Cafeteria plan documents providing for medical flexible spending accounts must be amended by June 30, 2011 to limit the reimbursements to prescribed drugs or insulin. The cost of over-the-counter drugs may not be reimbursed after 2010. This change results from the Health Care Reform legislation enacted last year. The amendment must be retroactive to January 1, 2011 and made by June 30, 2011 according to IRS Notice 2010-59. The way around this restriction is to receive a prescription from your doctor for the over-the-counter medicine.
Note that the restriction also applies to Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). If a non-qualifying reimbursement is made by an HSA or an Archer MSA, the reimbursement will be included as taxable income and subject to a 20% tax penalty.
The restriction does not apply to items that are not medicines, such as crutches, bandages, diagnostic devices, etc.
Wednesday, June 22, 2011
Monday, June 13, 2011
FBAR Due June 30, 2011
U.S. persons having interests in foreign financial accounts must file an annual report with the U.S. government. The 2010 Report of Foreign Bank and Financial Account (FBAR) must be received by the U.S. Treasury Department in Detroit, Michigan on or before June 30, 2011. The normal postmark rule for timely mailing of tax returns is not applicable. In addition, no extension of time permitted. Owners of entities that are required to file the FBAR must also file FBARs at the owner level if they have more than a 50% direct ownership interest. Significant penalties exist for late or non-filing.
The FBAR is an information return and is filed annually. The FBAR is required for all years in which the maximum bank account value (multiple accounts are aggregated for this purpose) exceeds US$10,000. A year-end exchange rate is used for conversion purposes. In addition, any account earnings must be included in the U.S. income tax return.
The IRS currently has an amnesty program that provides an incentive for those who have failed to file the FBAR and/or to report the foreign account earnings on their income tax returns. The program ends on August 31, 2011. See my posting dated February 28, 2011 for more information.
Tuesday, May 24, 2011
Corporate Tax Reform Proposals
Various corporation income tax reform proposals have surfaced over the past six months. At 35%, the U.S. has one of the highest top corporate income tax rates in the world. However, a tangle of tax deductions, credits, and incentives enable many corporations to pay a much lower effective tax rate. The impact of the corporate tax varies greatly by industry. For example, large incentives currently exist for technology, manufacturing, and energy industries and also for multi-national companies. In addition, income of C corporations is taxed twice: once at the corporate level and again by shareholders when dividends are paid.
The proposals seek to lower the top rate to somewhere around 25%. The proposals seek "revenue neutrality" by eliminating many deductions, credits, and incentives. Thus industries and corporations benefiting the most under current tax law may have the most to lose in corporate tax reform. Those industries and corporations that pay a higher effective tax rate could see their tax burden drop. Corporate reform cannot be done in a vacuum. If individual tax rates remain at 35% or higher, and the corporate rate drops to 25%, there could be a rush to reorganize business tax structures to benefit from the rate reduction. Therefore, the drive for corporate tax reform could lead to overall fundamental tax reform.
Businesses operated as "pass-through" entities generally only have one-level of income tax which is paid by the owners of the entity. As a result, there has been a large increase in the number of businesses operated as limited liability companies and S corporations. The trend toward pass-through entities has caused a sharp drop-off in the amount of corporate income tax collected as a percentage of the gross domestic product (GDP). According to a Congressional Research Service report, the percentage in the 1950's was around 5% of GDP. In 2007 it was 2.7% of GDP. And in 2010 the percentage was 1.3%, also reflecting the impact of the current financial recession. As a result of this trend, one startling proposal is to tax pass-through entities with gross receipts of $50 million or more as C corporations. If enacted, this change would have dramatic, adverse impact on many businesses and family organizations that have arranged their affairs to reduce their tax burdens in accordance with current tax law.
The proposals seek to lower the top rate to somewhere around 25%. The proposals seek "revenue neutrality" by eliminating many deductions, credits, and incentives. Thus industries and corporations benefiting the most under current tax law may have the most to lose in corporate tax reform. Those industries and corporations that pay a higher effective tax rate could see their tax burden drop. Corporate reform cannot be done in a vacuum. If individual tax rates remain at 35% or higher, and the corporate rate drops to 25%, there could be a rush to reorganize business tax structures to benefit from the rate reduction. Therefore, the drive for corporate tax reform could lead to overall fundamental tax reform.
Businesses operated as "pass-through" entities generally only have one-level of income tax which is paid by the owners of the entity. As a result, there has been a large increase in the number of businesses operated as limited liability companies and S corporations. The trend toward pass-through entities has caused a sharp drop-off in the amount of corporate income tax collected as a percentage of the gross domestic product (GDP). According to a Congressional Research Service report, the percentage in the 1950's was around 5% of GDP. In 2007 it was 2.7% of GDP. And in 2010 the percentage was 1.3%, also reflecting the impact of the current financial recession. As a result of this trend, one startling proposal is to tax pass-through entities with gross receipts of $50 million or more as C corporations. If enacted, this change would have dramatic, adverse impact on many businesses and family organizations that have arranged their affairs to reduce their tax burdens in accordance with current tax law.
Monday, May 23, 2011
Tax Benefits for Heavy SUVs in 2011
Sports utility vehicles having gross vehicle weight (GVW) of over 6,000 pounds are exempt from the so-called "luxury" automobile tax deduction limitations which generally restrict depreciation and Section 179 expensing to very modest amounts. If the luxury auto is used 100% for business in 2011, then the maximum write-off would be either $3,060 or $11,060; depending upon whether the auto qualified for bonus depreciation. To qualify for bonus depreciation, the vehicle must be new, meaning its original use begins with the taxpayer. Under the 2010 Tax Relief Act, the first-year bonus depreciation amount was raised from 50% to 100% for new property acquired and placed in service after 9/8/2010 and before 1/1/2012. Luxury auto rules limit the amount of bonus depreciation to $8,000. Since heavy SUVs are exempt from the luxury auto rules, the full cost of the purchase is deductible in 2011 because of 100% bonus depreciation.
Bonus depreciation is different than Section 179 expensing. Section 179 expensing is available for new or used vehicles, but is limited in amount and is limited to taxable income. Section 179 expensing limits were greatly enhanced to $500,000 for 2010 and 2011. However, a special rule limits the Section 179 expensing amount to $25,000 for heavy SUVs rated at 14,000 pounds of GVW or less. Therefore, bonus depreciation is generally preferable to Section 179 expensing.
The tax deductions must be reduced if the vehicle is not used 100% for business. In addition, if the vehicle is not used more than 50% for business, it will fail to qualify for both bonus depreciation and Section 179 expensing.
Bonus depreciation is different than Section 179 expensing. Section 179 expensing is available for new or used vehicles, but is limited in amount and is limited to taxable income. Section 179 expensing limits were greatly enhanced to $500,000 for 2010 and 2011. However, a special rule limits the Section 179 expensing amount to $25,000 for heavy SUVs rated at 14,000 pounds of GVW or less. Therefore, bonus depreciation is generally preferable to Section 179 expensing.
The tax deductions must be reduced if the vehicle is not used 100% for business. In addition, if the vehicle is not used more than 50% for business, it will fail to qualify for both bonus depreciation and Section 179 expensing.
Monday, April 25, 2011
W-2 Reporting of Health Insurance Coverage Delayed
The 2010 health care law imposed a new reporting obligation on employers, to report the aggregate cost of employer-provided health insurance on their employees' W-2s. This reporting is informational only; not an increase in taxable wages. The original due date of this reporting obligation began January 1, 2011. In IRS Notice 2010-69, the IRS made this reporting "optional" for all employers for 2011 W-2s. Now, in new IRS Notice 2011-28, the IRS extends this voluntary reporting for small employers (those issuing fewer than 250 Forms W-2 for 2011) through 2012.
The aggregate cost to be reported includes both the portion of the premium paid by the employee and the employer, regardless of whether the employee's contributions were made on a pre-tax or an after-tax basis. However, the aggregate cost does not include contributions to an Archer MSA, Health Savings Account, or a flexible spending arrangement. Many other special rules exist and reference should be made to IRS guidance for the details.
UPDATE:
IRS Notice 2012-9 extends the exception from reporting employer paid health costs on W-2s for small employers to future tax years beyond 2012 until further guidance is issued by the IRS.
The aggregate cost to be reported includes both the portion of the premium paid by the employee and the employer, regardless of whether the employee's contributions were made on a pre-tax or an after-tax basis. However, the aggregate cost does not include contributions to an Archer MSA, Health Savings Account, or a flexible spending arrangement. Many other special rules exist and reference should be made to IRS guidance for the details.
UPDATE:
IRS Notice 2012-9 extends the exception from reporting employer paid health costs on W-2s for small employers to future tax years beyond 2012 until further guidance is issued by the IRS.
Expanded Form 1099 Reporting Repealed
On April 14, 2011, Pres. Obama signed legislation repealing the expanded Form 1099 reporting requirement that was part of the 2010 health care law. The expansion was to include information reporting for payments of $600 or more each year to vendors of goods in addition to services, and to also require reporting to corporations (previously exempt from receiving Form 1099s) beginning with payments made in 2012. The repeal reverts to the former Form 1099 reporting requirements for payments of $600 or more to non-corporations for services (except that payments to corporations for legal services and health care must be reported).
In addition, the expanded Form 1099 reporting requirement for renters of real estate that was enacted as part of the Small Business Jobs Act of 2010 is repealed. The expansion was to include information reporting for payments of $600 or more each year for vendors of goods in addition to services, and to also require reporting to corporations (previously exempt from receiving Form 1099s), beginning with payments made in 2011. In addition, the expansion applied to all landlords, not just those who were in the business of renting property. The repeal reverts to the former Form 1099 reporting requirements for landlords in the business of renting property to report payments of $600 or more to non-corporations for services (except that payments to corporations for legal services and health care must be reported).
In addition, the expanded Form 1099 reporting requirement for renters of real estate that was enacted as part of the Small Business Jobs Act of 2010 is repealed. The expansion was to include information reporting for payments of $600 or more each year for vendors of goods in addition to services, and to also require reporting to corporations (previously exempt from receiving Form 1099s), beginning with payments made in 2011. In addition, the expansion applied to all landlords, not just those who were in the business of renting property. The repeal reverts to the former Form 1099 reporting requirements for landlords in the business of renting property to report payments of $600 or more to non-corporations for services (except that payments to corporations for legal services and health care must be reported).
Thursday, March 17, 2011
Treasury Inspector General Says IRS Should Increase Audits of Tax Returns with Real Estate Rental Losses
In a report dated December 20, 2010, the Treasury Inspector General for Tax Administration (TIG) concluded that 53% of individual taxpayers misreported their rental real estate (RRE) activity. An estimated $12.4 billion was under reported. The TIG recommended that the IRS analyze tax returns with RRE losses to determine which returns to include in Compliance Initiative Programs (specialized audits), revise the Form 8582 instructions to require all taxpayers with suspended RRE passive losses to include the form in each year's tax return, and to record which taxpayers claim to be real estate professionals who are exempted from the passive loss limitations.
The IRS is already gathering some additional information on RRE activities by requiring addresses of each property be reported on 2010 tax returns, indicating the type of property (e.g. residential, commercial, etc.), and reporting the number of days rented at fair value or used personally. In addition, the Small Business Jobs Act of 2010 requires owners of RRE activities to file Form 1099s for all service providers to whom more than $600 is paid, beginning in 2011.
Clearly the government sees some abuses by taxpayers in the tax reporting of RRE activities. It is important that taxpayers have good records and documentation of income and expenses for each activity, and that they comply with the passive activity loss regulations. Such records and compliance may be audited more frequently in the future based upon the TIG's recommendations.
The IRS is already gathering some additional information on RRE activities by requiring addresses of each property be reported on 2010 tax returns, indicating the type of property (e.g. residential, commercial, etc.), and reporting the number of days rented at fair value or used personally. In addition, the Small Business Jobs Act of 2010 requires owners of RRE activities to file Form 1099s for all service providers to whom more than $600 is paid, beginning in 2011.
Clearly the government sees some abuses by taxpayers in the tax reporting of RRE activities. It is important that taxpayers have good records and documentation of income and expenses for each activity, and that they comply with the passive activity loss regulations. Such records and compliance may be audited more frequently in the future based upon the TIG's recommendations.
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