Report

Under the new laws, businesses will report aggregated payments of $600 or more to all vendors, including corporations – but not tax exempt organizations – for goods, as well as services. Purchases affected could range from inventory, hotel and travel expenses to electricity bills. Presumably, they could even include multiple business meals at the same restaurant, office supplies, equipment and payments to foreign vendors. The new provisions will require businesses to track all payments made directly or through their employees or owners.

For the first time, taxpayers receiving income from renting real estate should be aware of their new information-reporting responsibilities for 2011. For this purpose only, rental income recipients are subject to the same requirements as a trade or business, even if they are not otherwise treated as engaged in the trade or business of renting real estate.

Under a proposed regulation, many business purchases made with credit or debit cards would be exempt from the new reporting requirements, because they are already reported by banks and other payment processors.

Action plans should identify all reportable transactions, characterize the type of payment, and develop a process to aggregate payments by reportable entity.

Collect

Implementing this change may require collaboration among businesses, software vendors or other consultants and CPAs. Businesses routinely collect name, address and taxpayer identification numbers (TIN) of payees for performance of services. However, businesses probably don’t routinely obtain a TIN and W-9 from every party with whom they make a purchase, including those payments reimbursed to an employee.

Action plans should identify the appropriate modifications to payment voucher or expense recording software, and to systems for sorting and reporting payment transactions. Also, if you expect the new requirements to increase required information returns to be 250 or greater, electronic filing will be mandatory.

Comply

Penalties for failure to file information returns correctly, and by the prescribed filing date, double and maximum penalties allowed increase three to five times previous limits. For each information return required to be filed on or after Jan. 1, 2011, the first-tier penalty increases from $15 to $30; the second-tier penalty from $30 to $60; and the third-tier penalty from $50 to $100. For small business filers (those with average annual gross receipts under $5 million), the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. Higher amounts apply to taxpayers that do not qualify as small businesses. The minimum penalty for each failure due to intentional disregard increases from $100 to $250. The increased penalties apply to information returns required to be filed on or after Jan. 1, 2011.

Action plans should identify a compliance project timeline for implementing new reporting requirements to avoid compliance penalties.

Receive

Businesses will not only provide information returns to their vendors, but will be receiving these returns for their own reportable gross income. Currently, the IRS presumes all information returns to be correct and it is the responsibility of the taxpayer to report those payments received as income. Businesses with fiscal year ends will have the added challenge of reconciling 1099 returns received based on calendar year transactions to fiscal year gross income.

Action plans should include a process to reconcile 1099 reported transactions to the income reported on the appropriate tax return.

We will continue to update you as this issue develops.   In the meantime, you should urge your representatives to repeal this job stifling provision.

• First, 1099s will have to be issued for goods as well as services.  In the past, you did not have to issue a 1099 for a purchase of goods such as office supplies, materials, or equipment.
• Second, 1099s will have to be issued to corporations, partnerships, LLCs – basically everyone you purchase from.  In the past, 1099s were used to report payments to individuals and certain partnerships.

Combined, this means that small businesses will now be sending out literally millions of 1099 forms and will be responsible for keeping track of every one of these throughout the tax year. Beginning in 2012, businesses will be required to issue 1099 tax forms not just to freelancers and contract employees, but to ANY individual or corporation from which a business buys more than $600 in goods or services.  Some examples:

• Homebuilders will have to issue a 1099 to the building material supplier for the materials used in the home.
• Have the airconditioning repaired at the office and you have to send a 1099 to the incorporated vendor.
• Purchase raw materials for manufacturing from a corporation and you have to send a 1099.

This means that in addition to the 1099s that you already prepare, you will also be preparing a flood of these for your office supply provider, office cleaner, caterer, accountant, computer hardware supplier, office furniture vendor, and on and on and on. The bill will drastically alter tax reporting by highlighting payments that have typically gone unreported – the idea is to increase government revenues by helping the IRS to account for millions of these payments.  The IRS has stated it may use its regulatory authority to allow credit card purchases to be exempt from these rules; however, the recordkeeping may get even harder if this is implemented.

The next pain of this reform is that you will also receive a flood of 1099s coming to you.  With the IRS efile mandate, you will have to enter all of these 1099s into your tax return in order for them to be matched by the IRS.  Count on more time to prepare your return and more inquiry letters from the IRS questioning the matching discrepancies.

Of course, there is a silver lining in this cloud for the accounting profession.  The days of keeping your books on a spreadsheet (or paper sack) will fast be disappearing.  In order to comply with these rules, all businesses will need some sort of accounting system with the ability to track payment amounts, payment types, 1099 status, and EIN numbers.  You will also need someone to oversee the accounting to make sure it is up to date and accurate.  The cost of noncompliance currently starts at $50 per 1099 that should have been issued and increases depending on the size of the business and the delay in delivering the form.  You will need to start planning for the implementation of your required information systems in 2011 to be ready to track payments in 2012 when the law goes into effect.

Small businesses and lobbyists have started to push back hard against this change, realizing the profound impact it will have on their operations and accounting procedures. And the Congress is listening; two bills have been introduced which would repeal this provision and if passed, small business will be spared another regulatory hurtle which could threaten to drown us all under a new flood of paperwork.  We are not likely to see any movement on this issue until the new Congress is in session.

Davis & Langford, Certified Public Accountants, have experienced Quickbooks Pro Advisors on staff to asisst in implementing accounting procedures to make the transition as painless as possible.  We can be reached at www.DavisLangford.com.

1. First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

For more assistance  with starting and operating a new business, contact Davis & Langford CPA at 678-889-9548.

Standard Mileage Rate Method:

• Must own or lease the car,
• Cannot use it for hire, such as a taxi,
• Cannot operate five or more cars at the same time,
• Must not have claimed a depreciation deduction for the car in an earlier year, and
• Must have chosen to use it in the first year you placed the car in service at your business.

Then, for a car you own, in subsequent years, you can choose to use the standard mileage rate or actual expenses. However, if the car is leased, you must use the standard mileage rate method for the entire lease period. The standard mileage rate is determined by the government annually.

Actual Expenses Method: To use the actual expense method, you determine the entire actual cost of operating the car for the year and then determining the business portion attributable to the business miles driven. As example, a vehicle’s operating costs for the year totaled $7,000, the miles driven for business was 6,000 and the total miles driven was 10,000. The business portion would be 60% (6,000/10,000) of $7,000 or a business deduction of $4,200. Operating expenses include gas, oil, repairs, wash and wax, tires, insurance, registration fees, depreciation (or lease payments). The actual expense method can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting car expenses as part of their itemized deductions. Parking fees and tolls attributable to business use are also deductible.

Generally, cars are depreciated using an accelerated method of depreciation subject to the luxury auto rules, which limits the amount of allowable depreciation that can be deducted in a year. If the standard mileage rate was used in the first year the car was placed in service and you decide to switch to the actual expense method, straight line depreciation must be used and subject to the same luxury auto limits.

For more information on using your car in business and other business deductions visit the work related expense section of our website.

President Obama Signing the Healthcare Bill Into Law - March 23, 2010

In late March 2010, President Obama signed into law the new health care legislation.  The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future.  The provisions take effect over a period of years and are categorized by the year they become effective.  Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals. 

The following is an overview of the provisions that apply to individual taxpayers and small businesses.   

2009
o  Student Loan Forgiveness for Health Professionals – Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas.

o  Investment Credit for Therapeutic Discovery Projects – A small company investment tax credit for expenses incurred for qualified investments in qualifying therapeutic discovery projects.

2010
o  Insurance for Uninsured Americans with Pre-Existing Conditions – A Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition.

o  Expanding Coverage for Early Retirees – A program that provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents.

o  Providing Free Preventive Care – New plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.

o  Pre-Existing Condition Exclusions for Children Under Age 19 – For new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition.

o  Elimination of Arbitrary Rescission of Coverage – Insurance companies may no longer retroactively cancel policies because of an “unintentional” mistake on paperwork.

o  Lifetime Limits are Phased Out – Effective for all policies issued after September 23, 2010 and those renewing after this date, there can no longer be lifetime limits placed on health care plans.

o  Annual Dollar Limits – There is a phase out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans.

o  Tanning Services Excise Tax – A new 10% excise tax is imposed on the amount paid for any indoor tanning service.

o  Excludable Medical Reimbursements for Older Children – An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn’t attained age 27.

o  Self-Employed Health Insurance Deduction – Self-employed individuals may include in their tax-deductible health insurance children who have not attained age 27.

o  Tax Credits for Small Employers Offering Health Coverage – Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees.

2011
o  Employer W-2 Reporting Responsibilities – Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2.
   
o  Increased Tax on Nonqualifying HSA or Archer MSA Distributions – The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%.

o  Over-the-Counter Medication Restriction for Employer Plans – Over-the-counter medications will no longer qualify for reimbursement.

o  Small Employer Simple Cafeteria Plans – Small employers may provide employees with a “simple cafeteria plan.”

2012
O  Information Reporting Required for Payments to Corporations – Businesses that pay any amount greater than $600 during the year to non-tax-exempt corporate providers of property and services will have to file an information report with each provider and with IRS.

2013
o  Additional Hospital Insurance Tax for High-Income Taxpayers – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on incomes over a threshold.

o  Surtax on Unearned Income for High-Income Taxpayers – A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts. 

o  Employer Health FLEX-Spending Plan Contributions Limited – Medical reimbursements from flexible spending plans is limited to $2,500.

o  Medical Itemized Deductions Limited – The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%.

o  Compensation Deduction Limit for Health Insurance Issuers – Limits companies’ deduction for certain employees’ compensation.

2014
o  Mandatory Heath Insurance Overview – Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured.  The chart provides an overview of how these provisions interact to achieve that goal.

o  American Health Benefit Exchanges – By 2014, each state must establish an exchange to help individuals and small employers obtain coverage. 

o  Penalty For Not Being Insured – Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage.

o  Premium Assistance Credit – Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”.

o  Free Choice Vouchers – Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the insurance exchange. 

o  Large Employer Health Coverage Excise Tax – Large employers would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy.

2018
o  Excise Tax on High-Cost Employer-Sponsored Health Coverage – There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits.

Reference Links

• Davis & Langford CPA – Further information on each topic on the website or call us for a personal consultation.
• CCH Coverage of Health Care Reform - Downloadable PDF coverage