Hall & Company

Payroll tax cut extended through 2012

Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.

Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.

The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.

Another provision in the law includes the so-called “doc fix” that prevents a scheduled 27% reduction in Medicare payments to doctors.

The unemployment benefits and doctor payments will be paid for by government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.

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IRS & Offshore Account Disclosures

The IRS has reopened the offshore voluntary disclosure program (OVDP) to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The newest program is similar to the 2011 program in many ways, but with a few key differences. Unlike the 2011 program, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers or decide to end the program entirely at any point.

Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI), the penalty framework required individuals to pay 25-percent of the amount in the foreign bank account in the year with the highest aggregate account balance covering the 2003 to 2010 period. The IRS also created a new penalty category of 12.5-percent for “small offshore accounts.” Taxpayers whose offshore accounts or assets were less than $75,000 in any calendar year covered by the OVDI qualified for this lower rate. In addition, some taxpayers qualified for a 5-percent penalty, including taxpayers who did not open the foreign account, or cause the account to be opened, if additional requirements were met; and foreign residents who were unaware that they were U.S. citizens.

The overall penalty structure for the new program is the same as that for the 2011 program, except for taxpayers in the highest penalty category. For OVDP, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. Some taxpayers will be eligible for 5-percent or 12.5-percent penalties; these remain the same in the new program as in 2011. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties. Taxpayers who have come forward to make voluntary disclosures since the 2011 program closed will be treated under the provisions of the new OVDP.

The OVDP can be a significant benefit to affected taxpayers. Penalties outside the program can be onerous and can include, among others: penalties for failing to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR); civil penalties; penalties for failing to file a return; and accuracy related penalties. In addition, criminal prosecution may be a risk.

Be well informed in this area if you have foreign accounts.

California Businesses Beware: Are Your Independent Contractors Really Employees?

New California Law imposes hefty civil penalties for employers who willfully misclassify workers as independent contractors. Faced with high payroll and workers’ compensation costs, many California businesses are increasingly tempted to hire part time workers as independent contractors, or even to reclassify existing employees as independent contractors.  Effective January 1, 2012, California employers face stiff penalties with fines up to $10,000 for the first violation and $25,000 for each repeat violation for “voluntarily and knowingly” misclassifying workers as independent contractors. Many employers in California (studies indicate as high as 30%) have ignored the stringent legal requirements to properly classify workers as employees vs independent contractors to save money, payroll taxes, workers compensation insurance and benefits. California Senate Bill 459 greatly steps up the enforcement efforts to eliminate blatant misclassification of workers.

Employers need to exercise great caution in doing so, since employers who misclassify employees as independent contractors may find themselves liable for paying workers’ compensation benefits out of their own pockets, paying employment taxes, or providing retroactive benefits, such as vacation pay and retirement plan contributions to a misclassified worker, together with hefty penalties and interest payments. In an extreme case, if an employee suffers a workplace injury while the employer is uninsured for workers’ compensation (for example, because the employer has classified its entire staff as independent contractors and has no workers’ compensation coverage), the employer can be fined up to $100,000. The owners of the company can be held personally liable for this fine, together with any workers’ compensation benefits paid to the injured worker, even if the employer is a corporation. It is important to remember that in any California workers’ compensation action, the worker is legally presumed to be an employee and the employer has the evidentiary burden of proving that the worker meets the legal requirements for independent contractors.

Unfortunately, there is no single, clear-cut test to determine whether a worker is an independent contractor or an employee. Although California applies its own test, it is still useful to refer to the IRS’ list of 20 factors to determine a worker’s status, which is available in IRS Publication 15-A, Employer’s Supplemental Tax Guide on the IRS Web site at www.irs.gov. While no single factor is determinative, according to the IRS, the following are characteristics of independent contractors: setting their own work hours; furnishing their own tools; not receiving training from the hiring firm; working for more than one firm at a time; being paid by the job rather than by the hour; not providing progress reports; making their services available to the general public; and paying for their own business and travel expenses. California also places emphasis on whether a worker has a substantial investment in his or her business and has a legitimate opportunity to make a profit (or loss) from the operation of the business based upon his or her skills. The level of control over the worker’s activities, i.e., who exercises it and how, is a key factor.

The bottom line is that the test for establishing whether a worker is an employee or independent contractor under California law is complicated. Senate Bill 459 does not contain language in how to establish a safe harbor in deciding who qualifies for independent status. Therefore, California businesses are left in the dark on this and must look at each worker on a case by case basis. You could also review the topic on the California websitehttp://www.dir.ca.gov/dlse/faq_independentcontractor.html

We have posted the WINTER 2011 CLIENT UPDATE.

THE TAX RULES CAN PROVIDE RELIEF WHEN DISASTER STRIKES
Hurricanes, tornadoes, earthquakes, wildfires, floods, storms.
Few parts of the country escape the risk of natural disaster.
If you’re an unlucky victim, you may receive help from insurance
and federal disaster aid.

ACT SOON TO SAVE TAXES
Want to lower your 2011 tax bill? The time for action is running
out, so consider these tax-savers now.

UNDERSTAND “SUNK COSTS” IN MAKING DECISIONS
Emotions add zest to life. They propel us to our feet when our
favorite running back scores a touchdown. They warm us at an
inspirational concert or movie. But in the realm of business and
investing, emotions sometimes hinder good choices.

SCAMS AGAINST THE ELDERLY: KNOW THE DANGER SIGNS TO PROTECT
YOUR FAMILY
News of yet another investment scam is alarming enough, but when
the victim is elderly, the crime seems especially offensive.

2 Things to Consider When Making Charitable Donations

The earthquake, tsunami and nuclear reactor fallout in Japan have created a national disaster, the damage of which is beyond comprehension.  Millions of dollars have already been donated, and as you probably know the IRS recognizes the importance of donations to charitable organizations and allows certain donations to be itemized deductions.  Obviously the important thing is that the Japanese affected by the disaster are getting the help they need, but while making your donation you might as well ensure you’re getting your full deduction!

1. The first thing to ensure is that the organization in which you are donating to is a  qualified organization, as it must be religious, charitable, educational, scientific or literary in nature.   In general it is safer to donate to the more established organizations such as the Red Cross, but you should be able to verify any organization’s charitable status through checking their website or through direct contact.

Continue reading →

Deductions This Tax Season

One of the main goals that we all are striving for as tax season approaches is to maximize our deductions, and one crucial element are deductions we can take for business expenses.  Though we wish we could deduct everything that relates to a business, there are obviously rules set in place to regulate which expenses can and cannot be deducted.  This guidance can be found in Section 162(a) of the Internal Revenue Code, and there are certain elements which must be present in order to claim a deduction.  To qualify as a deduction, the code states that, “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

A breakdown of the elements of this guidance is as follows:

Expenses Paid or Incurred During the Taxable Year – The deduction must relate to an actual outflow of cash or an expense that was related to an action that took place in the current year.  This implies however that the expense does not necessarily have to be paid for in the current year, just that it be incurred.  For example, if you charged business expenses on the business credit card on December 31, 2010 and you don’t pay the credit card bill until sometime in 2011, you are still entitled to deduct the expenses.

Ordinary and Necessary – This implies that the deductions must be for expenses that are part of the normal and expected course of business.  If you own a pizza restaurant in Irvine, it would not be ordinary or necessary to purchase a $10 million mansion in the Hamptons, so that expense would not qualify as a deduction.

In Carrying On any Trade or Business – The expenses must be related to a business that is past the start-up phase, because deductions for expenses related to starting a company may need to be spread out over 15 years.  Also, the expense must be solely for the purpose of running the business, and not for a personal hobby or for pleasure.  Going along with the previously mentioned credit card example, if the expense was incurred on a personal trip to Las Vegas on New Year’s, the expense would not be related to the trade or business and would not be allowed to be deducted.

The moral of the story is that there may be business-related expenses that you have been incurring that can qualify under these criteria, so be sure to ask us and our Irvine CPA firm can straighten things out!

Avoiding the Dreaded IRS Audit

As the deadline nears to file our personal tax returns, we all are doing our best to maximize our deductions and increase our tax refunds while avoiding the dreaded IRS audit.  Although getting selected for an audit does not always result in additional taxes needing to be paid or imply an error, it is obviously something that anyone would rather not have to deal with.

Since the IRS receives millions of tax returns, they obviously do not have to resources to go through them all, so they need some sort of method to determine which returns they should further examine.  There are a variety of methods that the IRS uses, which include ‘tips’ the IRS may receive, looking at large corporations, complex transactions, returns with forms that do not match or even by scanning Facebook or Twitter posts, but the most systematic approach the IRS uses is an automated computer-based scoring system called the Discriminant Function System.   Per the IRS website, the Discriminant Function System (DIF) score ‘rates the potential for change, based on past IRS experience with similar returns,’ meaning they use their computer system to check for irregularities in returns that may indicate an erroneous return.  Though the calculation of the actual scoring system is a well-kept secret, the purpose behind the programming is likely an attempt to determine which returns would have the most potential of generating additional revenue for the IRS.  This seems logical, because it would be a waste of time for the IRS to pursue errors on returns that would not create additional tax revenues for the government.

What this means for you is that if you are taking more deductions than the average person in your tax bracket is, your DIF score may be higher than normal.  Of course, our Irvine CPA firm would take care of these issues for you, but as a reference the average itemized deductions for 2007 per CCH are listed below.  If you are taking more than these levels beware, the IRS may come knocking!

Mark to Market Accounting Rules Update

One of the key issues that arose from the sub-prime mortgage crisis was the issue of mark to market accounting, specifically how mortgage-backed securities which are on a bank’s balance sheet should be valued.  In the past couple of years there has been an ongoing dispute between the Financial Accounting Standards Board (FASB) and banks in regards to this issue.  In May 2010, FASB proposed that banks value loans using market prices rather than historical cost.  The banks adamantly opposed this proposal since they felt that reporting loans at fair market value could cause significant spikes in the volatility of their earnings results each financial period.

For now however, this battle seems to be over.  Last week, FASB decided to allow banks to continue to be able to report loan values at amortized cost with a reserve for possible losses.  The amount of the reserve is up to the judgment of the banks, and leaves room for interpretation at the bank’s discretion.  However, FASB is still debating where the fair market value of these loans should be disclosed.  Currently, banks are required to disclose the fair market value of loans only in the footnotes, and FASB is debating whether banks should disclose this information in the balance sheet as well.  While this proposed balance sheet disclosure would not change the value of the banks’ assets, it would make the market value of the loans more visible to investors.

Had FASB’s original “fair market value” approach been passed, the consequences could have been significant for banks. In periods of economic crisis or during temporary downturns, banks would be forced to significantly write-down loan assets. These write-downs would result in significant losses and reduced net income and ultimately, reduced retained earnings and shareholder equity.

While this decision more closely aligns US accounting practices with those sanctioned by International Financial Reporting Standards (IFRS), many feel that FASB’s concession to the banks’ demands demonstrates that FASB is transforming into an organization that gives into public pressure rather than an organization set out to ensure that the proper information is being disclosed to investors. It should also be noted that one of the proposed legislation’s strongest allies, former FASB Chairman Robert Hertz, stepped down in August.

Questions to ask before choosing an accountant

Does your current CPA identify opportunities for your business’s growth rather than simply looking at your historical figures?

Does your CPA respond promptly to your calls or emails?

Do you consider your CPA your most trusted advisor to provide information for making the best decisions?

Do you meet throughout the year with your CPA to discuss tax planning?

Do you feel your CPA is assisting you in minimizing your taxes and maximizing your available tax credits?

Does your CPA work with your banker to optimize your business’s working capital level?

Selecting Your CPA Firm

Every CPA firm is unique in their strengths & abilities. Here’s seven easy steps to finding a CPA firm that perfect for you.

1.     Compile a list of candidates. Ask your business attorney or trusted friends and colleagues to recommend a CPA firm — one with a reputation for favorable results.

2.     Schedule an interview with the candidates. (Most CPA firms offer a one-hour evaluation appointment, free of charge.)

3.     Prepare a list of detailed questions that relate to your particular issue, situation or need. (Be very specific.) Also ask standard questions during each interview:

o    Why does the firm want your business? (Is the firm familiar with the uniqueness of your type of business?)

o    How big is the firm? (Is it large or small enough?)

o    What experience and educational background — including continuing education — have firm members acquired? (Are you impressed, especially in relationship to your specialized needs?)

o    What computing technology does the firm use? (Does it fit your immediate or anticipated technology profile?)

o    In what format does the firm accept accounting information? (Is the format satisfactory? Do they know your particular accounting software?)

o    What are the fee structures and billing policies? (Does it suit you?)

4.     Ask if the CPA candidate has any questions for you. (Are the questions on target and address your concerns?)

5.     Evaluate the personal “chemistry.” (Are you able to communicate easily?)

6.     Consider the firm’s location. (Is it convenient?) and how often are they willing to meet with you?

7.     What can you expect in turnaround for questions? (an hour, four hours, a day)

Once you have interviewed all the potential firms score each on the above questions and rate based upon your most important criteria.

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