Even though there was no estate tax in 2010, many estates still have to file an estate tax return. Those estates with non cash assets exceeding $1.3 million must file Form 8939 with the IRS. The reason for this is that the IRS wants to know how the executor allocated the basis to heirs. In addition the heirs will need to know the basis of the inherited assets so that when the inherited property is sold they can calculate their gain or loss. In addition, if the property is business property, the heirs can take depreciation if there is a basis step up.
On property that is not given a basis step up, the basis of the decedent is the basis for the heir.
In 2010 executors can increase the basis of estate assets by $1.3 million plus an extra $3 million for assets that go to a surviving spouse. The filing of the Form 8939 is due by April 18, 2011, although the Service may extend the deadline because the agency has not yet issued any public guidance on the allocation rules.
Tuesday, November 16, 2010
WATCH YOUR COMPANY HEALTH PLANS
Firms face a stiff penalty if their insured health plans are discriminatory. You will owe a $100-a-day excise tax for each person discriminated against. In the past, only self-insured medical plans were subject to nondiscrimination rules, but the health reform law expanded the rules reach to insured group health plans.
Generally, plans must benefit 70% or more of employees, not counting workers with fewer than three years of service and those under age 25 and part-time workers. Additionally benefits for highly compensated workers,...one of the five highest paid officers, the top 25% of paid workers or owners of over 10% of the firm...must also be given to the rank and file.
The rules are effective for plan years beginning after September 22, 2010. Existing plans are protected unless they are changed significantly, such as by raising the percentage of medical bills that employees are responsible for or boosting deductibles by more than 15% plus the rate of inflation for health care.
All insured health arrangements should be checked in light of these rules, including employment and severance agreements giving execs special health benefits.
Generally, plans must benefit 70% or more of employees, not counting workers with fewer than three years of service and those under age 25 and part-time workers. Additionally benefits for highly compensated workers,...one of the five highest paid officers, the top 25% of paid workers or owners of over 10% of the firm...must also be given to the rank and file.
The rules are effective for plan years beginning after September 22, 2010. Existing plans are protected unless they are changed significantly, such as by raising the percentage of medical bills that employees are responsible for or boosting deductibles by more than 15% plus the rate of inflation for health care.
All insured health arrangements should be checked in light of these rules, including employment and severance agreements giving execs special health benefits.
Friday, November 5, 2010
NEW BOOTH RENTAL CASE
In a result that surprised me, the Tax Court ruled that service providers at spa were booth renters not employees. In the past if the rent was not a fixed amount and if the service provider did not collect the cash, then they were considered employees. The Tax Court overlooked this precedence and ruled that the workers were booth renters.
Cheryl A. Mayfield Therapy Center, TC Memo 2010-239
The Tax Court has held that cosmetologists, nail technicians and massage therapists who performed services at a spa were not its employees but rather were independent contractors. Accordingly, the spa did not owe employment taxes and penalties as IRS had contended.
Upon audit the IRS determined that cosmetologists, nail technicians and massage therapists (collectively, service providers) who performed services at a spa in exchange for payments were employees of the spa.
• The service providers received no set salary or wages and no fringe benefits.
• As a general rule, the spa charged each service provider weekly “booth rent” equal to the greater of approximately $80 “base rent” or 25% of the gross revenues the service provider generated that week.
• The service providers set their own hours. Some of them worked full time; others were part-time workers who were students or had jobs elsewhere.
• The spa posted prices for various spa services on brochures and on its Internet site. But the service providers were not required to charge these posted prices; they often charged less and occasionally provided free services for repeat customers, family, and friends.
• Clients paid for services at a central point as they left the spa. The spa accepted payment by cash, check, gift certificate, or credit card.
• Cash payments were kept in a wicker basket beneath the receptionist's desk. When low on funds, a service provider would sometimes take money from the basket and leave a handwritten note.
• Service providers generally provided their own supplies. Each service provider purchased his or her own work clothing, which generally consisted of shirts with the spa logo and either khaki, black or white slacks or shorts.
• Each week the spa would prepare payout sheets for the service providers. These payout sheets listed each service provider's clients and the total amount that each client paid for services rendered. From these amounts the spa would deduct booth rent, expenses for products the service providers might have purchased from the spa, and any amount that the service provider might have taken from the basket money.
The spa did not file Forms W-2, Wage and Tax Statement, with respect to any individuals listed in the notices of determination. Nor did it report any compensation payments to employees during the years at issue on Forms 941, Employer's Quarterly Federal Tax Return, or Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
In the notices of determination, IRS classified as employees the receptionists, massage therapists, cosmetologists and nail technicians who worked at the spa during 2002 through 2004 and an instructor who worked at the massage school during 2003 and 2004.
Spa prevails in Tax Court. Before the Tax Court, the spa conceded that the receptionists and instructor were employees but it argued that the massage therapists, cosmetologists and nail technicians were independent contractors. The Tax Court agreed. Although it was a close case, more factors supported a finding of independent contractor status than of employment status.
The following factors supported the spa's contention that the service providers were not employees:
• The spa generally did charge, and the service providers did generally pay, weekly rent of at least $80.
• The service providers were compensated on a straight commission basis, with no minimum guaranteed level of payment.
• The spa did not pay service providers' business or travel expenses.
• Many of the massage therapists made significant investments in outfitting and decorating their massage rooms. Thus, the service providers bore the risk of suffering net losses.
• Several service providers believed that they had a non employee relationship with the spa; and
• The spa did not tell the service providers how to provide their services to the clients. The service providers were all licensed professionals, possessing skills as required by their licensing. They set their own hours. Although the spa posted prices for various services, the service providers were free to charge less and sometimes provided services for free.
Other factors supported employment status for the service providers: their services were integrated into the spa's operations; they provided their services mostly on the spa's premises; the spa provided at least some informal training to new service providers; there was no showing that the service providers made their services available to the general public (other than by working at the spa) regularly and consistently; they were assisted in booking appointments and in receiving payments by receptionists that the spa employed and supervised; clients paid the spa rather than the service providers; and the spa kept the payments until it distributed the service providers' weekly checks.
Other factors were neutral. For example, the Tax Court regarded as neutral the fact that the service providers rendered their services personally since this was dictated by the nature of the services and the licensing requirements.
Bottom line. The Tax Court acknowledged that it was confronted with a close case. But weighing all the evidence, it concluded that factors indicating the service providers' autonomy predominated over those indicating the spa's control over them. Accordingly, it held that the service providers were independent contractors rather than employees.
To review the entire Tax Court Case see the attachment below.
To review the entire Tax Court Case see the attachment below.
HERE ARE MY THOUGHTS ON THE TAX RAMIFICATIONS OF THE ELECTION
It's finally official. The Republicans have taken over the House of Representatives and clawed away much of the Democrats' edge in the Senate. As I gaze into my crystal ball, here are my latest thoughts on what we can expect from the new Congress. But don’t take this to the bank… remember I was the guy that said the Congress would never allow the estate tax to lapse in 2010. Boy was I wrong. Here are my thoughts:
• Most tax accountants have been skeptical that Congress would get their act together and extend the 2001 and 2003 Bush tax cuts (even just for those earning under $250,000) in the lame duck session of Congress convening on November 13. But White House Press Secretary Robert Gibbs announced just today that the administration is open to extending the cuts for all. http://www.cnbc.com/id/40007621
• Word on the street suggests we may see a one-year extension for everyone, then fight it all out again with the new Congress in 2011. However, the Republicans may wait until the new Congress convenes in January to address the issue. In that case, clients can expect to see less take-home pay as the IRS adjusts withholding tables to reflect the new, higher rates.
• If Congress reaches the consensus necessary to resolve the Bush tax cuts question, they'll also manage to "patch" the AMT to avoid soaking millions of unsuspecting Americans. We have been doing several pre tax appointments and so far, if they do not do the patch, we only had one client that was not paying the additional Alternative Minimum Tax. It could get ugly.
• The new Republican House makes it unlikely that we'll see the estate tax roar back with a vengeance like it's scheduled to on January 1. But Congress isn't going to come up with a compromise imposing it retroactively for 2010, either. At this point, the smart money is betting on a compromise with a unified credit in the neighborhood of $3.5-5.0 million and rate of 45%.
• Republican leaders insist they plan to repeal the Legislation that Washington refers to as Healthcare Reform. But even L. Ron Hubbard can't imagine an alternate universe that gives them the votes they need to overcome a Senate Democratic filibuster or presidential veto. However, prospects are good that they can cherry-pick some of their least-favorite provisions — specifically; the requirement that all business file 1099s for all purchases over $600.
Some clients are breathing sighs of relief that the Republican victory will keep taxes low. But that view ignores the reality that deficits are still going up — and taxes will ultimately have to follow. This week's elections may have postponed that day of reckoning, but they haven't eliminated it. Don’t bury your heads in the sand. Recognize this economic inevitability and realize that continued gridlock means uncertainty — and even mere uncertainty not only makes it hard to tax plan, but impacts the economy.
• Most tax accountants have been skeptical that Congress would get their act together and extend the 2001 and 2003 Bush tax cuts (even just for those earning under $250,000) in the lame duck session of Congress convening on November 13. But White House Press Secretary Robert Gibbs announced just today that the administration is open to extending the cuts for all. http://www.cnbc.com/id/40007621
• Word on the street suggests we may see a one-year extension for everyone, then fight it all out again with the new Congress in 2011. However, the Republicans may wait until the new Congress convenes in January to address the issue. In that case, clients can expect to see less take-home pay as the IRS adjusts withholding tables to reflect the new, higher rates.
• If Congress reaches the consensus necessary to resolve the Bush tax cuts question, they'll also manage to "patch" the AMT to avoid soaking millions of unsuspecting Americans. We have been doing several pre tax appointments and so far, if they do not do the patch, we only had one client that was not paying the additional Alternative Minimum Tax. It could get ugly.
• The new Republican House makes it unlikely that we'll see the estate tax roar back with a vengeance like it's scheduled to on January 1. But Congress isn't going to come up with a compromise imposing it retroactively for 2010, either. At this point, the smart money is betting on a compromise with a unified credit in the neighborhood of $3.5-5.0 million and rate of 45%.
• Republican leaders insist they plan to repeal the Legislation that Washington refers to as Healthcare Reform. But even L. Ron Hubbard can't imagine an alternate universe that gives them the votes they need to overcome a Senate Democratic filibuster or presidential veto. However, prospects are good that they can cherry-pick some of their least-favorite provisions — specifically; the requirement that all business file 1099s for all purchases over $600.
Some clients are breathing sighs of relief that the Republican victory will keep taxes low. But that view ignores the reality that deficits are still going up — and taxes will ultimately have to follow. This week's elections may have postponed that day of reckoning, but they haven't eliminated it. Don’t bury your heads in the sand. Recognize this economic inevitability and realize that continued gridlock means uncertainty — and even mere uncertainty not only makes it hard to tax plan, but impacts the economy.
Wednesday, November 3, 2010
IRS STILL WON'T ANSWER QUESTIONS ON NEW 1099 REPORTING
The IRS remains unclear about 1099 reporting implementation.
The Internal Revenue Service is still avoiding questions about how it will implement the controversial 1099 reporting rule, a provision of the health care reform law that requires a business to file a 1099 when a vendor is paid more than $600. IRS Commissioner Douglas Shulman has declined to provide information on the rule after requests for clarity, says Rep. Sam Graves, R-Mo. See the article and comments from The Hill.
http://r.smartbrief.com/resp/zpzgvscgyzecybBoajaoyAalxeEw?format=standard
The Internal Revenue Service is still avoiding questions about how it will implement the controversial 1099 reporting rule, a provision of the health care reform law that requires a business to file a 1099 when a vendor is paid more than $600. IRS Commissioner Douglas Shulman has declined to provide information on the rule after requests for clarity, says Rep. Sam Graves, R-Mo. See the article and comments from The Hill.
http://r.smartbrief.com/resp/zpzgvscgyzecybBoajaoyAalxeEw?format=standard
JUST BECAUSE YOUR DEAD DOESN'T MEAN THAT THE GOVERNMENT WILL QUIT SENDING YOU CHECKS
Last Sunday was Halloween and for some reason we had an exorbitant number of kids dressed up as zombies. It felt like the night of the living dead, which for some reason made me think about taxes and the federal government. You see the federal government does not apparently believe in death. For some reason they keep sending money to dead people. Maybe that's why we had so many zombies at our door begging for candy. Here is proof that the government does not believe that people die.
Remember those $250 stimulus checks? An investigation found that $18 million of those checks were sent to 71,688 deceased individuals. While some percentage of those checks were mailed out because SSA had not been informed that the taxpayers had died, an alarming number of the beneficiaries were actually accurately reported as deceased. In fact, in 2008, SSA paid deceased beneficiaries a whopping $40.3 million in benefits even after being notified of those deaths.
The beleaguered Department of Housing and Urban Development paid out more than $15.2 million in to households in 2008 to program households containing at least one deceased tenant. This included $7 million sent to single-member households whose only “family” was a deceased individual.
Scary, huh? The report goes on to cite examples of poor oversight and waste in other programs, including Medicare and Medicaid.
You can find the report on Senator Coburns oversight link below.
http://coburn.senate.gov/public/?p=OversightAction
Remember those $250 stimulus checks? An investigation found that $18 million of those checks were sent to 71,688 deceased individuals. While some percentage of those checks were mailed out because SSA had not been informed that the taxpayers had died, an alarming number of the beneficiaries were actually accurately reported as deceased. In fact, in 2008, SSA paid deceased beneficiaries a whopping $40.3 million in benefits even after being notified of those deaths.
The beleaguered Department of Housing and Urban Development paid out more than $15.2 million in to households in 2008 to program households containing at least one deceased tenant. This included $7 million sent to single-member households whose only “family” was a deceased individual.
Scary, huh? The report goes on to cite examples of poor oversight and waste in other programs, including Medicare and Medicaid.
You can find the report on Senator Coburns oversight link below.
http://coburn.senate.gov/public/?p=OversightAction
Tuesday, November 2, 2010
NEW DEPRECIATION RULES CAN SLASH TAXES
Congress passed new legislation which was signed into law September 27, 2010 that gives them talking points for their reelection campaigns for the current elections. While these changes are intended to incite businesses to spend money on capital improvements, it becomes challenging for taxpayers to stay in tune to the latest depreciation rules in effect for the current year.
For those taxpayers that have profited even with the weak economy, these expanded depreciation incentives will enable taxpayers to plan their 2010 and 2011 capital expenditures and obtain very attractive tax results, thus helping to offset some of the taxable income.
Background
This legislation brings the second change of rules we have for depreciation for 2010. The changes enacted by the HIRE Act signed in to law on March 18, 2010 are no longer valid. The Section 179 level for 2010 started off at $134,000 and then went to $250,000 with the passage of the HIRE Act. Until now, 50% bonus depreciation had terminated for asset purchases after December 31, 2009. But that is now all changed.
Here is the New Stuff - Section 179 Allowance for 2010 and 2011
The Small Business legislation enacted in September 2010 increased the Section 179 expensing allowance to $500,000 for taxable years beginning in 2010 and 2011. The expensing allowance phase-out threshold has also been increased for qualifying property additions in the range of $2,000,000 to $2,500,000. The definition of qualified property under Sec. 179 remains virtually unchanged from prior law.
However, IRC Sec. 179(f) now allows Section 179 expensing (subject to a $250,000 expensing limit) for certain Qualified Real Property such as Qualified Leasehold Improvements, Qualified Restaurant Property, and Qualified Retail Improvement Property.
2007 $125,000
2008 $250,000
2009 $250,000
2010 $500,000 **
2011 $500,000 **
** $250,000 limit for Qualified Real Property
Congress has been using Section 179 expensing as a major stimulus provision for the past several years. So trying to guess what Section 179 limits will be in the future may be a futile activity, particularly with the recent tendency to enact these changes retroactively.
NOTE: For the record, IRC Sec. 179(b)(1)(C) now states that for tax years beginning after 2011, the Section 179 expensing limit is $25,000. This scheduled large reduction in the Section 179 level is actually designed to encourage capital investments in 2010 and 2011. If the large reduction actually occurs, it would be a major adjustment for many farm producers.
Retroactive Extension of the 50% Bonus Depreciation
The 50% bonus depreciation deduction is retroactively restored for qualified property acquired and placed in service prior to January 1, 2011. This means that qualified property placed in service after December 31, 2007 and before January 1, 2011 is eligible for the bonus 50% depreciation.
The definition of qualified property for the 50% bonus remains the same as under the law in effect for 2008 and 2009. To qualify, the original use of the property must commence with the taxpayer (i.e., the asset must be new rather than used), and the asset must meet the qualified property definition.
For trades, 50% bonus depreciation may be claimed on the entire adjusted tax basis of the new asset.
As a reminder, the bonus 50% depreciation is mandatory. However, the taxpayer can decline to take the 50% bonus on a class by class basis. An election statement must be placed in the return stating which class lives are being elected out of 50% bonus.
50% Depreciation Available
2007 No
2008 Yes
2009 Yes
2010 Yes
2011 No
For those taxpayers that have profited even with the weak economy, these expanded depreciation incentives will enable taxpayers to plan their 2010 and 2011 capital expenditures and obtain very attractive tax results, thus helping to offset some of the taxable income.
Background
This legislation brings the second change of rules we have for depreciation for 2010. The changes enacted by the HIRE Act signed in to law on March 18, 2010 are no longer valid. The Section 179 level for 2010 started off at $134,000 and then went to $250,000 with the passage of the HIRE Act. Until now, 50% bonus depreciation had terminated for asset purchases after December 31, 2009. But that is now all changed.
Here is the New Stuff - Section 179 Allowance for 2010 and 2011
The Small Business legislation enacted in September 2010 increased the Section 179 expensing allowance to $500,000 for taxable years beginning in 2010 and 2011. The expensing allowance phase-out threshold has also been increased for qualifying property additions in the range of $2,000,000 to $2,500,000. The definition of qualified property under Sec. 179 remains virtually unchanged from prior law.
However, IRC Sec. 179(f) now allows Section 179 expensing (subject to a $250,000 expensing limit) for certain Qualified Real Property such as Qualified Leasehold Improvements, Qualified Restaurant Property, and Qualified Retail Improvement Property.
2007 $125,000
2008 $250,000
2009 $250,000
2010 $500,000 **
2011 $500,000 **
** $250,000 limit for Qualified Real Property
Congress has been using Section 179 expensing as a major stimulus provision for the past several years. So trying to guess what Section 179 limits will be in the future may be a futile activity, particularly with the recent tendency to enact these changes retroactively.
NOTE: For the record, IRC Sec. 179(b)(1)(C) now states that for tax years beginning after 2011, the Section 179 expensing limit is $25,000. This scheduled large reduction in the Section 179 level is actually designed to encourage capital investments in 2010 and 2011. If the large reduction actually occurs, it would be a major adjustment for many farm producers.
Retroactive Extension of the 50% Bonus Depreciation
The 50% bonus depreciation deduction is retroactively restored for qualified property acquired and placed in service prior to January 1, 2011. This means that qualified property placed in service after December 31, 2007 and before January 1, 2011 is eligible for the bonus 50% depreciation.
The definition of qualified property for the 50% bonus remains the same as under the law in effect for 2008 and 2009. To qualify, the original use of the property must commence with the taxpayer (i.e., the asset must be new rather than used), and the asset must meet the qualified property definition.
For trades, 50% bonus depreciation may be claimed on the entire adjusted tax basis of the new asset.
As a reminder, the bonus 50% depreciation is mandatory. However, the taxpayer can decline to take the 50% bonus on a class by class basis. An election statement must be placed in the return stating which class lives are being elected out of 50% bonus.
50% Depreciation Available
2007 No
2008 Yes
2009 Yes
2010 Yes
2011 No
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