Tax Issues and Planning 2011

A Global Reach with a Local Perspective

2011
Rocket City
Gov Con
Conference

September 22, 2011

www.decosimo.com

Tax Issues and Planning 2011
JOHN HENEGAR, CPA

Please Note
 This information is for educational purposes only
and should not be relied on or used for taking a
position on any tax return.

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(c) 2011 Joseph Decosimo & Co., PLLC

Agenda for Today
 Business Planning
 S Corporation Trends
 Current Business Tax Incentives
 Corporate Loans
 IRS Initiatives
 Alabama Update

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Agenda for Today
 Individuals
 ROTH IRA’s
 Losses in IRA’s & 529 Plans
 Federal Estate & Gift Tax changes
 Excluded Capital Gain
 Foreign Financial Asset Reporting

4


Agenda for Today
 Known Legislative Changes
 Being Discussed

5


S Corporations-Trends
 IRS loves S Corps
 National Research Program (audits)
 2010-2012; 2,000 returns per year
 Employee vs. independent contractor
 Reasonable compensation
 Mr. Watson (Watson v. US 107 AFTR 2d 2011-311)
 Mr. Renkemeyer (Renkemeyer, Campbell & Weaver,
LLP 136 TC No 7)

6


Current Business Tax Incentives
 Starting in 2010 Health insurance 35% credit 24 or <
employees, average wage <$50,000.
 100% Bonus depreciation for new property
scheduled to drop to 50% in 2012.
 $500,000 maximum 179 deduction (first year
expensing) for 2011, phase out starts at $2 million of
expenditures. 2012 $125k/$500k
 Up to $250k expensing of qualified real property in
2011.
 Non residential interior costs at least three years after
7 building placed in service.


Current Business Tax Incentives
 2011
 Standard mileage rate 51 cents January-June
 Increased to 55.5 cents July-December
 Personal exemption $3,700
 Standard Deduction
 Single $ 5,800
 Married $11,600

8


Loan or Dividend
 Knutsen-Rowell, Inc. TC Memo 2011-65
 Earmarks of a loan
 Written note or other instrument
 Interest charge
 Scheduled repayments
 Secured by collateral
 Repayments actually paid
 Can borrower repay, solvency of lender
 How the parties treat the transaction
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IRS Initiatives
 IRS facing severe staffing crisis, no reduction to
workload
 Use of Electronic Accounting Software Records;
Frequently Asked Questions
 IRS Information Document Requests will now
routinely request electronic backup files:
 CD
 DVD
 Flash/jump drive

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IRS Initiatives
 Passwords and Security
 Information beyond just verifying what is on the
return
 IRS will examine how transactions were originally
posted
 Multiple year data
 Authority
 IRC 7602(a); 6001
 Regulation 1.6001-1(a) and 1(e)
11  Rev. Rul. 71-20; Rev. Proc. 98-25


IRS Initiatives
 Note FAQ # 7
 Consider your record retention policy

12


Alabama Update
 Act 2011-551 (HB 230) Full Employment Act of 2011
years beginning on or after January 1, 2011
 Incentive for job creation
 AL income tax credit for small businesses that have
50 or fewer workers
 That create new jobs paying at least $10 per hour
 $1,000 credit available in tax year employee
completes one year service
 Must be a net increase year over year
13


Alabama Update
 Act 2011-616 (HB 434)
 Double weights sales factor for business income
apportionment
 Sources revenues based on “market” rather than
“cost of performance”

14


Alabama Update
 Act 2011-644 (SB 395)
 Deduction allowed for retrofitting homes against
catastrophic windstorm events
 Hurricane, tornado, etc.
 Deduction = the lesser of 50% of cost or $3,000

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ROTH IRA’s
 Favorable attributes
 No age limit for contribution
 Participation in employer plan and ROTH
 Earned income-THINK CHILDREN
 NO RMD
 Tax free income to beneficiaries
 Unfavorable
 2011 phase out
 Single individual $107k-122k
16  Married-joint $169k-$179k


ROTH IRA’s
 2011 contribution limits
 $5,000
 $6,000 (age 50 and older)

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Losses in IRA’s & 529 Plans
 Proceeds – Basis = Loss
 Miscellaneous itemized deduction
 Must liquidate all accounts in individual’s name
 10% penalty in play for traditional IRA
 See IRS Notice 89-25; Publication 590
 ROTH accounts have basis
 Beware the 10% penalty if ROTH has conversion
proceeds
Limited ability to rebuild the accounts
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Federal Estate and Gift Tax
 Late legislation increased the federal estate and
lifetime gift exemption to $5 million
 Effective through 2012
 2013 exemption scheduled to return to $1 million
 Depressed values today
 Valuation discounts have unknown future
 Perfect storm for family transfers/sales

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100% Gain Exclusion
 Section 1202, Qualified Small Business Stock
(QSBS)
 QSBS, not personal services, financial services or
hospitality services
 Not more than $50 million in assets
 Five year holding period
 Acquired after September 27, 2010 and before
January 1, 2012
 Gain excluded from income, not an AMT preference
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100% Gain Exclusion
 Must be a C corporation
 Noncorporate owner
 Annual gain exclusion is the greater of
 $10 million (less previously excluded gain), or
 10 times the basis of the shares sold

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Not Excluded but Deferred
 Failed 5 year holding period
 Section 1045 deferral
 Sold at a gain
 Held more than 6 months
 Reinvested in another QSBS within 60 days

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Foreign Financial Assets for HIRE
 HIRE Act expanded reporting requirements
 Years beginning after March 18, 2010
 IRC 6038D requires reporting for any individual who
holds > $50,000 (in aggregate) ANY:
 foreign financial account in a foreign institution,
 foreign stock,
 interest in a foreign entity, or
 financial instrument with a foreign counterpart not
held in an institution
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Foreign Financial Assets
 Reported as part of the individual tax return
 Does not replace FBAR
 New form 8938
 Penalty for failure to report $10K up to $50K
 Reasonable cause available
 2013 Foreign Account Tax Compliance Act (FATCA)

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 Statute of Limitations
 Six year statute for omissions of > $5K income from
one or more reportable foreign assets regardless of
value
 Statute of the entire return is suspended for failure
to disclose/file certain information related to foreign
operations or transactions

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 Notice 2011-55
 Draft form 8938

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Disclosure
 Form 926-transfer of property to foreign corp.
 Form 3520-transactions with foreign trusts
 Form 5471-information with respect to foreign corps.
 Form 5472-foreign owed US company/foreign corp.
engaged in US trade or business
 Form 8621-shareholder of PFIC or QEF
 Form 8858-foreign DRE
 Form 8865-foreign partnerships

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Known Changes
 Without further legislative action these tax changes
will occur:
 Sales tax deduction gone after 2011
 Bush tax reductions sunset 12-31-2012
 Max individual rate 39.6%
 Dividends taxed as ordinary income
 Capital gains 20%/18% acquired after 2000 and held
for 5 years
 Most enhanced deductions and credits for individuals
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Known Changes-2013
 0.9% Medicare surtax on higher wage earners, $200k
single/$250k married-joint
 3.8% Medicare surtax on “Net Investment Income
 $200k single/$250k joint threshold
 Tax applied to the lesser of:
 1. Net investment income
 2. Modified Adjusted Gross Income>Threshold
 Net Investment Income
 Interest, dividends, rents, capital gains, royalties, annuities
 Also, Income from Passive Activities
29  Applies to trusts also


Known Changes-2013
 $2,500 cap on FSA Contributions
 Medical deduction threshold up to 10%

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Being Discussed
 President’s proposed American Jobs Act:
 50% reduction in payroll tax on employers’ first $5
million of payroll
 NO Payroll tax for firms that add workers or increase
payroll (capped at $50 million)
 100% Bonus depreciation extended through 2012
 Up to $9,600 of tax credits for hiring veterans
 $4,000 tax credit for hiring long term unemployed
 50% reduction in employee share of payroll tax

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Being Discussed
 Joint Select Committee (super committee)
 5.4% tax surcharge income > $1 million
 Repeal Bush cuts in 2012
 Deny passports if an individual owes unpaid federal
taxes of $100,000 or more
 Repeal MACRS replace with ADS
 Company owed aircraft depreciated over 7 years
rather than the current 5 years
 Professional “S” corporation income subject to SE
tax

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Being Discussed
 Eliminate Section 199 (DPAD)
 No more LIFO
 Capping mortgage interest deduction
 Eliminate interest deduction for second homes and
home equity loans
 Capital gains becomes a tax preference item
 No more LKE
 Repeal cafeteria plans
 Gifts of property limited to basis
 Restricting charitable contributions
 Tax SS as pensions
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Annual Tax Seminar
 Save the Date!
Decosimo’s Tax Seminar
Nov. 15th
Receive up to 8 hours of CPE
 Find more information online at:
http://decosimo.com/2011taxseminar
 Or See a Decosimo Representative

Connect with me

John E. Henegar, CPA
Principal
423.756.7100
johnhenegar@decosimo.com

On LinkedIn:
http://www.linkedin.com/pub/john-
henegar/26/86a/291

Disclaimer:
The contents of this presentation are for informational purposes only. The information is not intended to be a substitute for
professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you
may have regarding your financial goals or specific situations.

Tax Issues and Planning 2011

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