Tax Tips from Zinner & Co.

Tax Deadline Extended Following Tragedy in Boston

A three-month tax filing and payment extension has been granted to all individual taxpayers who live in Suffolk County, Mass., including the city of Boston, and others impacted by the Boston Marathon tragedy.

The Internal Revenue Service will issue a notice giving eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by that date. By law, interest, currently at the annual rate of 3 percent compounded dialy, will still apply to any payments made after the April deadline. 

Eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, and identifying themselves to the IRS before filing a return of making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated. Suffolk County residents do not have to take further action to obtain this relief. 

Eligible taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing Form 4868 by July 15, 2013.

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

IRS Crackdown on Employee Misclassification

The Internal Revenue Service is cracking down on employers who misclassify workers in a government effort to boost tax revenue.

State studies have shown that local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors to avoid paying payroll taxes and other employment-related expenses. Some small businesses turn to contractors to remain competitive while avoiding the 50-employee threshold that would require them to pay for employees' health insurance, starting next year under the federal healthcare law, or pay a penalty. 

Many business owners blame the complex tax code, which does not make it easy to distinguish between full-time staff and independent contractors doing full-time work. The distinction is based on the employer's degree of control over a worker, the length of the relationship and a series of other factors that are open to interpretation. Congress has proposed various bills to clarify the definition of independent contractors in recent years, including as recently as December, but none of the bills have passed.

Since September 2011, the government has collected $9.5 million in back wages for more than 11,400 workers who were misclassified as independent contractors by their employers, according to the Labor Department. Rather than risk an audit, and perhaps costly penalties, many small business owners are rushing to convert any long-term contract workers into permanent staff.

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Small Business Tax Credit Affected by Sequestration

Sequestration, a series of across-the-board cuts totaling $1.2 trillion over 10 years to government agencies, may potentially affect many tax credits in part of the government's attempts to get a handle on the growing national debt.

One of the credits that will feel the effects immediately is the Small Business Health Care Tax Credit, which puts money back in the pockets of small employers with fewer than 25 full-time equivalent employees, who pay an average wage of less than $50,000 a year, and pay at least half of employee health insurance premiums.

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic cuts will take place as of March 1, 2013. These required cuts include a reduction to the refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers under Internal Revenue Code section 45R. As a result, the refundable portion of your claim will be reduced by 8.7% percent. The sequestration reduction rate will be applied until the end of the fiscal year (Sept. 30, 2013) or intervening Congressional action, at which time the sequestration rate is subject to change.

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Four Taxpayers Who Require Extra Return Preparation Due Diligence

While tax preparers are not required to audit their clients' records before filing returns, there are several client profiles that may require a closer look to ensure an accurate tax return and avoid potential civil and/or criminal fraud allegations.

Compliance studies by agencies such as the Treasury Inspector General for Tax Administration (TIGTA) and the U.S. Government Accountability Office (GAO) have shown significant tax return errors across several taxpayer types. The IRS has responded by targeting the following taxpayer profiles in audits:

Small retail businesses

The IRS knows that small business is the largest taxpayer segment that underreports income, largely because these businesses receive few or no information statements, resulting in little or no audit trail for the IRS. 

When you’re closing a client’s books and preparing a client’s return, analyze the client’s bank accounts. Reconcile your client’s bank deposits to total revenue reported on the return. Significant, unexplained deposits should be examined to determine whether income is being reported. It’s rare for a retail business to receive Forms 1099-MISC, Miscellaneous Income, but if your client’s business receives one, determine whether your client properly recorded the income source.  

Pay particular attention to clients who receive Form 1099-K, Payment Card and Third Party Network Transactions, for debit and credit card payments. The IRS is starting to use this information to question business tax returns. If your client’s business records credit card sales in its accounting system, reconcile total credit card sales to Form 1099-K at the end of the year. If your client doesn’t record merchant card transactions, consider comparing the amounts received from merchant card transactions by month to your client’s sales. Look for inconsistencies each month in the proportionate amounts to overall gross receipts.

Noncash contributions

Twenty million individual taxpayers deduct noncash charitable contributions each year. In 2012, 60% of taxpayers who claimed more than $5,000 in noncash contributions did not comply with the recording requirements. The study indicated that the main error was inaccurate Forms 8283, Noncash Charitable Contributions. Other errors included missing appraisals, incomplete donor acknowledgments, and unclear or incomplete descriptions of donated property and contribution dates. 

If your client has a noncash contribution this year, make sure that Form 8283 is accurate and that your client provides all required documentation. If your client donated a vehicle, make sure your client receives Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, from the charitable organization, attaches the form to the return, and does not overvalue the donation

Rental property

In 2001, 53% of individual taxpayers made significant reporting errors by overstating expenses, understating income, deducting amounts in excess of passive activity loss limitations, and not applying limitations on deductions due to personal use of the rental property. 

When you’re preparing returns with rental property activity, ask clients to substantiate expenses. According to the GAO, 35% of taxpayers with rental property deduct a nonallowable personal expense or can’t substantiate a reported expense. Nineteen percent did not fully report an expense that would have been allowed.

You should also look closely at depreciation deductions; many taxpayers incorrectly includ the value of their land within the depreciable basis of their properties.

Partnerships and S corporations 

In 2012, the IRS increased audits of partnerships and S corporations by 18.7%. A more considerable concern for the IRS in this area is the deduction of flowthrough losses from these entities. Many times partners or shareholders recognize a loss in excess of the amount allowed due to basis limitations. 

The IRS expects compliance help from tax practitioners. Most flowthrough entity returns are prepared by a paid professional, who also may prepare the shareholder/partner’s Form 1040. When the practitioner doesn’t prepare both returns, it may be challenging to resolve issues that carry over from the entity to the shareholder or partner. 

Look for the IRS to pursue preparer penalties for paid professionals who don’t conduct their due diligence in calculating basis and allowable losses.

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Ohio's Use Tax Amnesty Program to End May 1

Taxpayers who have been taking advantage of the Ohio Consumer's Use Tax Amnesty Program should be aware that the program will end on Wednesday, May 1, 2013.

Consumer's use tax must be paid on all taxable purchases of tangible personal property (e.g. computer equipment, office supplies, furniture, etc.) or services (e.g. installation, repair employment services, etc.) used, stored or otherwise consumed in Ohio unless Ohio sales tax has been paid to a vendor or the tax has been properly paid to another state. The intent of the Tax Amnesty Program was to help Ohio businesses unaware of the use tax or behind on paying their use tax obligations to pay their past use tax liability without incurring additional penalties or interest.

Companies that are behind on their use tax obligations and have not received an assessment notice may qualify for amnesty; to be considered, the Tax Amnesty Program application must be postmarked by May 1, 2013. 

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Important Update for CAT Taxpayers

The commercial activity tax (CAT) is an annual tax imposed on retailers, service providers, manufacturers, and other types of businesses for the privilege of doing business in Ohio.

Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year must register for the CAT, file all the applicable returns, and make all corresponding payments.

Taxpayers affected by the CAT should pay close attention to this tax's changes effective in 2013; a taxpayer that pays the CAT on a quarterly basis shall apply the annual exclusion of $1 million of taxable gross receipts to the first quarter of the calendar year. Any unused portion of the exclusion amount may be carried forward to subsequent quarters within the same calendar year. Taxpayers may not carry forward any used exclusion amount to the following calendar year (this also applies to any unused exclusion amount from calendar year 2012). 

Under prior law, a quarterly taxpayer would exclude up to $250,000 of taxable gross receipts on each of the four quarterly returns in a calendar year and could carry forward any unused exclusion amount for three calendar quarters. 

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Important Tax Elections Reminder

With April 15 less than a month away, it may be easy for busy practitioners to overlook some of the tax benefits clients can elect to take.

To allow for thorough tax planning, here is a reminder of elections currently available for individuals, estates and partnerships:

Individuals

• Election out of alimony treatment. Under Sec. 71(b)(1)(B), alimony does not include payments that would otherwise be treated as alimony (deductible to the payor, includible in income to the payee) if the spouses designate in a divorce or separation instrument that the payments not be treated as alimony. Electing to not treat payments as alimony would be beneficial in instances where the payor spouse’s income is primarily from nontaxable sources or where the payor spouse’s income is sheltered by other deductions and exemptions.
• Election to maximize the investment interest deduction. Individuals can make an election to include qualified dividends and net capital gains in the calculation of net investment income for purposes of maximizing the investment interest deduction. If the election is made, the taxpayer waives the right to the lower tax rate on long-term capital gains on the amount elected to be included in net investment income, and it is taxed as ordinary income. The election to include net capital gains is limited to the lesser of net capital gains from investment property or net gains from investment property.
• Request extension of time for making an election. A taxpayer who misses a filing deadline for a regulatory election may request a letter ruling from the IRS granting an extension of time to make the election under Regs. Sec. 301.9100-3. The IRS will grant relief only for failure to timely file a regulatory election, not a statutory election, under this provision. Relief will be granted if the taxpayer provides evidence that establishes to the satisfaction of the IRS that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government.

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

IRS Offers Online Tax Resources for Small Business Owners

When you own a small business, the the efficiency of your company ultimately lies on your shoulders.

Luckily, you do not have to be a tax expert to ensure your business runs smoothly; the Internal Revenue Service has tons of useful tax information and services to teach business owners the basics.

The Small Business and Self-Employed Tax Center can help whether you are starting, operating or closing a business by employing its A-Z index. You can apply for an Employer Identification Number online or get a form you need. If you want employment tax information, the center has it. It also offers tools and resources:

• IRS Video Portal.  Watch helpful videos and webinars on a variety of topics from filing and paying your taxes to understanding the IRS audit process. 
• Online Tools.  The Tax Calendar for Small Businesses and Self-Employed features e-filing and e-paying options, alerts for important filing dates and tax tips. You can order a wall calendar or install the IRS CalendarConnector and access important tax dates for small businesses right from your desktop. 
• Small Business Events and Educational Products.  The online Virtual Small Business Tax Workshop has nine interactive lessons designed to help you understand and meet your federal tax obligations. You can also find free IRS small business workshops and other events planned in your state.

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Interest Rates to Remain the Same for Second Quarter of 2013

The Internal Revenue Service recently announced that interest rates would remain the same for the 2013 calendar quarter beginning on April 1.

What are these rates?

In 2013, these rates will remain as:

• 3.0% for overpayments (2% for a corporation)
• 3.0% for underpayments
• 5.0% for large corporate underpayments
• 0.5% for the portion of a corporate overpayment exceeding $10,000

How are these rates determined?

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

How is this different for large corporations?

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

These interest rates are computed from the federal short-term rate determined during January 2013 to take effect February 1, 2013, based on daily compounding. Click here for Revenue Ruling 2013-13, which announced these rates of interest.

Need more information regarding these IRS interest rates and their impact on both individual and corporate payments in 2013?

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com

Important Reminder for 2010 Roth IRA Converters

Taxpayers who converted a traditional IRA to a Roth IRA in 2010 are being reminded by the Internal Revenue Service to report half of the resulting taxable income on their 2012 returns.

Those who converted to a Roth IRA in 2010 should already be well aware of the changes that took effect January 1, 2010, which allowed for the conversion regardless of income and tax-filing status and postponed the tax bill for converting to be paid off over two years for that year only.

Normally, Roth conversions are taxable in the year the conversion occurs, but under a special rule that applied only to 2010 conversions, taxpayers generally include half the taxable amount in their income for 2011 and half for 2012, unless they chose to include all of it in income on their 2010 return. 

Roth conversions in 2010 from traditional IRAs are shown on 2012 Form 1040, Line 15b, or Form 1040A, Line 11b. Conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts, are reported on Form 1040, Line 16b, or Form 1040A, Line 12b. Taxpayers who made Roth conversions in 2012 or are planning to do so in 2013 or later years must file Form 8606 to report the conversion.

 

For more information, contact Howard J. Kass, CPA, Partner, at hkass@zinnerco.com