Keeping track of tax changes these days is quite a task. Congress is constantly tweaking the tax laws in an effort to stimulate the economy and deal with the budget deficit. The following is a compilation of recent changes to keep you up date.

• Cell Phones No Longer Listed Property – This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property. This is effective for tax years beginning after Dec. 31, 2009.

• Business Owners’ Health Insurance Deduction – A one-year law change allowed business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax. For years before and after 2010, the deduction is used only as an above-the-line deduction from gross income on the self-employed individual’s income tax return and does not affect the SE tax.

• Medicare B as an SE Health Insurance Deduction – The IRS very quietly reversed its position related to the deductibility of Medicare B premiums as an SE health insurance deduction. The 2009 Form 1040 instructions indicated that it was not deductible, while the 2010 instructions reversed that position to indicate that it is. The 2011 instructions also permit voluntarily paid Medicare premiums to be treated as SE health insurance premiums.

• Payment Card and Third-Party Payment Transactions – Beginning in 2012 (for 2011 returns), payment settlement entities (e.g., a bank) will have to make an annual information report in settlement of reportable payment transactions (e.g., a credit or debit card transaction) and transactions settled through third-party payment networks (e.g., PayPal) that settle online transactions. The report is made to the merchant and the IRS stating the gross amount paid to the merchant during the previous calendar year. Form 1099-K will be used for this reporting.
The IRS had intended to require business owners to reconcile credit and debit card income with the gross income reported on business returns beginning with 2012 returns filed in 2013. However, in February of 2012, the IRS announced that they were dropping that requirement.
Even though the reconciliation requirement is being dropped, business owners should be aware that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. On a cautionary note, the IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at the estimated gross income for various types of businesses. This will help them select their audit targets.

• Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000). The $5,000/$50,000 amounts return for tax years beginning in 2011.

• Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation.
For tax years beginning in 2010 and 2011, a taxpayer is allowed to expense (under Section 179) up to $500,000 (up from $250,000 under prior law) of the cost of qualifying business property, which includes machinery, equipment, and certain software placed in service during the year. For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit. The maximum Sec. 179 deduction and investment cap amounts for 2012 are $139,000 and $560,000, respectively.

• Certain Real Property Can Be Expensed – Generally, real property is not eligible for Sec 179 expensing. However, for property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of expensed property can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

• Bonus First-Year Depreciation Extended and Expanded – Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years. Congress extended the 50% rate for qualifying property purchased through September 8, 2010 and doubled the first-year bonus rate to 100% for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain property). The bonus rate for 2012 (through 2013 for certain property) will again be 50%.

• Lower SE Tax Rate – Beginning in 2011, Congress authorized a 2 percentage-point reduction in the employee’s portion of the payroll tax (OASDI) and a corresponding reduction in the SE tax for self-employed individuals. Thus, the overall SE tax rate dropped from 15.3% to 13.3% for 2011. The reduction was subsequently extended to apply to all of 2012.

• Research Credit – The research tax credit expired at the end of 2009. As part of the 2010 Tax Relief Act, Congress reinstated the credit for 2010 and extended it through 2011.

• Small Employer Health Insurance Credit – The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for their employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

• Credit for Hiring Veterans – The VOW to Hire Heroes Act of 2011 added two new categories to the existing qualified veteran targeted group for the Work Opportunity Credit (WOTC). Employers may claim the WOTC for veterans certified as qualified veterans and who begin work before January 1, 2013. The credit can be as high as $9,600 per qualified veteran, but the amount of the credit will depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. Non-profit organizations are also eligible to claim this credit. All employers must obtain certification from their respective state workforce agency that an individual is a member of the targeted group before the employer may claim the credit.

• Other Provisions with Limited Application – Calculations of the built-in gains tax on C-corporations converted to S-corporations, special rules for long-term contract accounting, the extension of certain business energy credits, and the limitation of the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

If you have questions related to any of these tax benefits or wish to schedule a tax planning appointment to see how your business might benefit, please give this office a call.

Last month, we cautioned you about Internet scams aimed at tricking you into divulging information that will compromise your identity. That article described how Internet crooks disguise themselves as the IRS in an attempt to steal your identity.

The IRS is not the only disguise these scammers use. They pretend to be attorneys representing estates, lottery payouts, and other such subterfuge to draw you into their web.

Here are some good rules to follow:
1. If it’s too good to be true, it probably isn’t true.
2. If you receive a request for financial information via the Internet, it is probably a scam.
3. Never give your financial information over the Internet except when you are absolutely sure with whom you are dealing.

Take this example of how clever scammers can be. The latest scam is an e-mail requesting individuals to update their Intuit accounts. The e-mails claiming to be from Intuit ask recipients go to what is supposed to be an Intuit web site and update their tax return information. The e-mail includes an Intuit logo in the header. The scammer selected Intuit as the bait because so many individuals and small businesses use their Quicken and Quickbooks products.

So do not be fooled by this scam or any others that do not make sense. Do not be hasty; stop and carefully consider what you are doing before you click on a link to a potentially dangerous web site. These people are clever and can disguise their scams well.

If you ever have questions related to suspect e-mails, please call this office before responding to them.

Fans of AMC’s Mad Men rejoiced last week when Don Draper and his colleagues at Sterling Cooper Draper Pryce returned after a 17-month absence. The year is 1966, and change is in the air. Protestors oppose the war in Vietnam, and riots break out in Los Angeles, Cleveland, and Atlanta. The “kids” are listening to Dusty Springfield and the Rolling Stones. And the “grownups” are struggling to make sense of it all.

Mad Men creator Matthew Weiner is famed for his obsessive attention to period detail. (One episode featured junior executive Pete Campbell displaying a spectacularly ugly “chip and dip” platter he received as a wedding present — the very same chip and dip that Weiner’s own parents received for their wedding back in 1959.) So, fashion mavens predictably ooh’ed and ahh’ed over the period costumes, which have inspired today’s Banana Republic to introduce an entire Mad Men collection. Interior design aficionados ooh’ed and ahh’ed over Don and his new bride Megan’s stylish Upper East Side penthouse, with its white carpeting, sunken living room, and broad terrace. But tax professionals cheered loudest of all when partner Roger Sterling bribed media buyer Harry Crane $1,100 to give up his office for rising star Campbell. “That’s more than you make in a month,” Sterling whee died, “after tax!”

And really, who cares about Don’s suits, Megan’s dresses, or Roger’s cocktails, when we can spy on their money and their taxes?

Prices from 1966 seem comically quaint today. A gallon of gas cost just 32 cents. A dozen eggs cost 60 cents. Postage stamps cost a nickel. But there was nothing comical or quaint about taxes. Rates in 1966 started at 14% on income over $1,000 (roughly $7,000 in today’s economy), and rose to 70% on income over $200,000. 70% is a lot compared to today’s 35% maximum — but 70% was actually a big step down from the 91% top rate that Don and his colleagues faced just three years earlier in 1963. One small consolation — Don’s Form 1040 was quite a bit simpler. However, the “Expense Account Information” section at the bottom of page two includes an intimidating box to check — and separate instructions to follow — “if you had an expense account or charged expenses to your employer.”

And what about those three-martini lunches that play such a central role in lubricating Mad Men’s ensemble? Well, for starters, they sure cost less back then. In one scene from Season One, Don flips a waitress at a beatnik bar $5 to cover three martinis, plus tip. Today, those same martinis cost $14 each at The Roosevelt Hotel, where Don stays after separating from first wife Betty. As for tax breaks, under today’s rules, meals and entertainment are 50% deductible. That means, if you’re in the top 35% bracket, a dollar’s worth of martini saves 17.5 cents in tax. But back in 1966 — when doctors appeared in cigarette commercials and seatbelts were still optional in most cars — meals and entertainment were 100% deductible. That means that same dollar’s worth of martini saved up to 70 cents in tax. No wonder the partners spent more time getting soused than they did talking business!

If we had been practicing back in 1966, we would have looked just as good wearing the silhouettes of 1960s style. But Don Draper would have appreciated us more for the way we cut his taxes. There’s no need to get mad at the IRS if you have a proactive plan. And there’s no pesky two-drink minimum, either!

Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 79 million people had their tax refunds deposited directly into their bank accounts in 2011. It’s a secure and convenient way to get your money in your pocket faster.

• Speed—When combining e-file with direct deposit, the IRS will likely issue your refund in as few as 10 days.
• Security—Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail.
• Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen.
• Convenience—There’s no special trip to the bank to deposit a check!
• Options—You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions.
• Fund Your IRA—You can even direct a refund into your IRA account.

To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have them available at your appointment.
If you have questions, please give this office a call.