WHAT A MESS – PAYROLL TAX DEBATE

The debate of the month is the extension of the 3% payroll tax extension. Let’s see how that will impact a taxpayer. If you were to make $40,000 per year this means about $46 per paycheck. Supposedly that will help stimulate the economy and create jobs, but don’t forget the money comes out of the Social Security Trust Fund.

But here is the problem. In just a few days you we will writing the first 2012 paychecks and we don’t know how much we are going to withhold. The IRS publications are out without the cut and I am sure that the computer programmers are going to be burning the midnight oil once Congress and the President act. There is also a chance that the extension of the law may occur early in 2012 and be retroactive to January 1, 2012. We hope that this does not happen, but recent history shows there is a good chance of it occurring.

The primary issue for our employers is whether the payroll tax software that they use is timely updated for these changes. If a new law is passed either at the end of the this month or early next month, the software may not get updated for your first payroll. This may cause it to be wrong and changes will need to be performed to get the right amount of pay to your employees and report the right taxes on your form 943 at year-end or form 941 for the first quarter.

We will keep you posted.

CLAIM IT WHILE YOU CAN

Year-end tax planning: claim the non-business energy property credit while you can....

Of the many energy-saving provisions in the Code, few are more accessible to ordinary taxpayers than the $500 credit for non-business energy property. The credit can apply to relatively inexpensive, easy-to-do (perhaps even do-it-yourself) items—the installation of insulation (e.g., exterior caulking and weather-stripping), doors, and windows—as well as slightly more expensive but standard items such as central air conditioning and heat pumps. However, currently this credit only applies through 2011, and the prospects for an extension are uncertain. As a result, homeowners should consider accelerating energy-saving home improvements into this year if doing so will generate a credit.

Summary of the credit. The non-business energy property credit, as most recently extended, applies only through Dec. 31, 2011. A taxpayer can claim a credit on Form 5695 equal to 10% of the cost of: (1) qualified energy efficiency improvements, and (2) residential energy property expenditures. There is a lifetime credit limit of $500 (with no more than $200 due to windows and skylights) over the total credits allowed to the taxpayer for all earlier tax years ending after 2005. (The expenses must be for property originally placed in service by the taxpayer and made on or in connection with a dwelling unit located in the U.S., and owned and used by taxpayer as his principal residence at the time of installation.

Qualified energy efficiency improvements are energy efficient building envelope components, such as (a) insulation materials or systems specifically and primarily designed to reduce heat loss/gain that meet criteria set by the International Energy Conservation Code (IECC); or (b) exterior windows, skylights or doors, or any metal roof with pigmented coating or asphalt roof with cooling granules specifically designed to reduce heat gain, installed on a dwelling unit that meet Energy Star program requirements. The component must be expected to last for at least five years This requirement is met if the manufacturer offers a two-year warranty to repair or replace at no extra charge.

Residential energy property expenses are expenses for qualified energy property (including labor costs for onsite preparation, assembly, or original installation) that meets specific standards. The credit allowed for energy property expenditures can't exceed:
... $300 for any energy-efficient building property (electric heat pump water heater, electric heat pump; central air conditioner; natural gas, propane or oil water heater; or a stove burning biomass fuel to heat or provide hot water to a taxpayer's residence in the U.S.) that meets specific energy efficiency standards;
... $150 for a qualified natural gas, propane, or oil furnace; or qualified natural gas, propane, or oil hot water boiler; or
... $50 for an advanced main air circulating fan.

DON’T FORGET YOUR FLEXIBLE SPENDING MONEY

Check your flexible spending account balance. You must clean it out by Dec. 31 if your employer still has not adopted the 2½-month grace period that IRS now permits. Otherwise, any money remaining in your account is forfeited. When you are deciding how much you should put into your flex plan for 2012, remember that a $2,500 annual cap on FSA payins is set to go into effect in 2013.

SIX YEAR-END TIPS TO REDUCE 2011 TAXES

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits.

CLICK HERE to read the 6 tips!

YEAR-END TAX PLANNING MEMO

Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. And even if there's no major tax legislation in the immediate future, Congress next year still will have to grapple with a host of thorny issues, such as whether to once again “patch” the alternative minimum tax (e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do about the post-2012 expiration of the Bush-era income tax cuts (including the current rate schedules, and low tax rates for long-term capital gains and qualified dividends), and the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.

Regardless of what Congress does late this year or early the next, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70- 1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won't be around next year unless Congress acts include: 100% bonus first-year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and the research tax credit.

1099 FORM LETTER TO YOUR VENDORS

We thought it might be helpful if you had a ‘form’ letter in which you could send to your vendors. Please feel free to copy and paste this into a word doc and send it out. Click on the link below the letter to obtain the W-9.

Dear Vendor,

IRS regulation requires that we issue 1099 forms to certain companies and individuals. In order to accurately prepare these forms, IRS requires that we obtain and maintain form W-9 for all of our vendors.

Therefore, in order to ensure our reporting accuracy, please complete the enclosed form W-9 and return to us by mail or fax.

Thank you for your immediate attention to this matter.

Sincerely,

W-9 LINK

W-9 WHAT ABOUT SENDING TO….

Q. I read your business blog and saw the topic on 'Issuing 1099-MISC's: I own an Electrical company and wondered if I need to send a w-9 to our vendors for the Electrical Co. & the Construction Co.? And then send 1099’s to them if required. ~ Thanks for your help.

A. I would advise getting W-9’s from them. This will assure that you were not required to do backup withholding. The IRS has not been penalizing companies that do not have W-9’s but it technically is required. My guess is that someday this will be an issue. You just as well get ahead of the curve.

If they are not a corporation and they are providing services then a 1099 is in order. If they are just your supplier and you buy inventory, hard goods etc. then you do not need to do a 1099. Some taxpayers are unsure of the form of business of the companies that they are dealing with. The W-9 will solve that problem. At the same time if you are not sure there form of business it is okay to send a 1099. There is no penalty for sending to a corp.

IRS OFFERS TIPS FOR YEAR-END GIVING

If you itemize your deductions (long form), you can deduct charitable contributions. The IRS just published Tips for Year-End Giving that you might want to review.

CLICK HERE

1099K - PAYPAL AND AMAZON

Q. Hello. I just had a couple of quick questions about the new 1099k form. I read your blog post "1099K NO WORRIES THIS YEAR". Does this mean card companies are not reporting any sales amounts to the IRS this year until they get it figured out? Does this apply to companies such as Paypal and Amazon as well? I haven't seen this news anywhere else and that's what prompted me to email you. Is there a link to read where it says this? The whole process is so confusing. Thank you very much for your time.

A. The best I can tell is that the credit card and debit card companies, including PayPal, will be sending out 1099K's with copies going to the IRS. Apparently the IRS will not be able to match so they are saying put 0 in the box.

As far as a link, I will look but I actually heard this at the Washington Tax Conference.

WHO MUST ISSUE 1099-MISCs

Here is some basic information about 1099-MISC:

First of all you just need to do a 1099 for certain business expenses.
o For example, someone paints your personal residence and charges you $1,100 you do not have to give that person a 1099. On the other hand if that person should paint your business property and charged you $1,100 you would give that person a 1099 for $1,100

You just have to issue a 1099 for services, not for tangible business purchases
o If the painter gives you a bill for painting and the bill includes labor and the cost of paint you would still give the painter a 1099 for the whole purchase

You do not need to give a 1099 to a corporation
o Both C corporation and S corporations qualify
o You must give a 1099 to LLC’s and partnerships

You just need to give a 1099 if you pay over $600 during the year
o For example the painter paints your business in January and charges you $400 then later in the year you bring them back and he does another $500 of painting. The total is over $600 so you must give the person a 1099

There is no penalty for sending a 1099 to a corporation so if in doubt play it safe and send. Of course there are more rules but these are the basics ones.

ONLY IN AMERICA

A fugitive who took a Kansas couple hostage in their home is suing them for $235,000. Accused murderer Jesse Dimmick claims Jared and Lindsay Rowley accepted his knifepoint offer of money to hide in their house. But the Rowleys later breached their "oral contract" by escaping as he slept, Dimmick says, "resulting in my being shot in the back by authorities."

Wow only in America!

HIP TO BE SQUARE

Have you seen the new Square credit card app? We use it when we are on the road to ring up credit card sales. It is really handy.

Developed by Twitter founder Jack Dorsey, this app allows merchants to accept credit cards via a small, square swiping device that plugs right into an iPhone or Android device. The only charge is a 2.75% transaction fee on every purchase.

In May they launched a new program called Square Register, a free iPad app that acts as a complete point of sale system for businesses It manages inventory and runs sales analytics. I have not used this software.

Here is how the software works. The customer swipes their cards on the Square card-reading device and sign their name directly on the screen of the iPad. They receive an email or text message receipt.

Customers with smart phones can download an app called Square Card Case, which allows them to set up and keep a tab with the merchant. When a customer activates the app and makes a purchase, his or her name appears on the merchant's iPad, and the merchant charges the account. The transaction is done completely over the iPad and the phone.

How long before a young person asks you "what was that stuff called cash that you used to use?"

2012 STANDARD MILEAGE RATES

The Internal Revenue Service today issued the 2012 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, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

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.

You do have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.

HARSH 1099 PENALTIES

The IRS wants everyone to issue 1099's so that they can spot unreported income. This year the penalty for failure to file a 1099 is $250 per form with an addition $250 per form if you did not act in good faith.

I can guarantee you that one of the first things that the IRS looks at during the audit is 1099's. It is easy money for them if you did not file.

Think about it. If you missed 10 forms for three years the penalty would be $7,500 minimum with it possibly going to $15,000. That is on just 10 missed forms. Do the math. Make sure you issue 1099's.

WHO CAN CLAIM THE CHILD AS A DEPENDENT

Q. My ex husband claimed our two children as dependents on his return. The kids live with me and I claimed them. Now the IRS sent me a notice. Who gets to claim the kids.

A. I run into this question all the time. Here is the law.

In most cases the child of the custodial parent gets the exemption. This is determined by the "time test." A qualifying child must have the same principal place of abode as the taxpayer for more than one-half of the year. Prior to 1994 the exemption was determined by the divorce decree.

There is a Form 8332 Release of Claim to Exemption for Child of Divorced or Separated Parents. This form is signed by the custodial parent and gives the non custodial parent the right to claim the child. This form needs to be attached every year to the non custodial parents tax return.