THE INTERNET RUMORS ARE NOT TRUE - MOST HOUSE SALES ARE NOT SUBJECT TO THE 3.8% MEDICARE TAX

The impending 3.8% Medicare surtax has fueled a spate of chain e-mails regarding a federal "real estate transaction tax" on home sales, and I have been hearing from worried clients. Here are the facts.

Gain on the sale of your house is not taxable unless your gain is greater than $250,000 for singles or $500,000 for married taxpayers

That's the facts Jack.

A REMINDER FOR 12/31 CORPORATIONS

A reminder for calendar year corporations that filed for an extension.

Contributions to retirement plans must be made by September 17, 2012, the same day that income tax returns are due. Normally, the deadline for filing and making payins is September 15, but that day falls on a Saturday this year. For firms on fiscal years (non-December 31st) with extensions, the due date is 8½ months after the fiscal year ends.

TEN TAX TIPS FOR INDIVIDUALS SELLING THEIR HOME

The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

SYSTEMS

I thought about this on vacation. So can I deduct my vacation?

My wife, my 15 year old son, Ryan, and I were fortunate enough to vacation a few weeks ago in the Turks Caicos Islands. We stayed at Beaches all inclusive family resort. As I walked around the resort I could not notice how efficiently it was run.  The systems they had in place were amazing. 

I often think about systems and how systems are so important for the operation of a business. All you have to do is take a look at the fast food franchises to see how good systems equal success. My oldest son happens to have an Arby’s restaurant and all the systems are created for them.  From their marketing system; to their menu; to how they cook the food; to what the workers wear. It’s all down orchestrated for them. It’s all about systems. These systems are what allow Arby’s, Runza, and McDonald’s to operate efficiently.

At the resort, these systems were definitely in place. They had systems for everything.  I was amazed as I watched a worker shining the chrome on the pool deck. There was an afternoon rain and there was a work on each floor mopping up the water on the balconies between the buildings.  With 629 rooms there were a lot of guests that ate a lot of food.  Most of the food comes from Florida.  You can’t just run to the store and pick up milk.  There is at least a week lead time for an order to get shipped from the dock.  Systems systems systems.   

I was fortunate enough to talk with the food service manager. Sixteen restaurants, what a job he has. I asked him how many managers he had under him. I was surprised by his answer. He has thirty managers underneath him. I could just visualize the organization chart that they must have.

Take a look at your business. What kind of systems do you have in place? What are your systems for new clients? What are your systems for how clients are greeted? What are your systems for the telephone system? What are your systems for how hair is washed? If you look at successful businesses, they have systems. If you don’t have systems in place, let us know. We can help.

Now to answer my question:  Since I thought about all of this while I was on vacation, can I deduct my vacation?

Unfortunately no. The primary purpose of travel has to be business and I did not spend a majority of my time on business while I was lying in the sun.  

OBAMA ADMINISTRATION BOOSTS FUNDING FOR BIG LABOR

As the Obama administration aggressively backs regulatory agencies' enforcement efforts, it's cutting back on programs that educate businesses on how to comply with regulations.

The White House's proposed 2013 budget allocates more funding for federal and independent labor agency enforcement, including whistleblower programs and cracking down on unpaid overtime and worker misclassification.

The boost in funding is tied to an increase in initiatives to investigate and fine businesses for failure to comply with labor regulations. "They're going out of their way to aggresively investigate businesses, turning over stones to see if they're doing anything wrong,"said Elizabeth Milito, senior executive counsel of NFIB's Small Business Legal Center.

The budget outlines:

• $1.8 billion for worker protection agencies within the Department of Labor.
• $374 million for the Equal Employment Opportunity Commission, up from $360 million in 2012.
• $293 million for the National Labor Relations Board, up $15 million from the prior year.

To make matters worse, the Obama administration is also cutting back on programs that educate businesses on how to comply with new regulations - such as websites, webinars and hotlines, Milito said.

The complexity and expense of new regulations is adding to the climate of fear for small business owners. "Hiring and business expansion come to a halt when small business owners are unsure of the effect of new rules coming out of Washington," Milito said.

DO OLYMPIC ATHLETES PAY TAX IF THEY WIN GOLD?

In response to exaggerated figures floating around the web, Snopes.com has an interesting look at the income tax consequences for those who win medals in the Olympics. Click here for article.

Basically, the winners do report the cash prizes they receive as income; but their deductible expenses to train, and attend the Olympics would most likely be more than enough to cancel out that income on their tax returns.

Thats the facts Jack.

WORSE ECONOMIC WRECKAGE FORECAST FROM "FISCAL CLIFF"

Even the Congressional Budget Office is worried about the upcoming financial cliff.  Here is an summary from Reuters.

By David Lawder

WASHINGTON Aug 22 (Reuters) - Massive spending cuts and tax increases due next year will cause even worse economic damage than previously thought if Washington fails to come up with a solution, Congress's budget office said on Wednesday.

Without congressional action to avoid a "fiscal cliff," Americans should expect a "significant recession" and the loss of some 2 million jobs, Congressional Budget Office director Doug Elmendorf said in his gloomiest assessment yet.

He said the economy was already being "held back" by the mere anticipation of the cliff and the uncertainty surrounding it. "The sooner that uncertainty is eliminated, the better," Elmendorf said.

The report could intensify pressure on Congress and the White House to resolve their differences. But the likelihood of a resolution any time soon, particularly before the November election, is seen as slim. Chances could improve after the election for action during the lame-duck session of Congress, but that's unpredictable as well.

Neither Democrats nor Republicans have shown a willingness to back away from fixed positions on either budget cuts or extension of tax cuts originally enacted during the administration of President George W. Bush.

The "cliff" refers to the impact of expiring tax cuts and automatic spending reductions set for 2013 as a result of successive failures by Congress to agree on some orderly alternative method of addressing the deficit.

The CBO said failure to avoid the cliff would deliver a shock to the economy that would cause U.S. gross domestic product to shrink 0.5 percent in 2013. Previously, the CBO had forecast full-year GDP growth of 0.5 percent.

NEBRASKA JOB REFERENCE LAW, LB959, NOW IN EFFECT

Now Nebraska employers can share certain information on prior employees without concern about a lawsuit.  Earlier this year, the Nebraska Legislature passed and Governor Heineman signed LB959, one of the session's most important labor law bills.  LB959 took effect last month. 

Introduced by Fremont Senator Charlie Janssen, LB959 allows employers to share more information with prospective employers about current and former employees with less threat of legal liability.  Upon written consent of the prospective employee, LB959 permits current or former employers to disclose relevant workplace and job-related information. 

Employers are encouraged to learn the new law's requirements, as well as its limitations, before changing policies, procedures and forms.  In order to obtain the protections under LB959, employers must first obtain a written authorization from the employee to release the information, and that consent must be signed and dated, and in either a stand-alone document, or be a conspicuous part of the employment application.

1099K QUESTION

Q: I attended one of your seminars in Orlando and you mentioned the 1099K forms that credit card companies are sending.  You mentioned that we do not need them; however, use them for internal purposes because IRS are getting them anyway.  Can you give us the information in regards to that new change?

A: 1099K’s have been really confusing. First the Government says it’s one way, then it’s another way, then they make another change. As I mentioned to you, right now the 1099 K’s still have to be prepared by the credit card companies and copies sent both to the IRS and to their customer. As I mentioned originally, we were supposed to reconcile these 1099K’s to Gross Income. Finally, they recognized that it was going to be very prohibitive to businesses because of sales tax that are added in, tips, cash backs and many other items.

Accordingly, they changed their rules. First of all, it was supposed to go into effect for 2011 returns and then they said no wait on 2011. Now they say it’s not included at all.

As I mentioned to you, you’re still going to get copies of the 1099K’s and if you are audited, the IRS will still have access to that. Whether the IRS tries to reconcile this back to gross income, some commentators say they will, some commentators say they will be ignored.

I hope this answers your question. If you have any further questions, please feel free to contact me.

CONGRESS ONLY PASSED 54 BILLS SO FAR THIS YEAR

This year Congress has passed 54 bills and sent to the president the following:

•       14 to rename post offices

•         9 to approve real estate transactions

•         6 to renew existing leases

YEAREND PLANNING: MAKING THE MOST OF QUICK WRITE-OFFS FOR CAPITAL GOODS

Although bonus first-year depreciation and more-generous Code Sec. 179 expensing limits have been extended before, another lease on life for these tax breaks is far from certain this time around.

Unless Congress acts, additional depreciation deductions under Code Sec. 168(k) in the placed-in-service year equal to 50% of the adjusted basis of qualified property won't be available after this year.

Also, the Code Sec. 179 expensing limit is set to plummet to $25,000 for property placed in service next year.

Because of this uncertainty, business owners planning to purchase machinery and equipment during the remainder of this year or early the next should try to accelerate their buying plans, if doing so makes sound business sense.

IT IS NOT THE 1% THAT ARE STRANGLING THE ECONOMY

Everybody should have a favorite economist. Mine is Professor Ernie Goss of Creighton University.  The following is from his July newsletter.

The 25%, Not the 1%, Are Strangling the U.S. Economy

It's not the 1 percent that is siphoning U.S. economic resources. It is the 25 percent--the portion of the U.S. population born between 1946 and 1964 or, baby boomers like me. Not only are we 25 percenters leaving the workforce at very high rates, (consuming instead of producing), we are draining the U.S. Treasury via higher Social Security (SS) benefits and greater Medicare spending. Over the past decade, SS outlays soared by 69 percent and Medicare expenditures rocketed by 135 percent, enlarging the nation's debt to $16 trillion. This debt which is the largest in the galaxy and 100 percent of GDP will ultimately be paid for by the 60 percenters (those born after 1964). We need to take steps to reduce this wealth transfer from young to old by: (1) raising the SS retirement age from 67 to 70 by increasing it 2 months per year, (2) increasing the Medicare eligibility age from 65 to 67 and, (3) cut the yearly SS inflation adjustment by 1 percent. Taking these actions would save $360-$400 billion between 2012 and 2021. Additionally to reverse the aging of the nation’s labor market, the U.S. should expand legal immigration allowing younger workers and their families to enter the U.S. Latest U.S. Census data show the median age is 38.3 for Whites, 35.3 for Asians and 27.4 for Hispanics. By increasing legal immigration and slowing the growth in SS and Medicare spending, the U.S. would avoid the stagnation and looming economic calamities threatening Japan and Europe as a result of their aging populations and expanding pensions/healthcare payments to baby boomers. Ernie Goss.

I found his comments on a “fix” to the deficit that the Social Security fund very interesting.  Last fall I attended the National Tax Conference in Washington D.C.  One of the sessions was on Social Security and Medicare, the speaker, Theodore Sarenski echoed some of the advise that Dr. Goss presented.  If this happened, according to Sarenski, no person over 55 would be see their benefits change and people under 55 would still receive at least 85% of their benefits. 

FEDERAL STUDENT AID NEW WEBSITE

Federal Student Aid launched a new streamlined website, StudentAid.gov, which will assist in making it easier for students, parents, and borrowers to navigate the financial aid process. These new resources offer more than just information in an easy-to-read format; they also feature interactive tools, such as videos and infographics, to help answer the most frequently asked questions about financial aid.

StudentAid.gov is the first step to develop a single point of entry for students accessing federal student aid information, applying for federal aid, repaying student loans, and navigating the college decision-making process.

QUICKBOOKS SETUP ERROR & HOW TO FIX IT #3

Most errors can be avoided simply by planning your setup and knowing what your business needs are. Here is another QuickBooks setup error that we see the most AND how to fix it.

Vendors

Redundant or duplicate: The same as with the Chart of Accounts, you don’t want bloated Vendors list. So periodically review the list for duplicates and merge the Vendors.

Vendors properly not set up for 1099 reporting: Check with your accountant/tax profession regarding the necessary paperwork and filing requirements but you can (and should) track 1099 amounts in QuickBooks. When done properly, year-end 1099 filing is simple.

Remember, standing in a garage, doesn’t make you a car… knowing a bit about QuickBooks and being able to navigate it, does not make you an accounting expert. Don’t be afraid to look for or ask for some help.

JUNE HAS COME AND GONE - TIPS FOR RECENTLY MARRIED TAXPAYERS

If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are some tips for newlyweds.

1. Notify the Social Security Administration.  Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at http://www.ssa.gov.
2. Notify the IRS. If you move and have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from http://www.IRS.gov.
3. Notify the U.S. Postal Service.  You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.
4. Notify your employer.  Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
5. Check your withholding.  If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on http://www.IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee's Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
6. Choose the best filing status.   A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.
7. Don't forget the nontax items such as wills, beneficiaires of pension plans and life insurance policies.
8. Health Insurance.  If both parties have health insurance at work or private health insurance you need to look at your options.

WALMART STEAKS

Years ago, Folgers Coffee scored big with a series of ads taking the viewer inside various gourmet restaurants while a voiceover whispered "we're here at such-and-such snooty restaurant, where we've secretly replaced the fine coffee they usually serve with Folgers Crystals. Let's see if anyone can tell the difference." Then they interviewed diners, who expressed shock (and no small amount of embarrassment, I'm sure), when they discovered how much they liked the schlocky Folgers instant instead of the "gourmet" brand they expected. (This was way before Starbucks elevated our palates and made us all coffee connoisseurs.)

Now Walmart has paid homage to Folgers with their own ad promoting — believe it or not — Walmart steaks. "We're here at the famous Golden Ox steakhouse in Kansas City, where we switched their steak, with Walmart's choice premium steak . . . ." (If you haven't already seen it, click here to see for yourself — do it before you read the rest of this article.)

Back? Good. I want to make two points about the Walmart steaks, with lessons for your own business:

1. The Placebo Effect: Diners who gear up for a big night out at a fine steakhouse are primed for a great meal. They expect choice ingredients everywhere, and select service from a well-trained staff. And they'll probably be pretty happy, even if the experience isn't "objectively" all that great.

This effect has been proven time and time again. Most recently, researchers at Stanford University used MRIs to study Caltech grad students' brains as they swallowed five red wines priced at $5, $10, $35, $45, and $90 per bottle. They found that as the price of the wine rose, so did the activity in the subjects' medial orbitofrontal cortexes. (Apparently, that's the part of the brain that experiences pleasure — but just reading about it gives me a headache.) The "catch," of course, is that the subjects didn't drink five different wines — they drank three. The wine presented as costing $45 per bottle was really the one costing $5 — and the wine presented as costing $90 per bottle really cost just $10. D'Oh!

The placebo effect won't work just anywhere. Diners have to really expect a great meal for it to work. Nobody who shows up at the Squat-and-Gobble All You Can Eat Buffet expects a world-class steak. They're just happy they don't see marks from where the jockey was hitting it.

2. The Walmart Effect: Walmart steaks are actually perfectly fine beef. They're USDA "Choice," which is the same cut you'll find at mid-priced steakhouses like Outback or Longhorn. (The top 3% of beef, with the most marbling, is graded "Prime." That's the stuff you'll find "dry aged" at elite steakhouses, often drenched with butter, and sometimes served with a side of Lipitor. The next 55%, with "slightly abundant marbling," is graded "choice." That's the stuff you grill at home, and it's really pretty good. Finally, there's USDA "select," which usually winds up ground into burgers.)

The problem, of course, is that everyone knows Walmart is cheap. And nobody associates "cheap" with "good." Nobody expects good steaks at Walmart. So how does Walmart get around our prejudice?

Well, here they resort to a classic "dramatic demonstration." Showing happy diners enjoying Walmart steaks is a lot like H&R Block ads showing a stage full of happy clients stepping up to claim surprise refunds. It's just like "Vince from Sham-Wow" telling the camera guy to follow him as his miracle shammy soaks up a spill.

The downside of this approach is that while Walmart tells us their steaks are "surprisingly good," at least some of us still focus on the "surprise" more than the "good."

To sum up: 1) the "placebo effect" actually lets us sell downscale stuff at an upscale price; however, 2) the "Walmart effect" actually keeps us from selling upscale stuff in a downscale environment.

Still skeptical? Ask yourself this — would you have nearly as hard a time believing steaks from Target are good?

Here's the bottom line for your business. If you position yourself as a premium provider, clients may not even realize if you occasionally drop the ball. But if you position yourself as a discounter — if you give yourself a reputation for being cheap — clients will have a hard time believing you're good!

MEDICAL PREMIUMS - W-2

Q: Larry, I heard for someone that we are going to have to put any medical/dental premiums that we pay for our employees on the W2s starting this year. Do you have any information about this or know where I would be able to look that up? We just want to make sure that we have it covered sooner rather than later.

A: As long as a business had less than 250 employees in 2011, then there is relief, in that, there will not be a requirement to report in 2012.

To see Q and A sheer on IRS website: CLICK HERE

SENATE MAKES NO PROPOSED CHANGES TO ESTATE TAX IN EXTENSION BILL

I think that we all know that the only thing going on in Washington between the Republicans and the Democrats is positioning for the upcoming elections.  Bills are submitted in the Senate (controlled by the Democrats) and in the House (controlled by the Republicans) that will never become law because it takes both bodies and the President to make the provision law.  So bills are passed by one of  bodies with the realization that the other body will vote it down.  Just positioning.  At the same time, the defective proposals give us some indication of the thinking which could eventually become law if they ever get serious about doing their job. 

Senate Democrats removed any mention of the estate tax in a Bill that is currently headed to the floor.  This proposed Bill will now extend the 2001 and 2003 “Bush” tax cuts for families earning $250,000 or less.  An earlier version of the Bill would have included a maximum estate tax rate of 45% while dropping the exclusion level to $3.5 million.  With the new changes to the Bill, the maximum rate will be 55% with only a $1 million exclusion amount.

This new Bill would set the top rates for dividends and capital gains at 20% (plus the Medicare Surtax of 3.8% if applicable); reinstate the phase-out of personal exemptions and certain itemized deductions for higher income households; and extend certain credits such as the education credit, child tax credit and earned income credit for another year.  The Section 179 expensing limits would be set $250,000 for 2013 and probably most important, it would provide for another one-year “patch” to the alternative minimum tax for 2012.

CLARIFICATION OF DEDUCTION OF MEDICARE EXPENSES

Until about 2009, the IRS position was that a self-employed taxpayer (including partners and more than 2% S corporation shareholders) could not deduct Medicare premiums above the “line” as part of the self-employed health insurance deduction. In 2010, the instructions for form 1040 and other related forms had added a section indicating you could deduct these premiums above the line. The problem was that there was no actual formal announcement from the IRS just a change in the instructions.

We picked up on this right away and started deducting the Medicare premiums as a adjustment to gross income on page one of the return. Now, over two years later, the IRS announced a formal change in the long-held position on the deductibility of Medicare premiums (normally withheld from Social Security Benefits), which in most part agree with the 2010 instructions.

Take note that for S corporation shareholders and partnerships, a notice issued previously by the IRS requires that these premiums actually be reimbursed by the corporation (or paid directly by the employer, which is not normally applicable with Medicare premiums). This requires a check be issued by the employer to the employee paying the Medicare premiums. These payments would then be included in the income of the employee (deducted by the employer) and then deducted on page 1 of form 1040 of the employee. If these guidelines are not followed completely, then the deduction is not allowed.

QUICKBOOKS SETUP ERROR & HOW TO FIX IT #2

QuickBooks is driven by lists – quite a few of them. You have to know your business and know what the lists mean so that you can efficiently and effectively create a database.  Here is another QuickBooks setup error that we see the most AND how to fix it.
This is my second in the series of Quickbooks tips.

Customers and jobs
Customer and job organization not appropriate for reporting needs: Customer/Jobs don’t work for every QuickBooks user. In my experience, I’ve seen it used most often in construction, home improvement or real estate/property management companies where there are multiple & concurrent “jobs” worked for each customer that the business owner would like to track separately (typically for profitability reporting reasons). If this does not describe you and your business, then the extra level of “Jobs” is inappropriate for your reporting needs and is probably overkill.

Redundant or duplicate: Again, the same as with the Chart of Accounts, you don’t want a bloated list of Customers/Jobs. Periodically review the list for duplicates and merge the Customers.

Jobs not properly assigned to customers: If you use Jobs, you want to make sure that they are properly assigned to Customers. Periodically review your customer & job list to make sure that everything is as it should be.

Don’t be afraid to look for help.