Selected Tax Provisions Expiring at December 31, 2011

The tax code is full of temporary special tax incentives.  Some of the more broad and important provisions that will expire absent Congressional action are shown in the list below.  You should consider taking action before the end of 2011 if you benefit from these incentives.

1. Research credit.  A tax credit is available for research expenditures paid or accrued by December 31, 2011.
2. Bonus depreciation.  Depreciation of 100% of the cost of qualifying property (generally new equipment) is available if it is placed in service by December 31, 2011.  After 2011 the bonus depreciation amount declines to 50% if the property is placed in service by December 31, 2012.  No bonus depreciation applies after 2012.
3. Section 179 expensing.  For tax years beginning in 2011, an election is available under IRC §179 to expense the cost of qualifying property (generally new or used equipment) up to a maximum of $500,000.  The maximum amount is reduced dollar for dollar if the total cost of qualifying property placed in service during the tax year exceeds $2,000,000.  For tax years beginning in 2012 the amounts drop to $139,000 and $560,000 respectively.  For tax years beginning after 2012, the amounts drop again to $25,000 and $200,000 respectively.
4. IRA distributions to charity.  Taxpayers age 70 1/2 or older may make an IRA distribution to charity of up to $100,000 by December 31, 2011.  While the distribution does not count as taxable income or generate a charitable tax deduction, adjusted gross income is reduced which may save taxes under other tax provisions, and importantly, the distribution counts toward the fulfillment of the annual minimum distribution requirement.  This provision was extended through 2011 in late 2010, so the law permitted a taxpayer to elect to treat charitable distributions made during January 2011 as if the distributions occurred in 2010.  If the election was made, care must be taken to avoid including the January 2011 distribution with your total 2011 charitable distribution amount.
5. Purchase qualified small business stock.  Zero tax applies to gain from the sale of QSBS purchased after September 27, 2010 and before January 1, 2012 and held for more than five years.  Many qualifications and limitations apply.  A future blog post will examine this strategy in more detail.

IRS Announces New Voluntary Worker Classification Settlement Program

The IRS announced on September 21, 2011 a new program to help employers resolve past problems in classifying workers as independent contractors instead of employees.  There is not a brightline test in properly classifying workers, and errors can be made.  In addition, workers classified as employees are much more costly to a business than if the workers were instead classified as nonemployees.  Examples of additional costs are payroll taxes, health insurance (if offered to employees), and retirement plan (if offered to employees) contributions.  Therefore, some businesses may have tended toward classifying workers as independent contractors.  If the IRS discovers that workers were misclassified, the IRS can impose years of back taxes, interest, and penalties on the employer.  In addition, the employer could be responsible for past overtime pay, retirement plan contributions, and other employee fringe benefits.  With potential penalties building up over the years, employers felt stuck with the problem without a low-cost way of correcting the misclassification.

The new Voluntary Classification Settlement Program enables eligible employers to obtain substantial relief from past taxes if they prospectively treat workers as employees.  To be eligible, a business must:

1. Have consistently treated the workers in the past as nonemployees,
2. Have filed all required Forms 1099 for the workers for the previous three years,
3. Not be currently under audit by the IRS, and
4. Not be currently under audit by the Department of Labor or by a state agency concerning the classification of these workers.

Eligible employers must file Form 8952 with the IRS at least 60 days before they want to begin treating the workers as employees.  For example, application must be made by November 2, 2011 if the workers are to be reclassified effective January 1, 2012.  Employers accepted into the program will pay a penalty of about 1% of wages paid to the reclassified workers for the past year.  No other interest or penalty will be due, and the IRS will not audit the employer for payroll taxes related to these workers for prior years.  In addition, a six-year (instead of the normal three-year) statute of limitations will apply to the first three years after the start of the program.  Additional information is available on the IRS website at: http://www.irs.gov/businesses/small/article/0,,id=246013,00.html

This is a voluntary Federal program.  Participation in the program could be shared with states that may or may not have a voluntary compliance program of their own.  Note also that correcting worker classification may have an impact under the 2014 health insurance mandate for employers having 50 or more employees beginning in 2013.