The Treasury Department and the IRS have proposed regulations that identify occupations that customarily and regularly receive tips, and define "qualified tips" that eligible tip recipients may claim for the "no tax on tips" deduction under Code Sec. 224. This deduction was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).

The Treasury Department and the IRS have proposed regulations that identify occupations that customarily and regularly receive tips, and define "qualified tips" that eligible tip recipients may claim for the "no tax on tips" deduction under Code Sec. 224. This deduction was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).

Background

Under Code Sec. 224, an eligible individual can claim an income tax deduction for qualified tips received in tax years 2025 through 2028. The deduction is limited to $25,000 per tax year, and starts to phase out when modified adjusted gross income is above $150,000 ($300,000 for joint filers).

An employer must report qualified tips on an employee‘s Form W-2, or the employee must report the tips on Form 4137. A service recipient must report qualified tips on an information return furnished to a nonemployee payee (Form 1099-NEC, Form 1099-MISC, Form 1099-K).

If an individual tip recipient is "married" (under Code Sec. 7703), the deduction applies only if the individual and his or her spouse file a joint return. The deduction is not allowed unless the taxpayer includes his or her social security number (SSN) on their income tax return for the tax year. For this purpose, a SSN is valid only if it is issued to a U.S. citizen or a person authorized to work in the United States, and before the due date of the taxpayer’s return.

What is a Qualified Tip?

A "qualified tip" is a cash tip received in an occupation that customarily and regularly received tips on or before December 31, 2024. An amount is not a qualified tip unless (1) the amount received is paid voluntarily without any consequence for nonpayment, is not the subject of negotiation, and is determined by the payor; (2) the trade or business in which the individual receives the amount is not a specified service trade or business under Code Sec. 199A(d)(2); and (3) other requirements established in regulations or other guidance are satisfied.

The proposed regulations define qualified tips—and payments that are not qualified tips— based on several factors, including the following:

• Qualified tips must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash, or another form of electronic settlement or mobile payment application that is denominated in cash.

• Qualified tips do not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets).

• Qualified tips must be received from customers. For employees, qualified tips can be received through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.

• Qualified tips must be paid voluntarily by the customer, and not be subject to negotiation.

• Qualified tips do not include some service charges. For example, if a restaurant imposes an automatic 18-percent service charge for large parties and distributes that amount to waiters, bussers and kitchen staff, the amounts distributed are not qualified tips if the charge is added with no option for the customer to disregard or modify it.

• Qualified tips do not include amounts received for an illegal activity (a service the performance of which is a felony or misdemeanor under applicable law), prostitution services, or pornographic activity.

• Qualified tips do not include tips received by an employee or other service provider who has an ownership interest in or is employed by the tip payor.

The proposed regulations also include examples that illustrate some of the requirements and restrictions.

Occupations that Customarily and Regularly Receive Tips

The proposed regulations list the occupations that customarily and regularly received tips on or before December 31, 2024. For each occupation, the list provides a numeric Treasury Tipped Occupation Code (TTOC), an occupation title, a description of the types of services performed in the occupation, illustrative examples of specific occupations, and the related Standard Occupation Classification (SOC) system code(s) published by the Office of Management and Budget (OMB).

The list groups the eligible occupations into eight categories:

• Beverage and Food Service—includes bartenders; wait staff; food servers outside of a restaurant; dining room and cafeteria attendants and bartender helpers; chefs and cooks; food preparation workers; fast food and counter workers; dishwashers; host staff, restaurant, lounge, and coffee shop; bakers

• Entertainment and Events—includes gambling dealers; gambling change persons and booth cashiers; gambling cage workers; gambling and sports book writers and runners; dancers; musicians and singers; disc jockeys (but not radio disc jockeys); entertainers and performers; digital content creators; ushers, lobby attendants, and ticket takers; locker room, coatroom, and dressing room attendants

• Hospitality and Guest Services—includes baggage porters and bellhops; concierges; hotel, motel, and resort desk clerks; maids and housekeeping cleaners

• Home Services—includes home maintenance and repair workers; home landscaping and groundskeeping workers; home electricians; home plumbers; home heating and air conditioning mechanics and installers; home appliance installers and repairers; home cleaning service workers; locksmiths; roadside assistance workers

• Personal Services—includes personal care and service workers; private event planners; private event and portrait photographers; private event videographers; event officiants; pet caretakers; tutors; nannies and babysitters

• Personal Appearance and Wellness—includes skincare specialists; massage therapists; barbers, hairdressers , hairstylists, and cosmetologists; shampooers; manicurists and pedicurists; eyebrow threading and waxing technicians; makeup artists; exercise trainers and group fitness instructors; tattoo artists and piercers; tailors; shoe and leather workers and repairers

• Recreation and Instruction—includes golf caddies; self-enrichment teachers; recreational and tour pilots; tour guides; travel guides; sports and recreation instructors

• Transportation and Delivery—includes parking and valet attendants; taxi and rideshare drivers and chauffeurs; shuttle drivers; goods delivery people; personal vehicle and equipment cleaners; private and charter bus drivers; water taxi operators and charter boat workers; rickshaw, pedicab, and carriage drivers; home movers

Applicability Dates

The proposed regulations apply for tax years beginning after December 31, 2024. Taxpayers may rely on the proposed regulations for those tax years, and on or before the date the final regulations are published in the Federal Register, but only if the proposed regulations are followed in their entirety and in a consistent manner.

Request for Comments, Public Hearing

Written or electronic comments must be received by October 22, 2025 (30 days after the proposed regulations are published in the Federal Register). Comments may be submitted electronically via the Federal eRulemaking Portal (https://www.regulations.gov), or on paper submitted to: CC:PA:01:PR (REG-110032-25), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

A public hearing is being held on October 23, 2025, at 10:00 a.m. Eastern Time (ET). Requests to speak and outlines of topics to be discussed at the public hearing must be received by October 22, 2025; if no outlines are received by that date, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5:00 p.m. ET on October 21, 2023.

Proposed Regulations, NPRM REG-110032-25

The IRS issued final regulations implementing the Roth catch-up contribution requirement and other statutory changes to catch-up contributions made by the SECURE 2.0 Act of 2022 (P.L. 117-328). The regulations affect qualified retirement plans that allow catch-up contributions (including 401(k) plans, 403(b) plans, governmental plans, SEPs and SIMPLE plans) and their participants. The regulations generally apply for contribtions in tax years beginning after December 31, 2026, with extensions for collectively bargained, multiemployer, and governmental plans. However, plans may elect to apply the final rules in earlier tax years.

The IRS issued final regulations implementing the Roth catch-up contribution requirement and other statutory changes to catch-up contributions made by the SECURE 2.0 Act of 2022 (P.L. 117-328). The regulations affect qualified retirement plans that allow catch-up contributions (including 401(k) plans, 403(b) plans, governmental plans, SEPs and SIMPLE plans) and their participants. The regulations generally apply for contribtions in tax years beginning after December 31, 2026, with extensions for collectively bargained, multiemployer, and governmental plans. However, plans may elect to apply the final rules in earlier tax years.

The SECURE 2.0 Act amended the catch-up contribution provision to allow an increased contribution limit for participants aged 60 through 63 and an increased contribution limit for certain SIMPLE plans. The final regulations provide that SIMPLE plans may allow participant to take advantage of one of these increased contribution limits, but not both. However, beginning with the 2025 calendar year, a SIMPLE plan that provides for increased contribution limits for all participants may instead permit participants attaining age 60 to 63 to contribute the full amount allowed for that age group.

With respect to mandatory Roth catch-up contributions for particpants whose income exceeds a statutory threshold, the final regulations allow 401(k) and 403(b) plans to automatically treat catch-up contributions as Roth for affected participants, provided an opt-out opportunity is offered. The final regulations do not include a rule allowing deemed Roth elections for all employees' catch-up contributions, only for those employees whose income exceeds the threshold. In response to comments, the final regulations provide that deemed elections must cease within a reasonable period of time following the date on which the employee no longer meets the mandatory Roth threshold or an amended Form W-2 is filed or furnished to the employee indicating that the employee no longer meets the mandatory Roth threshold. As a result, Roth catch-up contributions made pursuant to the deemed election before the end of the reasonable period of time need not be recharacterized as pre-tax catch-up contributions. The IRS further indicated that the plan must be amended to implement deemed Roth elections, and that the deadline for adopting amendments implementing the SECURE 2.0 Act is generally December 31, 2026.

The final regulations provide two correction methods to address pre-tax contributions that should have been designated Roth. First, a plan may transfer pre-tax contributions to the participant's Roth account and report the contribution as an elective deferral that is a designated Roth contribution on the participant's Form W-2. This correction method is available only if the participant's Form W-2 for that year has not yet been filed or furnished to the participant. Alternatively, the plan can directly roll over the elective deferrals that would be catch-up contributions if they had been designated Roth contributions (adjusted for earnings and losses) from the participant’s pre-tax account to the participant’s designated Roth account and report the rollover on Form 1099-R. Failures do not need to be corrected if the amount of the pre-tax elective deferral that was required to be a designated Roth contribution does not exceed $250, or if the participant was incorrectly treated as subject to the Roth catch-up contribution requirement due to a Form W-2 that is later amended.

T.D. 10033

IR-2025-91

Revenue Procedure 2025-28 instructs taxpayers on how to make various elections, file amended returns or change accounting methods for research or experimental expenditures as provided under the One, Big, Beautiful Bill Act (P.L. 119-21). The revenue procedure also provides transitional rules, modifies Rev. Proc. 2025-23, and grants an extension of time for partnerships, S corporations, C corporations, individuals, estates and trusts, and exempt organizations to file superseding 2024 federal income tax returns.

Revenue Procedure 2025-28 instructs taxpayers on how to make various elections, file amended returns or change accounting methods for research or experimental expenditures as provided under the One, Big, Beautiful Bill Act (P.L. 119-21). The revenue procedure also provides transitional rules, modifies Rev. Proc. 2025-23, and grants an extension of time for partnerships, S corporations, C corporations, individuals, estates and trusts, and exempt organizations to file superseding 2024 federal income tax returns.

Background

The Tax Cuts and Jobs Act (TCJA) required taxpayers to capitalize and amortize specified research or experimental expenditures over 5 years for domestic research or 15 years for foreign research, beginning with taxable years after December 31, 2021. The OBBB Act, enacted July 4, significantly modified these rules by adding new Code Sec. 174A to allow immediate deduction of domestic research or experimental expenditures while retaining the capitalization and amortization requirements only for foreign research expenditures.

Code Sec. 174A provides that domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, are generally deductible when paid or incurred. Alternatively, taxpayers may elect under Code Sec. 174A(c) to capitalize these expenditures and amortize them over at least 60 months, beginning when the taxpayer first realizes benefits from the expenditures.

The OBBB Act also provides transition relief, including retroactive application options for small business taxpayers and methods for recovering previously capitalized amounts.

Code Sec. 280C(c)(2) Elections and Revocations

Eligible small business taxpayers may make late elections under Code Sec. 280C(c)(2) to reduce their research credit in lieu of reducing their deductible research expenditures or revoke prior Code Sec. 280C(c)(2) elections. These are available for applicable taxable years where the original return was filed before September 15, 2025.

Elections are made by adjusting the research credit amount on amended returns, attaching amended Form 6765 marked with the appropriate revenue procedure reference, and including required declarations.

Code Sec. 174A(c) Election Procedures

For domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, taxpayers may elect to capitalize and amortize these expenditures under Code Sec. 174A(c). The election must be made by the due date of the return for the first applicable taxable year by attaching a statement specifying the amortization period (not less than 60 months) and the month when benefits are first realized.

Automatic Consent for Accounting Method Changes

Rev. Proc. 2025-28 modifies Rev. Proc. 2025-23 to provide automatic consent procedures for various accounting method changes related to research expenditures:

changes to comply with Code Sec. 174 for expenditures paid or incurred before January 1, 2025;

changes to implement the new Code Sec. 174A deduction or amortization methods for expenditures paid or incurred after December 31, 2024; and

changes to comply with modified Code Sec. 174 requirements for foreign research expenditures.

For the first taxable year beginning after December 31, 2024, taxpayers may use statements in lieu of Form 3115 for certain accounting method changes, with simplified procedures and waived duplicate filing requirements.

Small Business Retroactive Election

Small business taxpayers meeting the Code Sec. 448(c) gross receipts test (average annual gross receipts of $31,000,000 or less for 2025) may elect to retroactively apply Code Sec. 174A to domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021. This election allows eligible taxpayers to either deduct these expenditures in the year paid or incurred or elect the Code Sec. 174A(c) amortization method.

The election is made by attaching a statement entitled "FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28" to the taxpayer's original or amended federal income tax return for each applicable taxable year. The statement must include the taxpayer's identification information, declarations regarding tax shelter status and gross receipts test compliance, and specification of the chosen method.

Elections made on amended returns must be filed by July 6, 2026, subject to the normal statute of limitations under Code Sec. 6511 for refund claims.

Relief for Previously Filed Returns

Rev. Proc. 2025-28 grants automatic six-month extensions for eligible taxpayers to file superseding returns for 2024 taxable years. This relief is available to taxpayers who filed returns before September 15, 2025, without extensions, and need to make elections or method changes provided by the revenue procedure.

The extension applies to partnerships, S corporations, C corporations, individuals, trusts, estates, and exempt organizations with 2024 taxable years ending before September 15, 2025, where the original due date was before September 15, 2025.

Effective Date

Most provisions of Rev. Proc. 2025-28 are effective August 28, 2025. The modified automatic change procedures apply to Forms 3115 filed after August 28, 2025, with transition rules for taxpayers who properly filed duplicate copies before November 15, 2025.

Rev. Proc. 2025-28

The shareholders of S corporations engaged in cannabis sales could not include wages disallowed under Code Sec. 280E when calculating the Code Sec. 199A deduction. The Court reasoned that only wages "properly allocable to qualified business income" qualify, and nondeductible wages cannot be so allocated under the statute.

The shareholders of S corporations engaged in cannabis sales could not include wages disallowed under Code Sec. 280E when calculating the Code Sec. 199A deduction. The Court reasoned that only wages "properly allocable to qualified business income" qualify, and nondeductible wages cannot be so allocated under the statute.

The individuals owned three S corporations and reported pass-through income for the tax years at issue. Two corporations, engaged in cannabis sales, were subject to Code Sec. 280E, which bars deductions for expenses of businesses trafficking in controlled substances. Both entities paid significant W-2 wages, but portions were nondeductible under Code Sec. 280E. Petitioners claimed the full amount of reported wages in computing the Code Sec. 199A deduction.

The IRS reduced the deductions, asserting that only deductible wages could count as W-2 wages under Code Sec. 199A. The Court agreed, finding that Code Sec. 199A(b)(4)(B) excludes any amount not "properly allocable to qualified business income," and Code Sec. 199A(c)(3)(A)(ii) limits qualified items to those "allowed in determining taxable income." Because nondeductible wages are not allowed in determining taxable income, they cannot be W-2 wages. "Although certain amounts may have been reported by an employer to an employee in a Form W-2," the Court explained, "those amounts do not constitute "W-2 wages" for purposes of 199A if they are not properly allocated to qualified business income."

A dissenting judge argued that Congress intended the wage limitation to encourage job creation and that wages properly allocable to a trade or business should count regardless of deductibility. The majority, however, concluded that statutory text foreclosed this interpretation.

A.A. Savage, 165 TC No. 5, Dec. 62,714

A married couple was not entitled to claim a plug-in vehicle credit after the year in which their vehicle was first placed in service. 

A married couple was not entitled to claim a plug-in vehicle credit after the year in which their vehicle was first placed in service. The Tax Court explained that Code Sec. 30D provides a one-time credit available only in the year a qualified vehicle is first placed in service, meaning when it is ready and available for its intended function. The couple purchased a new plug-in electric vehicle and continued to claim the credit in later years. The IRS disallowed the credit for the tax year at issue and determined a deficiency. An accuracy-related penalty was also proposed but later conceded. Relying on regulations interpreting similar provisions under the general business credit, the Court emphasized that once the vehicle was in use in the year of purchase, it was considered placed in service. Accordingly, the Court held that the credit could not be claimed again in subsequent years.

A. Moon, 165 TC No. 4, Dec. 62,712

The Financial Crimes Enforcement Network (FinCEN) has proposed regulations that would amend the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program and Suspicious Activity Report (SAR) Filing Requirements for registered investment advisers (IA AML Rule) by delaying the obligations of covered investment advisers from January 1, 2026, to January 1, 2028. 

The Financial Crimes Enforcement Network (FinCEN) has proposed regulations that would amend the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program and Suspicious Activity Report (SAR) Filing Requirements for registered investment advisers (IA AML Rule) by delaying the obligations of covered investment advisers from January 1, 2026, to January 1, 2028. The proposed regulation follows an exemptive relief order issued earlier this summer (FinCEN Exemptive Relief Order, August 5, 2025).

The IA AML Rule requires covered investment advisers to establish AML/CFT programs, report suspicious activity, and keep relevant records, among other requirements.

By delaying the effective date, FinCEN states that it will have an opportunity to review the IA AML Rule, and ensure that the rule is effectively tailored to the diverse business models and risk profiles of firms in the investment adviser sector. According to FinCEN, the review may also provide an opportunity to reduce any unnecessary or duplicative regulatory burden, and ensure the IA AML Rule strikes an appropriate balance between cost and benefit, while still adequately protecting the U.S. financial system and guarding against money laundering, terrorist financing, and other illicit finance risks.

Request for Comments

FinCEN invites interested parties to submit comments on the proposed delay in the effective date of the IA AML Rule. Written or electronic comments must be received by October 22, 2025 (30 days after the proposed regulations are published in the Federal Register). Comments may be submitted electronically via the Federal eRulemaking Portal (https://www.regulations.gov), or by mail to: Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-2025-0072 and RIN 1506-AB58 and 1506-AB69.

FinCEN Proposed Rule RIN-1506-AB58 and 1506-AB69

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Records

Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly.  Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript.  A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules.  However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.

Forms W-2

Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement.  If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS.  You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Filing deadline

April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012.  If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due.  To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Casualty losses

Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011.  For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010).   If you have any questions about a casualty loss, please contact our office.

Retirement savings

Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible.  Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum.  Different rules apply to other types of retirement savings plans.  Our office can review these rules in detail with you.

IRS Fresh Start Initiative

In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program.  Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.

If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.

Tax law changes

Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return.  Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return.  In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.

If you have any questions about preparing for the 2012 filing season, please contact our office.

Claiming a charitable deduction for a cash contribution is straightforward. The taxpayer claims the amount paid, whether by cash, check, credit card or some other method, if the proper records are maintained. For contributions of property, the rules can be more complex.

Contributions of property

A taxpayer that contributes property can deduct the property's fair market value at the time of the contribution. For example, contributions of clothing and household items are not deductible unless the items are in good used condition or better. An exception to this rule allows a deduction for items that are not in at least good used condition, if the taxpayer claims a deduction of more than $500 and includes an appraisal with the taxpayer's income tax return.

Household items include furniture and furnishings, electronics, appliances, linens, and similar items. Household items do not include food, antiques and art, jewelry, and collections (such as coins).

To value used clothing, the IRS suggests using the price that buyers of used items pay in second-hand shops. However, there is no fixed formula or method for determining the value of clothing. Similarly, the value of used household items is usually much lower than the price paid for a new item, the IRS instructs. Formulas (such as a percentage of cost) are not accepted by the IRS.

Vehicles

The rules are different for "qualified vehicles," which are cars, boats and airplanes. If the taxpayer claims a deduction of more than $500, the taxpayer is allowed to deduct the smaller of the vehicle’s fair market value on the date of the contribution, or the proceeds from the sale of the vehicle by the organization.

There are two exceptions to this rule. If the organization uses or improves the vehicle before transferring it, the taxpayer can deduct the vehicle’s fair market value when the contribution was made. If the organization gives the vehicle away, or sells it far well below fair market value, to a needy individual to further the organization’s purpose, the taxpayer can claim a fair market value deduction. This latter exception does not apply to a vehicle sold at auction.

To determine the value of a car, the IRS instructs that "blue book" prices may be used as "clues" for comparison with current sales and offerings. Taxpayers should use the price listed in a used car guide for a private party sale, not the dealer retail value. To use the listed price, the taxpayer’s vehicle must be the same make, model and year and be in the same condition.

Most items of property that a person owns and uses for personal purposes or investment are capital assets. If the value of a capital asset is greater than the basis of the item, the taxpayer generally can deduct the fair market value of the item. The taxpayer must have held the property for longer than one year.

Please contact our office for more information about the tax treatment of charitable contributions.

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

January 6

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 31–January 3.

January 10

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

January 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 4–6.

January 13

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 7–10.

January 17

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

January 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 11–13.

January 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 14–17.

January 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 18–20.

January 27

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 21–24.

January 31

Employers. Employers give employees copies of Form W-2 for 2011.

Employers. Employers file Form 945 to report income tax withheld for 2011 on all nonpayroll items. Deposit any undeposited tax (if more than $2,500).

Employers. Employers file Form 941 for the fourth quarter of 2011. Deposit any undeposited tax (if more than $2,500).

Employers file Form 940 to report federal unemployment tax for 2011. Deposit any undeposited tax (if more than $500).

Small employers. Certain small employers file Form 944 to report Social Security, Medicare, and withheld income tax for 2011. Deposit any undeposited tax (if more than $2,500).

February 1

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

February 3

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

The IRS recently announced that inflation is increasing many dollar amounts in the Tax Code for 2012.  For taxpayers, the inflation adjustments may help reduce their overall tax liability in 2012.

Inflation adjustments

Many provisions in the Tax Code are required to be adjusted annually for inflation. These include various deductions, exemptions and exclusion amounts.  The tax law also requires that the individual income tax brackets be adjusted annually for inflation.  Low inflation in 2009 and 2010 resulted in many of the provisions experiencing no increases for 2010 and 2011.

Next year is different. In October, the IRS announced that inflation is running at just over 3.8 percent. In response, the IRS adjusted a number of amounts in the Tax Code upward for 2012.

Retirement accounts

401(k) plans. For 2012, the maximum amount an individual can contribute tax-free to a 401(k) plan increases $500 from $16,500 to $17,000.  However, some 401(k) plans limit maximum contributions to levels below the ceiling in the Tax Code.

IRAs. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.

Roth IRAs are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.

Saver’s credit.  The Code Sec. 25B credit rewards eligible individuals with a tax credit for contributing to a retirement plan or an IRA.  For 2012, the AGI limit for the “saver’s credit” increases for single individuals to $28,750, an increase of $500 from 2011. The AGI limit for married couples filing joint returns increases from $56,500 for 2011 to $57,500 for 2012.

Individual income tax brackets

Inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012).  Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.

More inflation adjustments

Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012.   The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.

Personal exemption.  Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.

Estate tax.  The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.

Gift tax exclusion.  For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.

If you have any questions about these or other inflation adjustments, please contact our office.

Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.

Use-it or lose-it

The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.

Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800. 

Grace period

Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15^th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.

Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year.  On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.

Exceptions

There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services. 

Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.

If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.

Taxpayers can request a copy of their federal income tax return and all attachments from the IRS.  In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.

Tax return copy

A copy of your tax return is exactly that: a copy of the return you filed with the IRS. According to the IRS, copies of individual tax returns are generally available for returns filed in the current year and the past six years. The IRS charges a fee of $57 to send taxpayers a copy of their return.

Requests for copies of tax returns should be filed on Form 4506, Request for Copy of Tax Return.  The IRS has advised on its website that taxpayers should allow 60 days to receive a copy of their tax return.

Tax return transcript 

A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax transcript does not show any changes the taxpayer or the IRS made after the return was filed. According to the IRS, a tax return transcript is generally available for the current and past three years.

Taxpayers can request transcripts online at the IRS web site, telephoning the IRS, or filing Form 4506T-EZ, Short Form Request for Individual Tax Return Transcripts. Businesses that need business-related information should file Form 4506-T, Request for Transcript of Tax Return. Taxpayers can request that the IRS send the transcript to their tax representative.  The IRS reported on its website that transcript requests made online or by telephone generally will be processed within five to 10 days; transcript requests made by filing a paper form take longer to process.

Tax account transcript

The IRS also can provide a tax account transcript.   This document shows basic data from the individual’s return and includes any adjustments the taxpayer or the IRS made after the return was filed.  A tax account transcript is generally available for the current and past three years, according to the IRS and is provided at no-cost.

If you have any questions about the types of tax records available from the IRS, please contact our office.

Early in 2011, the IRS announced a series of measures to help taxpayers buffeted by the economic slowdown. The IRS calls these measures its “Fresh Start” program and they are intended help taxpayers who want to pay their tax liabilities but because of unemployment, slow business sales or for other legitimate reasons, cannot pay their tax debts. One of the most attractive features of the Fresh Start program involves the withdrawal of a tax lien.

Liens

When the IRS files a notice of federal tax lien (NFTL) it makes a claim to a taxpayer’s property as security or payment for a tax debt. The IRS must follow very detailed procedures, including sending the taxpayer a notice and demand for payment. If the taxpayer pays the tax debt, the IRS must release the lien within a prescribed period of time; generally within 30 days after the taxpayer satisfies the tax due, including interest and other additions.

There is an important distinction between release of a lien and withdrawal of a lien. Although the IRS may release the lien, the lien generally continues to be reflected on the taxpayer’s credit report unless the lien is withdrawn. This can negatively affect a taxpayer’s ability to get credit or, in some cases, could have a negative impact on the taxpayer obtaining a job if the employer reviews the taxpayer’s credit history.

Full payment

Under the “Fresh Start” program, the IRS has announced that liens will be withdrawn immediately once full payment is made by the taxpayer. The IRS has instructed taxpayers, whose lien has been released after full payment, to request withdrawal of the lien in writing. Taxpayers use Form 12277, Application for Withdrawal, to make this request.

Direct Debit installment agreement

The IRS will also withdraw a lien if the taxpayer agrees to enter into a Direct Debit installment agreement. In this arrangement, the taxpayer consents to having funds automatically debited from a bank account for the agreed upon installment amount. The IRS prefers Direct Debit installment agreements because they are automatic: the taxpayer does not need to remember to send a check or money order.

Not everyone is eligible for lien withdrawal after entering into a Direct Debit installment agreement. The IRS has explained on its web site that qualifying taxpayers are individuals; active businesses with income tax liability only (this would exclude active businesses with unpaid employment taxes); and defunct businesses with any type of tax debt. The current amount owed by the taxpayer must be $25,000 or less. The IRS has advised on its web site that taxpayers owing more than $25,000 may pay down the balance to $25,000 prior to requesting the lien withdrawal to be eligible for the relief. Additionally, the taxpayer’s Direct Debit installment agreement must pay in full the amount owed within 60 months or before the collection statute expires, whichever is earlier. The taxpayer also must have made three consecutive Direct Debit Payments before the IRS will withdrawal the lien.

Taxpayers should use Form 12277 to request withdrawal of a lien after entering into a Direct Debit installment agreement. The IRS warned it will file a new NFTL if the taxpayer subsequently defaults on its Direct Debit installment agreement.

Lien filing thresholds

The IRS has also adjusted the lien filing threshold under the Fresh Start program. The Fresh Start changes increase the IRS lien filing threshold from $5,000 to $10,000. However, the IRS has reserved the right to file liens on amounts less than $10,000 when circumstances warrant.

If you have any questions about withdrawing a lien under the IRS “Fresh Start” program, please contact our office.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Exempt organizations

Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status.  The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.

Contributions

Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.

The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.  Similar information is available on an IRS Business Master File (BMF) extract.

In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract.  Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.

Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.

Churches

As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.

Foreign charities

Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada.  Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.

The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.

With school almost out for the summer, parents who work are starting to look for activities for their children to keep them occupied and supervised. The possibilities include sending a child to day camp or overnight camp. Parents faced with figuring out how to afford the price tag of these activities may wonder whether some or part of these costs may be tax deductible. At least two possible tax breaks should be considered: the dependent care credit in most cases, and the deduction for medical expenses in certain special situations.

Dependent care credit. To qualify for the dependent care credit, expenses must be employment-related. The child also must be under age 13 unless he or she is disabled.

The child care expenses must enable the parent to work or to look for employment. The IRS has indicated that the costs of sending a child to overnight camp are not employment-related. However, the costs of sending a child to day camp are treated like day-care costs and will qualify as employment-related expenses (even if the camp features educational activities). At the same time, the costs of sending a child to summer school or to a tutor are not employment-related and cannot be deducted even though they also watch over your child while you are at work..

In some situations, the IRS requires that expenses be allocated between child care and other, nonqualified services. However, the full cost of day camp generally qualifies for the dependent care credit, without an allocation being required. If the parent works part-time, camp costs may only be claimed for the days worked. However, if the camp requires that the child be enrolled for the entire week, then the full cost qualifies.

Example. Tom works Monday through Wednesday and sends his child to day camp for the entire week. The camp charges $50 per day and children do not have to enroll for an entire week. Tom can only claim $150 in expenses. However, if the camp requires that the child be enrolled for the entire week, Tom can claim $250 in expenses.

Amount of Credit. The maximum amount of employment-related expenses to which the child care credit may be applied is $3,000 if one qualifying individual is involved or $6,000 if two or more qualifying individuals are involved. If you earn over a certain amount, the credit may be reduced. The credit amount is equal to the amount of qualified expenses times the applicable percentage, as determined by the taxpayer's adjusted gross income (AGI). Taxpayers with an AGI of $15,000 or less use the highest applicable percentage of 35 percent. For taxpayers with an AGI over $15,000, the credit is reduced by one percentage point for each $2,000 of AGI (or fraction thereof) over $15,000 The minimum applicable percentage of 20 percent is used by taxpayers with an AGI greater than $43,000. Bottom line: those with higher incomes are entitled to a maximum child care credit for one qualifying dependent is $1,050 and $2,100 for two or more qualifying dependents.

Dependent care costs also may be reimbursed by a flexible spending account (FSAs) under an employer-sponsored arrangement. FSAs allow pre-tax dollars to fund the account up to specified maximum. Each FSA may limit what it covers so check with your employer before assuming the day camp or similar child care is on its list of reimbursable expenses.

Medical expenses. The cost of camp generally is not deductible as a medical expense. The cost of providing general care to a healthy child is a nondeductible personal expense.

Example. The child's mother works; the child's father is ill and cannot take care of the child. The cost of sending the child to summer camp is not deductible as a medical expense; however, the costs may still qualify for the dependent care credit.

However, camps specifically run for handicapped children and operated to assist the child may come under the umbrella of medical expenses. The degree of assistance is usually determinative in these situations.

Dependency exemption. In any case, the cost of sending a child to camp can be treated as support, for claiming a dependency exemption. For a parent to claim a dependency exemption, the child cannot provide more than half of its own support. The parent must provide some support but does not necessarily have to provide over half of the child's support. If the child is treated as a qualifying relative (because he or she is too old to be a qualifying child), the parent must still provide over half of the child's support.

The rules on the deductibility of camp costs are somewhat complicated, especially in borderline situations. Please check with this office if you have any questions.

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.

As a result of recent changes in the law, many brokerage customers will begin seeing something new when they gaze upon their 1099-B forms early next year.  In the past, of course, brokers were required to report to their clients, and the IRS, those amounts reflecting the gross proceeds of any securities sales taking place during the preceding calendar year.

In keeping with a broader move toward greater information reporting requirements, however, new tax legislation now makes it incumbent upon brokers to provide their clients, and the IRS, with their adjusted basis in the lots of securities they purchase after certain dates, as well. While an onerous new requirement for the brokerage houses, this development ought to simplify the lives of many ordinary taxpayers by relieving them of the often difficult matter of calculating their stock bases.

When calculating gain, or loss, on the sale of stock, all taxpayers must employ a very simple formula. By the terms of this calculus, gain equals amount realized (how much was received in the sale) less adjusted basis (generally, how much was paid to acquire the securities plus commissions). By requiring brokers to provide their clients with both variables in the formula, Congress has lifted a heavy load from the shoulders of many.

FIFO

The new requirements also specify that, if a customer sells some amount of shares less than her entire holding in a given stock, the broker must report the customer's adjusted basis using the "first in, first out" method, unless the broker receives instructions from the customer directing otherwise. The difference in tax consequences can be significant.

Example.  On January 16, 2011, Laura buys 100 shares of Big Co. common stock for $100 a share. After the purchase, Big Co. stock goes on a tear, quickly rising in price to $200 a share, on April 11, 2011. Believing the best is still ahead for Big Co., Laura buys another 100 shares of Big Co. common on that date, at that price. However, rather than continuing its meteoric rise, the price of Big Co. stock rapidly plummets to $150, on May 8, 2011. At this point, Laura, tired of seeing her money evaporate, sells 100 of her Big Co. shares.

Since Laura paid $100 a share for the first lot of Big Co. stock that she purchased (first in), her basis in those shares is $100 per share (plus any brokerage commissions). Her basis in the second lot, however, is $200 per share (plus any commissions). Unless Laura directs her broker to use an alternate method, the broker will use the first in stock basis of $100 per share in its reporting of this first out sale. Laura, accordingly, will be required to report a short-term capital gain of $50 per share (less brokerage commissions). Had she instructed her broker to use the "last in, first out" method, she would, instead, see a short-term capital loss of $50 per share (plus commissions).

Dividend Reinvestment Plans

As their name would suggest, dividend reinvestment plans (DRPs) allow investors the opportunity to reinvest all, or a portion, of any dividends received back into additional shares, or fractions of shares, of the paying corporation. While offering investors many advantages, one historical drawback to DRPs has been their tendency to obligate participants to keep track of their cost bases for many small purchases of stock, and maintain records of these purchases, sometimes over the course of many years. Going forward, however taxpayers will be able to average the basis of stock held in a DRP acquired on or after January 1, 2011.

Applicability

The types of securities covered by the legislation include virtually every conceivable financial instrument subject to a basis calculation, including stock in a corporation, which become "covered" securities when acquired after a certain date. In the case of corporate stock, for example, the applicability date is January 1, 2011, unless the stock is in a mutual fund or is acquired in connection with a dividend reinvestment program (DRP), in which case the applicable date is January 1, 2012. The applicable date for all other securities is January 1, 2013.

Short Sales

In the past, brokers reported the gross proceeds of short sales in the year in which the short position was opened. The amendments, however, require that brokers report short sales for the year in which the short sale is closed.

The Complex World of Stock Basis

There are, quite literally, as many ways to calculate one's basis in stock as there are ways to acquire that stock. Many of these calculations can be nuanced and very complex. For any questions concerning the new broker-reporting requirements, or stock basis, in general, please contact our office.

Information reporting continues to expand as Congress seeks to close the tax gap: the estimated $350 billion difference between what taxpayers owe and what they pay. Despite the recent rollback of expanded information reporting for business payments and rental property expense payments, the trend is for more - not less - information reporting of various transactions to the IRS.

Transactions

A large number of transactions are required to be reported to the IRS on an information return. The most common transaction is the payment of wages to employees. Every year, tens of millions of Forms W-2 are issued to employees. A copy of every Form W-2 is also provided to the IRS. Besides wages, information reporting touches many other transactions. For example, certain agricultural payments are reported on Form 1099-G, certain dividends are reported on Form 1099-DIV, certain IRA distributions are reported on Form 1099-R, certain gambling winnings are reported on Form W-2G, and so on. The IRS receives more than two billion information returns every year.

Valuable to IRS

Information reporting is valuable to the IRS because the agency can match the information reported by the employer, seller or other taxpayer with the information reported by the employee, purchaser or other taxpayer. When information does not match, this raises a red flag at the IRS. Let's look at an example:

Silvio borrowed funds to pay for college. Silvio's lender agreed to forgive a percentage of the debt if Silvio agreed to direct debit of his monthly repayments. This forgiveness of debt was reported by the lender to Silvio and the IRS. However, when Silvio filed his federal income tax return, he forgot, in good faith, to report the forgiveness of debt. The IRS was aware of the transaction because the lender filed an information return with the IRS.

Expansion

In recent years, Congress has enacted new information reporting requirements. Among the new requirements are ones for reporting the cost of employer-provided health insurance to employees, broker reporting of certain stock transactions and payment card reporting (all discussed below).

Employer-provided health insurance. The Patient Protection and Affordable Care Act requires employers to advise employees of the cost of employer-provided health insurance. This information will be provided to employees on Form W-2.

This reporting requirement is optional for all employers in 2011, the IRS has explained. There is additional relief for small employers. Employers filing fewer than 250 W-2 forms with the IRS are not required to report this information for 2011and 2012. The IRS may extend this relief beyond 2012. Our office will keep you posted of developments.

Reporting of employer-provided health insurance is for informational purposes only, the IRS has explained. It is intended to show employees the value of their health care benefits so they can be more informed consumers.

Broker reporting. Reporting is required for most stock purchased in 2011 and all stock purchased in 2012 and later years, the IRS has explained. The IRS has expanded Form 1099-B to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports. The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss.

Payment card reporting. Various payment card transactions after 2010 must be reported to the IRS. This reporting does not affect individuals using a credit or debit card to make a purchase, the IRS has explained. Reporting will be made by the payment settlement entities, such as banks. Payment settlement entities are required to report payments made to merchants for goods and services in settlement of payment card and third-party payment network transactions.

Roll back

In 2010, Congress expanded information reporting but this time there was a backlash. The PPACA required businesses and certain other taxpayers to file an information return when they make annual purchases aggregating $600 or more to a single vendor (other than a tax-exempt vendor) for payments made after December 31, 2011. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The Small Business Jobs Act of 2010 required information reporting by landlords of certain rental property expense payments of $600 or more to a service provider made after December 31, 2011.

Many businesses, especially small businesses, warned that compliance would be costly. After several failed attempts, Congress passed legislation in April 2011 (H.R. 4, the Comprehensive 1099 Taxpayer Protection Act) to repeal both expanded business information reporting and rental property expense reporting.

The future

In April 2011, IRS Commissioner Douglas Shulman described his vision for tax collection in the future in a speech in Washington, D.C. Information reporting is at the center of Shulman's vision.

Shulman explained that the IRS would get all information returns from third parties before taxpayers filed their returns. Taxpayers or their professional return preparers would then access that information, online, and download it into their returns. Taxpayers would then add any self-reported and supplemental information to their returns, and file their returns with the IRS. The IRS would embed this core third-party information into its pre-screening filters, and would immediately reject any return that did not match up with its records.

Shulman acknowledged that this system would take time and resources to develop. But the trend is in favor of more, not less, information reporting.

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.

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.

Legislation enacted during the past few years, including the Small Business Jobs Act of 2010 and the more recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), contains a number of important tax law changes that affect 2011. Key changes for 2011 affect both individuals and businesses. Certain tax breaks you benefited from in 2010, or before, may have changed in amount, timing, or may no longer be available in 2011. However, new tax incentives may be valuable. This article highlights some of the significant tax changes for 2011.

New payroll tax cut for wage earners

New for calendar 2011 is a payroll tax cut for wage earners and self-employed individuals. The payroll tax cut, as provided by the 2010 Tax Relief Act, reduces the employee's share of Social Security taxes by two percent, from 6.2 percent to 4.2 percent, for all wages earned during the 2011 calendar year, up to the taxable wage base of $106,800. Future Social Security is not affected by the payroll tax cut.

Many workers can expect to see an average tax savings of more than $1,000 as a result of the new payroll tax cut. For example, a single individual who earns $40,000 annually and is paid weekly will see an extra $15 in her paycheck every week. A single individual who earns $60,000 annually and is paid bi-weekly will see an extra $46 in her paycheck.

Self-employed individuals also benefit from the payroll tax cut. Self-employed individuals will pay 10.4 percent on self-employment income up to the threshold.

Payroll companies and employers are responsible for implementing the payroll tax cut; employees do not need to adjust their withholding or take any other action. However, it is always a good decision regardless to review your withholding to ensure you are not withholding too much or too little.

No more Making Work Pay Credit. The payroll tax cut replaces the Making Work Pay Credit (MWPC), which expired at the end of 2010 and was not renewed for 2011. The MWPC provided a refundable tax credit of up to $400 for qualified single individuals and up to $800 for married taxpayers filing joint returns for 2009 and 2010.

Residential energy improvement credits

For individuals who may be making energy-efficient improvements to their homes in 2011 important changes have taken place for a popular tax credit. The 2010 Tax Relief Act extended the Code Sec. 25C nonbusiness energy efficient property credit for homeowners for one year, through December 31, 2011. However, more restrictive rules apply for 2011 than applied in 2010. Effective for property placed in service after December 31, 2010, an individual is entitled to a credit against tax in an amount equal to:

• 10 percent of the amount paid or incurred for qualified energy efficiency improvements (building envelope components) installed during the tax year, and
• The amount of residential energy property expenditures paid or incurred during the tax year.

The maximum credit allowable is $500 over the lifetime of the taxpayer. The $500 amount must be reduced by the aggregate amount of previously allowed credits the taxpayer received in 2006, 2007, 2009 and 2010. There are certain restrictions on the amounts claimed for certain items as well. The amount claimed for windows and skylights in a year can not exceed $200 less the total of the credits you claimed for these items in all earlier tax years ending after December 31, 2005. The credit also can not exceed:

 -- $50 for an advanced main circulating fan;
-- $150 for any qualified natural gas, propane, or hot water boiler; and
-- $300 for any item of energy efficient property

Energy-efficient credit for contractors

The 2010 Tax Relief Act retroactively extends the new energy efficient home credit for eligible contractors for two years, through December 31, 2011. Eligible contractors can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year.

Annuity contracts

Beginning in 2011, taxpayers may partially annuitize non-retirement plan annuity payments they receive from an annuity contract. This partial annuitization applies to amounts you receive in tax years beginning after December 31, 2010 and applies to such an annuity, endowment or life insurance contract. If you receive an annuity for a period of 10 years or longer, or over one or more lives, under any portion of the annuity, endowment or life insurance contract, that portion is treated as a separate contract for purposes of annuity taxation.

FSAs, HSAs and Archers MSAs

The Patient Protection and Affordable Care Act enacted in 2010 places new limits on flexible spending arrangements (FSAs), health savings accounts (HSAs) and Archer medical savings accounts (Archer MSAs). After December 31, 2010, a distribution from an FSA, HSA or Archer MSA for a medicine or drug is a tax-free qualified medical expense only if the medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. Additionally, for distributions made after 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses increases significantly, from 10 percent to 20 percent of the disbursed amount. The additional tax on distributions from an Archer MSA that are not used for qualified medical expenses increases from 15 percent to 20 percent of the disbursed amount.

Simple Cafeteria Plans for small employers

Beginning January 1, 2011, certain small employers can adopt "simple cafeteria plans," which provide certain nontaxable benefits to employees. Eligible employers generally include those with an average of 100 or fewer employees on business days during either of the two preceding tax years. Benefits of simple cafeteria plans can include certain medical coverage, group-term life insurance, flexible spending accounts (FSAs), and dependent care assistance.

New electronic filing rules for employers

Nearly all employers must use the IRS Electronic Federal Tax Payment System (EFTPS) for federal tax payments made in 2011. Beginning after December 31, 2010, employers must use electronic funds transfer (EFT) to make all federal tax deposits, including deposits of employment tax, excise tax, and corporate income tax. After December 31, 2010, Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used.

Employer payroll tax forgiveness expires

Qualified employers who hired unemployed workers after February 3, 2010 and prior to January 1, 2011 may have been eligible for payroll tax forgiveness. The Hiring Incentives to Restore Employment Act (HIRE Act) provided temporary forgiveness of the employer-share of Social Security tax for eligible new-hires. For each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

New broker basis reporting rules

Beginning in 2011, generally all brokers who are required to file information returns reporting gross proceeds of a "covered security" (such as corporate stock), must include in the return the customer's adjusted basis in the security. A broker must report the adjusted basis and type of gain (long term or short term gain or loss) for most stock acquired on or after January 1, 2011.

Reporting is generally undertaken on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. A "covered security" includes all stock acquired beginning in 2011, as mentioned above, except for stock in a mutual fund (regulated investment company or RIC) or stock acquired in connection with a dividend reinvestment plan (DRP). Reporting for these and other types of securities and options will need to be reported beginning after 2012 and 2013.

Real estate reporting requirements

Beginning in 2011, taxpayers receiving rental income from real estate who make payments of $600 or more during the tax year to a service provider (excluding incorporated entities) must provide an information return to the IRS, as well as the provider, reporting the payments. Typically, the information is to be reported on Form 1099-Misc. Certain exceptions, such as for hardship or active members of the uniformed services or employees of the intelligence community apply.

These are just some of the many important tax changes that expired at the end of 2010 or take effect this year. Please contact our office if you have any questions.

Businesses will benefit from a number of extended and enhanced tax breaks under the recently enacted Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). The 2010 Tax Relief Act boosts 50-percent bonus depreciation to 100 percent through 2011 and provides increased Code Sec. 179 expensing in 2012.

100 percent bonus depreciation

The 2010 Tax Relief Act benefits businesses by increasing 50-percent bonus depreciation to 100-percent for qualified investments made after September 8, 2010 and before January 1, 2012 (before January 1, 2013 for certain longer-lived and transportation property). Thus, businesses that bought qualifying property after September 8, 2010 but before December 17, 2010 (the date of enactment of the 2010 Tax Relief Act) in anticipation of using 50-percent bonus depreciation received a welcome surprise as they will benefit from 100-percent bonus depreciation.

This provision is especially beneficial for businesses because bonus depreciation, unlike Code Sec. 179 expensing, is not limited to smaller companies, or capped at a certain dollar level. However, only new property qualifies for the 100-percent bonus depreciation (unlike Code Sec. 179 expensing, which can be claimed for both new and used property).

Example. In January 2011, Big Co., a calendar year business, buys $1 million of qualifying property eligible for the 100-percent bonus depreciation deduction. Under the 2010 Tax Relief Act's enhanced 100-percent bonus depreciation provision, Big Co. will be able to claim a $1 million depreciation deduction for the property on its 2011 tax return.

Post-2011 depreciation

Although enhanced 100-percent bonus depreciation is not extended into 2012, the new law does provide 50-percent bonus depreciation for qualified property placed in service after December 31, 2011 and before January 1, 2013.

Option to take refundable credits in lieu of bonus depreciation

The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) provided that a corporation otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property placed in service after March 31, 2008 and before December 31, 2008. The 2010 Tax Relief Act generally extends similar treatment for two years, through December 31, 2012.

Code Section 179 expensing

Over the years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the 2010 Small Business Jobs Act increased the Code Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively. For tax years beginning in 2012, the new law provides for a $125,000 dollar limit and a $500,000 investment limit (both indexed for inflation). Without this provision, the dollar and investment limits would have reverted to $25,000 and $200,000 respectively for tax years beginning after 2011. Amounts that are not eligible for expensing due to excess investments can not be carried forward and expensed in a later year; they may only be recovered through depreciation.

Off-the-shelf computer software. The 2010 Tax Relief Act also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be "placed in service" (used) in a tax year beginning before 2013.

If you have any questions about these two business incentives under the 2010 Tax Relief Act, please call our office.