• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phase-out amount will drop to $560,000, and expensing won't be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year write-off generally won't be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won't be available for workers hired after this year.
• Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.
• If you are self-employed and haven't done so yet, set up a self-employed retirement plan.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

 

• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.
• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.
• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won't create an alternative minimum tax (AMT) problem.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated.
• Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won't be available after 2011.
• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year. 
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.
• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-�. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012—the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012—bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

 

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

 

David C. Onkka, PC and Brady Martz are pleased to announce that Dave Onkka, CPA, and his staff has joined the accounting practice of Brady Martz effective October 1, 2011. The combined firm will continue to operate under the name of Brady, Martz & Associates, PC.

 

Onkka is the third owner of the firm that started in 1956 under Eugene Nesland’s ownership. Ron Winter purchased the firm in 1984. Onkka joined the firm in 1991, eventually purchasing it from Winter in 2004. David C. Onkka, PC is a full service accounting, tax and consulting firm with 6 employees in Thief River Falls, MN.

 

Dave Onkka said, “We are excited about joining Brady Martz. It will allow us to better serve our clients by utilizing the additional resources and broader areas of expertise available with a firm the size of Brady Martz.”

 

Brady Martz was founded in 1928. The firm has offices in Grand Forks, Minot, Bismarck, Dickinson and Williston, ND and Thief River Falls, MN. Brady Martz is a full service accounting, tax and consulting firm with specialization in a wide range of industries including financial institutions, construction, health care, manufacturing, governmental, auto dealerships, public utilities, not-for profits, Native American tribes and agricultural.

 

Ron Johnke, president of Brady Martz said, “Brady Martz has a long history of providing professional services in North Dakota and Northwestern Minnesota. We feel fortunate to be expanding our presence in Thief River Falls and Northwestern MN, with a firm of the caliber and quality of Dave Onkka’s.”

 

Dave Onkka became a shareholder of Brady Martz effective October 1, 2011. Brady Martz has six offices and 170 employees, including 30 shareholders, serving over 10,000 clients.

The Alternative Minimum Tax (AMT) attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. 

Here are facts you should know about the AMT and changes to this special tax. 

 

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting taxpayers who could claim so many deductions they owed little or no income tax.

    

2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

    

3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

    

4. The AMT exemption amounts are set by law for each filing status.

    

5. For tax year 2010, Congress raised the AMT exemption amounts to the following levels:
   • $72,450 for a married couple filing a joint return and qualifying widows and widowers;
   • $47,450 for singles and heads of household;
   • $36,225 for a married person filing separately.

    

6. For tax year 2011, Congress raised the AMT exemption amounts to the following levels:
   • $74,740 for a married couple filing a joint return and qualifying widows and widowers;
   • $48,450 for singles and heads of household;
   • $37,225 for a married person filing separately.

    

7. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,700 for 2010 ($6,800 in 2011).

    

8. An individual’s AMT exemption is subject to certain phase-out (reduced) rules. 

 

 

During the 2010 year we have seen a lot of changes, modifications and reversals in our federal tax laws.  There was the Small Business Jobs Act (SBJA) of 2010.  Then there was the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which essentially had something for everyone.  Our goal and focus is to briefly outline what has happened to bonus deprecation and what it means to businesses. 

 

What is bonus depreciation and why is it important?  Depreciation is a reasonable allowance for the exhaustion, wear and tear, and obsolescence of certain types of property used in a trade or business.  Depreciation allows for part of the property’s cost to be expensed annually, over a period of time defined by our tax laws.  Those times periods are commonly called property class lives. 

 

Bonus deprecation allows taxpayers to temporarily increase the amount of deprecation they may claim in the year of acquiring the qualified NEW (not used) property, thereby accelerating deductions and potentially reducing taxable income.  In recent history bonus depreciation has been set at the 30% and 50% levels, and now there is 100% bonus deprecation (effectively letting the taxpayer immediately expense the entire cost of the qualified asset).  There are very few limitations on bonus depreciation, and the taxpayer can even elect to not take bonus deprecation.  However, any such election has to apply to ALL assets within that property class life. 

 

On December 31, 2009 bonus depreciation expired.  However, on September 27, 2010 SBJA brought bonus depreciation back to life, retroactively reinstating it for the entire 2010 year.  Since bonus deprecation is effective on a calendar year basis, the retroactive application has caused serious challenges for fiscal year corporations that completed their tax planning, or filed their tax returns, without the additional bonus deprecation.  The additional bonus depreciation may result in a much lower income (maybe lower than desired) if bonus depreciation is taken on the entire property class, or a much higher taxable income if the taxpayer elects out of bonus depreciation for that entire property class.  Further, if the fiscal year taxpayers have already filed their taxes, taxpayers will need to amend the tax filings to address the additional bonus deprecation. 

 

For qualified property acquired, AND placed in service after September 9, 2010 through 2011 there is now 100% bonus deprecation.  The same bonus rules apply, just the percentage has changed.  Bonus depreciation will generally revert to 50% for 2012.  It should be noted that if bonus deprecation is taken in 2010, there will potentially be assets subject to 50% bonus while others will be subject to 100% bonus.  You cannot elect between the two percentages.  If the election is made to not take bonus, that election is effective as to ALL assets in that property class, regardless of the 50% or 100% bonus levels. 

 

Caveat:  A number of states have chosen to not follow the federal rules and as such there may be state specific issues and adjustments to taxable income. 

 

 

Scott Hasbrouck, CPA

Shareholder

Brady, Martz & Associates, P.C.

 

Do you have what it takes to outlast your business? All too often, business owners, directors and managers hurt the long-term survival of their companies because they either don’t realize their shortcomings or lack the ability to do something about them before it’s too late.

A recent study conducted by the Guardian Life Small Business Institute discovered six traits that characterize success-oriented small business owners. How many of these traits do you have? How can you make up for areas of weakness? Here are some pointers.

1. Collaborate, But Also Motivate
   According to the study, effective delegation and building strong personal relationships with employees, customers and third-party providers are key components to true collaboration. However, collaboration is more than simply asking someone to take on a task. A leader empowers others to stretch and go beyond their comfort zone by creating opportunities that otherwise would not have existed.
   
   Avoid creating opportunities just for the sake of goodwill. Helping someone without any inherent personal or professional benefit might be seen as busywork without a purpose. Have a clear plan in mind with a substantial measurement component so that all activities can be properly evaluated.

    

    

    

2. Self-Fulfillment
   Remember when a job was just a job instead of a career? Successful owners and professionals definitely want to enrich their careers by focusing on continuous improvement and lifelong learning. The owner is the heart and soul of the business, so how can the owner expect others to experience success if he or she has a lack of interest?
   
   Much like the pros write their own job descriptions to match their skills, leaders should create an environment that gives their employees this much-needed validation. At its core, this can be done by creating a dynamic set of annual goals. And yes, even the head of the company should have goals.

    

    

    

3. Stay Focused on the Future
   We’ve all known CEOs and owners who run their companies by the seat of their pants. Ask them for their long-range business plan and you’re likely to receive the company’s mission statement. The well-adjusted, seasoned professional on the other hand has an ever-watchful eye on the future for the well being of all employees and customers.
   
   While a view to the future may seem hypothetical to some, it’s worth it to conduct an annual blue sky session. With unlimited funds and the staff to make anything happen, what would your future look like? Once the blue sky ideas are discussed, the company can begin to break these ideas down into more viable chunks.

    

    

    

4. Be as Curious as Possible
   All of us can learn life lessons from Curious George, the monkey who constantly got in trouble while metaphorically learning how to handle any malady that came his way. Curiosity was discovered as one of the six traits in the study because business owners, like entrepreneurs, have a natural curiosity about all kinds of matters. This makes perfect sense; if the leader of a company is not naturally interested in everything, how can he expect others to be curious?

    

    

    

5. Learn About Technology
   This trait is self-explanatory. No matter what kind of technology infrastructure a company has, today’s business owner must know more than just how to turn on a computer. Although the leader does not have to be certified in systems and processes, a working knowledge of technology is very important. Too much of our world focuses on technology as an enabler. One of the best ways to learn more about it is to read about best practices in similar industries, attend technology conferences and have conversations with colleagues and IT professionals.

    

    

    

6. Be Part of the Action
   The final trait seemingly complements most of the other traits and is designed to propel a company from “doing business as usual” to “let’s blow their socks off.” Leaders who are action-oriented get things done. They are the visionaries who know that their business cannot remain complacent. This is also a great time to involve other leaders in the company because it is through this collective brain trust that a business can truly succeed.

    

    

    

Business owners and upper management have a great deal on their plates, especially in this economy. However, they must pay attention to how the company improves the bottom line instead of just assuming improvements occur organically. These traits paint an accurate picture of a business leader who is confident, well-adjusted and nurturing of others.

Everyone knows the cost of college tuition has skyrocketed to almost incomprehensible levels. According to CollegeBoard.com, the average tuition and fees for in-state students at a public four-year college is $7,020, while the average full-time, out-of-state price tag is $11,528.

Compare that to private four-year colleges that charge an average of $26,273 per year in tuition and fees, and the numbers can make any student – and most parents – extremely nervous.

Thank goodness for education tax credits that provide tax relief. However, students and parents alike must pay attention to some very important changes in several of the key plans.

What Stays the Same?

The American Opportunity Credit does not change for 2010 or the foreseeable future. This plan offers a tax credit of up to $2,500 per student in 2010, available up to 100 percent of the first $2,000 in qualified college costs and 25 percent of the next $2,000. To get the full credit, parents or students must spend at least $4,000 on qualified expenses.

The American Opportunity Credit applies to all families – even if they do not owe any federal taxes. Forty percent of the credit is refundable, so the family could receive a check from the government for an amount up to $1,000.

What’s Set to Expire?

The Hope and Lifetime Learning Credit is set to expire on Dec. 31. While there is speculation that Congress might extend the credit, it is not known when that will actually happen.

Originated during the Clinton administration, the Hope and Lifetime Learning Credit is available for married couples with modified adjusted gross income of up to $160,000. This credit carries with it the same threshold as the American Opportunity Credit of $4,000 on qualified expenses.

Based on the cost of an in-state college, it’s not hard to see how the $4,000 can be easily reached. However, many students attend two-year colleges where the tuition price tag is much less –an average of $2,544 per year in tuition and fees.

If you have cash on hand, prepaying tuition and expenses is a way to reach the $4,000 in qualified expenses before Dec. 31. For example, there are no rules prohibiting anyone from prepaying tuition. Most colleges post 2011 invoices before Dec. 31. If the bill is paid in 2010, taxpayers can claim the credit on their 2010 tax return.

Textbooks and course materials are qualified expenses in the American Opportunity Credit, so consider buying spring 2011 textbooks in 2010 and claim the credit on the 2010 return.

A special note on 529 college savings plans. Popular since they were created in 1996, the 529 plan helps families set aside money for future college costs. Withdrawals are tax-free if they are used for educational purposes, but if you take advantage of the American Opportunity Credit or the Hope and Lifetime Learning Credit, paying for college out of a 529 is considered double-dipping.

Instead, advisers suggest using a 529 plan to pay for costs that aren't covered by the tax credit, such as room and living expenses.

What Becomes Less Advantageous

As of Dec. 31, Coverdell Education Savings accounts will become much less attractive. Annual contributions will shrink to $500, tuition for primary and secondary schools will no longer be a qualified expense and a portion of withdrawals taken after Dec. 31 will be taxed.

Established in 2002, the Coverdell Account enables families to contribute up to $2,000 a year in a portfolio of mutual funds or other investments. These are classified as after-tax contributions, but withdrawals are tax free as long as the money is used for qualified expenses, including college-related costs or tuition at a primary or secondary school.

If you have a Coverdell account, you can roll it into a 529 college savings plan with no tax liability. Withdrawals from 529 plans are tax-free as long as the money is used for qualified expenses.

As always, it’s best to consult your accountant for the most current information.

In mid-September, President Obama proposed expanding the research and development of a tax credit that was first enacted in 1981 – and making the benefit permanent. The provision, which has been extended some 13 times since 1981, provides companies that perform technological research with tax breaks on the cost of payroll, supplies for research workers and on 65 percent of the costs for paying contractors, as long as all the work performed is U.S. based.

Could your business be eligible for the R&D credit? Even if you haven’t considered this possibility before, why not think about it now? To qualify, the research undertaken must be technological in nature and involve new methods to improve or develop new products or processes. Here are some factors and questions to consider.

1. You don’t have to be a rocket scientist to qualify. If your business is based on scientific principles (e.g. environmental cleanup, remediation, recycling processes, heating and air conditioning, etc.), you might qualify for the R&D tax credit.
2. The exemption covers new or improved products or processes – a very general definition – but bear in mind your backup documentation to support your exemption claim must be very specific.
3. Can you document the project(s) undertaken as R&D in appropriate detail?
4. Do you have good documentation to date? Review what’s on hand with your project leader. If more thorough reporting is needed, implement the necessary procedures now.
5. Can you identify employee and out-of-pocket costs and expenses specifically earmarked and spent on R&D?
6. Can you determine how much you are spending on qualifying projects, and if they meet the IRS’ benchmarks? Currently the IRS accepts two ways of measuring R&D expenditure, though the president has proposed changes to simplify the calculation and potentially encourage more companies to seek the credits.

If this looks like it might work to your advantage, don’t wait until tax season is upon us. Confer with your professional tax advisor now to determine if your business might be eligible for the credit. If it is, your tax professional can determine the best way to generate the records and data needed to support your claim. He or she can also help you modify your existing accounting procedures to make the identification of R&D costs simpler when filing time comes around. Project-based accounting procedures are generally more helpful than cost-center based systems.

Your tax professional can also explain how the IRS determines if you are spending enough to qualify for a credit. The older and more complicated way of calculating overall R&D expenditures requires looking at expenses as a percentage of revenue over a period of time. The simpler method – and the one supported by President Obama – involves developing an average R&D expenditure over a three-year period, determining a base amount and calculating the tax credit on how much was spent above that base amount. The simpler calculation Obama proposes would provide a better return for most businesses. Don’t worry if you don’t have a three-year track record, as there are ways for startups to get R&D tax credits, too. Consult your tax advisor for more information. In mid-September, President Obama proposed expanding the research and development of a tax credit that was first enacted in 1981 – and making the benefit permanent. The provision, which has been extended some 13 times since 1981, provides companies that perform technological research with tax breaks on the cost of payroll, supplies for research workers and on 65 percent of the costs for paying contractors, as long as all the work performed is U.S. based.

Could your business be eligible for the R&D credit? Even if you haven’t considered this possibility before, why not think about it now? To qualify, the research undertaken must be technological in nature and involve new methods to improve or develop new products or processes. Here are some factors and questions to consider.

1. You don’t have to be a rocket scientist to qualify. If your business is based on scientific principles (e.g. environmental cleanup, remediation, recycling processes, heating and air conditioning, etc.), you might qualify for the R&D tax credit.
2. The exemption covers new or improved products or processes – a very general definition – but bear in mind your backup documentation to support your exemption claim must be very specific.
3. Can you document the project(s) undertaken as R&D in appropriate detail?
4. Do you have good documentation to date? Review what’s on hand with your project leader. If more thorough reporting is needed, implement the necessary procedures now.
5. Can you identify employee and out-of-pocket costs and expenses specifically earmarked and spent on R&D?
6. Can you determine how much you are spending on qualifying projects, and if they meet the IRS’ benchmarks? Currently the IRS accepts two ways of measuring R&D expenditure, though the president has proposed changes to simplify the calculation and potentially encourage more companies to seek the credits.

If this looks like it might work to your advantage, don’t wait until tax season is upon us. Confer with your professional tax advisor now to determine if your business might be eligible for the credit. If it is, your tax professional can determine the best way to generate the records and data needed to support your claim. He or she can also help you modify your existing accounting procedures to make the identification of R&D costs simpler when filing time comes around. Project-based accounting procedures are generally more helpful than cost-center based systems.

Your tax professional can also explain how the IRS determines if you are spending enough to qualify for a credit. The older and more complicated way of calculating overall R&D expenditures requires looking at expenses as a percentage of revenue over a period of time. The simpler method – and the one supported by President Obama – involves developing an average R&D expenditure over a three-year period, determining a base amount and calculating the tax credit on how much was spent above that base amount. The simpler calculation Obama proposes would provide a better return for most businesses. Don’t worry if you don’t have a three-year track record, as there are ways for startups to get R&D tax credits, too. Consult your tax advisor for more information.

After several failed attempts to arrive at a consensus, Congress finally passed the Small Business Jobs and Credit Act. This vital new legislation, which President Obama signed on September 27, 2010, provides various tax incentives targeted to small business owners.

 

 

Here are several key provisions in the new law:

 

 

More Stimulus for Job Creation

 

    The Small Business Jobs and Credit Act aims to create as many as 500,000 jobs through a $30 billion fund that will provide local community banks with capital to lend small business owners.

    The idea is to provide capital to start-up businesses and small enterprises that want to expand and hire new workers. Currently, large banks generally are not lending to small businesses, which create many of America's jobs.

    The law includes provisions to:

 

• Boost the Small Business Administration (SBA) maximum amount available to help start a business or help cover short-term capital requirements.
• Increase to 90 percent from 75 percent the amount of the loans that the SBA will guarantee. If a small business owner defaults, the bank that lent the money would take a maximum hit of 10 percent. This is aimed at encouraging local banks to lend to businesses that may be in trouble.
• Extend the elimination of SBA fees charged to originate loans.

   To help ensure that the money helps generate employment, the program will be overseen by Congress, the U.S. Accountability Office and the Inspector General.

   Even if a business appears small, it may not qualify for the loans. The definition of a small business is determined by annual sales, number of employees and the company's industry. To see if an enterprise qualifies, click here to go to the SBA's table of standards.

   While most business organizations applauded the new law, some are criticizing it. Critics argue the money will go to more mature businesses that aren't hiring rather than start ups and enterprises that want to grow. They note that while the law gives access to capital, it doesn't require banks to lend and in the current economic climate, many small businesses don't want to borrow or hire.

 

Revenue-Raisers: How Did Congress Pay for the New Law? 

 

    To offset the cost of the tax incentives in the Small Business Jobs Act, the new law imposes several revenue-raisers, including:

 

 

• New information reporting requirements on rental real estate activities for annual payments of $600 or more made after December 31, 2010. In other words, landlords will have to file 1099 forms for service providers, such as plumbers, painters and landscapers.
• Increased failure-to-file penalties on information returns.
• Allowing levies to be issued against federal contractors prior to a collections due process hearing.
• Treatment of debt guarantees by certain foreign entities as U.S. source income.
• Increased estimated tax penalties in 2015 for large corporations.

 

Enhanced Section 179 depreciation deductions: Under Section 179 of the Internal Revenue Code, a business can currently deduct the cost of qualified property placed in service during the year, within an annual limit. Prior to the new law, the limit for 2010 was $250,000, although the maximum deduction was subject to a phase-out for annual purchases above $800,000. The new law increases the maximum deduction to $500,000 for 2010 and 2011 with a phase-out threshold of $2 million. Eligible assets include computers, office equipment, and furniture. Certain real estate improvement costs now qualify for Section 179 deductions of up to $250,000.

 

 

 

"Bonus depreciation" is back: The new law also restores the bonus depreciation tax break, which expired after 2009. A business may claim a deduction equal to 50 percent of the cost of qualified assets, which include vehicles. (An additional year of bonus depreciation through 2011 is allowed for property with a cost recovery period of ten years or longer and certain transportation property.)

 

 

Note: There is a tax-saving opportunity for businesses that are able to take advantage of both the Section 179 deduction and 50 percent first-year bonus depreciation. These two breaks can be combined to offset a large part, or perhaps all, of a company's major acquisitions for the year. While larger businesses may be ineligible for the Section 179 deduction, 50 percent first-year bonus depreciation is available to any business regardless of size.

 

 

S corporation disposition rules are eased: After a C corporation converts to S corporation status, it may be liable for the "built-in gains" (BIG) tax if it sells or otherwise disposes of appreciated property within a specified time period. The normal recognition period of ten years was shortened to seven years for dispositions in tax years beginning in 2009 and 2010. The new law reduces this period still further to only five years for dispositions in tax years beginning in 2011.

 

 

Start-up expense deductions increase: Prior to the new law, a taxpayer could deduct up to $5,000 of qualified business start-up expenditures for new ventures just getting off the ground. The maximum $5,000 deduction was phased out for expenses over $50,000. The new law doubles the maximum deduction for 2010 to $10,000 with a $60,000 phase-out threshold. Note that these figures are scheduled to revert to their prior amounts in 2011.

 

 

Restrictions on business credits removed: With limited exceptions, general business credits cannot be used to offset a taxpayer's alternative minimum tax (AMT) liability. The new law removes this restriction for "eligible small businesses." To qualify, average annual gross receipts of a non-public corporation, partnership or small proprietorship for the prior three years can't exceed $50 million. In addition, beginning in 2010, an eligible small business may carry back general business credits for five years instead of one year.

 

 

Qualified small business stock gets better tax treatment: Assuming certain requirements are met, an investor in "qualified small business stock" may exclude part of the gain from the sale of the stock after a five-year holding period. Normally, the tax exclusion is 50 percent for QSBS which is taxed at the 28 percent rate, but the 2009 stimulus law increased the exclusion to 75 percent foar acquisitions after February 17, 2009 and before January 1, 2011. Now the new law allows a 100 percent exclusion for acquisitions from the date of enactment through December 31, 2010.

 

Cell phone recordkeeping is less burdensome: Previously, cell phones were treated as "listed property" for tax purposes, therefore triggering the same strict substantiation rules that apply to business use of vehicles. In other words, in order to claim deductions, you had to track your business and personal use. The new law removes these requirements for cell phones and similar communication devices and treats employer-provided devices as tax-free fringe benefits.

 

Self-employed taxpayers get a break on health insurance costs: A self-employed individual must pay self-employment tax comparable to the Social Security tax paid on employee wages. For 2010, eligible self employed people can deduct health insurance premiums from the self-employment income subject to employment tax. This tax break is a limited one-year window of opportunity.

 

Contributions to Roth accounts are made easier for some taxpayers: Roth IRAs provide tax-free treatment for qualified distributions. Beginning in 2011, participants in state and local government-operated 457 plans (other than employees of nonprofits) can contribute deferred amounts to designated Roth accounts. Participants in 401(k) and 403(b) plans already have this ability. Also, participants in 401(k), 403(b) and 457 plans can roll over account balances to a Roth, subject to tax on pre-tax contributions and earnings. This provision takes effect on the date of enactment. For rollovers in 2010, you can opt to have the taxable income split between 2011 and 2012.

 

Small business owners and individuals may want to take action before the end of the year based on these significant new law changes. Consult with your tax adviser about your situation.

 

The First Time Homebuyer Tax Credit was extended through April 30, 2010.  Additionally, effective November 7, 2009, qualified “Long-Term Residents” may qualify for their version of the home buyer credit (up to $6,500).  GENERALLY, the ability to qualify for the home buyer credit expires on April 30, 2010; it is possible to extend the tax credit time period to June 30, 2010 if there is a qualified written binding agreement (see below) in place.  Here are some helpful tidbits regarding the home buyer credit and how it relates to new construction and/or Long-Term Residents:

 

 

 

 

 

 

 

 

 

These tidbits are specific to certain situations and do NOT address all aspects of the First Time Homebuyer Tax Credit.  You should coordinate these activities with your tax adviser.  If Brady Martz can assist you with your tax planning needs and/or the home buyer tax credit please contact us.   You can contact us at one of our six offices or by contacting the Tax Services Contact. 

 

Our office is aware of several e-mails that have been received by taxpayers, purportedly from the Internal Revenue Service.  The e-mails are FRAUDULENT and are usually “phishing” schemes where the sender seeks to trick the recipients into providing personal and financial information that can be used to gain access to, and steal the e-mail recipient’s assets.  The fraudulent e-mails are an ongoing concern and taxpayers have to exercise caution to protect themselves and their assets.

 

The e-mails commonly claim to be about tax refunds or unreported income.  Common phishing e-mail subjects have been:

 

 

The Internal Revenue Service DOES NOT use e-mail to initiate communications with taxpayers.  If you receive e-mail that claiming to be from the Internal Revenue Service, you should view the e-mail as being fraudulent.  The IRS recommends that you:

 

 

The Internal Revenue Service has a webpage which provides additional guidance on different types of scams (e-mails, letters, telephone), how to protect yourself and what to do if you are contacted by the scam e-mails or bogus websites.  You may learn more from the Internal Revenue Service at:

 

http://www.irs.gov/newsroom/article/0,,id=155682,00.html

 

If Brady Martz can be of assistance please do not hesitate to contact one of our offices. 

 

College can be very expensive. To help students and their parents, the IRS offers the following five ways to offset education costs.

1. The American Opportunity Credit

This credit can help parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.

2. The Hope Credit

The credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009 a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as you do not claim an American Opportunity Tax Credit for any other student in 2009.

3. The Lifetime Learning Credit

This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years in the program.  Eligible taxpayers may qualify for up to $2,000 – $4,000 if a student in a Midwestern disaster area – per tax return.

4. Enhanced benefits for 529 college savings plans

Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan.  For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.

5. Tuition and fees deduction

Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.

You cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year. You also cannot claim any of the credits if you claim a tuition and fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.