Accounting & Tax News

G.R. Reid Associates, LLP
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Congress Passes Payroll Tax Cut Extension

Last Friday, the House of Representatives and the Senate both passed a bill that will extend the reduced 4.2% Social Security tax rate through the end of the year (The Middle Class Tax Relief and Job Creation Act of 2012, H.R. 3630). The vote was 293–132 in the House and 60–36 in the Senate. The bill now goes to President Barack Obama, who is expected to sign it quickly.
 
The employee portion of the Social Security tax was reduced from 6.2% of the first $106,800 of wages to 4.2% for 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. (The employer portion remained at 6.2%.) Under the Temporary Payroll Tax Cut Continuation Act of 2011, P.L. 112-78, enacted Dec. 23, 2011, the 4.2% rate was extended through Feb. 29, 2012. For 2012, that rate applies to the first $110,100 of wages. H.R. 3630 extends the 4.2% rate through the end of 2012. As a result, a recapture provision included in the temporary extension will not take effect. Under that rule, taxpayers with income from employment for January and February that exceeds $18,350 would have been required to recapture the excess benefit they receive. The act also extends certain unemployment benefits and blocks a cut in Medicare payments to doctors. The extension of the payroll tax cut is estimated by the Joint Committee on Taxation staff to cost $93 billion in revenue over the next two years. The act raises revenue through an auction of the spectrum of public airwaves, currently reserved for television, to allow for more wireless Internet systems. The auctions are projected to raise $15 billion. The act also repeals earlier-enacted shifts in the timing of corporate estimated tax payments.

Content provided by the Journal of Accountancy http://www.journalofaccountancy.com/Web/20125176.htm

Accounting & Tax News

G.R. Reid Associates, LLP 
631.425.1800

 Standard Mileage Rates for 2012


The IRS recently released standard mileage rates for use in 2012 (Notice 2012-1). Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile. For business use of an automobile remains at 55½ cents per mile. For medical or moving expenses, it is 23 cents per mile (a half-cent decrease from the second half of 2011). For services to charitable organizations, the rate (which is set by statute) is 14 cents per mile.
Rather than using the standard mileage rates, taxpayers may instead use their actual costs if they maintain adequate records and can substantiate their expenses. The rules for substantiating these amounts appear in Rev. Proc. 2010-51. For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is 23 cents per mile for 2012 (it was 22 cents per mile for  2011).

Accounting & Tax News

Tax Breaks Soon To Expire

:: Jonathan Cohen, CPA, Partner
631.425.1800 ext. 308
G.R. Reid Associates, LLP
 
Business owners currently face many uncertainties regarding present and future economic conditions. While certain soon-to-expire tax provisions may be extended for another year or so in an effort to kick start the economy, there is no guarantee that will be the case. Prudent business planning entails taking advantage of any available tax breaks while they are still "on the table." Following are some of the major business tax breaks that are slated to expire December 31, 2011.
 
100% Bonus Depreciation

Generally, a 100% bonus depreciation allowance may be claimed for qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012. For qualified property acquired and placed in service in 2012, a 50% bonus depreciation allowance is generally scheduled to apply.

Section 179 Expensing Allowance

For 2011, the maximum allowable amount of a qualifying asset purchase that may be expensed in full by a business is $500,000. (This amount is scheduled to be reduced to $125,000 after 2011). The maximum annual expensing amount for 2011 is reduced dollar for dollar by the amount of qualifying property placed in service in excess of $2,000,000 ($500,000 for 2012). For 2011, up to $250,000 of qualified real property (that is, qualified leasehold-improvement, restaurant, or retail-improvement property) may be expensed under IRC Sec. 179.
Note that the bonus depreciation and section 179 expensing rules together offer significant tax-planning opportunities for business taxpayers.

Research Tax Credit

Generally, this credit applies to amounts paid or accrued before January 1, 2012, and is equal to 20% of the excess of qualified research expenses for the tax year over a base amount.

Work Opportunity Tax Credit

Employers who hire individuals from certain targeted groups are allowed to claim a credit against income tax in an amount equal to a percentage of first-year wages of up to $6,000 per employee ($12,000 for qualified veterans). Generally, the percentage of qualifying wages is 40% of qualifying first year wages (25% for employees who have completed at least 120 hours of service, but less than 400 hours of service for the employer).
 
Differential Wage Payment Credit

Eligible small business employers who pay differential pay may claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. Differential pay is generally defined as payments made to employees for periods during which they are called to active service in the U.S. uniformed services for more than 30 days. Such payments represent all or part of the wages that they would have otherwise received from the employer. An eligible small business employer is one who, on average, employs fewer than 50 employees and provides eligible differential wage payments to each of its qualified employees under a written plan.

Charitable Contribution Deductions

Through December 31, 2011, a regular "C" corporation's so-called enhanced charitable contribution deduction is equal to the lesser of: 

• The property's tax basis, plus half of the property’s appreciation, or 
• Twice the property's tax basis for contributions of food inventory that is "apparently wholesome food."

A similar deduction applies to qualified contributions of book inventory to certain public schools, as well as computer technology or equipment to schools or libraries. Contact G.R. Reid Associates if you have any questions regarding the above information.

Accounting & Tax News

: : Gary Topple, CPA
, Partner
G.R. Reid Associates, LLP

631.425.1800

Income Tax Planning 2011

At this time last year, income tax planning was particularly challenging. Several tax deductions had already expired, and significant changes, including new, higher income tax rates, were scheduled to take effect at the end of the year. Legislation passed in mid-December, however, hit the "reset" button, re-instituting already-expired deductions, and extending major tax provisions--including lower rates--for an additional one to two years.

As a result of the December legislation, 2011 tax planning takes place in an environment characterized by something that was missing last year--a relative degree of certainty. That being said, here are some things to keep in mind as you consider your current tax situation.

Tax rates/calculation
•    Federal income tax rates --The same six federal income tax rates that applied in 2010 will continue to apply in 2011 and 2012. So, depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. Remember, though, that all of your taxable income is not necessarily taxed at that rate--instead, the rate at which you pay tax generally increases as your income increases. For example, if you're a single individual with 2011 taxable income of $100,000, you fall into the 28% tax bracket. However, your first $8,500 of taxable income is taxed at 10%, your next $26,000 of taxable income is taxed at 15%, and your next $49,100 in taxable income is taxed at 25%. Only $16,400 of your taxable income is actually taxed at 28%.
•    Rates for long-term capital gains and qualifying dividends --As in 2010, long-term capital gains and qualifying dividends continue to be taxed at a maximum rate of 15% through 2012; if your income (including any long-term capital gains and qualifying dividends) puts you in the 10% or 15% income tax brackets in 2011 and 2012, a special 0% rate will generally continue to apply.
•    Alternative minimum tax (AMT) --While regular income tax rates and the maximum rates that apply to long-term capital gains and qualifying dividends were extended through 2012, the latest AMT "fix" (in the form of increased AMT exemption amounts) is effective only through 2011. So, if you think you may be subject to the AMT this year, the good news is that you know ahead of time what the relevant exemption amounts are ($74,450 for married individuals filing jointly, $48,450 for unmarried individuals, $37,225 for married individuals filing separately); the bad news is that the AMT situation for 2012 remains up in the air. You can probably expect another AMT fix later this year, but as it stands now, AMT exemption amounts will drop significantly in 2012, dramatically increasing the number of taxpayers ensnared by this parallel tax system.

Temporary payroll tax reduction
Available for 2009 and 2010, the Making Work Pay tax credit was a refundable tax credit equal to the lesser of 6.2% of earned income or $400 ($800 for married couples filing joint returns); the credit was phased out for those with higher incomes. The tax credit was not extended to 2011, but the December legislation created a new one-year 2% reduction in employee Social Security payroll taxes (the 2% reduction also applies to the self-employment tax paid by self-employed individuals).
So, if you're an employee, 4.2% of your 2011 wages (up to the 2011 taxable wage base of $106,800) is being withheld for your portion of the Social Security retirement component of FICA employment tax instead of the 6.2% that would normally be withheld. If you're self-employed, the 12.4% you would normally pay for the Social Security portion of your 2011 self-employment tax is reduced to 10.4%. So, if you earn $100,000 in wages, you'll have an extra $2,000 in take-home pay for 2011. Consider opportunities to take advantage of this extra income by, for example, increasing your retirement savings; applying the extra money toward a long-term goal could extend the benefit of this temporary tax reduction beyond 2011.

Other considerations
    •    IRA qualified charitable distributions --Unless Congress passes additional legislation, 2011 will be the last opportunity for individuals age 70½ or older to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity. These charitable distributions can be excluded from your income, and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA for 2011.
•    Depreciation and IRC Section 179 expensing --If you're a business owner or self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011. The "bonus" first-year depreciation deduction drops to 50% for property acquired and placed in service during 2012. Additionally, the maximum amount that can be expensed under Internal Revenue Code (IRC) Section 179 for 2011 is $500,000; in 2012, the limit is currently scheduled to drop to $125,000.
•    Small business stock --Generally, you can exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided that you meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired in 2011, however, you'll be able to exclude 100% of any capital gain from income if the qualified stock is held for at least five years and all other requirements are met.

Energy efficient improvements
Though not as generous as it has been the last two years, a credit is still available to individuals who make energy-efficient improvements to their homes. You may be entitled to a 10% credit for the purchase of qualified energy-efficient improvements, including a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of specified energy-efficient property: $50 for an advanced main air circulating fan; $150 for a qualified furnace or hot water boiler; and $300 for other items, including qualified electric heat pump water heaters and central air conditioning units. There's a lifetime credit cap of $500 ($200 for windows), however. So, if you've claimed the credit in the past--in one or more tax years after 2005--you're only entitled to the difference between the current cap and the total amount that you've claimed in the past. That includes any credit that you claimed in 2009 and 2010, when the aggregate limit on the credit was $1,500.