The American Institute of Certified Public Accountants has been voicing its concerns about the new 1099 reporting rules, which were included in recent legislation that became law. There is no embed code available yet on this presentation by Ed Karl, vice-president of Taxation at the AICPA, however you can go here to view it. You can also go here to read up on things to be aware of regarding 1099′s.
The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Impact on Regulatory Mandates and Securities Litigation from The TASA Group, Inc. on Vimeo.
First, here is an overview of cloud computing…
The future is now! Cloud computing is setting the stage for the virtual enterprise. The days of outsourcing labor-intensive jobs have subsided giving rise to virtual computing. Net neutrality issue solved, correct? Not so fast.
With more people expected to gobble up bandwidth at an increasing rate over the next decade, device ownership will explode into the billions of users creating a labyrinth of problems. How do you store this much data without the system crashing? Basically, the amount of viewership one receives on the information highway will be directly related to the accessibility of the data. It sounds like a self-fulfilling prophecy, which it is. However, content is what drives the competitive forces of the Internet now. It is simply a matter of deciding how content will be dispersed without causing glitches along the way.
The Internet is gentrifying, however, this is the normal process for any new technology. There is a growth pattern in which at the beginning there is exponentially upward curve. Then toward the top of the bell the rate of increase declines, however, the numbers (customers in this instance) are relatively larger than before. Ask any economist and they will tell you. This is when business minds must adapt to the changing environment or miss an opportunity.
The opportunity game is being played out in the rules governing so-called “off-balance sheet” entities. If you need a refresher on how the notion of Variable Interest Entities came into being, it occurred in the wake of the Enron debacle in which non-consolidated entities would have adversely affected a shareholder’s decision to purchase Enron stock had they been disclosed. The Sarbanes-Oxley Act of 2002 put pressure to tighten the reporting rules for VIE’s, and the Financial Accounting Standards Board issued their on guidelines for VIE’s in Interpretation No. 46.
Off-balance sheet companies are often used to conduct research and experimentation and for leasing activities, and the rules governing VIE’s left out individual investors in such entities. Theoretically, if individuals wish to invest in the technologies of the future that will all but guarantee the positioning of a company in the Internet of the near future, then such activities will be undisclosed to those investing in the underlying company.
Often financial professionals look at rulings and think of the practical application of them in terms of reporting standards being limiting. In the case of cloud computing and VIE’s, individuals are literally being empowered in powerful decision-making capacities. But wasn’t the foundation of accounting supposed to be comprised of the notion of fairness as well as equity? And hasn’t history proven again and again that the individual is just as capable of producing more in terms of efficiency and creativity than a relatively slow-moving corporation?
Since cloud computing is also more energy efficient in terms of adjusting usage to the individual, it also presents an opportunity for various energy-related tax credits given the lighting and cooling for a more efficient data center. For more information on the energy tax credit aspect of cloud computing go here.
Often tax practitioners take for granted the language used in the tax code in order to establish a precedent for the way in which complex issues like health care are regarded for tax purposes. With a quick read of Sec. 162(l)(1) and Sec. 162(l)(2), one comes away with a feeling of a seemingly impossible situation. The topic of health care for self-employed individuals includes a dizzying array of options, and much is discussed in the media in terms of the uninsured and companies with group plans. However, the precedent for taxation of health care coverage itself is rooted in a few basic precepts found in the Internal Revenue Code [IRC], which directly affects self-employed individuals.
IRC Sec. 162(l)(1) states that self-employed individuals are allowed a deduction for health insurance costs, which is understandable, since the distinction between self-employed individuals and employee could probably not be greater. A business deducts 100% of medical insurance costs, and individuals are limited to the amount by which their entire qualified medical expenses exceeds 7.5% of their adjusted gross income, that is, if they itemize deductions.
In Sec. 162(l)(2), the tax code goes on to say that “no deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer’s earned income (within the meaning of Section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.” It would seem that from a read of Sec. 162(l)(1), it is saying that self-employed individuals should be afforded the right to deduct 100% of their health insurance costs, however, it is limited by which the amount of the deduction is greater than their earned income from the business, which essentially caps health insurance costs at the level of employee compensation. However, most importantly the code section says that the deduction for health insurance must be accompanied by a plan.
Let’s say that the plan allows for the sole shareholder employee to receive full medical coverage. If so, then the company will then begin setting aside money in the plan in order to cover medical insurance costs for the self-employed individual as well as for other allowable medical expenses. There are no discrimination issues with respect to being “top heavy” against other employees because there is only one employee. There simply has to be a plan established, and Sec. 105(b) steps in to set the guidelines. Basically, the plan must “reimburse” the employee/shareholder for medical expenses.
Clearly, it makes sense that taxable benefits should be not be disguised as non-taxable health care-related expenses, and there should be a plan in place for self-employed health care. There are many benefits associated with setting up a medical reimbursement plan, or MRP, for self-employed individuals who, for example, are not covered by a spouse’s group plan. However, there are limitations such as in the case of S corporation shareholders, and therefore, self-employed individuals should shop around to find the right plan for them. There are many plan providers out there. You can easily perform a search using the key words: medical reimbursement plan. Also, be advised that the recent health care legislation has affected MRP’s and limited the amounts reimbursable under the plan, so check with your plan provider for more details before entering into it.
There are other health care options for self-employed people. For more information you can check out IRS Publication 969 here.
On November 26, 2010, the IRS issued Notice 2010-84, which contains guidance for 401(k) and 403(b) retirement plans about in-plan Roth account rollovers. The new Roth account rules made a big splash in technical journals, however, the Small Business Jobs Act that was signed into law in September of 2010, which contained this provision also provided very media-friendly topics that seems to stress the ongoing battle to answer the question of where taxes are being raised in order to pay for the tax benefits of the legislation that becomes law. In other words, the traditional media were typically long on the issues of taxes, spending and the deficit, however, the coverage was shockingly yet predictably short on specifics, i.e., where the money is coming from and where it is going.
There were articles here and there about increased accelerated depreciation limits or in-plan Roth rollovers, however, no one it seems was comparing where the money comes from to pay for this feature of the legislation. All general business credits, not just some, but all business credits will now be able to be used against a taxpayer’s alternative minimum tax provided their regular tax liability exceeds their alternative minimum tax liability. This includes the small business employee health insurance expense credit. This provision alone is expected to cost taxpayers $977 million and is matched in exotic nature only perhaps by a provision that allows businesses to treat cell phones as are other business assets for depreciation purposes. This is estimated to cost $410 million over ten years. It is beginning to add up now. A billion here and a billion there, and suddenly you’ve got a trillion. Then we’re talking money.
This is definitely a story the media would have probably enjoyed to point out as an example of legislation which is doubtful at best as to its overall effect on small business in particular. Accelerating depreciation on cell phones is good and probably helps save money. The ability to use all business tax credits against the AMT is good news as well for those who are sweating the AMT. However, in order to pay for business tax incentives, they have to be paid for by, for example, requiring information reporting for rental property expense payments. Any payment of $600 or more for rental property expenses essentially must be substantiated with a timely-filed information return. The revenue raising element of this is expected to be upwards of $2.5 billion over ten years. Essentially, rental property owners are literally subsidizing business cell phone expenses by being subject to penalties for failure to timely file an information return, i.e., more paperwork to complete.
Making any sense yet? Now let’s move on to the primary topic of in-plan Roth account rollovers. From the government’s point of view, allowing in-plan Roth rollovers would probably make sense as being a good source for funding small business tax incentives such as, say, increasing the small business stock gain exclusion from 50% to 75% , which is estimated to cost $518 million over ten years. Sounds good for business, however, when reading between the lines it is probably business-neutral in the sense that small business stock that trades hands occurs essentially when a business is sold or trades hands. There is no guarantee of any business creation being involved, and it sounds like just another tax break for “the rich”, i.e., people who work hard and build a successful small business and deserve a break because they can replicate the business process again and again if allowed. So much for the media myth of the rich being under attack. Clearly this provision does have possibilities of being small business positive.
But let’s move on to the topic of the in-plan Roth rollover, which is usually only discussed either as a tax planning tool or as an investment advice topic, however, it is now permitted under IRC Sec. 402A(c)(4) and is expected to raise a whopping $5.1 billion over ten years. That means only one thing, which is there must be a catch. Maybe. Maybe not. Plan participants essentially choose to pay the tax now rather than later on the conversion to a non-taxable Roth from a tax-deferred 401(k) or 403(b) plan and thus avoid treatment as a distribution and the 10% additional tax on early distributions under IRC Sec. 72(t). Logically, if one expects taxes to be rising in the near term, which from the looks of things they will have to in order to pay for the huge deficit, then there is perhaps no better way of getting the point across. Tax maneuvers like this one do help in a small way in terms of solving a near-term deficit problem by providing a “way out” for plan participants. However, the central question remains: Is it good for small business?
Let’s say that an in-plan Roth rollover is an unknown quantity in terms of helping investors and the government solve their respective problems, and perhaps this does translate into some kind of economic stimulus of some sort. However, when you explore the in-plan Roth rollover in detail you will find that the 5-year rule is still a factor, and it begins January 1 of the year of the in-plan Roth rollover and ends on the last day of the fifth year of that period. Nonetheless, there is a special rule that applies for in-plan Roth rollovers in which one can report half of the taxable income in 2011 and the other half in 2012, in what is called the “2-year income spread”. Otherwise, one must elect to report the entire rollover in 2010. If a distribution is received from the in-plan Roth rollover in 2010 or 2011 that would not have been included in gross income until 2011 and 2012 under the 2-year income spread, then gross income in the year of distribution has to be increased by the amount of the distribution that was deferred to 2012. Keep in mind also that an in-plan Roth rollover cannot be recharacterized.
Let me state emphatically that before making a decision based upon tax laws, it is always the wise thing to do to consult a tax professional who is knowledgeable and trustworthy. The ability to judge the pros and cons of new tax laws is helpful, when it is accompanied by an explanation of the source legislation and its overall impact. Be informed and succeed. Always get your information from reliable sources, make wise decisions and prosper. Understanding why government is encouraging a certain behavior while penalizing another is part of the purpose of the tax laws, and therefore it is important to know the facts before making a decision.
Beginning January 1, 2011, paid tax preparers who prepare income tax returns for individuals, trusts and estates who “reasonably expect” to file 100 or more of these income tax returns in 2011, will be required to file these returns electronically. Also, starting January 1, 2012, the 100-return threshold will be reduced to 11 or more individual, trust and estate tax returns. Tax preparers must obtain an EFIN, or electronic filing identification number.
If the taxpayer chooses to file their return in paper format and the taxpayer, not the tax preparer, is submitting the paper return to the IRS, then under Sec. 301.6011-6(a)(4)(ii) of the IRS regulations, a statement by the taxpayer (by both spouses if a joint return) must be signed and dated on or before the date the taxpayer files the return. In addition, Sec. 301.6011-6(c)(1) authorizes the IRS to grant a waiver of the electronic filing requirement in cases of “undue hardship” to specified tax return preparers requesting a waiver. You can go here to read more about the waiver process.
Here is an informational video from the IRS for signing up as an ERO – Electronic Return Originator:
For information related to electronic filing for businesses and self-employed taxpayers, you can go here.
Additionally, tax return preparers must renew their Preparer Tax Identification Number [PTIN] before preparing any federal tax returns in 2011. You can go here to create a PTIN and pay the required $64.25 annual fee. Tax preparers who e-file tax returns for taxpayers must complete Form 8879, which authorizes the ERO to enter or generate the taxpayer’s personal identification number [PIN] on their e-filed tax return.
Small business owners can now access the instructions to Form 8941, Credit for Small Employer Health Insurance Premiums here. If you would also like to read up on the regulations for Sec. 45R, you can also go here.
In general, small businesses can claim a tax credit in tax years 2010 to 2013 and for any two years after that by a maximum amount of 35% of premiums paid. The maximum credit credit goes to smaller employers – those with 10 or fewer full-time employees – paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more full-time employees or that pay average wages of $50,000 or more per year.
You can view a PDF of the 2010 Form 8941 here. All small business owners should be encouraged by their tax professional to study the form in order to determine the benefits as well as any drawbacks resulting from recent health care legislation.
IRS Newswire
Issue Number: IR-2010-119
December 3, 2010
The Internal Revenue Service today issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
51 cents per mile for business miles driven
19 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Revenue Procedure 2010-51 contains additional details regarding the standard mileage rates.
