Archive for the ‘Tax’ Category

Over the summer, I found myself consumed with nonprofit work.  It’s the time of year when that is pretty much all I do.  It is occasionally broken up with other jobs, but they seem few and far between.  The following blog post is  focused on nonprofit topics:

Nonprofit entities are required to classify expenses between three categories: Program, Management & General, and Fundraising.  Determining how to classify expenses in these categories is usually a matter of judgement. 

The IRS does provide some guidance, but not much.  Hopefully the following will help answer some questions. 

The following descriptions come straight out of the Form 990 instructions: 

Program Services (Expenses) are mainly those activities that further the organization’s exempt purposes.  What is your exempt purpose?  How are you accomplishing that purpose?  What are the programs you run?  

Management and General are expenses that relate to the organization’s overall operations and management, rather than to fundraising activities or program services.  Overall management usually includes the salaries and expenses of the organization’s chief executive officer and his or her staff, unless a part of their time is spent directly supervising program services or fundraising activities.  In that case, salaries and expenses should be allocated among management, fundraising, and program services. 

The IRS generally considers the following expenses to be management and general:

Costs of board of directors meetings, committee meetings and staff meetings (unless they involve specific program services or fundraising activities)

• General legal and accounting
• General liability insurance
• Office management
• Human resources
• Management of investments 

Fundraising expenses are the expenses incurred in soliciting contributions, gifts and grants.  If you have contributions revenue, you should have some fundraising expenses.  These expenses include:

• Publicizing and conducting fundraising campaigns
• Soliciting bequests and grants from foundations, other organizations or government entities
• Participating in federated fundraising campaigns (such as United Way)
• Preparing and distributing fundraising manuals, instructions and other materials 

Expenses will either be direct expenses or indirect.  The direct expenses are easy, they are identified specifically with an organization’s activity or project and can be assigned with a high degree of accuracy.  Indirect expenses are costs that are not identified specifically to one category or another and must be allocated accordingly.  If the CEO spends time in management, programs and fundraising, compensation must be allocated among the three categories.  Oftentimes using a percentage based on hours spent in each activity is the most realistic approach. 

I wish I could say it’s easy to make the determination between these expense categories in all cases.  The fact of the matter is, we run into the grey areas with most returns we prepare and discussion is needed to make the determination.  Seek advice from your tax preparer when trying to make the distinction.  Have an in depth conversation about the activities. 

One way to simplify the process is to prepare an annual budget determining in advance the types of expense activity to be included in each category.

Well, it finally happened.  Sort of.  A deal has been made on the debt ceiling issue and supposedly there will be no new taxes.  Congress agreed to make $917 billion in spending cuts (over 10 years) and the President is able to raise the debt ceiling by $400 billion.  Future debt ceiling increases of $500 billion have also been authorized.  No one actually likes the deal, but apparently it is as good as it’s going to get according to Congressional leaders.

Where are the $900 billion in spending cuts going to hit?  Well, that is up to a joint committee to determine.  This “committee”, which has not yet been established, has until November to make its recommendations for a vote by Congress.  If unsuccessful, automatic spending cuts would occur which have already been established.

They say that there will be no tax increases.  The problem is, those Bush-era tax cuts that were extended last minute… (remember that chaos?) are set to expire December 31, 2012.  Do you think they forgot about that?  I highly doubt it.  In addition, there are tax increases which will mostly affect the high income earners that are set to begin in 2013.  I’m sure Congress is counting on those tax increases. 

I personally struggle with the continued last minute deals that really don’t make a difference except to calm down the immediate crisis.  Politicians are letting their political aspirations limit their actual potential impact for good in our government.  Everything they do and pass is for a temporary fix.  They extended the Bush tax cuts for only two years… they extended the estate tax and AMT issues out for two years… they refuse to actually take on the tax system and give it a much needed tax reform.  I can’t be too harsh.  The “Gang of Six”, made up of six Senate members, has been working on a comprehensive tax reform plan.  However, it’s far from being ready for proposal to Congress.  At this point, it’s hard to say where those efforts will lead us. I understand that with the two main parties having such differing opinions on tax issues, this task is not an easy one.  But no one can deny that something has to be done.  

For more information see the ‘Debt Ceiling breakdown of deal’ on CNN’s website

You may remember a few years ago when the sales tax in California increased by 1%.  That increase expired June 30, 2011 and as of July 1, 2011, we are back to a 7.25% state sales tax.   We’ve been waiting to see if the California legislature was going to extend it, since they can’t balance the budget. 

In San Diego, we have an additional 0.50% local tax which brings our sales tax to 7.75% in most areas.  Vista has an additional 0.50% city sales tax on top of that, bringing the new rate to 8.25%.  Click here to view the Board of Equalization’s chart of all cities in California and the sales tax rates effective July 1^st.  

Make sure your accounting software, POS systems, accountants, etc. are updated on the change. 

Be sure to see your tax advisor if you are uncertain of your responsibilities.  Any excess sales tax collected must be remitted to the state.

The IRS enacted a nonrefundable income tax credit for “new qualified plug-in electric drive motor vehicles”. For each qualifying vehicle, the credit is $2,500…. plus $417 for vehicles with at least five kilowatt hours (kwh) of rechargeable battery power, and an additional $417 for each additional kwh above five, to an additional credit of $5,000. This brings the maximum credit to $7,500. 

This is great news considering the 2011 Chevy Volt is advertised as having a battery capacity of 16 kwh, the 2011 Nissan Leaf 24 kwh, and the Ford Focus Electric 23 kwh. For example, Volt owners would be eligible to receive a whopping $7,500 tax credit ($2,500 plus $417 (for kwh of at least 5), plus $4,587 (for the extra 11 kwh (16-5)). 

Electric model requirements for the credit are that the qualified plug-in vehicles must be powered ‘to a significant extent’ by an electric motor drawing power from a battery with a capacity of at least 4 kwh that can be recharged from an external source of electricity. Cars with the ability to use both a plug-in electric engine and gasoline engine, technically known as plug-in hybrid electric vehicles (PHEVs) are eligible. 

Vehicles with fewer than 4 kwh or weighing more than 14,000 pounds are not eligible. 

The credit will have a production phase-out similar to the previous hybrid vehicle credit. The phase-out per manufacturer begins once the total qualifying vehicles manufactured and sold for use in the U.S. since the beginning of 2010 reaches 200,000 units. From there, the applicable credit per vehicle will be cut in half for two calendar quarters, then reduced by 25% in the third and fourth quarters and fully eliminated after that. The phaseout is more generous than the Hybrid credit which started to phase-out at 60,000 vehicles per manufacturer produced and sold after Dec. 31, 2005. 

To claim the credit Form 8834, “Qualified Plug-In Electric and Electric Vehicle Credit” will be filed with the taxpayer’s returns.

Do you own a small business using QuickBooks or Peachtree as your accounting software?  Most likely you have stored critical unrelated financial information within the framework of the software.  By unrelated financial information we are referring to customer/client lists, personnel data, confidential client information, and other information used for business purposes.

Jump forward a few months from now and imagine receiving a letter from the IRS giving your business an examination notice (meaning you’re under audit).  How concerned would you be, or your clients for that matter, if the IRS requested your software database containing all this unrelated financial data?  Unfortunately this request is occurring more frequently and is being explained as the IRS’ attempt to modernize.  The IRS has purchased copies of various small-business accounting software to accomplish this task.  Requesting the electronic files is now standard operating procedure.

In recent years the IRS has ramped up efforts to more aggressively collect taxes from small businesses.  Statistics show that small businesses are one of the largest contributors to the “tax gap” (taxes owed but not paid or reported).  What better way to close the gap than to increase audits on small businesses where non-compliance is an issue?  Let’s face it…large corporations have their own accounting armada to keep everything straight with laws, regulations, and the taxes they pay.  Small businesses don’t have that luxury.

The main concern we have in providing IRS access to an accounting database is whether the auditor will stay within the scope of the requested information.  Do you want to IRS potentially contacting one of your clients?  Seeing what they purchase from you? Seeing what you purchase from vendors?  The fact that you are being audited is not something to brag about, but client relationships could be affected if some of their private information is handed over.  How would you feel if your personal information was handed over to IRS?  What would you do if you found out?  Another concern would be your reputation if  word got out that your business was under audit.  Questions could arise regarding the circumstances of the audit (randomly selected as opposed to improper filing). 

If a company turns over complete electronic records, there is no way of knowing what the IRS will do with that information.  The IRS has not addressed this issue except to say “privacy of return information” is of utmost importance to the agency.  Virtually all professional organizations in our industry are vehemently opposing this policy.

In subsequent posts we will discuss ways to approach this dilemma if you are audited and IRS requests your data base.

We were introduced to Brendan Foote and his company, Cal Tax Group, Inc., through a client of ours who was able to claim quite a bit in California tax credits related to the Enterprise Zone.  This article gives the quick facts of what you need to know about the Enterprise Zone credits. 

By the way, if you are interested in contributing to our blog, email Mary for more information. mmm@politoeppich.com

Brendan Foote, Partner

Cal Tax Group, Inc.,  San Diego, CA  92101   

619-202-4198; bfoote@caltaxgroup.com

 “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” We are clearly in the midst of difficult economic times that limit our ability to grow a business, but for companies in certain areas of San Diego County, there is one program that may be the perfect catalyst to take steps in the expansion direction. The San Diego Regional Enterprise Zone is a California funded tax incentive program that encourages businesses and business owners in certain parts of the state to create job opportunities and buy equipment. Through lucrative tax incentives, companies creating eligible jobs and purchasing qualified equipment can look forward to tens of thousands of dollars in state income tax credits. 

San Diego’s Enterprise Zone is concentrated south of Interstate 8, stretching from Downtown and east, including the majority of the South Bay and border regions as well. Companies located “in the zone” can obtain state income tax credits for each new employee they hire who meets one of thirteen qualifying criteria. Among these criteria include; former military, those hired off unemployment, residents of the local communities and those laid off from their previous place of employment. For each employee that meets one of these qualifying criteria, companies can receive up to $38,000 in credits over a five year period. 

For qualified equipment purchased, namely manufacturing equipment or computer based equipment; companies can convert California sales tax paid on such expenditures into an income tax credit. 

All California income tax credits obtained can be carried forward indefinitely and used against any tax liabilities resulting from Enterprise Zone income. For pass-through entities such as S-Corporations and LLCs, the income tax credits flow directly to the shareholders of the company and can be applied against personal income taxes resulting from W2, K-1 and rental or other passive income sources generated within the Enterprise Zone. 

One of the best parts about this program is companies who have not yet participated can identify and claim credits retro-actively on amended tax returns for up to four years against taxes they have paid to the State. Refunds will be issued and any remaining credits can be carried forward for future use.

 In short, if you aren’t taking advantage of the Enterprise Zone Program, you are passing up “free” money.

In March I mentioned that both houses in Congress were working on a repeal of the new 1099 reporting requirements that came out of The Patient Protection and Affordable Care Act and the Small Business Jobs Act.  It appears we are now only a signature away from this repeal becoming a reality!  At this point, I can’t imagine the President not signing the legislation (H.R. 4).  This legislation repeals BOTH the reporting requirements for rental property owners as well as the provisions for payments made to corporations for payments of goods and other property.  Basically, things will go back the way we’ve been doing it for years. 

Hallelujah!!! 

(Now for the full repeal of The Patient Protection and Affordable Care Act… hey, a girl can dream, can’t she?)

In order to deduct charitable contributions, the charitable organization must be created or organized in the US (including the states, District of Columbia and possessions of the US) or must be provided by a treaty (side note – have you ever tried to read a treaty?  Not fun!).  Many generous people want to give for causes around the world and there is absolutely nothing wrong with it.  It is commendable!  However, in order for charitable contributions to be tax deductible, you need to give it to a bona fide US charitable organization which can direct the funds to those in need around the world.  Some think that Catholic churches located in other countries would qualify because they are arms of the Roman Catholic Church, a universal organization.  Tax courts have repeatedly rejected this argument. 

 Also beware of giving money to an individual or earmarking a donation for a specific individual.  You cannot give money to your church or other charity to give to a specific family in need. While it is a charitable act, it is not tax deductible.

For 2010 only, medical insurance premiums paid by self-employed individuals, including partners with self-employment income, can be deducted from self-employment income to reduce social security and Medicare taxes.

This creates a significant benefit for those with self-employment income of $106,800 or less. When self-employment income exceeds $106,800, the additional Medicare tax gradually consumes the savings.

There is another development in this area that is not new, but is turning out to be an implementation nightmare.

In 2008, IRS changed the rules under which partners in partnerships and S corporation shareholders could take the self-employed medical insurance deduction. This change was implemented because audits were revealing that frequently the deduction was taken twice; once at the entity level and again at the individual level.

We will use an example of a $10,000 medical insurance premium to illustrate this issue. Here’s what was happening:

This is a bit too complex to cover in a blog post so we provide a complete discussion on our website under “Articles of Interest”.

Greater than 2% S corporation shareholders must be diligent to make sure that the corporation’s payroll properly reflects this medical insurance on the W-2. Read the article on our website for a thorough discussion with examples.

When in doubt, always confer with your professional tax preparer or CPA.

Links:

Articles of Interest: http://www.politoeppich.com/article_pdfs/9-Partnership%20and%20S%20Corporation%20Health%20Insurance%20Premiums%20LH.pdf 

Tax preparer: www.politoeppich.com

We’ve had a few clients ask us about this “real estate sales tax” currently flying around on the World Wide Web.  Is it true?  Sometimes.  The new health care law made some changes to include a Medicare tax of 3.8% on investment income for the high income earners.  Investment income includes taxable gains on the sale of real estate.  You still get to exclude $250,000 of your gain on the sale of your principal residence ($500,000 if married) from taxable gains.

A tax attorney from Pennsylvania who calls herself “Taxgirl” wrote a great blog on this topic a little while ago.   See http://www.taxgirl.com/ask-the-taxgirl-real-estate-tax-in-health-care-law/ .

She did a thorough job in explaining what you need to know if you are selling real estate.  Of course, if congress repeals the health care law in its entirety, this could become a non-issue.  Call your tax professional for assistance in determining if this “surtax” on investment income is likely to apply to you.