Small Business Tax Articles
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had the matching capabilities to handle the massive volume of paperwork resulting from this provision, had it not been repealed.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.
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?”
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.
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.
1099 Issues From the Past Resurface
By: Gardiner Thomsen CPAs | email
Recently, the IRS began sending out notices related to tax year 2008 1099 forms. These notices detail problems with 1099 forms that our clients have filed, including incorrect or missing FEIN’s, incorrect names on the 1099’s, and other issues. Generally, a penalty for each occurrence is imposed, which could potentially total thousands of dollars for the client.
Now is a good time to review your internal accounting procedures in regard to non-employees. Before issuing a check to anyone who is not an employee, you should obtain a signed W-9 form. The information contained in a W-9 form is what you use to determine if a 1099 is required, and then to prepare form 1099 if it is required.
There are several common excuses that individuals and/or businesses use in order to avoid providing a W-9 form, for example:
- “I’m a corporation, you don’t need to issue me a 1099.” In actuality, it is the W-9 form that communicates this information. You need them to provide you a signed W-9.
- “I’m with the city/county/state/federal government, you won’t need to issue me a 1099.” Every government agency, from federal to a small city, has a FEIN. You need them to provide you a signed W-9.
- “My organization is a non-profit agency. We don’t pay tax.” Every non-profit agency has a FEIN. You need them to provide you with a signed W-9.
- “I take the funds that you pay me and then pay my employees, relatives, church, etc., so you don’t need to issue me a 1099.” The person/organization that you issue the check to is the person that you need the signed W-9 for, and if necessary, the 1099 issued to. If they redistribute the funds, they will need to determine to correct course of action to take regardless of your proper reporting.
- “I’ve been doing business with you for 25 years and I’ve never provided a W-9.” Situation’s like this are the reason why the rules are changing. You need them to provide you a signed W-9.
All of these excuses are invalid. The ideal policy regarding W-9 forms should forbid the issuance of a check to anyone, member or patron, who has not provided you with a signed W-9 form. Penalties are also imposed for incorrect or illegible 1099 forms, so you must have a zero exception policy. It takes resources to try to obtain the correct information after the fact, so get a signed W-9 form prior to anyone expecting payment. If you have any questions, please contact us.