Blog
December 21, 2010
Re: 2010 Tax Relief Act: Benefits for Individuals
Dear Client:
Many individuals entered 2010 uncertain over the fate of federal tax incentives scheduled to expire at year-end. On December 17, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853) after passage by the Senate on December 15 and the House on December 16. The new law extends, renews or enhances a large number of individual tax incentives, among the most far reaching being reduced individual income tax rates and an across-the board payroll tax cut for 2011. This letter highlights the key individual tax incentives in the new law. As always, please contact our office for more details.
Individual tax rates. Reduced individual tax rates put in place in 2001 were scheduled to expire after 2010. The new law extends the reduced rates for two years. The current rate brackets (10, 15, 25, 28, 33 and 35 percent) remain unchanged for 2011 and 2012. The new law also extends full repeal of the itemized deduction limitation and full repeal of the personal exemption phase-out, both scheduled to expire after 2010, for two years.
The extension of the reduced individual tax rates is significant. If the old rates had returned, the top two rates would have jumped from 33 and 35 percent to 36 and 39.6 percent, respectively. The current 10 percent rate would have disappeared. Additionally, marriage penalty relief in the form of an expanded 15 percent rate bracket would also have expired.
AMT relief. Along with extending these rate cuts, the new law targets relief to taxpayers facing the alternative minimum tax (AMT). Because the AMT is not indexed for inflation, and for other reasons, the tax steadily encroaches on middle income taxpayers. The new law stops this encroachment by giving individuals higher exemption amounts and providing other targeted relief. The reach of the AMT often surprises individuals. While the provisions in the new law are helpful, it is also important to plan strategically for the AMT. Unlike the income tax rates, the higher AMT exemption had already expired at the end of 2009 before the new law stepped in to save it. Its two-year extension, therefore, expires earlier, at the end of 2011.
Payroll tax cut. Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $106,800 (in 2010 and 2011), while self-employed individuals pay 12.4 percent. Effective for calendar year 2010, the new law reduces the employee-share from 6.2 percent to 4.2 percent up to the taxable maximum. The employer-share remains unchanged. Self-employed individuals will pay 10.4 percent on self-employment income up to the taxable maximum. The reduction has no effect on an individual’s future Social Security benefits.
Let’s look at an example.
Tyler, who is single, earns $106,800 (the maximum taxable wage). For 2011, the new law reduces Tyler’s share of Social Security taxes on his earnings to 4.2 percent. Tyler will see $2,136 in savings for 2011.
The payroll tax cut replaces the Making Work Pay credit, which temporarily reduced income tax withholding in 2009 and 2010. The Making Work Pay credit phased-out for higher-income individuals. The payroll tax cut is across-the-board (up to the taxable maximum of $106,800).
Shortly after the new law was passed, the IRS instructed employers to start reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. For any Social Security tax over-withheld in January, employers should make an offsetting adjustment in an individual’s pay no later than March 31, 2011.
The payroll tax cut opens up some tax planning opportunities for individuals. The savings could be contributed to an IRA or another retirement savings vehicle, thereby compounding available tax benefits. The savings also could be used to help fund a Coverdell education savings account. Please contact our office for details.
Capital gains/dividends. In 2003, Congress set new maximum tax rates for qualified capital gains and dividends but, like the individual rate cuts, these taxpayer-friendly rates were temporary. For 2010, the maximum tax rate is 15 percent (zero percent for individuals in the 10 and 15 percent tax brackets). The new law extends these rates for two years, through December 31, 2012. In a related development, the new law extends the temporary 100 percent exclusion of gain on certain small business stock.
Child tax credit. Many individuals enjoy the benefit of the $1,000 per child tax credit. Without the new law, the child tax credit would have dropped to $500 for 2011. The new law extends the $1,000 credit and keeps the refundability threshold at $3,000 for 2011 and 2012. In related developments, the new law also extends some enhancements to the earned income tax credit and the adoption credit for two years.
Estate tax. Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election, and many of the other estate tax provisions in the new law, is very technical. Besides the estate tax, there are provisions in the new law extending and modifying the federal gift tax and the federal generation skipping transfer (GST) tax. Please contact our office so we can discuss how these changes will affect your estate planning.
Education. A variety of tax incentives are available to help save for and finance education costs. Like so many incentives, they are temporary. The new law extends some of the most popular education tax incentives. They include:
American Opportunity Tax Credit Higher education tuition deduction
Student loan interest deduction
Exclusion for employer-provided educational assistance
Enhancements to Coverdell education savings accounts
Special rules for certain scholarships
The education incentives in the Tax Code are among the most complex. Often, taxpayers will mistakenly believe they cannot claim more than one or they may inadvertently claim ones they should not. Our office can help you sort through the complexity of the federal education tax incentives.
Energy. Individuals who made some energy-efficient improvements in 2009 or 2010 may have benefitted from a special tax break. This tax incentive rewarded individuals who installed energy-efficient windows, doors, furnaces, and other items in their homes. The credit, while very valuable, was also very complex. The new law extends the credit but also adds to the complexity by reinstating rules for the credit in place before 2009. The complexity is certain to confuse taxpayers. Please contact our office if you are planning to install new windows, doors, heating or cooling systems, or other energy-efficient items so you do not miss out on this tax break.
More incentives. The new law extends many valuable but temporary tax incentives for individuals. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, and special rules for individuals who contribute IRA proceeds to charity. Keep in mind that not all of the expired temporary individual tax incentives were extended. Among the incentives not extended are the additional standard deduction for real property taxes, the $2,400 exclusion for unemployment benefits, the first-time homebuyer tax credit, COBRA premium assistance, and some others. If you have any questions about which incentives were extended, please contact our office.
The new law provides many options for tax planning for 2011, 2012 and beyond. Please contact our office and we can discuss how you can maximize your tax savings.
Sincerely yours,
Phil
December 21, 2010
Re: 2010 Tax Relief Act: Benefits for Businesses
Dear Client:
Business planning for 2011 and beyond just got more certain with passage of the
Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853). The multi-billion dollar new law extends, renews or enhances a large number of business tax incentives. This letter highlights the key business tax incentives in the new law. As always, please contact our office for more details.
Business spending. During past economic slowdowns, Congress has used bonus depreciation and enhanced Code Sec. 179 small business expensing to help jumpstart business spending. The new law provides for 100 bonus depreciation. The 100 percent bonus depreciation rate applies to qualified property acquired after September 8, 2010 and before January 1, 2012 and placed in service before January 1, 2012 (or before January 1, 2013 for certain longer-lived and transportation property). Additionally, 50 percent bonus depreciation is available for qualified property placed in service in 2012. Moreover, certain corporations may be able to elect to accelerate any alternative minimum tax (AMT) credit in lieu of bonus depreciation.
Along with bonus depreciation, the new law extends enhanced Code Sec. 179 expensing for 2012 but not at the 2010 and 2011 dollar and investment limits. For 2010 and 2011, the Code Sec. 179 dollar limit is $500,000 and the investment limit is $2 million. The new law makes no changes to these limits for 2010 and 2011. However, the dollar limit will fall to $125,000 (indexed for inflation) and the investment limit will fall to $500,000 (indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012). The 2012 amounts, while reduced from 2010 and 2011, are still above the amounts that would have been in place for 2012 absent the new law ($25,000/$200,000 respectively).
For 2010 and 2011, special rules apply to qualified real property. Taxpayers can elect up to $250,000 of the $500,000 dollar limit for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The new law does not extend these special rules beyond 2011. The new law does renew a 15-year recovery period for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property for 2010 and 2011.
Payroll tax cut. The new law reduces an employee’s share of Social Security taxes (the OASDI portion) from 6.2 percent to 4.2 percent up to the taxable maximum amount of $106,800 for calendar year 2011. The new law does not reduce the employer’s share, which remains at 6.2 percent for 2011. Self-employed individuals, including independent contractors with which a business may contract, are also entitled to a 2 percentage point reduction in payroll taxes, from 12.4 percent to 10.4 percent.
The IRS has instructed employers to start using new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. The IRS also instructed employers to make any offsetting adjustments in an employee’s pay for Social Security over-withheld during January as soon as possible but no later than March 31, 2011.
The new law does not extend payroll tax forgiveness for qualified new hires. This incentive was part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 and will expire, as scheduled, after 2010. Under the HIRE Act, qualified employers do not have to pay their share of OASDI for a covered employee’s employment from the day after March 18, 2010 through December 31, 2010. The HIRE Act also provides for a worker retention credit, which qualified employers may be able to claim if the covered employee works a certain number of weeks and meets other requirements. If you have any questions about the interaction between the HIRE Act and the new law, please contact our office.
Tax brackets. Businesses owners, such as sole proprietors, who are taxed at the individual tax rates will benefit from an extension of reduced individual tax rates. The new law extends for two years (2011 and 2012) the current individual tax rates of 10, 15, 25, 28, 33, and 35 percent). Absent the new law, all of the rates would have risen with the top two rates increasing from 33 and 35 percent to 36 and 39.6 percent respectively.
Estate tax. Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply.
Research tax credit. In recent years, Congress has come close to making the Code Sec. 41 research tax credit permanent but the cost of a permanent credit has been prohibitive. The new law renews the credit, which expired at the end of 2009, for 2010 and 2011.
Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) rewards employers that hire economically-disadvantaged individuals and individuals from groups with historically high rates of unemployment. The WOTC was scheduled to expire after
August 31, 2011. The new law extends the WOTC through the end of 2011. However, the new law does not extend two groups that were added to the credit in 2009 (unemployed veterans and disconnected youth).
Energy. Recent laws have used the Tax Code to encourage the development and production of alternative fuels, such as energy from wind and biomass. Many of these incentives are temporary. The new law extends, renews or enhances some of the incentives, including:
Grants for certain alternative energy property in lieu of tax credits
Tax credits for biodiesel and renewable diesel fuel
Tax credit for refined coal facilities
Percentage depletion for oil and gas from marginal wells
Special tax incentives for builders of energy-efficient homes
And more
Business tax extenders. A package of business tax incentives, known as extenders because they regularly expire and are regularly extended, is renewed by the new law. They include:
Differential wage credit
New Markets Tax Credit (with modifications)
Brownfields remediation
Tax treatment of certain dividends of RICs and certain investments of RICs
Active financing exception/look-through treatment for CFCs
Tax incentives for empowerment zones and the District of Columbia
Indian employment credit
Railroad track maintenance credit
Mine rescue training credit
Code Sec. 199 deduction for Puerto Rico
Five-year write-off of farm machinery
Accelerated depreciation for business property on an Indian reservation
And more
What’s not included. Despite significant support in Congress, the new law does not repeal a controversial expansion of information reporting. The Patient Protection and Affordable Care Act of 2010 requires businesses to report payments for property and payments to corporations aggregating $600 or more in a calendar year made after December 31, 2011. Congress may revisit this requirement before the effective date. The new law also does not lower the corporate tax rate, another proposal that could be addressed in the future.
The new law extends, renews or enhances a large number of tax incentives targeted to businesses. Please contact our office if you have any questions about the provisions we have discussed or any of the measures in the new law. Our office can help you plan a strategy that maximizes your tax savings.
Sincerely yours,
Phil
October 4, 2010
Dear Clients and Friends,
Wow, it’s hard to believe that we are in the “4th quarter” of 2010. This last year has brought a ton of technological and “eco-friendly” changes to our firm. One such change has been our efforts to become a “paperless” office. Now that’s quite a feat in a paper intensive business like accounting and taxes but the technology and software available these days it just incredible!
Our firm has “partnered” with a company out of Casper Wyoming (of all places) that has developed a paperless document management system that is just miles ahead of anything else on the market today. We will be utilizing this system for not just our business clients but for our 1040 clients as well!
Let me ask you, what is the biggest hassle when it comes to getting ready to do your taxes? Isn’t it getting all those papers together to bring with to the appointment? In the next 30 days you will receive an e-mail notification that there has been established a web-based document management e-mail box just for you. Then, throughout the year, as you receive those important tax related papers, you can simply scan them and e-mail them into your secure mail box. Then come filing time most, if not all of your tax related documents are ready to go. What makes this even better is we can process those items ahead of your appointment. Now your tax appointment time can be used for tax planning and tax strategy. I know right now you might be thinking “but I don’t have a scanner”. In all likelihood, if you have a computer with a printer you probably have scanning capability. Check the printer operations manual and I’ll bet you’ll find a section on scanning documents into the computer. To learn more about the paperless document management system visit
www.delegationmagic.com.
Some of you have already been introduced to the other new services we are offering. QuickBooks training and QuickBooks “repair” has become a new focus for us. You can learn more about that at www.qbexpress.com.
A major new initiative for the firm is “Contract Bookkeeping.” Through the utilization of the “Paperless Document Management System,” and the internet, we are able to provide remote accounting department services for small and medium size businesses. If you would like to learn more about that please go to www.cashcowaccounting.com.
Please if you have any questions or concerns about this new system do not hesitate to call. In the mean time have a wonderful, happy holiday season!
Best Regards,
Phil Levin, EA
September 20, 2010
Entering Bills for Items Already Entered in an Inventory Adjustment
Occasionally you will go through your inventory and realize that you are showing more or less inventory than QuickBooks reflects. Typically a company will then make an inventory adjustment in QuickBooks to straighten this out. The problem you may encounter is that you will adjust your inventory on hand before you receive a bill from a vendor. This happens when your vendor sends you items before the bill. If you enter the bill as usual, you will end up causing mistakes in your inventory count because you already added the inventory with an inventory adjustment. At the same time however, you really should add the bill so you can track what you owe your vendors. If this is the case do not worry. There is a very simple solution.
First go to your item list in QuickBooks. You can get there by going to Lists from the menu strip and then selecting Item List. Now click Item at the bottom and select New. For type select Inventory Part. Enter Item Clear for Item Name/Number. Do not enter a cost since this number will always be different. Enter in the COGS Account and Income Account that you typically use. Make note of the COGS Account that you use as it will be used again in our final step. You may now click OK and close the Item List.
Now go to Enter Bills from your home screen in QuickBooks. Enter the Vendor Name, Date, Due Date, Ref. No, and Amount Due as shown on your bill. In the Memo field you should make a note saying you already added the inventory via Inventory Adjustment. Now click on the Items tab below. On the first item line select the item we just created, Item Clear. Only enter 1 for the Quantity and enter the cost for all the inventory items as the cost. If the bill contained other charges such as shipping, handling, or anything else you can enter those in the Expenses tab. You may also enter inventory items that you did not add in your prior Inventory Adjustment.
The next step will require you to be in Single User Mode. From the home screen in QuickBooks select Adjust Quantity on Hand. Enter the date from your bill in the Adjustment Date. Enter the same COGS Account that you made note of when you created the Item Clear item for Adjustment Account on this screen. Now find the item in the list below called Item Clear. The Current Qty should only be 1. In the New Qty column enter 0 and click Save & Close.
Basically what we have done is created a bill and used Item Clear as a place holder for our bill. When you made your first inventory adjustment after you checked your inventory the COGS and Inventory Asset accounts were already affected correctly. After entering the bill place holder we immediately adjusted the Item Clear account back to 0, reversing the bill we entered, so that the COGS and Inventory Asset accounts are unchanged
August 27,2010
Well it’s finally coming. Congress is going to essentially destroy the advantage of being an S-Corporation, at least for small professional services firms. So called “pass-thru” profits from small S-corps (three or fewer employees) in accounting, law, architecture, health, brokerage, investment management, sports and “consulting” (to name a few), will now be subject to SECA tax. SECA is the self employment equivalent of Social Security and Medicare. The tax treatment for businesses that are not professional service fields such as manufacturing will continue to have favorable treatment. At present it is not known whether loss pass thru from small s-firms will offset other self employment income for the owners. If I know congress and the treasury don’t count on it.
May 18, 2010
True Cost of an Employee
Are your employees costing you more than you think?
Do you ever feel like you are working for your employees, instead of them working for you?
That’s because in most small businesses, the owner has no idea of the true cost of employees and it is one of the biggest reasons we suffer poor cash flow.
For example...
If you pay your bookkeeper $15 an hour, he/she can be costing your company $75,000 a year. When I bring this up I get a shocked response from business owners, they say “NO WAY, I only pay her 15.00 an hour plus 7% in employee taxes - no way bookkeeping costs me $75,000 a year."
We underestimate our true cost or burden rate and the locked in expense kills our cash flow if our business ever takes a down turn. Costs like medical insurance, phones, rent, computers, software, training, hiring, sick days and the 100 other little costs that add up. But those costs are chump change for a small business compared to the real expense.
The big cost is the owners’ time. Your time MUST be spent looking for new and better customers. Any time you are dealing with a bookkeeper, you are losing sales to your competitor. The cost of finding a new employee and getting them trained on how you want things done can take up $5,000 to $15,000 of your time. That number never shows up on your Profit and Loss, it’s hidden. But that is lost time - losing customers that won't buy today, and they won't be buying from you in a year. You have lost opportunities forever when you’re dealing with back office tasks that don't need to be done.
Or what about the time you have to spend every day managing or 'interacting', as they say now a day at MBA school? How much does that wasted time cost?
Here is how to determine the 'burden rate' of an employee. Go to your Profit and Loss statement and look under payroll. Move the owner’s payroll to overhead, because you are management, and that is where it belongs (in overhead). Now divide the total gross payroll into your total overhead and here is what you are going to find. That for every 1.00 you pay your employees, your cost is actually $2.40 to $2.60.
So that $15.00 an hour bookkeeper is actually costing you 36.00 an hour at the low end and and up to 39.00 if your office is a little nicer or your benefits above average. That’s 39.00 an hour if you have work to do or not. That is $39.00 you are paying out every day and that is plum nuts for a small business owner.
If you want to improve your cash flow, look for jobs that do not affect the customer experience. Bookkeeping is one of the first to go. We can take that $75,000 burden rate, and cut it down to $15,000 to $25,000 a year. Plus - give you better numbers every morning and advice on how to run a better business.
Outsource your bookkeeping today, and start rounding up cash cows.
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