November 2011


How are you feeling? In any group of four people are you the one sneezing and wheezing? 2011 has been a particularly bad year for the estimated 60 million Americans with allergies, who collectively spend $3 billion on over-the-counter allergy medicines. The fall allergy season in the northern states was about 27 days longer than in previous years, and runny noses ran well into November. More bad news: Spring allergies will start in February. This is distressing news, but what has it to do with taxes?

Just this, reminds CPE Link instructor, Albert Grasso who teaches individual and corporate tax updates: “Beginning in 2011, only insulin and doctor-prescribed medicine qualify for tax- free reimbursement through flexible health spending accounts.” People with chronic illnesses, such as allergy sufferers, who depend on drugs that have gone from prescription-only to over-the-counter, are going to feel some added pain at tax time.

Then in 2013, the chronically ill and others who make maximum use of flex-spend accounts will be squeezed by another change. The maximum contribution will be lowered to $2,500 a year. (Heads up to taxpayers with kids who need braces!)

The thinking behind these changes goes like this: health coverage will be more affordable, so people won’t need flex-spend accounts so much. Then the additional tax revenue collected will help to fund further healthcare reform.

If the flex-spend changes–or other legislative and non-legislative developments in individual taxes–give your clients heartburn, remember, they’ll have to buy Tums with after-tax dollars.

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As certain as death and taxes, accountants are sure to brush up against the law in the daily practice of their profession. “Every accountant needs a good working knowledge of the every-day legal matters that affect their clients financially,” says CPE Link instructor, Paul Jorgensen, founder of a Washington, DC law firm specializing in intellectual property and contract law. “A basic knowledge of the legal concepts involving contracts, intellectual property law, and the Internet makes you a more valuable financial professional. It helps you know when to enlist a lawyer and to recognize bad or wasteful lawyering,” says Jorgensen.

When he teaches accountants about basics of law, Jorgensen likes to start with contracts. Non-lawyers often think that contracts have to sound legal and the more legal-sounding the better. Nothing could be further from the truth, says Jorgensen. There’s a lot of bad legal writing out there and bad writing should send up red warning flags.

When it comes to the language of contracts, several rules apply. One is that “Simple words are best.” Start is better than commence. If is better than in the event that. Later is better than subsequent.

Another is “Always reject the passive voice.” Passive voice leaves too many questions, never a good thing in a contract.

Bad: “Use of Services shall be paid for by Tenant. Payments shall be received monthly for such Services.” Who uses the services? Who provides them? What are the payments for? Who receives them? How much are they?

Better: “Tenant will pay Landlord $65 for the Services on the third day of each month during the term of the contract.”

Once you cut through the bad legal writing, it’s easier to understand the essential contract provisions, not only in the contracts that accountants review for clients, but also in the contracts they make.

How often do you review contracts in which your client is a party? Do you always understand them?

It seems there is no rest for our hero Super Tax Preparer. Fresh from exploits with business tax changes, Federal payroll changes and business retirement plans, “Super” rolls up her sleeves and dons her cape emblazoned with her IRS-issued PTIN, to do battle with the onslaught of recent changes in the realms of corporate tax, partnerships, and audit issues.

New! HIRE Act provides a payroll tax credit for keeping HIRE workers for 52 weeks. What if a worker left voluntarily in week 51? What if an employer paid a worker less in the second 26 weeks than in the first 26 weeks? Does the employer still qualify for the $1,000 credit in 2011?

New! IRS introduces amnesty program for employers who’ve misclassified employees as independent contractors.
New! National Research Project (NRP) audits begin for employment tax returns—and they’ll be vigorous! The IRS wants know whom to audit and what issues to focus on.
New! Employee and self employed Social Security rate is decreased for 2011.

New! The built-in gains (BIG) recognition period for S Corporations is temporarily reduced to 5 years. Will a company that elected S corporation status effective June 1, 2006 have to pay any BIG tax on assets sold in 2011?

New! Percentage exclusion of gain for qualified small business stock purchase is increased. What percentage of gain can a noncorporate taxpayer exclude from income on the sale of small business stock issued on October 11, 2010? That depends on the gross assets of the small business and the length of time that the taxpayer holds the stock.

New! Form 1099 Reporting Requirements for Payments to Corporations are repealed.
New! Form 1099-K Credit Card Income must be reported on a separate line from cash and checks.
New! IRS wins first case on S Corporation More Reasonable Compensation
New! Registration is required of all tax return preparers in your office. Not just those who sign returns.
New! IRS can’t interview our clients after POA is signed; four IRS agents reprimanded.
New! Economic Substance Doctrine kills tax shelters. Be very careful.
New! IRS clarifies reasons for demanding QuickBooks (and other accounting software) files.
New! Reporting requirements required by Health Bill.
New! IRS eases collection practices.
New! Signed consent before releasing any tax info to third parties.

Ready to conquer these Federal Tax Updates, “Super” strides confidently into current Tax Season. And we wish you safe travels into yours!

The 2010-11 is a tax season to beat all tax seasons. “This year has brought us some of the most interesting tax changes we’ve seen in years—at least interesting to us tax accountants,” says Vern Hoven, CPA, EA and CPE Link instructor, who specializes in demystifying tax legislation.

Who can keep up with all the changes? In the continuing saga of Tax Update Adventures, our hero, Super Tax Preparer, takes on general business updates.

A teashop owner also collects and sells vintage teapots. Is her collecting activity a business or a hobby? Is she engaged in a unified business enterprise? Super Tax Preparer figures it out.

A film writer, director, and producer amasses an extensive collection of materials, including books, magazines, and photos related to the life a famous person, about whom he plans to make a movie. Since these items deteriorate over time, he wants to depreciate them. Super sets him straight.

Leonard wants to buy an SUV for his Ski Lodge business. Should he do it now or wait until January 2012? He’s thinking of a GMC Yukon or a Ford Excursion. Super Tax Preparer has tax-saving information about expensing and depreciation rules that could help him decide.

Mary, a self-employed architect, and her husband Joe each paid $1,200 of Medicare B premiums in 2011. In addition they each paid $3,000 of Medigap insurance premiums to AARP in 2011. Can Mary deduct $8,400 as self-employed health insurance? Super knows the answer.

These and millions more tax adventures await the special powers of our hero.

Speaking of federal tax changes, “This year has brought us some real doozies,” says Vern Hoven, CPA, EA and CPE Link instructor, who specializes in demystifying tax legislation.

In the continuing Tax Update Adventures, our hero, Super Tax Preparer snatches a businessman with more than 50 businesses from the jaws of tax disaster! How? By helping him take advantage of the tax relief provisions provided under the passive loss regulations.

Our businessman, let’s call him Mr. Benjamin, owns or partially owns real estate investment properties; interests in convenience stores, gas stations, and restaurants; gasoline-hauling trailers; and an airplane. He purchases and develops properties and leases them to Benjamin Management, Inc., which manages the day-to-day business operations through on-site managers. Benjamin is a 44.9% shareholder, and president, of Benjamin Management. If Benjamin elects to treat each separate business as a single activity, he will create extensive taxable rental income for himself as a landlord while simultaneously creating large nondeductible passive losses as the tenant! Both ways, he loses and the IRS wins. Benjamin’s use of multiple entities in which to operate his various businesses is very common but, as “Super” knows, it can lead to a disastrous tax result.

The worst case scenario: all his businesses that are profitable create “active” income and all his businesses that are generating losses create nondeductible losses, with no offsetting between the activities allowed!

What can Benjamin do? To avoid the passive loss rules, he’d have to “materially participate” in each activity to the tune of 500 hours at each of his 50 businesses. An impossible feat! OR he may aggregate, for passive loss purposes, two or more activities reported separately elsewhere on his tax return, into a single business activity.

“Super” knows that taxpayers now must annually report their groupings and regroupings of business activities to the IRS. But deciding how many different businesses to report on the Passive Activity Form 8582 is critical. “Defining separate activities too narrowly, or too broadly, can either lead to evasion of the passive loss rules or, more tragically, make it impossible for taxpayers to take advantage of the relief provisions available to them,” says Hoven.

There are about 140 million tax filers in the United States and this has been just one more of their stories.

Next, in Episode III of The Tax Update Adventures, Super Tax Preparer tackles Business Tax changes, Federal Payroll changes and Business Retirement Plans.

The scene is set. It’s the 2010-11 tax season and United States is hit by an outbreak of tax changes unlike the world has ever seen before. “This year has brought us some of the most interesting tax changes we’ve seen in years—at least interesting to us tax accountants,” says Vern Hoven, CPA, EA and CPE Link instructor, who specializes in demystifying tax legislation.

In this episode of Tax Update Adventures, our hero, Super Tax Preparer rescues individuals from paying unnecessary taxes and being subjected to the terror of audits.

“Super” saves Joe and Mary Smith from the double whammy of having their home foreclosed or sold short and then, POW, having the amount of the cancelled debt counted as “income” on which they owe tax. “Super” shows them how to avoid the dreaded “cancellation of debt.”

“Super” helps Carlos, a factory worker who is retraining for a new job, to take advantage of extensions to the American Opportunity Tax Credit by deducting all qualified tuition costs, which now includes the cost of books. Joe breathes a sigh of relief because books have added $3,000 to the cost of his engineering degree.

Wealthy and philanthropic Mary, age 72, changes the world AND avoids paying income tax on the minimum IRA distribution she must take but doesn’t need by giving it directly to her favorite cause–thanks to the advice of “Super Tax Preparer,” her savvy accountant.

Registered domestic partners, parents of dependent children, investors, buyers of electric cars, and home remodelers are also among the countless individuals helped to pay their rightful tax and no more through in depth understanding of recent tax updates.

There are about 140 million tax filers in the United States and these are just a few of their stories.

In Episode II of The Tax Update Adventures, Super Tax Preparer tackles cases of real estate tax, passive loss, and Estate and Gift Taxation. Stay tuned…