Monthly Archives: August 2011

2011 – July and August Information

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July/August  2011 Information

Dear Client:

We have a new secure method for you to deliver documents and files to us 24 hours a day! Just go our website (“henrykulik.com” or “henrykulikcpa.com”) and visit the “Client Area” tab on the left hand side. On the bottom of that page you will see instructions (including entering your email) that will send you a link to our new “Henry Kulik CPA drop box” which is a secure method to send and receive files up to 2G in size. Remember, email is not secure unless encrypted, so this method is preferred if sending us tax documents, bank statements or Quickbook files! Call the office or email us if there are any questions!

Tax Developments The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Standard mileage rates increase for last half of 2011. The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is increased 4.5¢ from 51¢ to 55.5¢ per mile for business travel from July 1, 2011 to Dec. 31, 2011 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense also increases 4.5¢ for the last half of 2011 from 19¢ to 23.5¢ per mile.

FUTA surtax is no longer in effect. Beginning July 1, 2011, the 0.2% federal unemployment tax (FUTA) surtax is no longer in effect. Thus, the FUTA tax rate, before consideration of state unemployment tax credits, is now 6.0%. Employers need to separately track FUTA taxable wages paid before July 1, 2011, and FUTA taxable wages paid after June 30, 2011, since the FUTA tax rates are different during those two periods. Employers whose FUTA tax is more than $500 for the calendar year need to make quarterly FUTA deposits. The next quarterly payment is due on Aug. 1, 2011, but that payment is based on taxable wages paid through June 30, 2011, so it will be computed using the 6.2% FUTA tax rate. However, the payment after that is due on Oct. 31, 2011, and it will be computed using the 6.0% FUTA tax rate if legislation is not enacted to retroactively reinstate the FUTA surtax beginning July 1, 2011.

Two bonus depreciation deductions for one expenditure. Under IRS regulations, businesses that trade in machinery or equipment for which they claimed bonus depreciation may qualify for another bonus depreciation deduction on the remaining depreciable basis if they swap for like-kind property that also is eligible for bonus depreciation. In effect, the business gets two bonus depreciation deductions for its expenditure on the traded-in property.

Real estate professionals allowed late election to aggregate rental real estate interests. The IRS has provided guidance that allows certain real estate professionals to make a late election under the regulations to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules. This election can make it easier to currently deduct losses from real estate activities. As a general rule, the election is made by filing a statement with the taxpayer’s original income tax return for the tax year. However, under new guidance, a taxpayer meeting certain conditions can make a late election on an amended return.

More courts treating basis overstatements as triggering 6-year limitations period. Late last year, the IRS issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that’s greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in that fashion. Recently, two Courts of Appeals (the Tenth Circuit and the District of Columbia Circuit) have upheld the regulations. While the momentum clearly is in favor of the IRS on this issue, others courts have rejected the regulations. Ultimately, the Supreme Court will have to resolve the dispute.

Regulations would toughen tax rules for owners of bankrupt disregarded entities. A taxpayer whose debts are forgiven generally has cancellation of debt (COD) income subject to exceptions including one for bankruptcy and one for insolvency. Some taxpayers have taken the position that the bankruptcy exception is available if a grantor trust (trust used in family or business planning) or disregarded entity (e.g., a single-member limited liability company taxed directly to owner) is under the jurisdiction of a bankruptcy court, even if its owner is not. Similarly, some taxpayers have contended that the insolvency exception is available to the extent a grantor trust or disregarded entity is insolvent, even if its owner is not. The IRS has issued proposed regulations that would clarify that the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to the bankruptcy court’s jurisdiction, and the insolvency exception is available only to the extent the owner is insolvent. They would apply to COD income occurring on or after the date they are published as final regulations.

Trust’s investment advice fees. The Supreme Court has held that investment advisory fees paid by a trust were deductible only to the extent that they exceeded 2% of the trust’s adjusted gross income (AGI). Thus, such expenses didn’t qualify for the exception to the 2% of AGI limit in the tax law for costs paid or incurred in connection with the administration of a trust or estate that wouldn’t have been incurred if the property weren’t held in the trust or estate. However, for the sake of administrative convenience, the IRS has provided that, until final regulations are issued, nongrantor trusts and estates will not have to “unbundle” a fiduciary fee (i.e., separate the fee into components that are subject to the deduction limit and those that aren’t). As a result, until the regulations are issued, affected taxpayers can deduct the full amount of a bundled fiduciary fee without regard to the 2% floor.

IRA trustees weren’t liable for Madoff losses. A district court has dismissed all claims brought by holders of self-directed individual retirement accounts (IRAs) against the IRA trustees for losses incurred by the IRAs for investments with Bernard Madoff’s firm. A number of individuals owned self-directed IRAs with IRA agreements that clearly stated that they were solely responsible for making investment decisions in connection with the funds in their IRAs, and that the IRA trustees would not provide any investment advice. Pursuant to instructions given by these IRA owners, the IRA trustees sent IRA funds to Bernard Madoff’s brokerage firm, Bernard L. Madoff Investment Securities LLC, for investment in securities. These funds were ultimately lost in Madoff’s ponzi scheme. The IRA owners sought to hold the IRA trustees responsible for their role in the losses that the IRAs sustained. The action asserted claims under federal common law based on Internal Revenue Code sections governing IRAs, and state law negligence, contract, and unjust enrichment claims. However, the court rejected all such claims.

Another Appeals Court upholds IRS’s time limit on spousal relief requests. Married joint return filers are jointly and severally liable for the tax arising from their returns. Innocent spouses may request relief from this liability in certain circumstances. An IRS regulation states that a request for equitable innocent spouse relief must be no later than two years from the first collection activity against the spouse. The Tax Court had found this regulation invalidly imposed a time limit. However, the Court of Appeals for the Fourth Circuit has reversed the Tax Court and upheld the regulation (as have the Courts of Appeals for the Third and Seventh Circuits).

Nonspouse real estate transfers under scrutiny. A recent court case reveals that the IRS has discovered a pattern of taxpayers failing to file gift tax returns for real property transfers between nonspouse related parties. As a result, it launched a compliance initiative to capture data from states and counties regarding real property transfers taking place between nonspouse family members for little or no consideration during the period of Jan. 1, 2005, through Dec. 31, 2010. While the IRS has faced hurdles in attempting to force California to release the data, a number of states have voluntarily done so. These include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Thus, individuals who transferred real property to nonspouse family members should make sure that required gift tax returns were filed and file amended returns if they weren’t.

Sincerely, Henry

HENRY C KULIK, JR.
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
978-514-8829
www.henrykulik.com

2011 Summer Updates

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June, 2011 Newsletter

Hello everyone and happy summer!

A few things have happened since tax season:

  1. President Obama has signed the law that removes the new 1099 filing requirement I spoke of in earlier newsletters. This law would have been a burden on small business, forcing everyone to 1099 Staples, Home Depot, etc. Now, the old law remains which states that a 1099-MISC must be issued to anyone that is not a corporation if they are paid $600 or more in a calendar year.

  2. Tax deadlines: Estimated tax payments- bothFederal and MA are due June 15, 2011 (2nd quarterly); Corporate and Partnership tax returns on extension are due September 15; Trust and Individual tax returns are due October 15, 2011.

  3. Business automobile mileage: The IRS recently stated that the rate will remain unchanged at 51 cents per mile for 2011. IRS is keeping an eye on this, however.

  4. Gift tax return enforcement: A gift tax return is due to be filed if amounts over the annual exclusion ($13,000 for 2011) are gifted to anyone other than a spouse or charity. IRS is now looking closely at inter-family real estate transactions for $1 or little/no consideration. Less than Fair Market Value could establish a “gift”; also looking at those who give super generously to political organizations that quietly purchase political TV ads and such.

  5. Subcontractor or employee? If the IRS forces a reclassification from a 1099 subcontractor to W2 employee many things could follow.
    A) Any SEP contributions are retroactively disallowed that the employee made, plus penalties, excise tax for over-contributing (since $0 was allowed) and interest compounded daily.
    B) IRS can retroactively make the “employer” pay all the federal income tax that should have been withheld and both sides (employee/employer) of the FICA tax (15.3%) plus of course a 100% penalty and interest! A link to the IRS guide “Independent Contractor or Employee?”
    Is below. If you have any questions, or need help getting payroll prepared, please contact the office. We do not prepare payroll in-house, but we have several fantastic Payroll Service providers that prepare payroll for any company, any size and prepare all of those ugly reports for you! Link is: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

  6. Federal health care law: After 2013, if an individual does not have health insurance but is deemed able to afford it, a tax penalty of $95 to $285 will be assessed. We do not yet know if this is in addition to the current Massachusetts penalty but there also is an employer penalty if health insurance is not offered.

  7. New tax: To help “pay” for the health insurance laws, a “surtax” of 3.8% will apply to all income (including capital gains) if your income is $200,000 or greater. IRS is getting ready for another tax of 40% if you are self insured and your plan costs too much. More on that later…

  8. “Ebay tax”; This year (2011=NOW) Ebay/Paypal sellers who have over 200 transactions and sell in excess of $20,000 this year will receive a 1099 from Paypal/Ebay. This can make tax returns more complicated as some people sell off old household items, while others are involved in an active business. Starting in 2012 (about 6 months away) if you have more than 200 transactions, you will be required to give your social security or tax identification number to the person paying you or Paypal. If you don’t, a 28% federal tax withholding is mandated. Credit card companies must also withhold if you do not provide them a valid tax ID. They want the number so you can receive a 1099!

  9. New IRS audit targets and projects: Next time you meet with me, I will let you know who the latest targets are. Please use checks or credit cards to purchase your deductible items so we can prove it if necessary. Receipts should be kept filed by the year.

If you have any questions, please call the office and/or schedule an appointment.

Happy Summer!

HENRY C KULIK, JR.
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
978-514-8829
www.henrykulik.com