Newsletters for January 2011
Recent Tax Legislation Changes for 2011 and 2012
By: Chris Coldiron, CPA, Tax Manager | email
In addition to the changes made for Bonus Depreciation and 1099 reporting, several other items of interest were changed by the recent legislation for 2011 and 2012:
- Section 179 expense limits have been changed. For 2011, the maximum expense is $500,000, and the maximum amount of property that may be placed in service before the deduction becomes limited is $2,000,000. For 2012, those figures are reduced to $125,000 and $500,000, respectively.
- A payroll tax “holiday” was added for 2011 only. Employees will see their FICA tax reduced by 2% to 4.2%. Self-employed individuals will enjoy the same reduction, with their FICA rate set at 10.4%.
- The maximum tax bracket for individuals, as well as corporations, will remain at 35% for 2011 and 2012.
- The maximum individual capital gain tax rate of 15% remains in effect for both years, as does the application of this rate to “qualified dividends.” These preferential rates will not be “phased out” for higher income individuals as was reported in the popular press prior to enactment of the law. As the market continues to improve and profitable corporations begin issuing dividends, this change should result in substantial tax savings to many taxpayers.
- Itemized deductions and personal exemptions will not be subject to phase-out for high-income individuals through 2012.
- Individuals will be able to continue using nonrefundable personal credits to offset Alternative Minimum Tax for 2011.
- The standard mileage rate, used in lieu of actual expenses and depreciation, has been set at $.51 per mile for 2011.
- Under the new legislation, executors for decedents dying in 2010 have two options:
1. Apply the 2010 rules that were in effect at the decedent’s time of death.
2. Apply the new 2011 rules retroactively.
Most executors will find the election to retroactively apply 2011 rules beneficial as the gift and estate taxes have again been unified in 2011 and 2012 with a $5 million exclusion equivalent. In English, that means the estates of decedents dying from 2010 – 2012 will be able to enjoy the traditional “step-up” in basis of all estate assets, with the first $5 million exempt from tax. It also means that gifts up to this amount will also be exempt from tax. This $5 million will be inflation-adjusted for 2012.
Tax Law Changes for Bonus Depreciation
By: Charles L. Telk Jr., CPA, Partner | email
The latest tax law changes passed in 2010 enhanced available bonus depreciation from 50% to 100% for property placed into service between September 9, 2010 and December 31, 2011. Generally, the following rules apply:
1. The property must be MACRS property with a class life of 20 years or less. This includes qualified leasehold improvements (15 years) and “off the shelf” software (3 years).
2. The property’s original use must begin with the taxpayer, so used assets do not qualify. While there isn’t much guidance in this area, 168(k) has historically applied to property with a placed-in-service date during the applicable time-frame.
While we wait for the IRS to clarify the rules, RIA has issued guidance stating that property under a binding contract for purchase entered into after December 31, 2007 will qualify for the 100% bonus depreciation if it is placed in service during the dates mentioned earlier in this article.
50% bonus depreciation can’t be elected in lieu of 100%. The election to take bonus depreciation applies to each class life, not each asset.
The deduction drops back to 50% for assets placed in service after December 31, 2011 but before January 1, 2013.
1099 PATR Reporting for Calendar Year 2010
By: Charles L. Telk Jr., CPA, Partner | email
January is the month that 1099’s are prepared and distributed. As a cooperative, the form 1099 PATR is used to report information to your patrons. The following are items typically associated with cooperatives and should be reported as described:
Box 1 – Patronage Dividends: Report the total amount of qualified patronage to each member in this box.
Box 3 – Per-Unit Retain Allocations: Report the total amount of per-unit retain allocations paid to each member during calendar year 2010 in this box. Per-unit retain allocations include amounts paid to patrons for grain. We suggest that you report the gross amount prior to deductions for storage, drying, etc. Remember that even if your cooperative has a fiscal year, you report the total paid during calendar year 2010.
Box 6 – Domestic Production Activities Deduction: Report the amount of section 199 domestic production activities deduction that you have distributed to your patrons during the 2010 calendar year in box 6.
Got Enough Retained Savings?
By: Dave Thomsen, Partner | email
In the early days of cooperatives, the normal practice was to operate at break-even, and if you made a profit, the member business portion of that profit was allocated back to members. Little, if any, was retained. But if you ask a banker today, he’ll say, “you can never have enough retained savings.”
There has to be a happy medium.
Over the years we have seen cooperatives with allocation policies in place that led from little being retained, to retained amounts equal to regional investments– until the Farmland write down when everyone realized that if all regional equities were lost, all retained savings would be lost as well. The next goal was to increase retained savings to an amount equal to regional investments plus an “additional amount.” That’s basically where we are today. So, now we contemplate what that “additional amount” should be.
There may not be an easy answer to that question. You could do a complete turnaround and start allocating a higher percentage of your earnings, but that could have a negative impact on your balance sheet by reducing working capital and increasing cash requirements for future equity redemptions. Then again, you could continue on your present course and see where it leads.
Some of you have said you can’t divide up that concrete elevator you built, so retained savings should grow to an amount equal to regional investments plus fixed assets. We’ve also brought up the topic of non-qualified patronage dividends with many of you, whereas the balance sheet will basically remain intact while some of the non-allocated retained savings become allocated. But, you must then decide what to do with that equity as a part of your equity redemption policies– redeem or permanently hold? As we said, there is no easy answer; however, it may be time to start some serious discussion on the issue.
From new clients, to those we have been serving for over forty years, we have worked with you to build your balance sheets, including building retained savings. This will continue to be our goal as we continue to work together to answer the question “How much retained savings is enough?”
GASB 54 Fund Classifications
By: Janis Slater, CPA, Manager | email
It is important to review the new Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, that was issued March 30th, 2009. GASB 54 significantly changed the requirements for reporting fund balances for governmental funds. The new statement clarifies the definitions of individual governmental funds and may change the activities reported in a government’s special revenue fund.
Beginning in fiscal year ending June 30, 2011, governments are required to separately identify amounts that are non-spendable. All other amounts will be classified according to resource constraints. The new classifications are as follows:
Non-spendable Fund Balance – Amounts that are not in spendable form, such as inventory, prepaid amounts and long term receivables, and those that legally or contractually must be kept intact, such as the principal of endowments or revolving loan funds.
Restricted Fund Balance – Amounts that can be used only for specific purposes due to constitutional provisions, enabling legislation or externally imposed constraints, such as restrictions imposed by creditors, grantors or other governments.
Committed Fund Balance – Amounts that can only be used for specific purposes because of a formal action by the government’s highest decision making authority. These constraints are binding unless removed in the same manner in which they were originally committed.
Assigned Fund Balance – Amounts intended for specific purposes but not restricted or committed. The assigned fund balance can never be in excess of the total fund balance less the non-spendable, restricted and committed components of fund balance. Ultimately, this is the residual fund balance for all funds other than General Fund.
Unassigned Fund Balance – The residual classification for the General Fund, the only governmental fund that can report a positive unassigned fund balance. Other funds might have a negative unassigned fund balance due to overspending restricted, committed or assigned amounts. Not all components will always be present in each fund.
This overview of the requirements of GASB Statement 54 is to remind governments of the requirements which are now in effect. Governments will have to restate existing fund balances to conform to the new requirements. Governmental officials need to be educated about the new classifications and disclosures, and it may be necessary to alert third parties about any changes which could affect debt covenants or other requirements.
If more information is needed or if you have questions, feel free to call our Charles City office at 641-228-7096.
Cooperative Trends Expected in 2011
By: Dennis Gardiner, Partner | email
What we expect to see in 2011…
- Use of 100% bonus depreciation.
- Continued investments in capital improvements, particularly grain storage.
- More interest in non-qualified patronage allocations.
- With the quick build-up over the past few years of retained earnings, we anticipate seeing more time spent in the board room or board retreats addressing the member’s equity mix of the cooperative’s balance sheet.
- Considerable time and money being spent in complying with OSHA standards.
Cooperative Trends of 2010 – What We Have Seen
By: Dave Thomsen, Partner | email
What we have seen in 2010…
- Clients were more profitable in 2010 compared to 2009. Depending on year end, local savings was much better in 2010 than 2009, but not back to record 2008 levels.
- Increased grain and agronomy volumes, lower prices.
- Agronomy margins improved and were closer to historical averages, prices stabilized.
- Wet 2009 harvest led to substantially higher grain drying revenues in 2010, however grain quality became an issue.
- Clients with November 2010 through January 2011 year ends saw an excellent fall fertilizer season that will increase local savings.
- With lower prices, borrowing was down, and with low interest rates, interest expense was down, sometimes less than half of 2009 totals.
- Accounts receivable ageing generally improved.
- Build, build, build! Many clients spent substantial dollars for fixed asset additions, primarily grain and liquid fertilizer storage facilities. It appears these additions have been good investments.
- The recent trend to build retained savings and the company’s balance sheet continued, aided by the benefits of the gross domestic production deduction (Section 199).
- More clients began to allocate the benefits of Section 199 to their patrons. This was largely caused by the cooperative’s inability to use all of the benefit due to lower earnings.
- Some clients have begun to allocate a mix of patronage and Section 199.
Over 46 Years…and Counting!
By: Gardiner Thomsen CPAs | email
For the past 46 years, Dan Gardiner has managed his own firm, and we have all truly benefited from his leadership. But 46 years is quite a while, so Dan has decided to start keeping limited office hours. He recently announced that effective January 1, 2011, he is stepping down in his role as managing partner of Gardiner Thomsen.
“Due to recent health struggles, I have not been able to spend the time this position requires,” he said. Not to worry though, he’ll still be around to offer his seasoned expertise.
Dan has decided to name his son, Dennis, to the position of Managing Partner. “With the role Dennis has played in the day to day operation of the firm, I would expect this to be a smooth transition.’ Dan said.
Please join our firm in congratulating Dennis Gardiner!
An Important W-9 Rule Every Business Must Follow
By: Charles L. Telk Jr., CPA, Senior Tax Adviser | email
We would like to remind our clients of the importance of the new W-9 rules set into effect by recent tax legislation. We cannot stress enough that your attention to this new rule is crucial.
RULE: It is the responsibility of every person, business or entity to have a signed, legible copy of form W-9 on hand for every person, business or entity that it issues a check to. This includes all cooperative members as well. This means that any non-employee you issue money to needs to fill out a W-9 for you to keep on record, regardless of the amount of money you issue them or the number of times in a year that you do so. Yes, that means you could have a lot more W-9 forms to deal with. Unfortunately, there are no exceptions.
Form W-9 is the non-employee equivalent of form W-4. The information contained on a W-9 form for each person, business or entity is used to determine if you will need to file a 1099 form for them.
PENALTY: Even if you think you won’t need to issue a 1099 to a certain person, business or entity, you are still required to have their completed and signed W-9 on file. If you don’t, you run the risk of the IRS disallowing your related tax deductions, and assessing you taxes, penalties and interest.
You should review your contractor, vendor and member files to make certain that you have a signed, legible form W-9 on file for each of them. If any W-9 forms are missing, you need to obtain them. Have your contractors, vendors and members fill them out now.
As we discussed in prior newsletters, there is no valid excuse for a vendor to not provide a signed W-9 form. Should you have any questions regarding this issue or any others, please call us so we can help.