and
6. Extending and reforming Build America Bonds.

The president's FY 2012 budget does not include a cut in the U.S. corporate tax rate. Any reduction in the U.S. corporate tax rate is likely to come outside the budget process. The president has spoken often in recent weeks about reducing the U.S. corporate tax rate but he wants any reduction to be revenue neutral; that is, the cost of cutting the U.S. corporate tax rate must be paid for. President Obama has discussed closing some unspecific tax loopholes.

IRS operations

President Obama proposes a significant increase in funding for the IRS. Most of the money would go to hiring new revenue officers and boosting enforcement activities. The White House predicts that investing $13 billion in the IRS over the next 10 years will generate an additional $56 billion in additional tax revenue over the same time period.

Estate tax

Late last year, the White House and the GOP agreed on a maximum federal estate tax rate of 35 percent with a $5 million exclusion for 2010, 2011 and 2012. In his FY 2012 budget, the president proposes to return the federal estate tax to its 2009 levels after 2012 (a maximum tax rate of 45 percent and a $3.5 million exclusion). President Obama also proposes to limit the duration of the generation skipping transfer (GST) tax exemption and to make other estate-tax related changes.

Revenue raisers

The White House and Congress are both looking at ways to cut the federal budget deficit. Taxes are one way. The president's FY 2012 budget proposes a number of revenue raisers, especially in the area of international taxation and in fossil fuel production.

International taxation. The president's budget proposes to reduce tax incentives for U.S.-based multinational companies. One goal of this strategy is to encourage multinational companies to invest in job creation in the U.S. The president's FY 2012 budget calls for, among other things, to limit earnings stripping by expatriated entities, to limit income shifting through intangible property transfers, and to make more reforms to the foreign tax credit rules. If enacted, all of the proposed international taxation reforms would raise an estimated $129 billion in additional revenue over 10 years.

LIFO. President Obama proposes to repeal the last-in, first-out (LIFO) inventory accounting method for federal income tax purposes. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its first-in, first-out (FIFO) value in the first tax year beginning after December 31, 2012. This proposal would raise an estimated $52.8 billion over 10 years.

Fossil fuel tax preferences. The Tax Code includes a number of tax incentives for oil, gas and coal producers. President Obama proposes to repeal nearly all of these tax breaks for oil, gas and coal companies. These proposals would raise an estimated $46.1 billion over 10 years.

Financial institutions. President Obama proposes to impose a financial crisis responsibility fee on large U.S. financial institutions. The fee, if enacted, would raise an estimated $30 billion in additional revenue over 10 years.

Carried interest. The president's FY 2012 budget proposes to tax carried interest as ordinary income. This proposal would raise an estimated $14.8 billion in additional revenue over 10 years.

Insurance company reforms. Insurance companies are subject to specific and very technical tax rules. President Obama proposes to overhaul the tax rules for insurance companies. If enacted, these reforms would raise an estimated $14 billion over 10 years.

These are just some of the revenue raisers in the president's FY 2012 budget. All of them will be extensively debated in Congress in the coming months. Our office will keep you posted on developments. If you have any questions about the president's FY 2012 budget proposals, please contact our office.

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Employees and wages

An employer can claim the maximum 35 percent credit if it has no more than 10 full-time equivalent (FTE) employees receiving average annual wages of $25,000 or less. The credit is phased out as the number of FTEs increases to 25 and as average annual wages increase to $50,000.  An employer with 25 or more employees, or paying average annual wages of $50,000 or more per employee, will not receive a credit.

In counting FTEs, the employer should not include owners and family members.  Seasonal employees are not counted unless they work at least 120 days during the year. In determining average annual wages, employers must count all wages, bonuses, commissions or other compensation, including sick leave and vacation leave.

Applicable years

The credit took effect in 2010.  It did not expire at the end of 2010 but can be claimed from year to year.  The credit applies at the 35/25 percent levels for four years, through 2013. After 2013, the maximum credit increases to 50 percent for for-profit employers and 35 percent for tax-exempt employers, but only for two years. Thus, the credit can be claimed every year for the six years from 2010 and 2015.  The credit is recalculated every year based on the total health insurance premiums paid. Only non-elective employer premiums are counted; salary reduction contributions paid through a cafeteria plan or other arrangement are not counted.

Premiums

An employer must pay at least 50 percent of the premium cost of health insurance coverage, and must pay the same uniform percentage of costs for each employee who obtains health insurance through the employer. A transition rule for 2010 treats an employer as satisfying the uniformity rule as long as the employer pays at least 50 percent of the coverage costs of each employee, based on the cost of employee-only (single) coverage, even if the employer does not pay the same percentage of costs for each employee.

The premiums must be paid for qualified health insurance, such as a hospital or medical service plan or health maintenance organization. It includes coverage for dental, vision, long-term care, nursing home care, and coverage for a specified disease or illness.  Coverage does not accident insurance, disability income insurance, and workers' compensation.

Claiming the credit

The credit is determined on Form 8941, Credit for Small Employer Health Insurance Premiums. For-profit employers report the amount of the credit on Form 3800, General Business Credit, and attach the forms to their income tax return. As a general business credit, any unused credit (in excess of taxable income) can be carried back one year (except for a credit arising in 2010, the first year) or carried forward 20 years.  For-profit employers deduct the credit from the premiums paid for health insurance, when computing the deduction for health insurance premiums.

Tax-exempt employers report the credit on Form 990-T, Exempt Organization Business Income Tax Return, regardless of whether the organization is subject to tax on unrelated business income. The credit is refundable for tax-exempt employers, provided it does not exceed the employer’s income tax withholding and Medicare taxes. The credit is not refundable if the employer does not claim the credit on Form 990-T.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, brothers, sisters (including step-brothers, and -sisters), half-siblings, nieces, and nephews;

 -- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

 -- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

 -- The child receives more than one-half of his or her support from you; and

 -- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; -- The individual's gross income for the year is less than $3,650; -- You provide more than one-half of the individual's total support for the year; -- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.

Taxpayers may elect to deduct state and local general sales and use taxes in lieu of deducting state and local income taxes for 2010 and 2011. Before Congress passed the 2010 Tax Relief Act (Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010), the sales tax deduction was not available for the 2010 tax year. However, the 2010 Tax Relief Act retroactively extends the sales tax deduction for 2010 and also makes it available for the 2011 tax year.

Thus, all individual taxpayers who itemize their tax deductions for 2010 and 2011 on Schedule A, Form 1040, have a choice between deducting state and local income taxes (as has always been the case for itemized deductions) or deducting state and local general sales taxes as an itemized deduction instead. The state and local sales tax deduction is particularly beneficial for those taxpayers who live in states without state income taxes (Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington state, and Wyoming), and thus don't benefit from the state income tax deduction.

Planning Note. The extension of the deduction for state and local general sales taxes does not impact states such as California, Illinois, and Oregon that have decoupled from the deduction, or states such as Connecticut, Michigan, or West Virginia that do not allow federal itemized deductions.

Comment. It is important to remember for taxpayers who are claiming itemized deductions on Schedule A for the 2010 tax year (thus affecting deductions for state sales tax) that due to the late passage of the 2010 Tax Relief Act, the IRS will not be able to process returns of those whose filings are delayed (Schedule A filers, among others) until February 14, 2011.

Methods for calculating the deduction

The right decision is usually made simply by determining which deduction is higher for you (if you live in a state that provides for the state income tax deduction.)

If you elect to deduct state and local sales taxes in lieu of deducting state and local income taxes, you can chose between two methods of computation:

• The actual expense method; or
• The IRS's optional state sales tax tables method.

Actual expense method

Under the actual expense method, you must keep the actual sales receipts that show the sales tax paid. This may be somewhat more difficult for 2010 since the 2010 Tax Relief Act was not passed until December 2010, long after some taxpayers may have thrown most of their old sales slips for ordinary expenses into the trash. Nevertheless, collecting receipts, especially for major purchases, may prove enough to make use of the "actual expense method" instead of the IRS tables.

Some further complications. Qualifying state and local sales taxes allowed under the actual expense method include only sales taxes set at the general sales tax rate, with exceptions for food, clothing, medical supplies, and motor vehicles.

Optional state sales tax tables method

Under this method, you don't have to keep your receipts (although keeping some receipts from motor vehicle and other specified purchases may be advantageous (see below)).

The IRS optional state sales tax tables are supposed to reflect the average state sales tax deduction paid by the average resident of your state, based on both income level and number of exemptions. Income levels on the tables for each state run from $0 to "$200,000 or more;" exemption columns go from 1 to "more than 5."

Income for purposes of the IRS tables includes adjusted gross income, plus certain non-taxable income that increases your purchasing power. The later amounts include tax-exempt interest, veterans' and Social Security benefits, nontaxable IRA withdrawals and the like. Since the higher the income level, the higher the table deduction amount, it is to your advantage (although it is not required) to include these in this computation.

The local sales tax computation. The IRS tables do not reflect local sales taxes. The IRS does not publish the appropriate local sales tax rates. You have to find it. Taxpayers compute their combined state and local sales tax deduction amount by:

1. (a) Dividing the local general sales tax rate by the state general sales tax rate; (b) Multiplying that figure by the amount of state general sales taxes in the IRS tables; and
2. Adding the amount of local general sales taxes (1) to the amount of state general sales taxes in the tables.

Moving during the year

The IRS Optional State Sales Tax Tables cover most states and the District of Columbia. Your legal state of residence for the year determines which table to use.

If you lived in more than one state during 2010, you must multiply the table amount for each state you lived in by a fraction, equal to the number of days you lived in each state, divided by 365. Prorating local sales taxes is also required if you moved from one locality to another in the same state.

Figuring out the new sales tax itemized deduction takes several steps. Nevertheless, the tax savings available may make it well worth your while to "do the math." You should consult your tax advisor with questions since deduction planning can be more complicated than many think.

Although individual income tax returns don't have to be filed until April 15, taxpayers who file early get their refunds a lot sooner. The IRS begins accepting returns in January but does not start processing returns until February. Determining whether to file early depends on various personal and financial considerations. Filing early to somehow fly under the IRS's audit radar, however, has been ruled out long ago by experts as a viable strategy.

Although individual income tax returns don't have to be filed until April 15, taxpayers who file early get their refunds a lot sooner. The IRS begins accepting returns in January but does not start processing returns until February. Determining whether to file early depends on various personal and financial considerations. Filing early to somehow fly under the IRS's audit radar, however, has been ruled out long ago by experts as a viable strategy.

Required documents

Filing a return early may not make sense for many taxpayers because they do not yet have enough information to accurately fill out their return. If you have not received information returns, like Forms 1099, or other information you need to complete your return and/or accompanying forms, or if you are missing documents or other information you need to attach to your return, it may be difficult, if not impossible, to accurately complete your tax return. For example, employers do not have to provide wage statements to their employees until January 31 (although an employer can provide Form W-2 sooner if an employee terminates employment). The IRS requires this statement to be attached to your return (either in paper form or electronically when filing online).

Information returns do not have to be furnished until January 31. These include, among others, the 1099 forms for dividends, interest income, royalty income (Form 1099-MISC), stock sales (Form 1099-B), real estate sales (Form 1099-S), state tax refunds (Form 1099-G), and mortgage interest paid (Form 1098), and distributions from pension plans (Form 1099-R). Waiting until you receive all the information and forms necessary to complete your return accurately also lessens your chances of making mistakes, which can call attention to your return by the IRS. The IRS will not process your return until it is accurate.

Last year's return

You'll also want to take a look at your 2013 tax return. Did your circumstances change in 2014? Changes such as starting a new job, retiring, getting married, having a child, and so on, have important tax consequences. Congress extended, enhanced and created new tax incentives in 2014 that could generate a larger refund. Another important consideration is the current economic downturn, which has generated significant losses in many investment portfolios, IRAs, 401(k)s, and similar arrangements.

Refunds

If you have all the information you need to completely and accurately fill out your tax return, and are owed a refund, filing early is attractive. The sooner you file, the sooner you'll see your refund check from the IRS. If you file your return electronically and choose to have your refund direct deposited into your bank account, the IRS typically will issue your refund in as few as 10 days.

If you owe money, however, you may want to wait until April 15 to file or file early online and date your tax payment to be released on April 15. If you have the funds to pay what you owe and you pay early, you could lose out on keeping the money invested and earning interest on it until April 15.

The IRS expects to receive more than 150 million individual income tax returns during the 2015 filing season. Remember that the IRS does not start processing returns until February. Also, no matter how early you file your return before April 15, the three year statute of limitations during which the IRS can question your return and assess more tax doesn't start to run until April 15.

Please contact our office if you have any questions about filing early.

In 2011, millions of employees will receive a significant boost in their take-home pay as a result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) enacted December 17. In addition to maintaining the current lower individual income tax rates, the 2010 Tax Relief Act reduces the employee's share of the OASDI portion of Social Security two percentage points, from 6.2 percent to 4.2 percent, for wages earned during the 2011 calendar year, up to the taxable wage base of $106,800. Many workers can expect to see an average tax savings of more than $1,000 as a result of this payroll tax cut. Moreover, the payroll tax reduction is available to all wage earners irrespective of income level, with no phaseout. In effect, individuals earning at or above the OASDI cap of $106,800 will receive $2,136 in tax savings in 2011.

The employer's share of OASDI, however, remains at 6.2 percent. As a result of this payroll tax "holiday" for employees, employers will need to implement the 2011 cut in payroll taxes, in addition to new income-tax withholding tables that employers will use in 2011.

Withholding and adjustments

It is the responsibility of employers and payroll companies to handle the new payroll tax cut under the 2010 Tax Relief Act. Employees do not have to take any action regarding the payroll tax cut. For example, employees will not need to complete a new W-4 withholding form.

Employers should begin to use the new withholding tables released by the IRS (2011 Percentage Method Tables) to implement the 4.2 percent employee tax rate as soon as possible, and in any event, no later that January 31, 2011.

After implementing the new 4.2 percent rate, employers will need to make any offsetting adjustments to subsequent pay periods in order to correct for any over-withholding. For any Social Security tax that is over-withheld in January, an offsetting adjustment to an employee's pay should be made as soon as possible, but no later than March 31, 2011, the IRS advises.

Self-Employed individuals

Self-employed individuals would pay 10.4 percent on self-employment income up to the threshold. Under the 2010 Tax Relief Act, self-employed persons would calculate the deduction for employment taxes without regard to the temporary rate reduction (that is, one half of 15.3 percent of self-employment income). On the other hand, however, the new law provides an enhanced percentage representing the employer portion of the reduction.

Over the next few years, employers will face a number of new compliance and reporting obligations, among others, as a result of the new health care reform package (the Patient Protection and Affordable Care Act). On the horizon for employers is the requirement to report the value of health insurance coverage they provide to each employee on the employee’s annual Form W-2, Wage and Tax Statement. This new reporting requirement starts with the 2011 tax year and, according to the IRS, is for information purposes only. Employees will not have to pay tax on the amount reported on the W-2 for health care coverage; thus the new reporting requirement does not affect an employee’s tax liability.

Employers should plan now in order to implement and navigate the new W-2 health coverage reporting requirement, and understanding the basics of this new obligation is an important first step.

Applicable coverage

Generally, employers must calculate and report the aggregate cost of all "applicable employer-sponsored coverage" provided to each employee annually on the employee’s Form W-2, starting with the 2011 tax year. "Applicable employer-sponsored coverage" is coverage under any group health plan made available to any employee by the employer which is excluded from the employee’s gross income under Internal Revenue Code Sec. 106, or would be excludable. Applicable employer-sponsored coverage also includes coverage under a federal, state or local government group health plan. Coverage is treated as applicable employer-sponsored coverage regardless of whether the employer or employee pays for the coverage.

Applicable employer-sponsored coverage that must be reported includes the following:

- Medical plans;
- Prescription drug plans;
- Executive physicals;
- On-site clinics, if they provide more than de minimus care;
- Medicare supplemental policies;
- Employee assistance programs; and
- Coverage under dental and vision plans, unless they are "stand-alone" plans.

Excludable coverage. Employers do not need to report the following types of health care coverage on an employee’s W-2: the cost of contributions made by employees (or their spouses) to Archer medical savings accounts (MSAs) or health flexible spending accounts (HSAs); salary reduction contributions to flexible spending arrangements (FSAs); long-term care, disability, or accident income insurance; or specific disease or hospital/fixed indemnity plans. These are all excluded from the new W-2 reporting requirement.

Aggregate cost

Employers must report the aggregate or total cost of employer-sponsored health insurance coverage. This includes coverage paid for by both the employee and employer. The IRS has advised that employers do not need to provide a specific breakdown of the different types of medical coverage, they must just report the total cost of all applicable coverage.

According to the IRS, the aggregate cost of coverage should be computed under rules similar to COBRA cost of coverage rules. For fully insured plans, the COBRA cost of coverage is generally the amount of premiums paid to the insurer. For self-insured plans, the COBRA cost of coverage is based upon an actuarial estimate of future costs.

Valuing coverage may pose a challenge to employers with respect to plans that are subject to the new W-2 reporting requirement but that have not yet been valued for COBRA purposes, such as on-site medical clinics. Employers will need to determine reportable values for coverage under such programs. The IRS is still hammering out applicable guidance for such situations, and our office will keep you posted.

Updating payroll systems

However, because an employee whose employment is terminated before the close of a calendar year may request an early W-2 form from his or her former employer, employers must be prepared for and implement the new reporting requirements at the start of 2011. Employers will also need to ensure that their payroll systems are updated to reflect these changes so that they will be able to provide W-2 forms that comply with the new requirements.

Although the new W-2 reporting rule does not kick in until the 2011 tax year, employers may want to start updating their payroll systems now, and do so by the end of January 2011. Employers are not required to file Forms W-2 until January 31, 2012. However, having payroll systems updated in order to comply with the new W-2 requirement by the start of 2011 is important particularly if an employee requests their W-2 prior to this date (such as an employee who has been terminated and requests an early W-2 form). Employers must provide a W-2 upon an employee’s request within 30 days.

Former employees

The new W-2 reporting requirement applies to all employees. However, it may apply to former employees as well. If a former employee (such as a retiree, terminated employee on COBRA, or a surviving spouse) is provided with health insurance, you may be required to file a W-2 for the individual reporting their health coverage. However, the IRS has not yet issued guidance on reporting requirements for former employees. Our office will keep you updated on developments.

There are two important energy tax credits that can benefit homeowners in 2010: (1) the nonbusiness energy property credit and (2) the residential energy efficient property credit. Collectively, they are known as the "home energy tax credits." With the home energy tax credits, you can not only lower your utility bill by making energy-saving improvements to your home, but you can lower your tax bill in 2010 as well. Eligible taxpayers can claim the credits regardless of whether or not they itemize their deductions on Schedule A. Your costs for making these energy improvements are treated as paid when the installation of the item is completed.

Nonbusiness energy property credit

The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) extended the nonbusiness energy credit for 2009 and 2010. The nonbusiness property credit equals 30 percent of a homeowner's expenses on eligible energy-saving improvements, up to $1,500 for both the 2009 and 2010 tax years. Qualifying expenses include costs of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass, asphalt roofs, as well as costs associated with the installation of these items. The costs of energy-efficient windows, skylights, and doors, and qualifying insulation also qualify for the credit. However, the costs of installing these items do not qualify. Since the credit amounts are combined for both 2009 and 2010, if you made energy improvements in 2009 to which you claimed part of the expenses, you must take that into consideration when claiming the credit in 2010 for qualified expenses. The credit applies only to your principal residence, and special rules apply to condo owners.

Residential energy efficient property credit

The credit rate for the residential energy property credit equals 30 percent of the cost of all qualifying improvements. The residential energy efficient property credit can be claimed for solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. No cap exists on the amount of the credit available, except in the case of fuel cell property.

Caution. As in the case of the nonbusiness energy property credit, not all energy-efficient improvements qualify for this tax credit. As such, you should check the manufacturer's tax credit certification statement before purchasing or installing any energy-efficient property. We can help you determine your eligibility based on a certification statement.

Reporting

Both energy credits are claimed by eligible homeowners when they file their 2010 federal income tax return. While you do not get an immediate check from Uncle Sam since you claim it on your 2010 return filed in 2011, you might be able to lower your estimated tax payments or withholding immediately to enjoy the benefits of the credit earlier.

Both the nonbusiness energy property credit and the residential energy property credit are claimed and figured on Form 5695, Residential Energy Credits. Since these are credits, not deductions, they increase a taxpayer's refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Credits, to figure and claim these credits. Certain other credits you claim for the 2010 tax year, if any, will affect your computation of the home energy credits.

It can happen to any busy small business owner with inadequate tax assistance - depreciation deductions lost to errors or oversight. While amending and refiling your tax returns can help you recover depreciation lost in recent years, there is another remedy available that will allow a current deduction for depreciation going back to even "closed" tax years.

It can happen to any busy small business owner with inadequate tax assistance - depreciation deductions lost to errors or oversight. While amending and refiling your tax returns can help you recover depreciation lost in recent years, there is another remedy available that will allow a current deduction for depreciation going back to even "closed" tax years.

The tax law says that when you go to sell an asset, you must reduce the basis of the asset by the depreciation "allowed or allowable." For those companies that inadvertently missed out on the full depreciable deduction allowable on its assets, they get hit twice - once by the lost depreciation deduction and then again when they go to sell the asset and the basis is reduced for depreciation "allowable" but never claimed. Fortunately, the IRS does provide some relief. There are two courses of action to choose from to claim that "lost" depreciation:

Amend your returns. If your failure to deduct the full amount of depreciation allowed by law is limited to the prior tax year, your best bet is to simply file an amended tax return for that year. The error in computing depreciation must have resulted from:

If eligible, the amended return must be filed by the later of 3 years from the date you filed your original return for the year in which you did not deduct the correct amount; or 2 years from the time you paid the tax for that year.

Change your Accounting Method. If your failure to deduct the full amount of depreciation allowed by law extends beyond the prior year, you have in effect adopted a new method of accounting and must apply with the IRS to change your accounting method in order to claim the depreciation not deducted. In order to claim depreciation allowable but never claimed in prior years as a current tax deduction, you will need to get IRS approval for your change in accounting method.

To get IRS approval, you will need to file Form 3115, Application for Change in Accounting Method. Although this form can be quite a task to complete, the IRS does grant automatic approval under certain circumstances as long as you are making a change to an allowable method. Keep in mind that you may not be eligible for automatic approval if you are being audited or had certain recent requests for change in accounting method.

If you are concerned that you may have missed depreciation deductions due to you in the past, please contact the office for a review of your prior years' returns.