Small Business Planning Articles
Employees vs. Independent Contractors
By: Charles L. Telk Jr., CPA, Partner | email
The issue of whether a worker is an employee of your company or an independent contractor is very complicated, and it can be confusing to make the correct determination. Properly classifying a worker as an independent contractor can save a company payroll tax dollars, but an improper classification can subject the company to back payroll taxes, penalties and interest.
Recently the IRS launched a new program with the goal of allowing many employers to resolve worker classification issues. This program gives employers the opportunity to come into compliance by agreeing to classify workers as employees and making a reduced payment to cover past payroll tax liabilities.
This new program is referred to as the “Fresh Start” initiative and it coincides with a new Department of Labor program that will crack down on employers who incorrectly classify employees as independent contractors. The two organizations have signed a memorandum of understanding and have agreed to share information and coordinate enforcement efforts.
The intent here is fairly obvious: offer a reduced back payroll tax burden free from audit, penalties or interest as the incentive while providing for increased audit and enforcement actions as the consequence.
Under this program, eligible employers can reduce their past payroll tax obligations by prospectively treating workers as employees. To be eligible a company must:
- Consistently have treated workers in the past as non-employees.
- Have filed required forms 1099 for these workers for the previous 3 years.
- Not currently be under audit by the IRS, DOL or a state agency.
Once accepted, employers will pay only 10% of the amount of payroll taxes that would have been due from the most recent tax year. No interest or penalties will be due. Audit protection will be afforded in regards to payroll tax issues for prior years. But, for the first 3 years of the program, employers will be subjected to a 6-year statute of limitations instead of the usual 3-year rule.
Depending on your situation, this program may be worth checking into. Please call me at the Des Moines office should you have any questions regarding the “Fresh Start” initiative.
Fixed Assets and Depreciation
By: Dave Thomsen, Partner | email
Over the past few years or so, issues have arisen in our world of accounting for cooperatives that have brought the way we historically looked at property, plant and equipment, and the depreciation of those assets, under question. The first issue came about a few years ago when the loan commitments required to finance cooperative operations became so large that your lender saw it necessary to share some of the risk involved in certain loan packages. Thus, fixed asset appraisals became the norm in many cases. A second issue has occurred with new accounting standards related to mergers and the requirement to recognize business combinations at fair value.
Textbook Depreciation: Most accountants were taught in school to compute depreciation in the following manner: “Asset Cost” less “Salvage Value” divided by the “Useful Life of the Asset.” For example, a steel grain bin built for a cost of $500,000 with a scrap value of $25,000 that will be used for 25 years would have an annual depreciation expense of $19,000 and would have at least some book value for 25 years. However, in most cases today, salvage value is routinely ignored and the estimated useful life is based more on acceptable IRS tables than on the actual life the asset is used to produce income.
Actual Practice: Most of our cooperative audit clients take a “conservative” approach to depreciating their fixed assets. In the example above, the salvage value would be ignored and the $500,000 bin would depreciated over 10 years based on the IRS class life tables amounting to annual depreciation of $50,000. The asset is fully depreciated after 10 years and for book purposes has no value for more than half of its actual useful life.
Why do we do this? The accelerated depreciation expense lowers the bottom line thereby reducing income and income available for patronage dividend allocations, saving the cooperative cash. However, this conservative approach may be distorting the real value of the balance sheet by recognizing no or less than actual value of assets the company owns. Depending on the circumstances, appraisals may be necessary to give companies credit for the unrecognized value of those assets, or major adjustments will be required under the new fair value requirements in accounting for future mergers.
Maybe its time to re-think this process as we look at ways to further strengthen balance sheets and search for the right mix of allocated and unallocated members’ equity. We can still use these conservative ideas for tax purposes, but we must also consider alternatives to bring book balance sheets more in line with actual values. We are available if you would like to discuss this issue further and will be encouraging this debate as we begin our upcoming audit engagements.
Filing Requirements and Sales/Use Tax
By: Chris Coldiron, CPA, Tax Manager | email
Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%). With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors. If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.
State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met. If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.
1099 Reporting Changes, Again
By: Chris Coldiron, CPA, Tax Manager | email
As you may have heard, H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” repealed all new 1099 reporting requirements that were set to take effect January 1, 2012. The Act was signed into law by President Obama on April 15th. Basically, 1099 reporting requirements will continue to be the same as they’ve always been. This change will significantly decrease the compliance burden small businesses were anticipating. However, this recent change does not do away with the requirement that payers obtain and retain a form W-9, Request for Taxpayer Identification Number and Certification, for all payees. This requirement applies even to governmental agencies and corporations, although these entities are typically exempt from the 1099 reporting requirement. Absent obtaining a W-9 that either documents an exemption to the 1099 reporting requirement or provides the necessary information for that reporting, backup withholding at a rate of 28% is mandatory.
Standard Business Mileage Rates – 2011
By: Chris Coldiron, CPA, Tax Manager | email
To help offset the bite of rising gas prices, the IRS announced on June 23rd that the standard business mileage rate will increase for the second half of 2011 (beginning July 1st) to 55.5 cents per mile, up from 51 cents per mile for the first half of 2011. The mileage rate used in computing deductible moving expenses and medical transportation costs also increased by 4.5 cents per mile to 23.5 cents per mile with the same effective date. The rate used to compute mileage for charitable driving did not change and remains at 14 cents per mile for all of 2011.
401K Fee Disclosure Requirements To Change
By: Ryan Taylor, CPA, Audit Manager | email
Starting January 1, 2012, the Department of Labor will require 401(k) plans to clearly spell out all fees and expenses each quarter so that investors can more readily compare the costs of their holdings and investment choices.
Current laws don’t require sufficient information to allow workers to make the best investment decisions. Even if workers were given abundant investment information in the past, they didn’t always receive it in a user-friendly format.
Companies must begin laying out the administrative expenses, including accounting and recordkeeping fees, and the charges that apply to the individual choices a worker makes, such as fees charged for loans. The charges for administrative expenses must be laid out in the quarterly reports workers receive and also be made available online.
The fees and expenses associated with the funds a worker chooses must be explained as a percentage of assets held, and also expressed as a dollar amount for each $1,000 invested. Performance data must be provided for the various mutual funds offered, including 1-year, 5-year, and 10-year returns. Comparisons to appropriate benchmarks must also be provided for those time periods to enable investors to assess how their funds are performing.
The new rules also require that workers have access to an easily understood glossary of terms to help explain the investment options, fees, and other details. These rules can help fill an important knowledge gap because many investors don’t know that more than a half a dozen fees may be charged against their 401(k) account for recordkeeping, administration, investment advisory, brokerage and management services.
The regulations, however, offer protection to plan administrators on the completeness and accuracy of the information provided by a plan’s service provider, upon which the administrator reasonably and in good faith, relies.
The new regulations mean that plan administrators will want to discuss with their service providers (third-party administrators, record-keepers, fund managers) the various disclosure requirements and amend plan, trust, and provider agreements as necessary to allocate responsibility for satisfying those requirements.
1099 Update: President Obama Repeals Business Tax Reporting Mandate
By: Gardiner Thomsen CPAs | email
Just recently, President Obama signed a bill repealing a tax-compliance mandate that was included within last year’s health care law. This mandate was going to require any U.S. business, large or small, public or private, to issue a Form 1099 to each and every entity to which it had paid more than $600 for goods and services rendered for business purposes within its fiscal year. This provision was to close the “tax gap,” the estimated $300 billion difference between tax revenue that is collected by the government and that which is not, presumably because of unreported business income. Further, it was doubted that the IRS had the matching capabilities to handle the massive volume of paperwork resulting from this provision, had it not been repealed.
As many of you do, most corporations file taxes on a fiscal year that is different than the calendar year in which 1099 forms are filed which could have resulted in substantial errors in IRS attempts to accurately match information.
If you need additional information or have specific questions about 1099 reporting requirements for your organization please let us know.
Big GAAP versus Little GAAP
By: Dennis Gardiner, Partner | email
The Financial Accounting Foundation, FASB’s parent organization, was recently presented a report which recommends changes to the future of accounting standard setting for private companies, including a separate standard-setting board. It is believed that exceptions and modifications to GAAP for private companies is a better response to the needs for the private company sector.
Under the recommendations, a separate private company standards board would be established to make exceptions and modifications for both new and existing standards. FASB will also need to define what differentiates private companies from public companies.
We will keep you posted as we learn more.
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.